MTMY.L Regulatory News (MTMY)

29 March 2018

Matomy Media Group | 2017 Final Results 

Final results for the year ended 31 December 2017

Matomy Media Group Ltd. (the "Company" or "Matomy"), the global technology leader in data-driven advertising platforms announces its final results for the year ended 31 December 2017.

Matomy's leading platforms, Team Internet, a platform for domain advertising and monetisation, and Mobfox, a platform for programmatic mobile in-app advertising, recorded strong revenue growth of 66% and 20% respectively. The Group's[1] overall adjusted EBITDA and adjusted net income for 2017 increased by 16% and 93%.

In mid-2017, Matomy sold specific activities outside the Company's focus. Non-GAAP Unaudited Financial Highlights including exited activities:.

Non-GAAP Unaudited Financial Highlights, excluding the exited activities on a pro-forma basis:

Financial Highlights from Core Activities

Selected Team Internet (Domain Monetisation) Financial Data in thousands U.S. dollars

Selected Mobfox (Programmatic Mobile Advertising) Financial Data

*Adjusted gross profit / margin

Adjusted gross profit is a non‑GAAP financial measure that Matomy defines as revenues less direct media costs, which are the direct costs associated with the purchase of digital media. These costs include: payments for digital media based on the revenues Matomy generates from its customers on a revenue‑sharing basis; payments for digital media on a non‑revenue‑sharing basis (CPC or CPM); and serving fees for third‑party platforms.

Matomy believes that adjusted gross profit is a meaningful measure of operating performance because it is frequently used for internal management purposes, indicates the performance of Matomy's solutions in balancing the goals of delivering results to its customers whilst meeting margin objectives, and facilitates a more complete understanding of factors and trends affecting Matomy's underlying revenues performance.

**Adjusted EBITDA

Adjusted EBITDA is a non‑GAAP financial measure that Matomy defines as net income before taxes on income, financial expenses (income), net, equity losses of affiliated companies, net, depreciation and amortisation, share‑based compensation expenses (cash and non-cash) and exceptional items (as described below). Adjusted EBITDA is a key measure Matomy uses to understand and evaluate its core operating performance and trends, to prepare and approve its annual budget, to develop short‑ and long‑term operating plans and to determine bonus payments to management. In particular, Matomy believes that by excluding share‑based compensation expenses, adjusted EBITDA provides a useful measure for period‑to‑period comparisons of Matomy's core business.

***Adjusted net income (loss)

Adjusted net income is a non GAAP financial measure that Matomy defines as net income before share based compensation expenses (cash and non-cash) and any exceptional items, net of tax effect.

Following the agreement for the full purchase of Team Internet as announced on December 28, 2017, Matomy decided to streamline the manner it treats share‑based compensation expenses (cash and non-cash) across the Group so that from this report and going forward the Company will exclude both cash and non cash share‑based compensation expenses when measuring Adjusted EBITDA and Adjusted net income.

Business and operating highlights

§ The Company announced on May 8, 2017 a new strategic focus on core activities - Team Internet (domain monetisation) and Mobfox (programmatic in-app advertising) resulting in higher revenue stability, gross margins and profitability.

o Team Internet revenue increased 66% to $105.4 million (FY2016: $63.3 million) and Adjusted EBITDA increased 65% to $24.5 million (FY2016: $14.8 million).

o Mobfox revenue increased by 20% to $50.6 million (FY2016: $42.1 million) and Adjusted Gross Profit increased by 12% to $27.8 million (FY2016: $24.8 million). Adjusted EBITDA decreased following significant investment in R&D and infrastructure to support the growth of this activity.

o Matomy reduced the corporate team and significantly decreased operational overhead.

o R&D and technical employees now amount to about 45% of the staff overall, reflecting the Company's focus on proprietary technology and product development

o The Company sold and thereby exited the non-core activities "Performance from Matomy" and "mtmy" in July 2017. As such, full 2017 results still represent these activities for the first six months.

§ Adjusted EBITDA increased by 16% to $20.7 million (FY2016: $17.7 million) and excluding the exited activities, on a pro-forma basis, adjusted EBITDA rose 30%, resulting in higher level of cash generation.

§ Revenue for programmatic activity is generally stronger in the second half of the year. As the core activities at Matomy are primarily programmatic, the Company expects that revenues in H2 2018 will be significantly higher than in H1 2018.

§ The Company announced the issuance of convertible bonds on 28 December 2017, which was successfully completed in February 2018 and raised approximately $30 million US dollars in part to fund the acquisition of the remaining ownership percentage of Team Internet. 

Liam Galin, President and Chief Executive Officer of Matomy, said:

"Thanks to the excellent work done by Matomy's Board and Management in restructuring the company in 2017, Matomy is now a focused high tech company providing proprietary advertising platforms with true competitive advantage and value. It is my privilege to lead Matomy to the next level in 2018 as we look forward to continued growth particularly in the in-app and domain advertising spaces, and creating long term value for our stakeholders."

Harel Beit-On, Matomy Non-Executive Chairman of the Board, commented:

"Matomy went through a number of changes in 2017, including a shift in focus and management. The results published in this report validate these changes and today, Matomy is well positioned to be a leading innovative force in the in-app advertising and domain monetisation marketplaces."

Matomy Media GroupPamela Becker, VP Global Marketingpamela.b@matomy.com+972-74-7161971

Press Contact Information: 

Justine Rosin 

justine@headline-media.com 

UK: +44 20 3769 5656 | USA: +1 (917) 724-2176 

Investor Relations:

Daniel Polad

danielp@pr-ir.co.il

+972-505560216

A copy of this announcement will be available on the Matomy website: http://investors.matomy.com/rns.aspx.

Matomy will host two analyst conference calls: the first at 10:00am BST / 12:00pm IST Monday 2 April 2018 for international investors in English and a second call at 11:00am BST / 13:00pm IST Monday 2 April 2018 for Israeli investors in Hebrew to discuss these results. Matomy CEO & President, Liam Galin and CFO Keren Farag Krygier will host two analyst conference calls to discuss the results:

The first call for international investors will be held in English at 10:00am BST / 12:00pm IST Monday 2 April 2018. Participants may join online at https://matomy.zoom.us/s/373274987?pwd=B0G6FeSP_3A with password Matomy or dial in US: +1 646 876 9923 or +1 669 900 6833 or +1 408 638 0968, United Kingdom +44 (0) 20 3695 0088, Israel +972 (0) 3 978 6688, Webinar ID: 373 274 987

The second call for Israeli investors will be held in Hebrew at 11:00am BST / 13:00pm IST Monday 2 April 2018. Participants may join online at https://matomy.zoom.us/s/725507995?pwd=B0G6FeSP_3A with password Matomy or dial in US: +1 646 876 9923 or +1 669 900 6833 or +1 408 638 0968, United Kingdom +44 (0) 20 3695 0088, Israel +972 (0) 3 978 6688, Webinar ID: 725 507 995

About Matomy Media Group Ltd.

Matomy Media Group Ltd. (LSE: MTMY, TASE: MTMY.TA) is a global technology company with a portfolio of superior, data-driven advertising platforms including MobFox, myDSP, Team Internet, Optimatic and WhiteDelivery. By providing customized programmatic and performance solutions supported by unique data analytics and optimization technology, Matomy empowers advertising and media partners to best meet their evolving growth-driven goals. Founded in 2007 with headquarters in Tel Aviv and offices in the US, UK, Austria, Germany and China, Matomy is dual-listed on the London and Tel Aviv Stock Exchanges.

For more information:

Website: http://investors.matomy.com LinkedIn: www.linkedin.com/company/matomy-media-group 

Twitter: @MatomyGroup

Facebook: www.facebook.com/MatomyMediaGroup

CHAIRMAN and CHIEF EXECUTIVE OFFICER's STATEMENT

Introduction

2017 was a year of transition for Matomy. The Company announced on May 8, 2017 a new strategic focus on core activities and significant reduction of operational costs. The Company is already seeing an improvement in its financial results, validating the strategic decision-making.

Operating Performance

In 2017, on a non-GAAP basis, Matomy demonstrated a 16% increase in adjusted EBITDA and a 11.2% improvement in adjusted gross margin resulting in higher level of cash generation compared to 2016. Furthermore, net loss (non-GAAP) decreased by 93% bringing Matomy to nearly break-even. Matomy expects this positive trend of its core activities to continue, as the effects of the Company new focus and reduction of operating costs that began in May 2017 are fully realized in 2018.

The Company's core activities in programmatic mobile advertising and domain monetisation have demonstrated particularly strong financial and operational growth. Domain monetisation (Team Internet) revenue increased 66% to $105.4 million (FY2016: $63.3 million) and programmatic mobile (Mobfox) revenue increased 20% to $50.6 million (H1 2016: $42.1 million). The increase in adjusted EBITDA among the Company's core activities rose 56%.

Outlook

2017 was a year of transition for the company, as Matomy exited activities outside the Company's focus, and reduced operational costs. The core activities of programmatic mobile advertising and domain monetisation have grown nicely in 2017, and the Company is poised to enjoy the full effects of the new focus in the year ahead. The Board and Management are confident that the core activities will continue to grow and raise revenues through 2018 and beyond.

Harel Beit-On Liam Galin

Non-executive Chairman President and CEO

OPERATIONAL REVIEW

Revenues by Media Channel

The following table sets out Matomy's revenues by business unit for the years ended 31 December 2017 and 2016.

Domain monetisation

Domain monetisation revenues increased by $42.1 million, or 66%, to $105.4 million for the year ended 31 December 2017 from $63.3 million last year.

The proprietary ad delivery engines serve semantically relevant ads to approximately 2 billion monthly visitors across about 145 million websites, generating more than 100 million paid clicks per month.

Team Internet's growth, which is consistent over the years, is mainly attributable to its leading technology across its various platforms. The technology yields enhanced performance in comparison to peers and has led to increased recruitment of new clients and higher market share.

Mobile in-app

Programmatic mobile in-app (Mobfox) revenues increased by $8.5 million, or 20% to $50.6 million for the year ended 31 December 2017 from $42.1 million last year.

The mobile in-app activity includes platforms for the selling (supply) and buying (demand) of advertising media, as well as a data management platform and advertising exchange. This rise in profit was driven by strong growth in the recruitment and retention of new media sources and buyers with a low churn rate, as well as improvements to Mobfox's auction mechanism and introduction of new platform features that raised competitive advantage.

The Mobfox activity leverages anonymized user data for improved audience targeting, thereby enhancing advertising ROI for demand partners, and improving monetisation for supply partners, thus enhancing the revenue stream. We also saw compelling growth in the in-app video activity, the fastest growing advertising format on the Mobfox platform.

As part of Mobfox's enhanced business offering, Mobfox decided to turn away partners with lower quality traffic, so in fact this increase is even more significant and is based on more sustainable revenues.

Email and Video

Email media channel revenues decreased by $11.3 million, or 48%, to $12.2 million for the year ended 31 December 2017 from $23.5 million last year. This decrease was mainly attributable to the temporary inability to complete certain email delivery processes, following the introduction of new compliance tools by certain Internet service providers (ISPs). In addition, the consolidation and merger of external infrastructures through which emails are delivered also impacted the ability to deliver emails at full capacity.

Video media channel revenues decreased by $50.0 million, or 47%, to $55.4 million for the year ended 31 December 2017 from $105.4 million in last year. Industry changes reduced the quantity and value of available video advertising inventory from sellers, while enforcing stricter quality requirements by video advertisers. As a result, scale and margins decreased across the video industry.

In 2018, the Board instructed the Company to carefully review and provide a plan regarding the remaining non-core activities per their contribution to the Company's value-creation strategy. The plan may include divestment, reduction and/or closure. The Company is in final stages of establishing its findings.

Exited media channels

At the time of sale, the exited activities showed a consistently decreasing trend in both revenue and profitability and required resources which caused Matomy to deviate from its core growth activities. The exited activities include legacy display, social and search and virtual currency media channels. These exited activities will not be included in results for periods going forward. 

Revenues of Core Activities by Geography[3]

The following table sets out Matomy's revenues by geographical region only for the core activities.

USA

Revenues generated in the US market increased by $35.5 million, or 47.7%, to $110.0 million for the year ended 31 December 2017 from $74.5 million last year, due to continued growth focused particularly in the mobile and programmatic based activities, which are strongly centered on the US market.

Europe

Revenues generated in the European market increased by $3.8 million, or 17.8%, to $25.2 million for the year ended 31 December 2017 from $21.4 million last year, demonstrating the strength of the domain monetisation activity throughout Europe. Increasing regulations around privacy and digital advertising within Europe may have a negative impact on the Group's ability to maintain this rate of growth in 2018.

Asia

Revenues generated in Asian markets increased by $4.0 million, or 70.2%, to $9.7 million for the year ended 31 December 2017 from $5.7 million in 2016, demonstrating the penetration of the mobile programmatic activity primarily in China.

FINANCIAL REVIEW

GAAP Financial Highlights Including Exited Activities Sold Mid-2017

Revenue

During 2017, revenues of the core activities increased by $50.6 million, or 48%, to $156 million (FY2016: $105.4 million), and provide the best indication for Matomy's continued growth.

On a Group level, revenues in 2017 decreased by $31.5 million, or 11.4%, to $245.1 million (FY2016: $276.6 million), however this number includes the downward revenues of the exited activities for the first half of 2017 and as noted above, this does not provide a true picture of Matomy's activities as of December 31, 2017. Excluding revenues from the exited activities, which are not included in the reported results following the sale, revenues decreased by 4.6%, as a result of lower scale in the remaining non-core activities.

Cost of revenues

Cost of revenue for the Group decreased by $28.3 million, or 12.9%, to $191.4 million (78.1% of total revenues) for the year ended 31 December 2017 from $219.7 million (79.4% of total revenues) last year.

Other cost of revenue, which includes allocated costs, server expenses and amortisation of capitalised R&D and intangible assets, increased in part from higher server expenses on the fast growing mobile and domain monetisation activities.

Gross margin rose by 1.3% primarily as a result of the overall drop in cost of revenue.

Adjusted gross margin, which reflects media costs only, increased by 11.2%. This change was driven by significant improvements in margins and scale in core activities. In addition, exiting activities which had low margins and high operational costs also contributed to the improved margins.

Operating expenses

Operating expenses decreased by $7.9 million, or 13.5%, to $50.7 million (FY2016: $58.6 million). Operating expenses as a percentage of revenues were 20.7% (FY2016: 21.2%).

The decrease in operating expenses is mainly attributable to the sale of exited activities and the new focus adopted during 2017 following this sale, including a reduced and more efficient corporate team. These actions led to substantially lower general, administrative, sales and marketing costs of $9.6 million in aggregate. The decrease in operating expenses was partially offset by increased R&D expenses of $1.7 million.

Research and development expenses increased by $1.7 million, or 18.1%, to $11.0 million (FY2016: $9.3 million), following continued investment to strengthen our proprietary technological offerings within the core activities, as well as reduction in capitalization of expenses.

Sales and marketing expenses decreased by 17.1% to $25.8 million (FY2016: $31.1 million). This decrease is mainly a result of the new focused strategy implemented in 2017 and a decreased amortisation expenses recorded in sales and marketing (reduced in 2017 by $1.9 million).

General and administrative expenses decreased 23.8% to $13.9 million (FY2016: $18.2 million), due to continued success in introducing efficiencies at the corporate level, and the streamlining and reduction of overhead costs. This trend is aligned with the Company's strategic focus announced on May 8th and is expected to continue to show through the year 2018.

Financial expenses

Net financial expenses increased by $0.4 million to $2.5 million for the year ended 31 December 2017 (FY2016: $2.1 million). The increase is primarily due to an increase in interest payments on credit facilities and foreign exchange rate fluctuations.

Taxes on income

Taxes on income shifted to $2.1 million benefit for the year ended 31 December 2017 (12.8% of loss before taxes), compared to $4.7 million expense in last year (-140.3%).

Matomy's effective corporate tax rate of 12.8% in 2017 is mainly due to (1) reversal of deferred tax liability resulted from impairment of intangible assets, and (2) income from changes in fair value of contingent payment obligation related to acquisitions which are non-dedictable for tax purposes, off-set by (1) tax rate of 33% on Team Internet profit, and (2) record of full valuation allowances on current year and carry forward losses in the parent company and most of its subsidiaries.

Matomy's effective corporate tax rate in 2016 was negative 140.3% primarily due to valuation allowance totalling $4.3 million recorded on carry forward losses in both the parent company and few of its subsidiaries.

Matomy is subject to corporate tax on its income, principally in Israel, the United States and Germany. Matomy may also be subject to corporate tax on its income in other jurisdictions in which Matomy has operations.

Amortisation of intangible assets

Amortisation expenses amounted to $10.6 million for the year ended 31 December 2017, a decrease of $3.4 million from amortisation expenses of $14.0 million for the same period last year, primarily due to intangible assets that were already fully amortized in prior years, as well as impairment charge on non-core intangible assets recorded in H1 2017.

Net loss

Net loss increased by $6.3 million to a $14.4 million net loss for the year ended 31 December 2017 (FY2016: $8.1 million net loss), primarily due to the strategic changes in 2017, which led to an increase in "Exceptional items" as detailed below.

Net loss attributable to Matomy Media Group shareholders was $1.5 million lower than Group net loss (FY2016: $0.5 million lower). This difference was primarily due to improved performance and revenues of Team Internet, resulting in an increased net income attributed to redeemable non-controlling interest on account of the put options of the minority shareholder.

Exceptional items

Matomy views the following items, which were recorded in profit and loss, either as expense or income, as exceptional items which are material to the financial statements and therefore were excluded from non-GAAP measures:

· Impairments of intangible assets, goodwill and capitalised R&D amounting to $14.3 million in H1 and $12.9 million in H2, in total for the full year $27.2 million, as detailed herein below.

· Earnout adjustments income of $5.5 million in H1 and $4.5 million in H2, in total for the full year $10.0 million, as detailed herein below.

· Gain from sale of an activity of $0.9 million in 2017.

· Costs relating to the exited activities amounting to $0.9 million in 2017.

· Tax effect of exceptional items amounting to ($6.3M) million in 2017.

The impairment charges were attributed mostly to intangible assets and goodwill related to the non-core activity, primarily due to consolidation of certain business units, and adjustments to current market terms including adequacy of revenues generated by the relevant technological platforms.

These changes in the activity of the non-core assets also led the Company to reevaluate the contingent liability related to acquisitions. This resulted in a downward adjustment to the payment due on account of future earnouts mainly in connection with Optimatic, and the Company recorded an income of $10 million in 2017.

Liquidity and cash flows

The following table sets out selected cash flow information for the Group for the years ended 31 December 2017 and 2016.

(A) Net cash provided by / used in operating activities

Matomy's net cash provided by / used in operating activities increased by $17.7 million to a $17.5 million inflow for the year ended 31 December 2017 (FY2016: $0.2 million outflow). In 2017, net cash provided by operating activities consisted of a net loss of $14.4 million offset by $6.5 million relating to net changes in working capital, and $25.4 million relating to non‑cash expenses. Non‑cash expenses were primarily impairment of intangible assets, capitalized R&D and goodwill of $27.1 million, depreciation and amortisation of $14.4 million and stock‑based compensation expense of $1.4 million, off-set by earnout adjustments income of $10.0 million and decrease in deferred tax assets of $7.8 million.

In comparison, for the year ended 31 December 2016, Matomy's net cash provided by operating activities consisted of $8.1 million in net loss and $9.6 million relating to net changes in working capital, off-set by $17.5 million relating to non‑cash expenses. Non‑cash expenses were primarily depreciation and amortisation of $16.5 million, non-cash stock‑based compensation expense of $1.9 million, less decreases in deferred taxes of $1.0 million.

Net changes in working capital in 2017 were mainly driven by a decrease of $22.0 million in trade receivables, offset by the effects of decrease in trade payables ($14.8 million). The decrease in both trade receivables and trade payables was mainly attributable to the sale of the exited activity and lower scale of activities in the remaining non-core activities.

 (B) Net cash provided by / used in investing activities

Net cash provided by / used in investing activities increased by $9.1 million to $2.2 million inflow for the year ended 31 December 2017 (FY2016: $6.9 million outflow). In 2017, net cash provided by investing activities primarily included a $5.6 million from sale of activity, $1.8 million from sale of investment in affiliated company, off-set by $3.9 million capitalised investment in R&D and $1.0 million investment in domains.

For the year ended 31 December 2016, net cash used in investing activities included a $5.1 million capitalised investment in R&D and a $1.6 million investment in property and equipment.

(C) Net cash used in / provided by financing activities

Net cash used in / provided by financing activities decreased by $14.1 million to a $12.6 million outflow for the year ended 31 December 2017 (FY2016: $1.5 million inflow).

In 2017, net cash used in financing activities related primarily to a $17.7 total payments to non-controlling interests and earnout payments, less $4.6 million net increase in outstanding term loans and utilization of credit lines and $0.5 million of proceeds from the exercise of stock based compensation during the year.

In 2016, net cash provided by financing activities related primarily to a $2.0 million net increase in outstanding term loans and overdrafts and $2.4 million of proceeds from option exercises during the year, less $3.0 million total payments to non-controlling interests and earnout payments.

As of 31 December 2017, Matomy had $8.1 million in term loans. Of those, $5.1 million are due within one year, as well as revolving credit line amounted to $12.7 million.

NOTES TO FINANCIAL STATEMENTS

Goodwill

Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired.

Matomy's goodwill was created mainly through the 2013, 2014 and 2015 acquisitions.

Matomy has three reporting units: Domain Monetisation, Mobile ("Mobfox"), and non-core activities. The Company performs an annual impairment test during the fourth quarter of each fiscal year, or more frequently if indicators of potential impairment exist, to determine whether the net book value of each reporting unit exceeds its estimated fair value. The Company recorded goodwill impairment loss of $9.0 million during the year 2017 is attributable to the non-core reporting unit. During the year ended 31 December 2016, no impairment losses were identified.

Segments

Our chief operating decision-maker is our Chief Executive Officer. On a monthly basis, the CEO reviews revenue and adjusted EBITDA at Group level, as well as revenue at the level of media channels, for the purpose of allocating resources and evaluating financial performance.

As a result, Matomy operates in a single reportable segment as a provider of digital advertising services.

Liability to non-controlling interests

During the fourth quarter of 2016, the non-controlling interest of Team Internet ("Minority Holder"), exercised their put option and sold 10% of Team Internet to the Company. The payment of $10.4 million was made in January 2017. Following the exercise of the put option, the Company holds 80% of Team Internet shares.

On 28 December 2017, Matomy entered into an agreement with the Minority Holder relating to the exercise of the second and third sale exit option. The total consideration for the second sale exit was due no later than 15 March 2018 and has been completed. The consideration for the third sale exit option is due no later than 30 November 2018 according to the formula set out in the Team Internet Framework Agreement, with additional 10% premium. The parties also agreed that the Minority Holder will be entitled to an additional consideration of 8% of the net earnings of Team Internet during the period beginning on 1 September 2018 and ending on 31 December 2018 and in the subsequent financial year beginning on 1 January and ending on 31 December 2019. In addition, a one-off bonus of $1.0 million will be paid to the Minority Holder for the extension of the cooperation between Team Internet and its unrelated search engine provider beyond 31 July 2019. As of 31 December 2017 the Company recorded a liability of $41.5 million for the expected consideration based on fair value according to its best estimates. As of 31 December 2017 the Company believes that it is premature to estimate the expected payment for the search engine renewal bonus, and therefore no provision was recorded.

During H1 Matomy recorded an accretion of redeemable non controlling interest of $7.9 million in H1 and $9.2 million in H2, in total for the full year $17.1 million.

Sale of exited activities

In 2017 the Company entered into an agreement for the sale of its intangible assets and transfer of all employees related to its exited activities, for a total consideration of up to $10.9 million, comprised of $5.6 million in cash and a contingent consideration up to $5.2 million based on future business performance.

The sale resulted in a gain of $913 thousand, which is included in operating results for the year ended 31 December 2017.

Following the consummation of this transaction, the Company has exited from the legacy web display, social and search and virtual currency media channels, which are outside the Company's focus. Following the sale, these media channels ceased to be part of the Company's activity.

The Company elected to recognize the future proceeds when the contingency is resolved and therefore the contingent consideration amount was not accounted for as part of the gain.

Loss per share

Matomy's basic loss per share increased by $0.22, or 169%, to a loss per share of $0.35 for the year ended 31 December 2017 (FY2016: $0.13 loss per share). This change was influenced primarily by the decrease in after-tax profit, for the reasons noted above. In addition, there was a 2.8% increase in the weighted average number of outstanding shares mainly due to exercise of share-based incentives in 2017.

Treasury shares

As of 31 December 2017, Matomy has a total of 10,970,111 treasury shares, of which, 1,211,236 shares are held by Team Internet. As of December 31, 2017 Team Internet's Minority Holder is entitled to 80% share from gains derived from these shares, which is classified as a liability to non-controlling interest.

Financial obligations and covenants

Matomy's financial obligations and commitments as at 31 December 2017 were as follows:

Details of these obligations may be found in note 8 and 9 in the financial statements .

Financial reporting

This financial information has been prepared under US GAAP principles and in accordance with Matomy's accounting policies.

The Company changed its accounting policy regarding the presentation of the adjustment to the net income attributable to it as a result of accretion of redeemable non-controlling interest. For further information please refer to note 2 of the 2017 Financial Statements.

Going concern

The Directors confirm that, after making an assessment, they have reasonable expectation that the Group has adequate resources to meet its obligations for the foreseeable future.

The Directors took into consideration, among others, the fact that in February 2018, the Company completed a public offering in Israel of Convertible Bonds (the "Bonds"). Through the issuance of the Bond, the Company raised a total gross consideration of ILS 103 million (approximately $29.9 million) issuing a total of 101,000 units of Bonds, which bear a coupon of 5.5% per annum, payable semi-annually on June 30 and December 31 of each of the years 2018 to 2021 (inclusive). The principal of the Bonds, denominated in ILS, will be repaid in two equal annual instalments commencing on December 2020. The Bonds will be convertible into ordinary shares of the Company, at the discretion of the holders, up to ten (10) days prior to the final redemption date (December 21, 2021). The Company may redeem the Bonds upon delisting of the Bonds from the TASE, subject to certain conditions. In addition, the Company may redeem the Bonds or any part thereof at its discretion after 21 December 2021, subject to certain conditions.

Principal risks

The Directors assess and monitor the key risks of the business on an ongoing basis. The principal risks and uncertainties that could have a material effect on the Group's performance are set out in detail in the section entitled "Risk Factors" of the Group's IPO prospectus (the "Prospectus") dated 9 July 2014 as updated below. These include, among other things, the following:

· Certain internet and technology companies may intentionally or unintentionally adversely affect Matomy's operations, mainly, due to announced or unannounced changes and restrictions by such companies

· The delivery of digital ads and the recording of the performance of digital ads are subject to complex regulations, legal requirements and industry standards

· Matomy's revenue and operating results are highly dependent on the overall demand for advertising. Factors that affect the amount of advertising spending, such as economic downturns, particularly in the fourth quarter, can make it difficult to predict our revenue and could adversely affect our business

· Seasonal fluctuations in digital advertising activity, which may historically have been less apparent due to our historical core activities and growth, could adversely affect our cash flows and operating results

· In order to meet our growth objectives, we will need to rely upon our ability to innovate, the continued adoption of our solution by buyers and sellers for higher value advertising inventory, the extension of the reach of our solution into evolving digital media, and growth into new geographic markets

· Matomy operates in an intensely competitive market that includes companies that have greater financial, technical and marketing resources than we do

· The digital advertising industry is highly competitive and fragmented and currently experiencing consolidation, resulting in increasing competition

· In order to meet our growth objectives, we may need to rely on our ability to raise debt or utilize credit lines, which may not be sufficiently available to meet our ongoing financial needs

· Matomy is dependent on relationships with certain third parties with significant market positions

· Matomy relies on the continued compatibility of its technological platforms with third-party operating systems, software and content distribution channels, as well as newly-acquired systems.

· Matomy may be subject to third-party claims brought against it

· Matomy has historically derived the majority of its revenues from customers that use its solutions for display marketing campaigns which are now rapidly declining

· A key part of Matomy's strategy relates to acquisitions and the ability to effectively finance, integrate and manage them

· The digital advertising industry, remains susceptible to fraud

· Matomy is an Israeli-domiciled company and as such the rights and obligations of shareholders are governed by Israeli law and differ in some respects from English law

· As a result of the announcement of Brexit, the British government has begun negotiating the terms of the U.K.'s future relationship with the E.U. Although it is unknown what those terms will be, it is possible that these changes may affect our operations and financial results

· If Matomy fails to comply with the terms or covenants of its debt obligations, our financial position may be adversely affected

Forward-looking statements

Certain statements in this full-year report are forward looking. Although the Group believes that the expectations reflected in these forward looking statements are reasonable, we can give no assurance that these expectations will be fulfilled. Because these statements contain risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Directors' responsibility

The Directors confirm that to the best of their knowledge the condensed set of final audited financial statements, which has been prepared in accordance with US GAAP principles, gives a true and fair view of the assets, liabilities, financial position and profit of the undertakings included in the consolidation as a whole as required by DTR 4.1.

Liam Galin Keren Farag

President and Chief Executive Officer Chief Financial Officer

Reconciliation of GAAP measures to non-GAAP measures

The following table presents a reconciliation of adjusted gross profit to gross profit and to revenues, the most directly comparable financial measures calculated in accordance with US GAAP, for the periods indicated:

The following table presents a reconciliation of adjusted EBITDA to net income, the most directly comparable financial measure calculated in accordance with US GAAP, for the periods indicated:

The following table presents a reconciliation of adjusted net loss to net loss, the most directly comparable financial measure calculated in accordance with US GAAP, for the periods indicated:

MATOMY MEDIA GROUP LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF 31 DECEMBER 2017

IN US DOLLARS IN THOUSANDS

INDEX

- - - - - - - - - - - - - - - - - - -

The Board of Directors and shareholders of Matomy Media Group Ltd.

We have audited the accompanying consolidated financial statements of Matomy Media Group Ltd. ("the Company") and its subsidiaries, which comprise the consolidated balance sheets as of 31 December 2017 and 2016, and the related consolidated statements of operations, changes in shareholders` equity and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

Auditor's responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries at 31 December 2017 and 2016 and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

US dollars in thousands

The accompanying notes are an integral part of the consolidated financial statements.

US dollars in thousands

The accompanying notes are an integral part of the consolidated financial statements.

US dollars in thousands except earnings per share data

The accompanying notes are an integral part of the consolidated financial statements.

US dollars in thousands, except share data

The accompanying notes are an integral part of the consolidated financial statements.

US dollars in thousands

The accompanying notes are an integral part of the consolidated financial statements.

US dollars in thousands

The accompanying notes are an integral part of the consolidated financial statements.

NOTE 1:- GENERAL

a. Matomy Media Group Ltd together with its subsidiaries (collectively - "the Company") offers and provides a portfolio of proprietary programmatic data-driven platforms focusing on two core activities of domain monetization and mobile digital advertising to advertisers, advertising agencies, Apps developers, domain owners through access to digital media, via a vast chain of direct and indirect media partners, such as websites, mobile apps and video. With this large and diversified network of digital media source relationships, the Company reduces potential dependency on any one digital media source and can thereby give its customers broad reach, liquidity and choice. The focus on two core activities of domain monetization and mobile digital advertising is a result of the strategic focus plan adopted by the Company in 2017, shifting the key business focus away from its non-core business to these two core activities.

The Company through its proprietary programmatic technological platforms provides its customers with access to a wide range of digital media channels, and enables customized performance and programmatic solutions supported by big data analytics, optimization technology, business intelligence, programmatic media buying and Real-Time-Bidding (RTB) on mobile and web, empowering advertising and media partners to meet their digital goals, which include user acquisition and revenue results for both advertisers and media partners. The Company also provides a media management platform (SSP) and demand management platform (DSP) offering publishers or advertisers end to end solutions.

Matomy Media Group Ltd. was incorporated in 2006. The Company's markets are located primarily in the United States and Europe.

The Company's shares are traded in the "London Stock Exchange and also on the Tel Aviv Stock Exchange.

b. Sale of an activity:

On 29 June 2017 the Company entered into an agreement for the sale of its intangible assets and transfer of all employees related to part of its non-core business, for a total consideration of up to $10,892, comprised of $5,642 in cash and a contingent consideration up to $5,250 based on future business performance.

The sale resulted in a gain of $913, which is included in operating results for the year ended 31 December 2017.

Following the consummation of this transaction, the Company has exited from the legacy web display, social and search and virtual currency media channels, which are deemed non-core activities. Following the sale, these media channels ceased to be part of the Company's activity.

The Company elected to recognize the future proceeds when the contingency is resolved and therefore the contingent consideration amount was not accounted for as part of the gain.

NOTE 1:- GENERAL (Cont.)

c. In February 2018, the Company completed a public offering in Israel of Convertible Bonds (the "Bonds"). Through the issuance of the Bond, the Company raised a total gross consideration of ILS 103 million (approximately $29,930) issuing a total of 101,000 units of Bonds, which bear a coupon of 5.5% per annum, payable semi-annually on June 30 and December 31 of each of the years 2018 to 2021 (inclusive). Transaction costs amounted to $1,681. The principal of the Bonds, denominated in ILS, will be repaid in two equal annual instalments commencing on December 2020. The Bonds will be convertible into ordinary shares of the Company, at the discretion of the holders, up to ten (10) days prior to the final redemption date (ie December 21, 2021). The conversion price is subject to adjustment in the event that the Company effects a share split or reverse share split, rights offering or a distribution of bonus shares or a cash dividend. The Company may redeem the Bonds upon delisting of the Bonds from the TASE, subject to certain conditions.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United Sates ("US GAAP"). The significant accounting policies are applied in the preparation of the consolidated financial statements on a consistent basis, as follows:

a. Principles of consolidation:

The consolidated financial statements include the accounts of Matomy Media Group Ltd and its subsidiaries. Intercompany transactions and balances have been eliminated upon consolidation.

Changes in the parent's ownership interest in a subsidiary with no change of control are treated as equity transactions, with any difference between the amount of consideration paid and the change in the carrying amount of the non-controlling interest recognised in equity.

Redeemable non-controlling interests are classified as mezzanine equity, separate from permanent equity, on the consolidated balance sheets and measured at the higher of their redemption amount or the non-controlling interest book value, in accordance with the requirements of Accounting Standards Codification ("ASC") 810 "Consolidation" and ASC 480-10-S99-3A, "Distinguishing Liabilities from Equity".

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

b. Use of estimates:

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates, judgments and assumptions. The Company's management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

On an ongoing basis, the Company's management evaluates estimates, including those related to accounts receivable, fair values of financial instruments, fair values and useful lives of intangible assets, contingent payment obligation related to acquisitions, liability to non-controlling interest, fair values of stock-based awards, deferred taxes and income tax uncertainties and contingent liabilities. Such estimates are based on historical experience and on various other assumptions that it believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

c. Financial statements in US dollars:

The US dollar is the currency of the primary economic environment in which Matomy Media Group and its subsidiaries operate. A substantial portion of the revenues and expenses of the Company are generated in US dollars. In addition, financing activities including equity transactions and cash investments are made in US dollars, which is prepared in US dollars. Thus, the functional and reporting currency of the Company is the US dollar.

Accordingly, monetary accounts maintained in currencies other than the US dollar are remeasured into US dollars in accordance with ASC 830, "Foreign Currency Matters". All transaction gains and losses of the remeasured monetary balance sheet items using exchange rates in effect at the balance sheet date are reflected in the statements of income as financial income or expenses, as appropriate.

d. Cash and cash equivalents:

Cash equivalents are short-term highly liquid investments that are readily convertible into cash with original maturities of three months or less at acquisition.

e. Accounts receivable and allowance for doubtful accounts:

Accounts receivable are stated at realisable value, net of an allowance for doubtful accounts. The Company evaluates specific accounts where information indicates the Company's customers may have an inability to meet financial obligations. Allowance for doubtful accounts as of 31 December 2017 and 2016 were $ 1,648 and $ 1,704, respectively.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

During the years ended 31 December 2017 and 2016 bad debt expenses were $1,958 and $ 1,794, respectively, and the write offs of balances included in allowances for doubtful accounts amounted to $ 1,884 and $ 2,806 in the years ended 31 December 2017 and 2016, respectively. During 2017 recoveries amounted to $ 130 of amounts previously included allowance for doubtful accounts.

f. Property and equipment, net:

Property and equipment are stated at cost, net of accumulated depreciation and amortisation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, at the following annual rates:

g. Impairment of long-lived assets and intangible assets subject to amortization:

Property and equipment 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", and ASC 350, "Intangibles - Goodwill and other" whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The recoverability of these assets is measured by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value.

In determining the fair values of long-lived assets for purpose of measuring impairment, the Company's assumptions include those that market participants will consider in valuations of similar assets.

During the year ended 31 December 2017, following the recent strategic restructuring, consolidation of certain business units and considering the current market terms, including adequacy of certain technological products, the Company performed an impairment review of intangible assets that were recognized in connection with the acquisition of Optimatic and Avenlo, which resulted in impairment charge of $18,139.

In connection with the restructuring plan, the Company recorded in 2017 an impairment of $152 relating to disposal of certain office furniture and equipment.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

h. Goodwill and other intangible assets:

Goodwill reflects the excess of the purchase price of business acquired over the fair value of net identifiable assets acquired. Goodwill and indefinite intangible assets are not amortized but instead are tested for impairment, in accordance with ASC 350, 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.

The Company adopted in 2017, the Financial Accounting Standards Board ("FASB") authoritative guidance, which simplifies the subsequent measurement of goodwill. The standard eliminates Step 2 of the current goodwill impairment test, which requires companies to determine the implied fair value of goodwill when measuring the amount of impairment loss. Under the new standard, goodwill impairment is measured as the amount by which a reporting unit's carrying value exceeds its fair value, with the loss limited to the total amount of goodwill allocated to that reporting unit.

Following completion of Matomy's strategic restructuring to focus on programmatic mobile and domain monetization, the Company has also streamlined the way it measures its results to reflect such operational focus, which consists of one operating segment, comprised of three reporting units - Domain Monetisation, Mobile ("Mobfox") and non-core. The Company determined that certain indicators of potential impairment existed during 2017, which triggered goodwill impairment analysis for its reporting units.

The Company determines the fair value of each reporting unit using the income approach, which utilizes a discounted cash flow model, as it believes that this approach best approximates the reporting unit's fair value. Judgments and assumptions related to revenue, gross margin, operating income, future short-term and long-term growth rates, weighted average cost of capital, interest, cash flows, and market conditions are inherent in developing the discounted cash flow model. The Company considers historical rates and current market conditions when determining the discounted and growth rates to use in its analyses. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for its goodwill. As a result of the annual impairment test in 2016, no impairment loss was recorded. During 2017 the Company recorded goodwill impairment charges of $9,005 related to its non-core reporting unit. 

The majority of the inputs used in the discounted cash flow model to determine the fair value of the reporting units are unobservable and thus are considered to be Level 3 inputs.

Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives. Customer relationships and trade name are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in accelerated amortization of such intangible assets as compared to the straight-line method. Technology and database are amortised over their useful lives on a straight-line basis.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

i. Investments in affiliated companies:

Investments in companies in which the Company holds more than 20% (and less than 50%) or has the ability to exercise significant influence over their operating and financial policies are measured using the equity method.

In December 2017 the Company sold its investment in Adperio for a total consideration of $1,972, comprised of $1,823 in cash and $149 which is, held in escrow for additional year. The Company estimates that 50% of the escrow amount will be received, and therefore an amount of $75 is included in other receivables and prepaid expenses in the balance sheet. The sale resulted in a gain of $7, which is included in operating results for the year ended 31 December 2017.

The Company's investments in affiliated companies are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. For the years ended 31 December 2017 and 2016, no impairment losses were recorded.

j. Severance pay:

Effective September 2007, the Company's agreements with employees in Israel are generally in accordance with section 14 of the Severance Pay Law - 1963 which provide that the Company's contributions to severance pay fund shall cover its entire severance obligation with respect to period of employment subsequent to September 2007. Upon termination, the release of the contributed amounts from the fund to the employee shall relieve the Company from any further severance obligation and no additional payments shall be made by the Company to the employee. As a result, 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 severance obligation to employees once the amounts have been deposited, and the Company has no further legal ownership on the amounts deposited.

Severance expenses during the years ended 31 December 2017 and 2016 were $ 1,063 and $ 1,311, respectively.

k. 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 annual contribution limit. The Company matches 25% of each participant's contributions, up to 6% of employee deferral. There is also a vesting period for the employer match, which is based on the employee date of hire and years of service. Contributions to the U.S. Plan are recorded during the year contributed as an expense in the consolidated statement of operations.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Total employer 401(k) contributions for the years ended 31 December 2017 and 2016 were $ 79 and $ 54, respectively.

l. Revenue recognition: 

The Company provides smart marketing services through customized programmatic solutions supported by internal media capabilities, big data analytics, and optimization technology, Matomy empowers advertising and media partners to meet their evolving growth-driven goals across several media channels, including core mobile, domain monetisation and non-core email and video, for multiple industry verticals on a wide variety of devices and operating systems.

The Company generates a large part of its revenues when its customers' ad campaigns achieve certain predefined measurable and validated results on a per-action basis such as cost-per-acquisition ("CPA"), cost-per-sale ("CPS"), cost-per-lead ("CPL"), cost-per-download ("CPD"), cost-per-view ("CPV"), cost-per-install ("CPI") and pay per call ("PPC"). The Company also generates revenues based on a metric that predefines a certain amount of ad views based on a cost per thousand advertising impressions ("CPM").

The Company recognises revenue when all four of the following criteria are met: persuasive evidence of an arrangement exists; service has been provided; customer fees are fixed or determinable; and collection is reasonably assured. Revenue arrangements are evidenced by executed terms and conditions as part of an insertion order, with an advertiser or an advertising agency.

The Company evaluates whether its revenues should be presented on a gross basis, which is the amount that a customer pays for the service, or on a net basis, which is the customer payment less amounts the Company pays to suppliers. In making that evaluation, the Company considers indicators such as whether the Company is the primary obligor in the arrangement and assumes risks and rewards as a principal or an agent, including the credit risk, whether the Company has latitude in establishing prices and selecting its suppliers and whether it changes the products or performs part of the service.

The Company records deferred revenues for unearned amounts received from customers for services that were not recognised as revenues. Deferred revenues amounted to $ 1,059 and $ 1,737 at 31 December 2017 and 2016, respectively, and are included within accrued expenses and other liabilities on the balance sheets.

m. Cost of revenues:

Cost of revenues consists primarily of direct media costs associated with the purchase of digital media, data centre costs, amortisation of technology and internally developed software and allocation of attributable personnel and associated costs.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

n. Comprehensive income:

The Company accounts for comprehensive income in accordance with ASC 220, "Comprehensive Income". Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders. The Company's items of other comprehensive income relate to foreign currency translation adjustments, which were immaterial for the years 2017 and 2016.

o. Research and development costs:

Research and development costs are charged to the statement of operations as incurred, except for certain costs relating to internally developed software, which are capitalized and amortized on a straight-line basis over their estimated useful life once the asset is ready for its intended use. 

p. Internally developed software:

The Company capitalizes certain internal software development costs, consisting of direct labor associated with creating the internally developed software. Software development projects generally include three stages: the preliminary project stage (all costs expensed as incurred), the application development stage (costs are capitalized) and the post implementation/operation stage (all costs expensed as incurred). The costs capitalized in the application development stage primarily include the costs of designing the application, coding and testing of the system. Capitalized costs are amortized using the straight line method over the estimated useful life of the software, generally 3 years, once it is ready for its intended use. The Company believes the straight line recognition method best approximates the manner in which the expected benefit will be derived. During 2017 and 2016, the Company capitalized software development costs of $ 3,901 and $ 5,106, respectively. Amortization expense for the related capitalized internally developed software in 2017 and 2016 totaled $ 2,757 and $ 1,179, respectively, and is included in cost of revenues in the accompanying consolidated statements of operations. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. As a result of changes in circumstances in the non-core activity, management decided to abandon certain projects and therefore recorded an impairment charge of $ 447 in 2017.

Capitalized internally developed software of $ 6,755 and $ 6,058 are included in property and equipment in the consolidated balance sheets as of 31 December 2017 and 2016, respectively.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

q. Accounting for stock-based compensation:

The Company accounts for stock-based compensation under ASC 718, "Compensation - Stock Compensation", which requires the measurement and recognition of compensation expense based on estimated grant date fair values for all share-based payment awards made to employees 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 Company elected to account for forfeitures when they occur and adopted this change on a modified retrospective basis.

The Company recognizes compensation expenses for the value of its awards, which have graded vesting based on service conditions, using the accelerated attribution method, over the requisite service period of each of the awards

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016- 09"). The update simplifies several aspects of accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU is effective for annual reporting periods beginning after 15 December 2016, including interim periods within those annual reporting periods, early adoption is permitted. The Company adopted the standard commencing 1 January 2017. The impact of the adoption was to reduce retained earnings and to increase additional paid-in capital by $ 68 as of 1 January 2017.

1. The Company estimates the fair value of stock options granted to its employees and directors using the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton model requires a number of assumptions, of which the most significant are the fair value of its ordinary shares, the expected stock price volatility, expected option term, risk-free interest rates and expected dividend yield, which are estimated as follows:

· Volatility - the expected share price volatility was based on the historical equity volatility of the ordinary shares of comparable companies that are publicly traded and the Company's historical equity volatility.

· Expected option term - the expected term of the options represents the period of time that the options are expected to be outstanding and is based on the simplified method, which is the midpoint between the vesting date and the end of the contractual term of the option.

· Risk-free interest - the risk-free interest rate assumption is based on the yield from zero-coupon US government bonds appropriate for the expected term of the Company's employee stock options.

· Dividend yield - the Company estimates its dividend yield based on historical pattern, however the Company currently intends to invest funds in business development and not to distribute dividends.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The fair value of the Company's stock options granted to employees and directors for the years ended 31 December 2017 and 2016 was estimated using the following weighted average assumptions:

2. The Company estimates the fair value of restricted share units ("RSUs") granted to employees according to the fair value of the Company's share at the grant date.

r. Income taxes:

The Company is subject to income taxes in Israel, Germany, the United States and numerous other jurisdictions. The Company accounts for income taxes in accordance with ASC 740, "Income Taxes". This topic 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. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to the amount that is more likely than not to be realised. In such determination, the Company considers future reversal of existing temporary differences, future taxable income, tax planning strategies and other available evidence in determining the need for a valuation allowance.

The Company implements a two-step approach to recognise and measure 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, on an evaluation of the technical merits, 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% (on a cumulative basis) likely to be realised upon ultimate settlement. The Company classifies interest incurred payable to tax authorities as interest expenses.

s. Concentrations of credit risks:

Financial instruments that could potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables.

Cash and cash equivalents are managed in major banks, mainly in Israel, the United States, United Kingdom and Germany.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company's trade receivables are derived from sales to customers located mainly in Europe and the United States. The Company performs ongoing credit evaluations of its customers and a specific allowance for doubtful accounts is provided.

t. Fair value of financial instruments:

The Company applies ASC 820, "Fair Value Measurements and Disclosures". Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.

In determining fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximises the use of observable inputs and minimises 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 the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 - Unobservable inputs for the asset or liability.

w. Basic and diluted earnings per share:

Basic earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year. Diluted earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year, plus dilutive potential ordinary shares outstanding during the year, in accordance with ASC 260, "Earnings per Share".

x. Treasury shares:

In accordance with ASC 505-30, the Company shares held by the Company and/or its subsidiaries are recognized at cost of purchase and presented as a deduction from equity. Any gain or loss arising from a purchase, sale, issue or cancellation of treasury shares is recognized directly in equity.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

y. Domains:

During the year ended 31 December 2017, the Company changed its long-term strategy regarding the manner it relates to domains which were previously held for sale and accordingly reclassified the domains from current assets to non-current assets with indefinite useful lives. As of the date of reclassification, no impairment losses were recorded in accordance with ASC 350, "Intangibles - Goodwill and other".

Since the domains have no expiry date, management believes that these intangible assets have indefinite useful lives. Intangible assets with indefinite useful lives are not amortized and are tested for impairment annually or whenever there is an indication that the intangible asset may be impaired. 

z. Change in accounting policies:

The Company changed its accounting policy regarding the presentation of the adjustment to the net income attributable to Matomy Media Group Ltd. as a result of accretion of redeemable non-controlling interest. According to the new accounting policy, the Company presents the accretion amount in the calculation of the loss per share in the notes of the financial statements, compared to the previous presentation on the face of the consolidated statements of operations, since Company's management believes that reflecting the effects of the accretion as an adjustment to income available to Matomy Media Group Ltd. in the loss per share note is a more appropriate presentation. The presentation of prior years was changed to conform to current year's presentation. The reclassification had no effect on previously reported net loss or shareholders' equity.

aa. Reclassification:

Certain amounts in prior years' financial statements have been reclassified to conform to the current year's presentation. The reclassification had no effect on previously reported net loss or shareholders' equity.

bb. Recently issued accounting standards:

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09) "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)", and requires entities to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. As currently issued and amended, ASU 2014-09 is effective for annual reporting periods beginning after 15 December 2017, including interim periods within that reporting period, though early adoption is permitted for annual reporting periods beginning after 15 December 2016.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company elected to apply the modified retrospective method, and is still evaluating the effect that this guidance will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. The guidance is effective for the interim and annual periods beginning on or after December 15, 2018, and early adoption is permitted. For operating leases having initial or remaining non-cancelable lease terms in excess of one year, the lessee shall disclose both of the following: a. Future minimum rental payments required as of the date of the latest balance sheet presented, in the aggregate and for each of the five succeeding fiscal years. b. The total of minimum rentals to be received in the future under non-cancelable subleases as of the date of the latest balance sheet presented.

The Company is still evaluating the effect that this guidance will have on its consolidated financial statements and related disclosures.

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective for the Company 1 January 2018 and early adoption is permitted. The Company does not expect the guidance will have a material impact on its consolidated financial statements.

In January 2017, the FASB issued authoritative guidance clarifying the definition of a business to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard is effective for the Company for the first quarter of fiscal 2019 and will be applied on a prospective basis. Early adoption is permitted. The Company does not expect the adoption of the standard will have a material impact on its consolidated financial statements.

In October 2016, the FASB issued authoritative guidance requiring the recognition of income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The standard is effective for the Company for the first quarter of fiscal 2019 and will be applied on a modified retrospective basis. Early adoption is permitted.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

In August 2016, the FASB issued new authoritative guidance addressing eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain transactions are presented and classified in the statement of cash flows. The standard is effective for the Company for the first quarter of fiscal 2019 and will be applied on a retrospective basis. Early adoption is permitted. The Company does not expect the adoption of the standard will have a material impact on our consolidated financial statements.

NOTE 3:- PROPERTY AND EQUIPMENT, NET

a. Composition:

a. Depreciation and amortization expense amounted to $ 3,784 and $ 2,527 for the years ended 31 December 2017 and 2016, respectively.

In 2017 the Company recorded an impairment of capitalized research and development costs in the amount of $ 447.

In connection with the restructuring plan, the Company recorded in 2017 an impairment of $152 relating to disposal of certain office furniture and equipment which are included in restructuring charges in the statement of operations.

In 2017 and 2016, the Company recorded a loss on disposal of property and equipment in the amount of $ 77 and $ 55, respectively.

In 2017 and 2016, the Company derecognised property and equipment in the amount of $ 2,602 and $ 2,927, respectively, which were fully depreciated.

NOTE 4:- OTHER INTANGIBLE ASSETS, NET

a. Other intangible assets comprise of the following: