UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
20-F
OR
For
the fiscal year ended
December
31
,
2023
OR
OR
Date
of event requiring this shell company report ___________
For
the transition period from _____ to _____
Commission
File No.
000-51694
(Exact Name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Tel: +
(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.
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Title
of Each Class
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Trading
Symbol(s)
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Name
of Each Exchange on which Registered
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Securities
registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
(Title of Class)
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
(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, 2023, the Registrant had outstanding
47,991,344
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.
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).
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.
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Accelerated
filer
☐
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Non-accelerated
filer
☐
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Emerging
growth company
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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.
☒
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements.
☐
Indicate
by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
☐
Indicate
by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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International
Financial Reporting Standards as issued by
the
International Accounting Standards Board ☐
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Other
☐
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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.
Item
17 ☐ Item 18 ☐
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):
Yes
☐ No
☒
2
INTRODUCTION
Terms
As used herein, and unless the context suggests 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 3.627 to $1.00, the representative exchange rate reported by the Bank of Israel on December 31, 2023.
This Annual Report contains estimates, projections and other
information concerning our industry and our business, as well as data regarding market research, estimates and forecasts prepared by our
management. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject
to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information.
The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those discussed
under the headings “Cautionary Statement Regarding Forward-Looking Statements” and Item 3.D. “Risk Factors” in
this Annual Report.
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.
CAUTIONARY STATEMENT REGARDING
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.
3
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.
Our estimates and forward-looking statements may be influenced
by factors including:
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Our search advertising solution depends heavily upon revenue generated from our agreement with Microsoft, and any adverse change
in that agreement could adversely affect our business, financial condition and results of operations.
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The generation of search advertising revenue through publishers is subject to competition. If we cannot compete effectively in this
market, our revenue is likely to decline.
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In order to receive advertising-generated revenue from our search providers, we depend, in part, on factors outside of our control.
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Should the methods used for the distribution of our search solution, be blocked, constrained, limited, materially changed, based
on a change of policies, technology or otherwise (as has happened in the past), or made redundant by any of our search engine providers,
our ability to generate revenue from our search activity could be significantly reduced.
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• |
Should the providers of platforms, particularly browsers, further block, constrain or limit our ability to offer or change search
properties, or materially change their policies, technology or the way they operate, our ability to generate revenue from our search activity
could be significantly reduced.
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Our advertising customers comprised of brands, advertising agencies, DSPs and SSPs 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.
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Large and established internet and technology companies, such as Google, Meta, Apple and Amazon, play a substantial role in the digital
advertising market and may significantly harm our ability to operate in this industry.
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If the demand for digital advertising does not continue to grow or customers do not embrace our solutions, it could have a material
adverse effect on our business and results of operation.
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Due to our evolving business model and rapid changes in the industry in which we operate and the nature of services we provide, it
is difficult to accurately predict our future performance and may be difficult to increase revenue or profitability.
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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 also depend on service providers or partners who provide us with critical products and services.
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4
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Non-compliance with industry self-regulation could negatively impact our Display Advertising business, brand and reputation.
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The advertising industry is highly competitive. If we cannot compete effectively and overcome the technological gaps in this market,
our revenue is likely to decline.
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If our campaigns are not able to reach certain performance goals or we are unable to measure certain metrics proving achievement
of those goals, it could have a material adverse effect on our business
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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.
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Our business depends on our ability to collect, use, maintain and otherwise process data, including personal data, and any limitation
on the collection, use, maintenance and other processing of this data could significantly diminish the value of our solutions and
cause us to lose customers, revenue and profit.
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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.
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Our growth depends in part on the success of our relationships with advertising agencies, and third-party DSPs and SSPs.
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Our products are dependent on the platform terms of use and policies that are subject to changes out of our control.
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Global economic and market conditions and actions taken by our customers, suppliers and other business partners in markets in which
we operate might materially adversely impact us.
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A loss of the services of our senior management and other key personnel could adversely affect execution of our business strategy.
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We have acquired and may continue to acquire other businesses. These acquisitions divert a substantial part of our resources and
management attention and could in the future, adversely affect our financial results.
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Our share price has fluctuated significantly and could continue to fluctuate significantly.
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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.
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Our business and financial performance may be materially adversely affected by information technology issues, data breaches, cyber-attacks
and other similar incidents, as well as insufficient cybersecurity and other business disruptions.
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If we fail to detect or prevent fraudulent, suspicious 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.
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We depend on third-party service providers, suppliers and vendors, such as internet, telecommunication, data center, cloud computing
and hosting providers, to operate our platforms, websites and services. Temporary failure of these services, including catastrophic or
technological interruptions, would materially reduce our revenue and damage our reputation, and securing alternate sources for these services
could significantly increase our expenses and be difficult to obtain.
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5
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Our business depends on our ability to collect, use, maintain and otherwise process data, including personal data, to help our clients
deliver advertisements and to disclose data relating to the performance of advertisements. Any limitation imposed on our collection, use,
maintenance or other processing of this data could significantly diminish the value of our solution and cause us to lose sellers, buyers,
and revenue. Regulations, legislation or self-regulation relating to data protection, data privacy, cybersecurity, e-commerce and internet
advertising and uncertainties regarding the application or interpretation of existing or newly adopted laws and regulations threaten our
ability to collect, use, maintain and otherwise process this data, could harm our business and subject us to significant costs and legal
liability for non-compliance.
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Our proprietary information, technology and other intellectual property may not be adequately protected and thus our intellectual
property may be unlawfully copied by or disclosed to other third parties.
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Our business relies significantly on the North American market. Any material adverse change in that market could have a material
adverse effect on our results of operations.
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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.
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Political, economic and military instability in the Middle East and specifically in Israel may impede our ability to operate and
harm our financial results. Conditions in Israel, including the recent attack by Hamas and other terrorist organizations from the Gaza
Strip and elsewhere in the region, and Israel’s war against them, may adversely affect our operations which would lead to a decrease
in revenues.
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You should not rely on forward-looking statements as predictions
of future events. We have based the forward-looking statements contained in this Annual Report primarily on our current expectations and
projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome
of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section
titled “Risk Factors” and elsewhere in this Annual Report. Moreover, we operate in a very competitive and rapidly changing
environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties
that could have an impact on the forward-looking statements contained in this Annual Report. The results, events and circumstances reflected
in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from
those described in the forward-looking statements.
In addition, statements that “we believe” and similar
statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the
date of this Annual Report. While we believe that information provides a reasonable basis for these statements, that information may be
limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of,
all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Annual Report relate
only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made
in this Annual Report to reflect events or circumstances after the date of this Annual Report or to reflect new information or the occurrence
of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our
forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements
do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
6
TABLE OF CONTENTS
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Page
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3
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3
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Presentation of Financial and Other Information
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10
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| 10 | |
| 10 | |
| 10 | |
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[RESERVED]
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10 |
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A.
Selected
Financial Data
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10 |
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B.
Capitalization
and Indebtedness
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10 |
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C.
Reasons
for the Offer and Use of Proceeds
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10 |
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D.
Risk
Factors
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10 |
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44
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A.
History and Development of the Company
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44
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B.
Business
Overview
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45
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C.
Organizational
Structure
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58
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D.
Property,
Plants and Equipment
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58
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59
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59
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A.
Operating
Results
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59
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B.
Liquidity
And Capital Resources
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62
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C.
Research,
Development, Patents and Licenses, Etc.
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64
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D.
Trend
Information
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64
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E.
Critical Accounting Estimates
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66
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68
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A.
Directors
and Senior Management
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68
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B.
Compensation
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71
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C.
Board
Practices
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74
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D.
Employees
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77
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E.
Share
Ownership
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78
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F.
Disclosure of a Registrant’s Action to Recover Erroneously
Awarded Compensation
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79
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7
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80
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A.
Major
Shareholders
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80
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B.
Related
Party Transactions
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81
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C.
Interests
of Experts and Counsel
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81
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81
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A.
Consolidated
Statements and Other Financial Information
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81
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B.
Significant
Changes
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82
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| 82 | |
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A.
Offer
and Listing Details
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82 |
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B.
Plan
of Distribution
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82 |
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C.
Markets
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82 |
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D.
Selling
Shareholders
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82 |
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E.
Dilution
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82 |
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F.
Expenses of the Issue
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82 |
| 82 | |
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A.
Share
Capital
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82 |
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B.
Memorandum
and Articles of Association
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82 |
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C.
Material
Contracts
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82 |
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D.
Exchange
Controls
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83
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E.
Taxation
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83
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F.
Dividends and Paying Agents
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91
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G.
Statement
by Experts
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91
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H.
Documents
on Display
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92
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I.
Subsidiary Information
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92
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J.
Annual Report to Security Holders
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92
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92
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93
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8
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93
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94
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95
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96
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| 96 | |
| 96 | |
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97
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98
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98
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F-1
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9
PART I
ITEM 1.
IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2.
OFFER
STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3.
KEY
INFORMATION
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A.
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SELECTED FINANCIAL DATA
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Reserved.
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B.
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CAPITALIZATION AND INDEBTEDNESS
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Not applicable.
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C.
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REASONS FOR OFFER AND USE OF PROCEEDS
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Not applicable.
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D.
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RISK FACTORS
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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 Search
Business
Our search advertising solution depends heavily
upon revenue 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. (“Microsoft”). We entered into our first agreement with Microsoft in 2010. In November 2020,
we entered into a renewed agreement with Microsoft effective as of January 1, 2021 and in effect until December 31, 2024 (the “Microsoft
Agreement”). In 2022, our search advertising business Unit, CodeFuel, was named by Microsoft Advertising the “Global Supply
Partner of the Year”. The Microsoft Agreement accounted for 37%, 35% and 34% of our revenue, in 2021, 2022 and 2023, respectively.
If the Microsoft Agreement is terminated, expires or is substantially
amended on terms not favorable to us, we would experience a material decrease in our search advertising revenue and profits and would
be forced to seek additional or alternative search provider services, at less competitive terms or accelerate the business we have with
such search providers. In the first quarter of 2024, we experienced a decline in our search advertising activity, attributable to changes
in advertising pricing and mechanisms implemented by Microsoft in its search distribution marketplace. These adjustments led to a reduction
in Revenue Per Thousand Impressions (RPM) for both Perion and other Microsoft distribution partners. These changes contributed to decreased
search volume. Our results of operations were negatively impacted as a result in the first quarter of 2024 and we expect an adverse impact
on our results of operations in the future. Only a few companies in the market provide internet search and search advertising services
similar to those provided by Microsoft, such as Google and Yahoo. Such companies are substantially the only participants in western markets,
and their 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 expedite current operations we have with such alternative search providers, or if we do, but the
alternatives do not provide for terms that are as favorable as those currently provided and utilized, we would experience a material reduction
in our revenue and, in turn, our business, financial condition and results of operations would be adversely affected.
The generation of search advertising revenue
through publishers is subject to competition. If we cannot compete effectively in this market, our revenue is likely to decline.
We obtain a significant portion of our revenue through the configuration
of our search service as the default search provider during the download and installation of our publishers’ products and/or use
by their services of our search offering and the subsequent searches performed by the users thereof. In both 2022 and 2023, the top five
publishers distributing our search services accounted for approximately 11% of our revenue. There can be no assurance that our current
publishers will continue utilizing our revenue-generating monetization services at the levels they did in the past or at all or on terms
not less favorable to us. Additionally, traffic from low-quality sources, including websites with irrelevant content or poor user engagement
have impacted and may negatively impact the effectiveness of our search advertising. The loss of a substantial portion of our relationships
with our publishers, or a substantial reduction in their level of activity, could cause a material decline in our revenue and profitability.
10
To achieve these goals, we heavily rely on third-party publishers
to distribute and/or implement our search offering as a value-added component of their own offerings at a price sufficient to drive acceptable
margins. 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 and some of them may have other monetization solutions. The large search engine companies, including Google, Microsoft, Yahoo
and others, have become increasingly aggressive in their own search service offerings. In addition, we need to continuously 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 in more direct relationships with publishers or we are unable to maintain the technological advantage to service our
publishers, we may lose both current and potential new publishers and our ability to generate revenue will be negatively impacted.
In order to receive advertising-generated revenue
from our search providers, we depend, in part, on factors outside of our control.
The amount of revenue we receive from search providers depends
upon a number of factors outside of our control, including the amount such search providers charge for advertisements, the efficiency
of the search provider’s system in attracting advertisers and syndicating paid listings in response to search queries, and parameters
established by such search provider regarding the number and placement of paid listings displayed in response to search queries. In addition,
search providers analyze 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, have impacted our business and could have
an adverse effect on our business, financial condition and our results of operations. In the first quarter of 2024, we experienced a decline
in our search advertising activity, attributable to changes in advertising pricing and mechanisms implemented by Microsoft in its search
distribution marketplace. These adjustments led to a reduction in Revenue Per Thousand Impressions (RPM) for both Perion and other Microsoft
distribution partners. These changes contributed to decreased search volume. For additional information see also the Risk Factor
titled - “Our search advertising solution depends heavily upon revenue generated from our agreement with Microsoft, and any adverse
change in that agreement could adversely affect our business, financial condition and results of operations.”
Should the methods used for the distribution
of our search solution, be blocked, constrained, limited, materially changed, based on a change of policies, technology or otherwise
(as has happened in the past), or made redundant by any of our search engine providers, our ability to generate revenue from our
search activity could be significantly reduced.
Agreements with search providers, such as our agreements with Microsoft
and Yahoo, require compliance with certain policies promulgated by them for the use of the respective brands and services, including the
manner in which paid listings are displayed within search results, as well as the establishment of policies to govern certain activities
of third parties to whom the search services are syndicated, including the manner in which those third parties can acquire new users and
drive search traffic. Subject to certain limitations, search partners may unilaterally update their policies, 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’ policies, 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.
Our search providers have changed these policies with respect to
method of distribution, quality of traffic sources, homepage resets, and default search resets as well as other matters numerous times
in the past, having negative revenue implications for us. Since then, both companies have continued changing the policies governing their
relationship with search partners like us. Should any of our large partnerships be deemed non-compliant, blocked or partner with another
provider, it could be difficult to replace the revenue generated by that partnership and we would experience a material reduction in our
revenue and, in turn, our business, financial condition and results of operations would be adversely affected.
Should the providers of platforms, particularly
browsers, further block, constrain or limit our ability to offer or change search properties, or materially change their policies,
technology or the way they operate, our ability to generate revenue from our search activity could be significantly reduced.
As we provide our services through the internet, we rely on our
ability to work with different internet browsers. The internet browser market is extremely concentrated with Google’s Chrome, Safari,
Microsoft Edge and Mozilla’s Firefox, accounting for over 93% of the desktop browser market in 2023, with Google’s Chrome
alone accounting for over 64%, based on StatCounter reports as of March 2024. 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 68% of the market in 2023, and Apple MacOS accounting for more than
18% of the market, based on StatCounter reports. 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 ensure that users’ browser settings were optimally compatible
with our services. If Microsoft, Google, Apple or other companies that provide internet browsers, operating systems or other platforms
were to 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.
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Currently most users access the internet through
mobile devices, while a substantial part of our search revenue generation and services are currently not widely spread on mobile platforms.
Also, web-based software and similar solutions impact the attractiveness of downloadable software products.
Historically, the market for search services for desktop computers
has accounted for a substantial part of our search revenue. In recent years, there has been a trend towards shifting internet usage from
desktop computers to mobile devices such as mobile phones, tablets, etc. While in 2016 desktop worldwide market share was 54.09% it declined
over the years and stood at 43.72% in 2023, based on StatCounter reports. On the other hand, mobile worldwide market share in 2016 was
45.91% rising over the years and stood at 56.28% in 2023, based on StatCounter reports. If this trend towards using mobile devices accelerates
and desktop usage further declines, 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 to such decline in desktop usage.
Web (or “cloud”) based software and similar solutions
do not require the user to download software to their device and thus provide a very portable and accessible alternative to downloadable
software. While there are advantages and disadvantages to each method and system and the markets for each of them remain large, the market
for web-based systems is growing at the expense of downloadable software. Should this trend accelerate faster than our partners’
ability to provide differentiating advantages in their downloadable solutions, this could result in fewer downloads of their products
and lower search revenue generated through the use of these products. See Item 4.B. “Business Overview—Competition”
for additional discussion of our competitive market.
Our software or provision of search services
or advertising is occasionally blocked by software or utilities designed to protect users’ computers, thereby causing our business
to suffer.
Some third parties, such as anti-virus software providers, categorize
some of our products and offerings as promoting or constituting “malware” or “spamming,” or unnecessarily 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 problem increases or if we are unable to detect
and effectively reverse such categorization of our products and offerings, we may lose both existing and potential new users and our ability
to generate revenue will be negatively impacted.
Risks Related to our Business and Industry
Our advertising customers comprised of brands,
advertising agencies, DSPs and SSPs 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, which include brands, demand side partners, advertising agencies, and supply side partners, 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 subjects us to increased pricing pressure. Although we believe our rates are competitive, our competitors may
offer more favorable pricing or other advantageous terms. In light of the above factors, we seek to diversify our offerings and, as part
of our strategy, provide our customers with different advertising solutions and constantly adapt our relationship with our customers to
respond to their ever-changing 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 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 maintain our profit margins.
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Large and established internet and technology
companies, such as Google, Meta, Apple and Amazon, play a substantial role in the digital advertising market and may significantly
harm our ability to operate in this industry.
Google, Meta, Apple and Amazon account for a large portion of the
digital advertising market and digital advertising budgets. The high concentration in the market subjects us to the risk of any unilateral
changes Google, Meta, Apple and Amazon may make with respect to advertising on their respective lucrative platforms. These changes may
significantly harm our ability to operate in this industry and we could be limited in our ability to respond and adjust to such changes.
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 ways that impact the entire digital advertising marketplace.
Google’s 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 our subsidiary, Undertone, is also a member), and removes all ads from certain sites
that violate this standard. In addition, Google announced that it will begin phasing out third-party cookies in Chrome by disabling them
for 1% of users starting in Q1 2024 and ramping up to 100% of users in the third quarter in 2024. Google also announced its initiative
to avoid sharing a user's real IP address with third parties (a proposal called “IP Protection”), which could hamper geo-targeting
for advertisements or make it impossible. The IP Protection initiative is still in its early phases and has yet been implemented in any
browser.
Moreover, the leading mobile operating systems, Apple iOS and Google
Android, have implemented, and may plan to further implement, advertising and targeting restrictions within applications running on their
platforms.
These changes, together with other advertisement-blocking technologies
incorporated in or compatible with leading internet browsers and operating systems, could impact our (as well as those of our competitors)
advertising business. These changes could materially impact the way we do business, and if we or our advertisers and publishers are unable
to quickly and effectively adjust and provide solutions to those changes, there could be an adverse effect on our revenue and performance.
The concentration of large companies within
the industry and 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 the past and we expect this trend to continue, increasing the capabilities and competitive posture of larger companies,
particularly those that are already dominant in various ways, and enabling new or stronger competitors to emerge. We are currently able
to serve, track and manage advertisements on a variety of networks and websites for our customers as well as for our own operations. The
consolidation trend could substantially harm our ability to operate if such larger companies decide not to permit us to serve, track or
manage advertisements on their websites and/or on our properties, if they develop ad placement systems that are incompatible with our
ad serving capabilities or if they use their market power to force their customers to use certain vendors on their networks or websites
and/or on our properties.
Certain of our primary advertisers and publishers are owned, affiliated
with or controlled by a small number of large holding companies. If any of these holding companies decide to reduce, amend or terminate
their business relationship with us for any reason, and/or in case there is a rapid and/or significant decline in inventory available
to us, it may lead to a material adverse impact on our business, financial conditions and results of operation.
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If the demand for digital advertising
does not continue to grow or customers do not embrace our solutions, it could have a material adverse effect on our business
and
results of operation.
A substantial portion of our advertising revenue is derived from the sale of our digital
advertising solutions and we have made significant investments in our ability to deliver different types of advertisements on diverse
digital channels, including high-impact advertising, video advertising, connected TV (“CTV”), interactive TV (“iCTV”)
and digital out-of-home (“DOOH”), which are compatible on many devices and channels as well as different content monetization
solutions for which we partner with advertising networks to serve ads on our properties as well properties of our publishers. Nonetheless,
(i) customers may prefer other solutions than ours, (ii) our integration with advertising networks may be unsuccessful, (iii) there may
be a reduction in general demand for digital advertising or in spend for certain channels or solutions, (iv) advertising customers may
pay less or exclude supply inventory on publishers websites that are “Made for Advertising” or for other reasons, or (v) the
demand for our specific solutions and offerings may decrease, as have impacted us in the past, and could lead to a material adverse impact
on our business, financial conditions and results of operation.
Due to our evolving business model and rapid
changes in the industry in which we operate and the nature of services we provide, it is difficult to accurately predict our future
performance and may be difficult to increase revenue or profitability.
As the digital advertising ecosystem is dynamic, seasonal and subject
to shifts in spending trends, it is hard to predict our future performance, particularly with regard to the effect of our efforts to increase
revenue and profitability. Although we diversify our business, there is no assurance that we will not be adversely affected by shifts
in advertisers’ spending. 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 may adversely affect
our business and profitability.
In addition, we may experience an overall decline in advertising
spending and demand for our solutions as a result of enhanced competition, decrease in market demand, macroeconomic conditions, higher
rates of global inflation and shifts in spending trends. If we are unable to respond to such changes and timely adapt our business model,
we may not be able to sustain growth, meet our business targets or achieve or sustain profitability and our business may be adversely
affected.
We depend on supply sources to
provide us with advertising inventory in order for us to deliver advertising campaigns in a cost-effective manner.
We
also depend on service providers or partners who provide us with critical products and services.
We rely on a diverse set of publishers including direct publishers,
advertising exchange platforms, media owners, social networks and other platforms, that aggregate advertising inventory, to provide us
with high-quality digital advertising inventory on which we deliver ads, collectively referred to as “supply sources”. Our
intelligentHUB (“iHUB”) allows us to optimize utilization of our owned and operated supply, as well as what is available on
the open web. Together with that, the future growth of our advertising business will depend, in part, on our ability to maintain, expand
and further develop successful business relationships in order to increase the network of our supply sources.
Our supply sources typically make their advertising inventory available to us on a non-exclusive
basis and are not required to provide any minimum amounts of advertising inventory to us or to provide us with a consistent supply of
advertising inventory, at any predetermined price or through real-time bidding. Supply sources often maintain relationships with various
demand partners that compete with us, and it is easy for supply sources to quickly shift their advertising inventory among these demand
partners, or to shift inventory to new demand partners, without notice or accountability. Supply sources may also change the terms on
which they offer inventory to us, or they may allocate their advertising inventory to our competitors who may offer more favorable economic
terms, better solutions or more advanced technology. Supply sources may also elect to sell all, or a portion, of their advertising inventory
directly to advertisers and advertising agencies, or they may develop their own offerings competitive to ours, 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 provide us with sufficient amounts of high-quality digital advertising inventory in order for us to fulfill the demands of our
advertising customers. Some of the supply inventory is known as “Made for Advertising” and is less attractive to or excluded
by some of our advertising customers. Restrictions from advertisers, DSPs or SSPs regarding usage of this inventory source have impacted
us and could materially adversely impact our operations and revenue.
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Additionally, our ability to access advertising inventory in a
cost-effective manner may be constrained or affected as a result of a number of other factors, including, but not limited to:
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Supply sources may impose significant restrictions on the advertising inventory they sell or may impose other unfavorable terms and
conditions on the advertisers using their sites or platforms. For example, these restrictions may include frequency caps, prohibitions
on advertisements from specific advertisers or specific industries, or restrictions on the use of specific creative content or advertising
formats as well as content adjacent restrictions, which would restrain our supply of available inventory.
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Supply sources that offer online content and mobile applications may shift from an advertising-based monetization method to a pay-for-content/services
model, allowing users of services to pay a subscription in exchange for not to be shown advertisements. If they elect not to pay, then
in order to use the service, the user consents to the processing of their data for advertising purposes. This may reduce available inventory.
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Social media platforms, such as Meta’s Facebook, may be successful in keeping users within their sites, which may be competitive
to our offerings and solutions. If, as a result, users are not on the open web, online advertising inventory outside of such platforms
(including our publishers’ and our owned and operated sites) may be reduced or may become less attractive to our advertising customers.
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Supply sources may be reluctant or unable to adopt certain of our proprietary and unique high-impact, CTV, iCTV and video ad formats
for a variety of reasons (such as changes in user preference 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.
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Similarly, our service providers or partners which provide us with
services that are critical to our business could terminate their relationship with us at any time or with minimal notice. Our digital
advertising business relies on a number of third-party data, measurement and verification vendors as well as cloud computing and API services.
Should any of these vendors choose to terminate or modify on less favorable terms their relationships with us, and/or if we were to fail
to identify and contract with acceptable substitute vendors, we may not be able to offer those of our services that depend on such vendors
at the level of quality our customers expect or at all.
Because of these factors, we seek to expand and diversify our supply
sources; nonetheless, if we fail to diversify our sources or if our supply sources terminate or reduce our access to their advertising
inventory or services, increase the price of inventory or services or place significant restrictions on the sale of their advertising
inventory or services, 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 these sources with inventory from
other supply sources that satisfy our quality requirements as well as other requirements in a timely and cost-effective manner. If any
of these happens, our revenue could decline or our cost of acquiring inventory could increase, which, in turn, could lower our operating
margins and materially adversely affect our advertising business. For additional information see also the Risk Factor titled - “
The
concentration of large companies within the industry and consolidation among participants within the digital advertising market could
have a material adverse impact on our business, financial condition and results of operations.”
Our Display 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 demand from brands, advertising agencies, demand side partners (which include third-party DSPs) and
supply side partners (which include third-party SSPs). We have spent, and expect to continue spending, considerable sums and other resources
on the establishment, building and maintenance of our brands, as well as on enhancing market awareness of them. Our brands, however, may
be negatively impacted by a number of factors, including but not limited to, fraudulent, inappropriate or misleading content on our own
sites and those we operate, as well as on publishers’ inventory on which we serve ads, service outages, product malfunctions, data
protection, data privacy and cybersecurity issues, and exploitation of our trademarks by others without our permission. If we are unable
to maintain or enhance our brands in a cost-effective manner, our business and operating results could be materially adversely affected.
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Non-compliance with industry self-regulation
could negatively impact our Display Advertising business, brand and reputation.
In addition to compliance with applicable laws and regulations,
we voluntarily participate in industry self-regulatory bodies which promulgate best practices or codes of conduct addressing, among other
things, data protection, data privacy, cybersecurity and the delivery of digital advertising. Some of our subsidiaries voluntarily participate
in several such trade associations and industry self-regulatory groups, such as the Network Advertising Initiative (NAI), and the Digital
Advertising Alliance (DAA), the Interactive Advertising Bureau (IAB) and TAG Certified Against Fraud. If we or our subsidiaries are unable
to follow and abide by the rules and principles provided by such self-regulatory bodies 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, or by 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, or cause damage to our brand, which in turn could materially adversely affect our business,
financial condition and results of operations. We also could be adversely affected by new or altered self-regulatory guidelines that are
inconsistent with our current practices or in conflict with applicable laws and regulations in the United States, Canada, 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 data protection, data privacy, cybersecurity or the delivery of digital advertising,
our reputation may suffer and we could lose relationships with both buyers and sellers which may adversely affect our business and results
of operations.
We may be unable to deliver advertising in a
brand-safe environment or protect inventory from receiving unsafe advertising or content, 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. It is equally important for publishers not to have inappropriate content placed within their inventory.
While we strive to have all of our advertisements appear in a brand-safe environment and all inventory free from inappropriate content,
we cannot guarantee that they will be delivered in such an environment. If we are not successful in doing so, we may experience reputational
damage that could impede our ability to attract new business and additionally could decrease business affairs with existing advertisers
and publishers, or our customers may seek to avoid payment or demand refunds, any of which could harm our business, financial condition
and results of operations.
The advertising industry is highly competitive.
If we cannot compete effectively and overcome the technological gaps in this market, our revenue is likely to decline.
We face intense competition in the advertising industry. We operate
in a dynamic market that is subject to rapid development and the introduction of new technologies, products and solutions, changing branding
objectives, evolving customer demands rules, regulations and industry guidelines, all of which affect our ability to remain competitive.
There are a large number of digital media companies and advertising technology companies that offer products or services similar to or
more compelling than ours and that compete with us for finite advertising budgets and for limited inventory from publishers. Additionally,
companies that do not currently compete with us in this space may change their services to be competitive if there is a revenue opportunity,
and new or stronger competitors may emerge through consolidations or acquisitions. If our digital advertising platform and solutions are
not perceived as competitively differentiated, or if we fail to develop adequately to meet market evolution, or fail to acquire companies
to help us overcome the technological gaps in a timely manner and meet the market demands, we could lose customers and market share or
be compelled to reduce our prices and harm our operational results.
Our reputation is a key factor in our ability to compete successfully.
There is no assurance that our ability to compete effectively in the future may not be affected by negative market perception. Because
of these factors, we continuously seek to diversify our product suite to respond to the changing needs and interests of our customers
to benefit from a variety of different offerings, however, we cannot guarantee that we will always be able to accommodate such needs,
that such efforts will yield the expected revenue or that we will adapt quickly enough (or in a cost-effective manner) to evolving changes
in the industry in which we operate and related regulations, technologies, applications and devices, which could adversely impact our
reputation, and, in turn, our business, financial condition and results of operations.
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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 from our advertising business is affected by a number
of factors, including:
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Historically, our advertising business has experienced the lowest revenue levels in the first quarter and highest revenue levels
in the fourth quarter, with the second and third quarters being slightly stronger than the first quarter;
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Our advertising solutions revenue are influenced by political advertising in the US, which generally occurs every two years;
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In any single period, our advertising solutions revenue and delivery costs are subject to significant variation based on changes
in the volume and mix of deliveries performed during such period;
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Revenue is subject to the changes of brand marketing trends, including when and where brands choose to spend their money in a given
year;
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Advertising customers generally retain the right to supplement, extend, or cancel existing advertising orders at any time prior to
their delivery, and we have no control over the timing or magnitude of these revenue changes; and
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Relative complexity of individual advertising formats, and the length of the creative design process.
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As a result, in most cases, our profit from these operations is
seasonal, with the fourth quarter being the major contributor to our profits and the first quarter resulting in the lowest profit.
If our campaigns are not able to reach certain
performance goals or we are unable to measure certain metrics proving achievement of those goals, it 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 in our online business; user engagement, view ability, clicks or
conversions, or, in our DOOH business; brand awareness, foot traffic, and sales lift to validate their value proposition, particularly
as we offer costlier premium advertising services to clients. We may have difficulty achieving or proving these performance levels for
a variety of reasons (for example, it may be difficult to track view ability on our proprietary high-impact ad units, either directly
or through a third-party vendor), which could cause clients to cancel campaigns, not provide repeat business or request make-goods
or refunds.
Increased availability of advertisement-blocking
technologies could limit or block the delivery or display of advertisements by our solutions, which could undermine the viability
of our business, financial condition and results of operations.
Advertisement-blocking technologies, such as mobile apps or browser
extensions that limit or block the delivery or display of advertisements, are currently available for desktop, tablet and mobile users.
Further, new browsers and operating systems, or updates to current browsers or operating systems, offer native advertisement-blocking
technologies to their users, such as the support in Google Chrome for blocking advertisements from web sites that violate the “Better
Ads Standards” established by the Coalition for Better Ads (in which Undertone is a member). Furthermore, users can employ their
own advertisement-blocking client-based technology or use a browser that blocks advertisements. As such technologies or practices
become widespread, this could have a material adverse effect on our business, financial condition and results of operations.
Our business depends on our ability to collect, use, maintain and
otherwise process data, including personal data, and any limitation on the collection, use, maintenance and other processing of this data could
significantly diminish the value of our solutions and cause us to lose customers, revenue and profit.
In many cases, when we deliver an advertisement, we are able to
collect certain data, including personal data, about the content and placement of the ad, the relevancy of such ad to a user and the interaction
of the user with the ad, such as whether the user viewed or clicked on the ad or watched a video. As we collect and aggregate data provided
by billions of ad impressions and third-party providers, we analyze the data in order to measure and optimize the placement and delivery
of our advertising inventory and provide cross-channel advertising capabilities. Our ability to collect, use, maintain and otherwise process
such data is crucial.
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Our publishers or advertisers may decide not to allow us to collect
some or all of this data or may limit our use, maintenance or other processing of this data. Additional details regarding limitations
on the collection, use, maintenance and other processing of this data due to current and potential future laws and regulations are provided
below under the Risk Factor titled – “
Our business depends on our ability to collect, use,
maintain and otherwise process data, including personal data, to help our clients deliver advertisements, and to disclose data relating
to the performance of advertisements. Any limitation imposed on our collection, use, maintenance or other processing of this data could
significantly diminish the value of our solution and cause us to lose sellers, buyers, and revenue. Regulations, legislation or self-regulation
relating to data protection, data privacy, cybersecurity, e-commerce and internet advertising and uncertainties regarding the application
or interpretation of existing or newly adopted laws and regulations threaten our ability to collect, use, maintain and otherwise
process this data, could harm our business and subject us to significant costs and legal liability for non-compliance
.”
If we do not continue to innovate and provide
high-quality advertising solutions and services, we may not remain competitive, and our business and results of operations could
be materially adversely affected.
Our success depends on our ability to provide customers with innovative,
high-quality advertising solutions and services that foster consumer engagement. We face intense competition in the marketplace and are
confronted by rapidly changing technology, evolving industry standards, laws, rules and regulations and consumer needs, and the frequent
introduction of new products and solutions by competitors, as well as publishers themselves, that we must adapt and respond to in order
to remain competitive. While developments in artificial intelligence (“AI”) in our industry may present significant opportunities
to our business, at the same time, such developments may raise unexpected challenges, legal, reputational, ethical or technological, or
may not function as expected. For more information on AI-related risks, see the Risk Factor titled – “
Any
actual or perceived failure to comply with evolving legal and regulatory frameworks around the development and use of AI could adversely
affect our business, results of operations, and financial condition.”
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.
Any actual or perceived
failure to comply with evolving legal and regulatory frameworks around the development and use of AI could adversely affect our business,
results of operations, and financial condition. Additionally, AI could increase competition in the advertising technology industry.
We leverage new technologies and platforms to improve our products
and business effectiveness, including use of AI technologies. We leverage machine learning for campaign delivery and optimization, using
real-time analysis to determine the most effective advertisements for specific target audiences, in conjunction with our creative platform.
In 2023 we launched WAVE, our Waveform Audio Voice Engine, a generative AI-powered dynamic audio solution that enables advertisers to
generate personalized audio advertising messages at scale. Undertone’s SORT®, Smart Optimization of Responsive Traits
technology, is a pre-bid technology solution that analyzes all of the non-personal data signals present when a user lands on a page in
Undertone’s network and uses its proprietary AI technology to classify them into intent groups. The solution then serves the most
relevant ad for that intent group. Our search business model currently relies significantly on third-party search engine results, predominantly
those provided by Microsoft Bing and Yahoo. This dependence exposes our operations to the evolving landscape of AI technologies, including
ChatGPT, Copilot and Google’s Gemini, which are increasingly integral to these search engines. The Introduction of ChatGPT in November
of 2022, along with the launch of other AI platforms such as Gemini (formerly known as Bard) by Alphabet Inc., Google's parent company,
Claude by Anthropic, and Grok by X, are anticipated to result in the development of tools that could enhance competition in the advertising
technology industry and reduce barriers to entry. These technologies, while holding significant potential for search result accuracy and
efficiency, introduce uncertainties that could have negative impacts on our business.
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There are significant risks involved in utilizing AI and no assurances
can be provided that our use will enhance our solutions or services or produce the intended results. For example, AI algorithms may be
flawed, insufficient, of poor quality, reflect unwanted forms of bias or contain other errors or inadequacies, any of which may not be
easily detectable; AI has been known to produce false or “hallucinatory” inferences or outputs; AI can present ethical issues
and may subject us to new or heightened legal, regulatory, ethical or other challenges and inappropriate or controversial data practices
by developers and end-users, or other factors adversely affecting public opinion of AI, could impair the acceptance of AI technologies,
including those incorporated into our solutions and services. If the AI tools that we create or use are deficient, inaccurate or controversial,
we could incur operational inefficiencies, competitive harm, legal liability, brand or reputational harm, or other adverse impacts on
our business and financial results. Additionally, if any of our employees, contractors, vendors or service providers use any third-party
AI tools in connection with our business or the services they provide to us, may involve additional risks which may include, without limitation,
outputs obtained from such third-party AI tools containing copyrighted content and disclosure of our sensitive, proprietary, confidential
or personal information into publicly available or third-party training sets. If we do not have sufficient rights to use the data or other
material or content on which the AI tools we use rely, or to use the output of such AI tools, we also may incur liability through the
violation of applicable laws and regulations, third-party intellectual property, data protection, data privacy or other rights, or contracts
to which we are a party.
The technologies underlying AI and its uses are subject to a variety
of laws and regulations, including those related to intellectual property, data protection, data privacy, cybersecurity, consumer protection,
competition and equal opportunity, and are expected to be subject to increased regulation and new laws or new applications of existing
laws and regulations. The AI legal and regulatory landscape is rapidly evolving, and we are or may become subject to numerous state, federal
and foreign laws and regulations governing the use of AI. Implementation standards and enforcement practices are likely to remain uncertain
for the foreseeable future, and we cannot yet determine the impact future laws and regulations may have on our business.
In the United States and internationally, AI is the subject of
evolving review by various governmental and regulatory agencies, including the SEC and the FTC, and changes in laws and regulations governing
the use of AI may adversely affect the ability of our business to use or rely on AI and our ability to provide and to improve our solutions
and services, may require additional compliance measures and changes to our operations and processes, and may result in increased compliance
costs and potential increases in civil claims against us. For example, California and other states have implemented, or are in the process
of implementing, laws and regulations that impose obligations on the use of automated decision making. Further, in October 2023, the President
of the United States issued an executive order on the Safe, Secure and Trustworthy Development and Use of AI, emphasizing the need for,
among other things, transparency, accountability, safety and fairness in the development and use of AI.
