Incredimail 2013 Annual Report Download - page 47

Advertising and Other revenues
. Advertising and other revenues increased 63% in 2012, from $2.8 million in 2011 to $4.6
million in 2012. This increase is attributable to increased distribution of our software and to the offering of our homepage, which
includes display advertising, and the subsequent acceptance of this offer by our users.
Cost of revenues
. Cost of revenues in 2012 was $5.2 million, as compared to $2.8 million in 2011. Amortization of intangible assets
increased by $1.2 million due to the acquisition of SweetIM, and the balance was due to the inclusion of Smilebox for a full year in 2012 and
additional infrastructure costs. The increase in amortization expenses stemming from the SweetIM acquisition caused a slight decrease in gross
profit margin from 92% in 2011, to 91% in 2012.
Research and development expenses, net ("R&D")
. R&D increased by $3.2 million in 2012, from $7.5 million in 2011 to $10.7 million
in 2012, decreasing as a percentage of sales from 21% in 2011 to 18% in 2012. The increase was as a result of our investing in enriching our
product pipeline in 2012, primarily by making our products available on mobile platforms. A mobile version of our Smilebox product, available
for the iPhone, was announced in the third quarter of 2011 and already has accumulated over 1 million downloads.
Selling and marketing expenses
. Selling and marketing expenses more than doubled, from $13.0 million in 2011 to $29.5 million in
2012. This increase was primarily attributable to the increased investment in customer acquisition costs, which increased from $8.0 million in
2011 to $22.1 million in 2012. This increase reflects a ramping up of these expenses all through 2012, reaching $9.7 million in the fourth quarter
of 2012. In addition, marketing expenses increased due to personnel costs incurred by increasing the size of our marketing department as we
added the Smilebox marketing department in 2012.
General and administrative expenses ("G&A").
G&A increased from $7.6 million in 2011 to $8.6 in 2012. This increase was primarily
due to costs associated with the acquisition of subsidiaries in 2012, compared to the previous year. G&A expenses from organic operations in
2012 were at a level similar to that of 2011. As a result, and even after the increased in acquisition expenses, G&A as a percentage of sales
decreased from 22% in 2011 to 14% in 2012.
Taxes on Income.
Income tax in 2012 was $2.5 million, compared to $0.2 million in 2011. The increase in income tax was primarily a
result of a number of tax credits received in 2011 with respect to past years, a tax refund due to the settlement of a tax audit with the Israeli tax
authorities and the discontinuation of our dividend distribution policy. In 2012, we did not benefit from these credits, and while our maximum
statutory tax rate was 25%, we suffered from non-recurring tax expenses which, coupled with an increase in non-
deductible expenses, caused an
effective tax rate of 41%.
Net Income.
Net income in 2012 was $3.5 million, compared to $5.7 million in 2011. As described above, this decrease was primarily a
result of the $14.0 million increase in customer acquisition costs, the nominal increases in other operating expenses and the $2.3 million increase
in tax expenses, partially offset by increased profits from the increase in revenues.
B. LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2013, our working capital was a negative $2.9 million, consisting of approximately $47.6 million in current assets,
less $50.4 million in current liabilities, which included $9.1 million in deferred revenues. As of December 31, 2012, our working capital was a
negative $4.3 million, consisting of approximately $47.7 million in current assets, less $52.0 million in current liabilities, which included $5.1
million in deferred revenues. The increase in working capital was primarily due to trade accounts receivable, less trade accounts payable and
accrued expenses increasing $3.0 million as a result of our higher level of activity, partially offset by other net liabilities. Based on reports
received from Conduit, as of December 31, 2013 the ClientConnect business had negative working capital of $19.7 million, consisting of
approximately $1.3 million in current assets, less $21.0 million in current liabilities, which included a $10.8 million payable to Perion in
connection with the Conduit Commercial Agreement. Pursuant to the terms of the ClientConnect Acquisition, Conduit agreed to provide
ClientConnect a short-term working capital loan of up to $20 million,as described below under " – Credit Facilities".
As of December 31, 2013, we had cash and cash equivalents of $23.4 million and bank loans outstanding totaling $6.6 million to be
paid over the next two to three years, including $4.3 million classified as long term debt and $2.3 million with current maturities.
We believe that our cash balances and cash generated from operations, including the operations of the ClientConnect business, together
with the working capital loan from Conduit, will be sufficient to meet our anticipated cash requirements for operations, as well as our deferred
acquisition payments, for at least the next 12 months.
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