In Europe, the European Union (“EU”) the European Parliament
approved the EU Artificial Intelligence Act (“EU AI Act”), which establishes a comprehensive, risk-based governance framework
for regulating AI systems operating in the EU market. The EU AI Act is expected to enter into force in 2024, with the majority of its
substantive requirements applying two years later. The current draft of the EU AI Act will apply to companies that develop, use or provide
AI systems in the EU market and includes requirements around transparency, conformity assessments and monitoring, risk assessments, human
oversight, cybersecurity, accuracy, general purpose AI and foundation models. Additionally, the current draft of the EU AI Act proposes
fines for violations of up to the greater of EUR 35 million or 7% of worldwide annual turnover for the prior year. In addition, on September
28, 2022, the European Commission proposed two Directives seeking to establish a harmonized civil liability regime for AI in the EU, in
order to facilitate civil claims in respect of harm caused by AI and to include AI-enabled products within the scope of the EU’s
existing strict liability regime. If enacted in its current form or a similar form, the EU AI Act is expected to have a material impact
on the way AI is regulated in the EU (and, potentially, globally), together with developing guidance and decisions in this area.
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Our development of proprietary AI technologies and our use of third-party
AI tools could result in the risks mentioned above and additional risks to our business deriving from, or associated with, existing or
upcoming AI-related laws and regulations such as the EU AI Act, enforcement actions related to AI, or court precedents involving AI. We
may not be able to anticipate how to respond to these rapidly evolving laws and regulations, and we may need to expend resources to adjust
our offerings in certain jurisdictions if the legal and regulatory frameworks are inconsistent across jurisdictions. Furthermore, because
AI itself is highly complex and rapidly developing, it is not possible to predict all of the legal or regulatory risks that may arise
relating to the use of AI. If laws and regulations relating to AI are implemented, interpreted or applied in a manner inconsistent with
our current practices or policies, such laws and regulations may adversely affect our use of AI and our ability to provide and to improve
our services, require additional compliance measures and changes to our operations and processes, result in increased compliance costs
and potential increases in civil claims against us, and could adversely affect our business, operations and financial condition.
Sales efforts with advertisers and advertising
agencies require significant time and expense and may ultimately be unsuccessful.
Contracting with new advertisers and advertising agencies requires
substantial time and expenses, and we may not be successful in establishing new relationships or in maintaining current relationships.
It is often difficult to identify, engage, and market to potential advertising customers who are unfamiliar with our brand or services,
and we may spend substantial time and resources educating customers about our unique offerings, including providing demonstrations and
comparisons against other available solutions, without ultimately achieving the desired results. In addition, there has been commoditization
of services provided in digital advertising, resulting in margin pressure. Furthermore, many of our advertising clients’ purchasing
and design decisions generally require input from multiple internal and external parties of these clients, requiring that we identify
those involved in the purchasing decision and devote a sufficient amount of time to present our services to each of those decision-making
individuals. We may not be able to reduce our sales and marketing expenses to correspond proportionately to periods of reduced revenue.
If we are not successful in streamlining our sales processes with potential clients in a cost-effective manner, or if our efforts are
unsuccessful, our ability to grow our business may be adversely affected.
Our growth depends in part on the success of
our relationships with advertising agencies, and third-party DSPs and SSPs.
While we work with some brand advertisers directly, our primary
advertising customers are advertising agencies, third-party DSPs and SSPs who are paid by their brand or other advertiser customers
to develop their media plans. Such agencies, DSPs and SSPs in turn, contract with third parties, like us, to execute and fulfill
their brands’ advertising campaigns. As a result,
our future growth will depend,
in part, on our ability to enter into and maintain successful business relationships with advertising agencies, third-party
DSPs and SSPs.
Identifying advertising agencies, third-party DSPs and
SSPs, engaging in sales efforts, and negotiating and documenting our agreements with advertising agencies, DSPs and SSPs require
significant time and resources. These relationships may not result in additional brand or other advertiser customers or campaigns
for our business, and may not ultimately enable us to generate significant revenue. Our contracts with advertising agencies, DSPs
and SSPs are typically non-exclusive and they often work with our competitors or offer competing services or solutions.
When working with advertising agencies, third-party DSPs
and SSPs to deliver campaigns on behalf of their brand and other advertiser customers, we generally bill the agency, DSP and SSP
for our products and services, and in most cases, the brand has no direct contractual commitment to us to make any payments. While we
have benefited from our relationships with the advertising agencies, DSPs and SSPs we work with, there is no assurance that these
circumstances do not result in the future in longer collection 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
advertising agencies, DSPs and SSPs on commercially reasonable terms or if the advertising agencies are unable to effectively collect
corresponding payments from the brands, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating
results could suffer.
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Our products are dependent on the platform terms
of use and policies that are subject to changes out of our control.
Most of our products depend upon the platforms’ terms of
use and policies (e.g., Google Chrome, Edge, Mozilla, Apple, and Microsoft) which could also affect the terms of use of other platforms
in the industry. We do not control these platforms and cannot anticipate changes made to their policies, and as a result, we are subject
to risks and uncertainties. These policies, guidelines and terms of service govern the promotion, distribution, content and operation
generally of applications and content available through such platforms. Each platform has broad discretion to revise its terms of service,
guidelines and policies, and those changes may have an adverse effect on us or our partners’ ability to use and distribute our products.
A platform may also limit the use of personal information and other
data for advertising purposes or restrict how users can share information on their platform or across other platforms. If we or our customers
were to violate the terms of service, guidelines, certifications or policies, or if a platform believes that we or our customers have
violated, its terms of service, guidelines, certifications or policies, then that platform could limit or discontinue our or our customers’
access. In some cases, these requirements may not be clear and our interpretation of the requirements may not align with that of the platform,
which could lead to inconsistent enforcement of these terms of service or policies against us or our customers and could also result in
limiting or discontinuing access to such platform.
Further, these platforms frequently introduce new technology. Our
reliance on their technology reduces our control over quality of service and exposes us to potential service outages.
Global economic and market conditions
and actions taken by our customers, suppliers and other business partners in markets in which we operate
might
materially adversely impact us.
Negative conditions in the general economy, including conditions
resulting from changes in gross domestic product growth, labor shortages, supply chain disruptions, inflationary pressures, rising interest
rates, financial and credit market fluctuations, international trade relations and/or the imposition of trade tariffs, political turmoil,
natural disasters, regional or global outbreaks of contagious diseases, such as the COVID-19 pandemic, warfare and terrorist attacks,
could cause a decrease in business investments, including spending on advertising, disrupt the timing and cadence of key industry events
and otherwise could materially and adversely affect the growth of our business.
Geopolitical risks, including those arising from trade tension
and/or the imposition of trade tariffs, terrorist activity or acts of civil or international hostility, are increasing. Similarly, the
ongoing military conflict between Russia and Ukraine has had negative impacts on the global economy, including by contributing to rapidly
rising costs of living (driven largely by higher energy prices) and created uncertainty in the global capital markets and is expected
to have further global economic consequences, including disruptions of the global supply chain and energy markets. Further, other events
outside of our control, including natural disasters, climate change-related events, pandemics (such as the COVID-19 pandemic) or health
crises may arise from time to time and be accompanied by governmental actions that may increase international tension. Any such events
and responses, including regulatory developments, may cause significant volatility and declines in the global markets, disproportionate
impacts to certain industries or sectors, disruptions to commerce (including to economic activity, travel and supply chains), loss of
life and property damage, and may materially and adversely affect the global economy or capital markets, as well as our business and results
of operations.
Additionally, the global economy, including credit and financial
markets, has experienced extreme volatility and disruptions, and may continue to experience such disruptions in the future, including
severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment
rates, increases in inflation rates, higher interest rates and uncertainty about economic stability. As a result of these factors, our
revenue may be affected by both decreased customer acquisition and lower than anticipated revenue growth from existing customers. For
example, the COVID-19 pandemic resulted in widespread unemployment, economic slowdown and extreme volatility. Similarly, the ongoing military
conflict between Russia and Ukraine has created extreme volatility in the global capital markets and has caused and could continue to
cause disruptions of the global supply chain and energy markets. While the portion of our revenue directly associated with Russia, Ukraine
and Israel is not material to our consolidated financial results, our business may be affected by broader economic factors caused or intensified
due to the invasion.
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Any such volatility and disruptions may have material and adverse
consequences on us and our customers. Increased inflation and/or interest rates can adversely affect us by increasing our costs, including
labor and employee benefit costs. Any significant increases in inflation and related increase in interest rates could have a material
and adverse effect on our business or our, financial condition or results of operations.
Further, to the extent there is a sustained general economic downturn
and if there is a reduction in general demand and spending for digital advertising, our revenue may be disproportionately affected. Also,
competitors, many of whom are larger and more established than we are, may respond to market conditions by lowering prices and attempting
to lure away our customers and partners. We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery,
generally or within any particular industry. If the economic conditions of the general economy or markets in which we operate worsen from
present levels, our business, results of operations and financial condition could be materially and adversely affected. For more information
on the effect of the war in Gaza see Item 3.D “Key Information—Risk Factors – Political, economic and military instability
in the Middle East and specifically in Israel may impede our ability to operate and harm our financial results.”
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. On
August 1, 2023, Tal Jacobson, former General Manager of CodeFuel, our search advertising business, was promoted to Chief Executive Officer.
Following Jacobson’s promotion, our previous Chief Executive Officer, Doron Gerstel, stepped down from the executive team and later
also from our Board of Directors (when Mr. Jacobson replaced him as a director).
Further, our ability to execute our business strategy also depends
on our ability to continue to attract, retain and motivate qualified, skilled and creative key personnel and management, in technical
marketing and sales and other positions, and in addition to 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
key employees, 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
and partners could be adversely affected. Although we have established programs to attract new employees and provide incentives to retain
existing employees, particularly senior management, we cannot be assured that we will be able to retain the services of senior management
or other key employees as we continue to integrate and develop our solutions or that we will be able to attract new employees in the future
who are capable of making significant contributions and we may face challenges in adequately or appropriately integrating them into our
workforce and organizational culture. See Item 6. “Directors, Senior Management and Employees.”
Competition for highly skilled technical and
other personnel mainly in Israel, the United States and Canada is intense, and as a result we may fail to attract, recruit, retain and
develop qualified employees, which could materially and adversely impact our business, financial condition and results of operations.
We compete in a market marked by rapidly changing technologies
and an evolving competitive landscape. In order for us to successfully compete and grow, we must attract, recruit, retain and develop
personnel with requisite qualifications to provide expertise across the entire spectrum of our intellectual capital and business needs.
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Our principal research and development, certain sales and marketing
as well as significant elements of our general and administrative activities are conducted at our headquarters in Israel and in the United
States and Canada, and we face significant competition for suitably skilled employees in these places. There has been intense competition
for qualified human resources in the high-tech industry, which may intensify in times of sharp growth of the industry, as was the case
in 2021-2022, which resulted in high employee attrition. While layoffs carried out from time to time by large companies present good recruitment
opportunities to our company, our industry is still characterized by high competition between employers. Many of the companies with which
we compete for qualified personnel have greater resources than we do, and we may not succeed in recruiting additional experienced or professional personnel, retaining personnel
or effectively replacing current personnel who may depart with qualified or effective successors.
In addition, as a result of the intense competition for qualified
human resources, the Israeli, United States and Canada high-tech market as well as other markets have also experienced and may continue
to experience significant wage inflation. Accordingly, our efforts to attract, retain and develop personnel may also result in significant
additional expenses, which could adversely affect our profitability. Furthermore, in making employment decisions, particularly in the
high-technology industry, job candidates often consider the value of the equity they are to receive in connection with their employment.
While we offer competitive equity and compensation terms with our employees as a means of improving our employee retention, those terms
and agreements may not be effective towards that goal.
In light of the foregoing, there can be no assurance that qualified
employees will remain in our employ or that we will be able to attract and retain qualified personnel in the future. Failure to retain
or attract qualified personnel could have a material adverse effect on our business, financial condition and results of operations.
We have acquired and may continue to acquire
other businesses. These acquisitions divert a substantial part of our resources and management attention and could in the future,
adversely affect our financial results
We acquired Content IQ in January 2020, Pub Ocean in July 2020,
Vidazoo in October 2021 and Hivestack in December 2023 and we may continue to acquire complementary products, technologies or businesses.
These acquisitions divert a substantial part of our resources and management attention and could in the future, adversely affect our financial
results. Seeking and negotiating potential acquisitions to a certain extent diverts our management’s attention from other business
concerns and is expensive and time-consuming. Acquisitions expose us and our business to unforeseen liabilities or risks associated with
the business or assets acquired or with entering new markets. In addition, we lost and might continue to lose key employees and vendors
while integrating new organizations and may not effectively integrate the acquired products, technologies or businesses or achieve the
anticipated revenue or cost benefits, and we might harm our relationships with our future or current technology suppliers. Future acquisitions
could result in customer dissatisfaction or vendor dissatisfaction or performance problems with an acquired product, technology or company.
Paying the purchase price for acquisitions in the form of cash, debt or equity securities may weaken our cash position, increase our leverage
or dilute our existing shareholders, as applicable. Furthermore, a substantial portion of the price paid for these acquisitions is typically
for intangible assets. We may be required to pay additional funds for earn-outs based on achievement of milestones, or may incur contingent
liabilities, amortization expenses related to intangible assets or possible impairment charges related to goodwill or other intangible
assets (which has occurred in the past) or become subject to litigation or other unanticipated events or circumstances relating to the
acquisitions, and we may not have, or may not be able to enforce, adequate remedies in order to protect our Company. Moreover, acquisitions
may result in losses, in unwanted results and wasting valuable resources, time and money.
In past years, we have recognized impairments
in the carrying value of goodwill and purchased intangible assets. Additional such charges in the future could negatively affect
our results of operations and shareholders’ equity.
We continue to have a substantial amount of goodwill and purchased
intangible assets on our consolidated balance sheet as a result of historical acquisitions. The carrying value of goodwill represents
the fair value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date. The carrying value
of intangible assets with identifiable useful lives represents the fair value of customer relationships, content, domain names and acquired
technology, among other things, as of the acquisition date, and are amortized based on their economic or useful lives. Goodwill that is
expected to contribute indefinitely to our cash flows is not amortized but must be evaluated for impairment at least annually. If the
carrying value exceeds current fair value as determined based on the discounted future cash flows of the related business, the goodwill
or intangible asset is considered impaired and is reduced to fair value via a non-cash charge to earnings. Events and conditions that
could result in impairment include adverse changes in the regulatory environment, a reduced market capitalization or other factors leading
to reduction in expected long-term growth or profitability. Goodwill impairment analysis and measurement is a process that requires significant
judgment. Our stock price and any control premium are factors affecting the assessment of the fair value of our underlying reporting units
for purposes of performing any goodwill impairment assessment.
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We will continue to conduct impairment analyses of our goodwill
as required. Further impairment charges with respect to our goodwill would have a material adverse effect on our results of operations
and shareholders’ equity in future periods.
Shareholders may be able to control us.
As of March 27, 2024, three shareholders beneficially held 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, those shareholders are not party to a voting agreement with respect to our shares. However, should
any of these shareholders or any other shareholders decide to act together, they may have the power to control the outcome of proposals
submitted for the vote of shareholders. In addition, such share ownership may make certain transactions more difficult and result in delaying
or preventing a change in control of the Company, unless approved by such shareholders.
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 1, 2023, and March 27, 2024, our share price on Nasdaq
has fluctuated from a low of $21.58 to a high of $41.85, and the daily average trading volume in that period was 629,267 shares (and for
the period of January 1, 2023, and until December 31, 2023, was 650,207 shares). The following factors may cause significant fluctuations
in the market price of our ordinary shares:
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negative fluctuations in our quarterly revenue and earnings or those of our competitors;
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pending sales into the market due to the sale of large blocks of shares, due to, among other reasons, the expiration of any tax-related
or contractual lock–ups with respect to significant amounts of our ordinary shares;
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shortfalls in our operating results compared to levels forecast by us or by securities analysts;
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changes in our senior management;
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changes in regulations or in policies of search engine companies or other industry conditions;
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mergers and acquisitions by us or our competitors;
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technological innovations;
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the introduction of new products;
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the conditions of the securities markets, particularly in the internet and Israeli sectors; and
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political, economic and other developments in Israel (including the recent war between Israel and Hamas) and worldwide.
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In addition, we were, and may be in the future, the subject of
unfavorable allegations made by short sellers, who hope to profit from a decline in the value of our shares. Any such allegations may
be followed by periods of instability or decrease in the market price of our ordinary shares and negative publicity.
Further, 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 Ltd., 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.
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Future sales of our ordinary shares could reduce
our stock price.
As of March 27, 2024, there was an aggregate of 2,804,227 outstanding
options to purchase our ordinary shares and restricted share units (“RSUs”). As these securities vest, the holders thereof
could sell the underlying shares without restrictions, except for the volume limitations under Rule 144 applicable to our affiliates.
Sales by shareholders of substantial amounts of our ordinary shares,
or the perception that these sales may occur in the future, could materially and adversely affect the market price of our ordinary shares.
Furthermore, the market price of our ordinary shares could drop significantly if our executive officers, directors, or certain large shareholders
sell their shares, or are perceived by the market as intending to sell them.
We cannot guarantee that we will repurchase
any of our ordinary shares pursuant to our announced repurchase program or that our repurchase program will enhance long-term shareholder
value.
As of filing of this report, our board of directors authorized
our repurchase program under which an amount of $75 million was made available to purchase our ordinary shares. The repurchase program,
as authorized by our board of directors, provides the Company with the authority to make repurchases of our ordinary shares. The program
is subject to the issuance of the Company’s audited annual financial report for the year 2023, which is part of this annual report.
The specific timing and amount of repurchases under the repurchase program will depend upon several factors, including but not limited
to market and business conditions, the trading price of our ordinary shares, regulatory requirements and capital availability. The program
does not require the purchase of any minimum dollar amount or number of shares and the program may be modified, suspended or discontinued
at any time.
Repurchases of our ordinary shares pursuant to our repurchase program
could affect the market price of our ordinary shares or its volatility. Additionally, our repurchase program could diminish our cash reserves,
which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. There is
no assurance that our repurchase program will enhance long-term shareholder value, and short-term share price fluctuations could reduce
the repurchase program’s effectiveness.
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 salary and other
personnel related expenses, are incurred in NIS and, following the acquisition of Hivestack in December 2023, in Canadian Dollars as well.
Inflation in Israel or in Canada may have the effect of increasing the U.S. dollar cost of our operations in Israel or in Canada, respectively.
Further, whenever the U.S. dollar declines in value in relation to the NIS or Canadian Dollar, it will become more expensive for us to
fund our operations in Israel or in Canada, respectively. Based on our estimation, without an effective hedging, a revaluation of one
percent of the NIS as compared to the U.S. dollar could impact our income before taxes by approximately $0.4 million, and a revaluation
of one percent of the Canadian Dollar 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, decreased by approximately 3% in 2021 and increased by
13% and 3% in 2022 and 2023, respectively. The exchange rate of the Canadian Dollar was also volatile during 2023 and ended the year substantially
at same level as at the beginning of the year. As of December 31, 2023, we had a foreign currency net asset of approximately $10.5 million
(which number includes approximately $2.0 million in NIS denominated to the right of use liability relates to our offices in Israel),
and our total foreign exchange loss was approximately $0.6 million for the year ended December 31, 2023. To assist us in assessing whether,
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.
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We do not intend to pay cash dividends in the
foreseeable future.
Although we have paid cash dividends in the past, we have not adopted
a policy regarding the distribution of dividends in the foreseeable future. Our current policy is to retain future earnings, if any, for
funding growth as well as for our plan for repurchase of our shares. If we do not pay dividends, long-term holders of our shares will
generate a return on their investment only if the market price of our shares appreciates between the date of purchase and the date of
sale of our shares.
Any future dividend distributions are subject to the discretion
of our board of directors and will depend on various factors, including our operating results, future earnings, capital requirements,
financial condition, and tax implications of dividend distributions on our income, future prospects and any other factors deemed relevant
by our board of directors. The distribution of dividends is also limited by Israeli law, which permits the distribution of dividends by
an Israeli corporation only out of its retained earnings as defined in Israel’s Companies Law, 5759-1999, or the Companies Law,
provided that there is no reasonable concern that such payment will cause us to fail to meet our current and expected liabilities as they
become due, or otherwise with the court’s approval. See Item 8.A “Consolidated Statements and Other Financial Information—Policy
on Dividend Distribution” for additional information regarding the payment of dividends.
We are subject to ongoing costs and risks associated
with complying with extensive corporate governance and disclosure requirements.
As an Israeli public company, traded on Nasdaq, we incur significant
legal, accounting and other expenses. We incur costs associated with our public company reporting requirements as well as costs associated
with corporate governance and public disclosure requirements, including requirements under the Sarbanes-Oxley Act of 2002, the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010, the Listing Rules of the Nasdaq Stock Market, regulations of the SEC, the provisions
of the Israeli Securities Law that apply to dual listed companies (companies that are listed on the Tel Aviv Stock Exchange Ltd. (“TASE”)
and another recognized stock exchange located outside of Israel) and the provisions of the 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 and reporting and other requirements 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 and other intangible assets are generally characterized as non-passive or passive assets based on the nature of the income produced
in the activity to which the goodwill and other intangible assets relate.
We believe that we were not a PFIC for our 2023 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 and other intangible assets, 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
and other intangible assets may be determined by reference to our market capitalization from time to time, and because we hold and may
continue to hold significant amounts of cash and cash equivalents, our risk of being or becoming a PFIC for any taxable year will increase
if our market capitalization declines.
If we are a PFIC for any taxable year during which a U.S. investor
owns our ordinary shares, the U.S. investor could be subject to adverse U.S. federal income tax consequences. See “Taxation –
U.S. Federal Income Tax Considerations – Passive Foreign Investment Company Rules.”
Our business could be negatively affected as
a result of actions of activist shareholders, and such activism could impact the trading value of our securities.
In recent years, certain Israeli issuers listed on United States
exchanges, including our Company, have been faced with governance-related demands from activist shareholders, as well as unsolicited tender
offers and proxy contests. Although as a foreign private issuer we are not subject to U.S. proxy rules, responding to these types of actions
by activist shareholders could be costly and time-consuming, disrupting our operations and diverting the attention of management and our
employees. Such activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for the election
of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant
time and attention by management and our board of directors. The perceived uncertainties due to these potential actions of activist shareholders
also could affect the market price and volatility of our securities.
The rights and responsibilities of our shareholders
are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
We are incorporated under Israeli law. The rights and responsibilities
of holders of our ordinary shares are governed by our memorandum of association, articles of association and by Israeli law. These rights
and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular,
a shareholder of an Israeli company has a duty to act in good faith in exercising his or her rights and fulfilling his or her obligations
toward the company and other shareholders and to refrain from abusing his or her power in the company, including, among other things,
in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder
votes at the general meeting with respect to, among other things, amendments to a company’s articles of association, increases in
a company’s authorized share capital, mergers and actions and transactions involving interests of officers, directors or other interested
parties which require shareholders’ approval. There is little case law available to assist in understanding the implications of
these provisions that govern shareholder behavior.
As a foreign private issuer, whose shares are
listed on Nasdaq, we follow certain home country corporate governance practices instead of certain Nasdaq requirements.
As a foreign private issuer (as such term is defined in Rule 3b-4
under the Exchange Act), whose shares are listed on Nasdaq, we are permitted to follow certain home country corporate governance practices
instead of certain requirements contained in the Nasdaq listing rules. We follow the requirements of the Companies Law in Israel, rather
than comply with the Nasdaq requirements, in certain matters, including with respect to the quorum for shareholder meetings, sending annual
reports to shareholders, and shareholder approval with respect to certain issuances of securities. See Item 16.G. “Corporate Governance”
in this Annual Report on Form 20-F for a more complete discussion of the Nasdaq Listing Rules and the home country practices we follow.
As a foreign private issuer listed on Nasdaq, we may also elect in the future to follow home country practice with regard to other matters
as well. Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq’s corporate governance rules
to shareholders of U.S. domestic companies.
27
Provisions of our articles of association and
Israeli law may delay, prevent or make an acquisition of our Company difficult, which could prevent a change of control and, therefore,
depress the price of our shares.
Israeli corporate law regulates mergers, requires tender offers
for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant
shareholders and regulates other matters that may be relevant to these types of transactions. In addition, our articles of association
contain provisions that may make it more difficult to acquire our Company, such as provisions establishing a staggered board. Furthermore,
Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. See Exhibit 2.1 to this annual
report on Form 20-F, which is incorporated by reference into this annual report on Form 20-F, and Item 10.E. “Taxation—Israeli
Taxation” for additional discussion about some anti-takeover effects of Israeli law.
These Provisions of Israeli law may delay, prevent or make difficult
an acquisition of our Company, which could prevent a change of control and therefore depress the price of our shares.
We must meet the Nasdaq Global
Select Market’s continued listing requirements and comply with the other Nasdaq rules, or we may risk delisting. Delisting
could negatively affect the price of our ordinary shares, which could make it more difficult for us to sell securities in a financing
and for you to sell your ordinary shares.
We are required to meet the continued listing requirements of the
Nasdaq Global Select and comply with the other Nasdaq rules, including those regarding minimum shareholders’ equity, minimum share
price and certain other corporate governance requirements. Delisting of our ordinary shares from the Nasdaq Global Select would cause
us to pursue eligibility for trading on other markets or exchanges, or on the pink sheets. In such case, our shareholders’ ability
to trade, or obtain quotations of the market value of, our ordinary shares would be severely limited because of lower trading volumes
and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our securities.
There can be no assurance that our ordinary shares, if delisted from the Nasdaq Global Select in the future, would be listed on a national
securities exchange or quoted on a national quotation service, the OTCQB or OTC Pink. Delisting from the Nasdaq Global Select Market,
or even the issuance of a notice of potential delisting, would also result in negative publicity, make it more difficult for us to raise
additional capital, adversely affect the market liquidity of our ordinary shares, reduce security analysts’ coverage of us and diminish
investor, supplier and employee confidence. In addition, as a consequence of any such delisting, our share price could be negatively affected
and our shareholders would likely find it more difficult to sell, or to obtain accurate quotations as to the prices of, our ordinary shares.
Our ordinary shares are traded on more than
one market and this may result in price variations.
Our ordinary shares are traded on both the Nasdaq Global Select
Market and on TASE. Trading in our ordinary shares on these markets is 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.
Increasing scrutiny from investors, customers
and other market participants with respect to our Environmental, Social and Governance (“ESG”), policies could negatively
affect the price of our shares or impose additional costs on us.
In recent years, increasing attention has been given to ESG policies
of corporations across all industries, including with respect to climate change and diversity, equity and inclusion matters. We may be
affected by market or regulatory responses to climate change. Growing public concern about climate change has resulted in the increased
focus of local, state, regional, national and international regulatory bodies on greenhouse gas, or GHG, emissions and climate change
issues. In the United States, President Joe Biden has made climate change and the limitation of GHG emissions one of his primary objectives.
We may also incur additional expenses as a result of U.S. and international regulators requiring additional disclosures regarding GHG
emissions. Compliance with such regulations and the associated potential cost is complicated by the fact that various countries and regions
are following different approaches to the regulation of climate change. We could fail to achieve, or be perceived to fail to achieve expectations,
standards, and regulations on ESG matters as they continue to evolve, or may be perceived by investors, customers and other market participants
to have not responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so.
As a result, we may experience reputational damage and the business, financial condition and price our company’s shares could be
materially and adversely affected.
28
Our
cash, cash equivalents, Marketable Securities and short-term deposits are subject to risks that may cause losses and affect the liquidity
of these investments.
As of December 31, 2023, we had $472.7 million in cash, cash equivalents,
marketable securities and short-term deposits. We regularly maintain cash, cash equivalent, marketable securities and short-term deposits
at third-party financial institutions. We maintain and invest our cash and cash equivalents based on an investment policy approved by
our investment committee of the board and by our board of directors. Our investment policy set various principles for managing our cash,
including the rating level of third-party financial institutions in which we keep our cash, diversified portfolio and diversified countries
of incorporation of the relevant financial institutions. These deposits and investments are subject to general credit, liquidity, market
and interest rate risks. Further, we may be adversely affected by a crisis in the banking industry. For example, on March 10, 2023, the
Federal Deposit Insurance Corporation, took control and was appointed receiver of Silicon Valley Bank, or SVB. We have not held funds
at SVB other than a negligible amount. If banks and financial institutions enter receivership or become insolvent in the future and a
portion of our cash, cash equivalents, marketable securities or short-term deposits is held in such banks and financial institutions,
our ability to access our existing cash, cash equivalents and investments may be impacted and could have a material adverse effect on
our business and financial condition.
Risks Related to Our Technological Environment
Our business and financial performance may be
materially adversely affected by information technology issues, data breaches, cyber-attacks and other similar incidents, as well as insufficient
cybersecurity and other business disruptions.
We rely on information technology systems and networks to operate
and manage our business and to collect, use, maintain and otherwise process information, including information related to our customers,
partners, and personnel. This information is stored and managed within our internal information technology infrastructure or, in certain
instances, on platforms maintained by third-party service providers, suppliers and vendors. These systems and networks, whether operated
internally or externally, may be subject to information technology issues, data breaches, cyber-attacks and other similar incidents. Our
business is constantly challenged and may be impacted by information technology issues, data breaches, cyber-attacks and other similar
incidents, as well as insufficient cybersecurity and other business disruptions experienced by us or our third-party service providers,
suppliers and vendors. Data breaches, cyber-attacks, and other similar incidents in particular are a growing and evolving risk and often
are difficult or impossible to detect for long periods of time or to successfully defend against. Such incidents may include, but are
not limited to software bugs, server malfunctions, software or hardware failure, malicious software or activity, computer viruses, ransomware
attacks, denial-of-service attacks, social engineering, domain name spoofing, fraud, phishing attacks, worms/trojan horses, insider threats,
human error, attempts to gain unauthorized access to data, and other cybersecurity breaches that could lead to disruptions in systems
and networks, denial of services, remote code execution, unauthorized access to or release of sensitive, proprietary, confidential, personal
or otherwise protected information corruption of data, telecommunications failures, terrorist attacks, natural disasters, power loss,
war, physical security breaches, or other events that may harm our systems and networks, or those of our third-party service providers,
suppliers and vendors. Such incidents are increasing in frequency, levels of persistence, sophistication and intensity, are evolving in
nature, and are conducted by organized groups and individuals with a wide range of motives and expertise, including organized criminal
groups, “hacktivists,” terrorists, nation states, nation state-supported actors, and others, any of whom may see their effectiveness
enhanced by the use of AI. Unidentified groups continuously target numerous internet websites and servers, including our own, for various
reasons, political, commercial and other. High-profile data breaches, cyber-attacks and other similar incidents at other companies and
in government agencies have increased in frequency and sophistication in recent years. Moreover, geopolitical tensions, particularly the
Hamas-Israel and the Russia-Ukraine conflicts, have contributed to a surge in cyber-attacks targeting Israeli companies and products globally,
posing a threat to critical infrastructure. Any data breach, cyber-attack or other similar incident, or any failure to make adequate or
timely disclosures to the public, regulators, or law enforcement agencies following any such incident, could subject us or our third-party
service providers, suppliers and vendors 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 sensitive, proprietary, confidential, personal or otherwise
protected information, the destruction or corruption of data, other manipulation or improper use of our systems and networks, violations
of applicable data protection, data privacy and cybersecurity laws and regulations or notification obligations, legal claims, regulatory
scrutiny or enforcement actions, investigations, 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.
29
Given the unpredictability of the timing, nature and scope of such
incidents, and because techniques used to obtain unauthorized access to or sabotage systems and networks change frequently and generally
are not identified until they are launched against a target, there can be no assurance that such incidents can be prevented, that such
incidents are not occurring currently without our knowledge, or that any such incidents will not have a material adverse effect on us
in the future.
As cybersecurity threats continue to evolve, we expect to continue
to expend significant additional resources to continue to maintain, modify or enhance our protective measures or to investigate or remediate
any information technology issues, business interruptions, data breaches, cyber-attacks or other similar incidents. However, we may not
be able to anticipate such incidents, and such measures, as well as our response process, may not be adequate, may fail to detect or react
to such incidents in a timely manner, may fail to identify or accurately assess the severity of an incident, may not respond quickly enough,
or may fail to sufficiently remediate an incident. As a result, we may suffer significant legal, reputational, or financial exposure,
which could harm our business, financial condition, and operating results.
We do not control our third-party service providers, suppliers
and vendors, and because our ability to monitor their cybersecurity is limited, we cannot ensure the cybersecurity measures they take
will be sufficient to protect any information we share with them. Due to applicable laws and regulations or contractual obligations, we
may be held responsible for business interruptions, data breaches, cyber-attacks or other similar incidents attributed to such third parties
as they relate to the information we share with them. In addition, if we suffer a highly publicized business interruption, data breach,
cyber-attack or other similar incident, even if our platforms and solutions perform effectively, such an incident could have an adverse
effect and cause us to suffer reputational harm, lose existing commercial relationships and customers or deter existing customers from
purchasing additional solutions and prevent new customers from purchasing our solutions.
We cannot ensure that any indemnification or limitation of liability
provisions in our agreements with customers, service providers, suppliers, vendors and other third parties with which we do business would
be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim in connection
with a business interruption, data breach, cyber-attack or other similar incident. Additionally, we cannot be certain that our insurance
coverage will be adequate for cybersecurity liabilities actually incurred, that insurance will continue to be available to us on economically
reasonable terms, or at all, or that our insurer will not deny coverage as to any future claim.
We have contractual, legal and regulatory obligations to notify
relevant stakeholders of certain data breaches, cyber-attacks or similar incidents, as defined in the relevant laws, regulations or respective
contracts. Most jurisdictions have enacted laws and regulations requiring companies to notify individuals, regulatory authorities and
others of data breaches, cyber-attacks or similar incidents involving certain types of data. In addition, our agreements with certain
customers and third-party partners may require us to notify them in the event of a data breach, cyber-attack or similar incident. Such
mandatory disclosures are costly, could lead to negative publicity and may cause our customers to lose confidence in the effectiveness
of our security measures. If we fail to make such notification within the mandatory time frames, we may be subject to penalties and legal
actions.
Although we have implemented administrative, technical and organizational
safeguards to comply with applicable data protection, data privacy and cybersecurity laws and regulations in connection with the collection,
use, retention, disclosure and other processing of personal information, if a significant failure of such safeguards were to occur, our
business and reputation could be materially adversely affected. A business interruption, data breach, cyber-attack or other similar incident
could lead to claims by our customers, their users or other relevant parties that we have failed to comply with applicable laws, regulations
or contractual obligations to implement specified security measures. As a result, we could be subject to legal action or our customers
could end their relationships with us.
30
Data protection, data privacy and cybersecurity laws and regulations
in certain jurisdictions may require us to notify individuals and government or regulatory authorities of data breaches, cyber-attacks
or other similar incidents involving certain types of personal data. Pursuant to certain data protection, data privacy and cybersecurity
laws and regulations, including the California Consumer Privacy Act (as amended by the California Privacy Rights Act, the “CCPA”),
if we experience a data breach, cyber-attack or other similar incident, affected individuals could, under certain circumstances relating
to such incidents, bring a private action claiming the breach was the result of our violation of the duty to implement and maintain reasonable
security procedures and practices and recover civil damages, which could be costly, impact the operation of our business and cause reputational
harm. Similarly, there is a risk of class actions in the United Kingdom (the “U.K.”) and Europe. In Canada, there has been
an increase in tort claims and related civil litigation. Data breaches, cyber-attacks or other similar incidents could also result in
enforcement actions, including significant penalties and fines, by government or regulatory authorities alleging that we have violated
applicable laws or regulations that require us to maintain reasonable security measures and comply with mandatory disclosure requirements.
In the coming years, we expect further regulation regarding data protection, data privacy and cybersecurity in the U.S./Canada and abroad
that will likely apply to our business. These laws, regulations and other obligations may create additional regulatory, liability, and
reputational risks and may increase financial costs to mitigate such risks. For more information, see the Risk Factor titled – “
Our
business depends on our ability to collect, use, maintain and otherwise process data, including personal data, to help our clients deliver
advertisements, and to disclose data relating to the performance of advertisements. Any limitation imposed on our collection, use, maintenance
or other processing of this data could significantly diminish the value of our solution and cause us to lose sellers, buyers, and revenue.
Regulations, legislation or self-regulation relating to data protection, data privacy, cybersecurity, e-commerce and internet advertising
and uncertainties regarding the application or interpretation of existing or newly adopted laws and regulations threaten our ability to
collect, use, maintain and otherwise process this data, could harm our business and subject us to significant costs and legal liability
for non-compliance
.”
If we fail to detect or prevent fraudulent,
suspicious 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, suspicious or other invalid traffic, impressions, clicks, conversions,
or other ad engagements that advertisers may perceive as undesirable. Such fraudulent, suspicious or other invalid 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 designed
to identify fraudulent, suspicious or other invalid traffic, impressions, clicks, conversions or other ad engagements. Despite our efforts,
it can be difficult to detect fraudulent, suspicious or other invalid activity for different reasons. If we are unable to detect and prevent
fraudulent, suspicious or other invalid activity, the affected advertisers may experience or perceive a reduced return on their investment.
High levels of fraudulent, suspicious or other invalid 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 revenue.
We may not be able to enhance our platforms
and solutions to keep pace with technological and market developments in our evolving industry.
To keep pace with technological developments, satisfy increasing
developer requirements, maintain the attractiveness and competitiveness of our advertising solutions and ensure compatibility with evolving
industry standards, we will need to regularly enhance our platform and solutions as well as develop and introduce new services on a timely
basis. We also must update our software to reflect changes in advertising networks’ application programming interfaces (“APIs”),
technological integration, cybersecurity 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.
31
Our products operate in a variety of computer
and device configurations and could contain undetected errors, failures or defects that could result in product failures, lost revenue
and loss of market share.
Our software and advertising products may contain undetected errors,
failures or defects, especially when the products are first introduced or when new versions are released. Our customers’ computer
and other device environments are often characterized by a wide variety of standard and non-standard configurations that make pre-release
testing for programming or compatibility errors very difficult and time-consuming. As a result, there could be errors failures or defects
in our products. In addition, despite testing, errors, failures or defects may not be found in our products and new versions of our products.
In the past, we have discovered software errors, failures and defects in certain of our product offerings after their full introduction
and have experienced delayed or lost revenue during the period required to correct these errors, failures and defects.
Errors, failures or defects in our products could result in negative
publicity, make-goods, refunds, loss of or delay in market acceptance of our products, loss of competitive position or claims by customers.
Alleviating any of these problems could require significant expense and resources and could cause interruptions to our products.
We depend on third-party service providers,
suppliers and vendors, such as internet, telecommunication, data center, cloud computing and hosting providers, to operate our platforms,
websites and services. Temporary failure of these services, including catastrophic or technological interruptions, would materially
reduce our revenue and damage our reputation, and securing alternate sources for these services could significantly increase our
expenses and be difficult to obtain.
The availability of our products and services and fulfillment of
our customer contracts depend on the continuing operation of our information technology and communications systems and networks, and those
of our third-party service providers, suppliers and vendors. Our products’ operation as well as our internal conduct and daily management
are supported by third-party internet, hosting, SaaS services, and telecommunication providers. Such third-party service providers, suppliers
and vendors may experience disruptions, which would reduce our revenue and increase our costs. We own servers located in Israel, Europe
and the United States and we also rent the services of thousands of servers located around the world. Our servers mainly include 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, supplier or vendor could be substantial. Furthermore, although we maintain back-up systems
and networks for most aspects of our operations, we could still experience deterioration in performance or interruption in our systems
and networks, delays, and loss of critical data and registered users and revenue. Our systems and networks, and those of our third-party
service providers, suppliers and vendors, are vulnerable to damage, interference, or interruption from modifications or upgrades, terrorist
attacks, war, natural disasters, fires, pandemics (including COVID-19), the effects of climate change (such as sea level rise, drought,
flooding, wildfires, and increased storm severity), power loss, telecommunications failures, cyber-attacks, computer viruses, ransomware
attacks, denial-of-service attacks, phishing schemes, break-ins, sabotage, intentional acts of vandalism, misconduct or similar events.
Such events, a decision to close third-party facilities on which we rely without adequate notice, or other unanticipated problems could
result in lengthy interruptions to our services.
Our systems and networks 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. For more information, see the Risk Factor titled – “
Our
business and financial performance may be materially adversely affected by information technology issues, data breaches, cyber-attacks
and other similar incidents, as well as insufficient cybersecurity and other business disruptions.
” Additionally, should
some of our third-party service providers, suppliers and 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. Any of the foregoing could materially adversely affect our business, financial condition,
and operating results.
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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 while installing new software or updating existing software. After users
have installed search solutions offered by us, any event that results in a significant number of our users changing or upgrading their
internet browsers could result in the failure to generate the revenue that we anticipate from our users and result in a decline in our
user base. Should we not be able to timely respond to such changes or in the event that the search solutions offered by vendors would
offer better user experience than the one offered by us, this could have an adverse effect on our business, financial condition and our
results of operations. Finally, although we constantly monitor the compatibility of our internet search services and related solutions
with such new versions and upgrades, we may not be able to make the required adjustments to ensure constant availability and compatibility
of such solutions.
Risks Related to Data Protection Regulations
Our business depends on our ability to collect,
use, maintain and otherwise process data, including personal data, to help our clients deliver advertisements and to disclose data relating
to the performance of advertisements. Any limitation imposed on our collection, use, maintenance or other processing of this data could
significantly diminish the value of our solution and cause us to lose sellers, buyers, and revenue. Regulations, legislation or self-regulation
relating to data protection, data privacy, cybersecurity, e-commerce and internet advertising and uncertainties regarding the application
or interpretation of existing or newly adopted laws and regulations threaten our ability to collect, use, maintain and otherwise process
this data, could harm our business and subject us to significant costs and legal liability for non-compliance.
Our business is conducted through the internet and therefore, among
other things, we are subject to the laws and regulations that apply to e-commerce and online businesses around the world. These laws and
regulations are becoming more prevalent in the United States, Europe, Israel, Canada and elsewhere and may impede the growth of the internet
or otherwise adversely impact our services. These laws and regulations cover data protection, data privacy, cybersecurity, e-commerce,
content, use of “cookies,” pricing, advertising, distribution of “spam,” copyright and other intellectual property,
libel, marketing, distribution of products, protection of minors, consumer protection, accessibility, taxation and online payment services.
Many areas of laws and regulations affecting the internet remain largely unsettled, even in areas where there has been some legislative
or regulatory action.
We collect, use, maintain and otherwise process certain data, including
personal data, about our customers (including, without limitation, customers’ clients or users), partners, candidates and employees,
consultants, leads and consumers. Our ability to collect, use, maintain or otherwise process personal data has been, and could be further,
restricted by existing and new laws and regulations relating to data protection, data privacy and cybersecurity, including the EU
General Data Protection Regulation 2016/679 (the “GDPR”), the U.K.’s General Data Protection Regulation (“U.K.
GDPR”), the rules and regulations promulgated under the authority of the Federal Trade Commission (the “FTC”), the CCPA,
the Israeli Privacy Protection Law, 1981 and the regulations thereunder (“Israeli Privacy Law”), Canada’s federal Personal
Information Protection and Electronic Documents Act (the “PIPEDA”), the Quebec Privacy Act and other laws such as Quebec’s
new Privacy Legislation Modernization Act (“Quebec’s Law 25” and together with the
PIPEDA
and the Quebec Privacy Act, “Canadian Privacy Law”) and the EU ePrivacy Directive (“ePD”). These laws and regulations
generally define personal data to include location data and online identifiers, which are commonly used and collected parameters in digital
advertising and, among other things, impose stringent user consent requirements and permit data subjects to request that we discontinue
using certain data.
33
In the European Economic Area (“EEA”), the U.K. and
Canada, we are subject to the GDPR, the U.K. GDPR and Canadian Privacy Law, which, among other things, impose requirements to provide
detailed and transparent disclosures about how personal data is collected and processed, grant rights for data subjects to access, delete
or object to the processing of their personal data, provide for a mandatory breach notification to supervisory authorities (and in certain
cases, affected individuals) of certain data breaches, set limitations on the retention of personal data and outline significant documentary
requirements to demonstrate compliance through policies, procedures, training and audits. In the EEA and the U.K., failure to comply with
the GDPR and the U.K. GDPR can result in significant fines and other liability under applicable law. In particular, under the GDPR, fines
of up to EUR 20 million (or GBP 17.5 million under the U.K. GDPR) or up to 4% of the annual global revenue of the noncompliant company,
whichever is greater, could be imposed for violations of certain of the GDPR’s requirements. European data protection authorities
have already imposed fines for GDPR violations, in some cases, of hundreds of millions of euros.
In Canada, the data privacy landscape is made up of different provincial
data privacy laws (including the Quebec Privacy Act and Quebec’s Law 25), Canadian federal data privacy laws as well as sector-specific
data privacy laws. On September 22, 2021, Quebec passed Quebec’s Law 25 overhauling the Quebec Privacy Act. Quebec’s Law 25
imposes strict controller requirements, such as privacy policies; enhanced consent requirements when collecting, using or disclosing personal
data; risk assessments and data breach notification. Quebec’s Law 25 also granted individuals certain data privacy rights including
a right to erasure, right to restrict processing and, as of September 22, 2024, a right to data portability. Also under Quebec’s
Law 25, organizations must provide, by default, the parameters ensuring the highest level of confidentiality of a technological product
or service offered to the public. Canadian Privacy Law applies not only to third-party transactions, but also to transfers of information
between us and our subsidiaries, and under Quebec’s Law 25, personal data would include employee information. Failure to comply
with Canadian Privacy Law and other data privacy laws within Canada may expose us to administrative fines, litigation or enforcement actions
brought by data subjects and regulatory authorities, class actions and even punitive damages. Canadian federal data privacy law is currently
being overhauled and we expect that data privacy legislation across Canada will continue to evolve in the coming months and years.
In the U.S., both federal and state laws and regulations govern
the collection, use, maintenance and other processing of personal data, and the advertising industry has been subject to review by the
FTC, U.S. Congress, and individual states. For example, at the U.S. federal level, we are subject to the rules and regulations promulgated
under the authority of the FTC, which regulates unfair or deceptive acts or practices, including with respect to data protection, data
privacy and cybersecurity, and has taken an increasingly active approach to enforcing such regulations. Moreover, the U.S. Congress has
recently considered, and is currently considering various proposals for more comprehensive data privacy and cybersecurity legislation,
to which we may be subject if passed. Additionally, at the U.S. state level, we are subject to, among other things, the CCPA which provides
data privacy rights for California residents and operational requirements for covered companies. Among other things, companies covered
by the CCPA must provide certain disclosures to California residents and afford such residents the ability to opt-out of certain sales
of personal data. 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, the California Privacy Rights Act, which took effect in January 2023, has expanded
the rights granted under the CCPA and imposed additional notice and opt out-obligations, including an obligation to provide California
residents with the ability to opt-out of the processing of personal data for purposes of behavioral advertising and restrictions on the
“sale” or “share” of personal data (which it defines broadly under the CCPA), with significant enforcement penalties
for non-compliance. Additional U.S. states have implemented, or are in the process of implementing, similar new laws or regulations. For
example, the Virginia Consumer Data Protection Act, the Colorado Privacy Act, the Connecticut Data Privacy Act and the Utah Consumer Privacy
Act all went into effect in 2023 and impose new data privacy rights and obligations. This marks a trend toward more stringent United States
federal and state data privacy legislation, which could increase our potential liability and adversely affect our business. As of January
2024, there are at least nine comprehensive U.S. state data privacy laws taking effect between 2024 and 2026, including in Delaware, Florida,
Indiana, Iowa, Montana, New Jersey, Oregon, Tennessee and Texas. Laws and regulations similar to the CCPA are making it easier for certain
individuals to opt-out of having their personal data processed and disclosed to third parties through various opt-out mechanisms, which
could result in an increase to our operational costs to ensure compliance with such legal and regulatory changes. Further, laws in all
50 states require businesses to provide notice to consumers whose personal data has been disclosed as a result of a data breach.
Four US states (Vermont, California, Texas, and Oregon) have enacted
data broker laws and regulations imposing certain requirements on data brokers, including, without limitation, requirements relating to
registration, consent, disclosure, and/or cybersecurity. In addition, the FTC has increasingly issued orders restricting data brokers
from selling certain location data obtained by tracking individuals’ mobile devices. Other countries and jurisdictions have enacted
and may further enact similar or related laws or regulations, and/or their authorities may reach similar decisions. These laws, regulations
and decisions could impact our services, business operations, practices, products, or our ability to receive information necessary to
conduct our business.
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In Israel, failure to comply with the Israeli Privacy Law, 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 (including imprisonment of our officers). An amendment to the Israeli Privacy Law is pending
and, if enacted, is expected to enhance fines and sanctions for breaching the Israeli Privacy Law and to strengthen the enforcement capacity
of the Israeli Privacy Protection Authority. There have also been data privacy laws and regulations enacted in other countries around
the world, such as Brazil, which have introduced new or expanded existing data privacy requirements and we expect that data privacy legislation
and regulation will continue to evolve in the coming years. Therefore, it is difficult to determine whether and how such existing and
forthcoming laws and regulations will apply to and impact the internet and our business.
Most of our products and services are provided without direct relationships
with users/consumers, therefore, we rely on our data providers, customers or publishers to establish a legal basis required under the
applicable data protection and data privacy laws and regulations (for example, to obtain the consent from the user) on our behalf to process
their data and to implement any notice or choice mechanisms required under applicable data protection and data privacy laws and regulations,
but if our data providers, customers or publishers do not follow this process (and in any event, as the legal requirements in this area
continue to evolve and develop), we could be subject to liability.
The uncertainty created by these laws and regulations can be compounded
when services hosted in one jurisdiction are directed at users in another jurisdiction. For instance, certain data protection and data
privacy laws (including the GDPR and Canadian Privacy Law) have an extra-territorial scope causing such laws to potentially govern activities
conducted by organizations established in jurisdictions outside of, in the case of the GDPR, the EEA and, in the case of PIPEDA and Quebec’s
Law 25, Canada and Quebec, respectively. These laws contain significant penalties for non-compliance. Additionally, under the GDPR, supervisory
authorities in the EU member states have some flexibility when implementing European Directives and certain aspects of the GDPR, which
can lead to diverging national rules. In addition, following the withdrawal of the U.K. from the EU, we are subject to the U.K. GDPR.
While the U.K. GDPR current imposes substantially the same obligations as the GDPR, the U.K. GDPR will not automatically incorporate changes
to the GDPR going forward (which would need to be specifically incorporated by the U.K. government). Moreover, the U.K. government has
publicly announced plans to reform the U.K. GDPR in ways that, if formalized, are likely to deviate from the GDPR, all of which exposes
us to two parallel regimes (GDPR and U.K. GDPR), each of which authorizes similar fines and may subject us to increased compliance risk
based on differing, and potentially inconsistent or conflicting, interpretation and enforcement by regulators and authorities (particularly,
if the laws are amended in the future in divergent ways).
Additionally, some countries are considering or have enacted legislation
requiring local storage and processing of data or otherwise restricting cross-border transfers of personal data that could increase the
cost and complexity of delivering our services. For example, as of September 22, 2023, Quebec’s Law 25 requires organizations to
conduct a privacy impact assessment (“PIA”) in certain circumstances, such as when transferring personal data from Quebec
to other jurisdictions (including to other provinces in Canada) as well as when acquiring, developing, or overhauling an information system
or electronic service delivery system that involves the collection, use, release, keeping, or destruction of personal data. Such PIAs
can be time consuming and costly and may impact our ability to attract/retain customers and service providers. Additionally, the GDPR
and the U.K. GDPR generally prohibit the transfer of personal data from the EEA and the U.K. to the United States and most other countries,
unless the transfer is to a country deemed to provide adequate protection (such as Israel, Canada or the U.K.) or the parties to the transfer
have implemented specific safeguards to protect the transferred personal data. The GDPR and the U.K. GDPR requirements apply not only
to third-party transactions, but also to transfers of information between us and our subsidiaries, including employee information.
Where we transfer personal data outside the EEA or the U.K. to
a country that is not deemed to be “adequate,” we rely on transfer mechanisms available under the relevant laws and regulations,
and the efficacy and longevity of such mechanisms remains uncertain. In some jurisdictions like the EU, U.K., Canada and Israel, the law
and guidance on data transfers is rapidly developing and recent developments will require us to review and may require us to amend or
supplement the legal mechanisms by which we make and/or receive personal data transfers. Additional costs may need to be incurred in order
to implement necessary safeguards to comply with the GDPR and the U.K. GDPR and potential new rules and restrictions on cross-border transfers
of personal data could increase the cost and complexity of conducting business in some markets. If our policies and practices, or those
of third parties who process personal data on our behalf, are, or are perceived to be, insufficient, or if individuals have concerns regarding
the transfer of personal data from the EEA or the U.K. to the U.S., we could be subject to enforcement actions or investigations by individual
EU or U.K. data protection authorities or lawsuits by private parties.
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European supervisory authorities have also been very active in
terms of enforcing data protection rules. EU national laws that implement the ePD, which concerns the processing of personal data
and the protection of privacy in the electronic communications sector, may be replaced by an EU regulation, known as the ePrivacy Regulation,
which may alter rules on cookies and other tracking technologies, impose burdensome requirements surrounding obtaining consent and significantly
increase fines for non-compliance. While the text of the ePrivacy Regulation is still under development, a recent European court decision,
a regulator’s recent guidance, and recent campaigns by a not-for-profit organization are driving increased attention to cookies
and other tracking technologies under existing law. Increased regulation of cookies and similar technologies in the EEA and the U.K.,
in addition to certain other jurisdictions such as Canada and the U.S., and any decline of cookies or similar online tracking technologies
as a means to identify and potentially target individuals, may lead to broader restrictions and impairments on our business activities
and negatively impact our efforts to understand users. Industry participants in the advertising technology ecosystem have taken or may
take action to eliminate or restrict the use of cookies and other identifiers. Google has announced plans to fully eliminate support for
third-party cookies in the Chrome browser in 2024, and Apple has already implemented further restrictions on the use of mobile identifiers
on its devices. Such changes require us to take adaptive measures, which may include substantial development and commercial changes. While
we are taking measures to shift away from third-party cookies-based solutions, by using our proprietary cookieless solution, SORT®,
which enables advertisers to reach their audience in real time without storing any personally identifiable data, we still rely on third-party
cookies-based solutions. If regulators start to enforce an increasingly strict approach, this could lead to substantial costs, require
significant systems changes, limit the effectiveness of our solutions and services, divert the attention of our personnel, adversely affect
our business, and subject us to additional liabilities.
The increase in attention to and regulation of data protection,
data privacy and cybersecurity across the globe in recent years will require us to further devote resources and incur additional costs
associated with compliance, as well as impose additional restrictions on our and our partners’ operations. Although we strive to
comply with applicable laws and regulations regarding data protection, data privacy and cybersecurity and to inform our customers of our
business practices prior to any installations of our product and use of our services, it is possible that these laws and regulations may
be interpreted and applied in a manner that is inconsistent with our data collection, use, maintenance and other processing practices
or that it may be argued that our practices do not comply with certain countries’ data protection, data privacy and cybersecurity
laws and regulations. Due to rapid changes in technology and the inconsistent interpretations of privacy and data collection and protection
laws and regulations, we may be required to materially change the way we do business. The challenges imposed by the ongoing need to remain
compliant with such laws and regulations, as well as the need to implement any changes due to newly introduced laws and regulations, may
slow our growth, and if we are not able to cope with these challenges as effectively as other companies, we will be competitively disadvantaged.
Any limitation on our ability to collect and utilize data, including personal data, would make it more difficult for us to be able to
optimize ad placement for the benefit of our advertisers and publishers, which could render our solutions less valuable and potentially
result in loss of clients and a decline in revenue. For example, we need to adapt our advertising solutions that rely on third-party cookies
to a “cookie-less” environment and introduce alternative solutions which may not provide the targeting capabilities provided
by cookies. In addition, we may be required to implement physical, administrative and technological security measures that differ from
those we have now, such as different data access controls or encryption technology. Further, we use cloud-based computing, which is not
without substantial risk, particularly at a time when businesses of almost every kind are finding themselves subject to an ever-expanding
range of privacy, data collection and processing and cybersecurity laws and regulations, document retention requirements, and other standards
of accountability. Compliance with such existing and new laws and regulations can be costly and can delay or impede the development of
new products.
In November 2022, the EU’s Digital Services Act (the “DSA”)
came into force in the EEA, and the majority of its substantive provisions took effect on February 17, 2024. The DSA imposes new content
moderation obligations, notice obligations, advertising restrictions and other requirements on online intermediaries and platforms, including
providers of intermediary services, hosting services and social media services. Additionally, the DSA may indirectly impact additional
players in the advertising technology industry by subjecting them to the DSA’s transparency requirements concerning online advertising.
Although we do not expect the DSA to have a material impact on our operations, there could be indirect consequences that adversely affect
the advertising technology industry and our business.
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Any failure or perceived failure to comply with the foregoing
laws and regulations could result in negative publicity, increase our operating costs, require significant management time and attention
and subject us to inquiries or investigations, litigation (including class actions), claims, or other remedies, including penalties, fines,
sanctions and criminal and civil liabilities, or demands or orders that we modify or cease existing business practices, each of which
could materially adversely affect our operating results and our business. Further, any failure or perceived failure to comply with our
public privacy policies and other public statements about privacy and cybersecurity could potentially subject us to regulatory investigations,
enforcement or legal actions, and harm to our reputation and, if such policies or statements are found to be deceptive, unfair or misrepresentative
of our actual practices, fines, monetary or other penalties, and other damage to our business, financial condition and results of operations.
Moreover, concerns about our collection, use, maintenance and other processing of personal data or other data protection-, data privacy-
or cybersecurity-related matters, even if unfounded, could harm our reputation and operating results. For more information regarding government
regulations to which we are subject, see Item 4.B. “Business Overview— Government Regulation.”
If one or more states or countries determine
that we are required to collect sales, use, or other taxes on the services that we sell, this may result in liability to pay sales,
use, and other taxes (plus interest and penalties) on prior sales and a decrease in our future sales revenue.
While in some states we are subject to sales tax, in general, the
digital advertising business has not traditionally paid sales tax. However, a successful assertion by one or more cities, states or countries
that digital advertising services should be subject to such taxes or that we are not providing digital advertising services, but other
services and should collect sales, use, or other taxes on the sale of our services, or that we have failed to do so where required in
the past, could result in a decrease in future sales and/or substantial tax liabilities for past sales. Each state and country has different
rules and regulations governing sales, use, and other taxes, and these rules and regulations are subject to varying interpretations that
may change over time.
Following a US Supreme Court decision regarding the rights of individual
states to tax out-of-state suppliers, certain states have adapted their statutes to expand taxation on out-of-state suppliers of goods
and services. Some states are also pursuing legislative expansion of the scope of goods and services that are subject to sales and similar
taxes as well as the circumstances in which a vendor of goods and services must collect such taxes. Furthermore, legislative proposals
have been introduced in Congress that would provide states with additional authority to impose such taxes. Accordingly, it is possible
that either federal or state legislative changes may require us to collect additional sales and similar taxes from our clients in the
future which could impact our future sales, and therefore could result in a material adverse effect on our revenue.
For example, since 2021, the State of Maryland enacted legislation to tax digital
advertising revenues, which is currently under review by the relevant courts. Similar bills have been introduced in several other states.
Certain countries in the European Union and elsewhere have recently adopted taxation on digital services including digital advertising,
in various forms, such enacted and proposed taxes may have an impact on us.
Under current Israeli, U.S., Canada,
U.K. and Ukrainian
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. and Ukrainian law, and further under proposed legislation such as Senate Bill S3100A in new York, 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.
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Risks Related to our Intellectual Property
Our proprietary information, technology and
other intellectual property may not be adequately protected and thus our intellectual property may be unlawfully copied by or
disclosed to other third parties.
We regard the protection of our proprietary information, 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, trademark, copyright and patent laws 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, technology and other intellectual property. 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 would not prevent or deter independent development of similar intellectual
property by others.
In addition, there is no assurance that any existing or future
trade secrets, patents, copyrights or trademarks will afford adequate protection against competitors and similar technologies. Our intellectual
property rights may be misappropriated, infringed, reverse-engineered, circumvented, or otherwise violated by others, or challenged and
invalidated through administrative processes or litigation. Effective trade secret, trademark and patent protections are expensive to
develop and maintain, as are the costs of defending or enforcing our rights. Further, we cannot provide any assurances that competitors
will not misappropriate, infringe, reverse-engineer, circumvent or otherwise violate our intellectual property rights, or that we will
have adequate resources to defend or enforce our rights. In addition, the laws of some countries do not provide the same level of
intellectual property protection as U.S. or Israeli laws and courts.
Claims of misappropriation,
infringement
or other violation of third-party intellectual property rights or other third-party
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 third-party
intellectual property misappropriation, infringement, or other violation and subsequent litigation. We have been, and in the future may
be, the subject of claims that our solutions and underlying technology misappropriate, infringe or otherwise violate the intellectual
property rights of others. Regardless of whether such claims have any merit, they 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 claims of third-party intellectual
property misappropriation infringement or other violation without major financial expenditures or adverse consequences.
We may seek to obtain licenses to third-party intellectual property
rights that we desire to use but are allegedly misappropriating, infringing or otherwise violating or may misappropriate, infringe or
otherwise violate without such licenses. Although holders of intellectual property rights often offer these licenses, we cannot provide
any assurances that such licenses will be offered on acceptable terms or at all. Our failure to obtain a license for key intellectual
property rights from a third-party for technology, content, sound, or graphics we use could cause us to incur substantial liabilities
or to suspend the development or sale of our products. Alternatively, we could be required to expend significant resources to redesign
our products or develop non-infringing technology, content, sound, or graphics. If we are unable to redesign our products or develop non-infringing
technology, content, sound, or graphics, our revenue could decrease and we may not be able to execute our business strategy.
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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. Third parties may claim that our Company name, our brand
names, or product names infringe their trademark rights. If we have to change the name of our Company or any of our brands or products,
we may experience a loss in goodwill associated with such name, customer confusion or a loss of sales. Any lawsuit involving such name,
regardless of its merit, would likely be time-consuming, expensive to resolve, and divert our management’s 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 (the “Israeli 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 Israeli Patent Law also provides that if there is no such agreement between an employer and
an employee, the Israeli Compensation and Royalties Committee (the “Israeli Royalties Committee”), a body constituted under
the Israeli Patent Law, shall determine whether the employee is entitled to remuneration for his or her inventions. An employee may waive
the right to receive remuneration for “service inventions” and case law has held that in certain circumstances, such waiver
does not necessarily have to be explicit. The Israeli Royalties Committee will examine, on a case-by-case basis, the general contractual
framework between the parties in accordance with general Israeli contract law. Further, there is no specific formula for calculating this
remuneration. Under Canadian law, employees benefit from a presumption that they are entitled to ownership of a patent of any invention
they created in the course of their employment unless there is an express contract to the contrary or the employer can prove that the
employee was employed for the express purpose of inventing. Although we generally enter into invention assignment 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 still face claims demanding remuneration in consideration for such inventions. As a consequence of such claims, we could
be required to pay additional remuneration or royalties to our current and/or former employees, or be forced to litigate such claims,
which could negatively affect our business.
We use certain “open-source”
software tools that may be subject to intellectual property infringement claims or that may subject derivative works of such open-source
software
to unintended consequences, which may impair our product development plans, interfere with
our ability to support our clients, require us to allow access to the source code of our products or necessitate 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 embedded in our products contains open-source code. Open-source
code is computer 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 such users and modifiers abide by certain requirements. The original developers of the open-source code provide
no warranties on such code.
As a result of our 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 claims alleging non-compliance with, or seeking
to enforce, certain open-source code license terms. 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 purchase a costly license or re-engineer our software products to
remove the open-source code from our products, which may be a costly and time-consuming process, and we may not be able to complete such
re-engineering process successfully. Such events could disrupt our operations and the sales of our products, which would negatively impact
our revenue and cash flow.
Moreover, under certain conditions, we may be obligated to make
derivative works of open-source 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 code license, our previously proprietary software
products may be made available to others at no charge. As a result, our customers and our competitors may have access to our products
at no cost to them which could harm our business. Certain open-source code licenses require, as a condition to use, modify and/or distribute
such open-source code, that proprietary software incorporated into, derived from or distributed with such open-source code 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
requirements may under certain conditions be interpreted to apply to our software, depending upon the use of the open-source code and
the interpretation of the applicable open-source code licenses. The terms of many open-source code licenses to which we may be subject
have not been interpreted by U.S. or foreign courts, and there is a risk that open-source code licenses could be construed in a manner
that imposes unanticipated conditions or restrictions on our ability to provide or distribute our products or services. The use of open-source
code 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.
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In addition, third-party software licensors generally do not provide
warranties or controls on the origin of software or other contractual protections regarding infringement claims or the quality of the
code with respect to the open-source components of their products and would not indemnify us in the event that we or our customers are
held liable for intellectual property infringement or other software-related claims in respect of the open-source components contained
in such third-party software. Further, some open-source code is known to have security risks and other vulnerabilities and architectural
instabilities, or are otherwise subject to security breaches due to their wide availability, and are provided on an “as-is”
basis. There is typically no support available for open-source code, and we cannot ensure that the authors of such open-source code will
implement or push updates to address security risks or will not abandon further development and maintenance. Many of the risks associated
with the use of open-source code, such as the lack of warranties or assurances of title or performance, cannot be eliminated, and could,
if not properly addressed, have a material adverse effect our business, financial condition and results of operation.
Risks Related to the Geographical Location
of our Operations
Our business relies significantly on the U.S.
market. Any material adverse change in that market could have a material adverse effect on our results of operations.
Our revenue has been concentrated within the U.S. market, accounting
for approximately 86% of our revenue in 2023. A recession that causes a reduction in advertising expenditures generally or other circumstances
that cause a decrease in our U.S. revenue could have a material adverse effect on our results of operations. Recent fluctuations
in prevailing interest rates due to higher-than-average inflation materially increase the likelihood of such circumstances and present
significant potential challenges to our U.S. business.
Our business may be materially affected by changes
to fiscal and tax policies. Potentially negative or unexpected tax consequences of these policies, or the uncertainty surrounding
their potential effects, could adversely affect our results of operations and share price.
We operate in a global market and are subject to tax in Israel
and other jurisdictions. Our tax expenses may be affected by changes in tax laws, international tax treaties, international tax guidelines
(such as the Base Erosion and Profit Shifting project of the OECD’s Inclusive Framework (“BEPS”)).
The members of the OECD’s Inclusive Framework on BEPS have
agreed in October 2021 on certain recommendations, informally known as BEPS 2.0 or Pillar Two, which aim to modify international taxation
norms with the introduction of a 15% minimum tax applicable to in-scope multinational enterprises (with revenue in excess of Euro 750
million). The UK and the EU member countries as well as additional countries have already enacted legislation to implement the recommendations
which have come into effect in 2024. Israel has agreed in principle to the adoption of the global minimum tax rate, however, it has not
yet announced any proposed legislation for its implementation. Our effective tax rate and cash tax payments could increase in future years
as a result of these changes. Further, the OECD’s Inclusive Framework on BEPS known as Pillar One is progressing. This framework
deals with the allocation of taxing rights with respect to multinational enterprises with revenue in excess of Euro 20 billion and profitability
of more than 10%, focusing mostly on the digital economy, such as the proposed multilateral convention that was published in October 2023
and is expected to be signed in June 2024. While we are not subject to the foregoing, we could be indirectly impacted.
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.
Our international operations involve special
risks that could increase our expenses, adversely affect our operating results and require increased time and attention of our management.
A large portion of our operations are performed from outside the
United States. In addition, we derive and expect to continue to derive a portion of our revenue from users outside the United States.
Our international operations and sales are subject to a number of inherent risks, including risks with respect to:
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potential loss of proprietary information, technology and other intellectual property due to piracy, misappropriation, infringement,
or other violation or laws that may be less protective of our intellectual property rights than those of the United States;
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costs and delays associated with translating and supporting our products in multiple languages;
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foreign exchange rate fluctuations and economic instability, such as higher interest rates and inflation, which could make our products
more expensive in those countries;
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costs of compliance with a variety of laws and regulations;
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restrictive governmental actions such as trade restrictions and potential trade wars;
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limitations on the transfer and repatriation of funds and foreign currency exchange restrictions;
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compliance with different consumer, data protection, data privacy and cybersecurity laws and regulations, and restrictions on pricing
or discounts;
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lower levels of adoption or use of the internet and other technologies vital to our business and the lack of appropriate infrastructure
to support widespread internet usage;
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lower levels of consumer spending on a per capita basis and fewer opportunities for growth in certain foreign market segments compared
to the United States;
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lower levels of credit card usage and increased payment risk;
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changes in domestic and international tax regulations; and
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geopolitical events, including war and terrorism.
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Political, economic and military
instability in the Middle East and specifically in Israel may impede our ability to operate and harm our financial results.
Conditions
in Israel, including the recent attack by Hamas and other terrorist organizations from the Gaza Strip and elsewhere in the region, and
Israel’s war against them, may adversely affect our operations which would lead to a decrease in revenues.
We are incorporated under the laws of the State of Israel, where
we also maintain our headquarters. A significant portion of our research and development activities and other significant operations are
located in Israel, and most of our officers and directors are residents of Israel. As a result, political, economic and military conditions
affecting Israel directly influence us. Any major hostilities involving Israel, a full or partial mobilization of the reserve forces of
the Israeli army, the interruption or curtailment of trade or air traffic between Israel and its trading partners, or a significant downturn
in the economic or financial condition of Israel could adversely affect our business, financial condition and results of operations. Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries,
as well as terrorist acts committed within Israel by hostile groups or individuals. 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 have resulted in missiles
being fired from the Gaza Strip into Israel at various times. Additionally, since April 2011, internal conflict in Syria has escalated,
and chemical weapons have been used in the region. Conflicts in the Middle East, including in Egypt and Syria which countries border Israel,
have resulted in continued political uncertainty and violence in the region. This instability and any intervention may lead to deterioration
of the political and economic relationships 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, amid the increased hostility between the United States and Iran, 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.
41
In October 2023, Hamas terrorists infiltrated Israel’s southern
border from the Gaza Strip and conducted a series of attacks on civilian and military targets. Hamas also launched extensive rocket attacks
on Israeli population and industrial centers located along Israel’s border with the Gaza Strip and in other areas within the State
of Israel. These attacks resulted in extensive deaths, injuries and kidnapping of civilians and soldiers. Following the attack, Israel’s
security cabinet declared war against Hamas. In addition, since the commencement of these events, there have been continued hostilities
along Israel’s northern border with Lebanon (with the Hezbollah terror organization) and southern border (with the Houthi movement
in Yemen, as described below). It is possible that hostilities with Hezbollah in Lebanon will escalate, and that other terrorist organizations,
including Palestinian military organizations in the West Bank as well as other hostile countries, such as Iran, will join the hostilities.
Such clashes may escalate in the future into a greater regional conflict.
The intensity and duration of Israel’s current war against
Hamas are difficult to predict, as are such war’s economic implications on the Company’s business and operations and on Israel’s
economy in general. These events may be intertwined with wider macroeconomic indications of a deterioration of Israel’s economic
standing that may involve a downgrade in Israel’s credit rating by rating agencies (such as the recent downgrade by Moody’s
of its credit rating of Israel from A1 to A2, as well as the downgrade of its outlook rating from “stable” to “negative”),
which may have a material adverse effect on our Company and its ability to effectively conduct its operations.
In connection with the Israeli security cabinet’s declaration
of war against Hamas and possible hostilities with other organizations, several hundred thousand Israeli military reservists were drafted
to perform immediate military service. Currently, a limited number of our employee have been called to service. Additional employees
are or may be called for service in the current or future wars or other armed conflicts in which Israel is or may become engaged and such
persons may be absent for an extended period of time. As a result, our operations may be disrupted by such absences, which disruption
may materially and adversely affect our business and results of operations. Additionally, the absence of employees of our Israeli suppliers
and business partners due to their military service in the current or future wars or other armed conflicts may disrupt their operations,
which in turn may materially and adversely affect our ability to deliver or provide products and services to our partners.
The hostilities with Hamas, Hezbollah and other organizations and
countries have included and may include terror, missile and drone attacks. In the event that our facilities are damaged as a result of
hostile actions, or hostilities otherwise disrupt our ongoing operations, our ability to deliver or provide products and services in a
timely manner to meet our contractual obligations towards customers and partners could be materially and materially adversely affected.
Our commercial insurance does not cover losses that may occur as a result of events associated with war and terrorism. 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 such government coverage will be maintained or that it will sufficiently cover our potential damages. Losses or damages incurred
by us could have a material adverse effect on our business. Armed conflicts or political instability in the region may negatively affect
business conditions and could harm our results of operations.
In addition, some countries around the world restrict doing business
with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies
if hostilities in Israel or political instability in the region continue or increase. In addition, there have been increased efforts by
countries, activists and organizations to cause companies and consumers to boycott Israeli goods and services. In addition, in January
2024 the International Court of Justice, or ICJ, issued an interim ruling in a case filed by South Africa against Israel
in December 2023, making allegations of genocide amid and in connection with the war in Gaza, and ordered Israel, among other things,
to take measures to prevent genocidal acts, prevent and punish incitement to genocide, and take steps to provide basic services
and humanitarian aid to civilians in Gaza. There are concerns that companies and businesses will terminate, and may have already terminated,
certain commercial relationships with Israeli companies following the ICJ decision. The foregoing efforts by countries, activists and
organizations, particularly if they become more widespread, as well as the ICJ rulings and future rulings and orders of other tribunals
against Israel (if handed), may materially and adversely impact our ability to sell and provide our products and services outside of Israel.
42
Finally, political conditions within Israel may affect our operations.
Israel has held five general elections between 2019 and 2022, and prior to October 2023, the Israeli government pursued extensive changes
to Israel’s judicial system, which sparked extensive political debate and unrest. In response to such initiative, many individuals,
organizations and institutions, both within and outside of Israel, voiced concerns that the proposed changes may negatively impact the
business environment in Israel including due to reluctance of foreign investors to invest or transact business in Israel, as well as to
increased currency fluctuations, downgrades in credit rating, increased interest rates, increased volatility in security markets and other
changes in macroeconomic conditions. To date, these initiatives have been substantially put on hold. If such changes to Israel’s
judicial system are again pursued by the government and approved by the parliament, this may have an adverse effect on our business, our
results of operations and our ability to raise additional funds, if deemed necessary by our management and board of directors.
We are exposed to the risk of natural disasters,
political events, war, terrorism and pandemics, each of which could disrupt our business and adversely affect our results of operations.
Events beyond our control could have an adverse effect on our business,
financial condition, results of operations and cash flows. Disruption to our business resulting from natural disasters, political events,
war, terrorism, pandemics or other reasons could impair our ability to continue to provide uninterrupted service to our advertisers and
partners. For example, tensions between Russia and Ukraine, recently resulting in Russia’s invasion of Ukraine, and the possibility
of retaliatory measures taken by the U.S. and NATO have created global security concerns that could have a lasting adverse impact on regional
and global economies, and in turn, may lead to reduced spending on advertising and adversely affect our results of operations. Similarly,
disruptions in the operations of our key third-parties, such as data centers, servers or other technology providers, could have a material
adverse effect on our business.
While we have disaster recovery arrangements in place, they have
not been tested under actual disasters or similar events and may not effectively permit us to continue to provide our services. If any
of these events were to occur, our business, results of operations, or financial condition could 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 most of our directors, officers and Israeli external experts are located outside the United States, any judgment obtained in the United
States against us or any of them may be difficult to collect within the United States.
We have been informed by our legal counsel in Israel that it may
also be difficult to assert U.S. securities laws claims in original actions instituted in Israel. Israeli courts may refuse to hear a
claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum to bring such a claim.
In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the
claim. There is little binding case law in Israel addressing these matters. If U.S. law is found to be applicable, the content of applicable
U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed
by Israeli law.
Subject to specified time limitations and legal procedures, under
the rules of private international law currently prevailing in Israel, Israeli courts may enforce a U.S. judgment in a civil matter, including
a judgment based upon the civil liability provisions of the U.S. securities laws, as well as a monetary or compensatory judgment in a
non-civil matter, provided that the following key conditions are met:
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• |
subject to limited exceptions, the judgment is final and non-appealable;
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• |
the judgment was given by a court competent under the laws of the state of the court and is otherwise enforceable in such state;
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• |
the judgment was rendered by a court competent under the rules of private international law applicable in Israel;
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• |
the laws of the state in which the judgment was given provide for the enforcement of judgments of Israeli courts;
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• |
adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence;
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• |
the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel;
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• |
the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties;
and
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• |
an action between the same parties in the same matter was not pending in any Israeli court at the time the lawsuit was instituted
in the U.S. court.
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The tax benefits available to us for activities
in Israel require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs and
taxes.
We have benefited and currently benefit from a variety of Israeli
government programs and tax benefits with regards to our operations in Israel, that generally carry conditions that we must meet in order
to be eligible to obtain any benefit. Our tax expenses and the resulting effective tax rate reflected in our financial statements may
increase over time as a result of changes in corporate income tax rates, other changes in the tax laws of the countries in which we operate,
non-deductible expenses, loss and timing differences, or changes in the mix of countries, where we generate profit.
If we fail to meet the conditions upon which certain favorable
tax treatment is based, we would not be able to claim future tax benefits and could be required to refund tax benefits already received
including interest and linkage to the Israeli consumer price index. Any of the following could have a material effect on our overall effective
tax rate:
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we may be unable to meet the requirements for continuing to qualify for some programs;
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these programs and tax benefits may be unavailable at their current levels; or
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we may be required to refund previously recognized tax benefits if we are found to be in violation of the stipulated conditions.
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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 13 to our Financial Statements.
ITEM 4.
INFORMATION
ON THE COMPANY
| A. |
HISTORY AND DEVELOPMENT OF THE COMPANY
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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, 71
st
Floor, Suite J, New York, NY
10007.
We completed the initial public offering of our ordinary shares
in the United States on February 3, 2006. Since November 20, 2007, our ordinary shares are also traded on the TASE.
44
In the recent years, we completed several acquisitions, including
the acquisition of Content IQ LLC in January 2020, the acquisition of Pub Ocean in July 2020, the acquisition of Vidazoo in October 2021
and the acquisition of Hivestack in December 2023.
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.
For a description of our principal capital expenditures and divestitures, see Item 5.
“Operating and Financial Review and Prospects - Liquidity and Capital Resources.”
|
B.
|
BUSINESS OVERVIEW
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Perion is a global technology leader in connecting advertisers
to consumers across all major digital advertising channels, including search advertising, social, display, video, digital audio, digital
out of home (DOOH) and Connected TV (CTV) advertising. According to eMarketer, this represents a total addressable market of $611 billion
in 2023, which is expected to grow to $920 billion by 2027 globally.
Our goal at Perion is to be seamlessly integrated within the consumer
journey, and naturally exist in various digital properties they encounter during their day. To achieve that, we develop technological
solutions that are integrated into multiple touchpoints: video ads in the morning, personalized audio messages during their commute, passing
by digital screens and billboards, browsing online, or relaxing in front of a smart TV.
As we operate in a highly competitive market, we continuously seek
new innovative products and solutions that address current and future advertiser needs. We develop, enhance, acquire, and aggregate tools
and solutions that are relevant in an ever-evolving market. We own and operate a variety of digital properties. We have a strategic footprint
across channels, formats, and geographies, and we keep expanding it, organically and inorganically through acquisitions.
Industry Overview
According to eMarketer reports, digital advertising spending accounted
for 67.5% of total worldwide media advertising in 2023, reaching approximately $611 billion and expected to increase to approximately
$920 billion and 74.7% of total media advertising spend by 2027.
With the surge in digital ad spending, technology's role in targeting,
delivering, and measuring advertising campaigns is becoming more crucial across diverse platforms and screens. Here are some key trends
and opportunities in the industry:
CTV Ad Spending
As viewership increasingly shifts from conventional broadcast and
cable TV to connected TV platforms, advertisers have the chance to leverage advanced data analytics and targeting capabilities inherent
to digital platforms. According to eMarketer, CTV ad spending in the U.S. accounted for $24.6 billion in 2023, or 9.1% of total U.S. digital
ad spending, and is expected to grow by 72.4% to $42.4 billion in 2027, representing 10% of total U.S. digital ad spending for that year,
taking a growing share of linear TV ad spending.
This shift allows for more personalized and engaging ad experiences,
reaching audiences across multiple devices and formats. The granular audience insights available through Connected TV (CTV) and Over-The-Top
(OTT) platforms enable advertisers to optimize their campaigns for better ROI and expand their reach to additional audiences, tapping
into viewer preferences and behaviors. Consequently, the CTV space is not just expanding the reach for advertisers but also enhancing
the effectiveness of advertising by making it more relevant and interactive, opening innovative options for ad tech evolution and future
growth.
Commerce and Retail Media Networks
According to eMarketer, worldwide retail media ad spend is expected
to reach $140 billion in 2024, marking a 21.8% increase over 2023 and positioning Retail Media as one of the fastest-growing segments
in digital advertising. In the U.S., Retail Media accounted for $46.7 billion representing 17.3% of total U.S. digital ad spending in
2023 and is expected to reach $60 billion by 2024 and $110 billion by 2027, representing 19.5% and 26.0% of total U.S. digital ad spending,
respectively.
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Retail media networks harness first-party data with technological
solutions to create a powerful business opportunity through delivering ads that resonate with consumers, potentially transforming advertising
into immediate purchases. The synergetic combination of advertising technologies and commerce platforms create a consumer experience that
is localized and personalized, while generating a new revenue stream for retailers, and profitable advertising venues for advertisers.
Search Advertising
Search advertising is characterized by its targeted approach and
effectiveness in reaching potential customers who are actively searching for products or services online. As technologies advance and
user behaviors shift, search advertising continues to offer a powerful tool for businesses to reach high-intent audiences, driving both
online and offline conversions.
According to eMarketer, advertisers will increase their investment
in search advertising, reaching $175.8 billion in 2027. The U.S. search advertising spend accounted for $113.7 billion in 2023, representing
42.1% of total U.S. digital ad spending, and is expected to grow by 12.4% year-over-year to reach $127.8 billion in 2024, which represents
41.7% of U.S. digital ad spending.
DOOH
Digital out-of-home (DOOH) refers to digital media used for advertising
outside of the consumer's home in the public domain. Unlike traditional out-of-home advertising, such as billboards and bus stop printed
posters, DOOH utilizes digital technology to display advertisements on a variety of digital screens, transforming ordinary public spaces
into dynamic experiences, engaging audiences with eye-catching, contextually relevant content.
The transition from traditional out-of-home advertising to digital
out-of-home and further to programmatic out-of-home (POOH) signifies an industry-wide shift towards embracing digital technology and data-driven
approaches. This evolution is driven by the need for more engaging, interactive, and measurable advertising methods. Programmatic advertising
technology enables advertisers to automate the buying, placement, and optimization of DOOH advertising in real-time. This offers more
targeted advertising, efficient spending, and detailed analytics, providing insights into ad performance and audience engagement.
According to a PQ Media research report, worldwide DOOH ad spending
is expected to increase from US$21.5 billion in 2023 to US$30.7 billion in 2026, reflecting a 42.8% growth.
Digital Audio
Digital audio advertising is witnessing steady growth. According
to eMarketer, digital audio ad spending accounted for $6.7 billion in 2023, and is expected to grow by 10.5% to reach $7.4 billion in
2024 and $9.7 billion in 2027.
As consumers increasingly engage with digital audio platforms,
advertisers are leveraging this medium to reach targeted audiences effectively. With the evolving landscape of media consumption, the
digital audio advertising channel offers a unique and intimate way for brands to connect with listeners, driving incremental growth.
AI Technological Advancements
The digital advertising landscape is continually reshaped by artificial
intelligence (AI) and machine learning (ML), which drive enhancements in targeted advertising, optimization, and performance measurement.
These advancements are pivotal not just in campaign execution but also in creative development, significantly accelerating the campaign
lifecycle. Leveraging AI, advertisers can generate a wide array of creative variations quickly, for images, text, video, and audio ads,
and optimize campaigns in real-time, thereby achieving greater scale and impact. The integration of AI technologies adds the ability to
analyze vast datasets, which in turn enables more precise targeting and personalization, enhancing the relevance of ads to individual
users. Furthermore, AI-driven automation streamlines the advertising workflow, reducing manual tasks and increasing efficiency.
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Cookie Deprecation
Google's decision to phase out third-party cookies in Chrome has
catalyzed the industry to seek alternative solutions. In response, the industry is exploring cookieless solutions such as contextual advertising,
first-party data strategies, unified ID systems, and privacy-centric approaches. These innovations aim to balance effective targeting
and personalization with user privacy, ensuring advertisers can still deliver relevant content without invasive tracking methods.
These key trends are driving the digital advertising industry's
continued growth, propelled by relentless innovation and broader economic digitalization. We believe that the industry's leaders will
be those who invest in advanced technology, uphold data privacy, and craft adaptable, and immersive user-focused advertising solutions.
Our Strengths
Business Diversification
Perion’s presence across all major channels of digital advertising
provides diversification of our revenue streams and market agility that allows us to rapidly capitalize on shifts in spending and budget
allocation in a timely and efficient manner.
Our diversified revenue streams encompass a blend of search advertising
and display advertising. This includes a direct-response solution that is used by various publishers, and cross-channel high-impact advertising
across the open web through video, CTV, DOOH, and digital audio. Our programmatic DOOH capabilities extend our reach globally, allowing
omni-channel engagement with consumers in public spaces across 32 countries, including retail stores, transportation hubs, hotels and
other venues.
Perion’s technology is designed to continually balance the
right mix of channels to achieve optimal yield. This integrated technological moat delivers robust optimized campaigns that combine creativity,
reach, and our proprietary targeting capabilities. This moat also includes Perion’s exceptional client service and turnkey provisions
of comprehensive, full-funnel solutions to all brands and agencies.
Focus on Technology
Technology and innovation are core drivers of our culture and operations
and are essential for our growth. Hence, we invest substantial resources in research and development to develop new solutions, applications
and services, improve our core technologies and enhance our technology infrastructure and capabilities.
Our research and development activities are primarily conducted
in Israel, Europe and Canada, focusing on the development of new products, services and platform solutions that will offer our customers
a full comprehensive solution for their advertising needs and a higher return on investment (ROI).
Our advanced technological solutions, which are applied throughout
the consumer journey and marketing funnel, include capabilities that enable us to achieve above industry average margins.
Market Agility
Rapid shifts in media spending are the new normal, as brands have
gained the insights and internal capabilities to allocate media on a close to a real-time basis. Advertisers are shifting their digital
advertising budgets from awareness to performance, using different advertising channels, in accordance with macroeconomic impacts on consumer
spending. Advertisers are also following consumer trends that often demonstrate dynamic behavior, by optimizing the media mix to match
the consumer journey.
Perion’s ability to rapidly shift and reallocate resources
between different channels allows us to capitalize on these shifts in spending and budget allocation in a timely and efficient manner.
Efficient Operations
Over the past several years, Perion has been successfully implementing
cross-company efficiency measures and processes as part of our profitable growth strategy. The strict focus on efficient operations has
become part of the company’s DNA and is embedded in the day-to-day operations. This created an efficient operational infrastructure
that allows incremental top and bottom-line growth at lower cost and improvement in our productivity.
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Part of our highly efficient operations rely on our proprietary
iHUB, which acts as a shared infrastructure resource consisting of an ad-server, as well as a real-time bidding engine, a smart data layer,
and a sophisticated reporting mechanism. This efficiency eliminates excessive expenses that would otherwise be incurred if business units
had to develop separate infrastructures.
The iHUB allows our business units to quickly balance and harmonize
demand and supply, providing optimum utilization of our owned and operated supply, as well as what is available on the open web. This
enables us to serve direct demand in a closed loop, generating superior efficiency and performance, resulting in the optimization of our
Traffic Acquisition Cost (TAC) and better margins.
This optimization is enhanced by our ability to offer publishers
and advertisers multiple ad products to support their marketing efforts, which enables us to increase market share with current and new
clients.
Growth Strategy
Perion’s growth strategy is built on a foundation of business
diversification, global expansion, and leveraging innovative technological advertising solutions across all major channels, naturally
existing on advertising properties along the consumer journey. This approach aims to enhance every stage of the advertising funnel - from
awareness to purchase - leveraging the presence of our solutions on a multitude of advertising properties.
Our strategy encompasses channel diversification, including CTV,
high-impact display, video, search, DOOH, and digital audio, among others, to ensure advertisers can build meaningful immersive relationships
with their audiences in brand-safe environments.
Investments in commerce solutions and retail media are another
cornerstone of our strategy, tapping into a rapidly growing revenue stream that capitalizes on retailers’ first-party data for personalized
advertising.
Technological innovation remains at the heart of our growth, with
investments in new technologies, tools, and partnerships that enhance our offerings and operational efficiency.
This is complemented by a strategic approach to inorganic growth
through acquisitions, targeting companies that align with our goals for expanding digital ad channels, customer reach, and technological
capabilities.
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A. |
Diversification and Market Insight
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Our diversification model is strategically designed to quickly
adapt to market shifts, enabling us to ‘follow the money’ by aligning our product offerings with our customers’ spending
preferences. In 2023, this approach was particularly effective, as demonstrated by the standout growth in our Retail Media business, which
saw a revenue increase of 114% to nearly $50 million, significantly surpassing our expectations. Similarly, our CTV and search advertising
businesses experienced substantial growth, with increases of 56% and 23% year-over-year, respectively.
Furthermore, our investment in Commerce and Retail Media solutions
exemplifies our commitment to identifying and capitalizing on lucrative verticals. According to eMarketer, Retail Media is expected growth
to reach $110 billion in the U.S. by 2027, accounting for 26% of all digital ad spend. Retail Media Networks, leveraging retailers’
valuable first-party data, are expanding beyond traditional boundaries to attract new customers, distributing personalized offers across
all screens, including Digital Out of Home (DOOH). While this is one important example, we will continue leveraging our diversified and
modular technology solutions to anticipate and respond to emerging lucrative market opportunities, ensuring we stay ahead of where the
‘wind is blowing’ in the digital advertising landscape.
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B. |
Privacy & Cookie Deprecation
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The digital advertising industry is undergoing a significant transformation
with the deprecation of third-party cookies and tightened data protection and data privacy laws and regulations, posing a challenge to
traditional methods of audience targeting and tracking. While some may see this as a disruptive challenge, we at Perion view it as an
opportunity to innovate and reinvent the way we deliver value. One of the solutions already in place is our SORT® (Smart Optimization
of Responsive Traits), which employs sophisticated machine learning and AI to offer cookieless targeting.
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SORT® represents just the beginning of our innovative journey;
it is one of the first solutions in a privacy suite we are developing to address this evolving landscape. We are also focused on expanding
SORT®'s capabilities across additional channels, reinforcing our commitment to innovation and our proactive stance in adapting to
industry shifts. Our pipeline includes additional solutions, some of which are being developed through strategic integrations and partnerships,
and others through our in-house development efforts.
This privacy suite of solutions not only demonstrates our agility
and foresight but also solidifies our position as a leader in the next generation of digital advertising, driving our growth in a privacy-first
world.
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C. |
Geographical expansion
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Geographical expansion is a key driver for our business's growth,
happening in several impactful ways. Our recent purchase of the programmatic digital out of home advertising company, Hivestack, has immediately
extended our business into more than 32 countries. We recently announced the launch of a new partnership in Brazil with Eletromidia, one
of the biggest media companies in the country, through our Hivestack division. We also announced a new partnership with Way.io, a domestic
Demand Side Platform (DSP) in China - the world’s largest DOOH market. These partnerships not only gets us into the fast-growing
Chinese and Brazilian markets but also connects us with major players in the local media landscape. Additionally, our High Impact Display
business is now working closely with Hivestack. This teamwork allows both parts of our business to share customers and reach new markets
together. These steps show our commitment to growing globally and strengthening our position in the worldwide market, helping our business
to grow further.
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D. |
Investments in technology
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Innovation, driven by the introduction of new technologies, tools,
services and offerings, makes our revenue models more predictable, sustainable and resilient. We are expanding our product portfolio to
provide added value to our clients, while always maintaining efficiency across our different business units. The investments we have made
in the scale and reach of our business have enabled us to develop pioneering technological solutions such as SORT® and WAVE. To accelerate
this process, we completed several acquisitions, the most recent being the acquisitions of Vidazoo in October 2021 and of Hivestack in
December 2023.
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E. |
Inorganic growth strategy
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Perion’s growth strategy consists of both organic and inorganic
growth through acquisitions. Our net cash position provides us with the sufficient financial resources to acquire companies that will
boost our growth either through expanding digital ad channels, expanding our customer reach, geographical footprint or through new and
advanced technology that would shorten our time to market.
Perion follows a strict screening and evaluation process that includes
several well-defined criteria, including clear synergies with our existing businesses, companies that display growth in high-growth categories
(such as CTV, Retail Media and DOOH etc.), profitable or with a clear path to profitability, high level of technological match, cultural
match and more.
Recent acquisitions include the acquisition of Vidazoo in October
2021 and the acquisition of Hivestack in December 2023, a global leader in programmatic digital-of-home advertising (DOOH) with superior
technology and an unparalleled global footprint.
Our Solutions
Perion is positioned to benefit from the overall growth of the
digital marketplace.
In the rapidly evolving digital advertising space, we continue
to innovate and offer a suite of diversified business solutions. Our solutions span across key domains such as search advertising, high-impact
display, CTV, Retail & Commerce, DOOH, digital audio, SORT®, social and website publisher solutions.
With a commitment to driving growth and diversifying our market
share, Perion's solutions are designed to meet the complex needs of today's digital landscape, while respecting user privacy through proprietary
and leading industry solutions using technology integrations.
Our solutions are built to ensure higher yields for publishers
leveraging their digital properties, as well as high-impact, effective advertising that resonates with audiences and delivers unparalleled
ROI for brands and advertisers alike. We partner with world-class brands, leveraging proprietary technology to ensure an immersive advertising
experience across all digital touchpoints on the consumer journey.
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A. |
Search Advertising
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Capturing consumers at their moment of highest intent has been
well-established as the most ROI positive advertising channel. Thus, it’s not surprising that advertisers are increasingly allocating
budgets to search advertising.
Perion, through its publisher network, delivered 29.1 million average
daily searches in 2023 compared to 18.5 million daily searches in 2022, which represents an increase of 57% year-over-year. Perion’s
Search revenue in 2023 increased by 23% year-over-year to $345 million.
Our Search monetization solution is comprised of the following
three offerings:
|
|
• |
Content pages Monetization- with AI-based contextual Ads. Optimizing monetization of web pages by dynamically matching content with
ads from a huge pool of our search partners’ advertisers.
|
|
|
• |
App Monetization - using intent-based search signals to monetize publishers' desktop and mobile apps.
|
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|
• |
Search Mediation - enables media traders to monetize search demand and achieve higher yields by leveraging the machine learning that
drives our mediation platform.
|
Searching is a fundamental digital behavior that signals the consumer
has a high intent to complete a purchase of a product or service. We are continuously innovating and advancing our solutions to provide
more value in this dynamically changing environment. We deploy advanced AI and machine learning to optimize yield for our publishers and
transform search into revenue. At Perion we are poised to seize this shift, thanks to our longstanding relationship with Microsoft and
other leading search and content partners, across more than 60 countries.
According to eMarketer reports, advertisers will increase their
investment in search through 2027. The U.S. search advertising market is expected to reach $175.8 billion in 2027, and is expected to
grow by 12.4% year-over-year to reach $127.8 billion in 2024, which represents 41.7% of U.S. digital ad spending.
Microsoft Advertising has been our partner since 2010. In November
2020 we extended our partnership with Microsoft Advertising for four additional years. In the first quarter of 2024, we experienced a
decline in our search advertising activity, attributable to changes in advertising pricing and mechanisms implemented by Microsoft in
its search distribution marketplace. These adjustments led to a reduction in Revenue Per Thousand Impressions (RPM) for both Perion and
other Microsoft distribution partners. These changes contributed to decreased search volume. For additional information see also
the Risk Factor titled - “Our search advertising solution depends heavily upon revenue generated from our agreement with Microsoft,
and any adverse change in that agreement could adversely affect our business, financial condition and results of operations.”
|
|
B. |
High-Impact Display
|
In 2023, U.S. display advertising spend, including banners, rich
media, video and social, was $150 billion and, according to eMarketer, is expected to increase by 61% and reach $242 billion in 2027.
Perion's High Impact Advertising Suite is at the forefront of digital
advertising, transforming how brands engage with consumers in an ever-evolving digital landscape. eMarketer reports that rich media, including
high-impact ad formats, as well as outstream and instream video accounted for over $97.5 billion of U.S. digital display ad spend in 2023
and is expected to increase by 75.9%, reaching approximately $171.5 billion in 2027.
Leveraging the growth in digital media consumption, Perion's solutions
transcend the limitations of traditional advertising methods, offering immersive experiences on desktop, mobile, and tablet. These offerings
do more than just display ads; they engage audiences with rich media formats and moment-based messaging tailored to capture their attention
and drive them to action. The effectiveness of these solutions is evidenced by partnerships with prestigious brands, such as Mercedes-Benz
and Albertsons, illustrating a proven track record in achieving marketing goals.
50
Perion amplifies the power of advertising with High Impact formats
that integrate seamlessly across all screens. Core to our offerings is dynamic creative technology, which enables personalized experiences,
backed by an experienced in-house design team crafting visually striking ads. Undertone's diversified premium cross-channel inventory
assures high-quality campaign placements, while its targeting solutions take on both cookie-based and cookieless approaches to address
the shifting paradigms in digital advertising.
Flexibility is key; advertisers can choose between programmatic
or managed executions, all underpinned by data-driven insights and optimizations. Committed to delivering measurable results, Perion implements
full-funnel measurement to refine and advance campaign performance from inception to conclusion. Together, these integrated solutions
revolutionize digital engagement, ensuring that brands not only maintain but amplify their presence in a competitive market.
|
|
C. |
CTV
|
Perion’s CTV business continued to gain traction, growing
by 56% year-over-year in 2023, representing 8% of our total display advertising revenue.
Perion’s High Impact CTV Solution Suite stands as a testament
to our commitment to elevating advertising efficacy and viewer engagement on streaming platforms. This suite is engineered to captivate
audiences with a cinematic quality advertising experience, punctuating the traditional commercial break with storytelling precision and
interactive elements. Perion harnesses the power of the big screen to ensure brands make an indelible impression during prime moments—whether
it's during a gripping live sports event, the intermission of favorite shows, or even during a paused screen scenario.
This comprehensive suite encompasses a wide array of formats designed
to engage and interact with viewers. From Branded CTV, which integrates branding elements and custom animations, to Dynamic CTV, which
personalizes content in real-time; every format is crafted for maximum impact. The Stay-Live CTV provides a picture-and-picture experience,
keeping viewers connected during live events, while Interactive CTV overlays extend the advertisement's reach with additional interactive
features.
Notably, the Live CTV with the LBar format maintains brand visibility
with a non-intrusive 'L' shaped banner during live content—an innovation that sustains brand presence without the conventional video
asset. Moreover, a strategic partnership with DirectTV for Pause Ads offers brands a novel avenue to occupy the screen during a user's
reflective pause moments, providing another layer to the advertising experience.
|
|
D. |
Retail & Commerce
|
Retail Media is another important sector for advertising, as retailer
data is highly leveraged to create advertising opportunities both on the retailer site and on the open web. Retail Media Networks are
thought to be the “third wave” of digital advertising, as more and more retailers are looking to leverage their valuable first-party
data through advertising, without compromising their control over that proprietary data.
Perion’s retail media solution showcases the powerful combination
of data and technology. Our technological solution is designed to enable large retailers to leverage their own data for increased sales,
loyalty and ROI, replacing the outdated circular with the accuracy of digital targeting. Our retail media technology leverages the anonymized
retailer first-party data, third party enrichment data that includes, among others, demographic, behavioral, contextual, location, and
other environmental conditions, and our own proprietary data. These three data pools are processed through our AI-driven decisioning engine
to produce thousands of dynamic creative permutations that allows us to deliver relevant, customized, personalized, localized dynamic
high-impact ad experiences across all our media channels.
In 2023, Perion’s Retail Media revenue stream stood out,
and was among the top growth drivers for us, with a year-over-year revenue increase of 114% to nearly $50 million.
|
|
E. |
DOOH
|
With the acquisition of Hivestack, a programmatic DOOH technology
innovator since 2017, Perion has entered an exciting market at its nascent stage, positioning us to capitalize on its anticipated growth.
Hivestack is a global full stack platform that offers media owners
an array of purpose-built software like the DOOH Ad Server, supply-side platform (SSP), and Header Bidder, designed to manage, deliver,
and optimize advertising campaigns and revenue for digital screens, enhancing yield and diversifying demand sources efficiently.
51
For media buyers, Hivestack's DOOH demand-side platform (DSP),
along with its unique tools smart for campaign planning, delivery and measurement, provides robust capabilities for audience, geolocation
and contextual targeting, sourcing optimal inventory and maximizing the effectiveness and ROI of DOOH advertising campaigns.
Hivestack’s platform is used by many of the world's largest
brands, agencies, media owners, and partners including Uber, Colgate, Lego, InterContinental Hotel Group, Doordash, GroupM, Dentsu, The
Trade Desk, Xandr, Clear Channel, Lamar, Stroër, and many more.
According to a PQ Media research report, DOOH ad spending is expected
to increase from US$21.5 billion in 2023 to US$30.7 billion in 2026, reflecting a 15.3% CAGR.
|
|
F. |
Digital Audio
|
The U.S. Digital Audio Advertising Market is on a significant upward
trajectory, with projections indicating that advertising budgets will approach $7.4 billion in 2024. This rapidly growing sector represents
a substantial opportunity for innovative advertising solutions.
Responding to this market demand, Perion has recently introduced
WAVE, a cutting-edge addition to our advertiser solution suite. WAVE leverages Generative AI to produce dynamic audio ads, generating
hundreds of thousands of tailored audio messages. This solution adapts in real-time to a variety of factors such as context, behavior,
geography, and demographics, employing advanced AI algorithms to significantly enhance consumer engagement and impact.
Some of the early WAVE adopters include Pep Boys, a leading U.S.
automotive service provider, operating in more than 900 locations across the U.S., and Albertsons, the second-largest supermarket chain
in the U.S., integrating it into several successful campaigns.
|
|
G. |
SORT®
|
SORT® is a product of Perion’s AI Lab, a proprietary,
privacy-focused targeting technology enabling the ability for advertisers to find the consumers most interested in their brand, in that
moment, across all browsers and devices. This solution helps brands reach optimal performance by predicting how consumer groups will respond
to an ad without privacy-invasive practices or legacy third-party cookie-based targeting tactics.
SORT® technology utilizes real-time, cookieless data signals
to identify users with shared traits and behaviors, then classifies them into addressable and anonymous Smart Groups using a sophisticated,
proprietary AI algorithm. SORT® - which stands for “Smart Optimization of Responsive Traits” – not only eliminates
the need for cookies, but is being demonstrated by actual, real-time comparison tests made by Neutronian, a respected third-party research
firm, to outperform third party cookies. Due to such strong performance and the need for brands to shift to more privacy-focused approaches,
SORT® is currently used by the majority of our eligible customers.
Further, SORT® does not collect or store any user data, as
many other cookieless solutions do, which positions it as a superior, competitively advantaged replacement for third-party cookies. While
cookies are currently an essential part of the targeting infrastructure of the digital advertising market, they are under increasing pressure
for the manner in which they are perceived to violate user privacy. After postponing cookie deprecation several times in the past, Google
announced that it will begin phasing out third-party cookies in Chrome by disabling them for 1% of users starting in Q1 2024 and ramping
up to 100% of users in Q3 2024. Thus, SORT® provide a competitive solution that should enable Perion to capture additional revenue
as brands and advertisers move away from traditional methods such as cookies.
Finally, thanks to a proprietary “Privacy Shield” graphic
logo that is incorporated into every ad unit utilizing the technology, SORT® consumers are able to recognize when an advertisement
they are interested in is utilizing SORT®, and can feel a sense of safety and relief, that they won’t be followed around the
web as their behavior is not being tracked.
52
|
|
H. |
Social
|
The Perion Social platform supports the various phases of campaign
management across different channels, integrated with all major social channels like Facebook, LinkedIn, Snapchat, TikTok and Reddit.
The platform manages each of the planning, execution, optimization and measurement phases and simplifies the complexity of cross channel
advertising for brands and agencies while optimizing performance through AI in one unified, actionable holistic and intuitive dashboard.
Perion also developed sophisticated capabilities to buy media on
social channels such as Meta, X, and TikTok and others. The uniqueness is in the optimization process which runs in real-time, connecting
the monetization data flow and the cost of buying, per session. The service is a mix of manually managed service and machine learning
algorithms that run dedicated buying rules.
|
|
I. |
Website Publisher Solution
|
The nature of today’s digital ecosystem makes audience growth
and engagement challenging for publishers. Perion’s Website Publisher solutions provide publishers with monetization technology
tools, including an Online Video Player, Content Monetization System, Ad Server, Social monetization, Display monetization, and Yield
Ad Management Platform.
Online video, which includes in-stream, outstream and social network
in-stream video advertising, among others, continues to surge as a dominant force in ad spending, with publishers and advertisers recognizing
the potential for significant growth in revenue and brand exposure. According to eMarketer, 2024 programmatic digital video ad spending
in the U.S. is expected to grow by 21% year-over-year to $94 billion.
Our proprietary solutions help publishers monetize their assets,
while enhancing user experience, through boosting video and content engagement, to unveil new revenue avenues.
Enhancing its robust capabilities, our Website Publisher Solutions
platform now integrates seamlessly with Amazon's Transparent Ad Marketplace (TAM) and Unified Ad Marketplace (UAM), offering publishers
unparalleled access to our monetization capabilities and marketplace with ease.
An additional component in our Website Publisher Solutions Platform,
our Content Monetization system, helps publishers drive incremental growth using intent signals to keep users continuously engaged, as
it repeatedly optimizes content, advertising and layout within owned and operated mini-sites, in partnership with third-party publishers.
Our machine learning employs AI analysis and deploys tens of thousands of combinations of content and advertising to achieve maximum user
engagement and publisher profitability.
Our Technology
Perion’s strong technology moat is embedded in the core of
our products and solutions described above. Our advanced technological solutions, which are applied throughout the consumer journey and
marketing funnel, include capabilities that enabled us to achieve above industry average margins:
| ● |
The ability to monetize search traffic through our partnerships with search engines such as Microsoft Advertising (Bing), and others
through innovative publisher-centric solutions and online quality control and monitoring systems.
|
| ● |
The ability to meet advertiser demand for higher sustained user engagement with our sophisticated high-impact Ad suite;
|
| ● |
The ability to monetize the fast-growing Retail Media business, reflected in 114% year-over-year revenue growth we achieved in 2023;
|
| ● |
The ability to innovate in sectors that matter most to brands, such as:
|
|
|
■ |
The recent introduction of WAVE, a generative AI-powered dynamic audio solution that creates personalized audio advertising messages
at scale;
|
|
|
■ |
SORT®, our proprietary cookieless targeting technology, which was developed in response to advertiser recognition of privacy
matters and the upcoming deprecation of cookies by Google. SORT® displays the result of our ability to analyze the complex data signals
that are derived from our assets that flow through our iHUB.
|
53
| ● |
The ability to integrate programmatic DOOH advertising via Hivestack, which uses cutting-edge technologies to target, deliver and
measure unforgettable, immersive ads that connect brands with people on the go;
|
| ● |
Our AI Lab, which houses our AI-based R&D pipeline, has already launched several products such as SORT® and WAVE. The current
innovative product pipeline includes, among many others, upgrading SORT® to SORT® 2.0 and Dynamic Creative Optimization.
|
The technology backbone behind our solutions is designed to connect
brands with consumers via meaningful digital interactions and experiences. This is done through these key components:
a. Supply Management Platform
The Supply Management Platform facilitates relationships with our
publishers by treating every impression in an optimal manner. Our platform is driven by business requirements and agreed upon monetary
expectations, which in turn determine which ads are allowed, what prices are expected, and the allowable frequency. All components in
our supply management platform are based on proprietary technology and our specific needs and use cases.
b. Demand Management Platform
The Demand Management Platform addresses the needs of advertisers
for campaign planning and design with a system that delivers a recommendation that will meet, and often exceed the specific goals of any
advertiser. It recommends advertising channels, audience targeting strategies and ad product mix, which are all based on benchmarks and
past experiences of the advertiser. Once the plan is created, the data-driven platform pushes instructions to the campaign management
system for execution, based on parameters like dates, volume level, list of supply sources and campaign goal.
c. Analytics Layer
Our Analytics Layer provides information and performance metrics
and insights for our customers. It reports all the required data, including total budget; the delivery of reach and impressions; engagement
metrics, etc. The Analytics Layer supports our data driven operations, providing advertisers full visibility of KPI’s on key processes
while facilitating data and reporting in a self-service manner, with pre-build dashboards and reports.
d. Creative Platform
Perion’s High-Impact Creative Platform is a key component
of our solutions. Our proprietary creative technology platform enables the automation of High Impact ad unit production across all formats
(Display, Video, CTV & DOOH). Our consolidated technology workflow touches every aspect of campaign flow, including ad building, tag
creation, creative optimizations & post-campaign performance. We learn, adjust, and continually iterate - allowing us to create engaging,
high-performing user experiences that perform across all stages of the funnel. Available for use in fully managed campaigns or in programmatic
channels, our platform delivers superior results for advertisers and agencies looking to take their creativity to the next level.
In conjunction with
our creative platform, Perion leverages Machine Learning for campaign delivery and optimization, using real-time analysis to determine
the most effective advertisements for specific target audiences, leading to improved campaign performance. Our AI-based creative platform
has the ability to create hundreds and thousands of different ad permutations, targeted at different audiences. We also employ Generative
AI for voice and audio advertising and utilize our proprietary SORT® targeting technology, which utilizes AI without using personally
identifiable information data to find interested audiences across devices and browsers, based on real-time signals such as weather and
user intent groups.
e. AI Technologies
Our AI Technologies and machine learning bring deep intelligence
to the various phases of campaigns: planning, activation and reporting, utilizing models built on top of our data platforms. Based on
campaign-to-campaign learnings and complex heuristics, these technologies are leveraged to build products that generate better performance
for our customers and improved efficiency by providing rules-based and budget optimizations. Among the products leveraging AI are our
SORT cookieless solution, WAVE audio ads, and more products in the pipeline.
54
f. Online Video Player
Our proprietary Online Video Player (OVP), which integrates a full,
comprehensive suite of services, including an ad server, allows publishers and brands to upload, manage and stream video content to targeted
audiences. Perion’s OVP is certified with the major advertising platforms and compatible with all devices and video formats. The
OVP is integrated with a proprietary ad server, ensuring a consistent user experience by reducing latency and errors, adding to its inherent
power and efficiency.
g. Search Advertising Technology
The technology behind our search solution is composed of the following
systems:
|
|
● |
Publisher management system that provides publishers access to an online dashboard providing analytics and performance optimization
tools, as well as reports that enable them to maximize their distribution and monetization.
|
|
|
● |
Search demand management system that 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, and making it possible
for Perion’s R&D team to innovate on the “search stack.”
|
|
|
● |
Monetization products designed to deliver algorithmic search results concurrently with sponsored listings, both 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 publishers’ domains and an enriched and optimized hosted search results page which offers an
enhanced user experience.
|
|
|
● |
AI system whose 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.
|
Competition
The advertising technology industry is highly competitive. There
are a large number of digital media and advertising technology companies that offer services similar to our advertising solutions and
compete for finite advertiser/agency budgets and publisher inventory. There is also a large number of niche companies that are competitive
with our advertising solutions, providing a subset of services similar to those we provide.
Among our competitors, both on the supply side and on the demand
side, are companies that are not public such as GumGum and Teads, and public companies such as The Trade Desk, Pubmatic, Nexxen, Magnite,
Innovid and others.
Some of our competitors are larger and have more financial resources
than we have, including Google, Meta, Amazon and Microsoft. Microsoft is both a strategic partner and competitor since Microsoft Bing
generates organic traffic independent of our publisher network. We also compete with other companies that offer consumers the ability
to search outside of search engines themselves, such as IAC, System1 and others.
As we evolve and introduce new solutions, and as our competitors,
as well as other companies, do the same, we may be subject to additional competition. Many of our current and potential competitors may
have significantly greater financial, research and development, back-end analytical systems, manufacturing, and sales and marketing resources
than we have. These competitors could potentially use their greater financial resources to acquire other companies to gain even further
enhanced name recognition and market share, as well as to develop new technologies, enhanced systems and analytical capabilities, products
or features that could effectively compete with our existing solutions, products and search services. Demand for our solutions, products
and search services could be diminished by solutions, products, services and technologies offered by competitors, whether or not their
solutions, products, services and technologies are equivalent or superior.
In addition, the launch of ChatGPT in November of 2022, along with
the launch of other AI platforms such as Copilot, Gemini (formerly known as Bard) by Google, Claude by Anthropic, and Grok by X, are likely
to result in the creation of tools that could increase competition in the advertising technology industry and lower barriers to entry.
55
On the operational side, our ability to attract developers is largely
dependent on our ability to pay higher rates to our publishers and developers, our success in creating strong commercial relationships
with developers that have successful software, websites or distribution channels, and our ability to differentiate our distribution, monetization,
and optimization tools from those of our competitors.
Intellectual Property
Our proprietary technology, including our platforms, products and related algorithms,
are critical to our operations and competitive advantage. We strive to protect our intellectual property rights by relying on confidentiality
and invention assignment agreements, trade secret, trademark, copyright, and patent laws in the United States and other countries as well
as technical measures to establish and protect our intellectual property. Our portfolio includes registered trademarks and domain names
in various countries as well as approximately 10 patents registered mainly in the U.S.
Some components of our software products were developed solely by us. We have licensed
certain components of our software from third parties. We believe that the components we have licensed are not material to the overall
performance of our software and may be replaced without significant difficulty. We enter into licensing arrangements with third parties
for the use of software components, graphic, sound and multimedia content integrated into our products.
Our employees and consultants are required to execute confidentiality covenants in connection
with their employment and consulting relationships with us. These agreements generally contain assignment and waiver provisions relating
to the employee’s or consultant’s rights in respect of inventions.
Intellectual property laws, together with our efforts to protect our proprietary rights,
provide only limited protection, and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or
misappropriated.
For more information, see the Risk Factor titled – “
Our
proprietary information, technology and other intellectual property may not be adequately protected and thus our intellectual property
may be unlawfully copied by or disclosed to other third parties
.”
Government Regulation
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 or otherwise
adversely impact our services. These laws and regulations cover data protection, data privacy, cybersecurity, e-commerce, content, use
of “cookies,” pricing, advertising, distribution of “spam,” copyright and other intellectual property, libel,
marketing, distribution of products, protection of minors, consumer protection, accessibility, taxation and online payment services. Many
areas of laws and regulations affecting the internet remain largely unsettled, even in areas where there has been some legislative or
regulatory action.
In many cases, when we deliver an advertisement, we are able to collect certain data,
including personal data, about the content and placement of the ad, the relevancy of such ad to a user and the interaction of the user
with the ad, such as whether the user viewed or clicked on the ad or watched a video. As we collect and aggregate data provided by billions
of ad impressions and third-party providers, we analyze the data in order to measure and optimize the placement and delivery of our advertising
inventory and provide cross-channel advertising capabilities. Our ability to collect, use, maintain and otherwise process such data is
crucial.
56
We are subject to the data privacy laws and regulations of various jurisdictions, including
the GDPR, the CCPA, the Israeli Privacy Law, the Canadian Privacy Law and the ePD. These laws and regulations generally impose stringent
requirements such as transparency and user consent requirements and allow data subjects to request that we discontinue using certain data.
In addition, some countries are considering or have enacted legislation requiring local storage and processing of data. Certain U.S. federal
laws also restrict online service providers’ collection of user information on minors. Non-compliance with such laws could result
in enforcement actions, fines and reputational harm.
We voluntarily participate in industry self regulatory bodies such as the NAI and the
DAA, which promulgate best practices or codes of conduct addressing, among other things, data protection, data privacy, cybersecurity
and the delivery of digital advertising.
We have adopted privacy policies and practices to address privacy implications on our
various business activities. As part of our compliance program, we regularly review our privacy policies and practices in light of evolving
regulation.
An increasing number of U.S. states, such as California, Virginia,
Connecticut, and Colorado, have adopted and additional states are planning to adopt statutes concerning data protection which could affect
us. If other states follow suit, it could lead to an increasingly varied and complex regulatory landscape, and result in materially increased
costs. The interpretation of data protection, data privacy and cybersecurity laws and regulations, and their application to our business
may, in certain cases, be interpreted and applied in conflicting and more restrictive ways and in a manner that is not consistent with
our current data protection, data privacy and cybersecurity practices. The enactment of new proposed laws, and the interpretation of existing
laws, adds complexity to our operation, and result in material costs, and may restrict the growth and profitability of our business.
For more information, see the Risk Factor titled –
“Our business depends on our ability to collect, use, maintain and otherwise process data, including personal data, to help our
clients deliver advertisements and to disclose data relating to the performance of advertisements. Any limitation imposed on our collection,
use, maintenance or other processing of this data could significantly diminish the value of our solution and cause us to lose sellers,
buyers, and revenue. Regulations, legislation or self-regulation relating to data protection, data privacy, cybersecurity, e-commerce
and internet advertising and uncertainties regarding the application or interpretation of existing or newly adopted laws and regulations
threaten our ability to collect, use, maintain and otherwise process this data, could harm our business and subject us to significant
costs and legal liability for non-compliance.”
Recent Acquisitions
Acquisition of Hivestack
On December 11, 2023, Perion announced it has completed the acquisition
of Hivestack Inc., a global innovative full-stack programmatic DOOH company. The terms of the transaction included US $100 million
in cash paid at closing and a 3-year employee retention and performance-based payment plan of up to US $25 million.
DOOH advertising transforms ordinary public spaces into dynamic experiences, engaging
audiences with eye-catching, personalized content in real-time. It harnesses cutting-edge technologies to target, deliver and measure
immersive ads that connect brands with people on the go.
Acquisition of Vidazoo
On October 4, 2021, we entered into a Share Purchase Agreement,
for the acquisition of all the shares of Vidazoo, an Israeli privately held company founded in 2014. Vidazoo is a leading video technology
company that enables both advertisers and publishers to deliver high impact content and advertising to consumers. The acquisition was
made for a total consideration of $93.5 million, consisting of $35.0 million in cash upon closing with an additional of $58.5 million
structured as a performance earn-out, if certain EBITDA-based targets are achieved. On June 14, 2023, the Company entered into an amendment
to the SPA with Vidazoo’s sellers in connection with an additional overachievement earnout consideration in an aggregate amount
of up to $10.55 million payable in the Company’s ordinary shares.
57
Acquisition of Content IQ
On January 14, 2020, we consummated the acquisition of all of 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, out of which a maximum of $47.05 million payable in earn-outs over a period of two
years tied to revenue and EBITDA-based metrics. The agreement also contains customary representations, warranties, covenants and indemnification
provisions. The agreement was later amended in connection with the acquisition of Pub Ocean, a digital publisher-focused technology company,
consummated in 2020. As of the date of this report, the parties conduct an arbitration with respect to the amount of earnout to be ultimately
paid to the sellers.
|
C.
|
ORGANIZATIONAL STRUCTURE
|
The legal name of our Company is Perion Network Ltd. and we are
organized under the laws of the State of Israel.
The following table sets forth all of our subsidiaries, which are
100% owned directly or indirectly by Perion Network Ltd.:
|
Name
of Subsidiary
|
Place
of Incorporation
|
|
Codefuel Ltd.
|
Israel
|
|
IncrediMail, Inc.
|
Delaware
|
|
Intercept Interactive, Inc.
|
New York
|
|
Vidazoo Ltd.
|
Israel
|
|
Content IQ LLC
|
New York
|
|
Hivestack Technologies Inc.
|
Canada
|
|
D.
|
PROPERTY, PLANTS AND EQUIPMENT
|
Our headquarters are located in Holon, Israel. As of December 31,
2023, we lease approximately 36,113 square feet, excluding office space which we currently sublease. The lease expires in January 2025,
with an option to extend for two additional two-year periods at our sole discretion and upon 180-day prior written notice. Annual net
cost is approximately $0.7 million.
Undertone’s offices are located at the World Trade Center
(WTC) in New York. As of December 31, 2023, we lease approximately 9,500 square feet, excluding office space which we currently sublease.
The lease expires in 2025 and the annual net cost is approximately $0.7 million.
Hivestack’s offices are located in Montreal, Canada. As of
December 31, 2023, we lease approximately 4,000 square feet. The lease expires in 2025 and the annual net cost is approximately $0.1 million.
This excludes office spaces we currently sublease or short-term
rent in co-working spaces.
58
ITEM 4A.
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 consolidated Financial Statements. In addition to historical financial
information, the following discussion and analysis contains forward looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, including, without limitation, statements regarding the Company’s expectations, beliefs,
intentions, or future strategies that are signified by the words “expects,” “anticipates,” “intends,”
“believes,” or similar language. These forward looking statements involve risks, uncertainties and assumptions. Our actual results
and timing of selected events may differ materially from those anticipated in these forward looking statements as a result of many factors,
including those discussed under Item 3.D. “Risk Factors” and elsewhere in this annual report.
Certain information called for by this Item
5, including a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2022 has been reported
previously in our annual report on March 15, 2023 under Item 5 “Operating and Financial Review and Prospects”.
Company Overview
Perion is a global multi-channel advertising technology company that connects advertisers
with consumers through technology across all major channels of digital advertising – including search advertising, social media,
display, video, DOOH, digital audio and Connected TV (CTV) advertising. Our headquarters are located in Israel and our primary research
and development facilities are located in Israel, Canada and Europe. Our primary sales offices are located in the United States. We also
have several sales and representative offices located in North America, APAC and EMEA.
|
A.
|
OPERATING RESULTS
|
Components of Statements of Operations
The following describes the nature of our principal items of income
and expense:
Revenue
We generate our revenue primarily from two major sources, display
advertising and search advertising.
Display Advertising
- we
generate revenue from Display Advertising by delivering high-impact ad formats across different channels including display, social, CTV,
digital audio, DOOH and Web Publisher Solutions. Our diverse, technology-focused multi-channel set of solutions is designed to drive consumer
engagement and high ROI for advertisers through high-impact ad formats. Our solutions also include a content monetization platform that
provides publishers with monetization tools across different channels, and a social platform that supports campaign management and media
buying capabilities across all major social channels.
Search Advertising
- we
generate Search Advertising revenue from service agreements with our search partners. Search Advertising revenue is generated primarily
from monthly transaction volume-based fees earned by us for making our applications available to online publishers and app developers
on a revenue share basis relative to the revenue generated by such search partners.
Geographic Breakdown of Revenue
For the distribution of our total revenue, by geographic areas,
see Note 16 to our consolidated financial statements.
59
Cost of Revenue
Cost of revenue consists primarily of expenses associated with
the operation of our server hosting, data verification and targeting, campaign creative, labor, as well as customer support.
Traffic Acquisition Costs and Media Buy
Our traffic acquisition costs and media buy consist primarily of
payments to publishers and developers who distribute our search properties together with their products, as well as the cost of distributing
our own products. In addition, media buy costs consist of the costs of advertising inventory incurred to deliver ads. Traffic acquisition
costs are primarily based on revenue share agreements with our traffic sources and the media buy cost are primarily based on Cost Per
Click (“CPC”) and Cost Per Mille (“CPM”).
Research and Development Expenses (“R&D”)
Our research and development expenses consist primarily of salaries
and other personnel-related expenses, allocated facilities costs, subcontractors and consulting fees. Research and development costs are
charged to the statement of income as incurred.
Selling and Marketing Expenses (“S&M”)
Our selling and marketing expenses consist primarily of salaries
and other personnel-related expenses, allocated facilities costs, as well as other outsourced selling and marketing activities.
General and Administrative Expenses (“G&A”)
Our general and administrative expenses consist primarily of salaries
and other personnel-related expenses, allocated facilities costs, professional fees and other general corporate expenses.
Change in fair value of contingent consideration
Our change in fair value of contingent consideration expenses consist
of fair value adjustments of contingent considerations liabilities related to acquisitions.
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.
Financial Income (Expense), Net
Financial income (expense), net consists of mainly interest income,
foreign currency exchange gains or losses and foreign exchange forward transactions expenses. Interest income consists of interest earned
on our cash, cash equivalents, short -term bank deposits and marketable securities. We expect interest income to vary depending on our
average investment balances and market interest rates during each reporting period. Foreign currency exchange changes reflect gains or
losses related to transactions denominated in currencies other than the U.S. dollar.
Income Tax Expense
A significant portion of our income is taxed in Israel and, as
a result of previous acquisitions, in the United States. The standard corporate tax rate in Israel was 23% in 2022 and 2023. For our Israeli
operations, starting 2017 and through 2023, part of our subsidiaries 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 and other tax attributes.
The federal statutory income tax rate in the United States has been 21% in 2022 and 2023. Other subsidiaries in Europe are taxed according
to the tax laws in their respective countries of residence.
60
Comparison of Period to Period Results of Operations:
The following table sets forth our results of operations in dollars
amounts and as a percentage of revenue for the periods indicated (in thousands of U.S. dollars):
|
Year ended December 31,
|
||||||||||||||||
|
2022
|
2023
|
|||||||||||||||
|
Amount
|
% of Revenue
|
Amount
|
% of Revenue
|
|||||||||||||
|
Revenue:
|
||||||||||||||||
|
Display Advertising
|
$
|
360,690
|
56
|
%
|
$
|
398,244
|
54
|
%
|
||||||||
|
Search Advertising
|
279,566
|
44
|
344,911
|
46
|
||||||||||||
|
Total Revenue
|
640,256
|
100
|
743,155
|
100
|
||||||||||||
|
|
||||||||||||||||
|
Costs and Expenses:
|
||||||||||||||||
|
Cost of revenue
|
30,404
|
5
|
37,830
|
5
|
||||||||||||
|
Traffic acquisition costs and media buy
|
372,601
|
58
|
432,943
|
58
|
||||||||||||
|
Research and development
|
34,424
|
5
|
33,066
|
4
|
||||||||||||
|
Selling and marketing
|
56,014
|
9
|
57,991
|
8
|
||||||||||||
|
General and administrative
|
1
27,629
|
|
4
|
31,799
|
4
|
|||||||||||
|
Change in fair value of contingent consideration
|
1 (3,816 |
)
|
(1
|
)
|
18,694
|
3
|
||||||||||
|
Depreciation and amortization
|
13,838
|
2
|
14,092
|
2
|
||||||||||||
|
Total Costs and Expenses
|
531,094
|
83
|
626,415
|
84
|
||||||||||||
|
|
||||||||||||||||
|
Income from Operations
|
109,162
|
17
|
116,740
|
16
|
||||||||||||
|
Financial income, net
|
4,502
|
1
|
20,951
|
3
|
||||||||||||
|
|
||||||||||||||||
|
Income before Taxes on income
|
113,664
|
18
|
137,691
|
19
|
||||||||||||
|
Taxes on income
|
14,439
|
2
|
20,278
|
3
|
||||||||||||
|
|
||||||||||||||||
|
Net Income
|
$
|
99,225
|
16
|
%
|
$
|
117,413
|
16
|
%
|
||||||||
1 Reflects reclassification
of $3.8 million of earnout expenses in 2022 that were incurred in connection with an acquisition from general and administrative to change
in fair value of contingent consideration.
61
Year Ended December 31, 2023 Compared to December 31, 2022
Revenue.
Revenue increased
by 16% from $640.3 million in 2022 to $743.2 million in 2023.
Display Advertising revenue
. Display Advertising
revenue increased by 10%, from $360.7 in 2022 to $398.2 in 2023, accounting for 54% of revenue in 2023. This increase was mainly driven
by a 114% increase in Retail Media revenue to $49.7 million and a 56% increase in CTV to $33.5 million, partially offset by 7% decrease
in Video revenue to $143.2 million, due to shifting inventory from video to display to gain higher profit.
Search Advertising revenue
. Search Advertising
revenue increased by 23%, from $279.6 in 2022 to $344.9 in 2023, accounting for 46% of revenue in 2023. This increase was primarily due
to a 57% increase in Average Daily Searches and an 18% increase in the average annual number of publishers to 160.
Cost of revenue
. Cost of revenue increased by
24%, from $30.4 million in 2022 to $37.8 million in 2023 and remained stable at 5% of revenue in 2022 and 2023. The increase in
cost of revenue expenses was primarily as a result of increased headcount, hosting and data verification and targeting software expenses
which was aligned with the increase in the Company’s revenue.
Traffic acquisition costs and
media buy
. TAC amounted to $372.6 million in 2022, compared with $432.9 million in 2023 and remained stable at 58% of revenue in
2022 and 2023.
Research and development expenses
.
R&D decreased by 4% from $34.4 million, or 5% of revenue in 2022 to $33.1 million, or 4% of revenue in 2023. The decrease was primarily
due to employee-related costs resulting from exchange rate fluctuations as well as decrease in our average headcount during the year as
a result of process automation, offset by an increase in stock-based compensation expenses in 2023.
Selling and marketing expenses
.
S&M expenses increased by 4%, from $56.0 million, or 9% of revenue in 2022 to $58.0 million, or 8% of revenue in 2023. The increase
was primarily due to higher commissions aligned with the increase in revenue, as well as an increase in our marketing expenses and stock-based
compensation.
General and administrative expenses
.
G&A increased by 15%, from $27.6 million in 2022 to $31.8 million in 2023, and remained stable at 4% of revenue in 2022 and 2023.
The increase was primarily due to Hivestack acquisition related expenses, as well as increase in our headcount and higher expenses in
software and hardware, which were incurred to bolster our security initiatives.
Change in fair value of contingent
consideration
. Changes in fair value of contingent consideration in 2023 include a $18.7 million fair-value adjustment of the contingent
consideration payable in respect to Vidazoo acquisition as a result of performance overachievement and an amendment to the share purchase
agreement entered into effect on June 14, 2023.
Depreciation and amortization
.
Depreciation and amortization expenses increased by 2%, from $13.8 million in 2022 to $14.1 million in 2023. The increase is primarily
attributable to the amortization of the acquired intangible assets derived from Vidazoo acquisition.
Financial Income (Expense), Net.
Finance income increased by $16.5 million from $4.5 million in 2022 to $21.0 million in 2023. The increase was primarily due to
interest income earned on increased cash balances invested in bank deposits and marketable securities which yielded a higher interest
rate in 2023.
Taxes on income.
Taxes
on income increased from $14.4 million, or 2% of revenue in 2022 to $20.3 million, or 3% of revenue in 2023. The increase was primarily
due to higher pretax income in 2023 and a one-time recognition of earnout contingent expenses which are non-deductible for tax purposes.
|
B.
|
LIQUIDITY AND CAPITAL RESOURCES
|
To date, we have financed our general capital expenditures with
cash generated from operations, debt and equity offerings. To the extent we acquire new businesses, these acquisitions may be financed
by any of, or a combination of, current cash on the balance sheet, cash generated from operations, debt or equity issuances.
62
As of December 31, 2023, we had $472.7 million in cash, cash equivalents,
short-term deposits and marketable securities, compared to $429.6 million at December 31, 2022. The $43.1 million increase is primarily
result of $155.5 million net cash provided by operating activities offset by $101.9 million cash paid in connection with the Hivestack
acquisition, net of cash acquired and $13.3 million cash paid with connection to Vidazoo’s contingent consideration. In February
2024, our board of directors approved a shares repurchase plan for an aggregate amount of up to $50 million, which, as of the date of
this report, was increased to a total of up to $75 million. The program is subject to the filing of the Company’s audited annual
financial report for the year 2023, which is part of this annual report.
We believe that our current working capital and cash flow from
operation, in addition to proceeds from our 2021 public offerings, are sufficient to meet our operating cash requirements for at least
the next twelve months. Our cash requirements have principally been for working capital, capital expenditures and acquisitions.
The following table presents the major components of net cash flows
for the periods presented (in thousands of U.S. dollars):
|
Year ended December 31,
|
||||||||
|
2022
|
2023
|
|||||||
|
Net cash provided by operating activities
|
$
|
122,119
|
$
|
155,463
|
||||
|
Net cash used in investing activities
|
(46,816
|
)
|
(133,354
|
)
|
||||
|
Net cash used in financing activities
|
(3,258
|
)
|
(10,823
|
)
|
||||
|
Effect of exchange rate changes on cash and cash equivalents
|
(59
|
)
|
141
|
|||||
|
Net increase in cash and cash equivalents and restricted cash
|
$
|
71,986
|
$
|
11,427
|
||||
Net cash provided by operating activities
In 2023, our operating activities provided cash in the amount of
$155.5 million, primarily as result of income in the amount of $117.4 million, increased by non-cash expenses of change in payment obligation
related to acquisitions of $19.3 million, stock-based compensation expenses of $15.6,depreciation and amortization of $14.1 million, offset
by a net change of $3.2 million in operating assets and liabilities and $5.5 million change in accrued interest, net.
In 2022, our operating activities provided cash in the amount of
$122.1 million, primarily as result of income in the amount of $99.2 million, decreased by non-cash expenses, depreciation and amortization
of $13.8 million, stock-based compensation expenses of $11.6, and net change of $2.7 million in operating assets and liabilities offset
by change in accrued interest, net of $3.6 million and change in deferred taxes of $1.4 million.
Net cash used in investing activities
In 2023, we used in our investing activities $133.4 million cash, primarily due to $101.9
million cash paid for the acquisition of Hivestack, net of cash acquired, $76.6 million purchase of marketable securities, net of sales,
and $0.8 million purchase of property plant and equipment, offset by $46.0 proceeds from short-term deposits, net.
In 2022, we used in our investing activities $46.8 million cash,
primarily due to $36.2 million investment in short-term deposits, $9.6 million cash paid in connection to acquisitions and $1.1 million
purchase of property plant and equipment.
Net cash used in financing activities
In 2023, we used in our financing activities $10.8 million, primarily
due to $13.3 million payment of contingent consideration, offset by $2.4 million proceeds from exercise of options.
In 2022, we used in our financing activities $3.3 million, primarily
due to $9.1 million payment of contingent consideration, offset by $5.8 million proceeds from exercise of options.
Off
Balance
Sheet Arrangements
We do not have off-balance sheet arrangements (as such term is
defined by applicable SEC regulations) that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial conditions, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that
are material to investors.
63
|
C.
|
RESEARCH, DEVELOPMENT, PATENTS AND LICENSES, ETC.
|
We conduct our research and development activities primarily in
Israel, Europe and starting December 2023, in Canada. As of December 31, 2023, our research and development department included 157 employees
and the services of additional 13 contractors through a third-party service providers. Research and development expenses were $34.4 million
and $33.1 million in the years ended December 31, 2022 and 2023, respectively. We regard technology and innovation as core drivers of
our culture and operations and are essential for our growth. Hence, we invest substantial resources in research and development, both
in-house and through sub-contractors and collaborations with third parties, to develop new products and platform solutions, applications
and services, improve our core technologies and enhance our technology infrastructure and capabilities. Our advanced technological solutions,
which are applied throughout the consumer journey and marketing funnel, include capabilities that enabled us to achieve above industry
average margins.
In 2023, our efforts were focused on adapting, extending and maintaining
compatibility with the ever-changing business landscapes and automation of our platforms and operating systems.
For a discussion of our intellectual property and how we protect
it, see “Business Overview—Intellectual Property” under Item 4.B. above.
|
D.
|
TREND INFORMATION
|
Industry trends expected to affect our revenue, income from continuing
operations, profitability and liquidity or capital resources:
The digital advertising environment is very crowded and consumers
suffer from over exposure to advertising, which in turn has resulted in a certain level of blindness to these campaigns, decreasing their
effectiveness and value to advertisers. To cut through the clutter, Perion is concentrating on offering unique, stand-out quality ad formats,
including tremendous creative execution that grabs the attention of consumers, thereby increasing the effectiveness of the ad and ultimately
the value to advertisers.
The macroeconomic environment during 2023 forced advertisers to
reassess their digital advertising budgets, causing them to shift budgets from standard ad units to direct response platforms such as
search advertising and high-impact ad units for video and display, including CTV and retail. These actions were intended to increase customer
engagement, thus enhancing their brand equity and increasing return on investment (ROI). Through its business diversification strategy,
Perion operates across all major digital channels, and can rapidly react to those shifts in spending and capitalize on them by focusing
its efforts and resources to where budgets are shifting.
Retail media is a fast-growing market segment, as retailers look
to leverage the first-party data they manage to create advertising opportunities both on their consumer-facing websites and the open web.
According to eMarketer, Retail media accounted for $46.7 billion in 2023, 17.3% of all digital ad spending in the U.S., and is expected
to increase by 136% to $110.4 billion by 2027, or 26% of the U.S. digital ad spending. Perion’s Retail Media solutions provide a
unique solution through advertising “Ads-as-a-platform” that enable personalized, dynamic solutions in Perion’s signature
high-impact approach, which are highly coveted as grocers and other retailers shift from print advertising to digital solutions. Perion
also offers retailers an “always on” solution, ensuring retailers consistent advertising that drives high brand awareness
along ongoing performance campaigns on one hand, and generates a steady revenue stream for Perion along the year.
Advertisers and consumers are increasingly aware of online privacy
matters, recognizing the need to protect user privacy ahead of the expected depreciation of cookies by Google. This is evident in the
continuous increase in customer adoption of Perion’s cookieless SORT® solution, as over 80% of our SORT®-eligible campaigns
adopted our SORT® solution in Q4 2023.
64
Another trend we are seeing is a shift from linear TV to digital
Connected TV (CTV). Even though traditional linear TV ad spending dominates the market, CTV advertising is growing at a much faster rate.
According to eMarketer, CTV ad spending is expected to increase from $24.6 billion in 2023 to $42.4 billion in 2027, while linear TV ad
spending is expected to decrease by 9.3% from $60.4 billion to $54.7 billion during the same period. Perion’s CTV business continued
to gain traction in 2023, growing by 56% year-over-year and representing 8% of its total display advertising revenue.
The digital advertising environment is complex and fragmented,
making it increasingly difficult for advertisers, including brands and agencies, to determine the difference between offerings. This
is driving advertisers to look for comprehensive and holistic solution and service providers. In addition, advertisers are looking for
clean, safe and transparent solutions. Perion is working diligently 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 advertising brands
and agencies, from creative all the way through to analytic data collection and processing, which is also utilized through its in-demand
programmatic capabilities. 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 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.
Our search monetization revenue is predominantly within the desktop
computer environment. The transition in recent years of consumer consumption of applications, services and content from desktop towards
mobile platforms has accelerated and, as a result, an increasing share of advertising campaigns are channeled towards mobile platforms
resulting in fewer consumer software downloadable products 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.
In the first quarter of 2024, we experienced a decline in our search
advertising activity, attributable to changes in advertising pricing and mechanisms implemented by Microsoft in its search distribution
marketplace. These adjustments led to a reduction in Revenue Per Thousand Impressions (RPM) for both Perion and other Microsoft distribution
partners. These changes contributed to decreased search volume. Our results of operations were negatively impacted as a result in the
first quarter of 2024 and we expect an adverse impact on our results of operations in the future. For additional information see also
the Risk Factor titled - “Our search advertising solution depends heavily upon revenue generated from our agreement with Microsoft,
and any adverse change in that agreement could adversely affect our business, financial condition and results of operations.”
Another trend that is shaking up the Internet, and specifically
search advertising, is generative AI and Microsoft’s Bing integration of the AI-driven ChatGPT. Even though generative AI is expected
to change the way we consume content on the Internet, ChatGPT quickly gained traction, reaching 1 million users in the first days after
being launched in late 2022. In fact, the new AI-powered Bing search engine reached 100 million daily active users during March 2023,
with roughly one-third of users new to Bing. It is expected that ChatGPT will revolutionize Bing search capabilities by providing more
advanced and intuitive search experiences for its users, better meeting their needs and expectations.
Since the launch of Microsoft’s ChatGPT, other companies
were quick to introduce their own Generative AI platforms such as Gemini (formerly known as Bard) by Google, Claude by Anthropic and Grok
by X. This is likely to result in the creation of tools that could increase competition in the advertising technology industry and lower
barriers to entry.
In the past few years, browser companies, particularly Google and
Microsoft, as well as others, have been instituting policy changes, regulations and technologies that are 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 these settings has been a major part of the Company’s monetization model and until now we have been successful in dealing
with these measures, within the framework allowed by these companies. We continue to believe, as supported by the level of revenue over
the last couple of years, that as the market continues to consolidate around accepted marketing practices, there remains sufficient business
to generate significant revenue and profits.
For more information on uncertainties, demands, commitments or
events that are reasonably likely to have a material effect on our business, see Item 3.D “Key Information—Risk Factors.”
For additional trend information, see the discussion in Item 5.A.
“Operating and Financial Review and Prospects—Operating Results.”
65
|
E.
|
CRITICAL ACCOUNTING ESTIMATES
|
We have provided a summary of our significant accounting policies,
estimates and judgments in Note 2 to our consolidated financial statements, which are included elsewhere in this Annual Report. The following
critical accounting discussion pertains to accounting policies management believes are most critical to the portrayal of our historical
financial condition and results of operations and that require significant, difficult, subjective or complex judgments. Other companies
in similar businesses may use different estimation policies and methodologies, which may impact the comparability of our financial condition,
results of operations and cash flows to those of other companies.
Revenue recognition
The Company applies the provisions of Accounting Standards Codification
606, Revenue from Contracts with Customers (“ASC 606” or “Topic 606”). The Company applies the practical expedient
for incremental costs of obtaining contracts when the associated revenue is recognized over less than one year.
The Company generates revenue primarily from two major sources,
Display Advertising and Search Advertising. The Company evaluates whether Search Advertising revenue and Display Advertising revenue should
be presented on a gross basis, which is the amount that a customer pays for the service, or 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, whether it changes the products
or performs part of the service, whether the Company has discretion in establishing prices and whether it controls the underlying advertising
space. The evaluation of these factors is subject to significant judgment and subjectivity. Generally, in cases in which the Company
controls the specified good or service before it is transferred to a customer, revenue is recorded on a gross basis.
Stock-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 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
reassess the probability of vesting at each reporting period for awards with performance conditions and adjust compensation cost based
on its probability assessment.
Total stock-based compensation expense recorded during 2023 was $15.6 million,
of which $0.9 million was included in cost of revenue, $2.8 million in research and development expenses, $7.0 million
in selling and marketing expenses, and $4.9 million in general and administrative expenses.
As of December 31, 2023, the maximum total compensation cost related
to options and RSU’s, granted to employees and directors not yet recognized amounted to $25.7 million. This cost is expected to
be recognized over a weighted average period of 1.58 years.
66
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 upon examination by the relevant tax authority, including resolution of related
appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely
of being realized upon settlement.
Although we believe we have adequately reserved for our uncertain
tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in
light of changing facts and circumstances, such as the closing of a tax examination, the refinement of an estimate or changes in tax laws.
To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision
for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions
and changes to reserves that are considered appropriate.
Accounting for tax positions requires judgments, including estimating
reserves for potential uncertainties. We also assess our ability to utilize tax attributes, including those in the form of carry forwards
for which the benefits have already been reflected in the financial statements. We record valuation allowances for deferred tax assets
that we believe are not more likely than not to be realized in future periods. While we believe the resulting tax balances as of December
31, 2023 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 13 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 account for our business combinations using the acquisition
method of accounting, which requires, among other things, allocation of the fair value of purchase consideration to the tangible and intangible
assets acquired and liabilities assumed at their estimated fair values on the acquisition date. The excess of the fair value of purchase
consideration over the values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of
assets acquired and liabilities assumed, we make estimates and assumptions, especially with respect to intangible assets. Our estimates
of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable, and, as a result,
actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, we may record
adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related
to facts and circumstances that existed as of the acquisition date. Acquisition costs, such as legal and consulting fees, are expensed
as incurred.
Goodwill and Other Intangible Assets
Goodwill and certain other purchased intangible assets have been
recorded in our financial statements as a result of acquisitions. In business combinations, in accordance with ASC Topic 805, “Business
Combination,” 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. Such valuations require us to make significant estimates, assumptions, and judgments,
especially with respect to intangible assets. The estimated fair values and useful lives of identifiable intangible assets are based on
many factors, including estimates and assumptions of future operating performance and cash flows of the acquired business, market conditions,
technological developments and specific characteristics of the identified intangible assets. The allocation of the consideration transferred
in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be
up to one year from the acquisition date.
Goodwill represents excess of the purchase price in a business
combination over the fair value of identifiable tangible and intangible assets acquired. Goodwill is not amortized, but rather is subject
to an impairment test.
ASC No. 350, “Intangible—Goodwill and Other”
requires goodwill to be tested for impairment at least annually and, in certain circumstances, between annual tests. The accounting guidance
gives the option to perform a qualitative assessment to determine whether further impairment testing is necessary. The qualitative assessment
includes judgement and considers events and circumstances that might indicate that a reporting unit’s fair value is less than its
carrying amount.
For the years ended December 31, 2022 and 2023, no impairment losses
were recorded.
67
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.
For the years ended December 31, 2022 and 2023, no impairment of
long-lived assets was recorded.
Recent Accounting Standards
For a discussion of other significant accounting policies used
in the preparation of our financial statements and recent accounting pronouncements, see Note 2 to our consolidated financial statements
contained elsewhere in this Annual Report.
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 27, 2024:
|
Name
|
Age
|
Position
|
||
|
Eyal Kaplan*
(1)(2)
|
64
|
Chairman of the Board of Directors
|
||
|
Tal Jacobson
|
49
|
Chief Executive Officer; Director
|
||
|
Maoz Sigron
|
46
|
Chief Financial Officer
|
||
|
Michal Drayman*
(1)(4)
|
51
|
Director
|
||
|
Amir Guy*
(1)(3)
|
54
|
Director
|
||
|
Rami Schwartz*
(4)
|
66
|
Director
|
||
|
Michael Vorhaus*
(2)(3)
|
66
|
Director
|
||
|
Joy Marcus*
(2)(3)(4)
|
62
|
Director
|
||
|
Daniel E. Aks
|
64
|
President, Undertone
|
* “Independent director” under
the Nasdaq Listing Rules.
(1) Member of our investment committee.
(2) Member of our nominating and governance
committee.
(3) Member of our compensation committee.
(4) Member of our audit committee.
68
On August 1, 2023 Tal Jacobson was promoted to Chief Executive
Officer, replacing Doron Gerstel. Following Mr. Jacobson’s promotion, Mr. Gerstel stepped down from the executive team and later,
in November 2023, Mr. Jacobson also replaced Mr. Gerstel as a member of our board of directors.
There are no arrangements or understandings between any of our
directors or executive officers and any other person pursuant to which our directors or executive officers were selected.
Eyal Kaplan
has
served as the chairperson of the board of directors of the Company since May 2018. He is also the chairperson of Medial Earlysign, a privately
held company in the healthcare technology field, since 2020 and as board member at CUBEC Investment Corporation, owned by the University
of Colorado Boulder since 2021. Mr. Kaplan is also engaged in advisory and consulting, 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
was a member of the Technion (Israel Institute of Technology) Council (executive board) from January 2014 until September 2023, serving
the maximum allowed term., where he chaired the Finance and Budget Committee, and is currently the chairman of the Technion’s 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.
Tal Jacobson
has
been a leader and executive in the ad-tech industry for more than two decades. Prior to his appointment as Perion's CEO in 2023, Tal served
as General Manager of CodeFuel, Perion's Search Advertising unit, since 2018. During his tenure, he turned CodeFuel into a significant
driver of Perion's market share and valuation. He also cemented a strategic relationship with Microsoft for which the company won the
Microsoft Advertising Global supply partner award. Tal's success is rooted in his extensive experience in all facets of the tech industry.
As Chief Revenue Officer of SimilarWeb, he was paramount to the Israeli unicorn growth spurt in its early days. Prior to that, he held
the position of VP of Business at McCann Erickson, the role of CEO at the video collaboration platform Watchitoo, and Director of Business
Development at AOL (as part of the IM division - ICQ).
Maoz
Sigron
has
served as the Chief Financial Officer of the Company since February 2018. Prior to that, from 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) and prior to that he served as a CPA with PwC. Mr. Sigron holds
a B.A in accounting and Economics from the College of Management, Israel.
Michal Drayman
has served
as a director of the Company since June 2022. Ms. Drayman serves as a director and member of the audit and compensation committee of Ree
Automotive Ltd. (Nasdaq:Ree) and serves on the boards of several privately held companies including aVISI Ltd. and MetzerPlast.
A long standing investor who served as a partner in Jerusalem Venture Partners VC since 2014 to sept 2023 and a CFO and VP business development
at European High Tech Capital, a privately held investment firm which is focused on healthcare investments. Prior to that from 2001 to
2004 Ms. Drayman served as the VP Finance America of Lumenis Inc. From 1994 to 2001, Ms. Drayman served in different financial positions
in Lumenis Ltd. (previously, Nasdaq:LMNS). Ms. Drayman holds a BA in Economics and Accounting from Haifa University and an MBA in excellence
from The College of Management, Rishon Letzion, Israel, Biomedical Management Track.
69
Amir Guy
has
served as a director of the Company since June 2022. Mr. Guy spent most of his career, more than 26 years, in the advertising industry,
both in corporate and entrepreneurial settings. Mr. Guy is the founder of Moonshoot since October 2023. Mr. Guy was the founder of togetherr
(a Fiverr company) since March 2021 through 2022. Mr. Guy served as a director of Adler-Chomski Group / Grey Israel until July 2023. Prior
to joining Adler-Chomski Group, Mr. Guy served in various accounting roles, including Wunderman Thompson LLC and other private advertising
companies. Mr. Guy holds a B.B.A in marketing and finance from the College of Management in Israel and an MBA from the Kellog School of
Management at Northwestern University.
Rami
Schwartz
has
served as a director of the Company since January 2019. Mr. Schwartz joined The Portland Trust as Managing Director of the Tel Aviv office
in April 2018. Mr. Schwartz also serves as a director of Radcom (NASDAQ: RDCM) and 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 (acquired by Qualitest), 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). Mr. Schwartz holds a B.Sc. in excellence, in Mathematics and Computer Science from the Hebrew University in Jerusalem.Exanet
(acquired by Dell) and General Manager of Precise Software (acquired by Veritas software). Mr. Schwartz holds a B.Sc. in excellence, in
Mathematics and Computer Science from the Hebrew University in Jerusalem.
Michael Vorhaus
has
served as a director of the Company since April 2015. Mr. Vorhaus also serves as a Director of Ionik (formerly known as Popreach)
(TSE:INIKIF). Starting December of 2018, Mr. Vorhaus founded Vorhaus Advisors and is CEO of the firm. From 1994 to November
2018, he was in a variety of positions at of Frank N. Magid Associates, Inc., a research-based strategic consulting firm. From
1994 to 2008, he served as its Senior Vice President and Managing Director and from 2008 to 2018 he served as the President of Magid Advisor,
a unit of Magid Associates. From 2013 to 2014, Mr. Vorhaus served as a director of Grow Mobile. In 1987, he founded Vorhaus Investments.
Vorhaus advises a number of start-ups and venture capital firms. He also has a wide variety of early stage investments primarily in media
and related areas. Mr. Vorhaus formerly served as a director of Altimar Acquisitions Corporation I, II and III. 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
served as a director of the Company since November 2019. Ms. Marcus has a wealth of experience in the media industry, including
EVP and GM Digital Video at Condé Nast Entertainment, CEO of Bloglovin’ (acquired by Impact), SVP Global Marketing Solutions
at Time Warner (now WarnerMedia), VP International at MTV Networks, a division of Viacom (now Paramount) and GM North America of DailyMotion
(acquired by Orange/France Telecom) and VP Business Development at B&N.com (IPO). She sits on the Boards of digital media companies
BBC Maestro, Muso and Qwire, and the nonprofits New York Tech Alliance and MOUSE. Joy is the Co-Founder and Managing Director of The 98,
a venture fund that invests in women led tech enabled businesses. She is a full time Lecturer on Entrepreneurship at Princeton University
where she was the James Wei Visiting Professor in Entrepreneurship in 2014 and is a Venture Fellow at Jerusalem Venture Partners. Joy
graduated Magna Cum Laude, Phi Beta Kappa, from Princeton University and has a JD from NYU Law School and completed the management course
in Finance & Accounting at Columbia University Graduate School of Business.
Daniel E. Aks
has
served as President of Undertone since August 2019 and an external director of the Company from August 2018 until August 2019. Since December
2017, Mr. Aks is the Chief Executive Officer of Antenna International, a story-maker and creative technology company devoted to cultural,
iconic site and commercial attractions. Prior to Antenna, from December 2010 to December 2017, he was the owner of C3 Multimedia LLC.,
a consulting firm in the fields of information, education K-16 and media and during his term with C3 was, inter-alia, the Acting Chief
Operating Officer for the Educational Records Bureau (ERB), a K-12 assessment organization serving private education and high performing
public institutions (from March 2015 until December 2017). From January 2014 until December 2017, Mr. Aks was the Co-Founder of The EdTech
Fund, an investment vehicle for seed capital investments in educational technologies. He also served as the Senior Vice President and
Chief of Staff for McGraw-Hill Education (MHE) from September 2008 until November 2010 . From July 2007 until April 2008 he served as
the Chief Operating Officer and Executive Vice President at The Greenspun Companies. 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 Officern. 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. 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.
There are no family relationships between any of our directors or executive officers.
70
|
B.
|
COMPENSATION
|
The aggregate direct compensation we paid to our directors and
officers as a group (13 persons) for the year ended December 31, 2023, was approximately $12.8 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. In addition,
our directors are reimbursed for expenses incurred in order to attend board of directors or committee meetings.
In the year ended December 31, 2023, we granted our officers (i)
170,463 restricted share units (“RSUs”), which vest over a three-year period; and (ii) 160,000 performance-based share units
(“PSUs”), linked to certain financial KPI’s. These awards were granted under our Equity Incentive Plan, as amended,
formerly known as the 2003 Israeli Share Option Plan (the “Incentive Plan”).
In 2023, we paid each of our non-executive directors $62,500 (as
approved by our shareholders on June 30, 2022). At the annual general meeting of our shareholders held on December 23, 2020, an annual
grant of RSUs to our non-executive directors has been approved, with a variable value based on the role held by each 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. The RSUs are subject to the terms and conditions of the Incentive
Plan and the RSU agreement pursuant to the Incentive Plan. The RSUs 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, 2023 was $125,000, (as approved by our shareholders on June 30, 2022) 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 to 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 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).
71
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
a grant of options to grant of RSUs. Accordingly, Mr. Kaplan was granted an annual grant of RSUs with a value of up to $200,000, such
annual grant 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 this special grant was the date of our board of directors’ approval which occurred on
October 27, 2020.
The table below reflects the compensation granted to our five most
highly compensated office holders during or with respect to the year ended December 31, 2023. 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, 2023, including the compensation paid to such Covered Executive following
the end of the year in respect of services provided during the year. Each of the Covered Executives was covered by our D&O liability
insurance policy and was entitled to indemnification and exculpation in accordance with applicable law and our articles of association.
All numbers below are in US Dollars in thousands.
|
Name and Principal Position
(1)
|
Salary Cost
(2)
|
Bonus
(3)
|
Equity-Based
Compensation (4) |
Total
|
||||||||||||
|
Tal Jacobson, Chief
Executive Officer
|
651
|
853
|
1,916
|
3,420
|
||||||||||||
|
Doron Gerstel, Former
Chief Executive Officer
|
166
|
822
|
1,577
|
2,565
|
||||||||||||
|
Maoz Sigron, Chief
Financial Officer
|
416
|
616
|
691
|
1,723
|
||||||||||||
|
Daniel E. Aks, President, Undertone Business Unit
|
585
|
228
|
546
|
1,359
|
||||||||||||
|
Gal Dagan, Co-Founder and Former VP R&D, Vidazoo Business
Unit
|
303
|
-
|
675
|
978
|
||||||||||||
(1) Unless otherwise indicated herein, all Covered Executives are employed on a full-time (100%) basis.
On August 1, 2023, Doron Gerstel stepped down from his role as Company’s CEO and later, in November 2023, Mr. Gerstel also stepped
down from his role as a member of our board of directors. Gal Dagan’s role as VP R&D of Vidazoo Business ended on December 31,
2023.
(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, 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 and/or special bonus approved by compensation committee of the board and the board of directors pursuant
to the terms of our Compensation Policy for Directors and Officers.
(4) Represents the equity-based compensation expenses recorded in our consolidated
financial statements for the year ended December 31, 2023. Such numbers are based on the RSU 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.
72
Compensation Terms of our Chief Executive Officer
Tal Jacobson was appointed as our Chief Executive Officer effective
August 1, 2023. His compensation terms as Chief Executive Officer were approved by the shareholders at the Annual General Meeting held
on June 21, 2023. The following is a summary of his compensation terms, which are consistent with the Company's Compensation Policy.
Mr. Jacobson's annual base salary was set at NIS 1,440,000 (equivalent
to approximately 397,022 USD) effective February 7, 2023. He is eligible for a target annual cash bonus of up to 100% of his annual base
salary, or 150% in case of overachievement, based on a performance matrix pre-approved annually by the Company's Compensation Committee
and board of directors. The bonus also includes a discretionary component, not based on measurable performance indexes. In addition, our
Compensation Committee and the board of directors shall be authorized to grant Mr. Jacobson, from time to time, a special bonus as set
out in, and subject to the terms of, our Compensation Policy.
In addition, Mr. Jacobson was granted 90,000 RSU and 90,000 PSUs
as of February 7, 2023. The RSUs shall vest over three years with a 12-month cliff; one-third vests on the first anniversary of the grant
date, and the balance vests quarterly over the next eight quarters. The PSUs are subject to the Company meeting at least 80% of revenue
and Adjusted EBITDA targets for fiscal years 2023, 2024, and 2025. No PSUs vest if either revenue or Adjusted EBITDA targets are below
80%. The vesting of the PSUs is calculated based on the average performance levels of actual revenue and Adjusted EBITDA. The maximum
vesting of the PSUs is capped at 100%. The PSUs will not vest before the first anniversary of the grant date. The RSUs and PSUs are subject
to vesting acceleration provisions in the event of a change in control of the Company, provided that the Mr. Jacobson is still employed
by the Company or any of its subsidiaries, as the case may be. The PSUs and RSUs will become fully vested upon the closing of an M&A
Event, which shall mean in essence (A) any consolidation, merger or reorganization (“Transaction”) of the Company, in which
the shareholders of the Company, immediately prior to such Transaction, own less than 50% of the voting power of the surviving entity
(or its affiliated company, as the case may be) immediately after such Transaction; or (B) any transaction or series of related transactions
to which the Company is a party, in which all or substantially all of the Company’s outstanding share capital is transferred to
any entity or person (excluding a public offering in a stock exchange, or any consolidation, merger or reorganization effected exclusively
to change the domicile of the Company, or a transaction or series of related transactions, in which the shareholders of the Company prior
to such transaction, hold more than 50% of the voting and economic rights of the Company or surviving entity, as applicable, immediately
following such transaction), or (C) the sale, lease, exclusive license, transfer or other disposition, in a single transaction or series
of related transactions of all or substantially all the assets of the Company and its subsidiaries taken as a whole, or the sale or disposition
of one or more subsidiaries of the Company if substantially all of the assets of the Company and its subsidiaries taken as a whole are
held by such subsidiary or subsidiaries, or any exclusive license of material intellectual property of the Company, other than when any
such transfer is to a wholly owned subsidiary of the Company.
Mr. Jacobson's employment agreement includes non-solicitation,
confidentiality, intellectual property assignment, insurance plan participation, expense reimbursement and 28 annual vacation days. The
employment agreement is for an indefinite period. and may be terminated by either party with a 6-month advance notice. Mr. Jacobson performance-based
compensation is subject to our clawback policy.
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.
73
|
C.
|
BOARD PRACTICES
|
Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various
corporate governance practices under the Companies Law, relating to such matters as external directors (or, to the extent applicable,
the provisions of the opt-out from external directors), the audit committee, the internal auditor and approvals of interested party transactions.
These matters are in addition to the ongoing listing conditions of Nasdaq and other relevant provisions of U.S. securities laws. Under
the Nasdaq Listing Rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of the
comparable Nasdaq requirements, except for certain matters such as composition and responsibilities of the audit committee. For further
information, see Item 16.G “Corporate Governance.”
Nasdaq Requirements
As required by the Nasdaq Listing Rules, a majority of our directors
are “independent directors” as defined in the Nasdaq Listing Rules.
As contemplated by the Nasdaq Listing Rules, we have an audit committee,
a compensation committee and a nominating and governance committee, all of whose members are independent directors.
See Item 16.G. “Corporate Governance” for exemptions that we have taken
from certain Nasdaq Listing Rule requirements.
Israeli Companies Law
Board of Directors
According to the Companies Law and our articles of association, our board of directors
is responsible, among other things, for:
|
|
• |
establishing our policies and overseeing the performance and activities of our chief executive officer;
|
|
|
• |
convening shareholders’ meetings;
|
|
|
• |
approving our financial statements;
|
|
|
• |
determining our plans of action, principles for funding them and the priorities among them, our organizational structure and examining
our financial status; and
|
|
|
• |
issuing securities and distributing dividends.
|
Our board of directors may exercise all powers and may take all
actions that are not specifically granted to our shareholders. Our board of directors also appoints and may remove our chief executive
officer and may appoint or remove other executive officers, subject to any rights that the executive officers may have under their employment
agreements.
As of March 27, 2024, our board of directors consists of seven
directors. Our directors 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.
74
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. Michal Drayman
has such expertise.
Under the Companies Law, a person, who is, directly or indirectly
subordinated to the chief executive officer of a public company, may not serve as the chairman of its board of directors. In addition,
neither the chief executive officer nor his relative is eligible to serve as chairman of the board of directors (and vice versa), unless
such nomination was approved by a majority of the company’s shareholders for a term not exceeding three years, and either: (i) such
majority included the majority of the voting shareholders (shares held by abstaining shareholders are not considered) which are not controlling
shareholders and have not personal interest regarding the decision; or (ii) the aggregate number of shares voting against the proposal
did not exceed 2% of company voting shareholders. The term can be extended for additional three year terms, in the same manner.
External Directors
Under the Companies Law, Israeli companies whose shares have been
offered to the public in or outside of Israel are required to appoint at least two individuals to serve as external directors.
Pursuant to regulations promulgated under the Companies Law, companies
with shares traded on a U.S. stock exchange, including the Nasdaq Global Select Market, may, subject to certain conditions, “opt
out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition
of the audit committee and compensation committee of the board of directors. In accordance with these regulations, in August 2019, we
elected to “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning
the composition of the audit committee and compensation committee of the board of directors (the “Opt-Out”).
Under these regulations, the exemptions from such Companies Law
requirements will continue to be available to us so long as: (i) we do not have a “controlling shareholder” (as such term
is defined under the Companies Law), (ii) our shares are traded on a U.S. stock exchange, including the Nasdaq Global Select Market, and
(iii) we comply with the director independence requirements, the audit committee and the compensation committee composition requirements,
under U.S. laws (including applicable Nasdaq Rules) applicable to U.S. domestic issuers.
Committees of the Board of Directors
Our board of directors has established an audit committee, a compensation
committee, an investment committee and a nominating and governance committee.
Audit Committee
Our audit committee is comprised of Ms. Michal Drayman (chairperson),
Ms. Joy Marcus and Mr. Rami Schwartz, and operates pursuant to a written charter.
75
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. Michael Vorhaus and Mr. Amir Guy, all of whom satisfy
the respective “independence” requirements of the Companies Law, SEC and Nasdaq Listing Rules for compensation committee members.
Our compensation committee meets at least once each quarter, with additional special meetings scheduled when required.
Our compensation committee is authorized to, among other things,
review, approve and recommend to our board of directors base salaries, incentive bonuses, including the specific goals and amounts, stock
option grants, employment agreements, and any other benefits, compensation or arrangements of our executive officers and directors. In
addition, our compensation committee is required to propose for shareholder approval by a special majority, a compensation policy governing
the compensation of office holders based on specified criteria, to review, from time to time, modifications to the said compensation policy
and examine its implementation, and to approve the actual compensation terms of office holders prior to approval thereof by the board
of directors. Our shareholders adopted a new Compensation Policy for Directors and Officers on June 30, 2022. Our compensation committee
also oversees the administration of our Incentive Plan.
Investment Committee
Our investment committee is comprised of Mr. Eyal Kaplan (chairperson),
Ms. Michal Drayman and Mr. Amir Guy. The Investment Committee is responsible for formulating the overall investment policies of the Company,
and establishing investment guidelines in furtherance of those policies. The Committee monitors the management of the portfolio for compliance
with the investment policies and guidelines and for meeting performance objectives over time as well as assist the board of directors
in fulfilling its oversight responsibility for the investment of assets of the company.
Nominating and Governance Committee
Our nominating and governance committee is comprised of Mr. Michael
Vorhaus (chairperson), Mr. Eyal Kaplan, and Ms. Joy Marcus, and operates pursuant to a written charter. It is responsible for making recommendations
to the board of directors regarding candidates for directorships and the size and composition of the board. In addition, the committee
is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board concerning corporate
governance matters. Under the Companies Law, nominations for director are generally made by our board of directors but may be made by
one or more of our shareholders pursuant to applicable law and our articles of association.
76
Internal Auditor
Under the Companies Law, the board of directors of a public company
must appoint an internal auditor nominated based on the audit committee’s recommendation. The role of the internal auditor is to
examine whether a company’s actions comply with the law and proper business procedure. The internal auditor may be an employee of
the company employed specifically to perform internal audit functions but may not be an interested party or office holder, or a relative
of any interested party or office holder, and may not be a member of the company’s independent accounting firm or its representative.
The Companies Law defines an interested party as a substantial shareholder of 5% or more of the shares or voting rights of a company,
any person or entity that has the right to nominate or appoint at least one director or the general manager of the company or any person
who serves as a director or as the general manager of a company. The internal auditor’s term of office shall not be terminated without
his or her consent, nor shall he or she be suspended from such position unless the board of directors has so resolved after hearing the
opinion of the audit committee and after giving the internal auditor a reasonable opportunity to present his or her position to the board
and to the audit committee. Our internal auditor is Ms. Linur Dloomy, CPA, of Brightman Almagor Zohar & Co., a member of Deloitte
Touche Tohmatsu.
|
D.
|
EMPLOYEES
|
The breakdown of our employees, by department, as of the end of
each of the past three fiscal years is as follows:
|
December 31,
|
||||||||||||
|
2021
|
2022
|
2023
|
||||||||||
|
Cost of sales
|
83
|
91
|
129
|
|||||||||
|
Research and development
|
115
|
121
|
158
|
|||||||||
|
Selling and marketing
|
154
|
150
|
170
|
|||||||||
|
General and administration
|
68
|
78
|
104
|
|||||||||
|
Total
|
420
|
440
|
561
|
|||||||||
As of December 31, 2023, we had 561 employees globally, from whom
235 were located in Israel, 173 were located in the United States, 99 were located in Canada, 34 were located in Europe and 20 of our
employees were located across APAC. As of December 31, 2023, we also engaged the services of 112 contractors in different locations through
a third-party service organization.
We provide our employees around the world with fringe benefits
in accordance with applicable law and we are subject to various labor laws and labor practices around the world. 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.
77
Israeli law generally requires the payment of severance by employers
upon the retirement or death of an employee or upon termination of employment by the employer or, in certain circumstances, by the employee.
Substantially all of our agreements with employees in Israel contain an arrangement made in accordance with Section 14 of the Severance
Pay Law, 1963 (“Section 14”), where our contributions for severance pay are paid in lieu of any severance liability. Upon
termination of employment, for any reason, and subject to contribution of the employee’s entire monthly salary as of the commencement
date of his/her employment, and release of the policy to the employee, no additional severance payments are required to be made by us
to the employee. Additionally, the related obligation and amounts deposited pursuant to such obligation are not stated on the balance
sheet, as we are legally released from any obligation to employees once the deposit amounts have been paid.
Furthermore, Israeli employees and employers are required to pay
predetermined sums to the National Insurance Institute, which covers, amongst other benefits, payments for state retirement benefits and
survivor benefits (similar to the United States Social Security Administration), as well as state unemployment benefits. These amounts
also include payments for national health insurance. The payments to the National Insurance Institute can equal up to approximately 19.6%
of wages subject to a cap if an employee’s monthly wages exceed a specified amount, of which the employee contributes up to approximately
12% and the employer contributes approximately 7.6%.
Our U.S. subsidiaries sponsor a retirement plan for eligible employees.
Their 401(k) Plan allows eligible employees to defer compensation up to the maximum amount allowed under the current Internal Revenue
Code. Our U.S. subsidiaries may make discretionary employer matching contributions to the 401(k) Plan to match employees’ elective
deferrals subject to certain nondiscrimination requirements under the Internal Revenue Code. This matching contribution is made
for all eligible employees who elected to make salary deferral contributions into the plan. In addition to 401(k) Plan, our U.S subsidiaries
provide healthcare and life insurance coverage to all eligible employees.
Our Canadian subsidiary offers its employees a Registered Retirement
Savings Plan with employer matching contributions. A Registered Retirement Savings Plan is a savings plan that is registered with the
Canada Revenue Agency. The employer will match employee contributions up to a specific percentage of earnings and up to a maximum dollar
amount per calendar year. Our Canadian subsidiary also offers eligible employees a group insurance program for life, disability,
health and dental benefits. All benefits are employer paid except the long-term disability benefit.
|
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 27, 2024 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 48,422,123 ordinary shares outstanding as of March 27, 2024 (such amount excludes 115,339 ordinary shares held by the Company).
|
Name
|
Number of Ordinary
Shares Beneficially Owned |
Percentage of Ordinary
Shares Outstanding |
||||||
|
All directors and officers as a group (10 persons)
(1)
|
368,279
|
0.76
|
%
|
|||||
| (1) |
Includes 93,654 RSUs and options to purchase ordinary shares that are vested or will vest within 60 days of March 27, 2024.
|
78
Employee Benefit Plans
Our Incentive Plan was initially adopted in 2003, providing certain
tax benefits in connection with stock-based compensation under the tax laws of Israel and potentially the United States. On November 8,
2022 our board of directors approved to extend the term of the Incentive Plan for an additional period of two years, expiring on December
9, 2024. Please also see Note 11 to our Financial Statements for information on the options and RSUs issued under the Incentive Plan.
Under the Incentive Plan, as amended from time to time, we may
grant to our directors, officers, employees, consultants, advisers, service providers and controlling shareholders options to purchase
our ordinary shares, restricted shares and RSUs. As of December 31, 2023, a total of 3,025,309 ordinary shares were subject to the Incentive
Plan. As of March 27, 2024, 2,804,227 RSUs and options to purchase our ordinary shares were outstanding under our Incentive Plan, of which
RSUs and options to purchase a total of 444,224 ordinary shares were held by our directors and officers (10 persons) as a group. The outstanding
options are exercisable at purchase prices of $6.56 per share. RSUs are exercisable at a price of NIS 0.03 per share. Any expired or cancelled
options or RSUs are available for reissuance under the Incentive Plan.
Our Israeli employees and directors may be granted awards under
Section 102 (“Section 102”) of the Israeli Income Tax Ordinance [New Version], 1961 (the “Ordinance”), which provides
them with beneficial tax treatment, and non-employees (such as service providers, consultants and advisers) and controlling shareholders
may only be granted awards under section 3(i) of the Ordinance, which does not provide for similar tax benefits. In order to be eligible
for tax benefits under Section 102, the securities must be issued through a trustee, and if held by the trustee for the minimum required
period, the employees and directors are entitled to defer any taxable event with respect to the award until the earlier of (the “
Exercise
Date
”) (i) the transfer of securities from the trustee to the employee or director or (ii) the sale of securities to a third-party.
Our board of directors has resolved to elect the “Capital Gains Route” (under Section 102) for the grant of awards to Israeli
grantees under the Company's incentive plan. Based on such election, and subject to the fulfillment of the conditions of Section 102,
under the Capital Gains Route, gains realized from the sale of shares issued pursuant to the Incentive Plan will generally be taxed at
the capital gain tax rate of 25%, provided the trustee holds the securities for 24 months following the date of grant of the award. To
the extent the conditions of Section 102 are not met, tax will be payable at the Exercise Date at the marginal income tax rate applicable
to the employee or director (up to 47% in 2023 and additional National Security contributions). In addition, in certain circumstances,
an excess tax of 3% will be imposed as well. We are not entitled to deduct for Israeli tax purposes the expenses recorded with respect
to grant of awards on the “Capital Gains Route.” However, in case the employee has an ordinary income component under section
102(b)(3) of the Ordinance, that component is deductible by the company for tax purposes. The voting rights of any shares held by the
trustee under Section 102 remain with the trustee.
The Incentive Plan contains a U.S. addendum that provides for the
grant of awards to U.S. citizens and resident aliens of the United States for U.S. tax purposes. Pursuant to the approval of our board
of directors and shareholders, stock options granted to U.S. citizens and resident aliens may be either incentive stock options under
the Internal Revenue Code of 1986, as amended (the “Code”) or nonqualified options that do not qualify as incentive stock
options. Subject to the fulfillment of the applicable conditions of the Code, an incentive stock option may provide tax benefits to the
holder in that it converts ordinary income into income taxed at capital gain rates and defers the tax until the sale of the underlying
share. In that event, we would not recognize a tax deduction with respect to such capital gain. The incentive stock options issued under
our Incentive Plan are not qualified stock options under the Code.
Our board of directors has the authority to administer, and to
grant awards, under the Incentive Plan. However, the compensation committee appointed by the board provides recommendations to the board
with respect to the administration of the plan. Generally, RSUs and options granted under the Incentive Plan vest over a period of three
years following the grant date
See Item 6.B. “Compensation” for a description of awards granted under the
Incentive Plan to our directors and officers in 2023.
|
F.
|
DISCLOSURE OF A REGISTRANT’S ACTION TO RECOVER ERRONEOUSLY AWARDED
COMPENSATION
|
None.
79
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 27, 2024, 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 48,422,123 ordinary shares issued and outstanding
as March 27, 2024 (such amount excludes 115,339 Ordinary Shares held by the Company).
Except as indicated in the footnotes to this table, to our knowledge,
the shareholder in the table has voting and investment power for the shares shown as beneficially owned by such shareholder, except to
the extent the power is shared by spouses under community property law. Our major shareholder does not have different voting rights than
our other shareholders. The information in the table below with respect to the beneficial ownership of shareholders is based on the public
filings of such shareholders with the SEC through March 27, 2024 and information provided to us by such shareholders.
|
Name of Beneficial Owner
|
Shares Beneficially Owned
|
|||||||
|
Number
|
Percentage
|
|||||||
|
Harel Insurance Investments & Financial Services Ltd.
(1)
|
4,267,312
|
8.81
|
%
|
|||||
|
The Phoenix Holdings Ltd.
(2)
|
2,888,735
|
5.97
|
%
|
|||||
|
Clal Insurance Enterprises Holdings Ltd.
(3)
|
2,597,939
|
5.37
|
%
|
|||||
(1)
Based solely upon, and qualified in its entirety with reference to, Amendment No.2 to Schedule 13G/A filed with the SEC on January 30,
2024, by Harel Insurance Investments & Financial Services Ltd. (“Harel”). Of the 4,267,312 Ordinary Shares reported as
beneficially owned by Harel ): (i) 4,074,296 Ordinary Shares are held for members of the public through, among others, provident funds
and/or mutual funds and/or pension funds and/or insurance policies and/or exchange traded funds, which are managed by subsidiaries of
Harel, each of which subsidiaries operates under independent management and makes independent voting and investment decisions, and (iii)
193,016 Ordinary Shares are beneficially held for its own account. The address of Harel is Harel House; 3 Aba Hillel Street; Ramat Gan
52118, Israel. Harel notified the Company via email that its holdings in the Company as of March 31, 2024 were 5,142,872 ordinary shares.
(2) Based solely upon, and qualified in its entirety with reference
to, Amendment No.14 to Schedule 13G/A filed with the SEC on February 12, 2024, by the Phoenix Holdings Ltd. (“Phoenix”). The
securities reported by Phoenix are beneficially owned by various direct or indirect, majority or wholly-owned subsidiaries of Phoenix
(the “Subsidiaries”). The Subsidiaries manage their own funds and/or the funds of others, including for holders of exchange-traded
notes or various insurance policies, members of pension or provident funds, unit holders of mutual funds, and portfolio management clients.
Each of the Subsidiaries operates under independent management and makes its own independent voting and investment decisions. The address
of Phoenix is Derech Hashalom 53, Givataim, 53454, Israel. The Phoenix notified the Company via email that its holdings in the Company
as of March 31, 2024 were 2,821,495 ordinary shares.
(3) Based solely upon, and qualified in its entirety with reference
to, Amendment No.1 to Schedule 13G/A filed with the SEC on February 14, 2024, by Clal Insurance Enterprises Holdings Ltd. (“Clal”).
Of the 2,597,939 Ordinary Shares as beneficially owned by Clal (i) 4,804 Ordinary Shares are beneficially held for Clal’s own account;
and (ii) 2,593,135 Ordinary Shares, are held for members of the public through, among others, provident funds and/or pension funds and/or
insurance policies, which are managed by subsidiaries of Clal, which subsidiaries operate under independent management and make independent
voting and investment decisions.
80
To our knowledge, the significant changes in the percentage of
ownership held by our major shareholders during the past three years preceding the date of this annual report on Form 20-F have been:
(i) the increase in the percentage of ownership by Harel Insurance Investments & Financial Services Ltd. and its third-party client
accounts and various direct or indirect, majority or wholly-owned subsidiaries, above 5% during the year 2022 and 2023; (ii) the increase
in the percentage of ownership by the Phoenix Holdings Ltd. and its various direct or indirect, majority or wholly-owned subsidiaries,
above 10% and the decrease in the percentage of ownership below 10% during the year 2022 and further decrease in their ownership percentage
below 5% during 2023, according to a written notice provided to us by Phoenix Holdings Ltd. on February 21, 2023, which later increased
above 5% during 2023; (iii) the increase in the percentage of ownership by Clal Insurance Enterprises Holdings Ltd. and its third-party
client accounts and various direct or indirect, majority or wholly-owned subsidiaries, above 5% during the year 2023; and (iv) the decrease
in the percentage of ownership held by Renaissance Technologies LLC and Renaissance Technologies Holdings Corporation below 5% during
the year 2021; (v) the decrease in the percentage of ownership held by Private Capital Management, LLC below the 5% during the year 2021.
To our knowledge, as of March 27, 2024, we had 5 shareholders of
record (excluding the Depository Trust Company) all of which were registered with addresses in the United States. These U.S. holders were,
as of such date, the holders of record of approximately 0.02% of our outstanding shares. The number of record holders in the United States
is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since
many of these ordinary shares were held of record by brokers or other nominees.
|
B.
|
RELATED PARTY TRANSACTIONS
|
It is our policy that transactions with office holders or transactions
in which an office holder has a personal interest will be on terms that, on the whole, are no less favorable to us than could be obtained
from independent parties.
See Exhibit 2.1 to this annual report on Form 20-F, which is incorporated
by reference into this annual report on Form 20-F, for a discussion of the requirements of Israeli law regarding special approvals for
transactions involving directors, officers or controlling shareholders.
The following is a description of some of the transactions with
related parties to which we are party and which were in effect within the past three fiscal years. The descriptions provided below are
summaries of the terms of such agreements and do not purport to be complete and are qualified in their entirety by the complete agreements.
Indemnification Agreements
Our articles of association permit us to exculpate, indemnify and
insure our directors and officeholders to the fullest extent permitted by the Companies Law. We have obtained directors’ and officers’
insurance for each of our officers and directors and have entered into indemnification agreements with all of our current officers and
directors.
We have entered into indemnification and exculpation agreements
with each of our current office holders and directors exculpating them to the fullest extent permitted by the law and our articles of
association and undertaking to indemnify them to the fullest extent permitted by the law and our articles of association, including with
respect to liabilities resulting from this annual report, to the extent such liabilities are not covered by insurance. See also Item 10.B.
“Related Party Transactions—Indemnification Agreements.”
Employment and Consulting Agreements
We have or have had employment, consulting or related agreements
with each member of our senior management. For more information on employment and consulting agreements see Item 6.B. “Compensation.”
|
C.
|
INTERESTS OF EXPERTS AND COUNSEL
|
Not applicable.
ITEM 8.
FINANCIAL
INFORMATION
|
A.
|
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
|
Our Financial Statements are included in this annual report pursuant to Item 18.
81
Legal Proceedings
From time to time, we or our subsidiaries may be a party to legal proceedings and claims
in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, we do not believe they will
have a material effect on our consolidated financial position, results of operations, or cash flows. We are currently not involved in
any material proceedings.
Policy on Dividend Distribution
It is currently our policy not to distribute dividends.
|
B.
|
SIGNIFICANT CHANGES
|
None.
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
|
B.
|
MEMORANDUM AND ARTICLES OF ASSOCIATION
|
A copy of our amended and restated articles of association is attached
as Exhibit 1.1 to this annual report on Form 20-F. The information called for by this Item is set forth in Exhibit 2.1 to this annual
report on Form 20-F and is incorporated by reference into this annual report on Form 20-F.
|
C.
|
MATERIAL CONTRACTS
|
We have not entered into any material contract within the three
years prior to the date of this Annual Report, other than contracts entered into in the ordinary course of business, or as otherwise described
herein in Item 4.A “
History and Development of the Company,
” Item 4.B “
Business
Overview,
” Item 5.B “
Operating and Financial Review and Prospects—Liquidity
and Capital Resources,
” Item 6.C “
Board Practices
” and Item 7.B
“Related
Party Transactions.
”
82
|
D.
|
EXCHANGE CONTROLS
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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.
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E.
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TAXATION
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The following is a general summary only and should not be considered
as income tax advice or relied upon for tax planning purposes.
ISRAELI TAXATION
THE FOLLOWING DESCRIPTION IS NOT INTENDED TO CONSTITUTE A COMPLETE
ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO THE OWNERSHIP OR DISPOSITION OF OUR ORDINARY SHARES. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR
CONCERNING THE TAX CONSEQUENCES OF YOUR PARTICULAR SITUATION, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY STATE,
LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.
The following is a summary of the material Israeli tax laws applicable
to us, and some Israeli Government programs benefiting us. This section also contains a discussion of some Israeli tax consequences to
persons acquiring our ordinary shares. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular
investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli
law. Examples of this kind of investor include residents of Israel or traders in securities who are subject to special tax regimes not
covered in this discussion. Since some parts of this discussion are based on new tax legislation that has not yet been subject to judicial
or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed
in this discussion.
The discussion below should not be construed
as legal or professional tax advice and does not cover all possible tax considerations. Potential investors are urged to consult
their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares,
including, in particular, the effect of any foreign, state or local taxes.
General Corporate Tax Structure in Israel
Taxable income of Israeli companies is generally subject to corporate
tax at the rate of 23% for 2018 and subsequent tax years. However, the effective tax rate payable by a company that derives income from
a Preferred Enterprise or a Preferred Technological 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.
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The Israeli parliament enacted a reform to the Investment Law,
effective January 2011 (the “2011 Amendment”). The reform introduced new benefits for “Preferred Enterprise” 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 were met, or elect instead, irrevocably,
to forego such benefits and elect the benefits of the Preferred Enterprise. The 2017 Amendment introduced new benefits for Technological
Enterprises, alongside the existing Preferred Enterprise tax benefits. According to the 2011 Amendment, a flat rate tax applies to companies
eligible for the Preferred Enterprise status. In order to be eligible for Preferred Enterprise status, a company must meet minimum requirements
to establish that it contributes to the country’s economic growth and is a competitive factor for the Gross Domestic Product (a
competitive enterprise).
We elected Preferred Enterprise status commencing in 2011 and one
of our Israeli subsidiaries became a Preferred Enterprise in 2017.
We believe that the Company and certain of its Israeli subsidiaries,
qualify as a Preferred Technology Enterprise in 2023 and therefore, the portion of the income derived from Preferred Technology Income,
as defined in the Investment Law, which qualifies for the benefits, is subject to a lower tax rate of 12% according to Amendment 73 to
the Law, as described below.
Benefits granted to a Preferred Enterprise’s Preferred Income
include reduced tax rates. In peripheral regions (Development Area A) the reduced tax rate was 7.5%. In other regions the tax rate was
16%. Preferred Enterprises in peripheral regions will be eligible for grants from the Israeli Authority for Investments and Development
of the Industry and Economy (the “Investment Center”), as well as the applicable reduced tax rates.
A dividend distribution from a Preferred Enterprise out of the
“Preferred Income” would be generally subject to 20% withholding tax (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 such reduced 20% withholding tax rate,
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 (although, if such dividends are subsequently distributed to individuals or
a non-Israeli company the aforesaid will apply).
In December 2016, the Economic Efficiency Law (Legislative Amendments
for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016, which includes Amendment 73 to the Investment Law, was published.
Amendment 73 prescribes special tax tracks for technological enterprises as described below, and is in addition to the other existing
tax beneficial programs under the Investment Law. On June 30, 2021, certain grandfather rules in Amendment 73 pertaining the preferred
enterprises have expired, most significantly the limitation of Preferred Income to exclude such which is generated by intangible assets
not related to the manufacturing or such that would not have been recognized as Preferred Technology Income.
Tax benefits under Amendment 73 that became effective on January
1, 2017.
Amendment 73 provides 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
conditions, including, inter-alia, the following:
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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
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A company must also satisfy one of the following conditions: (1) at least 20% of the workforce (or at least 200 employees) are employees
whose full salary has been paid and reported in the Company’s financial statements as R&D expenses; (2) a venture capital investment
of an amount approximately equivalent to at least NIS 8 million (approximately $2.2 million) was previously made in the company, and the
company did not change its line of business after such investment; (3) growth in sales by an average of 25% or more, over the three years
preceding the tax year provided that the company's turnover in the tax year and in each of the previous three years was at least NIS 10
million (approximately $2.8 million); or (4) the number of the company’s employees increased by 25% (on average) or more in the
course of three years, provided that the company employed at least 50 employees in the tax year and in each of the previous three years.
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Companies that do not meet one of the above two conditions may request preliminary approval from the National Authority for Technological
Innovation regarding being companies that own an innovation-promoting enterprise.
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A company must qualify as a “Competitive Enterprise” as described under the Investment Law.
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Total annual consolidated revenue is below NIS10 billion (approximately $2.9 billion).
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A “Special Preferred Technology Enterprise” is an enterprise
that meets conditions one and two above, and in addition is a part of a group of companies that have total annual consolidated revenue
in excess of NIS 10 billion (approximately $2.8 billion).
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. These corporate tax rates shall apply only with respect to the portion of intellectual property developed in Israel unless certain
exceptions apply. 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 (approximately
$56 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 Technological Enterprise that
acquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million (approximately $140 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 Technological
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 such 20% reduced withholding tax rate 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 (although, if such dividends are subsequently distributed
to individuals or a non-Israeli company the aforesaid will apply). If such dividends are distributed to a parent foreign company that
holds solely or together with other foreign companies at least 90% of the shares of the distributing company and other conditions are
met, the withholding 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 ITA allowing for a reduced tax rate).
We believe that we and our Israeli subsidiary Vidazoo are qualified
as a “Preferred Technology Enterprise” in 2022 and 2023, and subject to a lower tax rate of 12% according to Amendment 73
to the Law, as described above.
Law for the Encouragement of Knowledge Intensive Industry (Temporary
Provision), 2023
In July 2023, the Israeli Parliament enacted the Law for the Encouragement
of Knowledge Intensive Industry (Temporary Provision), 2023 (“the
Angel’s Law
”)
among other stipulations, the Angel’s Law provides certain benefits to companies qualifying for the Preferred Technological Enterprise
status in the form of tax deductions when acquiring other companies, Israeli or foreign. In order to obtain the benefits, the acquiror
and target companies must meet certain criteria, perform certain actions and obtain certain approvals from the government.
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Law for the Encouragement of Industry (Taxes), 5729-1969
We believe that we currently qualify as an “Industrial Company”
within the meaning of the Law for the Encouragement of Industry (Taxes), 5729-1969, or the Industry Encouragement Law. The Industry Encouragement
Law defines an “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 income from certain government 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 any given tax year is industrial production.
The following corporate tax benefits, among others, are available to Industrial Companies:
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Amortization of the cost of purchased know-how, patents, and right to use patent or know how that were purchased in good faith and
are used for the development or promotion of the Industrial Enterprise, over an eight-year period beginning from the year in which such
rights were first used;
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Under specified conditions, an election to file consolidated tax returns with additional related Israeli Industrial Companies controlled
by it; and
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Deduction of expenses related to a public offering in equal amounts over three years beginning from the year of the offering.
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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.
Taxation of our Shareholders
Capital Gains Taxes Applicable
to Non-Israeli Resident Shareholders.
The 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 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 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 2023), 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 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 2023) and a marginal
tax rate of up to 47% for an individual in 2023 (excluding excess tax as discussed below)) unless contrary provisions in a relevant tax
treaty apply. Non-Israeli entities (including corporations) will not be entitled to the foregoing exemption if Israeli residents, whether
directly or indirectly: (i) have a controlling interest of more than 25% in such non-Israeli entity or (ii) are the beneficiaries of,
or are entitled to, 25% or more of the revenue or profits of such non-Israeli entity. Such exemption is not applicable, inter alia, to
a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
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Additionally, a sale of shares by a non-Israeli resident may be
exempt from Israeli capital gains tax under the provisions of an applicable tax treaty between Israel and the shareholder’s country
of residence. For example, under the Convention Between the Government of the United States and the Government of the State of Israel
with respect to Taxes of Income, as amended, or the United States-Israel Tax Treaty, the disposition of shares by a shareholder who (i)
is a U.S. resident (for purposes of the United States-Israel Tax Treaty), (ii) holds the shares as a capital asset, and (iii) is entitled
to claim the benefits afforded to such person by the United States-Israel Tax Treaty, is generally exempt from Israeli capital gains tax.
Such exemption will not apply, inter alia, if (a) the capital gain arising from such sale, exchange or disposition is attributed to a
permanent establishment that the shareholder maintains in Israel, (b) the shareholder holds, directly or indirectly, shares representing
10% or more of the voting capital of the company at any time in the 12-month period preceding such sale, exchange or disposition, subject
to certain conditions, (c) such U.S. resident is an individual and was present in Israel for a period or periods aggregating to 183 days
or more during the relevant taxable year, (d) the capital gains arising from such sale, exchange or disposition is attributed to real
estate located in Israel, or (e) the capital gain arising from such sale, exchange or disposition is attributed to royalties. In each
case, the sale, exchange or disposition of our ordinary shares would be subject to Israeli tax, to the extent applicable.
Regardless of whether non-Israeli shareholders may be liable for
Israeli capital gains tax on the sale of our ordinary shares, the payment of the consideration may be subject to the withholding of Israeli
tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding
at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in
the form of a merger or otherwise, the ITA 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 ITA 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 ITA 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 ITA
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 ITA 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 20% if the dividend is distributed from income attributed to a “Preferred Enterprise”
(as such terms are defined in the Investment Law), subject to the receipt in advance of a valid certificate from the ITA allowing for
such reduced tax rate, or such lower rate as may be provided under an applicable tax treaty. If such dividends are distributed by a “Preferred
Technology Enterprise” or a “Special Preferred Technology Enterprise”, paid out of “Preferred Technology Income”
(as such terms are defined under the Investment Law), to a parent 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 ITA allowing for a reduced tax rate).
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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 a 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 a Preferred
Enterprise are not entitled to such reduction under such tax treaty but are subject to withholding tax at the rate of 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 a
Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions
of the two types of income. U.S. residents (for purposes of the United States-Israel Tax Treaty) who are subject to Israeli withholding
tax on a dividend may be entitled to a credit or deduction for United States federal income tax purposes up to the amount of the taxes
withheld, subject to detailed rules contained in U.S. tax law.
We cannot assure you that we will designate the profits that we
may distribute in a way that will reduce shareholders’ tax liability.
A non-Israeli resident who receives dividends from which tax was
withheld is generally exempt from the obligation to file tax returns in Israel in respect of such income, provided, inter alia, that (i)
such income was not derived from a business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable sources of income
in Israel with respect to which a tax return is required to be filed and (iii) in the case of individuals, 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 698,280 (approximately $195 thousand) for 2023 (which amount is linked to the annual
change in the Israeli consumer price index), including, but not limited to, dividends, interest and capital gain.
Estate and Gift Tax.
Israeli tax law
presently does not impose estate or gift taxes.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a description of material U.S. federal income
tax consequences to the U.S. Holders described below of owning and disposing of our ordinary shares, but this discussion does not purport
to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to own,
or dispose of, our ordinary shares.
This discussion applies only to a U.S. Holder that holds the ordinary
shares as capital assets for U.S. federal income tax purposes (generally, property held for investment). It does not describe all of the
tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including the alternative minimum tax,
the Medicare contribution tax on net investment income and tax consequences applicable to U.S. Holders subject to special rules, such
as:
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certain financial institutions;
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dealers or traders in securities
that use a mark-to-market method of tax accounting;
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persons holding ordinary shares as part of a straddle, integrated or similar transaction;
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persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
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entities classified as partnerships for U.S. federal income tax purposes and their partners;
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tax-exempt entities, “individual retirement accounts” or “Roth IRAs”;
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real estate investment trusts or regulated investment companies;
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persons who acquired our ordinary shares pursuant to the exercise of an employee stock option or otherwise as compensation;
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persons that own or are deemed to own 10% or more of our stock by voting power or value; or
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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.
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This discussion is based on the Code, administrative pronouncements,
judicial decisions, final, temporary and proposed Treasury regulations, and the income tax treaty between the United States and Israel,
or the Treaty, all as of the date hereof, any of which is subject to change, possibly with retroactive effect.
As used herein, a “U.S. Holder” is a person that is
eligible for the benefits of the Treaty and is, for U.S. federal income tax purposes, a beneficial owner of ordinary shares and:
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a citizen or individual resident of the United States;
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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
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an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
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This discussion does not address any U.S. federal taxes (such as
estate or gift taxes) other than income taxes, nor does it address any state, local or non-U.S. tax considerations. U.S. Holders should
consult their tax advisers concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of our ordinary
shares in their particular circumstances.
Taxation of Distributions
This discussion is subject to the discussion under “—Passive Foreign Investment
Company Rules” below.
We currently do not intend to make distributions on the ordinary
shares. Any distributions (other than certain pro rata distributions of ordinary shares) will be treated as dividends to the extent paid
out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Because we do not maintain
calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be
reported to U.S. Holders as dividends. Dividends will not be eligible for the dividends-received deduction generally available to U.S.
corporations under the Code. Subject to applicable limitations, dividends paid on our ordinary shares to certain non-corporate U.S. Holders
may be taxable at a favorable rate, provided that we are not (and are not treated with respect to any U.S. Holder as) a passive foreign
investment company, or PFIC, for our taxable year in which the dividend is paid or the preceding taxable year. Non-corporate U.S. Holders
should consult their tax advisers regarding the availability of this favorable rate in their particular circumstances.
Dividends will generally be included in a U.S. Holder’s income
on the date of receipt. If any dividend is paid in NIS, the amount of dividend income will be the U.S. dollar amount of the dividend calculated
by reference to the exchange rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. dollars.
If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder should not be required to recognize foreign currency
gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into
U.S. dollars after the date of receipt. Such gain or loss will generally be treated as U.S.-source ordinary income or loss.
Dividend income will include any amounts withheld in respect of
Israeli taxes and will be treated as foreign-source income. Subject to applicable limitations, some of which vary depending upon the U.S.
Holder’s circumstances, Israeli taxes withheld from dividends on our ordinary shares (at a rate not exceeding the applicable Treay
rate) generally will be creditable against the U.S. Holder’s U.S. federal income tax liability. The rules governing foreign tax
credits are complex. For example, Treasury regulations provide that, in the absence of an election to apply the benefits of an
applicable income tax treaty, in order for foreign income taxes to be creditable the relevant foreign income tax rules must be consistent
with certain U.S. federal income tax principles, and we have not determined whether the Israeli income tax system meets these requirements.
The U.S. Internal Revenue Service (the “IRS”) has released notices that provide relief from certain of the provisions of the
Treasury regulations described above for taxable years ending before the date that a notice or other guidance withdrawing or modifying
the temporary relief is issued (or any later date specified in such notice or other guidance). In lieu of claiming a non-U.S. tax credit,
U.S. Holders may elect to deduct non-U.S. taxes (including Israeli taxes) in computing their taxable income, subject to applicable limitations.
An election to deduct creditable non-U.S. taxes instead of claiming foreign tax credits applies to all such non-U.S. taxes paid or accrued
in the taxable year. U.S. Holders should consult their tax advisers regarding the creditability or deductibility of Israeli taxes in their
particular circumstances.
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Sale or Other Taxable Disposition of Ordinary Shares
This discussion is subject to the discussion under “—Passive
Foreign Investment Company Rules” below.
Gain or loss realized on the sale or other taxable disposition
of our ordinary shares will be capital gain or loss and will be long-term capital gain or loss if the U.S. Holder has owned the ordinary
shares for more than one year. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the
ordinary shares disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. This gain or loss
will generally be U.S.-source gain or loss for foreign tax credit purposes. The deductibility of capital losses is subject to limitations.
Israeli taxes on capital gains will generally not be eligible for foreign tax credits. U.S. Holders should consult their tax advisers
with respect to the creditability or deductibility of Israeli taxes, if any, on disposition gains in their particular circumstances.
Passive Foreign Investment Company Rules
In general, a non-U.S. corporation is a PFIC for any taxable year
in which (i) 75% or more of its gross income consists of passive income or (ii) 50% or more of the value of its assets (generally determined
on an average quarterly basis) consists of assets that produce, or are held for the production of, passive income. For purposes of the
above calculations, a non-U.S. corporation that owns (or is treated as owning for U.S. federal income tax purposes), directly or indirectly,
at least 25% by value of the shares or equity interests of another corporation or partnership is treated as if it held its proportionate
share of the assets of the other corporation or partnership and received directly its proportionate share of the income of the other corporation
or partnership. Passive income generally includes dividends, interest, rents, royalties and certain gains. Cash is generally a passive
asset for these purposes. Goodwill and other intangible assets are generally characterized as non-passive or passive assets based on the
nature of the income produced in the activity to which the goodwill and other intangible assets relate.
We believe that we were not a PFIC for our 2023 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 and other intangible assets, 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
and other intangible assets may be determined by reference to our market capitalization from time to time, and because we hold and may
continue to hold significant amounts of cash and cash equivalents, our risk of being or becoming a PFIC for any taxable year will increase
if our market capitalization declines.
If we are a PFIC for any taxable year and any of our non-U.S. subsidiaries
or other companies in which we own equity interests is also a PFIC (any such entity, a “Lower-tier PFIC”), a U.S. Holder will
be deemed to own a proportionate amount (by value) of the shares of any Lower-tier PFIC and will be subject to U.S. federal income tax
according to the rules described in the subsequent paragraph on (i) certain distributions by the Lower-tier PFIC and (ii) dispositions
of shares of the Lower-tier PFIC, in each case as if the U.S. Holder held such shares directly, even though the U.S. Holder will not receive
the proceeds of those distributions or dispositions.
In general, if we are a PFIC for any taxable year during which
a U.S. Holder holds ordinary shares, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of
its ordinary shares will be allocated ratably over the U.S. Holder’s holding period. The amounts allocated to the taxable year of
the sale or disposition and to any year before we became a PFIC will be taxed as ordinary income. The amount allocated to each other taxable
year will be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and
an interest charge will be imposed on the resulting tax liability for each such year. Furthermore, to the extent that distributions received
by a U.S. Holder in any taxable year on its ordinary shares exceed 125% of the average of the annual distributions on the ordinary shares
received during the preceding three taxable years or the U.S. Holder’s holding period, whichever is shorter, such distributions
will be subject to taxation in the same manner. If we are a PFIC for any taxable year during which a U.S. Holder owns ordinary shares,
we will generally continue to be treated as a PFIC with respect to the U.S. Holder for all succeeding taxable years during which the U.S.
Holder owns the ordinary shares, even if we cease to meet the threshold requirements for PFIC status. If we are a PFIC for any taxable
year but cease to be a PFIC for subsequent taxable years, U.S. Holders should consult their tax advisers regarding the advisability of
making a “deemed sale” election that will allow them to eliminate the continuing PFIC status under certain circumstances.
90
Alternatively, if we are a PFIC for any taxable year and if our
ordinary shares are “regularly traded” on a “qualified exchange,” a U.S. Holder can make a mark-to-market election
that will result in tax treatment different from the general tax treatment for PFICs described above. The ordinary shares will be treated
as “regularly traded” for any calendar year in which more than a de minimis quantity of the ordinary shares are traded on
a qualified exchange on at least 15 days during each calendar quarter. Nasdaq, where the ordinary shares are listed, is a qualified exchange
for this purpose. If a U.S. Holder of ordinary shares makes a timely mark-to-market election, the U.S. Holder generally will recognize
as ordinary income any excess of the fair market value of the ordinary shares at the end of each taxable year over their adjusted tax
basis, and will recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ordinary shares over their fair market
value at the end of the taxable year (but only to the extent of the net amount of income previously included as a result of the mark-
to-market election). If a U.S. Holder makes the election, the U.S. Holder’s tax basis in the ordinary shares will be adjusted to
reflect the income or loss amounts recognized. Any gain recognized on the sale or other disposition of ordinary shares in a year in which
we are a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount
of income previously included as a result of the mark-to-market election, with any excess treated as a capital loss). If a U.S. Holder
of ordinary shares makes a timely mark-to-market election, distributions paid on ordinary shares will be treated as discussed under “—Taxation
of Distributions” above. U.S. Holders should consult their tax advisers regarding the availability and advisability of making a
mark-to-market election in their particular circumstances. In particular, U.S. Holders should consider carefully the impact of a mark-to-market
election with respect to their ordinary shares given that we may have Lower-tier PFICs and that there is no provision in the Code, Treasury
regulations or other official guidance that would permit them to make a mark-to-market election with respect to any Lower-tier PFIC the
shares of which are not “regularly traded” as described above.
We do not intend to provide information necessary for U.S. Holders to make “qualified
electing fund” elections which, if available, would result in tax treatment different from the general tax treatment for PFICs described
above.
If we are a PFIC for any taxable year during which a U.S. Holder owns any ordinary shares,
the U.S. Holder will generally be required to file annual reports with the IRS. 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 IRS.
Certain U.S. Holders who are individuals (or certain specified entities) may be required to report information
relating to their ownership of ordinary shares or non-U.S. accounts through which the ordinary shares are held. U.S. Holders should consult
their tax advisers regarding their reporting obligations with respect to our ordinary shares.
|
F.
|
DIVIDENDS AND PAYING AGENTS
|
Not applicable.
|
G.
|
STATEMENT BY EXPERTS
|
Not applicable.
91
|
H.
|
DOCUMENTS ON DISPLAY
|
We are subject to the informational requirements of the Exchange
Act that are applicable to foreign private issuers, and under those requirements file reports with the SEC. Those other reports or other
information may be inspected without charge at the locations described above. As a foreign private issuer, we are exempt from the rules
under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders
will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition,
we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently
or as promptly as United States companies whose securities are registered under the Exchange Act. However, we will file with the SEC,
within 120 days after the end of each subsequent fiscal year, or such applicable time as required by the SEC, an annual report on Form
20-F containing financial statements audited by an independent registered public accounting firm, and will submit to the SEC reports on
Form 6-K containing unaudited quarterly financial information.
Our filings with the SEC are also available to the public through
the SEC’s website at http://www.sec.gov. This site contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. The information on that website is not part of this annual report on Form 20-F
and is not incorporated by reference herein.
|
I.
|
SUBSIDIARY INFORMATION
|
Not applicable.
|
J.
|
ANNUAL REPORT TO SECURITY HOLDERS
|
Not applicable.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Exchange Rate Risk. A portion of our revenue
and expenses are denominated in foreign currencies. As a result, numerous balances are denominated or linked to these currencies. Foreign
currency related fluctuations resulted in $0.5 million net losses in 2021, $0.3 million net losses in 2022 and $0.6 million net losses
in 2023. These losses are included in financial expenses, net, as presented in our statements of income.
As of December 31, 2023, balance sheet financial items in U.S.
dollars, our functional currency, and those currencies other than the U.S. dollars were as follows:
|
U.S. dollars
|
NIS
|
Canadian dollars
|
Other Currencies
|
Total
|
||||||||||||||||
|
In thousands of U.S.
dollars
|
||||||||||||||||||||
|
Current assets
|
631,573
|
18,508
|
38,526
|
37,979
|
726,586
|
|||||||||||||||
|
Long-term assets
|
(907
|
)
|
4,238
|
-
|
934
|
4,265
|
||||||||||||||
|
Current liabilities
|
(250,353
|
)
|
(17,451
|
)
|
(36,066
|
)
|
(33,862
|
)
|
(337,732
|
)
|
||||||||||
|
Long-term liabilities
|
(16,771
|
)
|
(2,013
|
)
|
(58
|
)
|
(249
|
)
|
(19,091
|
)
|
||||||||||
|
Total
|
363,542
|
3,282
|
2,402
|
4,802
|
374,028
|
|||||||||||||||
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 $0.5 million.
92
A significant portion of our costs, including salaries and office
expenses are incurred in NIS. Inflation in Israel may have the effect of increasing the U.S. dollar cost of our operations in Israel.
If the U.S. dollar declines in value in relation to the New Israeli Shekel, it will become more expensive for us to fund our operations
in Israel. A revaluation of 1% of the New Israeli Shekel will affect our income before tax by approximately $0.4 million. The exchange
rate of the U.S. dollar to the New Israeli Shekel, based on exchange rates published by the Bank of Israel, was as follows:
|
Year Ended December 31,
|
||||||||||||
|
2021
|
2022
|
2023
|
||||||||||
|
Average rate for period
|
3.231
|
3.359
|
3.688
|
|||||||||
|
Rate at year-end
|
3.110
|
3.519
|
3.627
|
|||||||||
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
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 chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures
as of December 31, 2023, 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 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, 2023. 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, 2023.
|
In accordance with guidance
issued by the Securities and Exchange Commission, companies are permitted to exclude acquisitions from their final assessment of internal
control over financial reporting for the first fiscal year in which the acquisition occurred. Our management’s evaluation of internal
control over financial reporting excluded the internal control activities of Hivestack, which we acquired in December 2023. Hivestack’s
total assets, excluding goodwill and acquired intangible assets, constituted approximately 7.7% of our consolidated total assets as of
December 31, 2023.
|
(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-2.
93
|
|
(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 16.
RESERVED
ITEM 16A
.
AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Ms. Michal Drayman,
who is an independent director (as defined in the Nasdaq Listing Rules) and serves as our chairperson of the audit committee, qualifies
as an “audit committee financial expert” as defined in Item 16A of Form 20-F.
ITEM 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 2023.
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 of U.S. dollars):
|
2022
|
2023
|
|||||||
|
Audit Fees
|
$
|
643
|
$
|
747
|
||||
|
Tax Fees
|
109
|
57
|
||||||
|
Audit Related fees
|
288
|
483
|
||||||
|
Total
|
$
|
1,040
|
$
|
1,287
|
||||
Audit fees
include
fees for professional services rendered by our principal accountant in connection with the annual audit, review of quarterly consolidated
financial data, internationally required statutory audits, consents and assistance with review of documents filed with the SEC.
Tax fees
include services
related to tax compliance and claims for refunds, tax planning and advice, including assistance with tax audits and appeals, advice related
to additional efforts required in connection with mergers and acquisitions and assistance with respect to requests for rulings from tax
authorities.
Audit-related fees
principally
include assistance with audit services and consultations, mainly related to follow-on public offerings, mergers and acquisitions.
Our audit committee provides assistance to our board of directors
in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control
and legal compliance functions by pre-approving the services performed by our independent accountants and reviewing their reports regarding
our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees the audit efforts
of our independent accountants and takes those actions that it deems necessary to satisfy itself that the accountants are independent
of management. Our audit committee has authorized all auditing and non-auditing services provided by our independent accountants during
2022 and 2023 and the fees paid for such services.
94
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.
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.
95
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.
ITEM 16I.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION
Not applicable.
| ITEM 16J. |
INSIDER TRADING POLICIES
|
Not applicable.
ITEM 16K.
CYBERSECURITY RISK MANAGEMENT POLICIES AND PROCEDURES
Cybersecurity Risk Management
and Strategy
We have developed and implemented a cybersecurity risk management
program designed to protect the confidentiality, integrity, and availability of our critical systems, networks, and information. Our cybersecurity
risk management program includes a cybersecurity incident response plan and cybersecurity controls. Our cybersecurity risk management
program is assessed annually by independent third-party auditors. Our cybersecurity risk management program is integrated into our overall
enterprise risk management program, and shares common methodologies, reporting channels and governance processes.
Our cybersecurity risk management program includes:
|
|
• |
risk assessments designed to help identify, manage and address material cybersecurity risks to our critical systems, networks, information,
products, services, and broader enterprise information technology environment;
|
|
|
• |
a cybersecurity management team principally responsible for managing (1) our cybersecurity risk assessment processes, (2) our cybersecurity
controls, and (3) our response to cybersecurity threats and incidents;
|
|
|
• |
the use of third-party service providers, where appropriate, to assess, test, or otherwise assist with aspects of our security controls;
|
|
|
• |
a risk management process for third-party service providers and suppliers and vendors;
|
|
|
• |
cybersecurity awareness training of our employees, incident response personnel, and senior management; and
|
|
|
• |
a cybersecurity incident response plan that includes procedures for responding to cybersecurity threats and incidents.
|
With respect to our third-party risk management processes, we generally
seek to impose certain cybersecurity requirements on critical third parties with whom we do business. Although we employ third-party due
diligence, onboarding, and other procedures designed to assess the data protection, data privacy, and cybersecurity practices of third-party
service providers, suppliers and vendors (including risk assessments and contractual protections), our ability to monitor or control such
practices is limited and there can be no assurance that we can detect, prevent, mitigate, or remediate the risk of any weakness, compromise,
or failure in the systems, networks, and information owned or controlled by such third parties. When we do become aware that a third-party
service provider, supplier, or vendor has experienced any compromise or failure, we attempt to mitigate our risk, including by terminating
such third party’s connections to our systems, networks and information where appropriate
96
Despite our efforts to improve prevent, detect, mitigate, and remediate
cybersecurity incidents, complete protection in the field of cybersecurity cannot be guaranteed and we can make no assurances that we
have not experienced an undetected cybersecurity incident, including an incident that may have been material. For more information, see
the Risk Factor titled – “
Our business and financial performance may be materially adversely
affected by information technology issues, data breaches, cyber-attacks and other similar incidents, as well as insufficient cybersecurity
and other business disruptions
.”
Cybersecurity Governance
Our board of directors considers cybersecurity risk as part of
its overall enterprise risk management function and oversees management’s implementation of our cybersecurity risk management program.
As part of such oversight, our board of directors receives reports from management and our internal auditor on our cybersecurity risks.
In addition, management updates our board of directors, as necessary, regarding any material cybersecurity incidents, as well as any incidents
with lesser impact potential. In addition, at least once a year, our board of directors receives a report from management on the topic.
Our cybersecurity risk management team is led by our CIO and CISO.
The team is responsible for detecting, assessing and managing our material risks from cybersecurity threats and incidents. Our CIO runs
and oversees the cybersecurity risk management program, reporting to our CFO. Our CISO has primary responsibility for our overall cybersecurity
risk management program and supervises both our internal cybersecurity personnel and our retained third-party cybersecurity consultants.
Our CISO has extensive experience working in management roles related to cybersecurity and risk in various high-technology global companies,
as well as industry certifications such as the International Information System Security Certification Consortium’s Certified Information
Systems Security Professional certification (also known as ISC² CISSP).
Our CISO and CIO periodically report directly to our board of directors
on our cybersecurity risk management program and efforts to prevent, detect, mitigate, and remediate cybersecurity-related risks and incidents.
In addition, we have an escalation process in place designed to inform senior management and, based on management’s assessment of
risk, our board of directors of material cybersecurity-related risks and incidents.
Our cybersecurity management team supervises efforts to prevent,
detect, mitigate, and remediate cybersecurity risks and incidents through various means, which may include briefings from internal cybersecurity
personnel; periodic war games to prepare for data breaches, cyber-attacks, and other similar incidents; cybersecurity awareness
trainings; periodic fraud risk assessments; containment and incident response tools; threat intelligence and other information obtained
from governmental, public or private sources, including third-party consultants engaged by us; and alerts and reports produced by cybersecurity
tools deployed in the information technology environment. Our cybersecurity management team actively engages with industry groups
for benchmarking and awareness of best practices.
PART III
ITEM 17.
FINANCIAL STATEMENTS
Not applicable.
ITEM 18.
FINANCIAL STATEMENTS
The following financial statements and related auditors’ report are filed as part
of this annual report on Form 20-F:
97
PERION
NETWORK LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2023
IN
U.S. DOLLARS
INDEX
|
Page
|
|
|
Reports
of Independent Registered Public Accounting Firm
(PCAOB ID:
|
F-2
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
|
|
F-8
|
|
|
F-9
|
|
|
F-11
|
F
- 1
|
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 its subsidiaries' (the Company) as of December 31,
2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2023, 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, 2023, 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 April 8, 2024, 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 opinions 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 revenue are comprised primarily of Search Advertising
Revenue and Display Advertising Revenue. To determine whether Search Advertising and Display Advertising revenue should be presented on
a gross or net basis, the Company considers whether it controls the promised service before transferring that 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 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 controls the promised services before transferring that service to the
customer and is the primary responsible 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 gross
or net basis evaluation 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.
|
|
|
Acquisition
accounting for Hivestack Inc. (Hivestack) business combination
|
||
|
Description
of the Matter
|
As
described in Note 5.d to the consolidated financial statements, on December 11, 2023, the Company acquired 100% of the shares of Hivestack
Inc. ("the Hivestack Acquisition") for a total consideration of $106.9 million which paid in cash upon the completion of the transaction.
The Hivestack 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
identified intangible assets of $49.4 million, which consist primarily of $35 million of 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.
Auditing
the Company's evaluation of the fair value of the technology intangible asset for the Hivestack acquisition was complex and involved subjective
auditor judgment due to the assumptions required in evaluating 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 evaluation
of the fair value of the technology intangible asset for the Hivestack acquisition 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 discount rate applied.
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
5.d to the consolidated financial statements in relation to the Hivestack Acquisition.
|
/s/
KOST FORER GABBAY & KASIERER
A
Member of EY Global
We
have served as the Company‘s auditor since 2004.
Tel-Aviv,
Israel
April
8, 2024
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
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Shareholders and the Board of Directors of Perion Network Ltd.
Opinion
on Internal Control over Financial Reporting
We
have audited Perion Network Ltd. and its subsidiaries' internal control over financial reporting as of December 31, 2023, 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, Perion Network Ltd. And its subsidiaries' (the Company) maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria.
As
indicated in the accompanying Management's Annual 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 Hivestack which
is included in the 2023 consolidated financial statements of the Company and constitute 7.7% of total assets (excluding goodwill and acquired
intangibles assets) as of December 31, 2023. 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 Hivestack.
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, 2023 and 2022, 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, 2023, and the related notes, and our
report dated April 8, 2024, 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.
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 EY Global
April
8, 2024
F
- 4
PERION
NETWORK LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
U.S.
dollars in thousands (except share and per share data)
|
|
December
31,
|
|||||||
|
|
2023
|
2022
|
||||||
|
ASSETS
|
||||||||
|
Current
Assets
|
||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
||||
|
Restricted cash
|
|
|
||||||
|
Short-term bank deposits
|
|
|
||||||
|
Marketable securities
|
|
|
||||||
|
Accounts receivable (net
of allowance of $
|
|
|
||||||
|
Prepaid expenses and
other current assets
|
|
|
||||||
|
Total
Current Assets
|
|
|
||||||
|
|
||||||||
|
Long-Term
Assets
|
||||||||
|
Property and equipment,
net
|
|
|
||||||
|
Operating lease right-of-use
assets
|
|
|
||||||
|
Intangible assets, net
|
|
|
||||||
|
Goodwill
|
|
|
||||||
|
Deferred taxes
|
|
|
||||||
|
Other assets
|
|
|
||||||
|
Total
Long-Term Assets
|
|
|
||||||
|
Total
Assets
|
$
|
|
$
|
|
||||
|
|
||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accounts payable
|
$
|
|
$
|
|
||||
|
Accrued expenses and
other liabilities
|
|
|
||||||
|
Short-term operating
lease liability
|
|
|
||||||
|
Deferred revenue
|
|
|
||||||
|
Short-term payment obligation
related to acquisitions
|
|
|
||||||
|
Total
Current Liabilities
|
|
|
||||||
|
|
||||||||
|
Long-Term
Liabilities
|
||||||||
|
Payment obligation related
to acquisition
|
|
|
||||||
|
Long-term operating lease
liability
|
|
|
||||||
|
Other long-term liabilities
|
|
|
||||||
|
Total
Long-Term Liabilities
|
|
|
||||||
|
Total
Liabilities
|
|
|
||||||
|
Commitments and Contingencies |
||||||||
|
|
||||||||
|
Shareholders'
equity
|
||||||||
|
Ordinary shares of ILS
|
|
|
||||||
|
Additional paid-in capital
|
|
|
||||||
|
Treasury shares at cost
(
|
(
|
)
|
(
|
)
|
||||
|
Accumulated other comprehensive
loss
|
(
|
)
|
(
|
)
|
||||
|
Retained earnings
|
|
|
||||||
|
Total
Shareholders' Equity
|
|
|
||||||
|
Total
Liabilities and Shareholders' Equity
|
$
|
|
$
|
|
||||
The
accompanying notes are an integral part of the consolidated financial statements.
F
- 5
PERION
NETWORK LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS
OF INCOME
U.S.
dollars in thousands (except share and per share data)
|
Year ended December
31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Revenue
|
||||||||||||
|
Display Advertising
|
$
|
|
$
|
|
$
|
|
||||||
|
Search Advertising
|
|
|
|
|||||||||
|
Total Revenue
|
|
|
|
|||||||||
|
Costs and Expenses
|
||||||||||||
|
Cost of revenue
|
|
|
|
|||||||||
|
Traffic acquisition costs and media buy
|
|
|
|
|||||||||
|
Research and development
|
|
|
|
|||||||||
|
Selling and marketing
|
|
|
|
|||||||||
|
General and administrative
|
|
1
|
1
|
|||||||||
|
Change in fair value of contingent consideration
|
|
1
(
|
)
|
1
(
|
)
|
|||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Total Costs and Expenses
|
|
|
|
|||||||||
|
Income from Operations
|
|
|
|
|||||||||
|
Financial income (expense), net
|
|
|
(
|
)
|
||||||||
|
Income before Taxes on Income
|
|
|
|
|||||||||
|
Taxes on income
|
|
|
|
|||||||||
|
Net Income
|
$
|
|
$
|
|
$
|
|
||||||
|
Net Earnings per Share - Basic:
|
$
|
|
$
|
|
$
|
|
||||||
|
Net Earnings per Share - Diluted:
|
$
|
|
$
|
|
$
|
|
||||||
|
Weighted average number of shares
– Basic:
|
|
|
|
|||||||||
|
Weighted average number of shares
– Diluted:
|
|
|
|
|||||||||
The accompanying
notes are an integral part of the consolidated financial statements.
1
Reflects reclassification in the amounts of $
3,816
and $
2,246
in 2022 and 2021, respectively, that were incurred in connection with an acquisition from general and administrative to change in fair
value of contingent consideration.
F
- 6
PERION
NETWORK LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENT
S
OF COMPREHENSIVE INCOME
U.S.
dollars in thousands
|
Year
ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Net
income
|
$
|
|
$
|
|
$
|
|
||||||
|
Other comprehensive income
(loss), net of tax:
|
||||||||||||
|
Change
in foreign currency translation
|
|
(
|
)
|
(
|
)
|
|||||||
|
Changes
in unrealized gain (loss) on marketable securities
|
(
|
)
|
|
|
||||||||
|
Cash
Flow Hedge:
|
||||||||||||
|
Changes
in unrealized gain (loss)
|
(
|
)
|
(
|
)
|
|
|||||||
|
Gain
(loss) reclassified into net income
|
|
|
(
|
)
|
||||||||
|
Net
change
|
|
(
|
)
|
|
||||||||
|
Total Other comprehensive
income (loss), net of tax:
|
|
(
|
)
|
(
|
)
|
|||||||
|
Comprehensive
income
|
$
|
|
$
|
|
$
|
|
||||||
The accompanying
notes are an integral part of the consolidated financial statements.
F
- 7
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, 2020
|
|
|
|
|
(
|
)
|
(
|
)
|
|
|||||||||||||||||||
|
Issuance of shares - Offering
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Stock-based compensation
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Exercise of stock-based compensation
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Other comprehensive loss
|
-
|
|
|
(
|
)
|
|
|
(
|
)
|
|||||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Balance as of December 31, 2021
|
|
|
|
(
|
)
|
(
|
)
|
(
|
)
|
|
||||||||||||||||||
|
Stock-based compensation
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Exercise of stock-based compensation
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Other comprehensive loss
|
-
|
|
|
(
|
)
|
|
|
(
|
)
|
|||||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Balance as of December 31, 2022
|
|
|
|
(
|
)
|
|
(
|
)
|
|
|||||||||||||||||||
|
Stock-based compensation
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Exercise of stock-based compensation
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Other comprehensive income
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Balance as of December 31, 2023
|
|
|
|
(
|
)
|
|
(
|
)
|
|
|||||||||||||||||||
The accompanying notes
are an integral part of the consolidated financial statements.
F
- 8
PERION
NETWORK LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
Year
ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Cash
flows from operating activities
|
||||||||||||
|
Net income
|
$
|
|
$
|
|
$
|
|
||||||
|
Adjustments required
to reconcile net income to net cash provided by operating activities:
|
||||||||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Stock-based compensation
expense
|
|
|
|
|||||||||
|
Change in payment obligation
related to acquisitions
|
|
(
|
)
|
|
||||||||
|
Foreign currency translation
|
(
|
)
|
|
(
|
)
|
|||||||
|
Accrued interest, net
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Deferred taxes, net
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Accrued severance pay,
net
|
(
|
)
|
(
|
)
|
|
|||||||
|
Amortization of premium
and accretion of discount on marketable securities
|
(
|
)
|
|
|
||||||||
|
Loss (gain) 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 revenue
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Net
cash provided by operating activities
|
$
|
|
$
|
|
$
|
|
||||||
|
Cash
flows from investing activities
|
||||||||||||
|
Purchases of property
and equipment
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Proceeds
from sale of property and equipment
|
|
|
|
|||||||||
|
Investment
in marketable securities
|
(
|
)
|
|
|
||||||||
|
Proceeds
from sales and maturities of marketable securities
|
|
|
|
|||||||||
|
Proceeds
from short-term deposits
|
|
|
|
|||||||||
|
Investment
in short-term deposits
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Cash paid
in connection with acquisitions, net of cash acquired
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Net
cash used in investing activities
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Cash
flows from financing activities
|
||||||||||||
|
Issuance
of shares in private placement, net
|
$
|
|
$
|
|
$
|
|
||||||
|
Proceeds
from exercise of stock-based compensation
|
|
|
|
|||||||||
|
Payments
of contingent consideration
|
(
|
)
|
(
|
)
|
|
|||||||
|
Repayment of long-term
loans
|
|
|
(
|
)
|
||||||||
|
Net
cash provided by (used in) financing activities
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
||||
|
Effect of exchange rate
changes on cash and cash equivalents
|
|
(
|
)
|
(
|
)
|
|||||||
|
Net
increase 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
- 9
PERION
NETWORK LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
Year
ended December 31
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Reconciliation
of cash, cash equivalents, and restricted cash to the consolidated balance sheet
|
||||||||||||
|
Cash and cash equivalents
|
$
|
|
$
|
|
$
|
|
||||||
|
Restricted cash
|
|
|
|
|||||||||
|
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
- 10
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 multi-channel advertising
technology company that connects advertisers with consumers through technology across all major channels of digital advertising –
including search advertising, social media, display, video, Digital out of Home (DOOH), digital audio and Connected TV (CTV) advertising.
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 revenue recognition, allowance for credit losses, fair value of intangible assets
and goodwill, useful lives of intangible assets, contingent consideration, fair value of share-based awards, realizability of deferred
tax assets, and tax uncertainties, 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 Income 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 - 11
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE
2:
SIGNIFICANT
ACCOUNTING POLICIES
(Cont.)
Cash
and cash equivalents and short-term bank deposits
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
at the date acquired. The short-term deposits as of December 31, 2023 and 2022 are denominated primarily in USD and bear interest at an
average annual rate of
6.67
%
and
3.82
%,
respectively.
Restricted
cash
Restricted
cash is comprised primarily of security deposits that are held to secure the Company’s lease obligations.
Marketable
Securities
Marketable
securities consist of debt securities. The Company classifies its marketable securities as available-for-sale at the time of purchase
and reevaluates such classification at each balance sheet date. Available-for-sale securities are stated at fair value, with unrealized
gains and losses reported in accumulated other comprehensive income (loss), a separate component of shareholders’ equity, net of
taxes. Realized gains and losses on sales of marketable securities, as determined on a specific identification basis, are included in
Financial income (expense), net. The amortized cost of marketable securities is adjusted for amortization of premium and accretion of
discount to maturity, both of which, together with interest, are included in Financial income (expense), net. The Company may sell these
securities at any time for use in current operations even if they have not yet reached maturity. As a result, the Company classifies its
marketable securities, including those with maturities beyond 12 months, as current assets in the consolidated balance sheets.
The
Company periodically evaluates its available-for-sale debt securities for impairment. If the amortized cost of an individual security
exceeds its fair value, the Company considers its intent to sell the security or whether it is more likely than not that it will be required
to sell the security before recovery of its amortized basis. If either of these criteria are met, the Company writes down the security
to its fair value and records the impairment charge in the consolidated statements of income. If neither of these criteria are met, the
Company determines whether credit loss exists. Credit loss is estimated by considering changes to the rating of the security by a rating
agency, any adverse conditions specifically related to the security, as well as other factors. Any remaining unrealized losses, net of
taxes, are included in accumulated other comprehensive income (loss) in shareholders’ equity.
Allowance
for credit losses on available-for-sale marketable securities are recognized in the Company’s consolidated statements of income,
and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in shareholders’
equity.
The Company did not recognize an allowance for credit losses on marketable securities for the period ended December 31, 2023.
F - 12
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE
2:
SIGNIFICANT
ACCOUNTING POLICIES
(Cont.)
Accounts receivable and allowance for credit losses
Accounts receivable are recorded at the invoiced amount and amounts for which revenue has been recognized but not invoiced, net of 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, 2023 and 2022, the Company has recorded an allowance for credit losses in the amounts of $
Total
expenses for credit losses during 2023, 2022 and 2021 amounted to $
1,133
,
$
210
and $
82
,
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
|
|
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 and Short-term and long-term operating lease liabilities in the Company’s consolidated balance sheets.
ROU
assets represent the right to use an underlying asset for the lease term and lease liabilities represent the 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.
The
Company elected the practical expedient allowing not to separate the lease and non-lease components for its leases. For short-term leases
with a term of 12 months or less, operating lease ROU assets and liabilities are not recognized and the Company records lease payments
on a straight-line basis over the lease term.
F - 13
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Intangible
assets
Intangible
assets that are not considered to have finite useful life are amortized over their estimated useful lives. The Customer Relationship is
amortized over its estimated useful lives in proportion to the economic benefits realized. This accounting policy results in accelerated
amortization of such intangible asset as compared to the straight-line method.
All other intangible assets are amortized over their estimated useful lives using the straight-line method.
Impairment
of long-lived assets, including 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 of the asset (assets group) to the future undiscounted
cash flows the assets are expected to generate. If the long-lived 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.
There
were no impairment charges to long-lived assets during the periods presented.
Goodwill
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. 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. Refer to Note 7 for further information.
There
were no impairment losses to goodwill during the periods presented.
Business
combinations
The
Company accounted for business combination in accordance with ASC 805,
Business
Combinations
(“ASC 805”).
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.
During the measurement period, not to exceed one year from the date of acquisition, the Company may record adjustments to the assets
acquired and liabilities assumed, with a corresponding offset to goodwill only for adjustments resulting from facts and circumstances
that existed as of the acquisition date. After the measurement period, any subsequent adjustments are reflected in the consolidated statements
of income.
F - 14
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Acquisition related costs are expensed to the statement of income in the period incurred.
Revenue
recognition
The
Company applies the provisions of ASC 606,
Revenue from Contracts with Customers
.
The
Company applies the practical expedient for incremental costs of obtaining contracts when the amortization period is less than one year.
The
Company generates revenue primarily from two major sources:
Display
Advertising Revenue
– The company generates revenue from Display Advertising by delivering high-impact ad formats across
different channels including display, social, CTV, digital audio, DOOH and Web Publisher Solutions. The company’s diverse, technology-focused
multi-channel set of solutions is designed to drive consumer engagement and high ROI for advertisers through high-impact ad formats. The
company’s solutions also include a content monetization platform that provides publishers with monetization tools across different
channels, and a social platform that supports campaign management and media buying capabilities across all major social channels.
Search
Advertising Revenue
- The company generates Search Advertising revenue from service agreements with our search partners. Search
Advertising revenue is generated primarily from monthly transaction volume-based fees earned by us for making our applications available
to online publishers and app developers on a revenue share basis relative to the revenue generated by such search partners.
For
more disaggregated information of revenue refer to Note 16.
The
Company’s payments terms are less than one year. Therefore, no finance component is recognized.
The
Company evaluates whether Display Advertising Revenue and Search Advertising Revenue 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, whether it changes the products or performs part of the service, whether the
Company has discretion in establishing prices and whether it controls the underlying advertising space. The evaluation of these factors
is subject to significant judgment and subjectivity.
Generally,
in cases in which the Company controls the specified good or service before it is transferred to a customer, revenue is recorded on a
gross basis.
F - 15
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Contract balances are presented separately on the consolidated balance sheets as either Accounts receivable or Deferred revenue. The Company does not have contract assets.
Remaining
performance obligations (RPOs) represent amounts collected on contracted revenue that have not yet been recognized. As of December 31,
2023, the aggregate amount of the RPOs was $
Accounts receivable include amounts billed and currently due from customers.
Deferred
revenue is recorded when payments are received from customers in advance of the Company's rendering of services.
Revenue
recognized during 2023 from amounts included within the Deferred revenue balance at the beginning of the period amounted to $
2,377
.
Cost
of revenue
Cost
of revenue consists primarily of expenses associated with the operation of the Company’s server hosting, data verification and targeting,
campaign creative, labor and customer support.
Traffic
acquisition costs and media buy
Traffic
acquisition costs and media buy consist primarily of payments to publishers and developers who distribute the Company’s search properties
together with their products, as well as the cost of distributing the Company own products. In addition, media buy costs consist of the
costs of advertising inventory incurred to deliver ads. Traffic acquisition costs are primarily based on revenue share agreements with
the Company traffic sources and the media buy cost are primarily based on CPC (Cost-per-click) and CPM (Cost-per-thousand), which are
charged as incurred.
Research
and development costs
The
Company capitalized certain internal and external software development costs, consisting primarily of direct labor associated with creating
the internally developed software. During 2021, depreciation expense for the related capitalized internally developed software in the
consolidated statements of income amounted to $
1,392
.
No expense related to internally developed software incurred in 2023 and 2022.
Research
and development costs are charged to the statement of income as incurred.
Income
taxes
The
Company accounts for income taxes in accordance with ASC 740,
Income Taxes
(“ASC
740”). ASC 740 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.
F - 16
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE
2:
SIGNIFICANT
ACCOUNTING POLICIES
(Cont.)
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.
Severance
pay
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, 2023, 2022 and 2021 amounted to $
3,206
,
$
2,809
,
and $
2,612
,
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 4% 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, 2023, 2022 and 2021 were $
1,006
,
$
865
,
and $
683
,
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, unrealized gain (loss) on marketable securities and foreign currency translation adjustments.
F - 17
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
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, restricted shares 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.
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. 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 credit losses.
The
allowance against gross trade receivables reflects the current expected credit loss inherent in the receivables portfolio determined based
on the Company’s methodology. The Company’s methodology is based on historical collection experience, customer creditworthiness,
current and future economic condition, and market condition. Additionally, specific allowance amounts are established to record the appropriate
provision for customers that have a higher probability of default. Trade receivables are written off after all reasonable means to collect
the full amount have been exhausted.
Share-based
compensation
The
Company accounts for share-based compensation under ASC 718,
Compensation - Stock Compensation
(“ASC 718”),
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 at the time of
grant, and revised if necessary in subsequent periods, if actual forfeitures differ from those estimates.
F - 18
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
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 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 accounts for changes in award terms as a modification in accordance with ASC 718.
The
Company estimates the fair value of its new share-based awards using the Binomial option-pricing model.
In
2023 and 2022 only restricted share units (“RSUs”) were granted and the fair value is based on the market value of the underlying
shares on the date of grant.
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:
|
Year ended December 31,
|
|
|
2021 |
|
|
Risk-free interest rate
|
|
|
Expected volatility
|
|
|
Early exercise factor
|
|
|
Forfeiture rate post vesting
|
|
|
Dividend yield
|
|
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 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.
F - 19
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Derivative
instruments
The
Company follows the requirements of ASC 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.
Changes in the fair value of these derivatives are recorded in accumulated other comprehensive income in the consolidated balance sheets, until the forecasted transaction occurs. Upon occurrence, the Company reclassifies the related gains or losses on the derivative to the same financial statement line item in the consolidated statements of income to which the derivative relates.
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, forward 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 SWAP, 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.
The
notional value of the Company’s derivative instruments designed as hedging instruments as of December 31, 2023 and 2022, amounted
to $
6,006
and $
14,364
,
respectively.
The
notional value of the Company’s derivative instruments not designed as hedging instruments as of December 31, 2023 and 2022, amounted
to $
0
and $
3,576
,
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.
F - 20
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)
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.
Three
levels of inputs may be used to measure fair value, 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, and unobservable inputs based on the Company's own
assumptions used to measure liabilities at fair value. The inputs require significant management judgment or estimation.
|
The
Company measures its marketable securities (money market funds and available-for-sale marketable securities), foreign currency derivative
instruments and contingent considerations in connection to the acquisitions at fair value. Marketable securities are classified within
Level 1 or Level 2 of the fair value hierarchy because their fair value is derived from quoted market prices or alternative pricing sources
and models utilizing observable market inputs. Derivative instruments are classified within Level 2 as the valuation inputs are based
on quoted prices and market observable data of similar instruments. The Company's contingent considerations in connection to the acquisitions
were classified within Level 3 because factors used to develop the estimated fair value are unobservable inputs that are not supported
by 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.
Recently
Adopted Accounting Pronouncements:
In
October 2021 the FASB ASU 2021-08, Topic 805, “Business Combinations” – Accounting for Contract Assets and Contract
Liabilities from Contracts with Customers. The amendments in this update require that an entity (acquirer) recognize and measure contract
assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer
should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. To achieve this,
an acquirer may assess how the acquiree applied Topic 606 to determine what to record for the acquired revenue contracts. The amendments
in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years,
and early adoption is permitted. The Company adopted ASU 2021-08 on January 1, 2023, and the adoption has an immaterial impact on its
consolidated financial statements.
F - 21
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIE S (Cont.)
Recently
issued Accounting Pronouncements not yet adopted
In
December 2023, the FASB issued ASU 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”, which expands
the disclosure requirements for income taxes, primarily related to the rate reconciliation and income taxes paid. This ASU is effective
for the fiscal years beginning after December 15, 2024. Early adoption permitted. The Company is currently evaluating the impact of this
guidance on its consolidated financial statements and related disclosures.
In
November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”,
which expands the annual and interim disclosure requirements for public company reportable segments, primarily through enhanced information
about the significant expenses. This ASU is effective for fiscal years beginning after December 15, 2023, and for interim periods within
fiscal years beginning after December 15, 2024. Early adoption permitted. The Company is currently evaluating the impact of this guidance
on its consolidated financial statements and related disclosures.
F - 22
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE
3:
MARKETABLE
SECURITIES
The
following is a summary of available-for-sale marketable securities by investment categories and contractual maturities as of December
31, 2023:
|
December
31, 2023
|
||||||||||||||||
|
Amortized
cost
|
Gross
unrealized
gain
|
Gross
unrealized loss
|
Fair
value
|
|||||||||||||
|
Matures within one year:
|
||||||||||||||||
|
Corporate
debentures
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Government
agencies
|
|
|
|
|
||||||||||||
|
Government
debentures
|
|
|
|
|
||||||||||||
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||
|
Matures after one year
through three years:
|
||||||||||||||||
|
Corporate
debentures
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Government
agencies
|
|
|
|
|
||||||||||||
|
Government
debentures
|
|
|
|
|
||||||||||||
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
As
of December 31, 2022, the Company had no investments in marketable securities.
For
the year ended December 31, 2023, the unrealized losses related to marketable securities were as a result of market fluctuations and not
due to credit related losses, therefore, the Company did not record an allowance for credit losses for its available-for-sale marketable
securities.
As
of December 31, 2023, the Company had no investments with unrealized loss for more than 12 months.
F - 23
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 4: |
FAIR VALUE OF FINANCIAL
INSTRUMENTS
|
The
following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2023:
|
December
31, 2023
|
||||||||||||||||
|
Fair
value measurements using input type
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Financial
Assets:
|
||||||||||||||||
|
Money market funds
|
$
|
|
$ |
|
$ |
|
$
|
|
||||||||
|
Available-for-sale marketable
securities
|
|
|
|
|
||||||||||||
|
Derivative assets
|
|
|
|
|
||||||||||||
|
Total
financial assets
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Financial
Liabilities:
|
||||||||||||||||
|
Derivative liabilities
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Contingent consideration
in connection to the acquisitions
|
|
|
|
|
||||||||||||
|
Total
financial liabilities
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
The
following table presents financial assets measured at fair value on a recurring basis as of December 31, 2022:
|
December
31, 2022
|
||||||||||||||||
|
Fair
value measurements using input type
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Financial
Assets:
|
||||||||||||||||
|
Derivative assets
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Total
financial assets
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Financial
Liabilities:
|
||||||||||||||||
|
Derivative liabilities
|
$
|
-
|
$
|
|
$
|
|
$
|
|
||||||||
|
Contingent consideration
in connection to the acquisitions
|
|
|
|
|
||||||||||||
|
Total
financial liabilities
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
F - 24
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 4: |
FAIR VALUE OF FINANCIAL
INSTRUMENTS (Cont.)
|
The
following table sets forth a summary of the changes in the fair value of the contingent consideration:
|
Fair value as of December 31, 2022
|
$
|
|
||
|
Payments of contingent consideration
|
(
|
)
|
||
|
Changes in fair value of contingent consideration
|
|
|||
|
Revaluation of acquisition-related contingent consideration
|
|
|||
|
Fair value as of December 31, 2023
|
$
|
|
| NOTE 5: |
ACQUISITIONS
|
| a. |
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 revenue and EBITDA-based metrics over a period of
two
years
, estimated at fair value of $
22,838
on the acquisition date. In addition, the acquisition includes a retention-based component of up to $
11,000
.
As
of December 31, 2023, the contingent consideration is estimated at fair value of $
| b. |
Pub Ocean
|
On
July 22, 2020, the Company acquired the net assets of Pub Ocean Limited, also known as “Pub Ocean” (the “Pub Ocean Acquisition"),
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
on the acquisition date. In addition, the acquisition includes a retention-based component of up to $
1,000
.
As of December 31, 2022, the remaining balance of the contingent consideration was settled. In 2021 and 2022 the change in fair value
of the contingent consideration that was recorded as income in the statement of income was $
122
and $
3,816
,
respectively.
F - 25
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 5: |
ACQUISITIONS (Cont.)
|
| c. |
Vidazoo
|
On
October 4, 2021, the Company consummated the acquisition of Vidazoo Ltd., also known as “Vidazoo” (the “Vidazoo Acquisition”),
a leading video technology company that enables both advertisers and publishers to deliver high impact content and advertising to consumers.
The
total consideration for the acquisition was $
90,038
,
comprised of $
35,000
paid in cash at closing, contingent consideration (with a maximum amount of up to $
58,545
),
tied to financial targets over a period of
2.25
years, estimated at fair value of $
48,903
on the acquisition date, and a net working capital in the amount of $
6,135
which will be set-off against collection.
On
June 14, 2023, the Company entered into an amendment to the SPA with Vidazoo’s sellers in connection with an additional overachievement
earnout consideration in an aggregate amount of up to $
10,550
payable in the Company’s ordinary shares.
As
of December 31, 2023, Vidazoos’ sellers had met the specified earnout targets, and the Company recognized an expense of $
| d. |
Hivestack
|
On
December 11, 2023, the Company consummated the acquisition of Hivestack Inc. (“Hivestack”), a global innovative full-stack
programmatic Digital out of Home (DOOH) company.
The
total consideration for the acquisition was $
106,931
,
comprised of $
100,000
paid in cash at closing and a net working capital in the amount of $
6,931
subject to working capital adjustments.
In
addition, the acquisition includes a contingent consideration payment of up to $
25,000
,
tie to financial target and service of a period of 3 years to be settled in cash and in the Company’s ordinary shares.
The
following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
|
Fair
value
|
||||
|
Net Assets
1
|
|
|||
|
Technology
|
|
|||
|
Customer
Relationship
|
|
|||
|
Tradename
|
|
|||
|
Deferred
Taxes
|
(
|
)
|
||
|
Goodwill
|
|
|||
|
Net
assets acquired
|
$
|
|
||
1
Includes cash in the amount of $
5,010
.
F - 26
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 5: |
ACQUISITIONS (Cont.)
|
Goodwill
is
primarily attributable to expected synergies arising from technology integration and expanded product availability to the Company’s
existing and new customers.
Technology
includes an
array of purpose-built software like the DOOH Ad Server, Header Bidder, Supply-Side Platform (“SSP”), and Demand-Side Platform
(“DSP”), designed to manage, deliver, and optimize targeted advertising on digital screens, enhancing yield and sourcing demand
efficiently. The technology is amortized over the estimated useful life of
8
years
using the straight-line method.
Customer
relationship
is derived from customer contracts and related customer relationships with existing customers. Customer relationship
is amortized based on the accelerated method over the estimated useful life of
15
years
.
Tradename
is derived from developed products tradenames, common law tradenames, service marks, service names, brand names, trade dress rights, logos,
internet domain name and URL addresses and general-use e-mail addresses. Tradename is amortized over the estimated useful life of
10
years
using the straight-line method.
The
results of operations of Hivestack have been included in the consolidated financial statements since the date of the acquisition.
The
Company incurred acquisition related costs of $
Pro forma results of operations related to this acquisition have not been presented because they are not material to the Company’s consolidated statements of income.
F - 27
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 6: |
PROPERTY AND EQUIPMENT,
NET
|
|
December
31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Cost:
|
||||||||
|
Computers and peripheral
equipment
|
$
|
|
$
|
|
||||
|
Office furniture and
equipment
|
|
|
||||||
|
Leasehold improvements
|
|
|
||||||
|
Capitalized software
|
|
|
||||||
|
Total cost
|
|
|
||||||
|
Less: accumulated depreciation
and amortization
|
(
|
)
|
(
|
)
|
||||
|
Property and equipment,
net
|
$
|
|
$
|
|
||||
Depreciation
expenses related to the Company’s property and equipment totaled to $
1,644
,
$
1,954
,
and $
3,022
,
for the years ended December 31, 2023, 2022 and 2021, respectively.
F - 28
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 7: |
GOODWILL AND OTHER
INTANGIBLE ASSETS, NET
|
| a. |
Goodwill
|
The
changes in the net carrying amount of goodwill in 2023 and 2022 were as follows:
|
Balance
as of January 1, 2022
|
$
|
|
||
|
Vidazoo measurement
period adjustments
|
$
|
|
||
|
Balance
as of December 31, 2022
|
$
|
|
||
|
Acquisition of
Hivestack
|
$
|
|
||
|
Balance
as of December 31, 2023
|
$
|
|
Goodwill
has been recorded as a result of prior acquisitions and represents excess of consideration over the net fair value of the assets of the
businesses acquired. As of December 31, 2023, the Company has two reporting units - Display advertising and Search advertising. 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, 2023, 2022 and 2021.
F - 29
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 7: |
GOODWILL AND OTHER
INTANGIBLE ASSETS, NET (Cont.)
|
| b. |
Intangible assets, net
|
The
following is a summary of intangible assets as of December 31, 2023:
|
December 31, 2022
|
Additions
|
Amortization
|
December 31, 2023
|
|||||||||||||
|
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
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||
The
following is a summary of intangible assets as of December 31, 2022:
|
December 31, 2021
|
Additions
|
Amortization
|
December 31, 2022
|
|||||||||||||
|
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
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||
F - 30
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 7: |
GOODWILL AND OTHER
INTANGIBLE ASSETS, NET (Cont.)
|
The estimated useful life of the intangible assets are as follows:
|
Estimated
useful life
|
|
|
Acquired technology
|
|
|
Customer relationship
|
|
|
Tradename
|
|
Amortization
of intangible assets, net, in each of the succeeding five years and thereafter is estimated as follows:
|
2024
|
$
|
|
||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
2028
|
|
|||
|
Thereafter
|
|
|||
|
$
|
|
| NOTE 8: |
ACCRUED EXPENSES AND
OTHER LIABILITIES
|
|
December
31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Employees and payroll
accruals
|
$
|
|
$
|
|
||||
|
Government authorities
|
|
|
||||||
|
Accrued expenses
|
|
|
||||||
|
Other short-term liabilities
|
|
|
||||||
|
$
|
|
$
|
|
|||||
F - 31
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
NOTE
9:
DERIVATIVES
AND HEDGING ACTIVITIES
The
fair value of the Company’s outstanding derivative instruments is as follows:
|
|
December
31,
|
||||||||
| Balance sheet | 2023 | 2022 | |||||||
|
Derivatives
designated as hedging instruments:
|
|||||||||
|
Foreign
exchange forward contracts and other derivatives
|
''Prepaid expenses and other current assets''
|
$
|
|
$
|
|
||||
|
''Accrued expenses and other liabilities''
|
|
|
|||||||
|
''Accumulated other
comprehensive income''
|
|
|
|||||||
|
Derivatives
not designated
as hedging instruments:
|
|||||||||
|
Foreign
exchange forward contracts and other derivatives
|
''Prepaid expenses and
other current assets''
|
|
|
||||||
|
''Accrued expenses and
other
liabilities''
|
$
|
|
$
|
|
|||||
The
net amounts reclassified from accumulated other comprehensive loss to the operating expenses are as follows:
|
Gain
recognized in
Consolidated
Statements
of Comprehensive Income
|
Gain
(loss) recognized
in
Consolidated Statements of
Income
|
||||||||||||||||
|
Year
ended
December
31,
|
Statement
of Income
|
Year
ended
December
31,
|
|||||||||||||||
|
2023
|
2023
|
2022
|
2021
|
||||||||||||||
|
Derivatives
designated
as hedging instruments:
|
|||||||||||||||||
|
Foreign exchange options
and
forward contracts
|
$
|
|
"Operating
expenses"
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
||||||
|
Derivatives
not designated
as hedging instruments:
|
|||||||||||||||||
|
Foreign exchange options
and
forward contracts
|
-
|
"Financial
expenses"
|
(
|
)
|
(
|
)
|
|
||||||||||
|
Total
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
|||||||
F - 32
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 10: |
LEASES
|
In
January 2014, the Company entered into a lease agreement for new corporate offices in Holon, Israel. The lease expires in
, 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, a US subsidiary 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 2024. The Company sublease the office to a sub-tenant which led to
a decrease of $
344
in 2022 on the value of its ROU asset. The decrease in ROU asset was recognized in the depreciation expenses.
In
October 2022, a US subsidiary entered into an additional lease agreement for its office at World Trade Center (WTC) New York. The lease
expires in December 2025.
Hivestack
entered into a lease agreement for its office in Montreal, Canada. The lease expires in September 2025.
Certain
other facilities of the Company are rented under operating lease agreements, which expire on various dates, the latest of which is in
2024. The Company recognizes rent expense under such arrangements on a straight-line basis.
The
following table represents the weighted-average remaining lease term and discount rate:
|
Year
ended
December
31,
|
||||||
|
2023
|
2022
|
|||||
|
Weighted average remaining
lease term
|
|
|
||||
|
Weighted average discount
rate
|
|
|
|
|
||
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.
Maturities
of operating lease liabilities were as follows:
|
Year
ending December 31,
|
||||
|
2024
|
$ |
|
||
|
2025
|
|
|||
|
2026
|
|
|||
|
Total
lease payments *)
|
$
|
|
||
|
Less
– imputed interest
|
(
|
)
|
||
|
Present
value of lease liabilities
|
$
|
|
||
*)
Total lease payments are not offset by $
5,646
of expected non-cancelable future sublease payments.
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)
| NOTE 10: |
LEASES (Cont.)
|
Facilities leasing expenses, net in the years 2023, 2022 and 2021 were $
Cash
paid for amounts included in measurement of lease liabilities during the years ended 2023, 2022 and 2021 were $
6,191
,
$
5,880
,
and $
8,465
,
respectively.
| NOTE 11: |
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.
| 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, and on November 8, 2022 the Company’s Board
of Directors approved to extend the term of the Incentive Plan for an additional period of two years, expiring on December 9, 2024. 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
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, 2023, there were
83,848
ordinary shares reserved for future share-based awards under the Plan.
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)
| NOTE 11: |
SHAREHOLDERS' EQUITY
(Cont.)
|
The
following table summarizes the activities for the Company’s service-based share options and RSUs for the year ended December 31,
2023:
|
Weighted average
|
||||||||||||||||
|
Number of options
and RSUs
|
Exercise price
|
Remaining
contractual term
(in years) |
Aggregate intrinsic
value
|
|||||||||||||
|
Outstanding at January
1, 2023
|
|
$
|
|
|
$
|
|
||||||||||
|
Granted
|
|
|
-
|
-
|
||||||||||||
|
Exercised
|
(
|
)
|
|
-
|
|
|||||||||||
|
Cancelled
|
(
|
)
|
|
-
|
-
|
|||||||||||
|
Outstanding
at December 31, 2023
|
|
$
|
|
|
$
|
|
||||||||||
|
Exercisable
at December 31, 2023
|
|
$
|
|
|
$
|
|
||||||||||
|
Vested
and expected to vest at December 31, 2023
|
|
$
|
|
|
$
|
|
||||||||||
The
weighted-average grant-date fair value of options and RSUs granted during the years ended December 31, 2023, 2022 and 2021 was $
35.65
,
$
20.13
,
and $
18.55
,
respectively. The total fair value of options and RSUs, as their respective vesting dates, during the years ended December 31, 2023, 2022
and 2021 was $
11,531
,
$
10,008
,
and $
4,137
,
respectively.
The aggregate intrinsic value of the outstanding service-based equity grants at December 31, 2023, represents the intrinsic value of all outstanding options and RSUs since they were all in-the-money as of such date.
F - 35
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 11: |
SHAREHOLDERS' EQUITY
(Cont.)
|
The
following table summarizes the activities for the Company’s performance-based share options and RSUs for the year ended December
31, 2023:
|
Weighted average
|
||||||||||||||||
|
Number
of
Performance based
options
and RSUs
|
Exercise
price
|
Remaining
contractual term
(in
years)
|
Aggregate intrinsic
value
|
|||||||||||||
|
Outstanding at January
1, 2023
|
|
$
|
|
|
$
|
|
||||||||||
|
Granted
|
|
|
-
|
-
|
||||||||||||
|
Exercised
|
(
|
)
|
|
-
|
|
|||||||||||
|
Cancelled
|
(
|
)
|
|
-
|
-
|
|||||||||||
|
Outstanding
at December 31, 2023
|
|
$
|
|
|
$
|
|
||||||||||
|
Exercisable
at December 31, 2023
|
|
|
-
|
|
||||||||||||
|
Vested
and expected to vest at December 31, 2023
|
|
$
|
|
|
$
|
|
||||||||||
The
weighted-average grant-date fair value of options and RSUs granted during the year ended December 31, 2023, 2022 and 2021 was $
34.18
,
$
20.58
and $
20.03
,
respectively. The total fair value of options and RSUs, as their respective vesting dates, during the years ended December 31, 2023, 2022
and 2021 was $
2,506
,
$
2,434
,
and $
264
,
respectively.
The aggregate intrinsic value of the outstanding performance-based equity grants at December 31, 2023, represents the intrinsic value of all outstanding options and RSUs since they were all in-the-money as of such date.
The
number of service-based and performance-based options and RSUs expected to vest reflects an estimated forfeiture rate.
The
following table summarizes additional information regarding outstanding and exercisable service-based options and RSUs under the Company's
Equity Incentive Plan as of December 31, 2023:
|
Outstanding |
Exercisable |
|||||||||||||||||||||||||
|
Range of
exercise price
|
Number of
options and
RSUs
|
Weighted
average
remaining
contractual life
(years)
|
Weighted
average
exercise price
|
Number of
options
and
RSUs
|
Weighted
average
remaining
contractual life
(years)
|
Weighted
average
exercise price
|
||||||||||||||||||||
|
$
|
|
|
|
$
|
|
|
-
|
$
|
|
|||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
$
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
|
|
$
|
|
|
|
$
|
|
|||||||||||||||||||
F - 36
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 11: |
SHAREHOLDERS' EQUITY
(Cont.)
|
The
following table summarizes additional information regarding outstanding and exercisable performance-based options and RSUs under the Company's
share Option Plan as of December 31, 2023:
|
Outstanding |
Exercisable |
|||||||||||||||||||||||||
|
Range of
exercise price
|
Number of
options and
RSUs
|
Weighted
average
remaining
contractual life
(years)
|
Weighted
average
exercise price
|
Number of
options and
RSUs
|
Weighted
average
remaining
contractual life
(years)
|
Weighted
average
exercise price
|
||||||||||||||||||||
|
$
|
|
|
|
$
|
|
|
-
|
$
|
|
|||||||||||||||||
The
Company recognized share-based compensation expenses related to its share-based awards in the consolidated statements of income as follows:
|
Year
ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Cost of revenue
|
$
|
|
$
|
|
$
|
|
||||||
|
Research and development
|
|
|
|
|||||||||
|
Selling and marketing
|
|
|
|
|||||||||
|
General and administrative
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
As
of December 31, 2023, there was $
25,665
of unrecognized compensation cost related to outstanding options and RSUs. These amounts are expected to be recognized over a weighted-average
period of
1.58
years related to outstanding options and RSUs. 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.
F - 37
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 12: |
FINANCIAL INCOME (EXPENSE),
NET
|
|
Year
ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Financial
income:
|
||||||||||||
|
Interest income
|
$
|
|
$
|
|
$
|
|
||||||
|
Amortization/accretion
of premium/discount on marketable securities, net
|
|
|
|
|||||||||
|
$
|
|
$
|
|
$
|
|
|||||||
|
Financial
expense:
|
||||||||||||
|
Foreign currency translation
losses
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||
|
Interest expense on debts
|
|
|
(
|
)
|
||||||||
|
Bank charges and other
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
Financial
income (expense), net
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
| NOTE 13: |
INCOME TAXES
|
| a. |
Income before taxes on income
|
Income
before taxes on income is comprised as follows:
|
Year
ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Domestic
|
$
|
|
$
|
|
$
|
|
||||||
|
Foreign
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
F - 38
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 13: |
INCOME TAXES (Cont.)
|
| b. |
Taxes on income
|
Taxes
on income are comprised as follows:
|
Year
ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Current taxes
|
$
|
|
$
|
|
$
|
|
||||||
|
Deferred tax benefit
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Taxes in respect of previous
years
|
(
|
)
|
(
|
)
|
|
|||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
Taxes
on income by jurisdiction were as follows:
|
Year
ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Domestic
|
$
|
|
$
|
|
$
|
|
||||||
|
Foreign
|
|
|
(
|
)
|
||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Domestic:
|
||||||||||||
|
Current taxes
|
$
|
|
$
|
|
$
|
|
||||||
|
Deferred tax benefit
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Taxes in respect of previous
years
|
(
|
)
|
(
|
)
|
|
|||||||
|
Total
- Domestic
|
$
|
|
$
|
|
$
|
|
||||||
|
Foreign
:
|
||||||||||||
|
Current taxes
|
$
|
|
$
|
|
$
|
|
||||||
|
Deferred tax expense
(benefit)
|
|
(
|
)
|
(
|
)
|
|||||||
|
Taxes in respect of previous
years
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Total
- Foreign
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
|
Total
income tax expense
|
$
|
|
$
|
|
$
|
|
||||||
F - 39
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 13: |
INCOME TAXES (Cont.)
|
| c. |
Deferred Taxes
|
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,
|
||||||||
|
2023
|
2022
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net operating loss and
other losses carry forwards
|
$
|
|
$
|
|
||||
|
Research and development
|
|
|
||||||
|
Other temporary differences
mainly relating to reserve and allowances
|
|
|
||||||
|
Deferred
tax assets, before valuation allowance
|
$
|
|
$
|
|
||||
|
Deferred
tax liability:
|
||||||||
|
Intangible assets
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Deferred
tax liability, before valuation allowance
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Valuation allowance
|
(
|
)
|
(
|
)
|
||||
|
Total
deferred tax assets, net
|
$
|
|
$
|
|
||||
|
Domestic:
|
||||||||
|
Long term deferred tax
asset (liability), net
|
$
|
|
$
|
(
|
)
|
|||
|
$
|
|
$
|
(
|
)
|
||||
|
Foreign:
|
||||||||
|
Long term deferred tax
asset, net
|
$
|
|
$
|
|
||||
|
$
|
|
$
|
|
|||||
|
Total
deferred tax asset, net
|
$
|
|
$
|
|
||||
The
$
185
and $
340
change in the total valuation allowance for the year ended December 31, 2022 and 2023, respectively, 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)
| NOTE 13: |
INCOME TAXES (Cont.)
|
| 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:
|
Year
ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
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
|
|
(
|
)
|
(
|
)
|
|||||||
|
Previous years taxes
|
|
(
|
)
|
|
||||||||
|
Change in valuation allowance
|
(
|
)
|
(
|
)
|
|
|||||||
|
Other
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Taxes
on income
|
$
|
|
$
|
|
$
|
|
||||||
|
* Benefit per ordinary
share from "Preferred Enterprise" status:
|
|
Basic
|
$
|
|
$
|
|
$
|
|
||||||
|
Diluted
|
$
|
|
$
|
|
$
|
|
| e. |
Income tax rates
|
Taxable
income of Israeli companies was generally subject to corporate tax at the rate of
23
%
in 2023, 2022 and 2021. However, the effective tax rate payable by a company that derives income from a Preferred Enterprise or a Preferred
Technological Enterprise (as discussed below) may be considerably lower.
Non-Israeli
subsidiaries are taxed according to the tax laws in their respective countries of residence.
F - 41
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 13: |
INCOME TAXES (Cont.)
|
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. 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. |
Law for the Encouragement of Capital Investments,
1959
|
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 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. |
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 came into
effect in May 2017.
According
to Amendment 73, a Preferred Technological Enterprise, as defined in Amendment 73, with total consolidated revenue 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 revenue 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)
| NOTE 13: |
INCOME TAXES (Cont.)
|
The Company assessed the criteria for qualifying as a “Preferred Technological Enterprise,” status and concluded that the Company and certain of its Israeli subsidiaries are 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:
|
December
31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Balance
at the beginning of the year
|
$
|
|
$
|
|
||||
|
Decrease related to prior
year tax positions, net
|
(
|
)
|
(
|
)
|
||||
|
Increase related to current
year tax positions, net
|
|
|
||||||
|
Balance
at the end of the year
|
$
|
|
$
|
|
||||
In
2023, the Company recognizes interest accrued related to unrecognized tax benefits and penalties in tax expenses. The Company had $
910
and $
975
for the payment of interest and penalties accrued at December 31, 2023, and 2022, respectively which are included in the balance at the
end of the year.
As
of December 31, 2023, the total amount of gross uncertain tax benefits was $
12,722
,
out of which an amount of $
11,972
,
if recognized, would affect the Company’s effective tax rate.
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. Federal for tax years prior to 2018 and 2020 respectively are considered final.
The Company has net operating losses in the U.S. from prior tax periods beginning in 2015 which may be subject to examination upon utilization
in future tax periods.
| i. |
Tax loss carry-forwards
|
As
of December 31, 2023, the Company’s U.S. subsidiaries have Federal net operating loss carry-forwards of $
8,549
and States net operating loss carry-forwards of $
9,491
.
Net operating losses generated in fiscal years prior to 2018 in the U.S. may be carried forward through periods which will expire in
.
Net operating losses generated in 2018 and subsequent years in the U.S. may be carried forward indefinitely for Federal tax purposes yet
are subject to certain limitations. Different states have varying rules regarding utilization and expiration of net operating losses.
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.
F - 43
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 13: |
INCOME TAXES (Cont.)
|
As
of December 31, 2023, the Company’s European subsidiaries have net operating loss carry-forwards of $
6,164
which may be carried forward indefinitely.
The
Company has accumulated net operating losses for Israeli tax purposes as of December 31, 2023, in the amount of approximately $
2,560
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 in 2024 with a limitation of up to 50% of the Company's taxable income. In addition, the Company has accumulated
capital losses for tax purposes as of December 31, 2023, of approximately $
1,187
,
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:
|
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 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.
F - 44
PERION NETWORK LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
| NOTE 14: |
EARNINGS PER SHARE |
The
table below presents the computation of basic and diluted net earnings per common share:
|
Year
ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net
income attributable to ordinary shares – basic and 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
|
$
|
|
$
|
|
$
|
|
||||||
|
Potential
ordinary shares equivalents excluded because their effect would have been anti-dilutive
|
|
|
|
|||||||||
| NOTE 15: |
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 revenue in each of the years presented
below:
|
Year
ended December 31,
|
||||||||
|
2023
|
2022
|
2021
|
||||||
|
Customer A
|
|
|
|
|||||
|
Customer B
|
|
|
|
|||||
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 16: |
GEOGRAPHIC INFORMATION |
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 revenue for the years ended December 31, 2023, 2022 and 2021, allocated to the geographic areas in
which they were generated:
|
Year
ended December 31,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
U.S.
|
$
|
|
$
|
|
$
|
|
||||||
|
Other
|
|
|
|
|||||||||
|
$
|
|
$
|
|
$
|
|
|||||||
The
total revenue is 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, 2023 and 2022:
|
December
31,
|
||||||||
|
2023
|
2022
|
|||||||
|
Israel
|
$
|
|
$
|
|
||||
|
U.S.
|
|
|
||||||
|
Europe
|
|
|
||||||
|
|
$ |
|
$
|
|
||||
| NOTE 17: |
SUBSEQUENT EVENTS |
In
February 2024, the Company’s board of directors approved a shares repurchase plan for an aggregate amount of up to $
F
- 46
ITEM
19.
EXHIBITS:
|
|
|
Incorporation
by Reference
|
|||||
|
Exhibit
No.
|
Description
|
Form
|
File
No.
|
Exhibit
No.
|
Filing
Date
|
Filed
/ Furnished
|
|
|
20-F
|
000-51694
|
1.1
|
March
16, 2022
|
||||
|
20-F
|
000-51694
|
1.2
|
March
16, 2022
|
||||
|
*
|
|||||||
|
20-F
|
000-51694
|
4.1
|
April
29, 2013
|
||||
|
20-F
|
000-51694
|
4.2
|
March
15, 2023
|
||||
|
20-F
|
000-51694
|
4.3
|
March
15, 2023
|
||||
|
20-F
|
000-51694
|
4.17
|
March
27, 2018
|
||||
|
20-F
|
000-51694
|
4.6
|
March
25, 2021
|
||||
|
20-F
|
000-51694
|
4.7
|
March
25, 2021
|
||||
|
20-F
|
000-51694
|
4.8
|
March 16, 2020
|
|
|||
|
*
|
|||||||
|
|
|
|
|
*
|
|||
|
|
|
|
|
*
|
|||
|
|
|
|
|
*
|
|||
|
|
|
|
|
**
|
|||
|
|
|
|
|
**
|
|||
|
|
|
|
|
*
|
|||
|
101.INS
|
Inline
XBRL Instance Document
|
||||||
|
101.SCH
|
Inline
XBRL Taxonomy Extension Schema Document
|
||||||
|
101.CAL
|
Inline
XBRL Taxonomy Extension Calculation Linkbase Document
|
||||||
|
101.DEF
|
Inline
XBRL Taxonomy Definition Linkbase Document
|
||||||
|
101.LAB
|
Inline
XBRL Taxonomy Extension Label Linkbase Document
|
||||||
|
101.PRE
|
Inline
XBRL Taxonomy Extension Presentation Linkbase Document
|
||||||
|
104**
|
Inline
XBRL for the cover page of this Annual Report on Form 20-F (embedded within the Inline XBRL document)
|
||||||
_________________
|
*
|
Filed
herewith.
|
|
**
|
Furnished
herewith.
|
|
***
|
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.
|
|
†
|
Indicates
management contract or compensatory plan or arrangement.
|
98
SIGNATURES
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.
|
|
PERION
NETWORK LTD.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Tal Jacobson
|
|
|
|
|
Name:
Tal Jacobson
|
|
|
|
|
Title:
Chief Executive Officer
|
|
|
|
|
|
|
|
|
By:
|
/s/
Maoz Sigron
|
|
|
|
|
Name:
Maoz Sigron
|
|
|
|
|
Title:
Chief Financial Officer
|
|
Date: April 8, 2024
99
TABLE OF CONTENTS
Part IItem 1. Identity Of Directors, Senior Management and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 4. Information on The CompanyItem 4A. Unresolved Staff CommentsItem 5. Operating and Financial Review and ProspectsItem 6. Directors, Senior Management and EmployeesItem 7. Major Shareholders and Related Party TransactionsItem 8. Financial InformationItem 9. The Offer and ListingItem 10. Additional InformationItem 11. Quantitative and Qualitative Disclosures About Market RiskItem 12. Description Of Securities Other Than Equity SecuritiesPart IIItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15. Controls and ProceduresItem 16. ReservedItem 16A. Audit Committee Financial ExpertItem 16B. Code Of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemptions From The Listing Standards For Audit CommitteesItem 16E. Purchases Of Equity Securities By The Issuer and Affiliated PurchasersItem 16F. Change in Registrant S Certifying AccountantItem 16G. Corporate GovernanceItem 16H. Mine Safety DisclosureItem 16I. Disclosure Regarding Foreign Jurisdictions That Prevent InspectionItem 16J. Insider Trading PoliciesItem 16K. Cybersecurity Risk Management Policies and ProceduresPart IIIItem 17. Financial StatementsItem 18. Financial StatementsNote 1: GeneralNote 2: Significant Accounting PoliciesNote 2: Significant Accounting Policies (cont.)Note 3: Marketable SecuritiesNote 4: Fair Value Of Financial InstrumentsNote 4: Fair Value Of Financial Instruments (cont.)Note 5: AcquisitionsNote 5: Acquisitions (cont.)Note 6: Property and Equipment, NetNote 7: Goodwill and Other Intangible Assets, NetNote 7: Goodwill and Other Intangible Assets, Net (cont.)Note 8: Accrued Expenses and Other LiabilitiesNote 9: Derivatives and Hedging ActivitiesNote 10: LeasesNote 10: Leases (cont.)Note 11: Shareholders' EquityNote 11: Shareholders' Equity (cont.)Note 12: Financial Income (expense), NetNote 13: Income TaxesNote 13: Income Taxes (cont.)Note 14: Earnings Per ShareNote 15: Major CustomersNote 16: Geographic InformationNote 17: Subsequent EventsItem 19. Exhibits: