Perion Network
Annual Report 2016

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 20-F☐REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 OR ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ☐SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report…………………………………. For the transition period from ____ to _____ Commission File No. 000-51694 Perion Network Ltd.(Exact Name of Registrant as specified in its charter)N/A(Translation of Registrant's name into English)Israel(Jurisdiction of incorporation or organization)26 HaRokmim StreetHolon, Israel 5885849(Address of principal executive offices)Yacov Kaufman, CFOTel: +972-73-3981582; Fax: +972-3-644-550226 HaRokmim StreetHolon, Israel 5885849 (Name, Telephone, E-mail and /or Facsimile Number and Address of Company Contact Person)Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of Each Class Ordinary shares, par value ILS 0.01 per share Name of Each Exchange on which RegisteredNASDAQ Global Select Market Securities registered or to be registered pursuant to Section 12(g) of the Act. None(Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None(Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the AnnualReport. As of December 31, 2016, the Registrant had outstanding 77,223,069 ordinary shares, par value ILS 0.01 per share.Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes ☐ No ☒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 theSecurities 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 1934during 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 filingrequirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe 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 thatthe registrant was required to submit and post such files). Yes ☒ No ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer andlarge accelerated filer" in Rule 12b-2 of the Exchange Act (Check one):Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:U.S. GAAP ☒ International Financial Reporting Standards as issuedbythe International Accounting Standards Board ☐ Other ☐If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. 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 ☒  PRELIMINARY NOTES Terms As used herein, and unless the context suggest otherwise, the terms "Perion," "Company," "we," "us" or "ours" refer to Perion Network Ltd. andsubsidiaries. References to "dollar" and "$" are to U.S. dollars, the lawful currency of the United States, and references to "ILS" are to New Israeli Shekels, thelawful currency of the State of Israel. This annual report contains translations of certain ILS amounts into U.S. dollars at specified rates solely for yourconvenience. These translations should not be construed as representations by us that the ILS 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 ILS amounts into U.S. dollars at an exchangerate of ILS 3.845 to $1.00, the representative exchange rate reported by the Bank of Israel on the last business day before December 31, 2016. 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, and Section21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements relate to future events or our future financialperformance 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 inferredby 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 andother comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not know whether we can achievepositive 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, weundertake no obligation to update or revise any of the forward-looking statements after the date of this annual report to conform those statements to reflectthe occurrence of unanticipated events, new information or otherwise. You should read this annual report and the documents that we reference in this report completely and with the understanding that our actual futureresults, 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 anduncertainties relating to our; business, intellectual property, industry and operations in Israel, as described in this annual report under Item 3.D. – "KeyInformation – Risk Factors." Assumptions relating to the foregoing, involve judgment with respect to, among other things, future economic, competitive andmarket conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Inlight of the significant uncertainties, inherent in the forward-looking information included herein, the inclusion of such information should not be regardedas 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 changingenvironment. 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 ourbusiness 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, publiclyavailable information and industry publications. Industry publications generally state that they obtain their information from sources that they believe to bereliable, but they do not guarantee the accuracy and completeness of the information. Similarly, while we believe that the statistical data, industry data andforecasts and market research are reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of theinformation. 1 TABLE OF CONTENTS Page PART I Item 1.Identity of Directors, Senior Management and Advisers 3Item 2.Offer Statistics and Expected Timetable 3Item 3.Key Information3Item 4.Information on the Company27Item 4.AUnresolved Staff Comments 35Item 5.Operating and Financial Review and Prospects 35Item 6.Directors, Senior Management and Employees 49Item 7.Major Shareholders and Related Party Transactions 59Item 8.Financial Information 61Item 9.The Offer and Listing 61Item 10.Additional Information 63Item 11.Quantitative and Qualitative Disclosures about Market Risk 77Item 12.Description of Securities Other than Equity Securities 78 PART II Item 13.Defaults, Dividend Arrearages and Delinquencies 79Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds 79Item 15.Controls and Procedures 79Item 16A. Audit Committee Financial Expert79Item 16B.Code of Ethics 79Item 16C.Principal Accountant Fees and Services 80Item 16D. Exemptions from the Listing Standards for Audit Committees 80Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers 80Item 16F. Change in Registrant's Certifying Accountant80Item 16G. Corporate Governance80Item 16HMine Safety Disclosure 82 PART III Item 17.Financial Statements 83Item 18.Financial Statements 83Item 19.Exhibits84 2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 A. SELECTED FINANCIAL DATA On January 2, 2014, we purchased all of the outstanding shares of ClientConnect Ltd. ("ClientConnect"), which received the ClientConnect businessof Conduit Ltd. ("Conduit") on December 31, 2013, in a stock-for-stock transaction (the "ClientConnect Acquisition"). Immediately following the closing,approximately 81% of our shares were owned by the former ClientConnect shareholders and option holders, and 19% by our pre-closing shareholders andoption holders, on a fully diluted basis (as determined pursuant to the purchase agreement). Accordingly, since 2014, the ClientConnect Acquisition hasbeen reflected in our financial statements as a reverse acquisition of all of our outstanding shares and options by ClientConnect in accordance withAccounting Standards Codification Topic 805, "Business Combinations" ("ASC 805"), using the acquisition method of accounting whereby ClientConnectis the deemed accounting acquirer and Perion is the deemed accounting acquiree. In accordance with the ASC 805 presentation requirements, our financialstatements include ClientConnect’s comparative numbers, but not Perion's comparative numbers, for the years preceding 2014.We derived the selected operations data below for the years ended December 31, 2014, 2015 and 2016 and the selected balance sheet data as ofDecember 31, 2015 and 2016 from our audited consolidated financial statements and the related notes to the financial statements included elsewhere herein(the "Financial Statements"). We derived the selected operations data below for the years ended December 31, 2012 and 2013 and the selected balance sheetdata as of December 31, 2012, 2013 and 2014 from our audited consolidated financial statements not incorporated by reference in this report. Ourconsolidated financial statements are prepared and presented in U.S. dollars and in accordance with U.S. Generally Accepted Accounting Principles ("U.S.GAAP"). The following tables present selected financial data and should be read in conjunction with "Item 5 – Operating and Financial Review andProspects" and our Financial Statements. 3(in thousands, except share and per share data) Year ended December 31, 2012 2013 2014 2015 2016 Revenues: Search and other $517,060 $277,275 $343,655 $188,897 $172,683 Advertising 19,948 48,233 45,076 32,053 140,111 Total Revenues 537,008 325,508 388,731 220,950 312,794 Costs and Expenses: Cost of revenues 4,159 4,724 10,950 7,877 16,515 Customer acquisition costs and media buy 119,555 185,355 174,575 91,194 140,210 Research and development 16,858 22,057 37,427 21,692 26,528 Selling and marketing 7,920 10,172 20,792 22,886 58,572 General and administrative 4,188 18,848 36,730 31,064 32,916 Restructuring charges - - 3,981 1,052 728 Impairment, net of gain on reversal of contingentconsideration - - 19,941 72,785 - Depreciation and amortization 1,871.00 2,110.00 21,321 11,422 25,977 Total Costs and Expenses 154,551 243,266 325,717 259,972 301,446 Income (Loss) from Operations 382,457 82,242 63,014 (39,022) 11,348 Financial income (expense), net 7,696 2,782 (2,888) (1,939) (8,288) Income (Loss) before Taxes on Income 390,153 85,024 60,126 (40,961) 3,060 Taxes on income 75,435 22,616 10,816 697 212 Net Income (Loss) from Continuing Operations 314,718 62,408 49,310 (41,658) 2,848 Net loss from discontinued operations 23,798 33,795 6,484 26,999 2,647 Net Income (Loss) $290,920 $28,613 $42,826 $(68,657) $201 Net Earnings (Loss) per Share - Basic: Continuing operations $6.02 $1.16 $0.72 $(0.58) $0.04 Discontinued operations $(0.45) $(0.63) $(0.10) $(0.38) (0.04)Net Income (Loss) $5.57 $0.53 $0.62 $(0.96) $0.00*) Net Earnings (Loss) per Share – Diluted: Continuing operations $5.91 $1.14 $0.67 $(0.58) $0.04 Discontinued operations $(0.45) $(0.62) $(0.09) $(0.38) $(0.04)Net Income (Loss) $5.46 $0.52 $0.58 $(0.96) $0.00*) Number of shares continuing and discontinued: Basic 52,320,133 53,910,741 68,213,209 71,300,432 76,560,454 Diluted 53,264,743 54,837,307 70,327,411 71,300,432 76,673,803 *) Less than $0.01 Balance Sheet Data (in thousands): As of December 31, 2012 2013 2014 2015 2016 Cash and cash equivalents $78,395 $949 $101,183 $17,519 $23,962 Working capital (**) $208,793 $(19,682) $91,255 $37,394 $27,048 Total assets (**) $308,920 $31,058 $356,139 $442,298 $368,452 Total liabilities (**) $64,899 $21,031 $110,142 $242,461 $160,308 Shareholders' equity $244,021 $10,027 $245,997 $199,837 $208,144 ** In November 2015, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update No. 2015-17, Income Taxes (Topic740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes by requiring deferred taxassets and liabilities to be classified as noncurrent on the balance sheet. We have early adopted this standard retrospectively, and reclassified all of ourcurrent deferred tax assets to noncurrent deferred tax assets which has resulted in a change to previously published amounts. 4 B. CAPITALIZATION AND INDEBTEDNESS Not applicable. C. REASONS FOR OFFER AND USE OF PROCEEDS Not applicable. D. RISK FACTORS We are subject to various risks and uncertainties relating to or arising out of the nature of our business and general business, economic, financial, legaland 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 amaterial adverse effect on our business, financial condition, cash flows and results of operations. Risks Related to our Business and Industry Digital Advertising BusinessOur advertising customers may reduce or terminate their business relationship with us at any time. If customers representing a significant portion ofour revenue reduce or terminate their relationship with us, it could have a material adverse effect on our business, results of operations and financialcondition. We generally do not enter into long-term contracts with our advertising customers, and such customers do business with us on a non-exclusive basis,with no minimum spending guarantees. 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 and development of new or more compelling offerings byour competitors, which could either lead to reduced advertising expenditures generally or motivate our current or potential customers to migrate to ourcompetitors. Any reduction in spending by, or loss of, existing or potential advertisers would negatively impact our revenue and operating results. 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 be able to offer more favorable pricing or other advantageous terms. As a result, we maybe compelled to reduce our rates or offer rebates or other incentives in order to maintain our current customers and attract new customers. If a significantnumber of customers are able to compel us to charge lower fees or provide fee concessions or refunds, there is no assurance that we would be able tocompensate for such price reductions or conserve our profit margins. Large and established internet and technology companies, such as Google and Facebook, play a substantial role in the digital advertising market andmay significantly impair our ability to operate in this industry. Google as an advertising publisher accounted for most U.S. online search-generated revenues, and Microsoft and Yahoo accounted for substantiallyall of the rest of search-generated revenues. In addition, a small number of social network companies, such as Facebook, are seizing a growing portion ofdigital advertising budgets. The high concentration of power among Google, Facebook and some other large market participants causes us to be subject toany unilateral changes they may make with respect to advertising on their respective platforms, which may be more lucrative than alternative methods ofadvertising or partnerships with other publishers that are not subject to such changes. Furthermore, we could have limited ability to respond to, and adjust for,changes implemented by large market participants.These companies, along with other large and established Internet and technology companies, may also leverage their power to make changes to theirweb browsers, operating systems, platforms, networks or other products or services in a way that impacts the entire digital advertising marketplace. Thesechanges could materially impact the way we do business, and if we are unable to quickly and effectively adjust to those changes, there could be an adverseeffect on our revenues and performance.5 The consolidation among participants within the digital advertising market could have a material adverse impact on our business and results ofoperations. The digital advertising industry has experienced substantial evolution and consolidation in recent years and we expect this trend to continue,increasing the capabilities and competitive posture of larger companies, particularly those that are already dominant in various ways, and enabling new orstronger competitors to emerge. This consolidation could adversely affect our business in a number of ways, including: ·our customers or vendors could acquire, or be acquired by, our competitors and terminate their relationship with us; and ·competitors could improve their competitive position or broaden their offerings through strategic acquisitions or mergers. While we work with a wide variety of advertising buyers and sellers, many buyers and sellers are part of larger organizations. For example, ourprimary advertising customers are advertising agencies, and many of those agencies are owned, affiliated with or controlled by a small number of largeholding companies. If any of these large consolidated enterprises decided to reduce or terminate their business relationship with us for any reason, it maylead to a material adverse impact on our revenue and profitability. Further, the growing trend of consolidation of digital advertising networks, exchanges, web portals, search engines and web publishers, could harmour business. For example, we are currently able to serve, track and manage advertisements for our customers on a variety of networks and websites. Theseenterprises could substantially impair our ability to operate if they decide not to permit us to serve, track or manage advertisements on their websites, if theydevelop ad placement systems that are incompatible with our ad serving systems or if they use their market power to force their customers to use certainvendors on their networks or websites.If the demand for digital advertising does not continue to grow or customers do not embrace our solutions, this could have a material adverse effect onour business and financial condition. A substantial portion of our revenues is derived from the sale of our digital advertising solutions. We have made significant investments in ourability to deliver high impact advertising which is compatible on multiple devices and channels through internal development efforts and acquisitions.While the digital advertising market has grown in past years, it is possible it will not continue to grow, or that the demand for advertising in a specificmedium or channel (such as mobile advertising) does not grow. Additionally, even if the general market for digital advertising continues to grow, customersmight not embrace our solutions. If there is a reduction in general demand for digital advertising, decreases in spending for specific channels or solutions, orthe demand for our specific solutions and offerings does not develop, revenues could decline or otherwise adversely affect our business.Due to our evolving business model and rapid changes in the Internet and the nature of services, it is difficult to accurately predict our futureperformance and may be difficult to increase revenue or profitability. We do not have an extensive history of ongoing operations in digital advertising from which to predict our future performance, and making suchpredictions, particularly with regard to the effect of our efforts to aggressively increase the distribution and profitability is very complex and challenging. Ifwe are unable to continuously improve our systems and processes, this could have a negative effect on our competitiveness and ability to service and attractcustomers. If we are unsuccessful in doing so in a timely fashion, we may not be able to achieve revenue growth or increase our profitability.We depend on publishers to supply us with advertising inventory in order for us to deliver advertising campaigns in a cost-effective manner. We rely on a diverse set of publishers or digital media properties, including direct publishers, advertising exchange platforms and other platformsthat aggregate advertising inventory, to provide us with high-quality digital advertising inventory on which we deliver ads, collectively referred to as“supply sources”. The future growth of our advertising business will depend, in part, on our ability to enter into and maintain successful businessrelationships with these supply sources. If we are unsuccessful in establishing or maintaining our relationships with supply sources on commerciallyreasonable terms, or if these relationships are not profitable for us and competitive in the marketplace, our ability to compete in the marketplace or to growour revenues from our advertising business could be impaired. Our supply sources typically supply their advertising inventory to us on a non-exclusive basisand are not required to provide any minimum amounts of advertising inventory to us or to provide us with a consistent supply of advertising inventory, atany predetermined price. Supply sources often maintain relationships with various sources of demand that compete with us, and it is easy for supply sourcesto quickly shift their advertising inventory among these demand sources, or to shift inventory to new demand sources, without notice or accountability. Supply sources may also seek to change the terms at which they offer inventory to us, or they may allocate their advertising inventory to our competitors whooffer more favorable economic terms or whose offerings are considered more beneficial. Supply sources may also elect to sell all, or a portion, of theiradvertising inventory directly to advertisers and agencies, or they may develop their own competitive offerings, which could diminish the demand for oursolutions. In addition, significant supply sources within the industry may enter into exclusivity arrangements with our competitors, which could limit ouraccess to a meaningful supply of inventory. As a result of all of these factors, our supply sources may not supply us with sufficient amounts of qualityadvertising inventory in order for us to fulfill the demands of our advertising customers. 6 Additionally, our ability to access advertising inventory in a cost-effective manner may be constrained or affected as a result of a number of otherfactors, including, but not limited to: ·Supply sources may impose significant restrictions on the advertising inventory they sell, or may impose other unfavorable terms andconditions on the advertisers using their sites or platforms. For example, these restrictions may include frequency caps, prohibitions onadvertisements from specific advertisers or specific industries, or restrictions on the use of specified creative content or advertising formats,which would restrain our supply of available inventory. ·Supply sources that offer online content and mobile applications may shift from an advertising-based monetization method to a pay forcontent/services model, thereby reducing available inventory. ·Social media platforms may be successful in keeping users within their sites via products such as Facebook's Instant Articles. If, as a result,users are not on the open web, advertising inventory on the open web (including our publisher’s sites) may be reduced or may become lessattractive to our advertising customers. ·Supply sources may be reluctant to adopt certain of our proprietary ad formats for a variety of reasons (such as user preference changesmaking such ad formats less desirable) resulting in limited advertising inventory supply for such formats and inhibiting our ability to scalesuch formats. In summary, if our supply sources terminate or reduce our access to their advertising inventory, increase the price of inventory or place significantrestrictions on the sale of their advertising inventory, or if platforms or exchanges terminate our access to them, we may not be able to replace this withinventory from other supply sources that satisfy our requirements in a timely and cost-effective manner. If any of this happens, our revenue could decline orour cost of acquiring inventory could increase, lowering our operating margins.Our advertising business depends on a strong brand reputation, and if we are not able to maintain and enhance our brand, our business and results ofoperations could be materially adversely affected. Maintaining and enhancing our Undertone brand is an important aspect of our efforts to attract and expand our agency, advertiser, and publisherbase. We have spent, and expect to continue spending considerable sums and other resources on the establishment, building and maintenance of ourUndertone brand, as well as on enhancing market awareness of it. Our Undertone brand, however, may be negatively impacted by a number of factors,including but not limited to, fraudulent, inappropriate or misleading content on publisher sites on which we serve ads, service outages, product malfunctions,data protection and security issues, and exploitation of our trademarks by others without our permission. If we are unable to maintain or enhance ourUndertone brand in a cost-effective manner, our business and operating results could be materially adversely affected.We may be unable to deliver advertising in a brand-safe environment, which could harm our reputation and cause our business to suffer. It is important to advertisers that their advertisements are not placed in or near content that is unlawful or would be deemed offensive orinappropriate by their customers, or near other advertisements for competing brands or products. Unlike advertising in other mediums, we cannot guaranteethat all online advertisements will appear in a brand-safe environment. If we are not successful in delivering ads in such an environment, our reputation couldsuffer and our ability to attract potential advertisers and retain and expand business with existing advertisers could be harmed, or our customers may seek toavoid payment or demand refunds, any of which could harm our business and operating results. 7The advertising industry is highly competitive. If we cannot compete effectively in this market, our revenues are likely to decline. We face intense competition in the marketplace. We operate in a dynamic market that is subject to rapid development and introduction of newtechnologies, products and solutions, changing branding objectives and evolving customer demands, all of which affect our ability to remain competitive.There are a large number of digital media companies and advertising technology companies that offer services similar to ours and that compete with us forfinite advertising budgets and for limited inventory from publishers. There are also a large number of niche companies that are competitive with us, as theyprovide a subset of the services that we provide. Some of our existing and potential competitors are better established, benefit from greater name recognition,may offer solutions and technologies that we do not offer or that are more evolved than ours, and have significantly more financial, technical, sales andmarketing resources than we do. In addition, some competitors, particularly those with a larger and more diversified revenue base and a broader offering, mayhave greater flexibility than we do to compete aggressively on the basis of price and other contract terms. Additionally, companies that do not currentlycompete with us in this space may change their services to be competitive if there is a revenue opportunity, and new or stronger competitors may emergethrough consolidations or acquisitions. Given that the barriers to entering the digital advertising market are relatively low, the number of competitors mayincrease even further. If our digital advertising platform and solutions are not perceived as competitively differentiated or we fail to develop adequately tomeet market evolution, we could lose customers and market share or be compelled to reduce our prices and harm our operational results.Our digital advertising business is susceptible to seasonality, unexpected changes in campaign size and prolonged cycle time, which could affect ourbusiness, results of operations and ability to repay indebtedness when due. The revenue of our digital advertising business is affected by a number of factors, including: ·Historically, our Undertone business experienced the lowest sales in the first quarter and the highest sales in the fourth quarter, with thesecond and third quarters being slightly stronger than the first quarter. Fourth quarter sales tend to be the highest due to a need to utilizeremaining budgets, and increased customer advertising volumes during the holiday selling season. ·Product and service revenues are influenced by political advertising, which generally occurs every two years. ·In any single period, product and service revenues and delivery costs are subject to significant variation based on changes in the volumeand mix of deliveries performed during such period. ·Revenues are subject to the changes of brand marketing efforts, i.e., when and where brands choose to spend their money in a given year. ·Advertising customers generally retain the right to supplement, extend, or cancel existing advertising orders at any time prior to theircompletion, and we have no control over the timing or magnitude of these revenue changes. ·Relative complexity of individual advertising formats, and the length of the creative design process. As a result, our profit from these operations is seasonal, with the fourth quarter accounting for as much as almost half our annual profits and the firstquarter possibly resulting in a loss. Moreover, due to the long receivable cycle and shorter payable cycle, this seasonality puts strains on our cash flowthrough the first and second quarter of every year. These factors could adversely impact our cash flow and our ability to meet our financial debt covenants.If our campaigns are not able to reach certain performance goals or we are unable to measure certain metrics proving achievement of those goals, thiscould 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 userengagement, clicks or conversions, to validate the value proposition, particularly as or services can be costlier. We may have difficulty achieving or provingthese performance levels for a variety of reasons. Additionally, customers may request measurement of campaign metrics that are difficult or impossible tomeasure. For example, it may be difficult to track view-ability on our proprietary high-impact ad units, either directly or through a third-party vendor.Accordingly, we may not be able to reach customer requested performance levels or measure certain metrics, which could cause customers to cancelcampaigns, not provide repeat business or request make-goods or refunds. 8Increased availability of advertisement-blocking technologies could limit or block the delivery or display of advertisements by our solutions, whichcould undermine the viability of our business. Advertisement-blocking technologies, such as mobile apps or browser extensions that limit or block the delivery or display of advertisements, arecurrently available for desktop and mobile users. Further, new browsers and operating systems, or updates to current browsers or operating systems, offerusers the ability to block ads. If these technologies become widespread, the commercial viability of the current Internet ad-supported model may beundermined, thereby adversely affecting our business, financial condition and results of operations.Our advertising business depends on our ability to collect and use data, and any limitation on the collection and use of this data could significantlydiminish the value of our solutions and cause us to lose customers and revenue. In most cases, when we deliver an ad, we are often able to collect certain information about the content and placement of the ad and the interactionof the user with the ad, such as whether the user clicked on the ad or watched a video. We may also be able to collect information about the user's location. Aswe collect and aggregate this data provided by billions of ad impressions, we analyze the data in order to optimize the placement and scheduling of adsacross all of our advertising inventory and to measure performance. Our ability to access and utilize such data is crucial. Our publishers or advertisers might decide not to allow us to collect some or all of this data or might limit our use of this data. Our ability to eithercollect or use data could be restricted by new laws or regulations, changes in technology, operating system restrictions, requests to discontinue using certaindata, restrictions imposed by advertisers and publishers, industry standards or consumer choice. Interruptions, failures or defects in our data collection,analysis and storage systems could also limit our ability to aggregate and analyze data from our advertisers' advertising campaigns. If this happens, we may not be able to optimize ad placement for the benefit of our advertisers, which could render our solutions less valuable andpotentially result in loss of clients and a decline in revenues. Additional details are provided below under "--Risks Related to our TechnologicalEnvironment”. If we do not continue to innovate and provide high-quality advertising solutions and services, we may not remain competitive, and our business andresults 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 consumerengagement. We face intense competition in the marketplace and are confronted by rapidly changing technology, evolving industry standards and consumerneeds, and the frequent introduction of new products and solutions by competitors, as well as publishers themselves, that we must adapt and respond to inorder to remain competitive. Therefore, our continued success depends in part upon our ability to develop new solutions and technologies, enhance ourexisting solutions and expand the scope of our offerings to meet the evolving needs of the industry. As a result, we must continue to invest significantresources in research and development in order to enhance our technology and our existing solutions and services, and introduce new high-quality solutionsand services. Our operating results will also suffer if our innovations are not responsive to the needs of our customers, are not appropriately timed with marketopportunity or are not effectively brought to market. If we are unable to accurately forecast market demands or industry changes, if we are unable to developor introduce our solutions and services in a timely manner, or if we fail to provide quality solutions and services that run without complication or serviceinterruptions, we may damage our brand and our ability to retain new and existing customers or attract new customers. As online advertising technologiescontinue to develop, our competitors may be able to offer solutions that are, or that are perceived to be, substantially similar or better than those offered byus. Customers will not continue to do business with us if our solutions do not deliver advertisements in an appropriate and effective manner or if theadvertising we deliver does not generate the desired results. If we are unable to meet these challenges, our business and results of operations could bematerially adversely affected. Commoditization in digital advertising could have a material adverse effect on our business. There has been commoditization of services provided in digital advertising, resulting in margin pressure. If such commoditization occurs in areassuch as high impact, this could have a material adverse effect on our business. 9Sales efforts with advertising and ad agency customers, and with advertisers of mobile applications, require significant time and expense and mayultimately be unsuccessful. Contracting with new advertising and ad agency customers requires substantial time and expense, and we may not be successful in establishing newrelationships or in maintaining current relationships. It is often difficult to identify, engage, and market to potential advertising customers who are unfamiliarwith our brand or services, and we may spend substantial time and resources educating customers about our unique offerings, including providingdemonstrations and comparisons against other available solutions, without ultimately achieving the desired results. Furthermore, many of our advertisingclients’ purchasing and design decisions generally require input from multiple internal and external parties of these clients, requiring that we identify thoseinvolved in the purchasing decision and devote a sufficient amount of time to presenting our services to each of those decision-making individuals. If we arenot successful in streamlining our sales processes with potential clients in a cost effective manner, or if our efforts are unsuccessful, our ability to grow ourbusiness may be adversely affected.Our growth depends in part on the success of our relationships with advertising agencies. While we work with some brand advertisers directly, our primary advertising customers are advertising agencies, who are paid by their brandcustomers to develop their media plans. The agencies, in turn, contract with third parties, like us, to execute and fulfill their brands’ advertising campaigns.As a result, our future growth will depend, in part, on our ability to enter into and maintain successful business relationships with advertising agencies. Identifying agencies, engaging in sales efforts, and negotiating and documenting our agreements with agencies requires significant time andresources. These relationships may not result in additional brand customers or campaigns for our business, and may not ultimately enable us to generatesignificant revenues. Our contracts with advertising agencies are typically non-exclusive and the agencies often work with our competitors or offercompeting services. When working with agencies to deliver campaigns on behalf of their brand customers, we generally bill the agency for our products and services,and in most cases, the brand has no direct contractual commitment to us to make any payments. Furthermore, some agencies contractually limit their paymentobligations to us through sequential liability provisions, whereby the agency is liable for payment if, and only to the extent, that the agency collects acorresponding payment from the brand on whose behalf our services were rendered. These circumstances may result in longer collections periods, increasedcosts associated with pursuing brands directly for payments, or our inability to collect payments. In summary, if we are unsuccessful in establishing ormaintaining our relationships with these agencies on commercially reasonable terms, or if these relationships are not profitable for us, our ability to competein the marketplace or to grow our revenues could be impaired and our operating results would suffer. If the demand for social advertising does not grow as expected, or if our solution for advertising through those channels is not competitive, the revenuesrelated to our Make Me Reach business could decline. We leverage the capabilities of our Make Me Reach business to offer our customers the ability to deliver ads on social platforms. The future growthof this market could be negatively impacted if consumers decrease the time they spend engaging on social media sites or mobile applications. In addition, thedemand for advertising in these channels, and the success of our social and in-app solutions in particular, may be constrained by the limited flexibility,increased requirements that are associated with advertising in these environments, and the social platforms working through independent service providers. As a result, it is difficult to predict the future customer demand for our solution, and there is no guarantee that we will be able to generate significant revenuesfrom our Make Me Reach business. In addition to the foregoing, our Make Me Reach business is dependent on our ability to create, optimize, and manageour customers’ advertising campaigns on Facebook, Instagram, and Twitter. As a result, we are subject to each social network’s respective terms andconditions governing our ability to access and utilize its platform. Our Make Me Reach business would be harmed if any of these social networksdiscontinues our partnership, makes changes to its platform, or modifies the terms and standards applicable to its marketing partners or to advertising on itsplatform in general. Moreover, these social networks may develop offerings or features that compete with our solution, or may otherwise make changes totheir platforms that would render our social advertising solution obsolete. Further, consumers may migrate away from Facebook, Twitter, and Instagram toother social networking platforms with which we are not affiliated, which would in turn decrease the demand for our solutions. Any of these outcomes couldcause demand for our Make Me Reach solutions to decrease, our development costs to increase, and our results of operations and financial condition to beharmed. 10Search BusinessOur search business depends heavily upon revenues generated from our agreement with Microsoft, and any adverse change in that agreement couldadversely affect our business or its financial condition and results of operations. We are highly dependent on our search services agreement with Microsoft Online Inc. ("Microsoft"), which covers substantially all of our searchbusiness and has a term from January 1, 2015 until December 31, 2017, which upon mutual agreement may be renewed until December 31, 2018. In 2016, oursearch services agreement with Microsoft accounted for 49% of our revenues. If our agreement with Microsoft is terminated, substantially amended or not renewed on favorable terms, we would experience a material decrease inour search-generated revenues or the profits it generates and would be forced to seek alternative search providers, at less competitive terms. There are very fewcompanies in the market that provide Internet search and advertising services similar to those provided by Microsoft, with Google and Yahoo being the mainrelevant ones. These three companies are substantially the only participants in western markets, and competitors do not offer as much coverage throughsponsored links or searches. Although we have agreements with Google and Yahoo, we do not generate a significant amount of revenue from them. If we failto quickly locate, negotiate and finalize alternative arrangements, or if we do, but the alternatives do not provide for terms that are as favorable as thosecurrently provided and utilized, and we would experience a material reduction in our revenues and, in turn, our business, financial condition and results ofoperations would be adversely affected.Our search revenue business is highly reliant upon a small number of publishers, who account for the substantial majority of pay-outs to publishers andgenerate most of our revenues. If we were to lose all or a significant portion of those publishers as customers, our revenues and results of operationswould be materially adversely affected. In 2016, the top ten publishers distributing our search properties accounted for approximately 45% of our revenues, of which the top five publishersrepresented approximately 40% of our revenues (the two largest representing 19% and 10%, and the next three representing 5%, 4% and 2% of our revenues).There can be no assurance that these existing publishers will continue to distribute our search properties or continue utilizing the revenue-generatingmonetization services at the levels they did in the past or at all. The loss of a substantial portion of our relationships with these publishers, or a substantialreduction in their level of activity, could cause a material decline in our revenues and profitability.The generation of revenues from search activity through large publishers is subject to competition. If we cannot compete effectively in this market, ourrevenues are likely to decline. We obtain a significant portion of our revenues through designating the Company as the default search provider during the download andinstallation of our publishers’ products and the use of our search services and the subsequent searches performed by the users thereof. We therefore areconstantly looking for more ways to distribute our search services through various means and collaborations. To achieve these goals, we rely heavily onthird-party publishers to distribute our search syndication services as a value-added component of their own offerings. There are other companies thatgenerate revenue from searches, some of them with a more significant presence than ours and with greater capability to offer substantially more content. Thelarge search engine companies, including Google, Microsoft and others, have become increasingly aggressive in their own search service offerings. Inaddition, we need to continually maintain the technological advantage of our platform, products and other services in order to attract partners to our offering. If the search engine companies engage more direct relationships with publishers or we are unable to maintain the technological advantage to service ourpartners, we may lose both existing and potential new partner publishers and our ability to generate revenues will be negatively impacted.In order to receive advertisement-generated revenues from our search partners, we depend, in part, on factors outside of our control. The amount of revenue we receive from each of our search partners depends upon a number of factors outside of our control, including the amountthese search providers charge for advertisements, the efficiency of the search provider’s system in attracting advertisers and syndicating paid listings inresponse to search queries and parameters established by it regarding the number and placement of paid listings displayed in response to search queries. Inaddition, each of the search partners makes judgments about the relative attractiveness (to the advertiser) of clicks on paid listings from searches performedon our search assets, and these judgments factor into the amount of revenue we receive. Changes in the efficiency of a search partner’s 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 could have an adverseeffect on our business, financial condition and our results of operations. Such changes could come about for a number of reasons, including general marketconditions, competition or policy and operating decisions made by Microsoft or Google or our other search partners. 11We have experienced a decline in our search business, and market perception of this business has not been favorable. As a result, we may have difficultystemming this decline or offsetting it by entering new markets. For a prolonged period of time, we have experienced a decline in revenues and an increasingly negative market bias regarding a major source ofrevenues - our search-generated revenues. The combination of these factors presents challenges in: ·recruiting and retaining highly qualified personnel for our current business and the new business we are developing; ·attracting and acquiring customers and partners to support and expand our business; and ·raising funds or utilizing our equity to facilitate acquisitions. If we cannot maintain the commitment of our employees, recruit new employees and make the acquisitions required to enhance our organic activity,we may not be able to stem the decline in this business and our financial results will suffer. Our reputation has been and may continue to be negatively impacted by a number of factors, including the negative reputation associated withsearch assets, search setting take-over, toolbars, product and service quality concerns, complaints by publishers or end users or actions brought by them or bygovernmental or regulatory authorities and related media coverage and data protection and security breaches. Moreover, the inability to develop andintroduce monetization products and services that resonate with consumers and/or the inability to adapt quickly enough (and/or in a cost effective manner) toevolving changes to the Internet and related technologies, applications and devices, could adversely impact our reputation, and, in turn, our business,financial condition and our results of operations.We rely heavily on the ability to offer our search properties to our publishers and, as a result of such action, to obtain and retain the search propertiesof their users. Should this method of distribution be blocked, constrained, limited, materially changed, based on a change of guidelines, technology orotherwise (as has happened in the past), or made redundant by any of our search engine providers, particularly Microsoft, our ability to generaterevenues from our users' search activity could be significantly reduced. Our search distribution agreements with Microsoft and other search partners require that we comply with certain guidelines promulgated by them forthe use of their brands and services, including the manner in which their paid listings are displayed within search results, and that we establish guidelines togovern certain activities of third parties to whom we syndicate the search services, including the manner in which those parties drive search traffic to theirwebsites and display paid listings. Subject to certain limitations, our search partners may unilaterally update their policies and guidelines, which could, inturn, require modifications to, or prohibit and/or render obsolete certain of our products, services and practices, which could be costly to address or otherwisehave an adverse effect on our business, our financial condition and results of operations. Noncompliance with our search partners' guidelines, particularlyMicrosoft’s, by us or by third parties to which we syndicate paid listings or by the publishers through whom we secure distribution arrangements for ourproducts 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 thereimbursement of funds paid to us by our search partners, or the imposition of additional restrictions on our ability to syndicate paid listings or distribute ourproducts or the termination of the search distribution agreement by our search partners. These guidelines, with respect to method of distribution, homepage resets and default search resets to search engine services, were changed by bothMicrosoft and Google numerous times in the past, having negative revenue implications. Since then, both companies have continued instituting otherchanges to the policies governing their relationship with search partners. As a result, fewer and fewer substantial publishing partners are compliant with these requirements, resulting in the termination of our businessrelationship with them and increasing the concentration of revenues generated through each of our remaining partners. Should any of our large partnershipsbe deemed non-compliant, blocked or partner with another provider, it could be difficult to replace the revenues generated by that partnership and we wouldexperience a material reduction in our revenues and, in turn, our business, financial condition and results of operations would be adversely affected. 12Should the providers of the underlying platforms, particularly browsers, further block, constrain or limit our ability to offer or change searchproperties, or materially change their guidelines, technology or the way they operate, our ability to generate revenues from our users' search activitycould be significantly reduced. As we provide our services through the Internet, we are reliant on our ability to work with the different Internet browsers. The Internet browser marketis extremely concentrated with Google’s Chrome, Microsoft’s Internet Explorer and Mozilla’s Firefox, accounting for over 83% of the desktop browsermarket in the aggregate as of December 2016, and Google’s Chrome alone accounting for over 63%, based on StatCounter reports. In June 2014, Googlerestricted the ability to install multi-purpose extensions onto its Chrome Internet browser. As most of our products and services offered such multi-purposeextensions at that time, this policy shift adversely affected our business. Since then, Google continued to further change and update its policies andtechnology in general, and specifically those relating to Chrome. Each such change further limits and constrains our ability to offer or change searchproperties. The operating system market is very concentrated as well, with Microsoft Windows dominating over 83% of the market as of December 2016, andApple operating systems accounting for 11% of that market, based on StatCounter reports. In addition, during 2015, Microsoft announced changes to itsbrowser modifier detection criteria and issued a new operating system (Windows 10), which includes a new default Internet browser (Edge). Some of thesechanges limited our ability to maintain our users' browser settings. If Microsoft, Google, Apple or other companies that provide Internet browsers, operatingsystems or other underlying platforms, effectively further restrict, discourage or otherwise hamper companies, like us, from offering or changing searchproperties, this would continue to cause a material adverse effect on our revenue and our financial results. Currently most individuals are using mobile devices to access the Internet, while substantially all of our search revenue generation and services arecurrently not usable on mobile platforms. Also, web-based software and similar solutions are impacting the attractiveness of downloadable softwareproducts. The market related to personal computers ("PCs") has accounted for substantially all our search revenues. As Internet usage continues to shift fromPCs to mobile devices, there is downward pressure on desktop revenues in general and in our search business in particular. Recently, the number ofindividuals who access the Internet through devices other than PCs, such as mobile phones, tablets, etc., has increased dramatically. While we have begundeveloping other models and solutions for mobile platforms and we have acquired Make Me Reach SAS ("Make Me Reach") and Interactive Holding Corp.and its subsidiaries (collectively referred to as "Undertone"), our search and application services are not yet compatible with these alternative platforms anddevices and substantially all of our search revenue to date has come from PCs. If this trend towards using the Internet on non-PC devices accelerates, some ofour services will become less relevant and may fail to attract advertisers and web traffic. In addition, even if consumers do use our services, our revenuegrowth will still be adversely affected if we do not rapidly and successfully implement revenue-generating models for mobile platforms. Web (or "cloud") based software and similar solutions do not require the user to download software and thus provide a very portable and accessiblealternative for PCs, as compared to downloadable software. While there are advantages and disadvantages to each method and system and the markets foreach of them remain large, the market for web-based systems is growing at the expense of downloadable software. Should this trend accelerate faster than ourpartners’ ability to provide differentiating advantages in their downloadable solutions, this could result in fewer downloads of their products and lowersearch revenues-generated through the download of these products. See "Item 4.B Business Overview — Competition" for additional discussion of ourcompetitive market.Our software or provision of search services or advertising is occasionally blocked by software or utilities designed to protect users' computers, therebycausing our business to suffer. Some of our products and offerings are viewed by some third parties, such as anti-virus software providers, as promoting or constituting "malware" or"spamming," or unjustly changing the user’s computer settings. As a result, our software, provision of search services or advertising is occasionally blockedby software or utilities designed to detect such practices. If this phenomenon increases or if we are unable to detect and effectively deal with suchcategorization of our products, we may lose both existing and potential new users and our ability to generate revenues will be negatively impacted.Risks related to our Financial and Corporate StructureIf we fail to comply with the terms or covenants of our debt obligations, our financial position may be adversely affected. As of December 31, 2016, we had convertible bonds outstanding having an aggregate principal amount of approximately ILS 114.8 million (thenequivalent to approximately $29.9 million). In the event that we fail to comply with the terms or covenants of our convertible bonds and cannot obtain awaiver of noncompliance, we may be required to immediately repay all of our outstanding indebtedness and the bond trustee may be entitled to exercise theremedies available under the applicable agreement and applicable law. 13 In addition, if Undertone fails to comply with the terms and/or covenants of its $42.5 million secured loan agreement, Undertone may be required toimmediately repay all of its outstanding indebtedness under the loan agreement. There is no assurance that we will be able to generate the cash necessary to fund the scheduled payments from operations or from additional equityor debt financings or other funding sources or that our operating results will enable us to meet our covenants and financial ratios as of the end of each fiscalquarter. Our inability to comply with the repayment schedules, covenants or financial ratios under our debt instruments could result in a material adverseeffect on us.The terms of our credit facilities contain restrictive covenants that limit our business, financing and investing activities. The terms of our credit facilities include customary covenants that impose restrictions on our business, financing and investing activities, subject tocertain exceptions or the consent of our lenders including, among other things, limits on our ability to incur additional debt, create liens, enter into merger,acquisition and divestiture transactions, pay dividends and engage in transactions with affiliates. The credit facilities also contain certain customaryaffirmative covenants and events of default. Our ability to comply with the covenants may be adversely affected by events beyond our control, including butnot limited to, economic, financial and industry conditions. A breach of any credit facility covenant that is not cured or waived may result in an event ofdefault. This may allow our lenders to terminate the commitments under the credit facilities, declare all amounts outstanding under the credit facilities,together with accrued interest, to be immediately due and payable, and to exercise other rights and remedies. If this occurs, we may not be able to refinancethe accelerated indebtedness on acceptable terms, or at all, or otherwise repay the accelerated indebtedness, which could have a material adverse effect on us. In addition, certain covenants also limit our flexibility in planning for, or reacting to, changes in our business and our industry. Complying withthese covenants limits our tax planning abilities, our ability to pay dividends and may impair our ability to finance our future operations, acquisitions orcapital needs or to engage in other favorable business activities.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 oursenior management could create a gap in management and could result in the loss of expertise necessary for us to execute our business strategy and therebyadversely affect our business. On September 27, 2016, we announced that Josef Mandelbaum, serving as our Chief Executive Officer since July 2010, will beleaving his position after a transition period of up to several months. On January 23, 2017, our board of directors appointed Mr. Doron Gerstel as ChiefExecutive Officer, effective April 2, 2017. From January 23, 2017 to April 1, 2017, our Chief Financial Officer, Mr. Yacov Kaufman, also serves as interimChief Executive Officer. We do not currently have "key person" life insurance with respect to any of our senior management. Further, our ability to execute our business strategy also depends on our ability to continue to attract, retain and motivate qualified and skilledtechnical and creative personnel and skilled management, marketing and sales personnel, as well as third party technology vendors. 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 keyemployees and to attract new skilled employees as well. If we cannot attract and retain additional key employees or if we lose one or more of our current keyemployees, our ability to develop or market our products and attract or acquire new users could be adversely affected. Although we have establishedprograms to attract new employees and provide incentives to retain existing employees, particularly senior management, we cannot be assured that we will beable to retain the services of senior management or other key employees as we continue to integrate the Undertone business or that we will be able to attractnew employees in the future who are capable of making significant contributions. See "Item 6 Directors, Senior Management and Employees." 14We have acquired and may continue to acquire other businesses. These acquisitions divert a substantial part of our resources and managementattention and have in the past and could in the future, cause further dilution to our shareholders and adversely affect our financial results. We acquired Smilebox in August 2011, SweetIM in November 2012, ClientConnect in January 2014, Grow Mobile in July 2014, Make Me Reach inFebruary 2015, and Undertone in November 2015, and we may continue to acquire complementary products, technologies or businesses. Seeking andnegotiating 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. Inaddition, we lost and might continue to lose key employees and vendors while integrating new organizations and may not effectively integrate the acquiredproducts, technologies or businesses or achieve the anticipated revenues or cost benefits, and we might harm our relationships with our future or currenttechnology suppliers. Future acquisitions could result in customer dissatisfaction or vendor dissatisfaction or performance problems with an acquiredproduct, 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 typicallyfor intangible assets. We may incur contingent liabilities, amortization expenses related to intangible assets or possible impairment charges related togoodwill or other intangible assets (which has occurred in the past) or become subject to litigation or other unanticipated events or circumstances relating tothe acquisitions, and we may not have, or may not be able to enforce, adequate remedies in order to protect our Company. Moreover, acquisitions may end upin losses, unwanted results and waste of valuable resources, time and money.In the past, we have recognized impairments in the carrying value of goodwill. Additional such charges in the future could negatively affect our resultsof 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 historicalacquisitions. The carrying value of goodwill represents the fair value of an acquired business in excess of identifiable assets and liabilities as of theacquisition date. The carrying value of intangible assets with identifiable useful lives represents the fair value of relationships, content, domain names andacquired technology, among other things, as of the acquisition date, and are amortized based on their economic lives. Goodwill that is expected to contributeindefinitely to our cash flows is not amortized but must be evaluated for impairment at least annually. If the carrying value exceeds current fair value asdetermined based on the discounted future cash flows of the related business, the goodwill or intangible asset is considered impaired and is reduced to fairvalue via a non-cash charge to earnings. Events and conditions that could result in impairment include adverse changes in the regulatory environment, areduced market capitalization or other factors leading to reduction in expected long-term growth or profitability. Goodwill impairment analysis andmeasurement is a process that requires significant judgment. Our stock price and any control premium are factors affecting the assessment of the fair value ofour underlying reporting units for purposes of performing any goodwill impairment assessment. In the last two years, our stock price experienced volatility and our public market capitalization decreased to a value below the net book carryingvalue of our equity, triggering the need for an assessment more frequently than annually. While no impairment was recorded in 2016, it is possible thatanother material change could occur in the future. In particular, our Undertone reporting unit is at risk for goodwill impairment based on the volatility of thisbusiness and the market within which it competes. See Item 5A. “Operating and Financial Review and Prospects-Operating Results-Critical AccountingPolicies and Estimates-Goodwill.” We will continue to conduct impairment analyses of our goodwill on an annual basis, unless indicators of possibleimpairment arise that would cause a triggering event, and we would be required to take additional impairment charges in the future if any recoverabilityassessments reflect estimated fair values that are less than our recorded values. Further impairment charges with respect to our goodwill would have a materialadverse effect on our results of operations and shareholders' equity in future periods.Several shareholders may be able to control us. As a result of the ClientConnect Acquisition, several shareholders of Conduit became significant shareholders of Perion, including threeshareholders that each beneficially own more than 10% of our outstanding shares. One of these shareholders is currently a member of our board of directors.See Item 7.A for more information. To our knowledge, these shareholders are not party to a voting agreement with respect to our shares. However, should theyor other large shareholders decide to act together, they may have the power to control the outcome of matters submitted for the vote of shareholders. Inaddition, such share ownership may make certain transactions more difficult and result in delaying or preventing a change in control of the company, unlessapproved by them. 15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 2016 andMarch 2017, our share price has fluctuated from a high of $2.56 to a low of $0.94, and the average trading volume has been relatively low. The followingfactors may cause significant fluctuations in the market price of our ordinary shares: ·fluctuations in our quarterly revenues and earnings or those of our competitors; ·pending sales into the market due to the sale of large blocks of shares, due to, among other reasons, the expiration of any tax-related or contractuallock–ups with respect to significant amounts of our ordinary shares; ·shortfalls in our operating results compared to levels forecast by us or securities analysts; ·changes in our senior management; ·changes in regulations or in policies of search engine companies or other industry conditions; ·mergers and acquisitions by us or our competitors; ·technological innovations; ·the introduction of new products; ·the conditions of the securities markets, particularly in the Internet and Israeli sectors; and ·political, economic and other developments in Israel and worldwide. In addition, share prices of many technology companies in general and ad-tech companies in particular fluctuate significantly for reasons that maybe unrelated or disproportionate to operating results. The factors discussed above may depress or cause volatility to our share price, regardless of our actualoperating 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 andresources. Historically, public companies that experience periods of volatility in the market price of their securities and/or engage in substantial transactionsare sometimes the target of class action litigation. Companies in the Internet and software industry, such as ours, are particularly vulnerable to this kind oflitigation 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 defendantin this type of litigation in connection with our acquisition of ClientConnect, and although this lawsuit was dismissed, in the future litigation of this sortcould result in considerable costs and a diversion of management’s attention and resources. Future sales of our ordinary shares could reduce our stock price. At the closing of the ClientConnect Acquisition on January 2, 2014, we issued 54.75 million of our ordinary shares to ClientConnect’s shareholders.The ordinary shares were issued pursuant to an exemption from registration under the Securities Act and are not subject to any resale restrictions under U.S.law, except for the volume limitations under Rule 144 applicable to our affiliates. Since January 2, 2016, the resale of such ordinary shares is no longersubject to any lock-up restrictions. As of March 1, 2017, there were outstanding an aggregate of 11,863,941 options to purchase our ordinary shares. As these securities vest, theholders thereof could sell the underlying shares without restrictions, except for the volume limitations under Rule 144 applicable to our affiliates. As part of the consideration for the acquisition of Grow Mobile, we issued 600,100 ordinary shares in 2014, 342,329 ordinary shares in 2015 and2,503 ordinary shares in 2016, to the security holders of Grow Mobile. Such shares generally became freely tradable under U.S. law six months followingissuance. On February 10, 2015, as part of the consideration for the acquisition of Make Me Reach, we issued 1,437,510 ordinary shares to the security holdersof Make Me Reach and an additional 18,998 ordinary shares to certain employees. On February 17, 2016, we issued to certain former Make Me Reachsecurity holders and to certain employees an additional 288,478 ordinary shares. Such shares are generally not subject to any resale restrictions under U.S.law. 16 Pursuant to a registration rights undertaking described in Item 10.C "Material Contracts— J.P. Morgan Registration Rights Agreement," we haveregistered with the Securities and Exchange Commission 5,219,879 of our ordinary shares issued in a private placement in 2015, which may be resold by theholders thereof from time to time. Finally, our Series L Bonds are convertible into an aggregate of approximately 3.4 million ordinary shares, at a conversion price of ILS 33.605 pershare (approximately $8.74 per share as of December 31, 2016). These shares would be issued pursuant to an exemption from registration under the SecuritiesAct and will not be subject to any resale restrictions under U.S. law, 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 andadversely affect the market price of our ordinary shares. Furthermore, the market price of our ordinary shares could drop significantly if our executive officers,directors, or certain large shareholders sell their shares, or are perceived by the market as intending to sell them. Exchange rate fluctuations may harm our earnings and asset base if we are not able to hedge our currency exchange risks effectively. A significant portion of our costs, primarily personnel expenses, are incurred in ILS. Inflation in Israel may have the effect of increasing the U.S.dollar cost of our operations in Israel. Further, whenever the U.S. dollar declines in value in relation to the ILS, it will become more expensive for us to fundour operations in Israel. A revaluation of one percent of the ILS as compared to the U.S. dollar could impact our income before taxes by approximately $0.3million. The exchange rate of the U.S. dollar to the ILS has been volatile in the past, increasing by approximately 12% in 2014, increasing by less than 1% in2015, and decreasing by approximately 1% in 2016. As of December 31, 2016, we had a foreign currency net liability of approximately $31.1 million (whichnumber includes approximately $29.8 million in long-term ILS denominated convertible bonds that we issued in Israel in September 2014), and our totalforeign exchange loss was approximately $0.8 million for the year ended December 31, 2016. To assist us in assessing whether or not, and how to, hedge risksassociated with fluctuations in currency exchange rates, we have contracted a consulting firm proficient in this area, and are generally implementing theirproposals. However, due to market conditions, volatility and other factors, we do not always implement our consultant’s proposals in full and ourconsultant’s proposals do not always prove to be effective and may even prove harmful. We may incur losses from unfavorable fluctuations in foreigncurrency exchange rates. See "Item 11 Quantitative and Qualitative Disclosure of Market Risks" for further discussion of the effects of exchange ratefluctuations on earnings.We do not intend to pay cash dividends. Although we have paid cash dividends in the past, our current policy is to retain future earnings, if any, for funding growth and reducing our debt. Ifwe 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 betweenthe date of purchase and the date of sale of our shares. See "Item 8.A Consolidated Statements and Other Financial Information — Policy on Dividend Distribution" for additional information regardingthe 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 ourpublic company reporting requirements as well as costs associated with corporate governance and public disclosure requirements, including requirementsunder the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Listing Rules of the NASDAQ StockMarket, regulations of the SEC, the provisions of the Israeli Securities Law that apply to dual listed companies (companies that are listed on the Tel AvivStock Exchange ("TASE") and another recognized stock exchange located outside of Israel) and the provisions of the Israeli Companies Law 5759-1999 (the"Companies Law") that apply to us. For example, as a public company, we have created additional board committees and elected two external directorspursuant to the Companies Law. We have also contracted an internal auditor and a consultant for implementation of and compliance with the requirementsunder the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act requires an annual assessment by our management of our internal control over financialreporting of the effectiveness of these controls as of year-end. In connection with our efforts to comply with Section 404 and the other applicable provisionsof the Sarbanes-Oxley Act, our management and other personnel devote a substantial amount of time, and we have hired, and may need to hire, additionalaccounting and financial staff to assure that we comply with these requirements. The additional management attention and costs relating to compliance withthe foregoing requirements could adversely affect our financial results. See "Item 5 Operating and Financial Review and Prospects — Overview — Generaland Administrative Expenses" for a discussion of our increased expenses as a result of being a public company. 17If we lose our foreign private issuer status under U.S. federal securities laws, we would incur additional expenses associated with compliance with theU.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 theperiodic disclosure and current reporting requirements applicable to U.S. domestic issuers. If we lost our foreign private issuer status, we would be required tocomply with the reporting and other requirements applicable to U.S. domestic issuers, which are more extensive than the requirements for foreign privateissuers and more expensive to comply with. The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities ofshareholders 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 ofassociation, articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities ofshareholders 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 andfulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his or her power in the company, including, amongother things, in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder votes atthe general meeting with respect to, among other things, amendments to a company’s articles of association, increases in a company’s authorized sharecapital, mergers and actions and transactions involving interests of officers, directors or other interested parties which require shareholders’ approval. There islittle 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 certainNASDAQ requirements. As a foreign private issuer, whose shares are listed on NASDAQ, we are permitted to follow certain home country corporate governance practicesinstead of certain requirements contained in the NASDAQ listing rules. We follow the requirements of the Companies Law in Israel, rather than comply withthe NASDAQ requirements, in certain matters, including with respect to the quorum for shareholder meetings, sending annual reports to shareholders, andshareholder approval with respect to certain issuances of securities. See "Item 16.G – Corporate Governance" in this Annual Report for a more completediscussion 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 thefuture to follow home country practice with regard to other matters as well. Accordingly, our shareholders may not be afforded the same protection asprovided under NASDAQ’s corporate governance rules to shareholders of U.S. domestic companies. Provisions of our articles of association and Israeli law may delay, prevent or make an acquisition of our Company difficult, which could prevent achange 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 fortransactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. Inaddition, our articles of association contain provisions that may make it more difficult to acquire our Company, such as provisions establishing a staggeredboard. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. See "Item 10.BMemorandum and Articles of Association — Approval of Related Party Transactions" and "Item 10.E – Taxation — Israeli Taxation" for additionaldiscussion 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 andtherefore depress the price of our shares.If we do not satisfy the NASDAQ requirements for continued listing, our ordinary shares could be delisted from NASDAQ. Our listing on the NASDAQ Stock Market is contingent on our compliance with the NASDAQ's conditions for continued listing. One of suchconditions is maintaining a bid price for our ordinary shares of least $1.00 per share. In November 2016, the price of our ordinary shares temporarily droppedbelow $1.00 per share. If our ordinary shares trade for 30 consecutive business days below the $1.00 minimum closing bid price requirement, NASDAQ willsend us a deficiency notice giving us 180 calendar days to regain compliance, such as by effecting a reverse share split. There is no assurance that our shareprice will not fall below $1.00 per share or, if it does, that we will be able to regain compliance in a timely manner. If our ordinary shares are delisted fromNASDAQ, their liquidity and price may decline. 18Our ordinary shares are traded on more than one market and this may result in price variations. Our ordinary shares are traded on the NASDAQ Global Select Market and on the TASE. Trading in our ordinary shares on these markets is effected indifferent currencies (U.S. dollars on NASDAQ and ILS on the TASE) and at different times (resulting from different time zones, different trading days per weekand 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 andIsrael. 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 onthe other market. Risks related to our Technological EnvironmentOur financial performance may be materially adversely affected by information technology, insufficient cyber security and other business disruptions. Our business is constantly challenged and may be impacted by disruptions, including information technology attacks or failures. Cybersecurityattacks, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronicsecurity breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of dataand overloading our servers and systems with communications and data. Unidentified groups have hacked numerous Internet websites and servers, includingour own, for various reasons, political, commercial and other. Given the unpredictability of the timing, nature and scope of such disruptions, we couldpotentially be subject to substantial system downtimes, operational delays, other detrimental impacts on our operations or ability to provide products andservices to our customers, the compromising of confidential or otherwise protected information, destruction or corruption of data, security breaches, othermanipulation or improper use of our systems and networks, financial losses from remedial actions, loss of business or potential liability, and/or damage to ourreputation, any of which could have a material adverse effect on our cash flows, competitive position, financial condition and results of operations. Althoughthese attacks cause certain difficulties, they have not had a material effect on our business, financial condition or results of operations. However, there can beno assurance that such attacks can be prevented or that any such incidents will not have a material adverse effect on us in the future.If we fail to detect or prevent suspicious traffic or other invalid traffic or engagement with our ads, or otherwise prevent against malware intrusions, wecould lose the confidence of our advertisers, damage our reputation and be responsible to make-good or refund demands, which would cause ourbusiness to suffer. Our business relies on delivering positive results to our advertisers and their consumers. We are exposed to the risk of fraudulent or suspiciousimpressions, clicks or conversions that advertisers may perceive as undesirable. Such fraudulent activities may occur when a software program, known as abot, spider or crawler, intentionally simulates user activity causing impressions, ad engagements or clicks to be counted as real users. Such malicious softwareprograms can run on single machines or on tens of thousands of machines, making them difficult to detect and filter. If fraudulent or other malicious activity is perpetrated by others, and we are unable to detect and prevent it, the affected advertisers may experienceor perceive a reduced return on their investment. High levels of invalid or fraudulent activity could lead to dissatisfaction with our advertising services,refusals to pay, refund or make-good demands, or withdrawal of future business. Any of these occurrences could damage our brand and lead to a loss of ourrevenue.A loss of the services of our technology vendors could adversely affect execution of our business strategy. Should some of our technology vendors terminate their relationship with us, our ability to continue the development of some of our products couldbe adversely affected, until such time that we find adequate replacement for these vendors, or until such time that we can continue the development on ourown. 19We may not be able to enhance our platform to keep pace with technological and market developments in our evolving industry. To keep pace with technological developments, satisfy increasing developer requirements, maintain the attractiveness and competitiveness of ouradvertising solutions and ensure compatibility with evolving industry standards, we will need to regularly enhance our platform and develop and introducenew services on a timely basis. We also must update our software to reflect changes in advertising networks' application programming interfaces ("APIs"),technological integration and terms of use. The success of any enhancement or new solution depends on several factors, including timely completion,adequate quality testing, appropriate introduction and market acceptance. Our inability, for technological, business or other reasons, to timely enhance,develop, introduce and deliver compelling advertising services in response to changing market conditions and technologies or evolving expectations ofadvertisers or consumers could hurt our ability to grow our mobile marketing business.Our products operate in a variety of computer and device configurations and could contain undetected errors or defects that could result in productfailures, lost revenues and loss of market share. Our software and advertising products may contain undetected errors, failures or defects, especially when the products are first introduced or whennew versions are released. Our customers’ computer and other device environments are often characterized by a wide variety of standard and non-standardconfigurations that make pre-release testing for programming or compatibility errors very difficult and time-consuming. As a result, there could be errors orfailures in our products. In addition, despite testing by us and beta testing by some of our users, errors, failures or bugs may not be found in new products orreleases until after commencement of commercial sales. In the past, we have discovered software errors, failures and defects in certain of our product offeringsafter their full introduction and have experienced delayed or lost revenues during the period required to correct these errors. Errors, failures or defects in products released by us could result in negative publicity, product returns, make-goods, refunds, loss of or delay inmarket acceptance of our products, loss of competitive position or claims by customers. Alleviating any of these problems could require significant expenseand resources and could cause interruptions to our products.We depend on third party Internet and telecommunication providers to operate our websites and web-based services. Temporary failure of theseservices, including catastrophic or technological interruptions, would materially reduce our revenues and damage our reputation, and securingalternate sources for these services could significantly increase our expenses and be difficult to obtain. Our third-party Internet and telecommunication providers may experience disruptions, which would reduce our revenues and increase our costs. Wealso rent the services of approximately 400 servers located around the world, mainly through Amazon Web Services. While we believe that there are manyalternative providers of hosting and other communication services available to us, the costs associated with any transition to a new service provider could besubstantial. Furthermore, although we maintain back-up systems for most aspects of our operations, we could still experience deterioration in performance orinterruption in our systems, delays, and loss of critical data and registered users and revenues. Our backup systems are also not fully redundant and our disaster recovery planning may not be sufficient for all eventualities. In addition, we mayhave inadequate insurance coverage to compensate us for losses from a major interruption. Furthermore, interruptions in our website could materially impedeour ability to attract new companies to advertise on our website and to maintain relationships with current advertisers. Difficulties of this kind could damageour reputation, be expensive to remedy and curtail our growth.The introduction of new browsers and other popular software products may materially adversely affect user engagement with our search services. Users typically install new software and update their existing software as new or updated software is introduced online by third-party developers. Inaddition, 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 manysoftware vendors that distribute their solutions online also offer search services alongside their primary software product, users often replace our searchservices with those provided by these vendors in the course of installing new software or updating existing software. After users have installed searchsolutions 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 togenerate the revenues that we anticipate from our users and result in a decline in our user base. Finally, although we constantly monitor the compatibility ofour Internet search services and related solutions with such new versions and upgrades, we may not be able to make the required adjustments to ensureconstant availability and compatibility of such solutions. 20Risks related to Regulatory ChangesRegulatory, legislative, or self-regulatory developments relating to e-commerce, Internet advertising, privacy and data collection and protection, anduncertainties regarding the application or interpretation of existing laws and regulations, could harm our business. Our business is conducted through the Internet and therefore, among other things, we are subject to the laws and regulations that apply to e-commerce and online businesses around the world. These laws and regulations are becoming more prevalent in the United States, Europe, Israel, Canada andelsewhere and may impede the growth of the Internet and consequently our services. These regulations and laws may cover user privacy, data collection andprotection, location of data storage and processing, content, use of "cookies," access changes, "net neutrality," pricing, advertising, distribution of "spam,"intellectual property, distribution of products, protection of minors, consumer protection, taxation and online payment services. Many areas of the law affecting the Internet remain largely unsettled, even in areas where there has been some legislative action. This uncertaintycan be compounded when services hosted in one jurisdiction are directed at users in another jurisdiction. For instance, European data protection rules mayapply to companies which are not established in the European Union. The anticipated General Data Protection Regulation (expected to go take effect in May2018) will likely have an even wider territorial scope and more stringent user consent requirements. Further, it will include stringent operational requirementsfor companies that process personal data and will contain significant penalties for non-compliance. Also in other relevant subject matters, such as cybersecurity, e-commerce, copyright and cookies, new European initiatives have been announced by the European regulators. To further complicate matters inEurope, member States have some flexibility when implementing European Directives, which can lead to diverging national rules. Similarly, there have beenlaws and regulations adopted in Israel and throughout the United States that would impose new obligations in areas such as privacy, in particular protectionof personally identifiable information, and liability for copyright infringement by third parties. Therefore, it is difficult to determine whether and howexisting laws, such as those governing intellectual property, privacy, data collection and protection, libel, marketing, data security and taxation, apply to theInternet and our business. Due to rapid changes in technology and the inconsistent interpretations of privacy and data protection laws, we may be required to materiallychange the way we do business. For example, we may be required to implement physical, administrative and technological security measures that differ fromthose we have now, such as different data access controls or encryption technology. In addition, we use cloud-based computing, which is not withoutsubstantial risk, particularly at a time when businesses of almost every kind are finding themselves subject to an ever- expanding range of state and federaldata security and privacy laws, document retention requirements, and other standards of accountability. Compliance with such existing and proposed lawsand regulations can be costly and can delay, or impede the development of new products, result in negative publicity, increase our operating costs, requiresignificant management time and attention and subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modifyor cease existing business practices. In addition to compliance with government regulations, Undertone voluntarily participates in several trade associations and industry self-regulatorygroups that promulgate best practices or codes of conduct relating to digital advertising, including the Internet Advertising Bureau, the Network AdvertisingInitiative and the Digital Advertising Alliance. We could be adversely affected by new or altered self-regulatory guidelines that are inconsistent with ourcurrent practices or in conflict with applicable laws and regulations in the United States, Europe, Israel and other regions where we do business. If we fail toabide by or are perceived as not operating in accordance with industry best practices or any industry guidelines or codes with regard to privacy or theprovision of Internet advertising, our reputation may suffer and we could lose relationships with both buyers and sellers. For more information regarding government regulations to which we are subject, see "Item 4.B Business Overview — Government Regulation" foradditional discussion of applicable regulations affecting our business.If we are deemed to be non-compliant with applicable data protection laws, or are even thought to be so, our operating results could be materiallyaffected. We collect, use, and maintain certain data about our customers, partners, employees and consumers. Such collection and maintenance of informationis subject to data protection laws and regulations. A failure to comply with applicable regulations could result in class actions, governmental investigationsand orders, and criminal and civil liabilities, which could materially affect our operating results. Moreover, concerns about our collection, use, sharing orhandling of such data or other privacy related matters, even if unfounded, could harm our reputation and operating results. 21 Although we strive to comply with the applicable laws and regulations and use our best efforts to comply with the evolving global standardsregarding privacy and inform our customers of our business practices prior to any installations of our product and use of our services, it is possible that theselaws may be interpreted and applied in a manner that is inconsistent with our data collection, use and preservation practices or that it may be argued that ourpractices do not comply with other countries' privacy and data protection laws and regulations. In addition to the possibility of fines, such a situation couldresult in the issuance of an order requiring that we change our data collection or retention practices, which in turn could have a material adverse effect on ourbusiness. See "Item 4.B Business Overview — Government Regulation" for additional discussion of applicable regulations.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 inliability to pay sales, use, and other taxes (plus interest and penalties) on prior sales and a decrease in our future sales revenue. In general, the digital advertising business has not traditionally paid sales tax. However, a successful assertion by one or more cities, states orcountries that digital advertising services should be subject to such taxes or that we are not providing digital advertising services, but other services andshould 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 infuture 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. 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 thecircumstances in which a vendor of goods and services must collect such taxes. Furthermore, legislative proposals have been introduced in Congress thatwould provide states with additional authority to impose such taxes. Accordingly, it is possible that either federal or state legislative changes may require usto collect additional sales and similar taxes from our clients in the future which could impact our future sales, and therefore result in a material adverse effecton our revenue.Under current Israeli, U.S., U.K., French and German 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 orformer. We have entered into non-competition and non-solicitation agreements with many of our employees and vendors. These agreements prohibit ouremployees and vendors, if they terminate their relationship with us, from competing directly with us, working for our competitors, or soliciting currentemployees away from us for a limited period. Under current Israeli, U.S., U.K., French and German law, we may be unable to enforce these agreements, inwhole 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 competitiveactivities 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 asthe secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, wemay be unable to prevent our competitors from benefiting from the expertise of our former employees.Risks Related to our Intellectual Property Our proprietary information and intellectual property may not be adequately protected and thus our technology may be unlawfully copied by ordisclosed to other third parties. We regard the protection of our proprietary information and technology and other intellectual property as critical to our success. We strive toprotect our intellectual property rights by relying on contractual restrictions, trade secret law and other common law rights, as well as federal andinternational intellectual property registrations and the laws on which these registrations are based. However, the technology we use and incorporate into ourofferings may not be adequately protected by these means. We generally enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreementswith parties with whom we conduct business, in order to limit access to, and the disclosure and use of, our proprietary information. However, we may not besuccessful in executing these agreements with every party who has access to our confidential information or contributes to the development of ourintellectual property. In addition, those agreements that we do execute may be breached, and we may not have adequate remedies for any such breach. Further, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of ourintellectual property and/or trade secrets, or deter independent development of similar intellectual property by others. 22 In addition, there is no assurance that any existing or future patents or trademarks will afford adequate protection against competitors and similartechnologies. Our intellectual property rights may be challenged, invalidated, or circumvented by others or invalidated through administrative process orlitigation. Effective trademark and patent protections are expensive to develop and maintain, as are the costs of defending our rights. Further, we cannotassure you that competitors will not infringe our patents or trademarks, or that we will have adequate resources to enforce our rights.Third party claims of infringement or other claims against us could require us to redesign our products, seek licenses, or engage in costly intellectualproperty 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 similarproducts and services, which may lead to claims of intellectual property infringement and potentially litigation. We have been, and in the future may be, thesubject of claims that our solutions and underlying technology infringe or violate the intellectual property rights of others. Regardless of whether such claimshave any merit, these claims are time-consuming and costly to evaluate and defend, and the outcome of any litigation is inherently uncertain. Our businessmay suffer if we are unable to resolve infringement or misappropriation claims without major financial expenditures or adverse consequences. If it appears necessary or desirable, we may seek to obtain licenses to use intellectual property rights that we are allegedly infringing, may infringe ordesire to use. Although holders of these types of intellectual property rights often offer these licenses, we cannot assure you that licenses will be offered orthat the terms of any offered licenses will be acceptable to us. Our failure to obtain a license for key intellectual property rights such as these from a thirdparty for technology or content, sound, or graphic used by us could cause us to incur substantial liabilities and to suspend the development and sale of ourproducts. Alternatively, we could be required to expend significant resources to re-design our products or develop non-infringing technology. If we areunable to re-design our products or develop non-infringing technology, our revenues could decrease and we may not be able to execute our businessstrategy. On December 22, 2015, Adtile Technologies Inc. filed a lawsuit against Perion and Undertone alleging, inter alia, that Undertone’s UMotionadvertising format, “hand phone” image, and use of the full tilt library infringes on its intellectual property. On February 3, 2016, Adtile Technologies Inc.filed a motion for preliminary injunction to, inter alia, prevent Undertone from creating or selling motion-activated advertisements. On June 23, 2016, thecourt denied Adtile’s motion for a preliminary injunction. On June 24, 2016, the court (i) granted Perion’s motion to dismiss and (ii) granted Undertone’smotion to stay the action and compel arbitration. If we do not prevail in this case, we may incur monetary damages and/or be prohibited from using certainintellectual property. We may also become involved in litigation in connection with the brand name rights associated with our Company name or the names of ourproducts. We do not know whether others will assert that our Company name or any of our brands name infringe(s) their trademark rights. In addition, nameswe choose for our products may be alleged to infringe names held by others. If we have to change the name of our Company or products, we may experience aloss in goodwill associated with our brand name, customer confusion and a loss of sales. Any lawsuit, regardless of its merit, would likely be time-consuming,expensive to resolve, and require additional management time and attention.We use certain "open source" software tools that may be subject to intellectual property infringement claims or that may subject our derivative worksor products to unintended consequences, possibly impairing our product development plans, interfering with our ability to support our clients orrequiring us to allow access to the source code of our products or necessitating that we pay licensing fees. Certain of our products contain open source code and we may use more open source code in the future. In addition, certain third party software thatwe embed in our products contains open source code. Open source code is code that is covered by a license agreement that permits the user to liberally use,copy, modify and distribute the software without cost, provided that users and modifiers abide by certain licensing requirements. The original developers ofthe open source code provide no warranties on such code. As a result of the use of open source software, we could be subject to suits by parties claiming ownership of what they believe to be their proprietarycode or we may incur expenses in defending claims alleging non-compliance with certain open source code license terms. In addition, third party licensors donot provide intellectual property protection with respect to the open source components of their products, and we may be unable to be indemnified by suchthird-party licensors in the event that we or our customers are held liable in respect of the open source software contained in such third party software. If weare 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 removethe open source code from our products. Such events could disrupt our operations and the sales of our products, which would negatively impact our revenuesand cash flow. 23 Moreover, under certain conditions, the use of open source code to create derivative code may obligate us to make the resulting derivative codeavailable 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 tovarying interpretations. If we are required to publicly disclose the source code for such derivative products or to license our derivative products that use anopen source license, our previously proprietary software products may be available to others without charge. If this happens, our customers and ourcompetitors may have access to our products without cost to them which could harm our business. Certain open source licenses require as a condition to use,modification and/or distribution of such open source that proprietary software incorporated into, derived from or distributed with such open source bedisclosed or distributed in source code form, be licensed for the purpose of making derivative works, or be redistributable at no charge. The foregoing mayunder certain conditions be interpreted to apply to our software, depending upon the use of the open source and the interpretation of the applicable opensource licenses. We monitor our use of open source code to avoid subjecting our products to conditions we do not intend. The use of open source code, however,may ultimately subject some of our products to unintended conditions so that we are required to take remedial action that may divert resources away from ourdevelopment efforts.Risks Related to the Geographical Location of our Operations Our business is significantly reliant on the North American market. Any material adverse change in that market could have a material adverse effecton our results of operations. Our revenues have been concentrated within the North American market, accounting for approximately 81% of our revenues for 2016. A significantreduction in the revenues generated in such market, whether as a result of a recession that causes a reduction in advertising expenditures generally orotherwise, which causes a decrease in our North American revenues, could have a material adverse effect on our results of operations.Our international operations involve special risks that could increase our expenses, adversely affect our operating results and require increased timeand 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 ofour revenues from users outside the United States. Our international operations and sales are subject to a number of inherent risks, including risks with respectto: ·potential loss of proprietary information due to piracy, misappropriation or laws that may be less protective of our intellectual property rightsthan those of the United States; ·costs and delays associated with translating and supporting our products in multiple languages; ·foreign exchange rate fluctuations and economic instability, such as higher interest rates and inflation, which could make our products moreexpensive in those countries; ·costs of compliance with a variety of laws and regulations; ·restrictive governmental actions such as trade restrictions; ·limitations on the transfer and repatriation of funds and foreign currency exchange restrictions; ·compliance with different consumer and data protection laws and restrictions on pricing or discounts; ·lower levels of adoption or use of the Internet and other technologies vital to our business and the lack of appropriate infrastructure to supportwidespread Internet usage; ·lower levels of consumer spending on a per capita basis and fewer opportunities for growth in certain foreign market segments compared to theUnited States; ·lower levels of credit card usage and increased payment risk; ·changes in domestic and international tax regulations; and ·geopolitical events, including war and terrorism. 24 Political, economic and military instability in the Middle East may impede our ability to operate and harm our financial results. Our principal executive offices are located in Israel. Accordingly, political, economic and military conditions in the Middle East may affect ourbusiness directly. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors,Hamas (an Islamist militia and political group in the Gaza Strip) and Hezbollah (an Islamist militia and political group in Lebanon). Recent politicaluprisings, social unrest and violence in various countries in the Middle East and North Africa, including Israel’s neighbors Egypt and Syria, are affecting thepolitical stability of those countries. This instability may lead to deterioration of the political relationships that exist between Israel and these countries andhave raised concerns regarding security in the region and the potential for armed conflict. In addition, Iran has threatened to attack Israel and is believed to bedeveloping nuclear weapons. Iran is also believed to have a strong influence among the Syrian government, Hamas and Hezbollah. These situations maypotentially escalate in the future to more violent events which may affect Israel and us. These situations, including conflicts which involved missile strikesagainst civilian targets in various parts of Israel, such as the Gaza conflict in the summer of 2014, have in the past negatively affected business conditions inIsrael. Any hostilities involving Israel could have a material adverse effect on our business, operating results and financial condition. Although suchhostilities did not in the past have a material adverse impact on our business, we cannot guarantee that hostilities will not be renewed and have such an effectin the future. Ongoing and revived hostilities and the attempts to resolve the conflict between Israel and its Arab neighbors often results in politicalinstability that affects the Israeli capital markets and can cause volatility in interest rates, exchange rates and stock market quotes. The political and securitysituation in Israel may result in parties with whom we have contracts claiming that they are not obligated to perform their commitments under thoseagreements pursuant to force majeure provisions. These or other Israeli political or economic factors could harm our operations and product development andcause our sales to decrease. Since our headquarters are located in Israel, we could experience serious disruptions if acts associated with this conflict result inany serious damage to our facilities. Our business interruption insurance may not adequately compensate us for losses that may occur and any losses ordamages incurred by us could have a material adverse effect on our business. Any future armed conflicts in the region would likely negatively affect businessconditions, harm our results of operations and make it more difficult for us to raise capital. Several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may imposerestrictions on doing business with Israel and Israeli companies whether as a result of hostilities in the region or otherwise. In addition, there have beenincreased efforts by activists to cause companies and consumers to boycott Israeli companies based on Israeli government policies. Such actions, particularlyif they become more widespread, may adversely impact our business and results of operations. Investors and our shareholders generally may have difficulties enforcing a U.S. judgment against us, our executive officers or our directors or assertingU.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 Israeliexperts, if any, named in this annual report, substantially all of whom reside outside of the United States, may be difficult to obtain within the United States. Furthermore, because a significant portion of our assets and investments, and substantially all of our directors, officers and Israeli external experts arelocated 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 inIsrael. 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 tobring 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 afact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. 25 Subject to specified time limitations and legal procedures, under the rules of private international law currently prevailing in Israel, Israeli courtsmay 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 monetaryor compensatory judgment in a non-civil matter, provided that the following key conditions are met: ·subject to limited exceptions, the judgment is final and non-appealable; ·the judgment was given by a court competent under the laws of the state of the court and is otherwise enforceable in such state; ·the judgment was rendered by a court competent under the rules of private international law applicable in Israel; ·the laws of the state in which the judgment was given provide for the enforcement of judgments of Israeli courts; ·adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence; ·the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel; ·the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; and ·an action between the same parties in the same matter was not pending in any Israeli court at the time the lawsuit was instituted in the U.S. court.The tax benefits available to us for activities in Israel require us to meet several conditions and may be terminated or reduced in the future, whichwould 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, thatgenerally 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 ourfinancial 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 weoperate, 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 berequired to refund tax benefits already received. Any of the following could have a material effect on our overall effective tax rate: ·we may be unable to meet the requirements for continuing to qualify for some programs; ·these programs and tax benefits may be unavailable at their current levels; or ·we may be required to refund previously recognized tax benefits if we are found to be in violation of the stipulated conditions. Additional details are provided in "Item 5 – Operating and Financial Review and Products" under the caption "Taxes on income," in "Item 10 –Additional Information" under the caption "Israeli taxation, foreign exchange regulation and investment programs" and in Note 14 to our FinancialStatements. If we are characterized as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences. Non-U.S. corporations generally may be characterized as a passive foreign investment company ("PFIC") for any taxable year, if, after applyingcertain look through rules, either (1) 75% or more of such company’s gross income is passive income, or (2) at least 50% of the average value of all suchcompany’s assets (determined on a quarterly basis) are held for the production of, or produce, passive income. If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of ourordinary shares taxed at ordinary income rates, rather than capital gain rates. Similar rules apply to distributions that are "excess distributions." In addition,both gains upon disposition and amounts received as excess distributions could be subject to an additional interest charge. A determination that we are aPFIC could also have an adverse effect on the price and marketability of our ordinary shares. We believe that in 2016 we were not a PFIC. Whether we are a PFIC is based upon certain factual matters such as the valuation of our assets. Incalculating the value of our assets, we value our total assets, in part, based on our total market capitalization. We believe this valuation approach isreasonable. There is no assurance whether the IRS will challenge our valuations. If the IRS were to successfully challenge such valuations, we maypotentially be classified as a PFIC for the 2016 taxable year or prior taxable years. Furthermore, there can be no assurance that we will not become a PFIC inthe future. See a discussion of our PFIC status in Item 10.E under "U.S. Federal Income Tax Considerations – Passive Foreign Investment CompanyConsiderations."26 ITEM 4. INFORMATION ON THE COMPANY A. HISTORY AND DEVELOPMENT OF THE COMPANY Our History We were incorporated in the State of Israel in November 1999 under the name Verticon Ltd., changed our name to IncrediMail Ltd. in November2000 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 26HaRokmim Street, Holon 5885849, Israel. Our phone number is 972-73-3981000. Our website address is www.perion.com. The information on our websitedoes 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 340Madison Avenue, 8th Floor, New York, NY 10173-0899. 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 Tel Aviv Stock Exchange. On August 31, 2011, we completed the purchase of Smilebox Inc., a Washington corporation. On November 30, 2012, we completed the purchase of SweetIM Ltd., a Belize company that wholly owns SweetIM Technologies Ltd., an Israelicompany. Both companies were dissolved during 2015. On January 2, 2014, we completed the purchase of ClientConnect Ltd., an Israeli company that wholly owns ClientConnect Inc., a Delawarecorporation, and ClientConnect B.V., a Netherlands company. On July 15, 2014, we completed the purchase of Grow Mobile, Inc., a Delaware corporation. On February 10, 2015, we completed the purchase of Make Me Reach SAS, a French company. On November 30, 2015, we completed the purchase of Interactive Holding Corp., a Delaware corporation, and its subsidiaries (collectively referredto as "Undertone"). See "Recent Developments". Principal Capital Expenditures In 2014, capital expenditures consisted of $10.9 million for leasehold improvements and furnishing related to our new headquarters office in Holon,as well as investments in computer hardware and software. In 2015 and 2016, capital expenditures consisted of $2.0 million and $1.5 million, respectively,mainly from the acquisition of computer systems and software applications. In 2017, we expect to continue our growth strategy of acquiring products and businesses, in addition to organic capital investments. Our organicinvestments are expected to consist primarily of acquiring computer hardware, software, peripheral equipment and installation, all of which are expected tobe financed by our existing resources. We currently expect that outside of possible acquisitions of products and companies, our capital expenditures will beapproximately at the same level as in 2016. To date, we have financed our general capital expenditures with cash generated from operations and debt andequity financings. To the extent we acquire new products and businesses, these acquisitions may be financed by any of, or a combination of, cash generatedfrom operations, or issuances of equity or debt securities. Recent Developments Undertone Acquisition On November 30, 2015, we executed an Agreement and Plan of Merger (the “Merger Agreement”) according to which we completed the acquisitionof Interactive Holding Corp., a Delaware corporation, and its subsidiaries (collectively referred to as "Undertone") for a final purchase price of $119.8 millionpursuant to an amendment to the Merger Agreement described below. Total consideration was comprised of $89.1 million paid in cash at closing, $3.0million to be paid in installments over the period ending September 2017, for which a liability of $2.8 million was recorded at fair value ($1.0 million waspaid in 2016); $5.9 million deferred payments primarily excess tax advances (out of which $5.3 million was paid in 2016), a $20.0 million deferredconsideration payment, bearing 10% annual interest, to be paid in November 2020, and $16.0 million retained as a holdback to cover potential claims untilMay 2017. On August 2, 2016, we executed an amendment to the Merger Agreement, pursuant to which we paid $22.0 million and eliminated approximately$36.0 million of obligations ($35.5 million at fair value). Under said amendment, we reserved our right to claim indemnification only for certain materialpotential claims until May 2017. 27 Concurrently with the closing, Undertone entered into a new secured credit agreement with its existing lenders for $50.0 million, due in quarterlyinstallments from March 2016 to November 2019. On March 4, 2016, Undertone entered into an amendment to the secured credit agreement. The amendmentto the credit agreement adds a $10.0 million revolving loan facility. Additionally, the amendment postpones the commencement date of a few of Undertone’sundertakings and covenants and increases Undertone’s ability to invest in some of its subsidiaries. In addition, on May 8, 2016, Undertone entered into asecond amendment to the secured credit agreement further postponing the commencement of some of Undertone’s undertakings. Furthermore, on October 7,2016, Undertone entered into a third amendment reducing the revolving loan facility amount to $2.5 million and amending financial covenants. As ofDecember 31, 2016, the unpaid balance of the secured credit facility was $42.5 million. The credit agreement is not guaranteed by Perion, but it is secured by a pledge on Perion's indemnification rights under the Undertone acquisitionagreement. In connection with the acquisition, 1,131,000 options to purchase ordinary shares were granted to employees of Undertone and remainoutstanding as of March 1, 2017, and a warrant to purchase 200,000 ordinary shares to a third-party vendor that provides development services to Undertone. During July 2016, Mr. Corey Ferengul stepped down as Chief Executive Officer of Undertone. After an interim period in which our former ChiefExecutive Officer also served as Undertone’s Chief Executive Officer, on October 2016, our Chief Strategy and Development Officer, Mr. Robert Schwartzwas appointed as Undertone’s President. Private Placement On December 3, 2015, we completed a private placement of 4,436,898 ordinary shares for gross proceeds of $10.125 million pursuant to a securitiespurchase agreement with J.P. Morgan Investment Management Inc., as investment advisor to the National Council for Social Security Fund and 522 FifthAvenue Fund L.P. (collectively referred to as the "Investors"). The purchase price per share was $2.282, which was the average closing price of an ordinaryshare on the Nasdaq Global Select Market for the 30 trading days ending on December 1, 2015. According to a one-time price adjustment mechanism in thesecurities purchase agreement, on September 1, 2016, the per share purchase price was adjusted downward by 15%, and we issued to the Investors 782,981additional ordinary shares for no additional consideration. In connection with the private placement, we entered into a registration rights agreement with the Investors pursuant to which we granted to theInvestors certain registration rights related to the ordinary shares issued in the private placement. The Investors' shares were registered for resale on a shelfregistration statement on Form F-3 on March 31, 2016. We also agreed to other customary obligations regarding registration, including indemnification andmaintenance of the applicable registration statement. Bank Leumi credit facility On November 22, 2015, we borrowed $19.9 million under a new credit facility from LeumiTech, the technology banking arm of Bank Leumi le-Israel B.M. The credit facility was secured by a lien on the accounts receivable of ClientConnect Ltd., an Israeli subsidiary, from its current and futurebusiness clients and was guaranteed by Perion. The credit facility matured and was repaid in November 2016, and we have secured a new credit facility of $7million from LeumiTech, under similar terms. As of December 31, 2016, this credit facility was fully drawn down, and it was subsequently fully repaid duringJanuary 2017. Growmobile Engagement Sale On March 17, 2016, we decided to discontinue the operations of the engagement product of Growmobile business (“GME”) and to redeploy certainparts of the mobile marketing platform so that it will no longer function as an independent business. On July 25, 2016, we executed an Asset PurchaseAgreement, pursuant to which we sold the GME business operation, including the intellectual property, know-how and technology primarily related to GME,for $1.75 million. Chief Executive Officer Replacement On September 27, 2016, we announced that Josef Mandelbaum, serving as our Chief Executive Officer since July 2010, will be leaving his positionafter a transition period of up to several months. On January 23, 2017, our board of directors appointed Mr. Doron Gerstel as Chief Executive Officer,effective April 2, 2017. From January 23, 2017 to April 1, 2017, our Chief Financial Officer, Mr. Yacov Kaufman, also serves as interim Chief ExecutiveOfficer. 28 B.BUSINESS OVERVIEW General Perion is a global technology company that delivers high-quality advertising solutions to brands and publishers. Perion is committed to providingoutstanding execution, from high-impact ad formats to branded search and a unified social and mobile programmatic platform. OverviewOur Undertone business specializes in providing digital advertising solutions for the world’s leading brands, agencies and publishers. We provideour customers with high-quality, cross-screen digital advertising through desktop, mobile (web and app) and social channels across a portfolio of mediaproperties. Our ad formats, coupled with award-winning creative, are designed to attract and engage audiences, helping brands connect to consumers anddrive business results. We leverage our proprietary technology platform to provide our customers with a full range of tools and capabilities that enable theright creative product is delivered to the right audience at the right time. Our customers receive dedicated support throughout the full campaign cycle,including planning, creative services, client solutions, campaign management, performance and insights. We have long-standing relationships with majorbrands and advertising agencies across the United States and Europe. Our proprietary social marketing platform offers a dashboard for marketers that makes media buying more efficient on Facebook, Instagram, Twitterand other social networks and platforms. With our social marketing platform, customers can acquire users from the industry’s top-performing social traffic sources including Facebook,Twitter and Instagram, and can access their performance data and revenue information in one place, enabling them to make better, quicker and moreintelligent decisions and helping mobile application advertisers improve user acquisition, maximize their return on investment and ultimately meet theirbusiness goals. The platform allows advertisers to control their marketing expenditures, planning and strategy in-house and utilize the technical tool to createbetter operational marketing efficiencies. We offer our customers the opportunity to easily and efficiently increase their expenditures, reduce churn andimprove retention through engagement campaigns. Customers also receive ongoing analysis and optimization of their campaigns for increased return oninvestment and scaling of their key performance indicator goals. While we focus on the advertising market, we continue to generate significant revenues and profits by providing search-based monetizationsolutions for our publishers with enhanced analytics capabilities to track and monitor their business performance. From the end user perspective, we enableusers to configure their browser settings through the search setting dialogue so they are powered by our search-engine partners. Publishers can choose toimplement our solution into or with their products and services (mobile and desktop) and to monetize their users’ search assets. Our search related products enable end users to, among other things, replace their search assets with ours, where users may conduct searches or followlinks to advertisements that advertisers may display. They also allow publishers the ability to set up syndicated searches on their individual websites and tomonetize their users’ other search assets. In addition, we are still generating a small portion of our revenues through our toolbar platform, which allowspublishers to create, implement and distribute web browser toolbars, as well as through our consumer products; Smilebox, a leading photo sharing and socialexpression product, and IncrediMail, a unified messaging application that enables consumers to manage multiple email accounts in one place with an easy-to-use interface and extensive personalization features. Currently these products account for only 5% of our revenues and are profitable. Our consumerproducts are currently available in seven languages in addition to English. Prices and license fees for our premium products range between $5 and $50,varying based on market, length of license period and whether the products are offered together. Markets In general, we work with advertising agencies, advertisers, publishers and other inventory suppliers, and search partners. While we work with someadvertisers directly, our primary advertising customers are advertising agencies, who are paid by brand advertisers to develop their media plans. We workwith these advertisers and agencies to plan, design, deliver, manage, and measure their digital advertising campaigns. 29 We generally do not enter into long term contracts with our advertising customers. We charge customers variable rates based on ad formats,campaign complexity, and creative requirements. We then engage in a consultative sales process to determine the best offering for that customer. Ourcustomers generally purchase our products based on impressions served for each ad type, either using traditional insertion orders, or alternatively,programmatically, with options for managed service or self-service. Programmatic customers have access to the same ad formats as traditional customers butcan leverage programmatic direct delivery in order to increase automation and efficiency of their campaigns. All our advertising customers receive supportthroughout the campaign cycle, with service and support teams including planning, client solutions, campaign management, performance, and insights. In the past, we generated the majority of our revenues from services agreements with our search partners. Search-generated revenues accounted for85% and 78% of our revenues in 2014 and 2015, respectively. In 2016, as we shifted our focus to advertising outside of search, search-generated revenuesaccounted for 50% of our revenues, and we expect this percentage to continue to decline in the future as the other revues grow. Through our searchtechnology, including syndication, we offer end users the ability to search the Internet via easily embedded search boxes powered by premium searchcompanies, including Microsoft, Google and Yahoo, and depending on the search partner powering the search and the location in which the search wasinitiated, we receive either a fixed price, pay-per-search fee or portion of the revenues generated by these companies through the search process. We are currently one of the largest redistributors of search monetization in the United States and while we generate substantially all our searchrevenues through our relationship with Microsoft Bing, we have agreements with the three major search engine companies in the United States. Ouragreement with Microsoft is for a three-year term, from January 1, 2015 through December 31, 2017, and upon mutual agreement, the agreement may berenewed for an additional 12-month period, until the end of 2018. In the past, the fees payable by Microsoft under the Microsoft Agreement were payablebased on either a fixed price, pay-per-search basis that is tied to the number of searches conducted by end users, or in certain instances on a share of therevenue generated as a result of searches conducted by end users who utilize the search engine that appears on toolbars created by publishers through ourplatform or through other search related products. The fees payable by Microsoft have varied annually over the term of the agreement, decreasingsignificantly in 2013 and 2014, as compared to 2011 and 2012. As of 2015, the fees payable by Microsoft under our 2015 agreement with Microsoft arepayable based on a share of the revenue generated as a result of searches conducted by end users who utilize the search engine that appears on our product,the publisher’s product, search assets and websites. While substantially inactive, we entered into an agreement with Google, effective as of July 1, 2015, and which will expire on April 30, 2017. Wealso have an agreement with Yahoo, which is in effect until July 18, 2017. Strategy Our goal through our advertising offering is to be the leader in high-quality advertising solutions that cut through the digital clutter and delivermessages that stand out to consumers, through innovative and engaging ad units. To address all of our customers’ digital advertising needs with acomprehensive solution, we offer “high impact” ad units as well as standard and non-standard ad formats in desktop, mobile (web and app), and socialchannels. We define “high impact” as advertising that captures the attention of consumers, including video and non-standard rich media features andfunctionalities.The key components to our advertising solutions are: Creative Ad Units We offer our clients creative ad units that capture consumer attention, as well as functionality that drives consumer engagement. We have an in-house full-service creative team that works with clients to design, build and execute custom ad campaigns. Our formats, each with a suite of interactive features, can be deployed across desktop, mobile and tablet (“cross-screen”) and through web, app andsocial channels, depending on the specific needs of the customer. Most of these are our proprietary formats. We use HTML5 and responsive design to detectdevice type and screen size in order to deliver a seamless advertising experience across screens. Other proprietary formats leverage mobile-nativefunctionality such as tap, swipe, shake and tilt in order to deliver an engaging consumer experience. 30 Quality Media In order to be effective, advertisements must be delivered in media environments that reach the right audiences. We hand-pick a broad portfolio ofpremium media properties that are rigorously vetted using quantitative and qualitative criteria. Qualified publishers are then put through a certificationprocess to ensure proper delivery of our formats. Approved publishers are placed on Undertone’s “Green List” and are subsequently continuously monitoredfor inappropriate content and suspicious traffic. Proprietary Technology Platform Our proprietary technology platform supports our mission of delivering high-quality digital experiences for our clients. Key features of our platforminclude: ·HTML5-based ad creation platform and production tools that allow for the rapid creation of high impact creative ads and the development of new adformats. ·Programmatically enabled buying and selling, allowing our clients to increase efficiency and campaign flexibility. ·Brand safety and quality filters to help ensure our clients’ messages are placed in the safe, appropriate and on-brand environments. ·The Undertone Data Management System (UDMS), which enables us to capture, process and analyze data associated with ad campaigns in order todeliver better results to our clients. ·An ad delivery and decision-making engine that enables us to deliver sophisticated pacing and performance monitoring as we execute campaigns. Service and Support We provide our clients with service and support before, during and after the campaign cycle. Our sales, client solutions, and planning teams utilize aconsultative, solutions-driven approach in order to develop the appropriate campaign strategy for each individual client. Our campaign management andperformance teams oversee all aspects of client campaigns in order to ensure that they meet the clients’ objectives. Finally, our research and insights teamprovides clients with campaign results, key performance metrics and critical analysis in order to provide useful feedback to clients. Innovation To maintain our edge and innovative offering, we must continue to develop new solutions and services for our clients. To accomplish this, we havean in-house research and development team. This team researches, prototypes and tests emerging technology in order to determine how best to reach andinfluence consumers. The team also conducts research studies of consumer interactions with ad formats, features and functionalities to determine preferencesand usage behavior. Our innovation team focuses on three types of innovations: ·Near-term innovations, which may be brought to market in less than a year and typically represent advances to existing capabilities; ·Mid-term innovations, which may be brought to market in one to two years and typically represent new concepts; and ·Long-term innovations, which have a 2+ year time horizon, that we believe may have a material impact on our digital advertising capabilitiesand/or the digital advertising industry generally. With the solutions we provide to our publisher partners, in the turbulent marketplace we currently act in, we differentiate ourselves by providingsolutions with three major advantages: ·provide a user-friendly monetization solution, which enables them to engage users, by providing quality software, while creating monetizationthrough, user friendly, non-intrusive and transparent means; ·deliver superior analytics and optimization tools enabling the software developer to extend its reach and increase monetization with a positivereturn on investment; and ·offer creative and flexible monetization models with scalable risk and reward, suited to their business. Publishers face increasing challenges monetizing their offerings. This is partly because most consumers find that the free version of a given softwareproduct or content adequately meets their needs. Accordingly, most app developers or web content publishers do not earn sufficient revenue to sustain astandalone business. 31 We provide a broad spectrum of solutions for our clients' monetization challenges. We offer clients tailored and engaging advertising solutions forweb content publishers, thereby further increasing monetization opportunities. Through our search agreements with the world's leading search providers we enable our clients to monetize their search assets. Publishers anddevelopers may incorporate a search box, generic or tailored to the publisher’s offering, that is powered by our search providers, who in turn pay us fees forsearches emanating from such search boxes. Depending on the payment model adopted, we pay our clients a fee on a pay-per-search or revenue sharing basisfor search activity emanating from the incorporated search boxes. Products under Development Our research and development activities are primarily conducted internally, focusing on the development of new high impact ad formats andplatform-based solutions that will offer developers (i) standout brand experience (ii) effective distribution tools, (iii) increased monetization capabilitiesthrough content, and (iv) enhanced optimization via powerful, reliable, and easy-to-use analytics. Additionally, we focus our research and developmentefforts on developing new products and improving existing products through software updates and upgraded features. Our Research & Developmentdepartment is divided into groups based on scientific disciplines and types of applications and products. Breakdown of Revenues Our search monetization solutions, advertising and other, are distributed and sold throughout the world in more than 100 countries. The followingtable shows the revenues, presented in our statement of operations, generated by territory in the years ended December 31, 2014, 2015 and 2016. 2014 2015 2016 Searchand otherRevenues AdvertisingRevenues Searchand otherRevenues AdvertisingRevenues Searchand otherRevenues AdvertisingRevenues Tier 1 – North America 78% 69% 79% 75% 75% 89%Tier 2 – Europe 17% 23% 18% 22% 20% 9%Tier 3 - Other 5% 8% 3% 3% 5% 2%Total 100% 100% 100% 100% 100% 100% Intellectual Property Although we have a number of patents, copyrights, trademarks and trade secrets and confidentiality and invention assignment agreements to protectour intellectual property rights, we believe that our competitive advantage depends primarily on our marketing, business development, applications, know-how and ongoing research and development efforts. Accordingly, we believe that the expiration of any of our patents or patent licenses, or the failure of anyof our patent applications to result in issued patents, would not be material to our business or financial position. Part of the components of our software products were developed solely by us. We have licensed certain components of our software from thirdparties. We believe that the components we have licensed are not material to the overall performance of our software and may be replaced without significantdifficulty. We enter into licensing arrangements with third parties for the use of software components, graphic, sound and multimedia content integrated intoour products. All employees and consultants are required to execute confidentiality covenants in connection with their employment and consulting relationshipswith us. These agreements (excluding those with our German and U.K. employees) also contain assignment and waiver provisions relating to the employee'sor consultant’s rights in respect of inventions. Competition The markets in which we are active are subject to intense competition. 32 We compete with many other companies offering solutions for online publishers and developers, including search services and other software inconjunction with changing a user’s default search settings. The advertising technology industry is highly competitive. There are a large number of digital media companies and advertising technologycompanies that offer services similar to those of our Undertone business and that compete for finite advertiser/agency budgets and publisher inventory. Thereare also a large number of niche companies that are competitive with our Undertone business because they provide a subset of the services that we provide(e.g., mobile in-app ad networks). Some of these companies are larger and have more financial resources than we have, including, AOL, Google, andFacebook. New entrants and companies that do not currently compete with our Undertone business may compete in the future given the relatively lowbarriers to entry in the industry. As a major part of our revenues stem from our offering of search properties, we compete with search engine providers themselves such as Google,Microsoft, Yahoo, Ask and others. We also compete with many other companies offering consumer software, albeit totally different software, utilizing thesame strategy, to offer their search properties, such as Interactive Corporation, AOL, InfoSpace and others. Many of our current and potential competitors have significantly greater financial, research and development, back-end analytical systems,manufacturing, and sales and marketing resources than we have. These competitors could use their greater financial resources to acquire other companies togain 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 searchservices could be diminished by solutions, products, services and technologies offered by competitors, whether or not their solutions, products, services andtechnologies are equivalent or superior. Finally, our ability to attract developers is largely dependent on our ability to pay higher rates to our publishers and developers, our success increating strong commercial relationships with developers that have successful software, websites or distribution channels, and our ability to differentiate ourdistribution, monetization, and optimization tools from those of our competitors. Government Regulation We are subject to a number of U.S. federal and state and foreign laws and regulations that affect companies conducting business on the Internet. Themanner in which existing laws and regulations will be applied to the Internet in general, and how they will relate to our business in particular is unclear.Accordingly, we cannot be certain how existing laws will be interpreted or how they will evolve in areas such as user privacy, data protection, content, use of"cookies," access changes, "net neutrality," pricing, advertising, distribution of "spam," intellectual property, distribution, protection of minors, consumerprotection, taxation and online payment services. For example, we are subject to U.S. federal and state laws regarding copyright infringement, privacy and protection of user data, many of which aresubject to regulation by the Federal Trade Commission. These laws include the Digital Millennium Copyright Act, which aims to reduce the liability ofonline service providers for listing or linking to third-party websites that include materials that infringe copyrights or the rights of others, and other federallaws that restrict online service providers’ collection of user information on minors as well as distribution of materials deemed harmful to minors. Many U.S.states, such as California, are adopting statutes that require online service providers to report certain security breaches of personal data and to report toconsumers when personal data will be disclosed to direct marketers. There are also a number of legislative proposals pending before the U.S. Congress andvarious state legislative bodies concerning data protection which could affect us. The interpretation of data protection laws, and their application to theInternet, is unclear and in a state of flux. There is a risk that these laws may be interpreted and applied in conflicting ways and in a manner that is notconsistent with our current data protection practices. Foreign data protection, privacy and other laws and regulations may affect our business, and such laws can be more restrictive than those in theUnited States. For example, in Israel, privacy laws require that any request for information for use or retention in a database be accompanied by a notice thatindicates: whether a person is legally required to disclose such information or that such disclosure is subject to such person’s consent; the purpose for whichthe information is requested; and to whom the information is to be delivered. A breach of privacy under such laws is considered a civil wrong and subject to asignificant fines and civil damages. Certain violations of the law are considered criminal offences punishable by imprisonment. In the European Union,similar data protection rules exist as well was privacy legislation restricting the use of cookies and similar technologies. Subject to some limited exceptions,the storing of information, or the gaining of access to information already stored, in the terminal equipment of a subscriber or user is only allowed oncondition that the subscriber or user concerned has given his or her informed consent. Further, the new General Data Protection Regulation, which isexpected to take effect in or by May 2018, will likely have an even wider territorial in scope and more stringent user consent requirements. Further, it willinclude stringent operational requirements for companies that process personal data and will contain significant penalties for non-compliance. Also in otherrelevant subject matters such as cyber security, e-commerce, copyright and cookies new European initiatives have been announced by the Europeanregulators. To further complicate matters in Europe, Member States have some flexibility when implementing European Directives which can lead todiverging national rules. 33 Because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws, including injurisdictions where we have no local entity, employees or infrastructure. These regulations result in significant compliance costs and could result in restricting the growth and profitability of our business. C.ORGANIZATIONAL STRUCTURE ClientConnect Ltd., our wholly owned Israeli subsidiary, owns all of the outstanding shares of common stock of ClientConnect, Inc., a Delawarecorporation, and all of the outstanding ordinary shares of ClientConnect B.V., a Netherlands company. IncrediMail, Inc., our wholly-owned Delaware subsidiary, owns all of the outstanding shares of common stock of Smilebox Inc., a Washingtoncorporation, all of the outstanding equity of Grow Mobile LLC., a Delaware corporation and all of the outstanding shares of common stock of IncrediToneInc., our wholly-owned Delaware subsidiary. IncrediTone Inc. owns all of the outstanding shares of common stock of Interactive Holding Corp., a Delawarecorporation, which was acquired, together with its subsidiaries, in November 2015. Make Me Reach SAS, our wholly owned French subsidiary, was acquired in February 2015. D. PROPERTY, PLANTS AND EQUIPMENT Our headquarters are located in Holon, Israel. We lease approximately 101,500 square feet, out of which we currently sublease approximately 33,820square feet. The lease expires in 2024, with an option to extend for two additional two-year periods. Annual cost is approximately $1.7 million. We lease approximately 88,000 square feet in various locations in the United States. Our primary locations, and their principal terms, are as follows: Square feet Annual Rentfor 2017in US$ inthousands Leaseexpires on(not includingoptions) New York, New York 51,182 $2,511 2021 San Francisco, California 13,452 $836 2022 Redmond, Washington 8,300 $197 2021 Chicago, Illinois 7,943 $152 2018 In addition, we lease offices in various locations throughout Europe. Our primary locations, and their principal terms, are as follows: Square feet Annual Rent for 2017in US$in thousands Leaseexpires on(not includingoptions) London, England 4,361 $134 2022 Paris, France 5,000 $183 2017 We recently signed a lease for a new location in Paris, replacing the location that was set to expire. The new location has 6,200 square feet, hasannual rent of $0.4 million and expires in 2019. We believe that our current facilities are more than adequate to meet our current needs, and we believe thatsuitable additional space will be available as needed to accommodate ongoing operations and any such growth. We own approximately 500 servers located in Israel, Europe and the United States. We also rent the services of approximately 400 additional serverslocated around the world, approximately 330 of which are rented mainly through Amazon Web Services and approximately 70 of which are rented throughRackspace Hosting located in the United States. Our servers include mainly web servers, application servers, data collection servers, data storage servers, dataprocessing servers, mail servers and database servers. Bezeq and Cellcom Israel Ltd. provide our Internet and related telecommunications services in Israel,including hosting and co-location facilities, needed to operate our websites. Bezeq is Israel’s largest provider of such services and is a member of BezeqGroup, Israel’s incumbent national telecommunications provider. In the United States CenturyLink, and in Europe Evoswitch, are our co-location providers.Our Internet Service Providers ("ISPs") are CenturyLink, NTT Communication, Level3 Communication and Colt. Bezeq and Cellcom are the two largestproviders of such services in Israel. All other ISPs are tier-1 worldwide providers in this area. For our Undertone business, (1) Rackspace Hosting provides ourInternet and related telecommunications services in Dallas, Texas and Virginia data centers in the United States, and (2) Internap provides Internet and relatedtelecommunication services to our co-located data centers in Europe and the United States which are needed to operate our websites. Rackspace Hosting,Amazon Web Services and Internap are some of the largest providers of such services in the United States. All co-location and telecommunication servicesare provided through standard purchase orders and invoices. We add servers and expand our systems located at their facilities as our operations require. Webelieve there are many alternative providers of these services both within and outside of Israel. 34 ITEM 4.A UNRESOLVED STAFF COMMENTS None. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion of our financial condition and results of operations should be read in conjunction with our Financial Statements. Inaddition to historical financial information, the following discussion and analysis contains forward looking statements within the meaning of Section 27Aof the Securities Act of 1933 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 lookingstatements involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated inthese forward looking statements as a result of many factors, including those discussed under "Item 3.D Risk Factors" and elsewhere in this annual report. A. OPERATING RESULTS General Perion is a global technology company that delivers high-quality advertising solutions to brands and publishers. Perion is committed to providingoutstanding execution, from high-impact ad formats to branded search and a unified social and mobile programmatic platform. Our headquarters and primary research and development facilities are located in Israel, we have our primary sales office in the United States andseveral other offices located in Europe. Our search monetization product served 383 million average monthly queries in 2016, with 185 million being generated in United States. This levelof activity makes us one of the larger search service providers in the U.S. market. This business declined signifcantly since its high in 2014, due to industry changes and as a result of our significantly reducing investment inacquiring new customers and being more selective in choosing our partners since the second half of 2014. We reduced this investment as a result of twostrategic decisions. The first was to become more selective in the companies we are willing to partner with, focusing on those that promote a more positiveuser experience, in line with our strategy, and those that can and do comply with the standards and policies introduced by the search engine companies,Google and Microsoft Bing. The second strategic decision, in order to reduce our financial risk, was to discontinue up-front, payment-per-installrelationships, a method contingent on our ability to estimate the future revenues and that suffered from the lack of visibility inherent in an ever changingenvironment. In its stead, we instituted relationships based on sharing the revenue generated by the end users as the revenue is generated. While this newmethod did reduce our profit margins somewhat, it resolved the risk of paying up-front marketing costs that may not have a positive return. As a result of the regulations instituted by the search engine, browser and operating system companies on the desktop and the increasing trend awayfrom desktop downloadable software and towards mobile platforms, which inherently have very much reduced opportunities for monetization through theredistribution of search services, we are unable to grow our desktop monetization business. And while it continues to generate significant profits and cashflow, we currently expect it to decline slowly over time. We therefore have been focusing our growth efforts in delivering high-quality advertising solutions to brands and publishers through Undertone. The Undertone business is an advertising technology business focused on delivering standout brand experiences. We do so by developing digitaladvertising creatively designed to capture consumer attention and drive engagement, delivering these ads across a hand-picked portfolio of websites andmobile applications. With the Undertone acquisition, we are now able to deliver standard and proprietary display, mobile, video, and high impact ad formats,leveraging proprietary technology to ensure that ads are delivered to the right audience, at the right time, and across the right websites and mobileapplications. Our ad creation platform allows us to bring sophisticated high impact formats to market quickly and to streamline production of clientcampaigns. By using HTML5 and a responsive design, we can deliver a seamless creative experience across screens. This combination of creative capabilitiesand proprietary high impact cross-screen and mobile-only advertising formats enables us to differentiate our offering in the market. 35 Year Ended December 31, 2014 2015 2016 Search and other $343,655 $188,897 $172,683 Advertising 45,076 32,053 140,111 Total Revenues $388,731 $220,950 $312,794 The following describes the nature of our principal items of income and expense: Revenues We generate our revenues primarily from two major sources: (i) search-generated and other revenues; and (ii) advertising. The following table showsour revenues by category (in thousands of U.S. dollars):In 2015, revenues decreased by 43% compared to 2014, primarily as a result of our decision to dramatically reduce customer acquisition costsstarting from the third quarter of 2014. This decision reduced the tail of revenues going into 2015, as well as reduced ongoing revenues from the revenueshare model. In 2016, revenues increased by 42% compared to 2015, primarily due to the acquisition of Undertone in the fourth quarter of 2015.Cost of Revenues Cost of revenues consists primarily of salaries and related expenses, license fees, amortization of acquired technology and payments for content andserver maintenance. In 2016 cost of revenues increased primarily due to the costs associated with Undertone’s activity since December 2015. The number ofemployees included in cost of revenues in 2014, 2015 and 2016 were 22, 20 and 17, respectively. Customer Acquisition Costs and Media Buy Our customer acquisition costs consist primarily of payments to publishers and developers who distribute our search properties together with theirproducts, as well as the cost of distributing our own products. Media buy costs consist mainly of the costs of advertising inventory incurred to deliver ads.Customer acquisition costs are primarily based on fixed fee arrangements and on revenue share agreements with our traffic sources. As a result of changes inthe marketplace, and our being more selective regarding the partners we work with, in the third quarter of 2014 we significantly reduced our investment incustomer acquisition. In order to mitigate some of the risk inherent in the lack of visibility regarding the generation of future revenues by the users of ourpartners' software, since the beginning of 2015 we have sought to work with our partners on revenue share agreements instead of fixed fee arrangements. Thisreduction was partially offset by an increase in media buy costs from Undertone activity since its acquisition. Customer acquisition and media buy costs were$174.6 million, $91.2 million and $140.2 million in 2014, 2015 and 2016, respectively. As a percentage of revenues, these expenses have declined, as in theUndertone model this expense is relatively lower. In our search business, we continue to work exclusively by the sharing of future revenues, rather than payan up-front fixed fee to our partner software developers. Therefore, with the trailing off of revenues coming from the old model of prepaying for installs,revenues that were without expense in subsequent periods, the percentage of revenues invested in and generated through customer acquisition will continueto increase in 2017. In addition to the media buy costs paid by Undertone to its publishers we expect customer acquisition and media buy costs to increasenominally and as a percentage of revenues in 2017. Research and Development Expenses Our research and development expenses consist primarily of salaries and other personnel-related expenses for employees primarily engaged inresearch and development activities, allocated facilities costs, subcontractors and consulting fees. Our research and development expenditures in 2016increased compared to the prior year, primarily as a result of the research and development activities in Undertone since its acquisition in December 2015. We continue to invest development effort in our search-based business, adapting and maintaining compatibility with the ever-changing softwarelandscape in which we operate. This is in addition to the ongoing development effort in our high impact ad formats and technologies with the acquisitions ofMake Me Reach and Undertone. However, we expect research and development expenses to decrease in 2017 as we focus more on Undertone’s offering. The number of employees in research and development were 187, 168 and 136 at the end of 2014, 2015 and 2016, respectively. 36 Selling and Marketing Expenses Our selling and marketing expenses consist primarily of salaries and other personnel-related expenses for employees primarily engaged in marketingactivities, allocated facilities costs, as well as other outsourced marketing activity. This expenditure and the number of employees involved in this activityhas increased and is expected to continue to increase as the Company and its various activities shift and the increasing emphasis on selling and marketing itsproducts to grow the business, as well as a result of the Undertone acquisition. The number of employees in sales and marketing was 104, 262 and 272 at theend of 2014, 2015 and 2016, respectively. General and Administrative Expenses ("G&A") Our general and administrative expenses consist primarily of salaries and other personnel-related expenses for executive and administrativepersonnel, allocated facilities costs, professional fees and other general corporate expenses. G&A expenses are reflective of an independent public company,with all of its requisite costs, managing organic activity as well as being an active acquirer of other businesses. In 2015, G&A as a percentage of revenuesincreased significantly, primarily as result of the substantial Undertone acquisition and the costs associated with it. However, in 2016, while these expensesincreased nominally, they decreased as a percentage of sales as we leveraged our existing overhead in growing the business. We expect these expenses toremain stable as a percentage of revenues going forward. The number of G&A employees was 98, 128 and 110 at the end of 2014, 2015 and 2016,respectively. Depreciation and amortization Depreciation and amortization consist primarily of depreciation of our property and equipment and the amortization of our intangible assets as aresult of our acquisitions. In 2016, this number increased significantly due to the amortization of the acquired intangible assets from the Undertoneacquisition in December 2015. Restructuring Charges In 2014, we incurred restructuring charges of $4.0 million due to the restructuring of our search monetization business, including a head countreduction as well as other cost saving measures, such as the consolidation of our Israeli offices from three floors to two in order to sublease the third floor. In 2015 and 2016, we incurred restructuring charges of $1.1 and $0.7 million, respectively, in connection with the restructuring plan of one of ourconsumer app development project, mainly to reduce workforce, close certain facilities, as well as other cost saving measures. Impairment, net of change in fair value of contingent consideration We determined that certain indicators of potential impairment that required an interim goodwill impairment analysis for our reporting units existedin 2015. These indicators included a decrease in our share price and lower than expected sales and cash flow, as well as managerial decisions to abandoncertain R&D projects. Based on our goodwill assessment for the search monetization reporting unit, we determined that the carrying amount of the reportingunits exceeds its fair value resulting in an impairment of $70.9 million. We will continue to monitor our reporting units to determine whether events andchanges in circumstances, such as significant adverse changes in business climate or operating results, further significant decline in our market capitalization,changes in management's business strategy or changes of management's cash flows projections, warrant further impairment testing. In addition, we performedan impairment review of several intangible assets that were recognized in connection with the Perion acquisition, which resulted in an impairment of $8.5million. The impairment charges were measured as the difference between the carrying amounts of those intangible assets and their fair values. We recorded a net gain of $6.6 million, pursuant to an amendment to the Grow Mobile acquisition agreement, reversing the previously recordedcontingent payment of $9.1 million, in exchange for a payment of $2.5 million, $1.5 million out of which was paid in cash and $1.0 million was paid in ourordinary shares that were issued to Grow Mobile’s former shareholders. Income Tax Expense A significant portion of our income is taxed in Israel and, as a result of the Undertone acquisition on November 30, 2015, in the United States. Thestandard corporate tax rate in Israel was 26.5% in 2014 and 2015 and 25.0% in 2016. For our Israeli operations we have elected to implement a tax incentiveprogram pursuant to a 2011 Israeli tax reform, referred to as a "Preferred Enterprise," according to which a reduced tax rate of 16.0% is applied to our preferredincome in 2015 and 2016. With respect to U.S. tax, we expect to utilize cumulated losses we have from prior U.S. acquisitions. The federal statutory incometax rate in the United States is 35.0%. Subsidiaries in Europe are taxed according to the tax laws in their respective countries of residence. 37 Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operation are based on our financial statements, which have been prepared inconformity with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates on an on-going basis. Webase our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying amount values of assets and liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions or conditions. Under U.S. GAAP, when more than one accounting method or policy or itsapplication is generally accepted, our management selects the accounting method or policy that it believes to be most appropriate in the specificcircumstances. Our management considers some of these accounting policies to be critical. A critical accounting policy is an accounting policy that management believes is both most important to the portrayal of our financial condition andresults and requires management’s most difficult subjective or complex judgment, often as a result of the need to make accounting estimates about the effectof matters that are inherently uncertain. While our significant accounting policies are discussed in Note 2 of the Financial Statements, we believe thefollowing accounting policies to be critical: Stock-Based Compensation We account for share-based payment awards made to employees and directors in accordance with ASC 718, "Compensation – Stock Compensation",which requires the measurement and recognition of compensation expense based on estimated fair values. Determining the fair value of stock-based awards atthe grant date requires the exercise of judgment, as well as the determination of the amount of stock-based awards that are expected to be forfeited. If actualforfeitures differ from our estimates, stock-based compensation expense and our results of operations would be impacted. Expense is recognized for the valueof the awards, which have graded vesting based on service conditions, using the straight-line method, over the requisite service period of each of the awards,net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures. For performance-based stock units, expense isrecognized for the value of such awards, if and when we conclude that it is probable that a performance condition will be achieved. We are required toreassess the probability of the vesting at each reporting period for awards with performance conditions and adjust compensation cost based on its probabilityassessment. We account for changes in award terms as a modification in accordance with ASC 718. A modification to the terms of an award should be treated asan exchange of the original award for a new award with total compensation cost equal to the grant-date fair value of the original award plus the incrementalvalue measured at the same date. Under ASC 718, the calculation of the incremental value is based on the excess of the fair value of the new (modified) awardbased on current circumstances over the fair value of the original award measured immediately before its terms are modified based on current circumstances. Total stock-based compensation expense recorded during 2016 was $6.8 million, of which $0.2 million was included in cost of revenues, $0.7million in research and development costs, $1.9 million in selling and marketing expenses, and $4.0 million in general and administrative expenses. As of December 31, 2016, the maximum total compensation cost related to options and restricted stock units ("RSUs"), granted to employees anddirectors not yet recognized amounted to $1.5 million. This cost is expected to be recognized over a weighted average period of 1.31 years. We estimate the fair value of standard stock options granted using the Binomial method option-pricing model. The option-pricing model requires anumber of assumptions, of which the most significant is expected stock price volatility. Expected volatility was calculated based upon actual historical stockprice movements of our stock. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. The fair value ofRSUs is based on the market value of the underlying shares at the date of grant. Taxes on Income We are subject to income taxes primarily in Israel and the United States. Significant judgment is required in evaluating our uncertain tax positionsand determining our provision for income taxes. Based on the guidance in ASC 740 "Income Taxes", we use a two-step approach to recognizing andmeasuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicatesthat it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The secondstep is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. 38 Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of thesematters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of anestimate 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 impactthe provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisionsand changes to reserves that are considered appropriate. Interest is recorded within finance income, net. Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to utilize taxattributes, including those in the form of carry forwards for which the benefits have already been reflected in the financial statements. We record valuationallowances 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 asof December 31, 2016 are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to ourconsolidated financial statements and such adjustments could be material. See Note 14 of the Financial Statements for further information regarding incometaxes. 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 ofincome tax we pay is subject to ongoing audits by the tax authorities, which often result in proposed assessments. We believe that we adequately providedfor any reasonably foreseeable outcomes related to tax audits and settlement. However, our future results may include favorable or unfavorable adjustments toour estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessmentsexpire. Business Combinations We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on theirestimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded asgoodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especiallywith respect to intangible assets. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships andacquired patents and developed technology; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable,but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assetsacquired and liabilities assumed, as more fully discussed in Note 3 of the Financial Statements. Goodwill Goodwill is allocated to reporting units expected to benefit from a business combination. We perform tests for impairment of goodwill at thereporting 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 areporting unit below its carrying value. Goodwill impairment tests require judgment, including the identification of reporting units, assignment of assets andliabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. During 2015 and 2016, we determined that certain indicators of potential impairment existed, which triggered goodwill impairment analyses of ourreporting units. These indicators included a decrease in our share price and lower than expected sales and cash flow, as well as management decisions toabandon certain R&D projects. In 2015, we incurred impairment charges of $70.9 million, related to goodwill associated with the monetization reporting unitand $16.2 million to the Growmobile reporting unit (included as a loss from discontinued operations). In 2016, we determined the fair value of each of ourtwo reporting units using the income approach, which utilizes a discounted cash flow model, as we believed that this approach best approximated thereporting unit’s fair value at the time. Judgments and assumptions related to revenue, operating income, future short-term and long-term growth rates,weighted average cost of capital, interest, capital expenditures, cash flows, and market conditions are inherent in developing the discounted cash flow model.We concluded that the fair value of our reporting units exceeded their carrying amount, so no goodwill was determined to be impaired in 2016. If theforegoing judgments or assumptions change in the future, we may be required to record impairment charges for our goodwill. 39 We performed a sensitivity analysis for the two key assumptions used in our annual goodwill impairment test and determined that an increase of 1%in the estimated weighted average cost of capital or a shortfall of our future profitability projections below our current projections would result in theestimated fair value of our Undertone reporting unit falling below its carrying value. At December 31, 2016, the fair value of this reporting unit exceeded itscarrying value by 8%. We believe that this reporting unit is at risk for goodwill impairment based on the volatility of this business and the market withinwhich it competes. Impairment of Long-Lived Assets We are required to assess the impairment of tangible and intangible long-lived assets subject to amortization, under ASC 360 "Property, Plant andEquipment", on a periodic basis and when events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment indicatorsinclude any significant changes in the manner of our use of the assets or the strategy of our overall business, significant negative industry or economic trendsand 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 undiscountedprojected 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 ofcarrying amount over the fair value. We measure fair value using discounted projected future cash flows. We base our fair value estimates on assumptions webelieve to be reasonable, but these estimates are unpredictable and inherently uncertain. If these estimates or their related assumptions change in the future,we may be required to record impairment charges for our tangible and intangible long-lived assets subject to amortization. In 2015, we incurred impairmentcharges of $8.5 million related to intangible assets associated with our reporting units (out of which $3.4 million related to our Growmobile reporting unit,which are included as a loss from discontinued operations). In 2014, we incurred impairment charges of $19.9 million related to intangible assets associatedwith desktop technologies acquired in the acquisition of Perion that were determined during the process of integration with Perion to be redundant to thetechnology of ClientConnect. This impairment was also a result of our shifting future growth strategy towards mobile platforms and discontinuing some ofthe consumer products developed. In addition, in connection with the restructuring plans in 2014 and 2015, we recorded an impairment of $0.6 million and $0.1 million, respectively,of property and equipment, respectively. Derivative and Hedge Accounting During fiscal 2014, 2015 and 2016, approximately 15%, 18% and 13%, respectively, of our operating expenses, respectively, were denominated innew Israeli shekels (“ILS”). In order to mitigate the potential adverse impact on cash flows resulting from fluctuations in the exchange rate of the ILS, westarted to hedge portions of our forecasted expenses with options contracts. The effective portion of the gain or loss on the derivative is reported as acomponent of other comprehensive income and reclassified into earnings in the same period, or periods, during which the hedged transaction affectsearnings. The ineffective portion of a derivative’s change in fair value, if any, is recognized in earnings, as well as gains and losses from a derivative’s changein fair value that are not designated as hedges are recognized in earnings immediately. We have also entered into a cross currency interest rate SWAPagreement in order to transform cash flow in ILS into USD of interest payments and principal as derived from our convertible debt conditions (see Note 8 andNote 10 of the Financial Statements). The SWAP contracts were not designated as hedging instruments and therefore gains or losses resulting from the changeof their fair value are recognized in "financial income, net". We estimate the fair value of such derivative contracts by reference to spot rates quoted in activemarkets. Establishing and accounting for foreign exchange contracts involve judgments, such as determining the fair value of the contracts, determining thenature of the exposure, assessing its amount and timing, and evaluating the effectiveness of the hedging arrangement. Although we believe that our estimates are accurate and meet the requirement of hedge accounting, if actual results differ from these estimates, suchdifference could cause fluctuation of our recorded revenue and expenses. 40 Recent Accounting Standards In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09) "Revenue fromContracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 606)”, and requires entities torecognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to beentitled to in exchange for those goods or services. Topic 606 was further amended during 2016 as follows:·In March 2016, by ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting RevenueGross versus Net), which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assistan entity in determining whether it controls a specified good or service before it is transferred to the customers. ·In April 2016, by 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, that clarifiedtwo aspects of ASC 606, identifying performance obligations and the licensing implementation guidance, while retaining the related principles ofthose areas. ·In May 2016, by ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.ASU 2016-12 addresses certain issues in the guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completedcontracts and contract modifications at transition. As currently issued and amended, ASC 606 is effective for annual reporting periods beginning after December 15, 2017, including interim periodswithin that reporting period, though early adoption is permitted for annual reporting periods beginning after December 15, 2016 using either of two methods:(1) full retrospective application; or (2) modified retrospective application. We are currently evaluating the impact that the new principal versus agentguidance may have on the presentation of our revenue arrangements and the expected impact on our business processes, systems and controls, but have notcompleted our evaluation. We expect to complete our assessment process during 2017 and adopt the new standard on January 1, 2018. We did not select yetthe transition method of the new standard. In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires that long-term lease arrangements be recognized on the balancesheet. The standard is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We are currentlyevaluating the impact of adoption on our consolidated financial statements. In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvement toEmployee Share-based Payment Accounting (ASU 2016-09), to simplify the accounting for share-based payment transactions, including the income taxconsequences, an option to recognize gross share-based compensation expense with actual forfeitures recognized as they occur, as well as certainclassifications on the statement of cash flows. This guidance will be effective for the Company in the first quarter of 2017, and early adoption is permitted.We are currently evaluating the effect that this guidance will have on our consolidated financial statements. In November 2016, the FASB issued Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows: Restricted Cash, providing specificguidance on the cash flow classification and presentation of changes in restricted cash and restricted cash equivalents. Amounts generally described asrestricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on thestatement of cash flow. The amendments in ASU 2016-18 are effective for fiscal years beginning after December 15, 2017, and interim periods therein. Earlyadoption is permitted, including adoption in an interim period. We are currently evaluating the effect, if any, that the adoption of ASU 2016-18 will have onour financial statements. In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): - Simplifying the Test for Goodwill Impairment”, which eliminates the requirement to calculate the implied fair value ofgoodwill (i.e., Step 2 of the goodwill impairment test) for the purpose of measuring a goodwill impairment charge. Instead, an impairment charge shall berecognized based on the excess of a reporting unit’s carrying amount over its fair value. The standard shall be applied prospectively and is effective forannual and interim impairment tests performed in periods beginning after December 15, 2019, for public entities. Early adoption is permitted for annual andinterim goodwill impairment testing dates after January 1, 2017. We will adopt the new guidance on January 1, 2017. 41 Year Ended December 31, 2014 2015 2016 Revenues: Search and other 88% 85% 55%Advertising 12 15 45 Total revenues 100% 100% 100% Costs and expenses: Cost of revenues 3% 4% 5%Customer acquisition costs andmedia buy 45 41 45 Research and development 10 10 8 Selling and marketing 5 10 19 General and administrative 9 14 11 Depreciation and amortization 5 5 8 Restructuring charges 1 -(*) -(*)Impairment, net of change in fairvalue ofcontingent consideration 5 33 - Total costs and expenses 84 118 96 Operating income (loss) 16 (18) 4 Financial expenses, net 1 1 3 Income (loss) before taxes on income 15 (19) 1 Income tax expense 3 -(*) -(*)Income (loss) from continuingoperations 13 (19) (1)Loss from discontinuing operations, net 2 12 1 Net income 11% (31)% -(*)%Results of OperationsThe following table presents, for the periods indicated, our costs and expenses of our continuing operations, by category (in thousands of U.S.dollars): Year ended December 31, 2014 2015 2016 Cost of revenues $10,950 $7,877 $16,515 Customer acquisition costs and media buy 174,575 91,194 140,210 Research and development 37,427 21,692 26,528 Selling and marketing 20,792 22,886 58,572 General and administrative 36,730 31,064 32,916 Depreciation and amortization 21,321 11,422 25,977 Restructuring costs 3,981 1,052 728 Impairment, net of change in fair value of contingent consideration 19,941 72,785 - Total Costs and Expenses $325,717 $259,972 $301,446 The following table sets forth, for the periods indicated, our statements of operations expressed as a percentage of total revenues (the percentagesmay not equal 100% because of the effects of rounding): ___________(*) less than 1% 42Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 Revenues. Revenues increased by 42%, from $221.0 million in 2015, to $312.8 million in 2016. Search and other revenues. Search and other revenues decreased by 9% in 2016, from $188.9 million in 2015, to $172.7 million in 2016. Thisdecrease was primarily a result of our decision to dramatically reduce customer acquisition costs starting from the third quarter of 2014 and subsequentlymove from a pay per install model to a revenue share model beginning the first quarter of 2015. As a result, the revenues from the previous pay per installmodel, which have no costs associated with them in the then current period, have been decreasing since the third quarter of 2014, and in 2016 weresubstantially lower than in 2015. As two years have already passed since these changes, the remaining install base is quite small, and while it continues todecline, the impact on 2017 will be smaller. While the cost free revenues from the previous pay per install model declined, we have been successful inoffsetting most of that decline with new revenue share search revenues, and as a result our search revenues have declined quarterly only slightly since thesecond quarter of 2015, and we expect this trend to continue. Advertising revenues. Advertising revenues increased by 337% in 2016, from $32.1 million in 2015, to $140.1 million in 2016. This increase isattributable to the revenues recorded from Undertone’s activity, which were recognized only since the acquisition date in late 2015. We expect advertisingrevenues to increase further in 2017 as compared to 2016, further diversifying our revenue sources. Cost of revenues. Cost of revenues increased by 110%, from $7.9 million in 2015, to $16.5 million in 2016. This increase was primarily due to thecost of revenues associated to the Undertone operation, mainly in hosting expenses. Looking forward, we expect cost of revenues as a percentage of revenuesto remain at its current level. Customer acquisition costs (“CAC”) and media buy. CAC and media buy increased by 54%, from $91.2 million in 2015, to $140.2 million in 2016,primarily due to the nominal increase in the media buy costs associated with the Undertone revenues after the acquisition. CAC and media buy increasedfrom 41% of revenues in 2015 to 45% of revenues in 2016, primarily due to our transitioning to the current search revenue-share model, replacing the searchrevenues that were without expense in 2015, and have substantially decreased since then and continue to decrease. Research and development expenses ("R&D"). R&D increased by 22%, from $21.7 million in 2015, to $26.5 million in 2016. The increase wasprimarily associated with the expenses of our Undertone operation for a full year. Selling and marketing expenses ("S&M"). S&M expenses increased by or 156%, from $22.9 million in 2015, to $58.6 million in 2016. The nominalincrease was primarily as a result of consolidating our Undertone operation. The increase in S&M as a percentage of revenues is due to the Undertonebusiness where S&M activity is much more substantial. General and administrative expenses ("G&A"). G&A increased by 6%, from $31.1 million in 2015, to $32.9 million in 2016. The increase isprimarily associated with the inclusion our Undertone operation for a full year, partially offset by a decrease of $4.6 million associated with one-timeacquisition costs in 2015; as a result, G&A expenses as a percentage of sales decreased. We expect G&A expenses to continue to be stable, and possiblydecline, in 2017. Restructuring costs. In October 2015, the Company initiated a restructuring plan of its consumer apps department, reducing headcount, closingcertain facilities and taking other cost saving measures. In 2015 and 2016, we incurred restructuring costs of $1.1 million and $0.7 million, respectively. Depreciation and amortization. The increase in depreciation and amortization is primarily attributable to the amortization of the acquiredintangible assets from the Undertone acquisition. Impairment, net of change in fair value of contingent consideration. In 2015 we determined that certain indicators of potential impairment thatrequired an interim goodwill impairment analysis for our reporting units existed in 2015. These indicators included a decrease in our share price and lowerthan expected sales and cash flow, as well as managerial decisions to abandon certain R&D projects. Based on our goodwill assessment for the searchmonetization reporting unit, we determined that the carrying amount of the reporting unit exceeds its fair value amount, as a result an impairment of $70.9million was recorded. We will continue to monitor our reporting units to determine whether events and changes in circumstances, such as significant adversechanges in business climate or operating results, further significant decline in our market capitalization, changes in management's business strategy orchanges of management's cash flows projections, warrant further impairment testing. In addition, we performed an impairment review of several intangible assets that were recognized in connection with the acquisitions of Perion,which resulted in an impairment of $8.5 million. The impairment charges were measured as the difference between the carrying amounts of those intangibleassets and their fair values. 43 These expenses were partially offset in 2015 by a net gain of $6.6 million, pursuant to an amendment to the Grow Mobile acquisition agreement,reversing the previously recorded contingent payment of $9.1 million, in exchange for a payment of $2.5 million, $1.5 million out of which was paid in cash,and $1.0 million was paid in the our ordinary shares that were issued to Grow Mobile’s former shareholders. No impairment charges were recorded in 2016. Taxes on income. Taxes on income decreased by $0.5 million from $0.7 million in 2015 to $0.2 million in 2016. Net income (loss) from continuing operations. Net income (loss) from continuing operations increased by $44.5 million, from net loss of $41.7million in 2015, to net income of $2.8 million in 2016. The increase resulted primarily from the non-recurring impairment and restructuring costs of $73.8million recorded in 2015, partially offset by the decline in previous pay per install revenue model (which have no costs associated with them in the thencurrent period) of the search revenue from 2015 to 2016. Net loss from discontinued operations In March 2016, we decided to discontinue the mobile self-serve side of our business and put up for sale our Growmobile Engagement business. As aresult, we classified these operations as discontinued operations reported separately for all periods presented. On July 25, 2016, the Company sold the mobileengage business, including the intellectual property, know-how and technology, for total consideration of $1.75 million (see Note 2 of the FinancialsStatements).Year Ended December 31, 2015 Compared to Year Ended December 31, 2014 Revenues. Revenues decreased by 43%, from $388.7 million in 2014, to $221.0 million in 2015. Search and other revenues. Search and other revenues decreased by 45% in 2015, from $343.7 million in 2014 to $188.9 million in 2015. Thisdecrease was primarily a result of our decision to dramatically reduce customer acquisition costs and becoming more selective in choosing distributionpartners starting from the third quarter of 2014. This decision reduced the revenues generated from the previous pay per install revenue model (which haveno costs associated with them in the then current period) going into 2015, as compared to 2014, and also reduced ongoing revenues from our new revenueshare model. Advertising revenues. Advertising and other revenues decreased by 29% in 2015, from $45.1 million in 2014 to $32.1 million in 2015. Thisdecrease is primarily attributable to these revenues being substantially a side product of our search revenue monetization model and declined together withsearch as we decided to reduce our investment in customer acquisition. This decrease was partially offset by the revenues recorded from one month ofUndertone’s activity. Cost of revenues. Cost of revenues decreased by 28%, from $10.9 million in 2014 to $7.9 million in 2015. This decrease was primarily attributableto a decrease of approximately $2.7 million in our hosting expenses due to the reduction in our search revenue volume. Customer acquisition costs (“CAC”) and media buy costs. CAC and media buying costs decreased by 48%, from $174.6 million in 2014 to $91.2million in 2015. This decrease was a result of our decision to be more selective regarding our partners, coupled with the transition of our agreements from aprepayment per install method in 2014 to paying our partners a portion of the revenues generated as they are generated. In addition, $16.7 million of CACassociated to search revenues presented on net basis, was deducted directly from revenues in 2015. This reduction was partially offset by the increase inmedia buy costs of Undertone for the one month since the acquisition. Research and development expenses ("R&D"). R&D decreased by 42%, from $37.4 million in 2014 to $21.7 million in 2015. The decrease wasprimarily attributable to the restructuring of our search monetization business in November 2014, including a head count reduction as well as other costsaving measures, such as the consolidation of our Israeli offices. Selling and marketing expenses ("S&M"). S&M increased by 10%, from $20.8 million in 2014, to $22.9 million in 2015. This increase was primarilyattributable to expenses related to the acquisitions of Grow Mobile, Make Me Reach and Undertone in July 2014, February 2015 and November 2015,respectively, offset by a decrease in expenses resulting from the restructuring of our search monetization business in November 2014. General and administrative expenses ("G&A"). G&A decreased by or 15%, from $36.7 million in 2014 to $31.1 million in 2015. The decrease wasprimarily attributable to a decrease of $5.0 million in share based compensation and to the restructuring taken place in November 2014, including a headcount reduction as well as other cost saving measures. The decrease is partially offset by an increase associated in the G&A costs of Undertone as a result ofthe acquisition. 44 Depreciation and amortization. Depreciation and amortization decreased by 46%, from $21.3 million in 2014, to $11.4 million in 2015. Thedecrease in depreciation and amortization is attributable to a $9.9 million decrease in amortization of intangible assets, as a result of an impairment of certainintangible assets in the fourth quarter of 2014 and to a lesser extent in 2015, reducing the base for amortization. Impairment, net of change in fair value of contingent consideration. Based on our goodwill assessment for the search monetization reporting unit in2015, we determined that the carrying amount of the reporting unit exceeds its fair value amount, as a result an impairment of $70.9 million was recorded. Inaddition, we performed an impairment review of several intangible assets that were recognized in connection with the acquisitions of Perion, which resultedin an impairment of $8.5 million. These expenses were partially offset by a net gain of $6.6 million, pursuant to an amendment to the Grow Mobileacquisition agreement, reversing the previously recorded contingent payment of $9.1 million, in exchange for a payment of $2.5 million, $1.5 million out ofwhich was paid in cash and $1.0 million was paid in the our ordinary shares that were issued to Grow Mobile’s former shareholders.. Taxes on income. Taxes on income decreased by 94%, from $10.8 million in 2014, to $0.7 million in 2015. The decrease in the tax expenses islinked to the decrease in our income before tax as a result of the aforementioned decrease in revenues. In addition, in 2015 we recorded a tax benefit of $7.1million as a result of reversal of a valuation allowance in respect of net operating losses after the acquisition of Undertone, as it is more likely than not, theywill be utilized in future periods. Net income (loss) from continuing operations. Net income decreased by $91.0 million, from net income of $49.3 million in 2014 to a net loss of$41.7 million in 2015. The decrease resulted primarily from the substantial increase in net impairment costs and the decrease in our revenues, net of CAC,partially offset by a decrease in our share based compensation expenses, tax expenses, restructuring costs and other significant cost saving measures in 2015. B. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2016, we had $32.4 million in cash, cash equivalents and short-term deposits, compared to $60.0 million at December 31, 2015.The $27.6 million decrease is primarily the result of $29.5 million paid for the acquisition of Undertone in 2016, a $23.1 million repayment of our short andlong term debt and $5.2 million used in other investing activities, partially offset by $30.5 million cash provided by operating activities. For 2014, 2015 and 2016, our cash flows were as follows (in thousands of U.S. dollars): Year ended December 31 2014 2015 2016 Net cash provided by continuing operating activities $77,058 $23,772 $33,784 Net cash used in discontinued operating activities (5,016) (6,203) (3,329)Net cash provided (used in) investing activities (6,984) (120,446) 28,731 Net cash provided by (used in) financing activities 35,176 19,199 (52,607) $100,234 $(83,678) $6,579 Net cash provided by continuing operating activities In 2016, our continuing operating activities provided cash in the amount of $33.8 million, primarily as a result of net income from continuingoperations in the amount of $2.8 million, decreased by non-cash expenses including, depreciation and amortization of $26.0 million and share-basedcompensation expenses of $6.8 million, partially offset by net changes of $1.9 million in operating assets and liabilities. In 2015, our continuing operating activities provided cash in the amount of $23.8 million, primarily as a result of net loss in the amount of $41.7million, decreased by non-cash expenses including, impairment expenses of $79.3 million, depreciation and amortization of $11.4 million and share-basedcompensation expenses of $6.7 million, partially offset by a decrease of $5.6 million in the payment obligation related to an acquisition and by net changesof $26.3 million in operating assets and liabilities. 45 In 2014, our continuing operating activities provided cash in the amount of $77.1 million, primarily due to net income of $49.3 million, increasedby non-cash expenses including, depreciation, amortization and impairment expenses of $41.9 million, stock-based compensation expenses of $13.8 million,other non-cash expenses of $3.5 million and an increase in accounts payable and accrued expenses of $12.0 million, offset by a net increase of $13.9 millionin deferred tax assets, an increase in accounts receivable of $23.6 million and changes of $5.9 million in other operating assets and liabilities. Net cash used in investing activities In 2016, our investing activities provided $28.7 million cash, primarily due to $34.0 million of proceeds from maturities of short-term bank depositsand the removal of restriction on cash in the amount of $0.7 million, partially offset by $4.6 million invested in capitalized development costs and $1.4million invested in the purchase of property and equipment, net of proceeds from sale. In 2015, our investing activities used $120.4 million cash, primarily due to $27.4 million invested in short-term bank deposits, $81.7 million usedfor the acquisition of Undertone, $5.3 million used for the acquisition of Make Me Reach, $4.0 million invested in development costs that were capitalizedand $2.0 million invested in the purchase of property and equipment. In 2014, our investing activities used $7.0 million cash, primarily due to a deposit of $15.0 million in short term bank deposits, $10.9 millioninvested in the purchase of property and equipment and $4.3 million used for the acquisition of Grow Mobile, partially offset by cash acquired through theacquisition of Perion in the amount of $23.4 million. Net cash provided by (used in) financing activities In 2016, we used in our financing activities $52.6 million cash, primarily due to $29.5 million used for the repayment of obligations related to theUndertone acquisition, $9.5 million repayments of long-term loans, $7.6 million repayment of our convertible bonds, and $6.0 million repayments of short-term loans, net. In 2015, our financing activities provided $19.2 million cash, primarily due to the $13.0 million proceeds from a short-term loan and proceeds fromissuance of shares in the amount of $10.0 million, partially offset by $2.3 million repayment of long-term bank loans and $1.5 million of payment made inconnection with a prior acquisition. In 2014, our financing activities provided $35.2 million cash, primarily from $37.9 million raised from the Israeli public in long-term, convertibledebt, $1.6 million from the exercise of stock options and $0.5 million contributed by shareholders, partially offset by $2.5 million paid in connection with anacquisition and the $2.3 million repayment of long-term bank loans. Credit Facilities On May 17, 2012, we entered into a loan agreement with two Israeli banks, pursuant to which we borrowed $10.0 million. In December 2014, weexecuted a cross-currency and interest swap transaction with one of the banks in order to mitigate the potential impact of the fluctuations in the ILS/$exchange rate in regard to the future interest and principal payments of our convertible bonds (described below), which are denominated in ILS. In April 1,2015, we amended the loan agreement to ensure the fulfillment of the financial covenants, effective December 31, 2014. As of December 31, 2016, we havefully repaid one of the loans, and the outstanding balance of $0.4 million will be repaid by April 2017. The agreement contains various provisions, includingfinancial covenants, restrictive covenants, including negative pledges, and other commitments typically contained in loans agreements of this type. On November 30, 2015, concurrent with the closing of the Undertone acquisition, Undertone entered into a new secured credit agreement withSunTrust Bank, Silicon Valley Bank and Comerica Bank. The secured credit facility was amended three times during 2016. As of December 31, 2016, theprincipal amount of the facility was $42.5 million, currently being paid in quarterly installments, the last of which is scheduled for December 2019. Theinstallments started in the amount of $0.6 million, will increase to $1.25 million in March 2018 and require a final payment upon maturity in the amount of$30 million. The outstanding principal amount bears interest at LIBOR plus 5.5% per year and is secured by substantially all the assets of the companies inthe Undertone group and by guarantees of such companies. The loan is required to be prepaid by Undertone in certain circumstances, such as from proceedsof asset sales or casualty insurance policies, debt or equity offerings, or from excess cash flow in the event that Undertone's total leverage ratio exceedsspecified targets, and a pro rata portion of indemnification payments (or offset of the holdback amount) under our merger agreement with Undertone. During2016, Undertone prepaid $5 million. 46 Under the Undertone credit facility, Undertone is required to maintain the following financial covenants as of the end of each fiscal quarter: ·minimum total leverage ratio ranging from 2.95 to 1.75 during the course of the credit facility; and ·fixed coverage ratio of ranging between 1.5 to 2.0 during the course of the credit facility. The Undertone credit facility contains customary restrictive covenants, including those regarding indebtedness and preferred equity, liens,fundamental changes, investments, loans, restricted payments, asset sales, transactions with affiliates, restrictive agreements and sale and leasebacktransactions. It also contains customary events of default, including a "change in control", which is defined to include, among other things, the acquisition ofrecord or beneficial ownership by any person or group of 35% or more of Perion's outstanding ordinary shares or the failure of continuing directors toconstitute a majority of Perion's board of directors over a period of 24 consecutive months. As of December 31, 2016, the balance of the loan is $41.2 million,out of which $37.9 million classified as long term debt and $3.3 million as current maturities. Series L Convertible Bonds On September 23, 2014, we completed a public offering in Israel of Series L Convertible Bonds (the "Bonds"). The Bonds have an aggregateprincipal amount of approximately ILS 143.5 million, of which, as of December 31, 2016, approximately ILS 114.8 million are outstanding (approximately$29.9 million). The Bonds, which are listed on the Tel Aviv Stock Exchange, are convertible into an aggregate of approximately 4.3 million ordinary shares,at a conversion price of ILS 33.605 per share (approximately $8.74 per share as of December 31, 2016). The principal of the Bonds is repayable in five equalannual installments commenced on March 31, 2016, with a final maturity date of March 31, 2020. The Bonds bear interest at the rate of 5% per year, subjectto increases up to 6%, in the event of downgrades of our debt rating. On February 8, 2017, Standard & Poor's Maalot Ratings Services reaffirmed ourcorporate credit rating of ilA-, with a stable outlook. The interest is payable semi-annually on March 31 and September 30 of each of the years 2015 through2019, as well as a final payment on March 31, 2020. Under the terms of our Bonds, our ability to make distributions is subject to various limitations. In addition, we are required to maintain and complywith the following financial covenants: ·shareholders' equity of at least $120 million at the end of each quarter; ·ratio of net financial indebtedness to twelve-month EBITDA of not more than 2.5 at the end of each quarter; ·twelve-month EBITDA at the end of each quarter of not less than 40% of original aggregate principal amount of the bonds; and ·cash and cash equivalents of at least $10 million (and, six months prior to each principal payment date, a sufficient amount to repay the principaland interest then due). As of December 31, 2016, we were in compliance with all of the foregoing covenants. The Company may redeem the Bonds upon delisting of the Bonds from the TASE, subject to certain conditions. In addition, the Company mayredeem the Bonds or any part thereof at its discretion, subject to certain conditions. Private placement On December 3, 2015, we completed a private placement of 4,436,898 ordinary shares for gross proceeds of $10. 0 million, net of legal fees, pursuantto a securities purchase agreement with J.P. Morgan Investment Management Inc., as investment advisor to the National Council for Social Security Fund and522 Fifth Avenue Fund L.P. (collectively referred to as the "Investors"). The purchase price per share was $2.282 per share, which was the average closingprice of an ordinary share on the Nasdaq Global Select Market for the 30 trading days ending on December 1, 2015. According to a one-time price adjustmentmechanism in the securities purchase agreement, on September 1, 2016, the per share purchase price was adjusted downward by 15%, and we issued to theInvestors 782,981 additional ordinary shares. Financing Needs We believe that our current working capital and cash flow from operation are sufficient to meet our operating cash requirements for at least the nexttwelve months, including payments required under our existing bank loans and convertible bonds. C. RESEARCH, DEVELOPMENT, PATENTS AND LICENSES, ETC. Our research and development activities are conducted internally by a 136 person (at December 31, 2016) research and development staff. Researchand development expenses were $37.4 million, $21.7 million and $26.5 million in the years ended December 31, 2014, 2015 and 2016, respectively. In2016, our efforts were focused in two primary areas, (1) in our search generating revenue business, on maintaining our software products to adapt withchanges to operating systems, browsers or other underlying platforms and (2) in our high-impact advertising business on developing new solutions toenhance our digital advertising capabilities. 47 For a discussion of our intellectual property and how we protect it, see "Business Overview—Intellectual Property" under Item 4.B above. D. TREND INFORMATION Industry trends expected to affect our revenues, income from continuing operations, profitability and liquidity or capital resources: 1.The digital advertising environment is very crowded and consumers suffer from over exposure to advertising promotions. This in turn has brought ona certain level of blindness to advertising, decreasing their effectiveness and value to advertisers. We are therefore concentrating on unique stand-outad formats with great creative execution that grabs the attention of consumers, increasing the effectiveness of the ad and ultimately the value toadvertisers. 2.The digital advertising environment is also complex and fragmented. As a result, it is increasingly difficult for advertisers, including brands andagencies, as well as investors, to discern the difference between the offerings, and this situation requires that advertisers maintain an excessive numberof “small” relationships in order to understand and receive a comprehensive solution. We are attempting to address this need in our various revenuestreams by providing robust and differentiated products. Our solution offers a full suite of services for the advertising brand and agency, including theentire advertising process from creative through analytic data collection and processing. Our solution also includes a technology platform for buyingmedia on social and mobile platforms which helps optimize the money spent by agencies and advertisers. In turn, we also provide the publisher asolution for creating new advertising inventory and increasing their revenue. 3.Our search monetization revenue stream is predominantly within the PC desktop environment, encouraging the development of downloadablesoftware and advertising on the desktop. The transition of consumer consumption of utility and content towards mobile platforms has acceleratedand, as a result, an increasing share of advertising campaigns is channeled towards mobile platforms and fewer consumer software downloadableproducts are being developed. To address this trend, we have shifted the growth focus of all parts of our business away from downloadable PCsoftware. We are focusing on monetization tools for content publishers that could also be cross-platform, accommodating mobile platforms as well. 4.In past years the browser companies, particularly Google and Microsoft, as well as others, have been instituting policy changes and regulationsmaking it increasingly difficult to change a browser’s settings even with user consent, including the ability to change a browser’s default searchsettings. Changing such settings has been a major part of the Company’s monetization model and until now we have been successful in dealing withthese measures, within the framework allowed by these companies; however, it is becoming increasingly difficult to do so. In connection with theseefforts by the browser companies, they are also making an effort to reset the applicable browser’s settings back to its default setting, causing us tohave to recapture our users on a more frequent basis. These activities have shortened the average lifetime we see from users utilizing our searchsettings. This has reduced the return on investment from our marketing and distribution efforts. Moreover, the increased frequency of changes haslimited our visibility and therefore our ability to invest in customer acquisition. However, we continue to believe, as supported by the level ofrevenues over the last couple of years, that as the market consolidates around accepted marketing practices, there remains sufficient business. Whilethe profit margins continued to compress, we believe they are settling at a level sufficient to generate significant revenues and profits. For more information on uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our business, see Item 3 "KeyInformation—Risk Factors." For additional trend information, see the discussion in "Item 5.A Operating and Financial Review and Prospects – Operating Results." E. OFF-BALANCE SHEET ARRANGEMENTS We do not have off-balance sheet arrangements (as such term is defined by applicable SEC regulations) that have or are reasonably likely to have acurrent or future effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expendituresor capital resources that are material to investors. 48 F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS The following table summarizes our contractual commitments as of December 31, 2016 and the effect those commitments are expected to have onour liquidity and cash flow in future periods. All numbers below are in US dollars in thousands. Payments Due by Period(****) Contractual Commitments as of December 31, 2016 Total Less than1 year 1-3 Years 3-5 Years More than5 Years Long-term debt, including current portion (*) $49,900 $11,150 $38,750 $- $- Accrued severance pay (**) 1,555 - - - 1,555 Convertible debt (*) 29,854 7,463 14,927 7,464 - Payment obligation related to acquisitions(***) 7,714 7,714 - - - Operating leases 30,107 6,275 10,615 6,955 6,262 Total $119,130 $32,602 $64,292 $14,419 $7,817 (*)Long-term debt and convertible debt obligations represent maximum repayment of principal and do not include interest payments due thereunder.(**)Severance pay obligations to our Israeli employees, as required under Israeli labor law and as set forth in employment agreements, are payable onlyupon termination, retirement or death of the respective employee and are for the most part covered by ongoing payments to funds to cover suchobligations. Of this amount, $ 1,378 is unfunded. (***)Payment obligation related to acquisitions, represents the maximum cash payments we will be obligated to make under consideration arrangementswith former owners of certain entities we acquired. As of December 31, 2016 we have cash payment obligations related to acquisitions in the amount of$7,653 included on our balance sheet.(****)The total amount of unrecognized tax benefits for uncertain tax positions was $3,429 as of December 31, 2016. Payment of these obligations wouldresult from settlements with taxing authorities. Due to the difficulty in determining the timing of resolution of audits, these obligations are notincluded in the table. 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 1, 2017: Name Age PositionAlan Gelman*(1)(2) 61 Chairman of the BoardYacov Kaufman 59 Chief Financial Officer and Interim Chief Executive OfficerDror Erez 48 DirectorSarit Firon*(1)(3)(4) 50 External DirectorRoy Gen(1) 45 DirectorAvichay Nissenbaum*(2)(3)(4) 50 External DirectorOsnat Ronen*(4) 54 DirectorMichael Vorhaus*(2)(3) 59 DirectorLimor Gershoni Levy 46 Senior Vice President, General CounselRini Karlin 45 Senior Vice President, Human ResourcesMiki Kolko 54 Chief Technology OfficerAmir Nahmias 48 General Manager, CodeFuel Business UnitRobert Schwartz 39 President, Undertone Business Unit and Chief Strategy Officer____________ *"Independent director" under the NASDAQ Listing Rules.(1)Member of the investment committee.(2)Member of the nominating and governance committee.(3)Member of the compensation committee.(4)Member of the audit committee. There are no arrangements or understandings between any of our directors or executive officers and any other person pursuant to which our directorsor executive officers were selected. 49 Alan Gelman has been a director of the Company since August 2011 and as its Chairman of the Board since January 2016. From January 2014 untilDecember 2015, he also served as a director of Ion Asset Management Ltd. From December 2012 through May 2013, he served as the Global CFO and DeputyCEO of Better Place Inc. (in liquidation). From 2008 to 2012, Mr. Gelman served as the Chief Financial Officer and Deputy Chief Executive Officer of Bezeqthe Israeli Telecommunication Corp Ltd. (TASE: BEZQ). From 2006 to 2007, Mr. Gelman served in various positions at the Delek Group Ltd. (TASE:DELKG), including as the Deputy CEO and Chief Financial Officer from 2006 to 2007. From 2001 to 2006, Mr. Gelman served as the Chief Financial Officerof Partner Communications Company Ltd. (NASDAQ and TASE: PTNR), and from 1997 to 2000, he served as the Chief Financial Officer of Barak ITC. Heholds a B.A. in Accounting from Queens College and an M.B.A. from Hofstra University. Mr. Gelman is licensed as a Certified Public Accountant in NewYork (inactive) and in Israel. Yacov Kaufman has been the Chief Financial Officer of the Company since November 2005. Since January 2017, Mr. Kaufman is also our InterimChief Executive Officer. From 1996 to November 2005, Mr. Kaufman served as the Chief Financial Officer of Acorn Energy Inc. (formerly Data Systems &Software Inc., NASDAQ: ACFN). From 1986 to 1996, Mr. Kaufman served in various positions at dsIT Technologies Ltd., a subsidiary of Acorn, including asits Chief Financial Officer, from 1990 to 1996, and as its comptroller, from 1986 to 1990. From 1993 to 1999, Mr. Kaufman served as a director of TowerSemiconductor Ltd. (NASDAQ: TSEM). Mr. Kaufman is an Israeli Certified Public Accountant and holds a B.A. in Accounting and Economics from theHebrew University of Jerusalem and an M.B.A. in Business Finance from Bar-Ilan University. Dror Erez has been a director of the Company since January 2014. In 2005, Mr. Erez co-founded Conduit and has served as its Chief TechnologyOfficer until January 2014, when he became Conduit's President. Mr. Erez is also a member of the Conduit board of directors. Prior to founding Conduit, heserved in various executive roles in private technology companies. He holds a B.A. in Physics and Computer Science from Bar Ilan University. Sarit Firon has been an external director of the Company since January 2017. Since November 2014, Ms. Firon is a managing partner of CercaPartners, an Israeli venture capital fund. She has served at Extreme Reality Ltd., as its chief executive officer from December 2012 to November 2014 and asa director since December 2014. From November 2011 to November 2012, Ms. Firon was the Chief Financial Officer of Kenshoo Ltd. From November 2007to October 2011, Ms. Firon was the Chief Financial Officer of MediaMind Technologies Inc., a Nasdaq listed company which was acquired by DG, Inc. inAugust 2011. From May 2005 to June 2007, Ms. Firon was the Chief Financial Officer of OliveSoftware and from January 2000 to October 2004, she was theCFO of P-Cube, a private company which was acquired in October 2004 by Cisco Systems, Inc. (NASDAQ:CSCO). From October 2004 to January 2005, Ms.Firon was employed by Cisco to be responsible for the post-merger integration of P-Cube. From January 1995 to December 1999, Ms. Firon served in variouspositions at Radcom Ltd. (NASDAQ: RDCM), including as its Chief Financial Officer from September 1997 to December 1999. Since July 2015, she hasserved as Chairperson of the Board of myThings Israel Ltd. Since June 2014, Ms. Firon has served as a director of Mediwound Ltd. (NASDAQ: MDWD), andsince June 2012, Ms. Firon has served as a director of Datorama Ltd. From October 2000 to December 2006, Ms. Firon served as a director of MetaLink Ltd.(OTCMKTS:MTLK). Ms. Firon holds a B.A. in Accounting and Economics from Tel-Aviv University, Israel. Roy Gen has been a director of the Company since January 2014. Since 2008, he serves as the Chief Financial Officer of Conduit. Prior to joiningConduit, Mr. Gen served in various executive roles in private technology companies. He is an Israeli Certified Public Accountant and holds a B.A. inEconomics and Accounting from Tel Aviv University, as well as an M.B.A. from the Recanati School of Business Administration at Tel Aviv University. Avichay Nissenbaum has been an external director of the Company since July 2009, and in August 2015, he was reelected to serve a third three-yearterm. In 2012, Mr. Nissenbaum co-founded Lool Ventures L.P. and has since served as its general partner. In 2006, Mr. Nissenbaum co-founded Yedda, Inc.,which was acquired by AOL, Inc. (NYSE: AOL) in November 2007. He served as Yedda's Chief Executive Officer from 2006 to 2011. In 1996, Mr.Nissenbaum co-founded SmarTeam Corporation Ltd., which was acquired by Dassault Systems, S.A. in 1999. From 1996 to 2005, Mr. Nissenbaum served invarious positions at SmarTeam, including as VP Product, Executive VP Sales, Marketing and Business Development. Mr. Nissenbaum serves as a director ofTipa-Corp Ltd., as well as certain portfolio companies of Lool Ventures, including Zooz Ltd., Familio Technologies Ltd., Online Permission Technologies,Mediasafe, Sensibo Ltd., Shopial Ltd. Farm Dog Inc., Dbmaestro, Lawgeek and Mabaya. Mr. Nissenbaum also serves as a director of a non-for-profitorganization named "Leaders of the Future". Mr. Nissenbaum holds a B.Sc. in Computer Science and a B.A. in Economics, both from Bar-Ilan University. Osnat Ronen has been a director of the Company since December 2015. Ms. Ronen founded FireWind PE in 2015 and has since served as its generalpartner. Ms. Ronen has also served as an advisor to Liquidnet since 2013. From January 2008 to March 2013, she served as a general partner of Viola PrivateEquity. From 1994 to 2007, Ms. Ronen served in various positions at Bank Leumi Le Israel B.M. (TASE: LUMI), including as the Deputy Chief ExecutiveOfficer of Leumi Partners Ltd. from 2001 to 2007 and as Deputy Head of the Subsidiaries Division of the Leumi Group from 1999 to 2001. Ms. Ronencurrently serves as a director of Mizrahi Tefahot Bank Ltd. (TASE: MZTF), Fox-Wizel Ltd. (TASE: FOX) and Partner Communications Company Ltd.(NASDAQ and TASE: PTNR). She also volunteers as a director of the College for Management and Yissum Research Development Company of the HebrewUniversity of Jerusalem. Ms. Ronen has also served as a director of several portfolio companies of Viola, including: AmiadWater Systems Ltd. (AIM: AFS),Orad Hi-Tec Systems Ltd., Aeronautics Ltd., Degania Medical Ltd. and MatomyMedia Group Ltd. (LSE: MTMY). Ms. Ronen holds a B.Sc. in mathematicsand computer science from Tel Aviv University, as well as an M.B.A. from the Recanati School of Business Administration at Tel Aviv University. 50 Michael Vorhaus has been a director of the Company since April 2015. Since 1994, he has served as President of Frank N. Magid Associates, Inc., aresearch-based strategic consulting firm. From 1994 to 2008, he served as its Senior Vice President and Managing Director and since 2008 he has served asthe President of Magid Advisor, a unit of Magid Associates. From 2013-2014, Mr. Vorhaus served as a director of Grow Mobile. In 1987, he founded VorhausInvestments. Mr. Vorhaus holds a B.A. in Psychology from Wesleyan University and completed the Management Development Program at the University ofCalifornia, Berkeley's Haas School of Business. Limor Gershoni Levy has been the Senior Vice President, General Counsel and Corporate Secretary of the Company since January 2011. From 2003to 2010, Ms. Gershoni Levy served as General Legal Counsel at Veraz Networks Inc., a company which was listed on NASDAQ (VRAZ) prior to its merger in2010 with Dialogic Inc. (NASDAQ: DLGC). From 2000 to 2003, Ms. Gershoni-Levy served as the General Counsel at Medigate Ltd. Ms. Gershoni-Levyholds an L.L.B in Law from Essex University, England and an L.L.M. from Tel Aviv University Law School. Rini Karlin has been the Senior Vice President of Human Resources of the Company since October 2016. From 2004 until 2016, Ms. Karlin servedin various positions at Comverse – Xura (NASDAQ:MESG) including as Associated VP - Head of Israel HR, from 2014 to 2016, and as Associated VP - Headof HR Global Service Centers, from 2011 to 2014. From 1998 until 2004, Ms. Karlin served as strategic organizational consultant at Lotem, a strategicdevelopment consultancy company. Ms. Karlin holds a B.A. in Social Science from Bar Ilan University. Miki Kolko has been the Chief Technology Officer of the Company since January 2015. From 2012 to 2014 Mr. Kolko served as the Company VP ofthe Data Services Group. Previously, Mr. Kolko served as vice president of data at LivePerson (NASDAQ:LPSN), a global leader of digital engagementtechnology. Prior to his work at LivePerson, Mr. Kolko served in various engineering executive management positions and was a founder and chieftechnology officer of 3 startups in enterprise software and Internet B2C. Mr. Kolko holds an M.Sc. in computer science from Tel Aviv University and a B.A.in mathematics and computer science from Bar Ilan University. Amir Nahmias has been the General Manager of our CodeFuel business unit since December 2014. From March 2008 until December 2013, Mr.Nahmias served as Vice President of Publishers at Conduit Ltd. Between January 2014 and December 2014, Mr. Nahmias served as a Vice President of Salesand Partnerships in our CodeFuel division. Robert Schwartz has been the Chief Strategy and Development Officer of the Company since December 2015 and has served also as President of ourUndertone business unit, since October 2016. From October 2012 to November 2015, he was the Senior Vice President of Corporate Strategy and BusinessDevelopment of Undertone. From 2010 to 2012, Mr. Schwartz was the Vice President of Strategy and Corporate Development at the Topps Company. From2007 to 2010, Mr. Schwartz was a management consultant at Bain & Company, serving clients in the media and entertainment, consumer goods, andindustrial industries. He has also held strategy and operating roles at PepsiCo and IBM. Mr. Schwartz holds a B.A. in Government from Harvard College andan M.B.A. from Harvard Business School. There are no family relationships between any of our directors or executive officers. B. COMPENSATION The aggregate direct compensation we paid to our officers as a group (11 persons) for the year ended December 31, 2016, was approximately $9.3million, which included approximately $0.5 million that was set aside or accrued to provide for pension, retirement, severance or similar benefits. Thisamount includes bonuses paid to our officers pursuant to our executive bonus plan based on company performance measures, in accordance with ourCompensation Policy for Directors and Officers. This amount does not include expenses we incurred for other payments, including dues for professional andbusiness associations, business travel and other expenses, and other benefits commonly reimbursed or paid by companies in Israel. 51 The aggregate compensation we paid to our directors who are not officers for their services as directors as a group for the year ended December 31,2016 was approximately $0.4 million. In addition, our directors are reimbursed for expenses incurred in order to attend board or committee meetings. In the year ended December 31, 2016, we granted (i) options to purchase 615,000 ordinary shares to our officers, at a weighted average exercise priceof $1.03 per share, and the latest expiration date for such options is November 2021. These options were granted under our Equity Incentive Plan, asamended, formerly known as the 2003 Israeli Share Option Plan (the "Incentive Plan"). In 2016, we paid each of our directors $50,000 per year, subject to adjustment for changes in the Israeli consumer price index and applicablechanges in the Israeli regulations governing the compensation of external directors. Each of our directors also received, on January 5, 2017, an annual grantof options to purchase 25,000 ordinary shares under the Incentive Plan. Each option is exercisable for a term of five years at an exercise price per share equalto the closing price of our ordinary shares on the date of the annual meeting of shareholders on which such option was granted, as reported by the NASDAQStock Market. The options vest in three equal installments on each anniversary of date of grant. Following termination or expiration of the applicabledirector's service with the Company, provided that the termination or expiration is not for "cause" and is not a result of the director's resignation, the optionswould retain their original expiration dates and, with respect to each grant, the upcoming tranche of options that are scheduled to vest immediatelysubsequent to the termination date, if any, will automatically vest and become exercisable. All unvested options held by the director will automatically vestand become exercisable upon a change of control of the Company, which is defined for this purpose as (i) a merger, acquisition or reorganization of theCompany 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;(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 arebeneficially owned by one person or group (as defined in the SEC rules). The table below reflects the compensation granted to our five most highly compensated office holders during or with respect to the year endedDecember 31, 2016. 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 interms of cost to the Company, as recognized in our financial statements for the year ended December 31, 2016, including the compensation paid to suchCovered Executive following the end of the year in respect of services provided during the year. Each of the Covered Employees was covered by our D&Oliability insurance policy and was entitled to indemnification and exculpation in accordance with applicable law and our articles of association. All numbersbelow are in US Dollars in thousands. Name and Principal Position (1) Salary Cost (2) Bonus (3) Equity-BasedCompensation (4) Total Josef Mandelbaum, former CEO 892 150 1,944 2,986 Amir Nahmias, General Manager, CodeFuel Business Unit 548 451 735 1,734 Yacov Kaufman, CFO 532 87 628 1,247 Limor Gershoni Levy, Senior vice President, General Counsel 343 59 408 810 Robert Schwartz, President, Undertone Business Unit and Chief StrategyOfficer 441 105 88 634 ____________________ (1)Unless otherwise indicated herein, all Covered Executives are employed on a full-time (100%) basis. (2)Salary cost includes the Covered Executive's gross salary plus payment of social benefits made by the Company on behalf of such CoveredExecutive. Such benefits may include, to the extent applicable to the Covered Executive, payments, contributions and/or allocations for savingsfunds (e.g., Managers' Life Insurance Policy), education funds (referred to in Hebrew as "keren hishtalmut"), pension, severance, dismissal noticeaccrued during the year, risk insurances (e.g., life, or work disability insurance), payments for social security and tax gross-up payments, vacation,car, medical insurances and benefits, phone, convalescence or recreation pay and other benefits and perquisites consistent with the Company’spolicies. (3)Annual bonuses granted to the Covered Executives based on formulas set forth in the annual compensation plan approved by the Board of Directors. (4)Represents the equity-based compensation expenses recorded in our consolidated financial statements for the year ended December 31, 2016. Suchnumbers are based on the option or RSU grant date fair value in accordance with accounting guidance for equity-based compensation and does notnecessarily reflect the cash proceeds to be received by the applicable officer upon the vesting and sale of the underlying shares. For a discussion ofthe assumptions used in reaching this valuation, see Note 2 to our Financial Statements. 52 Compensation Terms of our Former Chief Executive Officer Josef Mandelbaum served as our Chief Executive Officer from July 2010 to January 2017. His base salary at the time of termination was ILS 161,684per month (equivalent to $42,100, as of December 31, 2016). In addition, Mr. Mandelbaum was entitled to an annual bonus equal to up to 50% of his basesalary, subject to our meeting our annual targets for revenue and EBIT set by our Board of Directors. Half of the bonus depended on meeting the revenuetarget and half on meeting the EBIT target. We granted to Mr. Mandelbaum 200,000 RSUs on November 18, 2013 and 232,400 RSUs on January 2, 2014. These RSUs were granted under theIncentive Plan and have a purchase price of ILS 0.01 per share. They all vested over a period of three years. Mr. Mandelbaum's separation terms are in accordance with his employment agreement, pursuant to which he will be entitled to continued benefitsuntil September 2017. He has agreed not to compete with us during his term of employment and for a period of 180 days thereafter. His employmentagreement also contains customary confidentiality and intellectual property assignment provisions. We also have employment agreements with our other executive officers. These agreements do not contain any change of control provisions andotherwise contain salary, benefit and non-competition provisions that we believe to be customary in our industry. C. BOARD PRACTICES Corporate Governance Practices We are incorporated in Israel and therefore are subject to various corporate governance practices under the Companies Law, relating to such mattersas external directors, the audit committee, the internal auditor and approvals of interested party transactions. These matters are in addition to the ongoinglisting conditions of NASDAQ and other relevant provisions of U.S. securities laws. Under the NASDAQ Listing Rules, a foreign private issuer may generallyfollow its home country rules of corporate governance in lieu of the comparable NASDAQ requirements, except for certain matters such as composition andresponsibilities 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 governancecommittee, 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. 53 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 ourfinancial 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 directorsalso appoints and may remove our chief executive officer and may appoint or remove other executive officers, subject to any rights that the executive officersmay have under their employment agreements. Our board of directors currently consists of seven directors, two of whom qualify as "external directors" under Israeli law and have also beendetermined by our board of directors to qualify as "independent directors" for the purpose of the NASDAQ Listing Rules. Other than external directors, whoare subject to special election requirements under Israeli law, our directors are elected in three staggered classes by the vote of a majority of the ordinaryshares 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 ateach 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 isrequired to be held at least once during every calendar year and not more than fifteen months after the last preceding meeting. At our 2015 annual meeting ofshareholders, held on December 31, 2015, Mr. Roy Gen and Ms. Osnat Ronen were each elected as a director for a three-year term. At an extraordinary generalmeeting of our shareholders, held on August 24, 2015, Mr. Avichay Nissenbaum was reelected to serve as an external director for a third three-year termcommencing on September 27, 2015, and Mr. Michael Vorhaus was elected as a director for a three-year term. At our 2016 annual meeting of shareholders,held on January 5, 2017, Ms. Sarit Firon was elected as an external director, effective as of January 6, 2017. In addition, in our 2016 annual meeting ofshareholders, Messrs. Alan Gelman and Dror Erez were each elected as a director for a three-year term. The external directors are not assigned to a class and areelected in accordance with the Companies Law. If the number of directors constituting our board of directors is changed, any increase or decrease shall be apportioned among the classes so as tomaintain 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 ofdirectors 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 meetingof 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 termsthat 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 morethan 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 onthe matter. Under the Companies Law, our board of directors must determine the minimum number of directors having financial and accounting expertise, asdefined in the regulations that our board of directors should have. In determining the number of directors required to have such expertise, the board ofdirectors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors hasdetermined that we require at least one director with the requisite financial and accounting expertise and that Ms. Sarit Firon has such expertise. Under the Companies Law, the chairperson of the board of a company is not permitted to hold another position in the company or a subsidiarythereof other than chairperson or director of a subsidiary or, if approved by a special majority of shareholders, chief executive officer of the company. 54 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 twoindividuals to serve as external directors. Our external directors under the Companies Law are Mr. Avichay Nissenbaum, whose third three-year termcommenced on September 27, 2015, and Ms. Sarit Firon, whose inital three-year term commenced on January 6, 2017. External directors are required to possess independence and professional qualifications as set out in the Companies Law and regulationspromulgated thereunder. Each committee of a company's board of directors that is authorized to exercise any powers of the board of directors is required toinclude at least one external director. The audit committee and the compensation committee must include all the external directors. External directors are elected by a majority vote at a shareholders’ meeting, as long as either: ·the majority of shares voted on the matter, including at least a majority of the shares of non-controlling shareholders voted on the matter, vote infavor of election; or ·the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed two percent of theaggregate voting rights in the company. The initial term of an external director is three years and such director may be reappointed for up to two additional three-year terms. Thereafter, he orshe may be reelected by our shareholders for additional periods of up to three years each only if the audit committee and the board of directors confirm that,in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additionalperiod is beneficial to us. Reelection of an external director may be effected through one of the following mechanisms: (1) the board of directors proposed thereelection of the external director and the election was approved by the shareholders by the majority required to appoint external directors for their initialterm; or (2) a shareholder holding 1% or more of the voting rights or the external director proposed the reelection of the external director, and the reelection isapproved by a majority of the votes cast by the shareholders of the company, excluding the votes of controlling shareholders and those who have a personalinterest in the matter as a result of their relations with the controlling shareholders, provided that the aggregate votes cast in favor of the reelection by suchnon-excluded shareholders constitute more than 2% of the voting rights in the company. An external director may be removed only in a general meeting, bythe same percentage of shareholders as is required for electing an external director, or by a court, and in both cases only if the external director ceases to meetthe statutory qualifications for appointment or if he or she has violated the duty of loyalty to us. An external director is entitled to compensation as provided in regulations under the Companies Law and is otherwise prohibited from receiving anyother compensation, directly or indirectly from us. We do not have, nor do our subsidiaries have, any directors’ service contracts granting to the directors anybenefits upon termination of their service in their capacity as directors. 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 governancecommittee. Audit Committee Our audit committee is comprised of Ms. Sarit Firon (Chairperson), Mr. Avichay Nissenbaum and Ms. Osnat Ronen, and operates pursuant to awritten charter. NASDAQ Requirements Under the listing requirements of the NASDAQ Stock Market, a foreign private issuer is required to maintain an audit committee that has certainresponsibilities 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 theboard of directors in fulfilling its responsibility for oversight of the quality and integrity of our accounting, auditing and financial reporting practices andfinancial statements. Our audit committee is also responsible for the establishment of policies and procedures for review and pre-approval by the committeeof 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 ourauditor’s independence. For more information see Item "16.C – Principal Accountant Fees and Services." Under the NASDAQ Listing Rules, the approval ofthe 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 atleast three directors who meet certain independence criteria and must include all of the external directors. The chairperson of the audit committee must be anexternal director. The responsibilities of the audit committee under the Companies Law include to identify and address problems in the management of thecompany, review and approve interested party transactions, establish whistleblower procedures and procedures for considering controlling party transactionsand oversee the company’s internal audit system and the performance of the internal auditor. 55 Compensation Committee Our compensation committee is comprised of Mr. Avichay Nissenbaum (Chairperson), Mr. Michael Vorhaus and Ms. Sarit Firon, all of whom satisfythe respective "independence" requirements of the Companies Law, SEC and NASDAQ Listing Rules for compensation committee members. Ourcompensation 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, incentivebonuses, including the specific goals and amounts, stock option grants, employment agreements, and any other benefits, compensation or arrangements ofour executive officers and directors. Pursuant to the Companies Law, our compensation committee must be comprised of at least three directors, include all ofthe external directors, its other members must satisfy certain independence standards under the Companies Law, and the chairman is required to be anexternal director. In addition, our compensation committee is required to propose for shareholder approval by a special majority, a compensation policygoverning the compensation of office holders based on specified criteria, to review, from time to time, modifications to the compensation policy and examineits implementation; and to approve the actual compensation terms of office holders prior to approval thereof by the board of directors. Our shareholders mostrecently re-approved our Compensation Policy for Directors and Officers on January 5, 2017. Our compensation committee also oversees the administrationof our equity based incentive plan. Investment Committee Our investment committee is comprised of Mr. Alan Gelman (Chairperson), Ms. Sarit Firon, and Mr. Roy Gen. The Investment Committee isresponsible for formulating the overall investment policies of the Company, and establishing investment guidelines in furtherance of those policies. TheCommittee monitors the management of the portfolio for compliance with the investment policies and guidelines and for meeting performance objectivesover 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. Alan Gelman, and Mr. Avichay Nissenbaum,and operates pursuant to a written charter. It is responsible for making recommendations to the board of directors regarding candidates for directorships andthe size and composition of the board. In addition, the committee is responsible for overseeing our corporate governance guidelines and reporting andmaking recommendations to the board concerning corporate governance matters. Under the Companies Law, nominations for director are generally made byour board of directors but may be made by one or more of our shareholders pursuant to applicable law and our articles of association. Internal Auditor Under the Companies Law, the board of directors of a public company must appoint an internal auditor nominated in accordance with the auditcommittee’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 oroffice 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 itsrepresentative. The Companies Law defines an interested party as a substantial shareholder of 5% or more of the shares or voting rights of a company, anyperson 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 oras 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 suspendedfrom such position unless the board of directors has so resolved after hearing the opinion of the audit committee and after giving him or her a reasonableopportunity to present his or her position to the board and to the audit committee. Our internal auditor is Mrs. Linur Dloomy, CPA, of Brightman AlmagorZohar & Co., a member of Deloitte Touche Tohmatsu. 56 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, 2014* 2015* 2016 Cost of sales 19 20 17 Research and development 187 168 136 Selling and marketing 104 262 272 General and administration 97 128 110 Total 439 646 535 *not including employees engaged in the discontinued operations. As of December 31, 2016, 222 of our employees were located in Israel, 237 of our employees were located in the United States and 76 employeeswere located in Europe. In Israel we are subject to certain labor statutes and national labor court precedent rulings, as well as to some provisions of the collective bargainingagreement between the Histadrut, which is the General Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations, including theIndustrialist’s Association of Israel. These provisions of collective bargaining agreements apply to our Israeli employees by virtue of extension orders issuedin accordance with relevant labor laws by the Israeli Ministry of Economy, and which apply such agreement provisions to our employees even though theyare not directly part of a union that has signed a collective bargaining agreement. The laws and labor court rulings that apply to our employees principallyconcern minimum wage laws, procedures for dismissing employees, determination of severance pay, leaves of absence (such as annual vacation or maternityleave), sick pay and other conditions for employment. The extension orders which apply to our employees principally concern the requirement for the lengthof the workday and the work-week, annual recuperation pay and commuting expenses, compensation for working on the day before and after a holiday andpayments to pension funds and other conditions for employment. Furthermore, these provisions provide that the wages of most of our employees are adjustedautomatically. The amount and frequency of these adjustments are modified from time to time. Additionally, we are required to insure all of our employees bya comprehensive pension plan or a managers' insurance according to the terms and the rates detailed in the order. In addition, Israeli law determines minimumwages for workers, minimum paid leave or vacation, sick leave, working hours and days of rest, insurance for work-related accidents, determination ofseverance pay, the duty to give notice of dismissal or resignation and other conditions of employment. In addition, certain laws prohibit or limit theemployer’s ability to dismiss its employees in special circumstances. We have never experienced a work stoppage, and we believe our relations with ouremployees are good. Israeli law generally requires the payment of severance by employers upon the retirement or death of an employee or upon termination ofemployment by the employer or, in certain circumstances, by the employee. Most of our agreements with employees in Israel are in accordance with Section14 of the Severance Pay Law, 1963 (“Section 14”), where our contributions for severance pay are paid in lieu of any severance liability. Upon contribution ofthe full amount of the employee's monthly salary, and release of the policy to the employee, no additional severance payments are required to be made by usto the employee. Additionally, the related obligation and amounts deposited pursuant to such obligation are not stated on the balance sheet, as we are legallyreleased from any obligation to employees once the deposit amounts have been paid. Our liability for severance pay to employees not under Section 14 iscalculated pursuant to Israel's Severance Pay Law based on the employees' most recent monthly salaries, multiplied by the number of years of theiremployment, or a portion thereof, as of the balance sheet date. This liability is provided for by monthly deposits into accounts for the benefit of theemployees and by an accrual. The deposited funds include profits (losses) accumulated up to the balance sheet date. As of December 31, 2016, our netaccrued unfunded severance obligations totaled $1,378 million. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which covers, amongstother benefits, payments for state retirement benefits and survivor benefits (similar to the United States Social Security Administration), as well as stateunemployment benefits. These amounts also include payments for national health insurance. The payments to the National Insurance Institute can equal upto approximately 19.5% of wages subject to a cap if an employee’s monthly wages exceed a specified amount, of which the employee contributes up toapproximately 12% and the employer contributes approximately 7.5%. 57 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 ofMarch 1, 2017 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 outstandingordinary shares. Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a personexercises 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 60days of a specified date are deemed to be outstanding and beneficially owned by the person holding the stock options for the purpose of computing thepercentage 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 shareholder in the table has sole voting and investment power for the shares shown asbeneficially owned by them. Percentage ownership is based on 77,550,069 ordinary shares outstanding as of March 1, 2017. Name Number of OrdinaryShares BeneficiallyOwned Percentage ofOrdinary SharesOutstanding Dror Erez (1) 9,190,642 11.8%All directors and officers as a group (12 persons) (2) 10,684,418 13.6%____________________________(1) Based upon information provided to us by Mr. Erez. Includes options to purchase 24,999 ordinary shares, that are vested or will vest, within 60 days ofMarch 1, 2017.(2) Includes options to purchase 853,897 ordinary shares, that are vested or will vest within 60 days of March 1, 2017. Employee Benefit Plans The Incentive Plan, our current equity incentive plan, was initially adopted in 2003, providing certain tax benefits in connection with share-basedcompensation under the tax laws of Israel and the United States. The term of the Incentive Plan will expire on December 9, 2022. Please also see Note 12 toour Financial Statements for information on the options issued under the Incentive Plan. Under the Incentive Plan, as amended from time to time, we may grant to our directors, officers, employees, consultants, advisers, service providersand controlling shareholders options to purchase our ordinary shares, restricted shares and RSUs. As of December 31, 2016, a total of 7,197,886 ordinaryshares were subject to the Incentive Plan. As of March 1, 2017, options to purchase a total of 11,863,941 ordinary shares were outstanding under ourIncentive Plan, of which options to purchase a total of 3,493,073 ordinary shares were held by our directors and officers (13 persons) as a group. Theoutstanding options are exercisable at purchase prices which range from $0.34 to $13.54 per share. Any expired or cancelled options are available forreissuance under the Incentive Plan. Our Israeli employees and directors may be granted awards under Section 102 ("Section 102") of the Israeli Income Tax Ordinance (the "TaxOrdinance"), which provides them with beneficial tax treatment, and non-employees (such as service providers, consultants and advisers) and controllingshareholders may only be granted awards under another section of the Tax Ordinance, which does not provide for similar tax benefits. To be eligible for taxbenefits under Section 102, the securities must be issued through a trustee, and if held by the trustee for the minimum required period, the employees anddirectors are entitled to defer any taxable event with respect to the award until the earlier of (i) the transfer of securities from the trustee to the employee ordirector 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 ofawards to Israeli grantees under the Incentive Plan. Based on such election, and subject to the fulfillment of the conditions of Section 102, under the CapitalGains Route, gains realized from the sale of shares issued pursuant to the Incentive Plan will generally be taxed at the capital gain rate of 25%, provided thetrustee holds the securities for 24 months following the date of grant of the award. To the extent that the market price of the ordinary shares at the time ofgrant exceeds the exercise price of the award or if the conditions of Section 102 are not met, tax will be payable at the time of sale at the marginal income taxrate applicable to the employee or director (up to 50% in 2016). We are not entitled to recognize a deduction for Israeli tax purposes on the capital gainrecognized by the award holder upon the sale of shares pursuant to Section 102. The voting rights of any shares held by the trustee under Section 102 remainwith 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. taxpurposes. Pursuant to the approval of our board of directors and shareholders, stock options granted to U.S. citizens and resident aliens may be eitherincentive stock options under the U.S. Internal Revenue Code of 1986, as amended (the "Code") or options that do not qualify as incentive stock options.Subject to the fulfillment of the conditions of the Code, an incentive stock option may provide tax benefits to the holder in that it converts ordinary incomeinto income taxed at long-term capital gain rates and defers the tax until the sale of the underlying share. In that event, we would not recognize a taxdeduction with respect to such capital gain. 58 Our board of directors has the authority to administer, and to grant awards, under the Incentive Plan. However, the compensation committeeappointed by the board provides recommendations to the board with respect to the administration of the plan. Generally, RSUs and options granted under theIncentive Plan vest in two or three installments on each anniversary of the date of grant. See "Item 6.B Compensation" for a description of awards granted under the Incentive Plan to our directors and officers in 2013. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. MAJOR SHAREHOLDERS The following table sets forth information regarding the beneficial ownership of our ordinary shares as ofMarch 1, 2017 by each person or group of affiliated persons that we know beneficially owns more than 5% of our outstanding ordinary shares. Other thanwith respect to our directors and officers, we have relied on public filings with the SEC. Beneficial ownership of shares is determined in accordance with the Exchange Act and the rules promulgated thereunder, and generally includes anyshares over which a person exercises sole or shared voting or investment power. Ordinary shares that are issuable upon the exercise of warrants, RSUs or stockoptions 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 stockoptions or warrants for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing thepercentage ownership of any other person. Except as indicated in the footnotes to this table, to our knowledge, each shareholder in the table has sole voting and investment power for theshares shown as beneficially owned by such shareholder. Our major shareholders do not have different voting rights than our other shareholders. Name Number of OrdinaryShares BeneficiallyOwned Percentage ofOrdinary SharesOutstanding (1) Benchmark Israel II, L.P. and affiliates (2) 9,576,772 12.3%J.P. Morgan Investment Management Inc. (3) 9,422,946 12.2%Dror Erez (4) 9,190,642 11.8%Ronen Shilo (5) 8,858,847 11.4%Zack and Orli Rinat (6) 6,484,347 8.4%(1)Based upon 77,550,069 ordinary shares outstanding as of March 1, 2017. (2)Based solely upon, and qualified in its entirety with reference to, a Schedule 13G/A filed with the SEC on February 14, 2017, by Benchmark Israel II,L.P. (“BI II”) and affiliates. BCPI Partners II, L.P. (“BCPI-P”), the general partner of BI II may be deemed to have sole power to vote and dispose ofthe 9,293,742 shares directly held by BI II. BCPI Corporation II (“BCPI-C”), the general partner of BCPI-P, may be deemed to have sole power tovote and dispose of the shares directly held by BI II. Michael A. Eisenberg and Arad Naveh, the directors of BCPI-C, may be deemed to have sharedpower to vote and dispose of the shares directly held by BI II. 283,030 shares are held in nominee form for the benefit of persons associated withBCPI-C. BCPI-P may be deemed to have sole power to vote and dispose of these shares, BCPI-C may be deemed to have sole power to vote anddispose of these shares and Messrs. Eisenberg and Naveh may be deemed to have shared power to vote and dispose of these shares. (3)Consists of: (i) 4,203,067 ordinary shares directly held by Project Condor LLC (“Condor”); (ii) 5,155,436 ordinary shares directly held by theNational Council for Social Security Fund (“SSF”); and (iii) 64,443 ordinary shares held by 522 Fifth Avenue Fund, L.P. (“522 Fund”). PEG DigitalGrowth Fund L.P. (“DGF”) owns 98.75% of the membership interests of Condor and 522 Fund owns 1.25% of the membership interests of Condor.As the holder of the majority of the membership interests of Condor, DGF manages Condor and has shared voting or dispositive power over the4,203,067 ordinary shares held by Condor. J.P. Morgan Investment Management Inc. (“JPMIM”) serves as investment advisor to each of DGF, 522Fund, and SSF. Based upon, and qualified in its entirety with reference to, a Schedule 13G filed with the SEC on January 11, 2017, by JPMIM, DGF,Condor and SSF. (4)Based solely upon, and qualified in its entirety with reference to, a Schedule 13D/A filed with the SEC on November 25, 2015, by Mr. Erez. Includesoptions to purchase 24,999 ordinary shares that are vested or will vest within 60 days of March 1, 2017. (5)Based solely upon, and qualified in its entirety with reference to, a Schedule 13D/A filed with the SEC on November 25, 2015, by Mr. Shilo. (6)Based solely upon, and qualified in its entirety with reference to, a Schedule 13G filed with the SEC on January 16, 2014, by Zack and Orli Rinat.The Ordinary Shares are held by Zack Rinat and Orli Rinat as community property. To our knowledge, as of March 1, 2017, we had 13 shareholders of record of which 11 (including the Depository Trust Company) were registeredwith addresses in the United States. These U.S. holders were, as of such date, the holders of record of approximately 93.79% of our outstanding shares. Thenumber of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holdersare resident since many of these ordinary shares were held of record by brokers or other nominees. 59 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 thewhole, are no less favorable to us than could be obtained from independent parties. See "Item 10.B Memorandum and Articles of Association — Approval of Related Party Transactions" for a discussion of the requirements of Israelilaw regarding special approvals for transactions involving directors, officers or controlling shareholders. Agreement with Conduit Shareholders As a condition precedent to the closing of ClientConnect Acquisition on January 2, 2014, Conduit spun off its ClientConnect business. As a resultof the ClientConnect Acquisition, two office holders of Conduit – Dror Erez and Roy Gen – became members of our Board of Directors and the majorshareholders of Conduit also became major shareholders of the Company. For information about a registration rights agreement we entered into in connectionwith the ClientConnect Acquisition, see Item 10.C "Additional Information—Material Contracts—Agreements Relating to the ClientConnect Acquisition."Such directors and major shareholders are parties to such agreement. C. INTERESTS OF EXPERTS AND COUNSEL Not applicable. 60 ITEM 8. FINANCIAL INFORMATION A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION Our Financial Statements are included in this annual report pursuant to Item 18. As described in Item 3.A above, since 2014, the ClientConnectAcquisition has been reflected in our financial statements as a reverse acquisition of all of our outstanding shares and options by ClientConnect inaccordance with Accounting Standards Codification Topic 805, "Business Combinations" ("ASC 805"), using the acquisition method of accounting wherebyClientConnect is the deemed accounting acquirer and Perion is the deemed accounting acquiree. In accordance with the ASC 805 presentation requirements,our financial statements include ClientConnect’s comparative numbers, but not Perion's comparative numbers, for 2013. Legal Proceedings On November 7, 2012, we entered into a Share Purchase Agreement with SweetIM Ltd., SweetIM Technologies Ltd., the shareholders of SweetIMand Nadav Goshen, as Shareholders' Agent, according to which we purchased 100% of the issued and outstanding shares of SweetIM Ltd. Under the terms ofthe Share Purchase Agreement, among other things, a third payment of up to $7.5 million in cash was due in May 2014, if certain milestones were met. Themilestones are based on our revenues in the fiscal year of 2013 and the absence of certain changes in the industry in which we operate. We believe that thatthe terms of the Share Purchase Agreement require us to pay only $2.5 million with respect to the contingent payment, which we have paid. However, theShareholders' Agent has demanded payment of an additional $5.0 million. We believe that the claim is without merit and we are defending against itvigorously. Until this dispute is resolved, we will maintain the $5.0 million liability in our financial statements that we recorded at the time that we enteredinto the Share Purchase Agreement. In April 2015, pursuant to the Share Purchase Agreement, an arbitration process with respect to this claim wascommenced in Israel and is still ongoing. On December 22, 2015, Adtile Technologies Inc. ("Adtile") filed a lawsuit against Perion and its wholly-owned subsidiary, Intercept Interactive Inc.(“Intercept”) in the United States District Court for the District of Delaware. The lawsuit alleges various causes of action against Perion and Intercept relatedto Intercept’s alleged unauthorized use and misappropriation of Adtile’s proprietary information and trade secrets. Adtile is seeking injunctive relief andunspecified monetary damages. We are unable to predict the outcome or range of possible loss at this stage. On June 23, 2016, the court denied Adtile’smotion for a preliminary injunction. On June 24, 2016, the court (i) granted Perion’s motion to dismiss and (ii) granted Intercept’s motion to stay the actionand compel arbitration. We believe that we have strong defenses against this lawsuit and we intend to defend against it vigorously. Policy on Dividend Distribution It is currently our policy not to distribute dividends. B. SIGNIFICANT CHANGES Since the date of our audited Financial Statements incorporated by reference in this report, there have not been any significant changes other than asset forth in this report under Item 4.A. – "Recent Developments." ITEM 9. THE OFFER AND LISTING A. OFFER AND LISTING DETAILS Our ordinary shares have been listed on the NASDAQ Capital Market from January 31, 2006 to June 26, 2007, on the NASDAQ Global Market fromJune 27, 2007 to December 31, 2013, and on the NASDAQ Global Select Market since January 2, 2014. Our ordinary shares commenced trading on the TelAviv Stock Exchange on December 4, 2007. Our trading symbol on NASDAQ is "PERI" and on the TASE is "PERION." The following table shows, for the periods indicated, the high and low market prices of our ordinary shares as reported on the NASDAQ and theTASE. The TASE prices have been translated from ILS to dollars based on the exchange rate between the ILS and the dollar, as quoted by the Bank of Israelwith respect to the date of the applicable high or low market price on the TASE. 61 NASDAQ TASE High ($) Low ($) High ($) Low ($) Five most recent full financial years 2016 3.25 0.94 3.71 0.95 2015 4.52 2.05 4.56 2.06 2014 14.33 4.26 14.33 4.31 2013 14.94 8.19 14.90 8.21 2012 10.50 3.68 10.45 3.85 Financial quarters during the past two recent full financialyears and any subsequent period Fourth Quarter 2016 1.47 0.94 1.43 0.95 Third Quarter 2016 1.49 1.07 1.51 1.09 Second Quarter 2016 2.05 1.01 2.01 1.05 First Quarter 2016 3.25 1.98 3.71 1.99 Fourth Quarter 2015 3.94 2.08 3.69 2.07 Third Quarter 2015 2.92 2.05 2.98 2.06 Second Quarter 2015 3.91 2.75 3.94 2.75 First Quarter 2015 4.52 3.11 4.56 3.07 Most recent six months February 2017 2.38 1.84 2.30 1.86 January 2017 1.87 1.44 1.93 1.42 December 2016 1.47 1.10 1.43 1.17 November 2016 1.22 0.94 1.21 0.95 October 2016 1.24 1.01 1.21 1.05 September 2016 1.39 1.16 1.38 1.21 The closing prices of our ordinary shares, as reported on the NASDAQ and on the TASE on March 6, 2017, were $1.94 and ILS 7.03 (equal to $1.91 based onthe exchange rate between the ILS and the dollar, as quoted by the Bank of Israel on March 6, 2017), respectively. B. PLAN OF DISTRIBUTION Not applicable. C. MARKETS Our ordinary shares are quoted on the NASDAQ Global Select Market under the symbol "PERI," and on the Tel Aviv Stock Exchange under thesymbol "PERION." D. SELLING SHAREHOLDERS Not applicable. E. DILUTION Not applicable. F. EXPENSES OF THE ISSUE Not applicable. 62 ITEM 10. ADDITIONAL INFORMATION A. SHARE CAPITAL Not applicable B. MEMORANDUM AND ARTICLES OF ASSOCIATION Registration Number and Purposes Our registration number with the Israeli Companies Registrar is 51-284949-8. Pursuant to Section 3 of our articles of association, our objectives arethe development, manufacture and marketing of software and any other objective as determined by our board of directors. Authorized Share Capital On November 18, 2013, our shareholders approved amendments to our memorandum and articles of association increasing our authorized sharecapital to ILS 1,200,000, divided into 120,000,000 ordinary shares, par value ILS 0.01 per share. The Board of Directors Under the Companies Law and our articles of association, our board of directors may exercise all powers and take all actions that are not requiredunder the Companies Law or under our articles of association to be exercised or taken by another corporate body, including the power to borrow money forthe purposes of our Company. Our directors are not subject to any age limit requirement, nor are they disqualified from serving on our board of directorsbecause of a failure to own a certain amount of our shares. For more information about our Board of Directors, see Item 6.C "Board Practices." Dividend and Liquidation Rights The holders of the ordinary shares are entitled to their proportionate share of any cash dividend, share dividend or dividend in kind declared withrespect to our ordinary shares on or after the date of this annual report. We may declare dividends out of profits legally available for distribution. Under theCompanies Law, a company may distribute a dividend only if the distribution does not create a reasonable risk that the company will be unable to meet itsexisting and anticipated obligations as they become due. Furthermore, a company may only distribute a dividend out of the company’s profits, as definedunder the Companies Law. If the company does not meet the profit requirement, a court may allow it to distribute a dividend, as long as the court isconvinced that there is no reasonable risk that such distribution might prevent the company from being able to meet its existing and anticipated obligationsas they become due. Under the Companies Law, the declaration of a dividend does not require the approval of the shareholders of a company unless the company’sarticles of association provide otherwise. Our articles of association provide that the board of directors may declare and distribute dividends without theapproval of the shareholders. In the event of our liquidation, holders of our ordinary shares have the right to share ratably in any assets remaining afterpayment of liabilities, in proportion to the paid-up par value of their respective holdings. These rights may be affected by the grant of preferential liquidation or dividend rights to the holders of a class of shares that may be authorized inthe future. Voting, Shareholder Meetings and Resolutions Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. This right may be changed ifshares with special voting rights are authorized in the future. Our articles of association and the laws of the State of Israel do not restrict the ownership or voting of ordinary shares by non-residents of Israel. Under the Companies Law, an annual meeting of our shareholders should be held once every calendar year, but no later than 15 months from thedate of the previous annual meeting. The quorum required under our articles of association for a general meeting of shareholders consists of at least twoshareholders present in person or by proxy holding in the aggregate at least 33-1/3% of the voting power. According to our articles of association a meetingadjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as thechairperson of the board of directors designates in a notice to the shareholders with the consent of the holders of the majority voting power represented at themeeting voting on the question of adjournment. In the event of a lack of quorum in a meeting convened upon the request of shareholders, the meeting shallbe dissolved. At the adjourned meeting, if a legal quorum is not present after 30 minutes from the time specified for the commencement of the adjournedmeeting, 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 ofshareholders present in person or by proxy. 63 Our board of directors may, in its discretion, convene additional meetings as "special general meetings." Special general meetings may also beconvened upon shareholder request in accordance with the Companies Law and our articles of association. The chairperson of our board of directors presidesat each of our general meetings. The chairperson of the board of directors is not entitled to a vote at a general meeting in his capacity as chairperson. Most shareholders’ resolutions, including resolutions to: ·amend our articles of association (except as set forth below) or our memorandum of association; ·make changes in our capital structure such as a reduction of capital, increase of capital or share split, merger or consolidation; ·authorize a new class of shares; ·elect directors, other than external directors; or ·appoint auditors will be deemed adopted if approved by the holders of a majority of the voting power represented at a shareholders’ meeting, in person or by proxy, andvoting on that resolution. Except as set forth in the following sentence none of these actions require the approval of a special majority. Amendments to ourarticles of association relating to the election and vacation of office of directors, the composition and size of the board of directors and the insurance,indemnification and release in advance of the company’s office holders with respect to certain liabilities incurred by them require the approval at a generalmeeting of shareholders holding more than two-thirds of the voting power of the issued and outstanding share capital of the company. Notices Under the Companies Law, shareholders’ meetings generally require prior notice of at least 21 days, or 35 days if the meeting is adjourned for thepurpose of voting on any of the following matters: (1)appointment and removal of directors; (2)approval of certain matters relating to the fiduciary duties of office holders and of certain transactions with interested parties; (3)approval of certain mergers; and (4)any other matter in respect of which the articles of association provide that resolutions of the general meeting may be approved by means of avoting document. Modification of Class Rights The Companies Law provides that, unless otherwise provided by the articles of association, the rights of a particular class of shares may not beadversely modified without the vote of a majority of the affected class at a separate class meeting. Election of Directors Our ordinary shares do not have cumulative voting rights in the election of directors. Therefore, the holders of ordinary shares representing morethan 50% of the voting power at the general meeting of the shareholders, in person or by proxy, have the power to elect all of the directors whose positionsare being filled at that meeting, to the exclusion of the remaining shareholders. External directors are elected by a majority vote at a shareholders’ meeting,provided that either: ·the majority of shares voted for the election includes at least a majority of the shares held by non-controlling shareholders voted at the meetingand excluding shares held by a person with a personal interest in the approval of the election, excluding a personal interest which is not as aresult of his connection with the controlling shareholder (excluding abstaining votes); or ·the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed two percent of theaggregate voting rights in the company. See "Item 6.C Board Practices" regarding our staggered board. 64 Transfer Agent and Registrar American Stock Transfer and Trust Company is the transfer agent and registrar for our ordinary shares. Approval of Related Party Transactions Office Holders The Companies Law codifies the fiduciary duties that office holders owe to a company. An office holder is defined in the Companies Law as anygeneral manager, chief business manager, deputy general manager, vice general manager, or any other person assuming the responsibilities of any of thesepositions regardless of that person’s title, as well as a director, or a manager directly subordinate to the general manager. Fiduciary duties. An office holder’s fiduciary duties consist of a duty of loyalty and a duty of care. The duty of loyalty requires the office holder toact in good faith and to the benefit of the company, to avoid any conflict of interest between the office holder’s position in the company and any other of hisor her positions or personal affairs, and to avoid any competition with the company or the exploitation of any business opportunity of the company in orderto receive personal advantage for himself or others. This duty also requires him or her to reveal to the company any information or documents relating to thecompany’s affairs that the office holder has received due to his or her position as an office holder. The duty of care requires an office holder to act with a levelof care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to use reasonable means toobtain information regarding the advisability of a given action submitted for his or her approval or performed by virtue of his or her position and all otherrelevant information pertaining to these actions. Compensation. Every Israeli public company must adopt a compensation policy, recommended by the compensation committee, and approved bythe board of directors and the shareholders, in that order. The shareholder approval requires a majority of the votes cast by shareholders, excluding anycontrolling shareholder and those who have a personal interest in the matter (similar to the threshold described below under " – Shareholders"). In general, alloffice holders’ terms of compensation – including fixed remuneration, bonuses, equity compensation, retirement or termination payments, indemnification,liability insurance and the grant of an exemption from liability – must comply with the company's compensation policy. In addition, the compensation termsof directors, the chief executive officer, and any employee or service provider who is considered a controlling shareholder generally must be approvedseparately by the compensation committee, the board of directors and the shareholders of the company, in that order. The compensation terms of otherofficers require the approval of the compensation committee and the board of directors. Approvals. The Companies Law provides that a transaction with an office holder or a transaction in which an office holder has a personal interestmay not be approved if it is adverse to the company’s interest. In addition, such a transaction generally requires board approval, unless the transaction is anextraordinary transaction, in which case it requires audit committee approval prior to the approval of the board of directors. A person, including a director,who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee may not attend that meeting or vote onthat matter; however, an office holder who has a personal interest in a transaction may be present during the presentation of the matter if the board orcommittee chairman determined that such presence is necessary for the presentation of the matter. A director with a personal interest in a matter that isconsidered at a meeting of the board of directors or the audit committee may attend that meeting or vote on that matter if a majority of the board of directorsor the audit committee also has a personal interest in the matter; however, if a majority of the board of director has a personal interest, shareholder approval isalso required. Shareholders Approval of the audit committee, the board of directors and our shareholders is required for extraordinary transactions with a controlling shareholderor in which a controlling shareholder has a personal interest. For these purposes, a controlling shareholder is any shareholder that has the ability to direct thecompany’s actions, including any shareholder holding 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights inthe company. The shareholdings of two or more shareholders with a personal interest in the approval of the same transaction are aggregated for this purpose. The shareholder approval must include the majority of shares voted at the meeting. In addition, either: ·the majority must include at least a majority of the shares of the voting shareholders who have no personal interest in the transaction voted atthe meeting; or ·the total shareholdings of those who have no personal interest in the transaction and who vote against the transaction must not represent morethan 2% of the aggregate voting rights in the company. 65 Under the Companies Law, a shareholder has a duty to act in good faith towards the company and other shareholders and to refrain from abusing hisor her power in the company including, among other things, when voting in a general meeting of shareholders or in a class meeting on the following matters: ·any amendment to the articles of association; ·an increase in the company’s authorized share capital; ·a merger; or ·approval of related party transactions that require shareholder approval. A shareholder has a general duty to refrain from depriving any other shareholder of their rights as a shareholder. In addition, any controllingshareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder or class vote and any shareholder who,pursuant to the company’s articles of association has the power to appoint or prevent the appointment of an office holder in the company, is under a duty toact with fairness towards the company. Anti-Takeover Provisions; Mergers and Acquisitions Merger. The Companies Law permits merger transactions with the approval of each party’s board of directors and shareholders. Under the Companies Law, a merging company must inform its creditors of the proposed merger. Any creditor of a party to the merger may seek acourt order to delay or block the merger, if there is a reasonable concern that the surviving company will not be able to satisfy all of the obligations of theparties to the merger. Moreover, a merger may not be completed until all of the required approvals have been filed by both merging companies with theIsraeli Registrar of Companies and (i) 30 days have passed from the time both companies’ shareholders resolved to approve the merger, and (ii) at least 50days have passed from the time that the merger proposal was filed with the Israeli Registrar of Companies. Tender Offer. The Companies Law requires a purchaser to conduct a tender offer in order to purchase shares in publicly held companies, if as a resultof the purchase the purchaser would hold more than 25% of the voting rights of a company in which no other shareholder holds more than 25% of the votingrights, or the purchaser would hold more than 45% of the voting rights of a company in which no other shareholder holds more than 45% of the voting rights.The tender offer must be extended to all shareholders, but the offeror is not required to purchase more than 5% of the company’s outstanding shares,regardless of how many shares are tendered by shareholders. The tender offer generally may be consummated only if (i) at least 5% of the voting rights in thecompany will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.The requirement to conduct a tender offer shall not apply to (i) the purchase of shares in a private placement, provided that such purchase was approved bythe company’s shareholders for this purpose; ; (ii) a purchase from a holder of more than 25% of the voting rights of a company that results in a personbecoming a holder of more than 25% of the voting rights of a company, and (iii) a purchase from the holder of more than 45% of the voting rights of acompany that results in a person becoming a holder of more than 45% of the voting rights of a company. Under the Companies Law, a person may not purchase shares of a public company if, following the purchase of shares, the purchaser would holdmore than 90% of the company’s shares, unless the purchaser makes a tender offer to purchase all of the target company’s shares. If, as a result of the tenderoffer, the purchaser would hold more than 95% of the company’s shares and more than half of the offerees that have no personal interest have accepted theoffer, the ownership of the remaining shares will be transferred to the purchaser. Alternatively, the purchaser will be able to purchase all shares if thepercentage of the offerees that did not accept the offer constitute less than 2% of the company’s shares. If the purchaser is unable to purchase 95% or more ofthe company’s shares, the purchaser may not own more than 90% of the shares of the target company. Tax Law. Israeli tax law treats some acquisitions, such as a stock-for-stock swap between an Israeli company and a foreign company, less favorablythan U.S. tax law. For example, Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in a foreign corporation to immediatetaxation. Please see "Item 10.E Taxation — Israeli Taxation." Exculpation, Indemnification and Insurance of Directors and Officers Our articles of association allow us to indemnify, exculpate and insure our office holders, which includes our directors, to the fullest extent permittedby the Companies Law (other than with respect to certain expenses in connection with administrative enforcement proceedings under the Israeli SecuritiesLaw), provided that procuring this insurance or providing this indemnification or exculpation is duly approved by the requisite corporate bodies (asdescribed above under "Related Party Transactions—Compensation"). 66 Under the Companies Law, a company may indemnify an office holder in respect of some liabilities, either in advance of an event or following anevent. If a company undertakes to indemnify an office holder in advance against monetary liability incurred in his or her capacity as an office holder, whetherimposed in favor of another person pursuant to a judgment, a settlement or an arbitrator’s award approved by a court, the indemnification must be limited toforeseeable events in light of the company’s actual activities at the time of the indemnification undertaking and to a specific sum or a reasonable criterionunder such circumstances, as determined by the board of directors. Under the Companies Law, only if and to the extent provided by its articles of association, a company may indemnify an office holder against thefollowing liabilities or expenses incurred in his or her capacity as an office holder: ·any monetary liability whether imposed on him or her in favor of another person pursuant to a judgment, a settlement or an arbitrator’s awardapproved by a court; ·reasonable litigation expenses, including attorneys’ fees, incurred by him or her as a result of an investigation or proceedings instituted against himor her by an authority empowered to conduct an investigation or proceedings, which are concluded either (i) without the filing of an indictmentagainst the office holder and without the levying of a monetary obligation in lieu of criminal proceedings upon the office holder, or (ii) without thefiling of an indictment against the office holder but with levying a monetary obligation in substitute of such criminal proceedings upon the officeholder for a crime that does not require proof of criminal intent; ·reasonable litigation expenses, including attorneys’ fees, in proceedings instituted against him or her by the company, on the company’s behalf orby a third-party, or in connection with criminal proceedings in which the office holder was acquitted, or as a result of a conviction for a crime thatdoes not require proof of criminal intent, or in connection with an administrative enforcement proceeding or financial sanction instituted againsthim; and ·reasonable litigation expenses, including attorneys’ fees, incurred by him or her as a result of an administrative enforcement proceeding institutedagainst him or her. Under the Companies Law, a company may obtain insurance for an office holder against liabilities incurred in his or her capacity as an office holder,if and to the extent provided for in its articles of association. These liabilities include a breach of duty of care to the company or a third-party, a breach ofduty of loyalty, any monetary liability imposed on the office holder in favor of a third-party, and reasonable litigation expenses, including attorney fees,incurred by an office holder as a result of an administrative enforcement proceeding instituted against him. A company may, in advance only, exculpate an office holder for a breach of the duty of care, except in connection with a distribution of dividendsor a repurchase of the company’s securities. A company may not exculpate an office holder from a breach of the duty of loyalty towards the company. Under the Companies Law, however, an Israeli company may only indemnify or insure an office holder against a breach of duty of loyalty to theextent that the office holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company. In addition, anIsraeli company may not indemnify, insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly, or an actioncommitted with the intent to derive an unlawful personal gain, or for a fine or forfeit levied against the office holder. We have purchased liability insurance and entered into indemnification and exculpation agreements for the benefit of our office holders inaccordance with the Companies Law and our articles of association. C. MATERIAL CONTRACTS Search Services Agreement with Microsoft Online Inc. On August 1, 2014, we announced the signing of a three-year agreement with Microsoft, extending our existing partnership, starting January 1, 2015through December 31, 2017. Upon mutual agreement, the agreement may be renewed for 2018, as well. The agreement includes desktop and tabletdistribution with limited exclusivity in the United States, as well as mobile distribution. Either party may terminate the agreement due to the other party’sbreach of the agreement. In addition, Microsoft may terminate the agreement upon one year’s prior written notice, if Microsoft decides to shut down the Bingsite. 67 Registration Rights Undertaking in connection with ClientConnect Acquisition Pursuant to the Registration Rights Undertaking, dated January 2, 2014, which we entered into with certain former shareholders of ClientConnectwith respect to our ordinary shares issued to them in the ClientConnect Acquisition, we have the following general obligations: ·Form F-3 Shelf Registration Rights. We were required to file a "shelf" registration statement on Form F-3, as soon as practicable following thefiling of our 2013 annual report, to register the resale from time to time by the holders thereof whose resale of shares would otherwise besubject to volume limitations set forth in SEC Rule 144. The holders of an aggregate of approximately 46.2 million ordinary shares haverequested to include such shares in such registration statement, including Ronen Shilo, Dror Erez, Benchmark Israel, Zack and Orli Rinat,Project Condor and Roy Gen. We undertook to use our commercially reasonable efforts to maintain the effectiveness of the registrationstatement until the earliest of (i) five years following effectiveness, (ii) the resale of all the shares covered thereby and (iii) with respect to anyshareholder, the ability of such shareholder to sell all of its shares under SEC Rule 144 without any volume limitations. Accordingly, we fileda shelf registration statement on May 8, 2014, and it was declared effective on August 7, 2014. For a period of three years following theexpiration of such registration statement, at the request of holders whose resale of shares would otherwise be subject to volume limitationsunder SEC Rule 144, we would be required to file additional shelf registration statements and maintain the effectiveness thereof until thedisposition of all the shares covered thereby. Such shelf registration rights are limited to four requests during such three-year period. ·Piggyback Registration Rights. If we effect a registered offering of securities, the holders of registrable securities consisting of at least 3% ofour outstanding share capital at the relevant time (or 2% in the case of W Capital Engage, L.P.) or a holder whose resale of registrablesecurities would otherwise be subject to volume limitations set forth in SEC Rule 144 will have the right to include its shares in theregistration effected pursuant to such offering. The number of piggyback registrations is unlimited. ·All reasonable expenses incurred in connection with any such registrations, other than underwriting discounts and commissions, will be borneby us. We are subject to customary indemnification undertakings with respect to any registration effected pursuant to the Registration RightsUndertaking. Undertone Merger Agreement On November 30, 2015, we entered into a Merger Agreement with IncrediTone Inc., our indirectly wholly owned subsidiary, Or Merger, Inc., whichwas wholly owned by IncrediTone, Interactive Holding Corp. (d/b/a Undertone), and Fortis Advisors LLC, as agent of the participating holders of Undertone,pursuant to which Or Merger, Inc. merged with and into Undertone on the same day, resulting in Undertone becoming a wholly owned subsidiary ofIncrediTone. We paid approximately $91 million in cash at the closing and retained $16 million as a holdback to cover potential claims until May 2017. We are also required to pay $3 million in installments over the period ending May 2017 and another $20 million, bearing interest, in November 2020. TheMerger Agreement contains customary representations, warranties, covenants and indemnification provisions. On August 2, 2016, we executed anamendment to the Merger Agreement, pursuant to which we paid $22 million and eliminated approximately $36 million of obligations. Under saidamendment, we reserved our right to claim indemnification only for certain material potential claims until May 2017. Undertone Secured Credit Agreement On November 30, 2015, concurrently with the closing of the Undertone Merger Agreement, Undertone entered into a new secured credit agreementwith its existing lenders for $50 million, due in quarterly installments from March 2016 to November 2019. The credit agreement is not guaranteed byPerion, but it is secured by a pledge on Perion's indemnification rights under the Undertone Merger Agreement. On March 4, 2016, Undertone entered into an amendment to the secured credit agreement. The amendment to the credit agreement adds a $10.0million revolving loan facility (which includes a $3.0 million swing line loan commitment and a $3.0 million letter of credit commitment). Additionally, theamendment postpones the commencement date of a few of Undertone’s undertaking and covenants and increases Undertone’s ability to invest in some of itssubsidiaries. On May 8, 2016, Undertone entered into a second amendment to the secured credit agreement further postponing the commencement of some ofUndertone’s undertakings. Furthermore, on October 7, 2016, Undertone entered into a third amendment reducing the revolving loan facility amount to $2.5million and amending financial covenants. As of December 31, 2016 the unpaid balance of the secured credit facility is $42.5 million. 68J.P. Morgan Securities Purchase Agreement On November 30, 2015, we entered into a securities purchase agreement (the “J.P. Morgan Securities Purchase Agreement”) with J.P. MorganInvestment Management Inc., as investment advisor to the National Council for Social Security Fund and 522 Fifth Avenue Fund L.P. (collectively referredto as the "Investors"). In accordance with the agreement, on December 3, 2015, we completed a private placement to the Investors of 4,436,898 ordinaryshares for gross proceeds of $10.125 million. The purchase price per share was $2.282, which was the average closing price of an ordinary share on theNasdaq Global Select Market for the 30 trading days ended on December 1, 2015. Since the 15-trading day weighted average price of an ordinary share onSeptember 1, 2016 was less than $2.624, the per share purchase price of $2.282 was adjusted downward by 15%, and we issued to the Investors 782,981additional ordinary shares for no additional consideration. J.P. Morgan Registration Rights Agreement On December 3, 2015, in connection with the J.P. Morgan Securities Purchase Agreement, we entered into a registration rights agreement with theInvestors, pursuant to which we granted to the Investors certain registration rights related to the ordinary shares issued per the J.P. Morgan Securities PurchaseAgreement. We were required to file a registration statement on Form F-3 for the resale of the ordinary shares within 30 days following December 3, 2015,which we did on December 29, 2015. The registration statement was declared effective on March 31, 2016. We also agreed to other customary obligationsregarding registration, including indemnification and maintenance of the applicable registration statement. D. EXCHANGE CONTROLS Non-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidationand winding up of our affairs, freely repatriable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli incometax is required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of exchange controls has notbeen eliminated, and may be restored at any time by administrative action. E. TAXATION The following is a general summary only and should not be considered as income tax advice or relied upon for tax planning purposes. ISRAELI TAXATION THE FOLLOWING DESCRIPTION IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATINGTO THE OWNERSHIP OR DISPOSITION OF OUR ORDINARY SHARES. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR CONCERNING THE TAXCONSEQUENCES OF YOUR PARTICULAR SITUATION, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANYSTATE, 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 alsocontains a discussion of some Israeli tax consequences to persons acquiring our ordinary shares. This summary does not discuss all the aspects of Israeli taxlaw 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 specialtreatment under Israeli law. Examples of this kind of investor include residents of Israel or traders in securities who are subject to special tax regimes notcovered in this discussion. Since some parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrativeinterpretation, 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. Potentialinvestors are urged to consult their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition of our ordinaryshares, 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 26.5% for the 2015 tax year. In January 2016, the Israeliparliament approved the reduction of the corporate tax to 25%, starting from January 1, 2016. Under an amendment to the Israeli Income Tax Ordinanceenacted in December 2016, the corporate tax rate will decrease to 24% for 2017 and 23% for 2018 and thereafter. However, the effective tax rate payable by acompany that derives income from a Preferred Enterprise (as further discussed below) may be considerably lower. 69 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, whichprovide 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 taxpurposes based on the U.S. dollar/ILS 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 meetingcertain 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. According to the reform, a flat rate tax applies to companieseligible for the "Preferred Enterprise" status. In order to be eligible for Preferred Enterprise status, a company must meet minimum requirements to establishthat 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. Benefits granted to a Preferred Enterprise include reduced tax rates. In peripheral regions (Development Area A) the reduced tax rate was 9% in 2014,2015 and 2016. Under an amendment to the Investment Law enacted in December 2016, the reduced tax rate will decrease to 7.5% for 2017 and thereafter. Inother regions the tax rate was 16% in 2014, 2015 and 2016. Preferred Enterprises in peripheral regions will be eligible for Investment Center grants, as well asthe applicable reduced tax rates. A distribution from a Preferred Enterprise out of the "Preferred Income" would be subject to 15% withholding tax for Israeli-resident individuals andnon-Israeli residents (subject to applicable treaty rates), or 20% for dividends which are distributed on or after January 1, 2014 and from preferred income thatwas 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. Acompany electing to waive its Beneficiary Enterprise or Approved Enterprise status, which relate to tax incentive programs afforded under previous versionsof the Investment Law, through June 30, 2015 may distribute "Approved Income" or "Beneficiary Income" subject to 15% withholding tax for Israeli residentindividuals and non-Israeli residents (subject to applicable treaty rates) and exempt from withholding tax for an Israeli-resident company. Nonetheless, adistribution from income exempt under Beneficiary Enterprise and Approved Enterprise programs will subject the exempt income to tax at the reducedcorporate income tax rates pertaining to the Beneficiary Enterprise and Approved Enterprise programs upon distribution, or complete liquidation in the caseof a Beneficiary Enterprise’s exempt income. Pursuant to an amendment to the Investments Law which became effective on November 12, 2012 (“Amendment 69”), a company that elects byNovember 11, 2013 to pay a corporate tax rate as set forth in that amendment (rather than the regular corporate tax rate applicable to Approved Enterpriseincome) with respect to undistributed exempt income accumulated by the company up until December 31, 2011, will be entitled to distribute a dividend fromsuch income without being required to pay additional corporate tax with respect to such dividend. A company that has so elected must make certain qualifiedinvestments in Israel over the five-year period commencing in 2013. A company that has elected to apply the amendment cannot withdraw from its election. During 2013, we applied the provisions of Amendment 69 to all undistributed exempt profits accrued prior to 2011 by us and our Israeli subsidiary.Consequently, we paid ILS 6.3 million (approximately $1.8 million) corporate tax on exempt income of ILS 63.2 million (approximately $17.9 million). Thisincome is available to be distributed as dividends in future years with no additional corporate tax liability. As a result, we are required to invest (and havealready invested) ILS 4.7 million (approximately $1.2 million) in our industrial enterprises in Israel over a five year period. Such investment may be in theform of the acquisition of industrial assets (excluding real estate assets), investment in R&D in Israel, or payroll payments to new employees to be hired bythe enterprise. In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years),2016, which includes Amendment 73 to the Law for the Encouragement of Capital Investments, was published. According to Amendment 73, the tax rateapplicable to preferred enterprises remains at 16% (in regions that are not designated as peripheral regions (Development Area A)). Amendment 73 alsoprescribes special tax routes for technological enterprises, which are subject to rules that are to be issued by the Minister of Finance by March 31, 2017. Thenew tax routes under the Amendment 73 are as follows: ·Technological preferred enterprise - an enterprise which the total consolidated annual revenues of its parent company and all subsidiariesare less than NIS 10 billion. A technological preferred enterprise, as defined in the Law, which is located in the center of Israel will besubject to tax at a rate of 12% on profits deriving from intellectual property. 70 ·Special technological preferred enterprise - an enterprise which the total consolidated annual revenues of its parent company and allsubsidiaries exceed NIS 10 billion. Such enterprise will be subject to tax at a rate of 6% on profits deriving from intellectual property,regardless of the enterprise's geographical location within Israel. Any dividends distributed to "foreign companies", as defined in the Law, deriving from income from the technological enterprises will be subject totax at a rate of 4%. Since as of December 31, 2016, regulations or other definitive criteria to determine the tax benefits were not yet established, it cannot be concludedthat the legislation in respect of technological enterprises was enacted or substantively enacted as of that date. Accordingly, the above changes in the taxrates relating to technological enterprises were not taken into account in the computation of deferred taxes as of December 31, 2016. Law for the Encouragement of Industry (Taxes), 1969 We believe that we currently qualify as an "Industrial Company" within the meaning of the Law for the Encouragement of Industry (Taxes), 1969, orthe Industry Encouragement Law. The Industry Encouragement Law defines "Industrial Company" as a company resident in Israel, of which 90% or more ofits income in any tax year, other than of income from defense loans, capital gains, interest and dividends, is derived from an "Industrial Enterprise" owned byit. An "Industrial Enterprise" is defined as an enterprise whose major activity in a given tax year is industrial production. The following corporate tax benefits, among others, are available to Industrial Companies: ·amortization of the cost of purchased know-how and patents, which are used for the development or advancement of the company, over an eight-year period; ·accelerated depreciation rates on equipment and buildings; ·under specified conditions, an election to file consolidated tax returns with additional related Israeli Industrial Companies; and ·expenses related to a public offering are deductible in equal amounts over three years. Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. Wecannot assure that we qualify or will continue to qualify as an "Industrial Company" or that the benefits described above will be available in the future. Transfer Pricing In accordance with Section 85A of the Israeli Tax Ordinance, if in an international transaction (where at least one party is a non-Israeli or all or partof the income from such transaction is to be taxed abroad as well as in Israel) there is a special relationship between the parties (including but not limited tofamily relationship or a relationships of control between companies), and due to this relationship the price set for an asset, right, service or credit wasdetermined or other conditions for the transaction were set such that a smaller profit was realized than what would have been expected to be realized from atransaction of this nature, then such transaction shall be reported in accordance with customary market conditions and tax shall be charged accordingly. Theassessment of whether a transaction falls under the aforementioned definition shall be implemented in accordance with one of the procedures mentioned inthe regulations and is based, among others, on comparisons of characteristics which portray similar transactions in ordinary market conditions, such as profit,the area of activity, nature of the asset, the contractual conditions of the transaction and according to additional terms and conditions specified in theregulations. Taxation of our Shareholders Taxation on Dividends to Israeli Resident Shareholders. Starting in 2012, dividends paid to Israeli individuals, are subject to 25% or 30%withholding tax depending on ownership percentage. Capital Gains Taxes Applicable to Israeli Resident Shareholders. An individual is subject to a 25% tax rate on real capital gains derived from thesale of shares, as long as the individual is not a "substantial shareholder" (generally a shareholder with 10% or more of the right to profits, right to nominate adirector and voting rights) in the company issuing the shares. A substantial shareholder will be subject to tax at a rate of 30% in respect of real capital gains derived from the sale of shares issued by a company inwhich he or she is a substantial shareholder. The determination of whether the individual is a substantial shareholder will be made on the date on which thesecurities are sold. In addition, the individual will be deemed to be a substantial shareholder if at any time during the 12 months preceding the date of sale, heor she was a substantial shareholder. 71 As of January 1, 2013, shareholders that are individuals who have taxable income that exceeds ILS 800,000 in a tax year (linked to the CPI eachyear) (ILS 803,520 in 2016), will be subject to an additional tax, referred to as High Income Tax, at the rate of 2% on their taxable income for such tax yearwhich is in excess of ILS such threshold. For this purpose taxable income will include taxable capital gains from the sale of our shares and taxable incomefrom dividend distributions. Under an amendment to the Israeli Income Tax Ordinance enacted in December 2016, for 2017 and thereafter the rate of HighIncome Tax will increase to 3% and will be applicable to annual income exceeding ILS 640,000 (linked to the CPI each year). Israeli corporations are generally subject to the corporate tax rate (26.5% in 2015, 25.0% in 2016, 24% commencing on January 1, 2017 and 23%commencing on January 1, 2018) on capital gains derived from the sale of shares. Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders. Shareholders that are not Israeli residents are generally exempt from Israelicapital gains tax on any gains derived from the sale, exchange or disposition of our ordinary shares, provided that (1) such shareholders did not acquire theirshares prior to our initial public offering, (2) the shares are listed for trading on the Tel Aviv Stock Exchange and/or a foreign exchange, and (3) such gainsdid not derive from a permanent establishment of such shareholders in Israel. However, non-Israeli corporations will not be entitled to the foregoingexemptions if Israeli residents (i) have a controlling interest of more than 25% in such non-Israeli corporation, or (ii) are the beneficiaries of or are entitled to25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. In certain instances, where our shareholders may beliable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source. Under the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our ordinary shares by a shareholder who is a U.S. resident (for purposes of theU.S.-Israel Tax Treaty) holding the ordinary shares as a capital asset is exempt from Israeli capital gains tax unless either (i) the shareholder holds, directly orindirectly, shares representing 10% or more of our voting capital during any part of the 12‑month period preceding such sale, exchange or disposition, or (ii)the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel. Taxation of Non-Israeli Shareholders on Receipt of Dividends. Non-residents of Israel are generally subject to Israeli income tax on the receipt ofdividends paid on our ordinary shares at the rate of 25%, which tax will be withheld at source, unless a different rate is provided in a treaty between Israel andthe shareholder’s country of residence. With respect to a substantial shareholder (which is someone who alone, or together with another person, holds,directly or indirectly, at least 10% in one or all of any of the means of control in the corporation at the time of distribution or at any time during the preceding12 months period), the applicable tax rate will be 30%. Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a U.S.resident (for purposes of the U.S.-Israel Tax Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated by ourApproved, Beneficiary or Preferred Enterprises that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital throughout the taxyear in which the dividend is distributed as well as the previous tax year, is 12.5%. The lower 12.5% rate does not apply if the company has more than 25% ofits gross income derived from certain types of passive income. Furthermore, dividends paid from income derived from our Approved, Beneficiary or PreferredEnterprise are subject, under certain conditions, to withholding at the rate of 15% or 20%. We cannot assure you that we will designate the profits that arebeing distributed in a way that will reduce shareholders’ tax liability. A non-resident of Israel who receives dividends from which tax was withheld isgenerally exempt from the duty to file returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israelby the taxpayer, and the taxpayer has no other taxable sources of income in Israel. U.S. FEDERAL INCOME TAX CONSIDERATIONS The following discussion is a description of certain U.S. federal income tax considerations applicable to an investment in our ordinary shares by U.S.Holders (defined below) who acquire our ordinary shares and hold them as capital assets for U.S. federal income tax purposes (generally, for investment). Asused in this section, the term "U.S. Holder" means a beneficial owner of an ordinary share who is: ·an individual citizen or resident of the United States; ·a corporation (or entity classified as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the UnitedStates, any state of the United States or the District of Columbia; 72 ·an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or ·a trust if (i) a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have theauthority to control all of its substantial decisions or (ii) the trust has in effect a valid election under applicable U.S. Treasury Regulations to betreated as a U.S. person. The term "Non-U.S. Holder" means a beneficial owner of an ordinary share other than a partnership or other pass-through entity who is not a U.S.Holder. The tax consequences to a Non-U.S. Holder may differ substantially from the tax consequences to a U.S. Holder. Certain limited aspects of U.S.federal income tax considerations relevant to Non-U.S. Holders of an ordinary share are also discussed below. This discussion is based on provisions of the Code, current and proposed U.S. Treasury Regulations and administrative and judicial interpretations,each in effect as of the date hereof, all of which are subject to change, possibly on a retroactive basis. This description does not discuss all aspects of U.S.federal income taxation that may be applicable to investors in light of their particular circumstances or to investors who are subject to special treatment underU.S. federal income tax laws, including: ·insurance companies; ·dealers in stocks, securities or currencies; ·financial institutions and financial services entities; ·regulated investment companies or real estate investment trusts; ·grantor trusts; ·S corporations; ·persons that acquire ordinary shares upon the exercise of employee stock options or otherwise as compensation; ·tax-exempt organizations; ·persons that hold ordinary shares as a position in a straddle or as part of a hedging, conversion or other integrated instrument; ·individual retirement and other tax-deferred accounts; ·certain former citizens or long-term residents of the United States; ·persons (other than Non-U.S. Holders) having a functional currency other than the U.S. dollar; and ·persons that own directly, indirectly or constructively 10% or more of our voting shares. Additionally, the tax treatment of persons who are, or hold our ordinary shares through, a partnership or other pass-through entity is not discussed,and such persons should consult their advisor as to their tax consequences. The possible application of the alternative minimum tax, U.S. federal estate or gifttaxes and any aspect of state, local or non-U.S. tax laws are also not considered in this discussion. We urge you to consult with your own tax advisor regarding the tax consequences of investing in the ordinary shares, including the effects of U.S.federal, state, local, and foreign or other tax laws. Distributions Paid on the Ordinary Shares Subject to the discussion below under "Passive Foreign Investment Company Considerations," a U.S. Holder generally will be required to include ingross income as ordinary dividend income the amount of any distributions paid by us on the ordinary shares, including the amount of any non-U.S. incometaxes withheld, to the extent that those distributions are paid out of our current or accumulated earnings and profits as determined for U.S. federal income taxpurposes. Distributions in excess of our earnings and profits will be treated first as a non-taxable return of capital and will reduce the U.S. Holder’s tax basis inits ordinary shares to the extent thereof and, to the extent distributions exceed such tax basis, then will be treated as gain from a sale or exchange of thoseordinary shares. Our dividends generally will not qualify for the dividends-received deduction applicable, in some cases, to U.S. corporations. Dividends paidin ILS, including the amount of any non-U.S. income taxes withheld, will be includible in the income of a U.S. Holder in a U.S. dollar amount calculated byreference to the exchange rate in effect on the date they are included in income by the U.S. Holder, regardless of whether the payment in fact is converted intoU.S. dollars. A U.S. holder that receives distributions paid in ILS (or any other foreign currency) and converts the ILS (or other foreign currency) into dollarsafter the date such distributions are included in income may have foreign exchange gain or loss based on any appreciation or depreciation in the value of theILS (or other foreign currency) against the dollar, which will generally be U.S. source ordinary income or loss. 73 A non-corporate U.S. holder’s "qualified dividend income" may be taxed at reduced rates (currently, a maximum rate of 20% applies). For thispurpose, subject to the limitations discussed below, "qualified dividend income" generally includes dividends paid by a non-U.S. corporation if either: (a)the stock of that corporation with respect to which the dividends are paid is readily tradable on an established securities market in the UnitedStates, or (b)that corporation is eligible for the benefits of a comprehensive income tax treaty with the United States which includes an information exchangeprogram and is determined to be satisfactory by the United States Secretary of the Treasury. The Internal Revenue Service has determined that theUnited States-Israel Tax Treaty is satisfactory for this purpose. No dividend income received by a U.S. Holder will be qualified dividend income (1) unless such U.S. Holder generally has held its ordinary sharesfor at least 61 days during the 121-day period beginning on the date that is 60 days prior to the ex-dividend date with respect to such dividend, excluding forthis purpose, under the rules of Code section 246(c), any period during which the U.S. Holder has an option to sell, is under a contractual obligation to sell,has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its risk ofloss by holding other positions with respect to, such ordinary share (or substantially identical securities) or (2) to the extent such U.S. Holder is under anobligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in property substantially similar or related to the ordinaryshare with respect to which the dividend is paid. In addition, a non-corporate U.S. Holder will be able to take a qualified dividend into account in determining its deductible investment interest(which is generally limited to its net investment income) only if it elects to do so; in such case the dividend will be taxed at ordinary income tax rates.Dividends paid by a non-U.S. corporation will not be qualified dividend income and thus, not qualify for reduced rates, if such corporation is, for the tax yearin which the dividend is paid or the preceding tax year, a "passive foreign investment company" for U.S. federal income tax purposes. Subject to certain conditions and limitations, non-U.S. income tax withheld on dividends may be deducted from taxable income or credited againsta U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes ofincome. Dividends paid by us generally will be foreign source "passive income" for U.S. foreign tax credit purposes. U.S. Holders that do not elect to claim aforeign tax credit may generally instead claim a deduction for the non-U.S. income taxes withheld if such U.S. Holders itemize their deductions for U.S.federal income tax purposes. The rules relating to the determination of foreign source income and the foreign tax credit are complex, and the availability of aforeign tax credit depends on numerous factors. U.S. holders should consult their tax advisors regarding the application of the foreign tax credit rules. A U.S. holder will be denied a foreign tax credit for non-U.S. income taxes withheld from a dividend received on the ordinary shares (i) if the U.S.holder has not held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date withrespect to such dividend or (ii) to the extent the U.S. holder is under an obligation (whether pursuant to a short sale or otherwise) to make related paymentswith respect to positions in substantially similar or related property. Any days during which a U.S. holder has substantially diminished its risk of loss on theordinary shares are not counted toward meeting the required 16-day holding period. Disposition of Ordinary Shares Upon the sale or other disposition of ordinary shares (other than with respect to certain non-recognition transactions), subject to the discussionbelow under "Passive Foreign Investment Company Considerations," a U.S. Holder generally will recognize capital gain or loss equal to the differencebetween the amount realized on the disposition and the holder’s adjusted tax basis in the ordinary shares. Gain or loss upon the disposition of the ordinaryshares will be treated as long-term if, at the time of the sale or disposition, the ordinary shares were held for more than one year. Long-term capital gainsrealized by non-corporate U.S. Holders generally are subject to reduced rates of tax (currently, a maximum rate of 20% applies). The deductibility of capitallosses by a U.S. Holder is subject to limitations. A U.S. holder that uses the cash method of accounting calculates the dollar value of the proceeds received on the sale as of the date that the salesettles. However, a U.S. holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the trade date andmay therefore realize foreign currency gain or loss between the trade date and the settlement date. A U.S. holder may avoid realizing foreign currency gain orloss by electing to use the settlement date to determine the proceeds of sale for purposes of calculating the foreign currency gain or loss. In addition, a U.S.holder that receives foreign currency upon disposition of ordinary shares and converts the foreign currency into dollars after the settlement date or trade date(whichever date the U.S. holder is required to use to calculate the value of the proceeds of sale) may have foreign exchange gain or loss based on anyappreciation or depreciation in the value of the foreign currency against the dollar, which will generally be U.S. source ordinary income or loss. 74 Net Investment Income Tax Non-corporate U.S. Holders may be subject to an additional 3.8% surtax on all or a portion of the "net investment income," which generally mayinclude dividends on, or capital gains recognized from the disposition of, our ordinary shares. U.S. Holders are urged to consult their own tax advisorsregarding the applicability of the net investment income tax to their investment in our shares. Passive Foreign Investment Company Considerations Special U.S. federal income tax rules apply to U.S. Holders owning shares of a passive foreign investment company or "PFIC." A non-U.S.corporation will be considered a PFIC for any tax year in which, after applying certain look-through rules, 75% or more of its gross income consists ofspecified types of passive income, or 50% or more of the average value of its assets (determined on a quarterly basis) consists of passive assets, whichgenerally means assets that generate, or are held for the production of, passive income. If we were classified as a PFIC, a U.S. Holder could be subject to increased tax liability upon the sale or other disposition of ordinary shares or uponthe receipt of amounts treated as "excess distributions." Under these rules, the excess distribution and any gain from the sale or disposition would be allocatedratably over the U.S. Holder’s holding period for the ordinary shares, and the amount allocated to the current taxable year and any taxable years prior to thefirst taxable year in which we were a PFIC would be taxed as ordinary income. The amount allocated to each of the prior taxable years in which we were aPFIC would be subject to tax at the highest marginal rate in effect for the applicable class of taxpayer for that year, and an interest charge for the deemeddeferral benefit would be imposed on the resulting tax allocated to such prior taxable years. The tax liability with respect to the amount allocated to taxableyears prior to the year of the disposition, or "excess distribution," cannot be offset by any net operating losses. In addition, holders of stock in a PFIC may notreceive a "step-up" in basis on shares acquired from a decedent. U.S. Holders who hold ordinary shares during a period when we are a PFIC will be subject tothe foregoing rules even if we cease to be a PFIC. Unless otherwise provided by the IRS, if a non-U.S. corporation is a PFIC, a U.S. Holder generally isrequired to file an annual informational return with the IRS. As an alternative to the tax treatment described above, a U.S. Holder could elect to treat us as a "qualified electing fund" ("QEF"), in which case theU.S. Holder would be required to include in income, for each taxable year that we are a PFIC, its pro rata share of our ordinary earnings as ordinary incomeand its pro rata share of our net capital gains as capital gain, subject to a separate election to defer payment of taxes where such deferral is subject to aninterest charge. A QEF election is made on a shareholder-by-shareholder basis, applies to all ordinary shares held or subsequently acquired by an electingU.S. Holder and can only be revoked with consent of the IRS. A U.S. Holder may make a QEF election only if we furnish such U.S. Holder with certain taxinformation. We currently do not provide this information, and we do not intend to take any actions that would be necessary to permit U.S. Holders to make aQEF election in the event we become a PFIC. As an alternative to making a QEF election, a U.S. Holder of PFIC stock which is "marketable stock" (e.g., "regularly traded" on the Nasdaq GlobalSelect Market) may in certain circumstances avoid certain of the tax consequences generally applicable to holders of stock in a PFIC by electing to mark thestock to market as of the beginning of such U.S. Holder’s holding period for the ordinary shares. As a result of such election, in any taxable year that we are aPFIC, a U.S. Holder generally would be required to report gain or loss to the extent of the difference between the fair market value of the ordinary shares at theend of the taxable year and such U.S. Holder’s tax basis in its ordinary shares at that time. Any gain under this computation, and any gain on an actualdisposition of the ordinary shares in a year in which we are a PFIC, would be treated as ordinary income. Any loss under this computation, and any loss on anactual disposition of the ordinary shares in a year in which we are a PFIC, generally would be treated as ordinary loss to the extent of the cumulative net-mark-to-market gain previously included. Any remaining loss from marking ordinary shares to market will not be allowed, and any remaining loss from anactual disposition of ordinary shares generally would be capital loss. A U.S. Holder’s tax basis in its ordinary shares is adjusted annually for any gain or lossrecognized under the mark-to-market election. There can be no assurances that there will be sufficient trading volume with respect to the ordinary shares inorder for the ordinary shares to be considered "regularly traded" or that our ordinary shares will continue to trade on the Nasdaq Global Select Market.Accordingly, there are no assurances that our ordinary shares will be marketable stock for these purposes. As with a QEF election, a mark-to-market election ismade on a shareholder-by-shareholder basis, applies to all ordinary shares held or subsequently acquired by an electing U.S. Holder and can only be revokedwith consent of the IRS (except to the extent the ordinary shares no longer constitute "marketable stock"). 75 Based on our income, assets, activities and market capitalization, we do not believe that we were a PFIC for the taxable year ended December 31,2016 for U.S. federal income tax purposes. Our belief that we were not a PFIC for the 2016 taxable year is based on our estimate of the fair market value of ourassets, including our intangible assets and goodwill, which are not reflected in our financial statements under U.S. GAAP. In calculating the value of ourassets, we value our total assets, in part, based on our total market capitalization. We believe this valuation approach is reasonable. However, there can be noassurances that the IRS could not successfully challenge our valuations or methods, which could result in our classification as a PFIC. While we intend tomanage our business so as to avoid PFIC status, to the extent consistent with our other business goals, we cannot predict whether our business plans willallow us to avoid PFIC status or whether our business plans will change in a manner that affects our PFIC status determination. In addition, because themarket price of our ordinary shares is likely to fluctuate and because that market price may affect the determination of whether we will be considered a PFIC,we cannot be certain that we will not be a PFIC in 2017 or become a PFIC in any other future taxable year. The rules applicable to owning shares of a PFIC are complex, and each prospective purchaser who would be a U.S. Holder should consult with itsown tax advisor regarding the consequences of investing in a PFIC. Tax Consequences for Non-U.S. Holders of Ordinary Shares Except as described in "Information Reporting and Back-up Withholding" below, a Non-U.S. Holder of our ordinary shares will not be subject to U.S. federalincome or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our ordinary shares, unless, in the case of U.S. federalincome taxes: ·the item is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States and (i) in the case of aresident of a country which has a treaty with the United States, the item is attributable to a permanent establishment, or (ii) in the case of anindividual, the item is attributable to a fixed place of business in the United States; or ·the Non-U.S. Holder is an individual who holds the ordinary shares as a capital asset and is present in the United States for 183 days or more inthe taxable year of the disposition, and certain other conditions are met. Information Reporting and Backup Withholding U.S. Holders generally are subject to information reporting requirements with respect to dividends on, or proceeds from the disposition of, ourordinary shares. In addition, a U.S. Holder may be subject, under certain circumstances, to backup withholding (currently, at a rate of up to 28%) with respectto dividends paid on, or proceeds from the disposition of, our ordinary shares unless the U.S. Holder provides proof of an applicable exemption or correcttaxpayer identification number, and otherwise complies with the applicable requirements of the backup withholding rules. A U.S. Holder of our ordinaryshares who provides an incorrect taxpayer identification number may be subject to penalties imposed by the IRS. Amounts withheld under the backupwithholding rules are not an additional tax and may be refunded or credited against the U.S. Holder’s U.S. federal income tax liability, provided the requiredinformation is furnished to the IRS. Non-U.S. Holders generally are not subject to information reporting or backup withholding, provided that the Non-U.S. Holder provides a taxpayeridentification number, certifies to its foreign status, or establishes another exemption to the information reporting or backup withholding requirements. Certain U.S. holders (and to the extent provided in IRS guidance, certain non-U.S. holders) who hold interests in "specified foreign financial assets"(as defined in Section 6038D of the Code) are generally required to file an IRS Form 8938 as part of their U.S. federal income tax returns to report theirownership of such specified foreign financials assets, which may include our common shares, if the total value of those assets exceed certain thresholds.Substantial penalties may apply to any failure to timely file IRS Form 8938. In addition, in the event a holder that is required to file IRS Form 8938 does notfile such form, the statute of limitations on the assessment and collection of U.S. federal income taxes of such holder for the related tax year may not closeuntil three years after the date that the required information is filed. Holders should consult their own tax advisors regarding their tax reporting obligations. F. DIVIDENDS AND PAYING AGENTS Not applicable. G. STATEMENT BY EXPERTS Not applicable. H. DOCUMENTS ON DISPLAY You may request a copy of our U.S. SEC filings, at no cost, by writing or calling us at Perion Network Ltd., 26 HaRokmim Street, Holon 5885849,Israel, Attention: Yacov Kaufman, Telephone: +972-73-3981000. A copy of each report submitted in accordance with applicable U.S. law is available forpublic review at our principal executive offices. In addition, our filings with the SEC may be inspected without charge at the SEC’s Public Reference Roomat 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public from the SEC’s website at www.sec.gov. 76 U.S. dollars ILS Other Currencies Total In thousands of U.S. dollars Current assets 103,589 1,426 5,586 110,602 Long-term assets 4,580 225 517 5,322 Current liabilities (73,207) (9,879) (5,613) (88,699)Long-term liabilities (50,180) (23,387) (31) (73,598)Total (15,218) (31,614) 459 (46,373) NotionalAmount Fair Value In thousands of U.S. dollars Cross currency SWAP 29,854 973 Zero-cost collar contracts to hedge payroll expenses 17,715 17 A copy of each document (or a translation thereof to the extent not in English) concerning Perion that is referred to in this annual report on Form 20-F, is available for public view (subject to confidential treatment of agreements pursuant to applicable law) at our principal executive offices at PerionNetwork Ltd., 26 HaRokmim Street, Holon 5885849, Israel. I. SUBSIDIARY INFORMATION Not applicable. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Exchange Rate Risk. A portion of our revenues and expenses are denominated in foreign currencies. As a result, numerous balances are denominatedor linked to these currencies. Foreign currency related fluctuations resulted in $2.7 million, $0.6 million and $0.8 million net losses in 2014, 2015 and 2016,respectively. These losses are included in financial expenses, net, as presented in our statements of income. As of December 31, 2016, balance sheet financial items in U.S. dollars, our functional currency, and those currencies other than the U.S. dollars wereas follows: The fair value of the outstanding derivative instruments and the notional amount of the hedged instruments as of December 31, 2016 were asfollows: 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 ILS 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 nothave a material effect on our income before taxes possibly reducing it by less than $0.3 million. 77 A significant portion of our costs, including salaries and office expenses are incurred in ILS. Inflation in Israel may have the effect of increasing theU.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 tofund our operations in Israel. A revaluation of 1% of the New Israeli Shekel will affect our income before tax by less than one percent (1%). The exchange rateof 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, 2014 2015 2016 Average rate for period 3.577 3.884 3.840 Rate at year-end 3.889 3.902 3.845 Since 2006 we’ve engaged a firm to analyze our exposure to the fluctuation in foreign currency exchange rates and are implementing theirrecommendations since then. However, due to the market conditions, volatility and other factors, its proposals and their implementation occasionally proveto be ineffective or can cause additional finance expenses. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 78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 interim chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures as ofDecember 31, 2016, has concluded that, as of such date, our disclosure controls and procedures were effective and ensured that information required to bedisclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our interim chiefexecutive officer and chief financial officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reportedwithin the time periods specified by the SEC's rules and forms. (b)Management annual report on internal control over financial reporting Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, ourmanagement used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control – IntegratedFramework" (2013 framework). Our management has concluded, based on its assessment, that our internal control over financial reporting was effective as ofDecember 31, 2016. (c)Attestation Report of the Registered Public Accounting Firm Not applicable. (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) and15d-15(f) under the Exchange Act) have occurred that have materially affected, or are reasonably likely to materially affect, our internal control overfinancial reporting. ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT Our board of directors has determined that Ms. Sarit Firon, who is an independent director (as defined in the NASDAQ Listing Rules) and serves onour 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 conduct (which was amended in March 2016) applicable to all of our directors, officers and employeesas 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 Actof 2002. A copy of the code of ethics can be found on our website at: http://www.perion.com/governance-documents. 79 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, foreach of the last two fiscal years were as follows (in thousands): 2015 2016 Audit Fees $657 $663 Tax Fees 239 183 Audit Related fees 145 120 Total $1,041 $966 Audit fees include fees for professional services rendered by our principal accountant in connection with the annual audit, review of quarterlyconsolidated financial data, internationally required statutory audits, consents and assistance with review of documents filed with the SEC. Audit-related fees principally include due diligence in connection with acquisitions and accounting consultation. Tax fees include services related to tax compliance, including the preparation of tax returns and claims for refunds, tax planning and advice,including assistance with tax audits and appeals, advice related to mergers and acquisitions and assistance with respect to requests for rulings from taxauthorities. All other fees principally include advisory services. Our audit committee is responsible for the establishment of policies and procedures for review and pre-approval by the committee of all auditservices and permissible non-audit services to be performed by our independent auditor, in order to ensure that such services do not impair our auditor’sindependence. Pursuant to the pre-approval policy adopted by our audit committee, certain enumerated audit, audit-related and tax services have beengranted general pre-approval by our audit committee and need not be specifically pre-approved. Pre-approval fee levels or budgeted amounts for all servicesto be provided by the independent auditor will be established annually by the audit committee and the committee may also determine the appropriate ratiobetween the total amount of fees for audit, audit-related, tax services and other services. All requests for services to be provided by the independent auditorwill be submitted to our Chief Financial Officer, who will determine whether such services are included within the enumerated pre-approved services. Theaudit committee will be informed on a timely basis of any pre-approved services that were performed by the auditor. Requests for services that require specificpre-approval will be submitted to the audit committee with a statement as to whether, in the view of the Chief Financial Officer and the independent auditor,the request is consistent with the SEC’s rules on auditor independence. The Chief Financial Officer will monitor the performance of all services and determinewhether such services are in compliance with the policy. 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. TheNASDAQ Listing Rules provide that foreign private issuers may follow home country practice in lieu of certain qualitative listing requirements subject tocertain exceptions and except to the extent that such exemptions would be contrary to U.S. federal securities laws, so long as the foreign issuer discloses thatit 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 ofthe significant ways in which our corporate governance practices differ from the corporate governance requirements of NASDAQ applicable to domestic U.S.listed companies: 80Shareholder Approval. Although the NASDAQ Listing Rules generally require shareholder approval of equity compensation plans and materialamendments thereto, we follow Israeli practice, which is to have such plans and amendments approved only by the board of directors, unless sucharrangements are for the compensation of chief executive officer or directors, in which case they also require the approval of the compensation committee andthe shareholders. In addition, rather than follow the NASDAQ Listing Rules requiring shareholder approval for the issuance of securities in certain circumstances, wefollow Israeli law, under which a private placement of securities requires approval by our board of directors and shareholders if it will cause a person tobecome 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 rightsor 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 ofthe outstanding shares of the issuer’s common voting stock. We have chosen to follow home country practice with respect to the quorum requirements of anadjourned shareholders meeting. Our articles of association, as permitted under the Companies Law, provide that if at the adjourned meeting a legal quorumis not present after 30 minutes from the time specified for the commencement of the adjourned meeting, then the meeting shall take place regardless of thenumber of members present and in such event the required quorum shall consist of any number of shareholders present in person or by proxy. Annual Reports. While the NASDAQ Listing Rules generally require that companies send an annual report to shareholders prior to the annualgeneral meeting, we follow the generally accepted business practice for companies in Israel. Specifically, we file annual reports on Form 20-F, which containfinancial statements audited by an independent accounting firm, electronically with the SEC and post a copy on our website. Annual Meetings. While the NASDAQ Listing Rules require that listed companies hold a shareholder meeting in each calendar year, our 2016annual meeting was held on January 5, 2017, in order to finalize the agenda and provide the requisite 35-day notice under Israeli law. Executive Sessions. While the NASDAQ Listing Rules require that "independent directors," as defined in the NASDAQ Listing Rules, must haveregularly scheduled meetings at which only "independent directors" are present. Israeli law does not require, nor do our independent directors necessarilyconduct, regularly scheduled meetings at which only they are present. Approval of Related Party Transactions. Although the NASDAQ Listing Rules require the approval of the audit committee or another independentbody 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 theprovisions of the Israeli Companies Law. Specifically, that all related party transactions are approved in accordance with the requirements and procedures forapproval 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 ofdirectors. Other specified transactions can require audit committee approval and shareholder approval, as well as board approval. See also "Item 10.BMemorandum and Articles of Association — Approval of Related Party Transactions" for the definition and procedures for the approval of related partytransactions. Compensation Committee. The NASDAQ Listing Rules require a listed company to have a compensation committee composed entirely ofindependent directors that operates pursuant to a written charter addressing its purpose, responsibilities and membership qualifications and may receivecounseling from independent consultants, after evaluating their independence. We have a compensation committee whose purpose, responsibilities andmembership qualifications are governed by the Israeli Companies Law, as described under Item 6.C "Board Practices—Committees of the Board of Directors—Compensation Committee." There are no specific independence evaluation requirements for outside consultants.81ITEM 16H. MINE SAFETY DISCLOSURE Not applicable. 82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: 83PERION NETWORK LTD. AND ITS SUBSIDIARIESCONSOLIDATED FINANCIAL STATEMENTSAS OF DECEMBER 31, 2016IN U.S. DOLLARSINDEX Page Reports of Independent Registered Public Accounting FirmF-1 Consolidated Balance Sheets as of December 31, 2015 and 2016F-2 Consolidated Statements of Income (Loss) for the Years Ended December 31, 2014, 2015 and 2016F-3 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2014, 2015 and 2016F-4 Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2014, 2015 and 2016F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2015 and 2016F-6 Notes to the Consolidated Financial StatementsF-8REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTO THE SHAREHOLDERS AND BOARD OF DIRECTORS OFPERION NETWORK LTD. We have audited the accompanying consolidated balance sheets of Perion Network Ltd. ("the Company") and its subsidiaries as of December 31, 2015and 2016, and the related consolidated statements of income (operations), comprehensive income, changes in shareholders' equity and cash flows for each ofthe three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility isto express an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We werenot engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Companyand its subsidiaries at December 31, 2015 and 2016, and the consolidated results of their operations and their cash flows for each of the three years in theperiod ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. /s/ KOST FORER GABBAY & KASIERERTel-Aviv, IsraelKOST FORER GABBAY & KASIERERMarch 7, 2017A Member of Ernst & Young GlobalF - 1PERION NETWORK LTD. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETSU.S. dollars in thousands (except share data) December 31, 2015 2016 Assets Current Assets: Cash and cash equivalents $17,519 $23,962 Short-term bank deposits 42,442 8,414 Accounts receivable (net of allowance of $1,063 and $789 at December 31, 2015 and 2016, respectively) 66,662 71,346 Prepaid expenses and other current assets 17,396 10,036 Total Current Assets 144,019 113,758 Property and equipment, net 12,714 14,205 Intangible assets, net 66,072 44,018 Goodwill 203,693 190,737 Deferred taxes 12,344 4,117 Other assets 3,456 1,617 Total Assets $442,298 $368,452 Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $40,388 $38,293 Accrued expenses and other liabilities 22,857 17,466 Short-term loans and current maturities of long-term and convertible debt 23,756 17,944 Deferred revenues 7,731 5,354 Payment obligation related to acquisitions 11,893 7,653 Total Current Liabilities 106,625 86,710 Long-Term Liabilities: Long-term debt, net of current maturities 46,920 37,928 Convertible debt, net of current maturities 28,371 21,862 Payment obligation related to acquisitions 37,231 - Deferred taxes 19,456 8,087 Other long-term liabilities 3,858 5,721 Total Liabilities 242,461 160,308 Commitments and Contingencies Shareholders' Equity: Ordinary shares of ILS 0.01 par value - Authorized: 120,000,000 shares; Issued: 76,157,506 and 77,569,088 shares atDecember 31, 2015 and 2016, respectively; Outstanding: 75,811,487 and 77,223,069 shares at December 31, 2015and 2016, respectively 206 210 Additional paid-in capital 227,258 234,831 Treasury shares at cost (346,019 shares at December 31, 2015 and 2016) (1,002) (1,002)Accumulated other comprehensive loss (794) (265)Accumulated deficit (25,831) (25,630)Total Shareholders' Equity 199,837 208,144 Total Liabilities and Shareholders' Equity $442,298 $368,452 The accompanying notes are an integral part of the consolidated financial statements. F - 2PERION NETWORK LTD. AND ITS SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEU.S. dollars in thousands (except share and per share data) Year ended December 31, 2014 2015 2016 Revenues: Search and other $343,655 $188,897 $172,683 Advertising 45,076 32,053 140,111 Total Revenues 388,731 220,950 312,794 Costs and Expenses: Cost of revenues 10,950 7,877 16,515 Customer acquisition costs and media buy 174,575 91,194 140,210 Research and development 37,427 21,692 26,528 Selling and marketing 20,792 22,886 58,572 General and administrative 36,730 31,064 32,916 Depreciation and amortization 21,321 11,422 25,977 Impairment, net of change in fair value of contingent consideration 19,941 72,785 - Restructuring charges 3,981 1,052 728 Total Costs and Expenses 325,717 259,972 301,446 Income (Loss) from Operations 63,014 (39,022) 11,348 Financial expenses, net 2,888 1,939 8,288 Income (Loss) before Taxes on Income 60,126 (40,961) 3,060 Taxes on income 10,816 697 212 Net Income (Loss) from Continuing Operations 49,310 (41,658) 2,848 Net loss from discontinued operations 6,484 26,999 2,647 Net Income (Loss) $42,826 $(68,657) $201 Net Earnings (Loss) per Share - Basic: Continuing operations $0.72 $(0.58) $0.04 Discontinued operations $(0.09) $(0.38) $(0.04)Net income (Loss) $0.63 $(0.96) $0.00*) Net Earnings (Loss) per Share – Diluted: Continuing operations $0.67 $(0.58) $0.04 Discontinued operations $(0.09) $(0.38) $(0.04)Net income (Loss) $0.58 $(0.96) $0.00*) Weighted average number of shares – Basic: Continuing and Discontinued operations 68,213,209 71,300,432 76,560,454 Weighted average number of shares – Diluted: Continuing and Discontinued operations 70,327,411 71,300,432 76,673,803 *) Less than $0.01The accompanying notes are an integral part of the consolidated financial statements. F - 3PERION NETWORK LTD. AND ITS SUBSIDIARIESCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEU.S. dollars in thousands Year ended December 31, 2014 2015 2016 Net income (Loss) $42,826 $(68,657) $201 Other comprehensive income (loss): Change in foreign currency translation adjustment - (822) 521 Cash Flow Hedge: Unrealized gain (loss) from cash flow hedges (62) 206 175 Less: reclassification adjustment for net gain (loss) included in net income (loss) 62 (178) (167)Net change - 28 8 Other comprehensive income (loss) - (794) 529 Comprehensive Income (Loss) $42,826 $(69,451) $730 The accompanying notes are an integral part of the consolidated financial statements. F - 4PERION NETWORK LTD. AND ITS SUBSIDIARIESSTATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITYU.S. dollars in thousands (except share data) Common stock Additionalpaid-incapital AccumulatedOtherComprehensiveincome (loss) Retainedearnings(Accumulateddeficit) Treasuryshares Totalshareholders’equity Number of Shares $ $ $ $ $ $ Balance as ofDecember 31, 2013 54,753,582 147 10,882 - - (1,002) 10,027 Issuance of sharesrelated to acquisitions 13,124,100 38 171,514 - - - 171,552 Acquisition relatedexpenses paid by theshareholders - - 3,060 - - - 3,060 Contribution byshareholders - - 1,803 - - - 1,803 Stock-basedcompensation - - 15,145 - - - 15,145 Exercise of stockoptions 1,324,749 4 1,580 - - - 1,584 Net income - - - - 42,826 - 42,826 Balance as ofDecember 31, 2014 69,202,431 189 203,984 - 42,826 (1,002) 245,997 Issuance of sharesrelated to acquisitions 1,798,837 5 5,574 - - - 5,579 Issuance of shares inprivate placement, netof issuance cost of $105 4,436,898 11 10,009 - - - 10,020 Stock-basedcompensation - - 7,679 - - - 7,679 Exercise of stockoption and vesting ofrestricted stock units 373,321 1 12 - - - 13 Other comprehensiveloss - - - (794) - - (794)Net loss - - - - (68,657) - (68,657) Balance as ofDecember 31, 2015 75,811,487 206 227,258 (794) (25,831) (1,002) 199,837 Issuance of sharesrelated to acquisitions 290,981 1 674 - - - 675 Issuance of sharesrelated to priceadjustment of privateplacement 782,981 2 (2) - - - - Stock-basedcompensation - - 6,900 - - - 6,900 Exercise of stockoption and vesting ofrestricted stock units 337,620 1 1 - - - 2 Other comprehensiveincome - - - 529 - - 529 Net income - - - - 201 - 201 Balance as ofDecember 31, 2016 77,223,069 210 234,831 (265) (25,630) (1,002) 208,144 The accompanying notes are an integral part of the consolidated financial statements. F - 5PERION NETWORK LTD. AND ITS SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSU.S. dollars in thousands Year ended December 31, 2014 2015 2016 Operating activities: Net income (loss) $42,826 $(68,657) $201 Loss from discontinued operations, net (6,484) (26,999) (2,647)Net income (loss) from continuing operations 49,310 (41,658) 2,848 Adjustments required to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21,321 11,422 25,977 Impairment of intangible assets and goodwill 19,941 79,349 - Restructuring costs related to impairment of property and equipment 632 124 254 Stock-based compensation expense 13,769 6,738 6,844 Issuance of ordinary shares related to employees' retention - 63 - Foreign currency translation - (347) 980 Acquisition related expenses paid by shareholders 3,060 - - Accretion of payment obligation related to acquisition 1,067 311 320 Accrued interest, net 655 37 406 Deferred taxes, net (13,851) (8,973) (3,268)Accrued severance pay, net 392 238 214 Change in payment obligation related to acquisitions 713 (5,937) 983 Fair value revaluation - convertible debt (2,566) 175 1,350 Loss from sale of property and equipment 121 17 149 Net changes in operating assets and liabilities: Accounts receivable, net (23,568) 3,362 (5,333)Prepaid expenses and other (5,020) (3,402) 8,613 Accounts payable 2,228 (3,725) (1,702)Accrued expenses and other liabilities 9,261 (13,250) (2,486)Deferred revenues (407) (772) (2,365)Net cash provided by continuing operating activities 77,058 23,772 33,784 Net cash used in discontinued operating activities (5,016) (6,203) (3,329)Net cash provided by operating activities $72,042 $17,569 $30,455 Investing activities: Purchases of property and equipment $(10,882) $(2,029) $(1,504)Proceeds from sale of property and equipment 58 24 151 Capitalization of development costs - (4,005) (4,591)Change in restricted cash, net (202) 50 647 Short-term deposits, net (15,000) (27,442) 34,028 Cash paid for acquisition, net of cash acquired 19,042 (87,044) - Net cash provided by (used in) continuing investing activities (6,984) (120,446) 28,731 Net cash provided by discontinued investing activities - - - Net cash provided by (used in) investing activities $(6,984) $(120,446) $28,731 Financing activities: Issuance of shares in private placement, net $- $10,020 $- Exercise of stock options and restricted share units 1,584 13 2 Contribution by shareholders 585 - - Payments made in connection with acquisition (2,545) (1,534) (29,537)Proceeds from the issuance of convertible debt 37,852 - - Proceeds from short-term loans - 13,000 40,000 Repayment of short-term loans - - (46,000)Repayment of convertible debt - - (7,620)Repayment of long-term loans (2,300) (2,300) (9,452)Net cash provided by (used in) continuing financing activities $35,176 $19,199 $(52,607) Effect of exchange rate changes on cash and cash equivalents - 14 (136) Net increase (decrease) in cash and cash equivalents $105,250 $(77,461) $9,772 Decrease in cash and cash equivalents - discontinued activities (5,016) (6,203) (3,329)Cash and cash equivalents at beginning of year 949 101,183 17,519 Cash and cash equivalents at end of year $101,183 $17,519 $23,962 The accompanying notes are an integral part of the consolidated financial statements. F - 6PERION NETWORK LTD. AND ITS SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSU.S. dollars in thousands Year ended December 31 2014 2015 2016 Supplemental Disclosure of Cash Flow Activities: Cash paid during the year for: Income taxes $20,855 $21,340 $3,976 Interest $260 $2,260 $5,678 Non-cash investing and financing activities: Issuance of shares in connection with acquisitions $171,552 $5,579 $673 Issuance of shares in private placement $- $- $2 Contribution by shareholders $1,218 $- $- Acquisition related expenses paid by shareholders $3,060 $- $- Stock-based compensation capitalized as part of capitalization of software development costs $- $187 $14 Purchase of property and equipment on credit $1,205 $312 $322 The accompanying notes are an integral part of the consolidated financial statements. F - 7PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 1:GENERALa.Perion Network Ltd. ("Perion") and its wholly-owned subsidiaries (collectively referred to as the "Company"), is a global technology company,providing high-quality advertising solutions to brands and publishers, high-impact ad formats that capture consumer attention and drivesengagement, branded search providing publishers with engagement and monetization solutions and a social programmatic platform.b.On January 2, 2014, the Company purchased all the outstanding shares of ClientConnect Ltd. ("ClientConnect"), in a stock-for-stock transaction.The ClientConnect acquisition has been reflected in the financial statements as a reverse acquisition of all of the outstanding shares and options byClientConnect using the acquisition method of accounting whereby ClientConnect is the deemed accounting acquirer and Perion is the deemedaccounting acquiree.On February 10, 2015, the Company completed the acquisition of Make Me Reach SAS ("MMR") and on November 30, 2015, completed theacquisition of Interactive Holding Corp and its subsidiaries (collectively referred to as "Undertone").c.In March 2016, the Company decided to discontinue the operations of the mobile self-serve side of the business and put out for sale the mobileengagement business, both under the Growmobile business. Certain parts of the mobile marketing platform were redeployed so that it no longerfunctions as an independent business. In August 2016, the Company completed the sale of mobile engagement business. Accordingly, thestatements of income and statements of cash flows, related to the mobile self-serve and mobile engage operations are classified as discontinuedoperations for all periods presented. As of December 31, 2015 and 2016, the carrying amounts of the assets and liabilities discontinued wereimmaterial (see Note 2).NOTE 2:SIGNIFICANT ACCOUNTING POLICIESBasis of consolidationThe consolidated financial statements include the accounts of Perion and its subsidiaries. All intercompany balances and transactions have been eliminated.Use of estimatesThe preparation of the consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires managementto make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actualresults could differ materially from those estimates. On an ongoing basis, the Company's management evaluates its estimates, including those related toaccounts receivable, intangible assets and goodwill, fair values and useful lives of intangible assets, fair values of stock-based awards, allowance for doubtfulaccounts, realizability of deferred tax assets, income taxes, and contingent liabilities, among others. Such estimates are based on historical experience and onvarious other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of theCompany’s assets and liabilities.Financial statements in U.S. dollarsThe 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 itssubsidiaries in the United States and Israel. The functional currency of these entities is the USD. Accordingly, monetary accounts maintained in currenciesother than the USD are remeasured into USD, in accordance with ASC 830, "Foreign Currency Matters". All transaction gains and losses resulting from theremeasurement of the monetary balance sheet items are reflected in the statements of income as financial income or expenses, as appropriate. F - 8PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:SIGNIFICANT ACCOUNTING POLICIES (Cont.) Management believes that the USD is the currency of the primary economic environment in which the Company operates. The financial statements of othersubsidiaries, whose functional currency is determined to be their local currency, have been translated into USD. All balance sheet accounts have beentranslated using the exchange rates in effect at the balance sheet date. Statement of operations amounts have been translated using the average exchange ratefor the applicable year. The resulting translation adjustments are reported as an accumulated other comprehensive income (loss) component of shareholders'equity.Cash and cash equivalents and short-term depositsThe Company considers all short-term, highly liquid and unrestricted cash balances, with stated maturities of three months or less from date of purchase, ascash equivalents. Short-term deposits are bank deposits with maturities of more than three months but less than one year. The short-term deposits as ofDecember 31, 2015 and 2016 are denominated primarily in USD and bear interest at an average annual rate of 0.72% and 1.12%, respectively.Restricted cashRestricted cash is comprised primarily of security deposits that are held to secure the Company’s hedging activity, lease obligations and certain letters ofcredit associated with lease obligations. Restricted cash in the amount of $646 and $1,184, as of December 31, 2015 and 2016, respectively, are includedunder prepaid expenses and other current assets. Restricted cash in the amount of $1,182, as of December 31, 2015, is included under other assets in the accompanying balance sheets.Accounts receivable and allowance for doubtful accountsTrade accounts receivables are stated at realizable value, net of an allowance for doubtful accounts. The Company evaluates its outstanding accountsreceivable and establishes an allowance for doubtful accounts based on information available on their credit condition, current aging and historicalexperience. These allowances are reevaluated and adjusted periodically as additional information is available.Property and equipmentProperty and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is calculated using the straight-line method overthe estimated useful lives of the assets at the following annual rates: %Computers and peripheral equipment33Office furniture and equipment6 - 15Leasehold improvements are amortized using the straight-line method over the term of the lease or the estimated useful life of the improvements, whichever isshorter. F - 9PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:SIGNIFICANT ACCOUNTING POLICIES (Cont.) Impairment of long-lived assets and intangible assets subject to amortizationProperty and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with ASC 360, "Accounting for theImpairment or Disposal of Long-Lived Assets", whenever events or changes in circumstances indicate that the carrying value of an asset may not berecoverable. The recoverability of these assets is measured by comparing the carrying amounts to the future undiscounted cash flows the assets are expectedto generate. If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which thecarrying 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 participantswill consider in valuations of similar assets.In 2014 and 2015, the Company recorded impairment charges of $19,941 and $8,471, respectively, with respect to intangible assets subject to amortization.No such impairment charges were recorded in 2016 (see Note 6).In addition, in connection with the restructuring plans of the Company in 2014 and 2015, the Company recorded, an impairment charge of $632 and $124,respectively, related to its property and equipment.Goodwill and other intangible assetsGoodwill reflects the excess of the purchase price of business acquired over the fair value of net assets acquired. Goodwill is not amortized but instead istested for impairment, in accordance with ASC 350, “Intangibles – Goodwill and Other”, at the reporting unit level (as of December 31, 2016, the Companyhad two reporting units – Search monetization and Undertone), at least annually at December 31 each year, or more frequently if events or changes incircumstances indicate that the carrying value may be impaired. The first step, identifying a potential impairment, compares the fair value of the reportingunit with its carrying amount. If the carrying amount exceeds its fair value, the second step would need to be performed; otherwise, no further step is required.The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess of thecarrying amount over the applied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. The Company determined that certain indicators of potential impairment existed during 2015 and 2016, which triggered goodwill impairment analysis for itsreporting units. These indicators included a decrease in the Company’s share price and lower than expected sales and cash flow, as well as managementdecisions to abandon certain R&D projects. Based on the goodwill assessment for the search monetization reporting unit and Grow Mobile reporting unit, in2015, the Company determined that the carrying amount of the reporting units exceeds their fair value and recorded an impairment of $87,043 (out of which$16,165 is included as a loss from discontinued operation) to its goodwill. No such impairment charges were recorded in 2014 or in 2016.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 consideredto be Level 3 inputs.F - 10PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:SIGNIFICANT ACCOUNTING POLICIES (Cont.)Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives. The acquired customer arrangements,technology and logo are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results inaccelerated amortization of such intangible assets as compared to the straight-line method.Deferred Financing CostsDirect and incremental costs related to the issuance of debt are capitalized as deferred financing costs and are deducted from the carrying amount of that debtin the consolidated balance sheets.The Company amortizes deferred financing costs using the effective-interest method and records such amortization as interest expense.Revenue recognitionThe Company generates revenues primarily from two major sources:Search Revenues - the Company obtains its search revenues from service agreements with its search partners. Search revenue is generated primarily frommonthly transaction volume-based fees earned by the Company for making its applications available to online publishers and app developers (either basedon fixed price models, pay-per-search fee or portion of the revenue generated by the search partners).Advertising Revenues - the Company primarily generates advertising revenues from delivering, high impact ad formats creatively designed to captureconsumer attention and drive engagement, across a hand-picked portfolio of websites and mobile applications.The Company evaluates whether Search and Advertising Revenues should be presented on a gross basis, which is the amount that a customer pays for theservice, or on a net basis, which is the amount of the customer payment less amounts the Company pays to publishers. In making that evaluation, theCompany considers indicators such as whether the Company is the primary obligor in the arrangement and assumes risks and rewards as a principal or anagent, including the credit risk, whether the Company has latitude in establishing prices and selecting its suppliers and whether it changes the products orperforms part of the service. The evaluation of these factors is subject to significant judgment and subjectivity. Generally, in cases in which the Company isprimarily obligated in a transaction, is subject to risk, involved in the determination of the product (or the service) specifications, separately negotiates eachrevenue service agreement or publisher agreement and can have several additional indicators, revenue is recorded on a gross basis.The Company recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; services arerendered; the fee or price charged is fixed or determinable; and collectability is reasonably assured. Deferred revenue is recorded when payments are receivedfrom customers in advance of the Company's rendering of services.Cost of revenuesCost of revenues consists primarily of expenses associated with the operation of the Company’s data centers, including depreciation, labor, energy andbandwidth costs, amortization of acquisition-related intangible assets, as well as content acquisition costs. The direct cost relating to search revenues isimmaterial.F - 11PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:SIGNIFICANT ACCOUNTING POLICIES (Cont.)Customer acquisition costs and media buyCustomer acquisition costs and media buy consist of amounts paid to publishers who distribute the Company’s search applications and services and otherproducts and the costs of advertising inventory incurred to deliver ads. Customer acquisition costs are primarily based on revenue share arrangements withminimum guaranty and are charged as incurred.Research and development costsResearch and development costs are charged to the statement of income as incurred, except for certain costs relating to internally developed software, whichare capitalized. The Company capitalizes certain internal and external software development costs, consisting primarily of direct labor associated with creating the internallydeveloped software. Software development projects generally include three stages: (i) the preliminary project stage (all costs expensed as incurred); (ii) theapplication development stage (costs are capitalized) and (iii) the post implementation/operation stage (all costs expensed as incurred). The costs capitalizedin the application development stage primarily include the costs of designing the application, coding and testing of the system. Capitalized costs areamortized using the straight-line method over the estimated useful life of the software, generally three years, once it is ready for its intended use. TheCompany believes that the straight-line recognition method best approximates the manner in which the expected benefit will be derived. Managementevaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact therecoverability of these assets. As a result of changes in circumstances, management decided to abandon certain projects and therefore recorded an impairmentcharge of $3,390 in 2015, which is included as a loss from discontinued operation. Capitalized software development costs, net of accumulated amortization of $557 and $4,393 are included in property and equipment in the consolidatedbalance sheets as of December 31, 2015 and 2016, respectively (see Note 5).Income taxesThe Company accounts for income taxes in accordance with ASC 740, "Income Taxes". This Statement prescribes the use of the liability method, wherebydeferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and aremeasured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. To the extent necessary, the Companyprovides a valuation allowance to reduce deferred tax assets to their estimated realizable value.The Company accounts for uncertain tax positions in accordance with ASC 740, which contains a two-step approach for recognizing and measuringuncertain 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 availableevidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigationprocesses. 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.The Company accrued interest and penalties related to unrecognized tax benefits in its financial expenses.F - 12PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:SIGNIFICANT ACCOUNTING POLICIES (Cont.)Severance payThe majority of the Company's agreements with employees in Israel are in accordance with section 14 of the Severance Pay Law, 1963 (“Section 14”), wherethe Company's contributions for severance pay is paid to the employee upon termination instead of the severance liability that would otherwise be payableunder 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 theemployee, no additional severance payments are required to be made by the Company to the employee. Therefore, the related obligation and amountsdeposited on behalf of such obligation are not stated on the balance sheet, as the Company is legally released from obligation to such employees once thedeposit amounts have been paid.The Company's liability for severance pay to its Israel-based employees not under Section 14, is calculated pursuant to Israel's Severance Pay Law based onthe most recent monthly salaries of such employees, multiplied by the number of years of their employment, or a portion thereof, as of the balance sheet date.This liability is fully provided for by monthly deposits in insurance policies and by an accrual. The deposited funds include profits and losses accumulatedup to the balance sheet date and they may be withdrawn only upon the fulfillment of the obligation pursuant to Israel's Severance Pay Law.Severance expenses from continuing operations for the years ended December 31, 2014, 2015 and 2016 amounted to $3,330, $2,310 and $2,917,respectively. The balances of severance deposits and accrued severance pay are immaterial and included in other assets and other long-term liabilities on theaccompanying balance sheets, respectively.Employee benefit planThe 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 theInternal 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 annualcontribution limit. The Company matches 100% of each participant’s contributions, up to 3% of employee deferral, and 50% of the next 2% of employeedeferral. 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, 2014, 2015 and 2016 were $116, $247 and $1,018, respectively.Comprehensive income (loss)The Company accounts for comprehensive income (loss) in accordance with ASC 220, "Comprehensive Income". This statement establishes standards for thereporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generallyrepresents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders. The Companydetermined that its other comprehensive income (loss) relates to hedging derivative instruments and foreign currency translation adjustments.F - 13PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:SIGNIFICANT ACCOUNTING POLICIES (Cont.)Net earnings per shareIn accordance with ASC 260, "Earnings Per Share", basic net earnings per share ("Basic EPS") is computed by dividing net earnings attributable to ordinaryshareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net earnings per share ("Diluted EPS") reflects thepotential dilution that could occur if stock options and other commitments to issue ordinary shares were exercised or equity awards vested, resulting in theissuance of ordinary shares that could share in the net earnings of the Company.The weighted average number of ordinary shares related to the outstanding options, restricted shares, convertible debt and warrants excluded from thecalculations of diluted net earnings per ordinary share, as these securities are anti-dilutive, was 3,766,080, 14,179,439 and 10,700,363 for the years endedDecember 31, 2014, 2015 and 2016, respectively.Concentrations of credit riskFinancial 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. andIsrael. Deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Generally, these deposits may be redeemed upondemand 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 Companyhas not experienced any material bad debt losses. Total expenses for doubtful debts during 2014, 2015 and 2016 amounted to $1,035, $104 and $152,respectively.Stock-based compensationThe Company accounts for stock-based compensation under ASC 718, "Compensation - Stock Compensation", which requires the measurement andrecognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors. ASC 718 requirescompanies 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 isultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated statement of income. ASC 718requires forfeitures to be estimated at the time of grant, and revised if necessary in subsequent periods, if actual forfeitures differ from those estimates.The Company recognizes compensation expenses for the value of its awards, which have graded vesting based on service conditions, using the straight-linemethod, over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vestingforfeitures. For performance-based stock units, the Company recognizes compensation expenses for the value of such awards, if and when the Companyconcludes that it is probable that a performance condition will be achieved based on the accelerated attribution method over the requisite service period. TheCompany should reassess the probability of vesting at each reporting period for awards with performance conditions and adjust compensation cost based onits probability assessment.F - 14PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:SIGNIFICANT ACCOUNTING POLICIES (Cont.)The Company accounted for changes in award terms as a modification in accordance with ASC 718. A modification to the terms of an award should be treatedas an exchange of the original award for a new award with total compensation cost equal to the grant-date fair value of the original award plus the incrementalvalue measured at the same date. Under ASC 718, the calculation of the incremental value is based on the excess of the fair value of the new (modified) awardbased on current circumstances over the fair value of the original award measured immediately before its terms are modified based on current circumstances.The Company estimates the fair value of its new stock-based awards using the Binomial option-pricing model.The following table presents the various assumptions used to estimate the fair value of the Company's stock-based awards granted to employees and directorsin the periods presented: Year ended December 31 2014 2015 2016 Risk-free interest rate0.10% - 1.72% 0.17% - 1.76% 0.46% - 1.73%Expected volatility44.44% - 51.62% 43.49% - 50.31% 49.49% - 53.54%Early exercise factor100% - 256% 160% - 210% 150% - 200%Forfeiture rate post vesting0% - 15% 0% - 18% 5% - 20%Dividend yield0% 0% 0% The expected volatility is calculated based on the actual historical stock price movements of the Company’s stock.The expected option term represents the period that the Company’s stock options are expected to be outstanding.The early exercise factor and the forfeiture rate post-vesting are calculated based on the Company’s estimated early exercise and post-vesting forfeituremultiples, which are based on comparable companies and on actual historical data.The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds, with a term which is equivalent to the expected term of the stock-basedawards. The dividend yield is based on the current decision of the Company’s management not to distribute any dividends.The fair value of restricted stock units (“RSU”) is based on the market value of the underlying shares on the date of grant.Derivative instrumentsThe Company accounts for derivatives and hedging based on ASC 815, "Derivatives and Hedging", which requires recognizing all derivatives on the balancesheet at fair value. If the derivatives meet the definition of a cash flow hedge and are so designated, depending on the nature of the hedge, the effectiveportion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period, orperiods, during which the hedged transaction affects earnings. The ineffective portion of a derivative’s change in fair value, if any, is recognized in earnings,as well as gains and losses from a derivative’s change in fair value that are not designated as hedges are recognized in earnings immediately.F - 15PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:SIGNIFICANT ACCOUNTING POLICIES (Cont.) Starting 2014, 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 started to hedge portions of its forecasted expenses denominated in ILS with swap and options contracts. In addition, the Company hasentered into a cross currency interest rate swap agreement in order to transform cash flow in ILS into USD of interest payments and principal as derived fromthe Company’s convertible debt conditions (see Note 10). The Company does not speculate in these hedging instruments in order to profit from foreigncurrency exchanges, nor does it enter into trades for which there are no underlying exposures.The Company follows the requirements of ASC No. 815, ”Derivatives and Hedging” (“ASC 815”), which requires companies to recognize all of theirderivative 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 aderivative instrument depends on whether it has been designated and qualifies as part of a hedging transaction and further, on the type of hedgingtransaction. 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.To protect against the increase in value of forecasted foreign currency cash flow resulting mainly from salaries and related benefits and taxes paid in ILSduring the year, the Company hedges portions of its anticipated payroll denominated in ILS for a period of one to twelve months with forward and optionscontracts (the “Hedging Contracts”). Accordingly, when the USD strengthens against the ILS, the decline in present value of future ILS currency expenses isoffset 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 isoffset by gains in the fair value of the Hedging Contracts. These Hedging Contracts are designated as cash flow hedges.Additionally, in order to mitigate the potential adverse impact of the fluctuations in the ILS-USD exchange rate in connection with the convertible debt (seeNote 10), the Company has entered into a cross currency interest rate SWAP agreement (the “SWAP”) in order to hedge the future interest and principalpayments, which are all denominated in ILS. However, since the convertible debt is measured at fair value at each reporting date, the SWAP does not qualifyand was not designated as a cash flow hedge under ASC 815.In order to limit the Company’s interest expenses derived from the secured credit agreement in which the Company entered concurrently with the closing ofthe Undertone acquisition (see Note 6), the Company has purchased a Cap Option for the interest amounts expected to be paid till June 2018. The cap optionis designated as cash flow hedge under ASC 815.The swap contracts were not designated as hedging instruments and therefore gains or losses resulting from the change of their fair value are recognized in"financial expenses, net". The Company measured the fair value of these contracts in accordance with ASC 820, "Fair Value Measurement and Disclosures",and they were classified as level 2.F - 16PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data)NOTE 2:SIGNIFICANT ACCOUNTING POLICIES (Cont.) The notional value of the Company’s derivative instruments as of December 31, 2015 and 2016, amounted to $57,052 and $72,569, respectively. Notionalvalues 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 orliabilities of the Company; however, they are used in the calculation of settlements under the contracts.Fair value of financial instrumentsThe carrying amounts of financial instruments carried at cost, including cash and cash equivalents, short-term deposits, restricted cash, accounts receivable,prepaid expenses and other assets, accounts payable, accrued expenses and other liabilities approximate their fair value due to the short-term maturities ofsuch instruments.The Company follows the provisions of ASC No. 820, “Fair Value Measurement” (“ASC 820”), which defines fair value as the price that would be received tosell 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 thatmaximizes 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 ofthe Company. Unobservable inputs are inputs that reflect assumptions that market participants would use in pricing an asset or liability, based on the bestinformation available under given circumstances.The hierarchy is broken down into three levels, based on the observability of inputs and assumptions, as follows:·Level 1 - Observable inputs obtained from independent sources, such as quoted prices for identical assets and liabilities in active markets.·Level 2 - Other inputs that are directly or indirectly observable in the market place.·Level 3 - Unobservable inputs which are supported by little or no market activity.Treasury sharesIn the past, the Company repurchased its ordinary shares on the open market. The Company holds those shares as treasury shares and presents their cost as areduction of shareholders' equity.Business combinationsThe Company accounted for business combination in accordance with ASC 805, "Business Combinations". ASC 805 requires recognition of assets acquired,liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair values as of that date. Any excess of the fair value of netassets acquired over purchase price is allocated to goodwill and any subsequent changes in estimated contingencies are to be recorded in earnings. Inaddition, changes in valuation allowance related to acquired deferred tax assets and in acquired income tax position are to be recognized in earnings.F - 17PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.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.Discontinued operationsUnder ASC 205, "Presentation of Financial Statements - Discontinued Operation", when a component of an entity, as defined in ASC 205, has been disposedof or is classified as held for sale, the results of its operations, including the gain or loss on its disposal are classified as discontinued operations and the assetsand liabilities of such component are classified as assets and liabilities attributed to discontinued operations, provided that the operations, assets andliabilities and cash flows of the component have been eliminated from the entity’s consolidated operations and the entity will no longer have any significantcontinuing involvement in the operations of the component.In August 2016, the Company completed the sale of the GME business, including the intellectual property, know-how and technology, for totalconsideration of $1,750, which was included in net loss from discontinued operations in the consolidated statement of income for the year ended December31, 2016.The results of the discontinued operations, including prior periods' comparable results, which have been retroactively reclassified as a separate line items inthe statements of income, are presented below: Year ended December 31, 2014 2015 2016* Costs and expenses 7,719 7,444 5,192 Impairment of intangible assets and goodwill - 19,555 - Gain on disposal of the discontinued operations - - (1,750)Loss before taxes on income (7,719) (26,999) (3,442)Taxes on income 1,235 - 795 Total net loss on discontinued operations $(6,484) $(26,999) $(2,647) * Represent the results of the discontinued operations until their disposal.Depreciation expenses from discontinued operations totaled $92, $550 and $71, for the years ended December 31, 2014, 2015 and 2016, respectively.ReclassificationsCertain financial statement data for prior years has been reclassified to conform to current year financial statement presentation.Recent Accounting PronouncementsIn May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09) "Revenue from Contracts with Customers." ASU 2014-09supersedes the revenue recognition requirements in “Revenue Recognition (Topic 606)”, and requires entities to recognize revenue when it transferspromised 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 goodsor services. Topic 606 was further amended during 2016 as follows:·In March 2016, by ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting RevenueGross versus Net), which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assistan entity in determining whether it controls a specified good or service before it is transferred to the customers. F - 18PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:SIGNIFICANT ACCOUNTING POLICIES (Cont.) ·In April 2016, by 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, that clarifiedtwo aspects of ASC 606, identifying performance obligations and the licensing implementation guidance, while retaining the related principles ofthose areas.·In May 2016, by ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.ASU 2016-12 address certain issues in the guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completedcontracts and contract modifications at transition.As currently issued and amended, ASC 606 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within thatreporting period, though early adoption is permitted for annual reporting periods beginning after December 15, 2016 using either of two methods: (1) fullretrospective application or (2) modified retrospective application. The Company's management is currently evaluating the impact that the new principalversus agent guidance may have on the presentation of its revenue arrangements, and the expected impact on its business processes, systems and controls, buthad not completed its evaluation. The Company expect to complete its assessment process during 2017 and adopt the new standard on January 1, 2018. TheCompany did not select yet the transition method of the new standard.In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires that long-term lease arrangements be recognized on the balance sheet. Thestandard is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is currentlyevaluating the impact of adoption on its consolidated financial statements.In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvement to EmployeeShare-based Payment Accounting (ASU 2016-09), to simplify the accounting for share-based payment transactions, including the income tax consequences,an option to recognize gross share-based compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on thestatement of cash flows. This guidance will be effective for the Company in the first quarter of 2017, and early adoption is permitted. The Company iscurrently evaluating the effect that this guidance will have on its consolidated financial statements.In November 2016, the FASB issued Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows: Restricted Cash, providing specific guidanceon the cash flow classification and presentation of changes in restricted cash and restricted cash equivalents. Amounts generally described as restricted cashshould be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement ofcash flow. The amendments in ASU 2016-18 are effective for fiscal years beginning after December 15, 2017, and interim periods therein. Early adoption ispermitted, including adoption in an interim period. The Company is currently evaluating the effect, if any, that the adoption of ASU 2016-18 will have on itsfinancial statements.In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-04, “Intangibles—Goodwill andOther (Topic 350): - Simplifying the Test for Goodwill Impairment”, which eliminates the requirement to calculate the implied fair value of goodwill (i.e.,Step 2 of the goodwill impairment test) for the purpose of measuring a goodwill impairment charge. Instead, an impairment charge shall be recognized basedon the excess of a reporting unit’s carrying amount over its fair value. The standard shall be applied prospectively and is effective for annual and interimimpairment tests performed in periods beginning after December 15, 2019, for public entities. Early adoption is permitted for annual and interim goodwillimpairment testing dates after January 1, 2017. The Company will adopt the new guidance on January 1, 2017. F - 19PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 3:FAIR VALUE OF FINANCIAL INSTRUMENTSThe following table present assets and liabilities measured at fair value on a recurring basis as of December 31, 2016: Fair value measurements using input type Level 1 Level 2 Level 3 Total Assets: Derivative assets $- $1,117 $- $1,117 Total financial assets $- $1,117 $- $1,117 Liabilities: Payment obligation in connection with acquisitions $- $- $7,653 $7,653 Derivative liabilities - 84 - 84 Convertible debt 29,526 - - 29,526 Total financial liabilities $29,526 $84 $7,653 $37,263 F - 20PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 3:FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont.)The following table present assets and liabilities measured at fair value on a recurring basis as of December 31, 2015: Fair value measurements using input type Level 1 Level 2 Level 3 Total Assets: Derivative assets $- $608 $- $608 Total financial assets $- $608 $- $608 Liabilities: Payment obligation in connection with acquisitions $- $- $49,124 $49,124 Derivative liabilities - 214 - 214 Convertible debt 35,463 - - 35,463 Total financial liabilities $35,463 $214 $49,124 $84,801 The following table summarizes the changes in the Company’s liabilities measured at fair value using significant unobservable inputs (Level 3), during theyear ended December 31, 2015 and 2016:Total fair value as of January 1, 2015 $13,645 Accretion of contingent liability related to acquisition 311 Change in fair value of contingent consideration related to acquisition (6,564)Settlements (2,500)Fair value of payment obligation in connection with Undertone acquisition 44,023 Reclassification to accrued expenses (189)Change in fair value recognized in earnings with respect to the employees of Grow Mobile 398 Total fair value as of December 31, 2015 $49,124 Accretion and interest of payment obligation related to acquisition $1,303 Settlements (7,537)Change to payment obligation as a result of working capital adjustment 309 Amendment to the merger agreement (35,546) Total fair value as of December 31, 2016 $7,653 F - 21PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 4:ACQUISITIONSa.Interactive Holding Corp.On November 30, 2015, The Company executed an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which the Company consummated,on the same date, the acquisition of 100% of the shares of Interactive Holding Corp., a Delaware corporation, and its subsidiaries (collectively referred to as"Undertone") for a total preliminary purchase price of $133,101, comprised of the following: 1.$89,078 paid in cash on November 30, 2015;2.$1,182 paid in cash on January 29, 2016;3.An amount of $2,143 excess in tax advances paid in 2016 upon refund from tax authorities;4.An amount of $3,000 to be paid in installments over the period ending September 2017, for which a liability of $2,804 was recorded at fair value($2,820 at December 31, 2015). In 2016 an amount of $1,000 was paid after which, the fair value of the remaining liability is $1,939 as of December31, 2016;5.$16,000 were retained as a holdback to cover potential claims until May 31, 2017, for which a liability of $14,391 was recorded at fair value($14,476 and $14,129 at December 31, 2015 and August 2, 2016, respectively), and an amount of $20,000, deferred consideration payment, bearing10% annual interest, to be paid on November 2020, for which a liability of $22,005 was recorded at fair value ($21,859 and $ 21,417 at December31, 2015 and August 2, 2016, respectively).6.Working capital adjustment in the amount of $1,498.In addition to the purchase price detailed above, the Company incurred acquisition related costs totaling $4,804, which are included in general andadministrative expenses. Acquisition related costs include banking, legal and accounting fees, as well as other external costs directly related to theacquisition.Adjustments to purchase price:On August 2, 2016, the Company executed an amendment to the Merger Agreement, pursuant to which, the Company paid $22,000 and eliminated $35,546at fair value, of obligations. Under said amendment, the Company reserved its right to claim indemnification only for certain material potential claims untilMay 2017. As a result of the amendment, the Company reduced the purchase price by $13,546.Final purchase price amounted to $119,768 including a working capital final adjustment of $213 in 2016.Adjustments to the purchase price allocation:As of December 31, 2015, the estimated fair values were preliminary and based on the information that was available as of the closing date. In 2016, theCompany recognized an adjustment of $590 to the goodwill balance, as a result of changes made to the preliminary amounts recognized for assets andliabilities, during the measurement period. As of December 31, 2016, the Company finalized the valuation and completed the purchase price allocation.F - 22PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 4:ACQUISITIONS (Cont.)The final allocation of the purchase price, to assets acquired and liabilities assumed, is as follows:Cash and cash equivalents $7,378 Accounts receivable 38,493 Prepaid expenses and other assets 4,427 Long term restricted cash 1,182 Property and equipment 1,905 Deferred taxes 815 Accounts payable (23,152)Accrued expenses and other liabilities (11,083)Deferred revenues (1,047)Long term loan, including current maturities (48,601)Deferred tax liability (20,241)Intangible assets 63,200 Goodwill 106,492 Total purchase price $119,768 The main reason for the acquisition was to continue the strategic evolution of the Company into a global technology company delivering high-qualityadvertising solutions to brands and publishers. The desired strategic benefits were to create a differentiated independent ad tech platform with significantscale and profitability, add noteworthy relationships with premium brands, agencies and publishers, enhance mobile footprint, extend programmaticcapabilities, broaden product suite with the addition of proprietary, high-impact creative formats and substantially diversify revenue base.Under business combination accounting principles, the total purchase price was allocated to Undertone's net tangible and intangible assets based on theirestimated fair values as set forth below. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill.The goodwill is attributable primarily to the strategic opportunities aforementioned. The related goodwill and intangible assets are not deductible for taxpurposes.Intangible assets:The fair value of intangible assets was based on the market participant approach to valuation, performed by a third-party valuation firm, using estimates andassumptions provided by management.F - 23PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 4:ACQUISITIONS (Cont.)The following table sets forth the components of intangible assets associated with the Undertone acquisition: Estimateduseful life Acquired technology (1) $19,500 5 yearsCustomer relationships (2) 30,000 6 yearsBacklog (3) 4,200 less than 1yearTradename (4) 9,500 4 years Total amount allocated to intangible assets $63,200 (1)Acquired technology represents the combined technology for delivering and administering Undertone’s attention-grabbing, full-page videoadvertisements and other advertising formats.(2)Customer relationships represent the existing relationships and agreements with Undertone’s brand advertisers.(3)Backlog represents customer insertion orders that are highly probable to be turned into revenues in the near future.(4)Tradename represents trade names and logos under which Undertone markets and sells its services.b.Make Me Reach SASOn February 10, 2015, the Company consummated the acquisition of 100% of the shares of Make Me Reach SAS, a private French company headquartered inParis, France ("MMR"). MMR enables advertisers to efficiently and effectively scale their advertising campaigns on social media, with a specific focus onoptimizing mobile ad campaigns. MMR is a Facebook Preferred Marketing Developer (PMD) and Twitter Marketing Platform Partner (MPP).The acquisition of MMR is part of the Company’s strategy to channel its future growth efforts towards the mobile advertising market, to extend its mobilemarketing technology by adding the ability to advertise on social media and to provide developers a more effective mobile advertising tool. Additionally,the acquisition of MMR established the Company’s first office in Europe.The acquisition has been accounted for as a business combination under ASC No. 805, “Business Combination”. The purchase price was $6,394 in cash and$4,378 in the form of 1,437,510 ordinary shares. In the subsequent 12 months, the Company was required to pay additional $442 in cash and issued anadditional $442 in ordinary shares to the founder of MMR, subject to retention conditions, which were paid in full in February 2016. In addition, certain keyemployees of MMR were entitled to retention payments of $144 in cash and $63 in the form of 18,998 ordinary shares, which were paid upon closing. Anadditional $266 in cash and $208 in the form of 92,348 ordinary shares that were subject to retention conditions, were paid to such key employees inFebruary 2016. Amounts subject to retention conditions were included as payroll expenses in the statement of operations.F - 24PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data)NOTE 4:ACQUISITIONS (Cont.)In addition, the Company incurred acquisition related costs totaling $139, included in general and administrative expenses. Acquisition related costs includelegal and accounting fees, as well as other external costs directly related to the acquisition.The allocation of the purchase price to assets acquired and liabilities assumed was as follows: Cash $1,050 Accounts receivable 666 Prepaid expenses and other assets 86 Property and equipment 87 Accounts payable (305)Accrued expenses and other liabilities (433)Deferred revenues (126)Deferred tax liability (1,159)Intangible assets 3,454 Goodwill 7,452 Total purchase price $10,772 The following table sets forth the components of intangible assets associated with the acquisition: Estimateduseful life Acquired technology $1,261 5 yearsCustomer relationship 395 5 yearsDistribution channel 1,798 5 years Total amount allocated to intangible assets $3,454 In performing the purchase price allocation, the Company considered, among other factors, analysis of historical financial performance, the best use of theacquired assets and estimates of future performance of MMR's products. In its allocation, the Company also conducted a valuation of intangible assets basedon a market participant approach to valuation using an income approach and in connection therewith considered the report of an independent third partyvaluation firm and estimates and assumptions provided by management.F - 25PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 5: PROPERTY AND EQUIPMENT, NET December 31, 2015 2016 Cost: Computers and peripheral equipment $11,775 $9,607 Office furniture and equipment 2,837 2,679 Leasehold improvements 6,981 7,142 Capitalized software 557 5,005 Total cost 22,150 24,433 Less: accumulated depreciation and amortization 9,436 10,228 Property and equipment, net $12,714 $14,205 Depreciation and amortization of capitalized software costs from continued operations totaled $2,583, $2,543 and $4,003, for the years ended December 31,2014, 2015 and 2016, respectively.In connection with the 2014 restructuring plan, the Company impaired leasehold improvements in the amount of $632 relating to office space that will nolonger be in use. In connection with the 2015 restructuring plan, the Company recorded an impairment of $159 relating to disposal of certain office furniture and equipment(see Note 16) which are included in restructuring charges in the statement of income. In addition, in connection with Growmobile platforms, the Companyimpaired software capitalized costs of $3,390, which are included as a loss from discontinued operations.During 2016, the Company capitalized software development costs of $4,605 (including $14 of stock-based compensation). Amortization expense for therelated capitalized internally developed software in 2016 totaled $769, and is included in Cost of revenues in the accompanying consolidated statements ofoperations. During 2015, the Company capitalized software development costs of $4,192 (including $187 of stock-based compensation). Amortizationexpense for the related capitalized internally developed software in 2015 totaled $245, and is included in Net loss from discontinued operations in theaccompanying consolidated statements of operations.F - 26PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS, NETa.GoodwillThe changes in the net carrying amount of goodwill in 2015 and 2016 were as follows: Balance as of January 1, 2015 $164,092 Acquisition of MMR 7,452 Acquisition of Undertone 119,448 Impairment (87,043)Revaluation (foreign currency exchange) (256) Balance as of December 31, 2015 $203,693 Final adjustments to Undertone's purchase price (see Note 4) (12,956) Balance as of December 31, 2016 $190,737 F - 27 PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data)NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Cont.)b.Intangible assets, netThe following is a summary of intangible assets as of December 31, 2016: December 31,2015 Amortization OCI Disposals December 31,2016 Acquired technology $30,715 $- $(41) $- $30,674 Accumulated amortization (8,963) (5,543) 16 - (14,490)Impairment (956) - - - (956)Acquired technology, net 20,796 (5,543) (25) - 15,228 Customer relationships 31,911 - (13) - 31,898 Accumulated amortization (1,161) (12,750) 6 - (13,905)Impairment (91) - - - (91)Customer relationships, net 30,659 (12,750) (7) - 17,902 Tradename and other 22,483 - (59) (4,200) 18,224 Accumulated amortization (4,609) (3,681) 11 4,200 (4,079)Impairment (3,257) - - - (3,257)Tradename and other, net 14,617 (3,681) (48) - 10,888 Intangible assets, net $66,072 $(21,974) $(80) $- $44,018 F - 28PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Cont.)The following is a summary of intangible assets as of December 31, 2015: December 31,2014 Additions Amortization Impairment OCI Disposals December 31,2015 Acquired technology $38,515 $20,761 $- $- $(46) $(28,515) $30,715 Accumulatedamortization (15,698) - (4,374) - 2 11,107 (8,963)Impairment (14,347) - - (4,017) - 17,408 (956)Acquired technology,net 8,470 20,761 (4,374) (4,017) (44) - 20,796 In-process R&D 2,000 - - - - (2,000) - Impairment (2,000) - - - - 2,000 - In-process R&D, net - - - - - - - Customer relationships 3,144 30,395 - - (14) (1,614) 31,911 Accumulatedamortization (903) - (766) - - 508 (1,161)Impairment - - - (1,197) - 1,106 (91)Customer relationships,net 2,241 30,395 (766) (1,197) (14) - 30,659 Tradename and other 11,911 15,498 - - (66) (4,860) 22,483 Accumulatedamortization (2,138) - (3,739) - 2 1,266 (4,609)Impairment (3,594) - - (3,257) - 3,594 (3,257)Tradename and other,net 6,179 15,498 (3,739) (3,257) (64) - 14,617 Intangible assets, net $16,890 $66,654 $(8,879) $(8,471) $(122) $- $66,072 F - 29 Estimateduseful lifeAcquired technology 3-5 yearsCustomer relationships 4-5 yearsTradename and other 4-11 years PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data)NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Cont.)The estimated useful life of the intangible assets are as follows:In December 2014 and 2015, the Company performed an impairment review of several intangible assets that were recognized in connection with theacquisitions of Perion (see Note 1) and Grow Mobile, respectively, which resulted in total impairment charges of $19,941 and $8,471 that are included inimpairment, net of change in fair value of contingent consideration in the statement of income for the years ended December 31, 2014 and 2015, respectively.Related deferred tax liabilities of $3,191 and $2,291 have also been written off and are included in taxes on income, as tax benefit, for the years endedDecember 31, 2014 and 2015, respectively. Such impairments resulted primarily due to lower than anticipated sales and cash flow as well as managerialdecisions to abandon certain R&D projects. No such impairment charges were recorded in 2016.Amortization of intangible assets, net, in each of the succeeding five years and thereafter is estimated as follows:2017 $16,197 2018 12,028 2019 9,944 2020 4,861 2021 229 Thereafter 759 $44,018 F - 30 December 31, Balance sheet 2015 2016 Derivatives designated as hedging instruments: Foreign exchange forward contracts and other derivatives''Prepaid expenses and other current assets'' $242 $125 ''Accrued expenses and other liabilities'' 214 84 ''Accumulated other comprehensiveincome'' - 36 Derivatives not designated as hedging instruments: Foreign exchange forward contracts and other derivatives''Prepaid expenses and other current assets'' - $20 Cross currency SWAP''Prepaid expenses and other current assets'' $366 $973 PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 7: ACCRUED EXPENSES AND OTHER LIABILITIES December 31, 2015 2016 Employees and payroll accruals $10,190 $7,668 Government authorities 1,850 2,929 Professional services accruals 3,171 1,812 Other accruals 3,587 3,549 Other overhead related expenses 1,592 991 Accrued restructuring charges (see note 16) 1,756 - Hosting, software and web services accruals 497 433 Derivative liabilities 214 84 $22,857 $17,466 NOTE 8: DERIVATIVES AND HEDGING ACTIVITESThe fair value of the Company’s outstanding derivative instruments is as follows: F - 31PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 8: DERIVATIVES AND HEDGING ACTIVITES (Cont.)The decrease in unrealized gains recognized in accumulated other comprehensive income on derivatives, is as follows: December 31, 2015 2016 Option contracts $206 $175 The net losses reclassified from accumulated other comprehensive loss to the operating expenses are as follows: Gain recognizedin Statements ofComprehensiveIncome Gain (loss) recognizedin consolidated statements ofIncome Year endedDecember 31, Statement ofIncome item Year endedDecember 31, 2016 2014 2015 2016 Derivatives designated as hedging instruments: Foreign exchange options and forward contracts $36 "Operating expenses" $(62) $178 $167 Derivatives not designated as hedging instruments: Foreign exchange options and forward contracts "Financial expenses" 125 (175) (16) SWAP "Financial expenses" - 225 608 Total $36 $63 $228 $759 NOTE 9:SHORT TERM AND LONG TERM DEBT1.On May 17, 2012, the Company entered into loan agreements, with two Israeli Banks, pursuant to which the Company borrowed a total of $10,000.In December 2014, the Company executed a cross-currency and interest swap transaction with one of the banks in order to mitigate the potential impactof the fluctuations in the ILS/USD exchange rate in regards to the future interest and principal payments of the Company’s convertible bonds (describedbelow), which are denominated in ILS. In April 1, 2015, the Company amended the agreement in regards to the financial covenants to secure thefulfillment of all the obligations, liabilities and indebtedness, effective December 31, 2014. As of December 31, 2016, the Company fully repaid one ofthe loans, and the outstanding balance of $400 will be repaid by April 2017. The agreement contains various provisions including compliance withcertain financial covenants, restrictive covenants, including negative pledges on future acquisition, and other commitments, typically contained infacility agreements of this type.F - 32PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 9:SHORT TERM AND LONG TERM DEBT (Cont.)2.On November 30, 2015, concurrently with the closing of the Undertone acquisition, Interactive Holding Corp. entered into a new secured creditagreement for $50,000, due in quarterly installments from March 2016 to November 2019. The installments started at $625 per quarter, increase to$1,250 per quarter in March 2018 and require a final payment upon maturity of $35,000. The outstanding principal bears interest at LIBOR plus 5.5%per annum and is secured by substantially all the assets of the companies in the Undertone group and by guarantees of such companies. The credit isrequired to be prepaid by Undertone in certain circumstances, such as from proceeds of asset sales or casualty insurance policies, debt or equityofferings, or from excess cash flow in the event that Undertone's total leverage ratio exceeds specified targets, and a pro rata portion of indemnificationpayments (or offset of the holdback amount) under the Merger Agreement. The debt issuance cost amounted to $1,399, which was deducted from thecarrying amount of that debt in the consolidated balance sheets and amortized during the term of the loan as interest expense according to the effectiveinterest method. According to the credit agreement, Undertone has the option for prepayment, which shall be applied to principal installments asspecified by Undertone. In 2016, Undertone repaid additional $5,000, which was applied to the final principal upon maturity.As of December 31, 2016, the principal outstanding balance was $42,500.Under said credit facility, Undertone is required to maintain financial covenants as of the end of each fiscal quarter as set forth in the credit facility. As ofDecember 31, 2016, the Company satisfies all of the financial covenants. 3.On November 22, 2015, the Company borrowed $19,900 under a credit facility from an Israeli Bank. The credit facility was secured by a lien on theaccounts receivable of ClientConnect Ltd., an Israeli subsidiary of Perion, from its current and future business clients and was guaranteed by Perion. Asof December 31, 2015, the unpaid balance of the credit facility was $13,000, bearing annual interest of LIBOR + 1.2%. In November 2016, the Companyrepaid the credit facility.4.On November 28, 2016, the Company borrowed $7,000 under a credit facility from the same Israeli bank. The credit facility is guaranteed by a lien onthe accounts receivable of ClientConnect Ltd., from its current and future business clients and is guaranteed by Perion. As of December 31, 2016, theutilized balance of the credit facility was $7,000 bearing annual interest of LIBOR + 3.3%. On January 26, 2017, the Company repaid the credit facility.F - 33PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 9:SHORT TERM AND LONG TERM DEBT (Cont.)As of December 31, 2016, the aggregate principal annual maturities according to the all of the above loan agreements were as follows: Repaymentamount 2017 $11,150 2018 5,000 2019 33,750 Total principal payments 49,900 Less: unamortized original issue discount (1,316) Present value of principal payments 48,584 Less: current portion 10,656 Long-term debt $37,928 F - 34PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 10: CONVERTIBLE DEBTIn September 2014, the Company completed a public offering in Israel of its Series L Convertible Bonds (the "Bonds"), with an aggregate par value ofapproximately ILS 143,500, out of which, as of December 31, 2016, approximately ILS 114,789 was outstanding, (approximately $29,854 as of December 31,2016). The Bonds were issued at a purchase price equal to 96.5% of their par value and bear annual interest at a rate of 5%, payable semi-annually, subject toa possible increase up to 6% in the event and to the extent the Company’s debt rating is downgraded. The Bonds’ principal, denominated in ILS, is repayablein five equal annual instalments commenced on March 31, 2016.The Bonds are convertible, at the election of each holder, into the Company’s ordinary shares at a conversion price of ILS 33.605 per share ($8.74 onDecember 31, 2016) from the date of issuance and until March 15, 2020. The ordinary shares issued upon conversion of the Bonds will be listed on theNASDAQ Stock Market (“Nasdaq”) and the Tel-Aviv Stock Exchange (“TASE”), to extent that the Company's ordinary shares are listed thereon at the time ofconversion. The conversion price is subject to adjustment in the event that the Company effects a share split or reverse share split, rights offering or adistribution 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. In addition, the Company may redeem theBonds or any part thereof at its discretion after December 1, 2014, subject to certain conditions.The Company elected to apply the fair value option in accordance with ASC 825, “Financial Instruments”, to the Bonds and therefore all unrealized gainsand losses are recognized in earnings. As of December 31, 2016, the fair value of the Bonds, based on their quoted price at the TASE and including accruedinterest of $376, was $29,526.The changes of the long-term convertible debt in 2015 and 2016 were as follows: Balance as of January 1, 2015 $35,752 Change in accrued interest 1,823 Change in fair value 175 Payment of interest (1,824) Balance as of December 31, 2015* $35,926 Change in accrued interest 1,586 Change in fair value 1,350 Payment of interest (1,716)Payment of principal (7,620) Balance as of December 31, 2016* $29,526 * include accrued interest of $463 and $376 as of December 31, 2015 and 2016, respectivelyF - 35 Repaymentamount 2017 $7,463 2018 7,464 2019 7,463 2020 7,464 $29,854 PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 10: CONVERTIBLE DEBT (Cont.)In order to mitigate the potential adverse impact of the fluctuations in the ILS-USD exchange rate, the Company entered into a cross currency interest rateswap agreement (the “SWAP”) in order to hedge the future interest and principal payments of the Bonds, which are denominated in ILS.As of December 31, 2016, the Company satisfies all of the financial covenants associated with both the Bonds and the SWAP.As of December 31, 2016, the aggregate principal annual payments of the Bonds were as follows: NOTE 11:COMMITMENTS AND CONTINGENT LIABILITIESa.Office lease commitmentsIn January 2014, the Company entered into a lease agreement for new corporate offices in Holon, Israel. The lease expires in January 2025, with an option bythe Company to extend for two additional terms of 24 months each. Additionally, the Company may exercise an early termination of the lease in November2019.Certain other facilities of the Company are rented under operating lease agreements, which expire on various dates, the latest of which is in 2022. TheCompany recognizes rent expense under such arrangements on a straight-line basis.Furthermore, the Company leases motor vehicles for employees under operating lease agreements.Aggregate minimum lease commitments under the aforesaid non-cancelable operating leases as of December 31, 2016, were as follows: Minimumleasepayments Minimumsubleaserentals Net futureminimumleasecommitment 2017 $6,275 $693 $5,582 2018 6,318 694 5,624 2019 4,297 697 3,600 2020 3,613 627 2,986 2021 3,342 695 2,647 Thereafter 6,262 970 5,292 $30,107 $4,376 $25,731 F - 36PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 11:COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)Facilities leasing expenses from continued operations in the years 2014, 2015 and 2016 were $1,166, $1,710 and $5,419, respectively. Car leases expensesfrom continued operations in the years 2014, 2015 and 2016 were $1,163, $1,046 and $790, respectively.b.Contingent purchase obligationOn November 30, 2012, the Company completed the acquisition of 100% of Sweet IM’s shares. Pursuant to the terms of the Share Purchase Agreement(“SPA”) between the Company and SweetIM, the Company was obligated to pay SweetIM's shareholders, among other payments, a payment of up to $ 7,500in cash in May 2014 if certain milestones were met (the “Contingent Payment”). The milestones were based on the Company's GAAP revenues in 2013, andthe absence of certain changes in the industry in which the Company operates. On May 28, 2014, the Company paid $2,500 in respect of the ContingentPayment. Following such payment, on June 22, 2014, SweetIM’s Shareholders’ representative notified the Company claiming that the Company owesSweetIM’s shareholders the entire Contingent Payment. The Company believes that the claim is without merit and plans to defend against it vigorously.Until this dispute is resolved, the Company will maintain the $5,000 liability in its financial statements that was recorded at the time it entered into the SPA.In April 2015, pursuant to the SPA, an arbitration process with respect to this claim was commenced in Israel.c. Legal Matters1.In November 2013, MyMail, Ltd. (“MyMail”), a non-practicing entity, filed a lawsuit in the Eastern District of Texas alleging that ClientConnect'stoolbar technology infringes one of its U.S. patents issued in September 2012, and demanding an injunction and monetary payments. In November2014, the Company filed a Petition for Inter Partes Review ("IPR") in the United States Patent & Trademark Office, challenging the validity of theasserted claims of the patent in question. On December 31, 2014, MyMail filed an unopposed motion to stay the district court case pendingresolution of the Petition for IPR. On January 9, 2015, the court granted a stay pending resolution of the Petition for IPR. On January 5, 2016, theparties have entered into a settlement agreement regarding, inter alia, the patent claim between the parties. The case was dismissed on January 8,2016 and as a result the Company accrued for $550 as of December 31, 2015 which was paid in 2016. Conduit signed an agreement with Perion,pursuant to which, Conduit will reimburse Perion for 50% of any amounts incurred by Perion with respect to the claim above and the Companyreceived such amount during 2016.2.On December 22, 2015, Adtile filed a lawsuit against Perion and Intercept Interactive Inc. (“Intercept”), a subsidiary of Interactive Holding Corp., inthe United States District Court for the District of Delaware. The lawsuit alleges various causes of action against Perion and Intercept, related toIntercept’s alleged unauthorized use and misappropriation of Adtile’s proprietary information and trade secrets. On February 3, 2016, AdtileTechnologies Inc. filed a motion for preliminary injunction to, inter alia, prevent Undertone from creating or selling motion-activatedadvertisements. On June 23, 2016, the court denied Adtile’s motion for a preliminary injunction. On June 24, 2016, the court (i) granted Perion’smotion to dismiss and (ii) granted Undertone’s motion to stay the action and compel arbitration. The Company is unable to predict the outcome orrange of possible loss at this stage, believes it has strong defenses against this lawsuit and intends to defend against it vigorously.From time to time, the Company is party to other various legal proceedings, claims and litigation that arise in the ordinary course of business. It is theopinion of management that the ultimate outcome of these matters will not have a material adverse effect on the Company's financial position, results ofoperations or cash flows. F - 37PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 12:SHAREHOLDERS' EQUITYa.Ordinary sharesOn November 18, 2013, the shareholders resolved to increase the authorized share capital of the Company to 120,000,000 ordinary shares with a par value ofILS 0.01 each. 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 excessassets upon liquidation of the Company.b.Private placementOn December 3, 2015 (the “Effective date”), the Company completed a private placement of 4,436,898 ordinary shares for gross proceeds of $10,125pursuant to a Securities Purchase Agreement (the “SPA”) with two investors. The purchase price per share was $2.282 per share, which was the averageclosing price of an ordinary share on the Nasdaq Global Select Market for the 30 trading days ending on December 1, 2015. According to the terms in theSPA, on September 1, 2016, the per share purchase price was adjusted downward to a price per share of $1.939, and the Company issued to the two investors782,981 additional ordinary shares for no additional consideration.On November 30, 2015, the Company entered into Registration Rights Agreement (the "Agreement") with the two investors, pursuant to which the Companyshall use its commercially reasonable efforts in order to file a registration statement on Form F-3 for the resale of the aforesaid Ordinary shares issued withintimeframe as detailed in the Agreement. The registration statement was declared effective on March 31, 2016. The Company also agreed to other customaryobligations regarding registration, including indemnification and maintenance of the applicable registration statement.c.Stock Options, Restricted Stock Units and WarrantsIn 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 onDecember 9, 2012, extended the term of the Plan for an additional ten years. On August 7, 2013, the Company’s Board of Directors approved amendments tothe Plan which include the ability to grant RSUs and restricted stock.The contractual term of the stock options is generally no more than five years and the vesting period of the options and RSUs granted under the Plan isbetween one and three years from the date of grant. The rights of the ordinary shares issued upon the exercise of stock options or RSUs are identical to thoseof the other ordinary shares of the Company.As of December 31, 2016, there were 7,719,995 ordinary shares reserved for future stock-based awards under the Plan.F - 38PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 12:SHAREHOLDERS' EQUITY (Cont.)The following table summarizes the activities for the Company’s service-based stock options for the year ended December 31, 2016: Weighted average Number ofoptions Exerciseprice Remainingcontractualterm (in years) Aggregateintrinsicvalue Outstanding at January 1, 2016 5,467,337 $5.30 3.17 $1,709 Granted 2,248,000 $1.94 Exercised (200) $2.00 Cancelled (2,360,917) $4.97 Outstanding at December 31, 2016 5,354,220 $4.04 2.82 $549 Exercisable at December 31, 2016 1,552,014 $7.88 1.43 $6 Vested and expected to vest at December 31, 2016 4,299,107 $4.57 2.57 $316 The weighted-average grant-date fair value of options granted during the years ended December 31, 2014, 2015 and 2016 was $4.49, $1.14 and $0.64,respectively.The aggregate intrinsic value of the outstanding stock options at December 31, 2016, represents the intrinsic value of 1,262,969 outstanding options thatwere in-the-money as of such date. The remaining 4,091,251 outstanding options were out-of-the-money as of December 31, 2016, and their intrinsic valuewas considered as zero. Total intrinsic value of options exercised during the years ended December 31, 2015 and 2016 was $9.0 and less than $1.0,respectively.The number of options expected to vest reflects an estimated forfeiture rate.F - 39PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 12:SHAREHOLDERS' EQUITY (Cont.)The following table summarizes the activities for the Company’s performance-based stock options for the year ended December 31, 2016: Weighted average Number ofPerformancebased options Exerciseprice Remainingcontractualterm (in years) Aggregateintrinsic value Outstanding at January 1, 2016 3,550,000 $2.38 4.93 $4,793 Cancelled (2,033,334) $2.28 Outstanding at December 31, 2016 1,516,666 $2.53 3.77 - Exercisable at December 31, 2016 549,995 $2.51 3.48 - Vested and expected to vest at December 31, 2016 1,174,535 $2.52 3.72 - The performance based options’ vesting is contingent upon achieving specific financial targets of the Company, set at the grant date.The weighted-average grant-date fair value of performance-based options granted during the year ended December 31, 2015, was $0.90.There is no aggregate intrinsic value of the outstanding performance-based options at 2016, since they were all are out-of-the-money as of such date.The number of options expected to vest reflects an estimated forfeiture rate.The following table summarizes additional information regarding outstanding and exercisable stock options under the Company's Stock Option Plan as ofDecember 31, 2016: Outstanding Exercisable Range ofexercise price Number ofoptions Weightedaverageremainingcontractuallife (years) Weightedaverageexercise price Number ofoptions Weightedaverageremainingcontractuallife (years) Weightedaverageexercise price $0.34-$2.00 1,504,493 4.28 $1.09 86,249 2.01 $1.88 $2.11-$2.52 2,200,166 3.47 $2.28 539,994 3.45 $2.26 $3.27-$3.77 1,917,666 2.70 $3.57 312,496 2.40 $3.61 $4.04-$6.93 312,521 1.21 $5.20 295,851 1.11 $5.22 $7.80-$9.14 141,875 1.03 $8.71 141,875 1.03 $8.71 $10.06-$11.94 668,540 1.46 $11.21 606,587 1.38 $11.24 $12.56-$13.54 125,625 0.46 $12.59 118,957 0.37 $12.58 6,870,886 3.03 $3.70 2,102,009 1.97 $6.47 F - 40PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 12:SHAREHOLDERS' EQUITY (Cont.)The following table summarizes the activities for the Company’s RSUs for the year ended December 31, 2016: Number ofRSUs Weightedaveragegrant datefair value Unvested at January 1, 2016 692,320 $12.64 Vested (337,420) $12.64 Cancelled (27,900) $12.64 Unvested at December 31, 2016 327,000 $12.64 Expected to vest after December 31, 2016 327,000 $12.64 RSUs expected to vest after December 31, 2016 were all vested on January 3, 2017.The Company recognized share-based compensation expenses related to its stock-based awards in the consolidated statements of operations as follows: Year ended December 31, 2014 2015 2016 Cost of revenues $249 $247 $219 Research and development 2,058 804 708 Selling and marketing 1,940 1,397 1,907 General and administrative 9,302 4,290 4,010 Restructuring costs 220 - - Total $13,769 $6,738 $6,844 Share-based compensation in discontinued operations $(1,376) $878 $42 As of December 31, 2016, there was $1,179 of unrecognized compensation cost related to outstanding stock options and RSUs, $182 related to outstandingwarrants and $332 related to outstanding performance-based options. These amounts are expected to be recognized over a weighted-average period of 1.33years related to outstanding stock options and RSUs, 1.99 years related to outstanding warrants and 1.25 years related to outstanding performance-basedoptions. To the extent the actual forfeiture rate is different from what has been estimated, stock-based compensation related to these awards will differ fromthe initial expectations.a.In connection with the termination of one of the Company officers’ employment in 2014, the Company reached a settlement under which itaccelerates 479,980 stock options upon termination. In accordance with ASC 718, "Compensation - Stock Compensation", the Company reversedexpenses previously recorded in connection with the unvested stock options and remeasured the award as of the termination date. Totalincremental expense incurred in connection with the acceleration amounted to approximately $4,800 and was included in general andadministrative expenses in 2014. F - 41PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 12: SHAREHOLDERS' EQUITY (Cont.)b.In connection with the restructuring in November 2014 (see Note 16), the Company accelerated 33,333 RSUs of one of its officers. Totalincremental expense incurred in connection with the acceleration amounted to $220 and was included in restructuring charges.c.In connection with the Undertone acquisition, the Company granted warrants to purchase 200,000 ordinary shares, at a weighted average exerciseprice of $3.03 per share, to a third-party vendor that provides development services to Undertone. The weighted-average grant-date fair value of thewarrants granted was $1.23. The total expense incurred in 2015 and 2016 was $2.0 and $62.0, respectively.NOTE 13: FINANCIAL INCOME (EXPENSE), NET Year ended December 31, 2014 2015 2016 Financial income: Interest income $93 $551 $204 Foreign currency translation gains, net - 572 - Change in fair value of convertible debt 2,566 - - Change in fair value of SWAP - 225 608 $2,659 $1,348 $812 Financial expense: Foreign currency translation losses, net $(2,669) $- $(779)Interest and change in fair value of payment obligation related to acquisitions (1,067) (489) (1,303)Issuance costs of convertible debt (741) - - Interest expense on debts (733) (2,313) (5,306)Change in fair value of convertible debt - (175) (1,350)Bank charges and other (337) (310) (362) $(5,547) $(3,287) $(9,100) Financial expense, net $(2,888) $(1,939) $(8,288)F - 42PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 14: INCOME TAXESa.Income (Loss) before taxes on incomeIncome (Loss) before taxes on income is comprised as follows: Year ended December 31, 2014 2015 2016 Domestic $62,991 $(16,712) $(3,393)Foreign (2,865) (24,249) 6,453 Total $60,126 $(40,961) $3,060 b.Taxes on incomeTaxes on income are comprised as follows: Year ended December 31, 2014 2015 2016 Current taxes $24,667 $9,670 $3,480 Deferred tax benefit (13,851) (8,973) (3,268) Total $10,816 $697 $212 Taxes on income by jurisdiction were as follows: Year ended December 31, 2014 2015 2016 Domestic $12,951 $8,830 $3,396 Foreign (2,135) (8,133) (3,184) Total $10,816 $697 $212 Domestic: Current taxes $24,507 $8,943 $2,459 Deferred tax (benefit) expense (11,556) (113) 937 Total - Domestic $12,951 $8,830 $3,396 Foreign: Current taxes $160 $727 $1,021 Deferred tax benefit (2,295) (8,860) (4,205) Total - Foreign $(2,135) $(8,133) $(3,184) Total income tax expense $10,816 $697 $212 F - 43PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 14: INCOME TAXES (Cont.)c.Deferred TaxesDeferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes 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, 2015 2016 Deferred tax assets: Net operating loss carry forwards $10,280 $8,267 Research and development 4,008 3,190 Other temporary differences mainly relating to reserve and allowances 4,058 2,703 Deferred tax assets, before valuation allowance 18,346 14,160 Valuation allowance 4,212 4,739 Total deferred tax assets, net $14,134 $9,421 Deferred tax liabilities: Intangible assets $(17,971) $(10,998)Property and equipment, net (3,275) (2,393)Total deferred tax liabilities $(21,246) $(13,391) Total deferred tax liability, net $(7,112) $(3,970) Domestic: Long term deferred tax asset, net $5,006 $4,069 Long term deferred tax liability (261) - $4,745 $4,069 Foreign: Long term deferred tax asset, net $7,338 $48 Long term deferred tax liability (19,195) (8,087) $(11,857) $(8,039) Total deferred tax liability, net $(7,112) $(3,970)The $527 change in the total valuation allowance for the year ended December 31, 2016, relates to the increase in deferred taxes on operating loss carry-forwards and temporary differences for which a full valuation allowance was recorded. This amount is net of a $448 decrease due to a change in the tax rate.F - 44PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 14: INCOME TAXES (Cont.)d.Reconciliation of the Company’s effective tax rate to the statutory tax rate in IsraelA reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company, and theactual tax expense as reported in the statement of income is as follows: Year ended December 31, 2014 2015 2016 Income (Loss) before taxes on income $60,126 $(40,961) $3,060 Statutory tax rate in Israel 26.5% 26.5% 25.0%Theoretical tax expense (income) $15,933 $(10,855) $765 Increase (decrease) in tax expenses resulting from: "Preferred Enterprise" benefits * (13,325) (5,654) (1,356)Non-deductible expenses including impairment charges 8,015 20,738 1,777 Deferred taxes on losses and other temporary charges for which a valuation allowance wasprovided, net 1,962 (4,617) 527 Tax adjustment in respect of different tax rate of foreign subsidiaries (793) 1,185 (2,032)Change in future tax rate - - 448 Other (976) (100) 83 Taxes on income $10,816 $697 $212 * Benefit per ordinary share from "Preferred Enterprise" status: Basic $0.17 $0.12 $0.02 Diluted $0.16 $0.12 $0.02 e.Income tax ratesTaxable income of Israeli companies is generally subject to corporate tax at the rate of 25% for the 2013 tax year, 26.5% for the 2014 and 2015 tax years, and25% for the 2016 tax year. On December 30, 2016, as part of the Economic Efficiency Law (Legislative Amendments for Accomplishment of BudgetaryTargets for Budget Years 2017-2018), 5777-2016, the corporate tax rate was reduced to 24% for the 2017 tax year and to 23% in 2018 tax year. However, theeffective tax rate payable by a company that derives income from a Preferred Enterprise (as discussed below) may be considerably lower.Non-Israeli subsidiaries are taxed according to the tax laws in their respective countries of residence.Taxes were not provided for undistributed earnings of the Company’s foreign subsidiaries. Currently the Company does not intend to distribute any amountsof its undistributed earnings as dividends. The Company intends to reinvest these earnings indefinitely in the foreign subsidiaries and pay down its debt.Accordingly, no deferred income taxes have been provided in respect of these subsidiaries. If these earnings were distributed to Israel in the form of dividendsor otherwise, the Company would be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign withholdingtaxes. F - 45PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 14: INCOME TAXES (Cont.)The amount of undistributed earnings of foreign subsidiaries is immaterial.f.Law for the Encouragement of Capital Investments, 1959The Law for Encouragement of Capital Investments, 1959 (the "Investment Law") provides tax benefits for Israeli companies meeting certain requirementsand 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. According to the reform, a flat rate tax applies to companies eligiblefor the "Preferred Enterprise" status. In order to be eligible for Preferred Enterprise status, a company must meet minimum requirements to establish that itcontributes 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. In peripheral regions (Development Area A) the reduced tax rate was 7% in 2013, 9% in2014, 9% in 2015 and 9% in 2016. As part of Economic Efficiency Law (Legislative Amendments for Accomplishment of Budgetary Targets for BudgetYears 2017-2018), 5777-2016, the tax rate for Area A will be 7.5% in 2017 onwards. In other regions the tax rate is 16%. Preferred Enterprises in peripheralregions will be eligible for Investment Center grants, as well as the applicable reduced tax rates.A distribution from a Preferred Enterprise out of the "Preferred Income" would be subject to 15% withholding tax for Israeli-resident individuals and non-Israeli residents (subject to applicable treaty rates), or 20% for dividends which are distributed on or after January 1, 2014 and from “Preferred Income” thatwas produced or accrued after such date. A distribution from a Preferred Enterprise out of the "Preferred Income" would be exempt from withholding tax for anIsraeli-resident company.In January 2014 and as part of ClientConnect’s spin-off that occurred on December 31, 2013, Conduit received a ruling from the Israel Tax Authority (the“Spin-off Ruling”), pursuant to which Conduit released an additional amount of $270,840 of its “trapped earnings”.F - 46PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 14: INCOME TAXES (Cont.)g.Uncertain tax positionsA reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows: December 31, 2015 2016 Balance at the beginning of the year $724 $2,367 Decrease related to prior year tax positions, net (22) (195)Increase related to current year tax positions 1,665 1,257 Balance at the end of the year $2,367 $3,429 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 taxoutcome 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 amaterial effect on the Company's income tax provision and net income in the period in which such determination is made.The Company’s tax assessments in Israel and the U.S. for tax years prior to 2012 are considered final. The Company has net operating losses in the U.S. fromprior tax periods beginning in 2005 which may be subject to examination upon utilization in future tax periodsh.Tax loss carry-forwardsAs of December 31, 2016, the Company’s U.S. subsidiaries have net operating loss carry-forwards of $10,000.Net operating losses in the U.S. may be carried forward through periods which will expire in the years starting from 2024 up to 2034. Utilization of U.S. netoperating losses may be subject to substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 andsimilar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.As of December 31, 2016, the Company’s European subsidiaries have net operating loss carry-forwards of $7,340.As of December 31, 2016, Perion have net operating loss carry-forwards, in Israel, of $12,780. F - 47PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 15:EARNINGS PER SHAREThe table below presents the computation of basic and diluted net earnings per common share: Year ended December 31, 2014 2015 2016 Numerator: Net income (Loss) attributable to ordinary shares - basic $49,310 $(41,658) $2,848 Gains related to convertible debt, net (2,100) - - Net income (Loss) from continuing operations - diluted $47,210 $(41,658) $2,848 Net loss from discontinued operations – basic and diluted $(6,484) $(26,999) $(2,647) Denominator: Number of ordinary shares outstanding during the year 68,213,209 71,300,432 76,560,454 Weighted average effect of dilutive securities: Assumed conversion of convertible debt 1,090,906 - - Shares to be issued in connection with acquisition 52,664 - - Employee stock options and restricted stock units 970,632 - 113,349 Diluted number of ordinary shares outstanding - Continuing and discontinued operations 70,327,411 71,300,432 76,673,803 Basic net earnings (loss) per ordinary share Continuing operations $0.72 $(0.58) $0.04 Discontinued operations $(0.09) $(0.38) $(0.04)Net income (loss) $0.63 $(0.96) $0.00*) Diluted net earnings (loss) per ordinary share Continuing operations $0.67 $(0.58) $0.04 Discontinued operations $(0.09) $(0.38) $(0.04)Net income (loss) $0.58 $(0.96) $0.00*) Ordinary shares equivalents excluded because their effect would have been anti-dilutive 3,766,080 14,179,439 10,700,363 *) Less than $0.01 F - 48PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 16: RESTRUCTURING COSTSIn November 2014, the Company initiated a restructuring plan of its search monetization business, mainly to reduce workforce, close certain facilities, as wellas other cost saving measures. Pursuant to this restructuring plan, in 2014, the Company incurred cumulative charges of $3,981 as follows: Payroll and share-based compensation expenses $1,993 Lease facilities and related expenses 1,248 Property and equipment impairment 632 Other 108 Total restructuring costs $3,981 In October 2015, the Company initiated a restructuring plan of one of its consumer app development projects, mainly to reduce workforce, close certainfacilities, as well as other cost saving measures. Pursuant to this restructuring plan, in 2015, the Company incurred cumulative charges of $1,052 as follows: Severance and payroll related $1,022 Property and equipment impairment 159 Write-off of prepaid royalties 219 Other (348) Total restructuring costs $1,052 As of December 31, 2015, the restructuring accrual amounted to $1,756, and is included under accrued expenses and other liabilities on the balance sheet. In2016, there was no accrual. The additions and adjustments to the accrued restructuring liability for the year ended December 31, 2016 are as follows: December 31,2015 Additionalcosts Cashpayments Adjustments December 31,2016 2015 Restructuring Plan: Severance and Payroll related $752 $272 $(1,065) $41 $- Rent and related expenses - 456 - (456) - Restructuring accrual assumed upon acquisition 1,004 - (566) (438) - $1,756 $728 $(1,631) $(853) $- NOTE 17: RELATED PARTY TRANSACTIONSClientConnect and Conduit entered into agreements pursuant to which the parties agreed to provide and receive certain administrative and business supportservices and systems, including data services, information technology, information security and management information systems, for consideration atmarket terms, from each other. In September 2014, following the Company’s moving of its offices to Holon, the above mentioned services were no longerprovided. During 2014, ClientConnect received $1,645, of services from Conduit, and provided $142, of services to Conduit. F - 49PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data)NOTE 18: MAJOR CUSTOMERSA substantial portion of the Company's revenue is derived from search fees and online advertising, the market for which is highly competitive and rapidlychanging. 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 represented 10% or more of the Company’s total revenues in each of the years presented below: Year ended December 31, 2014 2015 2016 Customer A 74% 81% 49% NOTE 19: GEOGRAPHIC INFORMATIONThe Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information isevaluated regularly by the Chief Operating Decision Maker, who is the Chief Executive Officer, in deciding how to allocate resources and assessingperformance. Over the past few years, the Company has completed several acquisitions. These acquisitions have allowed the Company to expand itsofferings, presence and reach in various market segments. While the Company has offerings in multiple enterprise market segments, the Company’s businessoperates in one segment which is the High Impact Advertising solutions, and the Company’s Chief Operating Decision Maker evaluates the Company’sfinancial information and resources and assesses the performance of these resources on a consolidated basis.The following table presents the total revenues for the years ended December 31, 2014, 2015 and 2016, allocated to the geographic areas in which they weregenerated: Year ended December 31, 2014 2015 2016 North America (mainly U.S.) $292,409 $173,424 $253,960 Europe 69,281 40,612 47,012 Other 27,041 6,914 11,822 $388,731 $220,950 $312,794 The total revenues are attributed to geographic areas based on the location of the end-users.F - 50PERION NETWORK LTD. AND ITS SUBSIDIARIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 19: GEOGRAPHIC INFORMATION (Cont.)The following table presents the locations of the Company’s property and equipment as of December 31, 2015 and 2016: December 31, 2015 2016 Israel $9,161 $9,108 U.S. 3,071 4,402 Europe 482 695 $12,714 $14,205 NOTE 20:SUBSEQUENT EVENTSOn January 23, 2017, Perion announced the appointment of Doron Gerstel as Perion’s Chief Executive Officer effective April 2, 2017 and Yacov Kaufman asInterim Chief Executive Officer, until then.F - 51 ITEM 19. EXHIBITS: No. 1.1Description Memorandum of Association of Perion, as amended and restated (translated from Hebrew). (1) 1.2Articles of Association of Perion, as amended and restated. (2) 4.1Share Purchase Agreement by and among Perion Network Ltd., SweetIM Ltd., SweetIM Technologies Ltd., the Shareholders of SweetIM Ltd. andNadav Goshen as Shareholders’ Agent, dated as of November 7, 2012, and Amendment No. 1, dated as of November 30, 2012. (3) 4.2Registration Rights Agreement among the Company and the investors listed therein, dated as of November 7, 2012. (3) 4.3Share Purchase Agreement by and among Perion Network Ltd., Conduit Ltd. and ClientConnect Ltd., dated as of September 16, 2013. (4) 4.4Form of Standstill Agreement between Perion Network Ltd. and certain shareholders thereof, dated as of September 16, 2013. (4) 4.5Form of Registration Rights Undertaking of the Company dated January 2, 2014. (4) 4.6Perion 2003 Israeli Share Option Plan and U.S. Addendum. (3) 4.7Perion Equity Incentive Plan. (4) 4.8 Compensation Policy for Directors and Officers, adopted November 18, 2013. (4) 4.12Summary Terms and Conditions of Series L Convertible Bonds. (2) 4.13Search Distribution Agreement by and between Microsoft Online, Inc. and Perion Network Ltd., dated July 29, 2014, as amended on September 15,2014.* (2) 4.14Merger Agreement by and between Perion Network Ltd., IncrediTone Inc., Or Merger, Inc., InteractiveHoldingCorp. and Fortis Advisors LLCas the Stockholders’ Representative, dated November 30, 2015. (6) 4.15Credit Agreement by and between Or Merger, Inc., Interactive Holding Corp., IncrediTone Inc., SunTrust Bank, Silicon Valley Bank and SunTrustRobinson Humphery, Inc., dated November 30, 2015. (6) 4.16Securities Purchase Agreement by and between Perion Network Ltd. and the purchasers listed therein, dated November 30, 2015. (6) 4.17Registration Rights Agreement by and between Perion Network Ltd. and the purchasers listed therein, dated December 3, 2015. (6) 4.18Amendments No. 1, No. 2 and No. 3 to the Credit Agreement by and between Or Merger, Inc., Interactive HoldingCorp., IncrediTone Inc., SunTrustBank, Silicon Valley Bank and SunTrust Robinson Humphery, Inc., dated March 4, 2016, May 8, 2016 and October 7, 2016, respectively. 8 List of subsidiaries. 12.1Certification required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Executive Officer of the Company. 12.2Certification required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Financial Officer of the Company. 13.1Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. 13.2Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. 15.1Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, Independent Auditors. 84 101The following Interactive Data Files, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December31, 2015 and 2016; (ii) Consolidated Statements of Income for the years ended December 31, 2014, 2015 and 2016; (iii) Consolidated Statements ofComprehensive Income for the years ended December 31, 2014, 2015 and 2016; (iv) Statements of Changes in Shareholders’ Equity for the yearsended December 31, 2014, 2015 and 2016; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2015 and 2016; and(vi) Notes to the Consolidated Financial Statements.**___________________________ (1)Previously filed with the SEC on April 10, 2014 as an exhibit to our annual report on Form 20-F, and incorporated herein by reference. (2)Previously filed with the SEC on April 16, 2015 as an exhibit to our annual report on Form 20-F, and incorporated herein by reference. (3)Previously filed with the SEC on April 29, 2013 as an exhibit to our annual report on Form 20-F, and incorporated herein by reference. (4)Previously filed with the SEC on October 15, 2013 as an exhibit to our Report on Form 6-K, and incorporated herein by reference. (5)Previously filed with the SEC on July 29, 2014 as an exhibit to our annual report on Form 20-F/A, and incorporated herein by reference. (6)Previously filed with the SEC on March 24, 2016 as an exhibit to our annual report on Form 20-F, and incorporated herein by reference. *Confidential treatment was granted with respect to certain portions of this exhibit pursuant to 17.C.F.R. §240.24b-2. Omitted portions were filedseparately with the SEC. **In accordance with Rule 406T of Regulation S-T, the information in Exhibit 101 is furnished and deemed not filed or a part of a registration statement orprospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934,and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other documentfiled under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing. 85SIGNATURESThe 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 undersignedto sign this annual report on its behalf. Perion Network Ltd./s/ Yacov KaufmanYacov KaufmanInterim Chief Executive OfficerDate: March 7, 2017 86 Exhibit 4.18 FIRST AMENDMENT TO CREDIT AGREEMENTTHIS FIRST AMENDMENT TO CREDIT AGREEMENT dated as of March 4, 2016 (this "Amendment"), by and among INTERACTIVE HOLDINGCORP., a Delaware corporation (the "Borrower"), INCREDITONE INC., a Delaware corporation ("Holdings"), each of the Guarantors party hereto, each of thefinancial institutions party hereto as "Lenders" (the "Lenders") and SUNTRUST BANK, in its capacity as Administrative Agent (in such capacity, the"Administrative Agent"). W I T N E S S E T H:WHEREAS, the Borrower, Holdings, SunTrust Bank, Silicon Valley Bank, Comerica Bank and the Administrative Agent are parties to that certainCredit Agreement dated as of November 30, 2015 (the "Credit Agreement"); andWHEREAS, in connection with the purchase on the date hereof by Cadence Bank of (i) $10,000,000 in principal amount of Term Loans held byComerica Bank, (ii) $3,333,333.34 in principal amount of Term Loans held by SunTrust Bank and (iii) $3,333,333.33 in principal amount of Term Loansheld by Silicon Valley Bank, the Borrower has requested certain amendments to the Credit Agreement, including a request to provide Aggregate RevolvingCommitments in an amount equal to $10,000,000 from the Lenders; andWHEREAS, the Lenders and the Administrative Agent are willing to so amend the Credit Agreement on and subject to the terms and conditionsherein.NOW, THEREFORE, for and in consideration of the above premises and other good and valuable consideration, the receipt and sufficiency of whichare hereby acknowledged by the parties hereto, the parties hereto hereby agree as follows:1.Defined Terms. Capitalized terms which are used herein without definition and which are defined in the Credit Agreement shall have thesame meanings herein as in the Credit Agreement; provided, that, solely for purposes of this Amendment, Perion Network Ltd. shall be deemed to be includedin the definition of the term "Loan Party".2.Amendments to Credit Agreement.(a) The Credit Agreement is hereby amended by deleting the defined terms "Aggregate Revolving Commitment Amount", "ConsolidatedEBITDA", "LC Commitment", "Permitted Third Party Bank" and "Swingline Commitment" in Section 1.1. thereof and substituting in lieu thereof thefollowing defined terms, respectively:"Aggregate Revolving Commitment Amount" shall mean the aggregate principal amount of the Aggregate RevolvingCommitments from time to time. On March 4, 2016, the Aggregate Revolving Commitment Amount is $10,000,000. "Consolidated EBITDA" shall mean, for the Borrower and its Subsidiaries for any period, an amount equal to the sum of (i)Consolidated Net Income for such period plus (ii) to the extent deducted in determining Consolidated Net Income for such period and tothe extent not excluded from Consolidated Net Income pursuant to the definition thereof, and without duplication, (A) ConsolidatedInterest Expense, (B) income tax expense determined on a consolidated basis in accordance with GAAP, (C) depreciation and amortizationdetermined on a consolidated basis in accordance with GAAP, (D) non-cash charges related to the mark-to-market treatment of obligationsunder Hedging Transactions, (E) any extraordinary, unusual or non-recurring expenses or losses or restructuring charges or costs, all asdetermined in accordance with GAAP; provided, that, the amount under this clause (E) shall not exceed (x) $1,250,000 in the aggregate forany period of four (4) consecutive Fiscal Quarter period through December 31, 2016 and (y) and $1,000,000 in the aggregate during anyFiscal Year after December 31, 2016; (F) transaction costs and expenses paid in cash in connection with the Related Transactions in anaggregate amount not to exceed $13,756,501; (G) non-cash charges related to the Great Plains accounting software and related services;provided, that, the amount under this clause (G) shall not exceed $650,000 in the aggregate; and (H) all non-cash foreign currencyexchange losses or charges and non-cash expenses deducted as a result of any grant of Capital Stock to employees, officers or directors forsuch period (but excluding any non-cash loss, charge or expense that is an accrual of or a reserve for a cash expenditure or payment to bemade, or anticipated to be made, in a future period); provided that, for purposes of calculating compliance with the financial covenants setforth in Article VI, to the extent that during such period any Borrower Loan Party shall have consummated a Permitted Acquisition or otherAcquisition approved in writing by the Required Lenders, or any sale, transfer or other disposition of any Person, business, property orassets, Consolidated EBITDA shall be calculated on a Pro Forma Basis with respect to such Person, business, property or assets so acquiredor disposed of. Notwithstanding the foregoing, but subject to any adjustment set forth above with respect to the immediately precedingproviso, Consolidated EBITDA shall be $10,118,601, $667,379, $6,920,800 and $6,645,632 for the Fiscal Quarters ended December 31,2014, March 31, 2015, June 30, 2015 and September 30, 2015, respectively. "LC Commitment" shall mean that portion of the Aggregate Revolving Commitments that may be used by the Borrower for theissuance of Letters of Credit in an aggregate face amount not to exceed $3,000,000. "Permitted Third Party Bank" shall mean SunTrust Bank, Silicon Valley Bank, Cadence Bank (or with the consent of the Agent(such consent not to be unreasonably withheld or delayed), another Lender or financial institution) and with whom any Loan Partymaintains a Controlled Account and with whom a Control Account Agreement has been executed. "Swingline Commitment" shall mean the commitment of the Swingline Lender to make Swingline Loans in an aggregateprincipal amount at any time outstanding not to exceed $3,000,000. - 2 -(b) The Credit Agreement is hereby further amended by adding the following new defined term "Israel Subsidiary" to Section 1.1. thereof in theappropriate alphabetical order: "Israel Subsidiary" shall mean, as long as it is not a Subsidiary Loan Party, any Subsidiary of the Borrower organized under the laws of theState of Israel.(c) The Credit Agreement is hereby further amended by deleting "75 days after the Closing Date" in the first line of Section 5.11 of the CreditAgreement and substituting "March 31, 2016 (except in the case of the establishment and maintenance of a Controlled Account with HSBC Bank USA,National Association, which shall be no later than May 17, 2016)" in lieu thereof.(d) The Credit Agreement is hereby further amended by adding the following at the end of Section 5.11:"Prior to May 17, 2016, the parties hereto agree that account number 1894408945 at Comerica Bank (the "Excluded Account")shall not be required to be subject to a Control Account Agreement pursuant to this Section 5.11 so long as the Borrower shallcause any and all cash at any time held in the Excluded Account to be swept and deposited on a daily basis into a ControlledAccount with a Permitted Third Party Bank which is subject to a Control Account Agreement."(e) The Credit Agreement is hereby further amended by deleting "commencing within ninety (90) days after the Closing Date" in the first lineof Section 5.15 of the Credit Agreement and substituting "no later than May 17, 2016" in lieu thereof.(f) The Credit Agreement is hereby further amended by deleting clause (d) in Section 7.4 thereof in its entirety and substituting in lieu thereofthe following:"(d)Investments made by the Borrower in or to any Subsidiary of the Borrower and by any Subsidiary of the Borrower tothe Borrower or in or to another Subsidiary of the Borrower; provided that the aggregate amount of Investments by the BorrowerLoan Parties in or to, and Guarantees by the Borrower Loan Parties of Indebtedness of, (i) any Subsidiary of the Borrower that is nota Subsidiary Loan Party (other than an Israel Subsidiary) shall not exceed $1,000,000 in the aggregate for all such Subsidiaries inany Fiscal Year and (ii) any Israel Subsidiary shall not exceed (A) for the Fiscal Year ending December 31, 2016, an amount equalto $3,000,000 in the aggregate for all such Israel Subsidiaries, (B) for the Fiscal Year ending December 31, 2017, an amount equalto 15% of Consolidated EBITDA for the Fiscal Year ending December 31, 2016 (with such limit to be an aggregate amount for allsuch Israel Subsidiaries), (C) for the Fiscal Year ending December 31, 2018, an amount equal to 12.5% of Consolidated EBITDAfor the Fiscal Year ending December 31, 2017 (with such limit to be an aggregate amount for all such Israel Subsidiaries) and (D)for the Fiscal Year ending December 31, 2019, an amount equal to 12.5% of Consolidated EBITDA for the Fiscal Year endingDecember 31, 2018 (with such limit to be an aggregate amount for all such Israel Subsidiaries); provided, further, that (1) both atthe time of and immediately after giving effect to any such Investment, no Default or Event of Default shall have occurred and becontinuing or shall result from the making of such Investment, (2) after giving effect to any such Investment, the pro forma TotalLeverage Ratio of Borrower and its Subsidiaries shall not exceed the Total Leverage Ratio required under Section 6.1 as of themost recently ended Fiscal Quarter minus 0.25 to 1.00 (and in the case prior to the Fiscal Quarter ended March 31, 2016, suchTotal Leverage Ratio shall not exceed 2.25:1.00), calculated as if any Borrowing or other Indebtedness used to finance suchInvestment (if any) had been funded as of the first day of the relevant period of measurement and (3) immediately after givingeffect to such Investment the sum of (i)(x) the Aggregate Revolving Commitment Amount minus (y) the aggregate principalamount of all Revolving Credit Exposure plus (ii) cash on hand (that is either unencumbered or in Controlled Accounts) of theLoan Parties is at least $7,500,000;"- 3 -(g)The Credit Agreement is hereby further amended by deleting all references to "Schedule II" contained in the Credit Agreement andsubstituting in lieu thereof "Schedule I".(h)The Credit Agreement is hereby further amended by deleting Schedule I thereto in its entirety and substituting in lieu thereof Schedule Iattached hereto.(i) The parties hereto acknowledge that certain Indebtedness of the Loan Parties in the form of letters of credit are outstanding and describedon Schedule 7.1 (other than the Letter of Credit dated June 28, 2012 for the benefit of 101 California Venture for the amount of $75,000 (the "101 CAVenture LC")) (such letters of credit (other than the 101 CA Venture LC), collectively, the "Existing Letters of Credit"). The parties hereto furtheracknowledge that the Existing Letters of Credit are secured by cash collateral in a deposit account described on Schedule 7.2 (the "Existing LC CashCollateral Account") and in Section 5.11(a)(iii), and that such cash collateral is "Excluded Property" under the Guaranty and Security Agreement. TheAdministrative Agent and the Lenders hereby acknowledge and agree that, notwithstanding the terms of the Credit Agreement or any other Loan Document:(i) the Existing Letters of Credit may be replaced from time to time with one or more replacement letters of credit issued by any Person or Persons in favor ofthe beneficiary of such Existing Letter of Credit that is being replaced (each a "Replacement Letter of Credit") so long as the aggregate stated amount of theExisting Letters of Credit and any Replacement Letters of Credit issued in replacement thereof shall not exceed the aggregate stated amount of the ExistingLetters of Credit as of the date hereof, provided that any Replacement Letter of Credit may be outstanding at the same time as its corresponding ExistingLetter of Credit for a reasonable period of time, not to exceed five (5) Business Days, (ii) the cash collateral held in the Existing LC Cash Collateral Accountmay be used (and such cash may be removed from the Existing LC Cash Collateral Account and deposited into one or more deposit accounts with otherfinancial institutions for the purpose of serving as cash collateral with such deposit accounts subject to a Lien for the benefit of the financial institutionsissuing the replacement letters of credit described in clause (i) immediately above) as credit support for such replacement letters of credit described in clause(i) immediately above so long as such cash collateral does not, in the aggregate, exceed $1,182,314, provided that for a reasonable period of time, not toexceed five (5) Business Days, the Existing LC Cash Collateral Account and the accounts holding cash collateral used for the purpose of providing creditsupport for such Replacement Letters of Credit may both be outstanding and the amount of such cash collateral may exceed $1,182,314 but shall not exceedthe aggregate stated amount of the outstanding Existing Letters of Credit and any Replacement Letters of Credit described in clause (i) immediately above,(iii) for purposes of Section 5.11(a)(iii) and the definition of "Excluded Property" in the Guaranty and Security Agreement, the Existing LC Cash CollateralAccount and the cash collateral held therein shall be deemed to include any new deposit accounts created for the Replacement Letters of Credit allowed byclause (i) immediately above and any cash collateral used for the purpose of providing credit support for such Replacement Letters of Credit as described inclause (ii) immediately above, and (iv) Funded Debt shall not include the replacement letters of credit described in clause (i) immediately above.- 4 -3. Waiver. Subject to the satisfaction of the conditions set forth in Section 4 below, in reliance on the representations and warranties setforth in Sections 5 and 6 below, and subject to the limitations set forth in Section 7 below, the Lenders hereby waive any Default or Event of Default existingon or prior to the date hereof arising solely under (i) Section 7.4(d) of the Credit Agreement to the extent such Default or Event of Default is attributable toInvestments made prior to the Closing Date and (ii) Sections 5.11 and 5.15 of the Credit Agreement. The foregoing waiver shall not apply to any Default orEvent of Default that may arise as a result of any event or circumstance that occurs or continues after the date on which the conditions precedent set forth inSection 4 hereof shall have been met (or duly waived). The Borrower acknowledges and agrees that the waiver contained in this Section 3 shall not waive oramend (or be deemed to be or constitute an amendment to or waiver of) any other covenant, term or provision in the Credit Agreement or hinder, restrict orotherwise modify the rights and remedies of the Lenders and the Administrative Agent following the occurrence of any other present or future Default orEvent of Default under the Credit Agreement or any other Loan Document. The Borrower and Holdings represent and warrant to the Administrative Agentand the Lenders that, for the period from and including the Closing Date through the date of this Amendment, the Borrower has (x) made Investmentspursuant to Section 7.4(d)(ii)(A) in an aggregate amount equal to $27,886 (which Investments are and remain outstanding in such amount as of the datehereof) and (y) made Investments pursuant to Section 7.4(d)(i) in an aggregate amount equal to $453,460 (which Investments are and remain outstanding insuch amount as of the date hereof).4. Conditions Precedent to Effectiveness. The effectiveness of this Amendment is subject to the truth and accuracy of the warranties andrepresentations set forth in Sections 5 and 6 below and receipt by the Administrative Agent of each of the following, each of which shall be in form andsubstance satisfactory to Administrative Agent:(a)This Amendment, duly executed and delivered by the Borrower, Holdings, the Subsidiary Loan Parties, the Lenders and theAdministrative Agent;- 5 -(b)A certificate of the Borrower dated as of the date hereof signed by a Responsible Officer of the Borrower certifying that, immediatelybefore and after giving effect to this Amendment (i) the representations and warranties contained in Article IV of the Credit Agreement and the other LoanDocuments are true and correct on and as of the date hereof, except to the extent that such representations and warranties specifically refer to an earlier date,in which case they shall have been true and correct as of such earlier date; (ii) since December 31, 2014, there has been no event, development orcircumstance, either individually or in the aggregate, that has had or could reasonably be expected to have, either individually or in the aggregate, a MaterialAdverse Effect; and (iii) no Default or Event of Default (other than such Default or Event of Default expressly waived by Section 3 above) has occurred and iscontinuing as of the date hereof and no Default or Event of Default will exist after giving effect to the amendments contemplated by this Amendment;(c)For the account of each Lender that has requested a promissory note in respect of such Lender's Revolving Commitment, a promissorynote evidencing such Lender's Revolving Commitment, duly executed by a Responsible Officer of the Borrower;(d)A Reaffirmation of Obligations Under Loan Documents (the "Reaffirmation") dated as of the date hereof duly executed by each LoanParty, in the form of Exhibit I attached hereto(e)A legal opinion addressed to the Administrative Agent and each of the Lenders from Kramer Levin Naftalis & Frankel LLP, counsel tothe Borrower and Holdings, which opinion shall be dated the date hereof and covering such matters relating to the Borrower, Holdings, this Amendment, andthe transactions contemplated hereby as the Administrative Agent or the Lenders shall reasonably request;(f) A certificate, dated as of the date hereof, signed by the Secretary of the Borrower, together with the resolutions of the Borrower in respectof the authorization and approval of the transactions contemplated by this Amendment;(g)Certified copies of all consents, approvals, authorizations, registrations and filings and orders required to be made or obtained underapplicable law, if any, or by any Contractual Obligation of each Loan Party, in connection with the execution, delivery, performance, validity andenforceability of this Amendment or any of the transactions contemplated hereby, and such consents, approvals, authorizations, registrations, filings andorders shall be in full force and effect and all applicable waiting periods shall have expired;(h)The payment of all fees and other amounts due and payable on or prior to the effective date of this Amendment, including (x)reimbursement or payment of all out-of-pocket expenses (including reasonable fees, charges and disbursements of counsel to the Administrative Agent)required to be reimbursed or paid by the Borrower and Holdings hereunder and under that certain engagement letter dated February 18, 2016 among theBorrower, Holdings and the Lenders and (y) the fees owing under that certain fee letter dated February 18, 2016 among the Borrower, Holdings and theLenders; and- 6 -(i) Such other documents as the Administrative Agent may reasonably request.5. Representations. Each of the Borrower and Holdings represents and warrants to the Administrative Agent and the Lenders that:(a)Power and Authority. Each of the Borrower and the other Loan Parties have the power and authority to execute, deliver and perform theterms and provisions of this Amendment and the Credit Agreement, as amended by this Amendment, and have taken all necessary corporate action to dulyauthorize the execution, delivery and performance of this Amendment. Each of this Amendment and the Credit Agreement, as amended by this Amendment,constitutes the legal, valid and binding obligation of the Borrower and Holdings enforceable in accordance with its terms, except to the extent that theenforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors'rights and by equitable principles.(b)No Violation. The execution, delivery and performance by the Borrower and the other Loan Parties of this Amendment, and complianceby them with the terms and provisions of the Credit Agreement, as amended by this Amendment: (i) will not contravene any provision of any law, statute, ruleor regulation or any order, writ, injunction or decree of any court or federal, state or local Governmental Authority, (ii) will not conflict with or result in anybreach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation tocreate or impose) any lien upon any of the property or assets of any Loan Party pursuant to the terms of any indenture, mortgage, deed of trust, creditagreement or loan agreement, or any other agreement, contract or instrument, to which any Loan Party is a party or by which they or any of their property orassets is bound or to which they may be subject or (iii) will not violate any provision of the certificate or articles of incorporation or bylaws of the Borrower,Holdings or any other Loan Party.(c)Governmental Approvals. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with(except for those that have otherwise been obtained or made on or prior to the date of the effectiveness of this Amendment and which remain in full force andeffect on such date), or exemption by, any Governmental Authority, is required to authorize, or is required in connection with, (i) the execution, delivery andperformance of this Amendment by the Borrower or Holdings or (ii) the legality, validity, binding effect or enforceability of the Credit Agreement, asamended by this Amendment against the Borrower or Holdings.(d)No Default. No Default or Event of Default (other than such Default or Event of Default expressly waived by Section 3 above) hasoccurred and is continuing as of the date hereof and no Default or Event of Default will exist immediately after giving effect to this Amendment.(e)No Impairment. The execution, delivery, performance and effectiveness of this Amendment will not: (a) impair the validity, effectivenessor priority of the Liens granted pursuant to any Loan Document, and such Liens continue unimpaired with the same priority to secure repayment of all of theapplicable Obligations, whether heretofore or hereafter incurred, and (b) require that any new filings be made or other action taken to perfect or to maintainthe perfection of such Liens.- 7 -(f) Solvency. As of the date hereof, on a pro forma basis after giving effect to the Revolving Commitments contemplated hereby and to allIndebtedness incurred, and to be incurred under such Revolving Commitments, the Borrower and each other Loan Party is Solvent.6. Reaffirmation of Representations. Each of the Borrower, Holdings and the Subsidiary Loan Parties hereby repeats and reaffirms allrepresentations and warranties made to the Administrative Agent and the Lenders in the Credit Agreement and the other Loan Documents on and as of thedate hereof (and after giving effect to this Amendment) with the same force and effect as if such representations and warranties were set forth in thisAmendment in full (except to the extent that such representations and warranties relate expressly to an earlier date, in which case such representations andwarranties were true and correct as of such earlier date).7. No Further Amendments; Ratification of Liability. Except as expressly amended or waived hereby, the Credit Agreement and each ofthe other Loan Documents shall remain in full force and effect in accordance with their respective terms, and the Lenders and the Administrative Agenthereby require strict compliance with the terms and conditions of the Credit Agreement and the other Loan Documents in the future. Each of the Borrower,Holdings and the Subsidiary Loan Parties hereby (i) restates, ratifies, confirms and reaffirms its respective liabilities, payment and performance obligations(contingent or otherwise) and each and every term, covenant and condition set forth in the Credit Agreement and the other Loan Documents to which it is aparty, all as amended by this Amendment, and the liens and security interests granted, created and perfected thereby and (ii) acknowledges and agrees thatthis Amendment shall not in any way affect the validity and enforceability of any Loan Document to which it is a party, or reduce, impair or discharge theobligations of the Borrower, Holdings, the Subsidiary Loan Parties or the Collateral granted to the Administrative Agent and/or the Lenders thereunder. TheLenders' agreement to the terms of this Amendment or any other amendment of the Credit Agreement or any other Loan Document shall not be deemed toestablish or create a custom or course of dealing between the Borrower, Holdings, the Subsidiary Loan Parties or the Lenders, or any of them. ThisAmendment shall be deemed to be a "Loan Document" for all purposes under the Credit Agreement. After the effectiveness of this Amendment, eachreference to the Credit Agreement in any of the Loan Documents shall be deemed to be a reference to the Credit Agreement as amended by this Amendment.8. Other Provisions.(a)This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of whichwhen so executed and delivered shall be deemed to be an original, and all counterparts, taken together, shall constitute but one and the same document.(b)The Borrower agrees to reimburse the Administrative Agent on demand for all reasonable costs and expenses (including, withoutlimitation, reasonable and documented legal counsels' fees; provided that such counsel shall be limited to one legal counsel and, to the extent necessary, onelocal counsel in each relevant jurisdiction for the Administrative Agent and the Lenders, collectively, in each case selected by the Administrative Agent)incurred by the Administrative Agent in negotiating, documenting and consummating this Amendment, the other documents referred to herein, and thetransactions contemplated hereby and thereby.- 8 -(c)THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH AND BEGOVERNED BY THE LAW (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF THAT WOULD RESULT IN THEAPPLICATION OF ANY LAW OTHER THAN THE LAW OF THE STATE OF NEW YORK) OF THE STATE OF NEW YORK.(d)THIS AMENDMENT CONSTITUTES THE ENTIRE CONTRACT AMONG THE PARTIES HERETO RELATING TO THE SUBJECTMATTER HEREOF AND SUPERSEDES ANY AND ALL PREVIOUS DISCUSSIONS, CORRESPONDENCE, AGREEMENTS AND OTHERUNDERSTANDINGS, WHETHER ORAL OR WRITTEN, RELATING TO THE SUBJECT MATTER HEREOF.(e)Each of the Borrower, Holdings and the Subsidiary Loan Parties agrees to take all further actions and execute such other documents andinstruments as the Administrative Agent may from time to time reasonably request to carry out the transactions contemplated by this Amendment, the LoanDocuments and all other agreements executed and delivered in connection herewith. (f)THE PARTIES HERETO HAVE ENTERED INTO THIS AMENDMENT SOLELY TO AMEND TERMS OF THE CREDIT AGREEMENT. THE PARTIES DO NOT INTEND THIS AMENDMENT NOR THE TRANSACTIONS CONTEMPLATED HEREBY TO BE, AND THIS AMENDMENT ANDTHE TRANSACTION CONTEMPLATED HEREBY SHALL NOT BE CONSTRUED TO BE, A NOVATION OF ANY OF THE OBLIGATIONS OWING BYANY LOAN PARTY UNDER OR IN CONNECTION WITH THE CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS TO WHICH ALOAN PARTY IS A PARTY. - 9 -IN WITNESS WHEREOF, the Borrower, Holdings, the Subsidiary Loan Parties, the Lenders and the Administrative Agent have caused this FirstAmendment to Credit Agreement to be duly executed by their respective duly authorized officers and representatives as of the day and year first abovewritten. INTERACTIVE HOLDING CORP. By: /s/ Yacov KaufmanName: Yacov KaufmanTitle: Director By: /s/ Josef Mandelbaum Name: Josef MandelbaumTitle: Director INCREDITONE INC. By: /s/ Yacov Kaufman Name: Yacov KaufmanTitle: Chief Financial Officer By: /s/ Josef Mandelbaum Name: Josef MandelbaumTitle: Chief Executive Officer [Signature Page to First Amendment to Credit Agreement]  INTERCEPT INTERACTIVE INC.By: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial OfficerUUU HOLDING, LLCBy: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial OfficerSPARK FLOW LLCBy: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial OfficerJAMBO MEDIA LLCBy: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial OfficerWORLD WEB NETWORK HOLDING COMPANY, LLCBy: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial Officer[Signature Page to First Amendment to Credit Agreement] SUNTRUST BANK, in its capacities as a Lender and as Administrative AgentBy: /s/ Kevin CurtisName: Kevin CurtisTitle: Director [Signature Page to First Amendment to Credit Agreement]  SILICON VALLEY BANK, as a Lender By: /s/ Michael Moretti Name: Michael Moretti Title: Managing Director [Signature Page to First Amendment to Credit Agreement]  CADENCE BANK, as a Lender By: /s/ Steve Prichett Name: Steve Prichett Title: EVP [End of Signatures] [Signature Page to First Amendment to Credit Agreement] SECOND AMENDMENT TO CREDIT AGREEMENT AND WAIVERTHIS SECOND AMENDMENT TO CREDIT AGREEMENT AND WAIVER is dated as of May 8, 2016 (this "Amendment"), by and amongINTERACTIVE HOLDING CORP., a Delaware corporation (the "Borrower"), INCREDITONE INC., a Delaware corporation ("Holdings"), each of theGuarantors party hereto, each of the financial institutions party hereto as "Lenders" (the "Lenders") and SUNTRUST BANK, in its capacity as AdministrativeAgent (in such capacity, the "Administrative Agent").W I T N E S S E T H:WHEREAS, the Borrower, Holdings, certain of the Lenders and the Administrative Agent are parties to that certain Credit Agreement dated as ofNovember 30, 2015, as amended by that certain First Amendment to Credit Agreement dated as of March 4, 2016 (the "Credit Agreement");WHEREAS, the Administrative Agent and the Lenders have been made aware of certain Events of Default listed on Schedule 1 attached hereto (the"Specified Defaults") that have occurred and are continuing under the Credit Agreement;WHEREAS, the Borrower has requested that the Administrative Agent and the Lenders waive the Specified Defaults and amend certain provisions ofthe Credit Agreement, all as more particularly set forth below;WHEREAS, subject to the terms and conditions set forth herein, the Administrative Agent and the Lenders are willing to so waive the SpecifiedDefaults and amend the Credit Agreement, all on the terms and conditions contained in this Amendment;NOW, THEREFORE, for and in consideration of the above premises and other good and valuable consideration, the receipt and sufficiency of whichare hereby acknowledged by the parties hereto, the parties hereto hereby agree as follows:Section 1. Defined Terms. Capitalized terms which are used herein without definition and which are defined in the Credit Agreement shall have thesame meanings herein as in the Credit Agreement; provided, that, solely for purposes of this Amendment, Perion Network Ltd. shall be deemed to be includedin the definition of the term "Loan Party".Section 2. Amendments to Credit Agreement. (a) The Credit Agreement is hereby amended by restating Section 5.1(c) thereof in its entirety as follows: (c)beginning May 10, 2016 until the occurrence of an Excluded Account Event, on the second Business Dayof each calendar week a written report, in form and substance satisfactory to the Administrative Agent, detailing, as of the lastBusiness Day of the immediately prior calendar week (i) the aggregate dollar amount of checks issued and outstanding on theExcluded Account and (ii) the balance on deposit in the Excluded Account;(b) The Credit Agreement is hereby amended by deleting "March 31, 2016" in the first line of Section 5.11 of the Credit Agreement andsubstituting "August 31, 2016" in lieu thereof.(c) The Credit Agreement is hereby further amended by restating the last sentence of Section 5.11 thereof in its entirety as follows:"The parties hereto agree that, prior to August 31, 2016, account number 1894408945 at Comerica Bank (the "ExcludedAccount") shall not be required to be subject to a Control Account Agreement pursuant to this Section 5.11. On and afterAugust 31, 2016, the Excluded Account shall either (i) be subject to a Control Account Agreement, (ii) qualify and continue tobe maintained as an Unrestricted Account or (iii) be closed (the occurrence of any of the foregoing, an "Excluded AccountEvent"). Notwithstanding the foregoing, on and after May 8, 2016, the Borrower shall cause any and all cash at any time held inthe Excluded Account to be swept and deposited on a daily basis into a Controlled Account with a Permitted Third Party Bankwhich is subject to a Control Account Agreement; provided, however that the Borrower shall be permitted to maintain a cashbalance in the Excluded Account in an amount not exceeding the amount necessary, in Borrower's reasonable discretion, tocover (i) the amount of any checks issued by the Borrower or any of its Subsidiaries that have not cleared the Excluded Accountand (ii) expense payables of the Borrower and its Subsidiaries in the ordinary course of business that are due during the next 15consecutive days."Section 3. Waiver. Subject to the satisfaction of the conditions set forth in Section 4 below, in reliance on the representations and warranties setforth in Sections 5 and 7 below, and subject to the limitations set forth in Section 8 below, the Lenders hereby waive the Specified Defaults. The Borroweracknowledges and agrees that the waiver contained in this Section 3 shall not waive or amend (or be deemed to be or constitute an amendment to or waiverof) any other covenant, term or provision in the Credit Agreement or hinder, restrict or otherwise modify the rights and remedies of the Lenders and theAdministrative Agent following the occurrence of any other present or future Default or Event of Default under the Credit Agreement or any other LoanDocument. The waiver of each Specified Default set forth above is solely with respect to the period(s) corresponding to such Specified Default prior to thedate hereof.Section 4. Conditions Precedent to Effectiveness. The effectiveness of this Amendment is subject to the truth and accuracy of the warranties andrepresentations set forth in Sections 5 and 7 below and receipt by the Administrative Agent of each of the following, each of which shall be in form andsubstance satisfactory to Administrative Agent:(a) This Amendment, duly executed and delivered by the Borrower, Holdings, the Subsidiary Loan Parties, the Required Lenders and theAdministrative Agent;- 2 -(b)A certificate of the Borrower dated as of the date hereof signed by a Responsible Officer of the Borrower certifying that, immediatelybefore and after giving effect to this Amendment (i) the representations and warranties contained in Article IV of the Credit Agreement and the other LoanDocuments are true and correct on and as of the date hereof, except to the extent that such representations and warranties specifically refer to an earlier date,in which case they shall have been true and correct as of such earlier date; (ii) since December 31, 2014, there has been no event, development orcircumstance, either individually or in the aggregate, that has had or could reasonably be expected to have, either individually or in the aggregate, a MaterialAdverse Effect; and (iii) no Default or Event of Default (other than such Default or Event of Default expressly waived by Section 3 above) has occurred and iscontinuing as of the date hereof and no Default or Event of Default will exist after giving effect to the amendments contemplated by this Amendment;(c)A Reaffirmation of Obligations Under Loan Documents (the "Reaffirmation") dated as of the date hereof duly executed by each LoanParty, in the form of Exhibit I attached hereto;(d)The payment of all fees and other amounts due and payable on or prior to the effective date of this Amendment, including reimbursementor payment of all out-of-pocket expenses (including reasonable fees, charges and disbursements of counsel to the Administrative Agent in connection withthe preparation, negotiation, execution and delivery of this Amendment and the other documents and agreements executed and delivered in connectionherewith) required to be reimbursed or paid by the Borrower and Holdings hereunder; and(e)Such other documents as the Administrative Agent may reasonably request.Section 5. Representations. Each of the Borrower and Holdings represents and warrants to the Administrative Agent and the Lenders that:(g)Power and Authority. Each of the Borrower and the other Loan Parties have the power and authority to execute, deliver and perform theterms and provisions of this Amendment and the Credit Agreement, as amended by this Amendment, and have taken all necessary corporate action to dulyauthorize the execution, delivery and performance of this Amendment. Each of this Amendment and the Credit Agreement, as amended by this Amendment,constitutes the legal, valid and binding obligation of the Borrower and Holdings enforceable in accordance with its terms, except to the extent that theenforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors'rights and by equitable principles.(h)No Violation. The execution, delivery and performance by the Borrower and the other Loan Parties of this Amendment, and complianceby them with the terms and provisions of the Credit Agreement, as amended by this Amendment: (i) will not contravene any provision of any law, statute, ruleor regulation or any order, writ, injunction or decree of any court or federal, state or local Governmental Authority, (ii) will not conflict with or result in anybreach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation tocreate or impose) any lien upon any of the property or assets of any Loan Party pursuant to the terms of any indenture, mortgage, deed of trust, creditagreement or loan agreement, or any other agreement, contract or instrument, to which any Loan Party is a party or by which they or any of their property orassets is bound or to which they may be subject or (iii) will not violate any provision of the certificate or articles of incorporation or bylaws of the Borrower,Holdings or any other Loan Party.- 3 -(i) Governmental Approvals. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with(except for those that have otherwise been obtained or made on or prior to the date of the effectiveness of this Amendment and which remain in full force andeffect on such date), or exemption by, any Governmental Authority, is required to authorize, or is required in connection with, (i) the execution, delivery andperformance of this Amendment by the Borrower or Holdings or (ii) the legality, validity, binding effect or enforceability of the Credit Agreement, asamended by this Amendment against the Borrower or Holdings.(j) No Default. No Default or Event of Default (other than such Default or Event of Default expressly waived by Section 3 above) hasoccurred and is continuing as of the date hereof and no Default or Event of Default will exist immediately after giving effect to this Amendment.(k)No Impairment. The execution, delivery, performance and effectiveness of this Amendment will not: (a) impair the validity,effectiveness or priority of the Liens granted pursuant to any Loan Document, and such Liens continue unimpaired with the same priority to securerepayment of all of the applicable Obligations, whether heretofore or hereafter incurred, and (b) require that any new filings be made or other action taken toperfect or to maintain the perfection of such Liens.Section 6. [Reserved].Section 7. Reaffirmation of Representations. Each of the Borrower, Holdings and the Subsidiary Loan Parties hereby repeats and reaffirms allrepresentations and warranties made to the Administrative Agent and the Lenders in the Credit Agreement and the other Loan Documents on and as of thedate hereof (and after giving effect to this Amendment) with the same force and effect as if such representations and warranties were set forth in thisAmendment in full (except to the extent that such representations and warranties relate expressly to an earlier date, in which case such representations andwarranties were true and correct as of such earlier date).Section 8. No Further Amendments; Ratification of Liability. Except as expressly amended or waived hereby, the Credit Agreement and each ofthe other Loan Documents shall remain in full force and effect in accordance with their respective terms, and the Lenders and the Administrative Agenthereby require strict compliance with the terms and conditions of the Credit Agreement and the other Loan Documents in the future. Each of the Borrower,Holdings and the Subsidiary Loan Parties hereby (i) restates, ratifies, confirms and reaffirms its respective liabilities, payment and performance obligations(contingent or otherwise) and each and every term, covenant and condition set forth in the Credit Agreement and the other Loan Documents to which it is aparty, all as amended by this Amendment, and the liens and security interests granted, created and perfected thereby and (ii) acknowledges and agrees thatthis Amendment shall not in any way affect the validity and enforceability of any Loan Document to which it is a party, or reduce, impair or discharge theobligations of the Borrower, Holdings, the Subsidiary Loan Parties or the Collateral granted to the Administrative Agent and/or the Lenders thereunder. TheLenders' agreement to the terms of this Amendment or any other amendment of the Credit Agreement or any other Loan Document shall not be deemed toestablish or create a custom or course of dealing between the Borrower, Holdings, the Subsidiary Loan Parties or the Lenders, or any of them. ThisAmendment shall be deemed to be a "Loan Document" for all purposes under the Credit Agreement. After the effectiveness of this Amendment, eachreference to the Credit Agreement in any of the Loan Documents shall be deemed to be a reference to the Credit Agreement as amended by this Amendment.- 4 -Section 9. Other Provisions.(g)This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of whichwhen so executed and delivered shall be deemed to be an original, and all counterparts, taken together, shall constitute but one and the same document.(h)The Borrower agrees to reimburse the Administrative Agent on demand for all reasonable costs and expenses (including, withoutlimitation, reasonable and documented legal counsels' fees; provided that such counsel shall be limited to one legal counsel and, to the extent necessary, onelocal counsel in each relevant jurisdiction for the Administrative Agent and the Lenders, collectively, in each case selected by the Administrative Agent)incurred by the Administrative Agent in negotiating, documenting and consummating this Amendment, the other documents referred to herein, and thetransactions contemplated hereby and thereby.(i) THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH AND BEGOVERNED BY THE LAW (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF THAT WOULD RESULT IN THEAPPLICATION OF ANY LAW OTHER THAN THE LAW OF THE STATE OF NEW YORK) OF THE STATE OF NEW YORK.(j) THIS AMENDMENT CONSTITUTES THE ENTIRE CONTRACT AMONG THE PARTIES HERETO RELATING TO THE SUBJECTMATTER HEREOF AND SUPERSEDES ANY AND ALL PREVIOUS DISCUSSIONS, CORRESPONDENCE, AGREEMENTS AND OTHERUNDERSTANDINGS, WHETHER ORAL OR WRITTEN, RELATING TO THE SUBJECT MATTER HEREOF.(k)Each of the Borrower, Holdings and the Subsidiary Loan Parties agrees to take all further actions and execute such other documents andinstruments as the Administrative Agent may from time to time reasonably request to carry out the transactions contemplated by this Amendment, the LoanDocuments and all other agreements executed and delivered in connection herewith. THE LOAN PARTIES DO NOT INTEND THIS AMENDMENT NOR THE TRANSACTIONS CONTEMPLATED HEREBY TO BE, AND THISAMENDMENT AND THE TRANSACTION CONTEMPLATED HEREBY SHALL NOT BE CONSTRUED TO BE, A NOVATION OF ANY OF THEOBLIGATIONS OWING BY ANY LOAN PARTY UNDER OR IN CONNECTION WITH THE CREDIT AGREEMENT OR ANY OF THE OTHER LOANDOCUMENTS TO WHICH A LOAN PARTY IS A PARTY.[Signature Page Follows] - 5 -IN WITNESS WHEREOF, the Borrower, Holdings, the Subsidiary Loan Parties, the Lenders and the Administrative Agent have caused this SecondAmendment to Credit Agreement and Waiver to be duly executed by their respective duly authorized officers and representatives as of the day and year firstabove written. INTERACTIVE HOLDING CORP.By: /s/ Josef MandelbaumName: Josef MandelbaumTitle: DirectorBy: /s/ Yacov KaufmanName: Yacov KaufmanTitle: DirectorINCREDITONE INC.By: /s/ Josef MandelbaumName: Josef MandelbaumTitle: Chief Executive OfficerBy: /s/ Yacov KaufmanName: Yacov KaufmanTitle: Chief Financial Officer [Signature Page to Second Amendment to Credit Agreement and Waiver]  INTERCEPT INTERACTIVE INC.By: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial OfficerUUU HOLDING, LLCBy: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial OfficerSPARK FLOW LLCBy: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial OfficerJAMBO MEDIA LLCBy: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial OfficerWORLD WEB NETWORK HOLDING COMPANY, LLCBy: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial Officer[Signature Page to Second Amendment to Credit Agreement and Waiver] SUNTRUST BANK, in its capacities as a Lender and as Administrative AgentBy: /s/ Eric SaxonName: Eric SaxonTitle: Vice President [Signature Page to Second Amendment to Credit Agreement and Waiver]  SILICON VALLEY BANK, as a Lender By: /s/ Michael Moretti Name: Michael Moretti Title: Managing Director [Signature Page to Second Amendment to Credit Agreement and Waiver] CADENCE BANK, as a Lender By: /s/ Steve Prichett Name: Steve Prichett Title: EVP [End of Signatures] [Signature Page to Second Amendment to Credit Agreement and Waiver]  THIRD AMENDMENT TO CREDIT AGREEMENT AND LIMITED WAIVERTHIS THIRD AMENDMENT TO CREDIT AGREEMENT AND LIMITED WAIVER is dated as of October 7, 2016 (this "Amendment"), by andamong INTERACTIVE HOLDING CORP., a Delaware corporation (the "Borrower"), INCREDITONE INC., a Delaware corporation ("Holdings"), each of theGuarantors party hereto, each of the financial institutions party hereto as "Lenders" (the "Lenders") and SUNTRUST BANK, in its capacity as AdministrativeAgent (in such capacity, the "Administrative Agent").W I T N E S S E T H:WHEREAS, the Borrower, Holdings, certain of the Lenders and the Administrative Agent are parties to that certain Credit Agreement dated as ofNovember 30, 2015, as amended by that certain First Amendment to Credit Agreement dated as of March 4, 2016 and by that certain Second Amendment toCredit Agreement and Waiver dated as of May 8, 2016 (as so amended, the "Credit Agreement");WHEREAS, the Administrative Agent and the Lenders have been made aware of certain Defaults and Events of Default listed on Schedule 1 attachedhereto (the "Specified Defaults") that have occurred and are continuing under the Credit Agreement;WHEREAS, the Borrower has requested that the Administrative Agent and the Lenders waive the Specified Defaults and amend certain provisions ofthe Credit Agreement, all as more particularly set forth below;WHEREAS, subject to the terms and conditions set forth herein, the Administrative Agent and the Lenders are willing to so waive the SpecifiedDefaults and amend the Credit Agreement, all on the terms and conditions contained in this Amendment;NOW, THEREFORE, for and in consideration of the above premises and other good and valuable consideration, the receipt and sufficiency of whichare hereby acknowledged by the parties hereto, the parties hereto hereby agree as follows:Section 1. Defined Terms. Capitalized terms which are used herein without definition and which are defined in the Credit Agreement shall havethe same meanings herein as in the Credit Agreement.Section 2. Amendments to Credit Agreement.(d) The Credit Agreement is hereby amended by deleting the defined terms "Aggregate Revolving Commitment Amount", "ConsolidatedEBITDA", "Consolidated Fixed Charges", "LC Commitment" and "Swingline Commitment" set forth in Section 1.1 thereof in its entirety and substituting inlieu thereof the following: "Aggregate Revolving Commitment Amount" shall mean the aggregate principal amount of the Aggregate RevolvingCommitments from time to time. On October 7, 2016, the Aggregate Revolving Commitment Amount is $2,500,000."Consolidated EBITDA" shall mean, for the Borrower and its Subsidiaries for any period, an amount equal to the sum of (i)Consolidated Net Income for such period plus (ii) to the extent deducted in determining Consolidated Net Income for such period and tothe extent not excluded from Consolidated Net Income pursuant to the definition thereof, and without duplication, (A) ConsolidatedInterest Expense, (B) income tax expense determined on a consolidated basis in accordance with GAAP, (C) depreciation andamortization determined on a consolidated basis in accordance with GAAP, (D) non-cash charges related to the mark-to-market treatmentof obligations under Hedging Transactions, (E) any extraordinary, unusual or non-recurring expenses or losses or restructuring charges orcosts, all as determined in accordance with GAAP; provided, that, the amount under this clause (E) shall not exceed (x) $1,250,000 in theaggregate for any period of four (4) consecutive Fiscal Quarter period through December 31, 2016 and (y) and $1,000,000 in theaggregate during any Fiscal Year after December 31, 2016; (F) transaction costs and expenses paid in cash in connection with the RelatedTransactions in an aggregate amount not to exceed $13,756,501; (G) non-cash charges related to the Great Plains accounting softwareand related services; provided, that, the amount under this clause (G) shall not exceed $650,000 in the aggregate; (H) all non-cash foreigncurrency exchange losses or charges and non-cash expenses deducted as a result of any grant of Capital Stock to employees, officers ordirectors for such period (but excluding any non-cash loss, charge or expense that is an accrual of or a reserve for a cash expenditure orpayment to be made, or anticipated to be made, in a future period); (I) all non-cash expenses allocated by the Parent to the Borrowerrelated to headcount at the Israel development cost center for the benefit of the Borrower in an aggregate amount not to exceed (x) for theFiscal Year ending December 31, 2016, $1,750,000, (y) for the Fiscal Year ending December 31, 2017, $2,500,000 and (z) for the FiscalYear ending December 31, 2018, 3,750,000; provided that, for purposes of calculating compliance with the financial covenants set forthin Article VI, to the extent that during such period any Borrower Loan Party shall have consummated a Permitted Acquisition or otherAcquisition approved in writing by the Required Lenders, or any sale, transfer or other disposition of any Person, business, property orassets, Consolidated EBITDA shall be calculated on a Pro Forma Basis with respect to such Person, business, property or assets soacquired or disposed of. Notwithstanding the foregoing, but subject to any adjustment set forth above with respect to the immediatelypreceding proviso, Consolidated EBITDA shall be $10,118,601, $667,379, $6,920,800 and $6,645,632 for the Fiscal Quarters endedDecember 31, 2014, March 31, 2015, June 30, 2015 and September 30, 2015, respectively.- 2 - Lender RevolvingCommitment Term LoanCommitment Amount SunTrust Bank $833,333.34 $0 Silicon Valley Bank $833,333.33 $0 Cadence Bank $833,333.33 $0 TOTAL $2,500,000 $0 "Consolidated Fixed Charges" shall mean, for the Borrower and its Subsidiaries for any period, the sum (without duplication) of(i) Consolidated Interest Expense for such period, (ii) scheduled principal payments made on Consolidated Total Debt (including theTerm Loan but excluding the Revolving Loans) during such period (as such scheduled principal payments may be reduced as a result ofany voluntary or mandatory prepayments of the principal amounts of such Indebtedness for such period or any prior period) and (iii)payments in respect of Capital Lease Obligations of the Borrower and its Subsidiaries during such period. For purposes of calculating theConsolidated Fixed Charges for the four quarters ending December 31, 2015, March 31, 2016, June 30, 2016 and September 30, 2016,scheduled payments of principal of Consolidated Total Debt shall be deemed to be $625,000 for each such quarter. For purposes ofcalculating Consolidated Fixed Charges for the December 31, 2015 determination date, Consolidated Interest Expense shall be deemedto be $3,000,000. For the March 31, 2016 through December 31, 2016 determination dates, Consolidated Interest Expense shall bedetermined on a cumulative basis for the period beginning January 1, 2016 and ending on the applicable date of determination andannualized. For the determination dates ending March 31, 2017 and thereafter, Consolidated Interest Expense shall be determined on atrailing four quarter basis."LC Commitment" shall mean that portion of the Aggregate Revolving Commitments that may be used by the Borrower forthe issuance of Letters of Credit in an aggregate face amount not to exceed $2,500,000."Swingline Commitment" shall mean the commitment of the Swingline Lender to make Swingline Loans in an aggregateprincipal amount at any time outstanding not to exceed $2,500,000.(e) The Credit Agreement is hereby further amended by adding the following new defined term "Third Amendment Effective Date" to Section1.1 thereof in the appropriate alphabetical order:"Third Amendment Effective Date" shall mean October 7, 2016.(f) The Credit Agreement is hereby further amended by deleting the first grid immediately under the heading "COMMITMENT AMOUNTS"on Schedule I attached thereto and substituting in lieu thereof the following: (g) The Credit Agreement is hereby further amended by deleting clause (c) of Section 5.11 thereof in its entirety and substituting in lieuthereof the following:- 3 -"(c)at any time after the occurrence and during the continuance of an Event of Default, at the request of theAdministrative Agent or the Required Lenders, Holdings and the Borrower will, and will cause each other Loan Party to, cause all paymentsconstituting proceeds of accounts or other Collateral to be directed into deposit accounts that are subject to Control Account Agreements.The parties hereto agree that account number 1894408945 at Comerica Bank (the "Excluded Account") shall not be required to be subjectto a Control Account Agreement pursuant to this Section 5.11. On or prior to May 31, 2017, the Excluded Account shall be closed (suchclosure, an "Excluded Account Event"). Notwithstanding the foregoing, at all times prior to May 31, 2017, the Borrower shall cause anyand all cash (except as provided in the proviso in this Section 5.11(c)) at any time held in the Excluded Account to be swept and depositedon a daily basis into a Controlled Account with a Permitted Third Party Bank which is subject to a Control Account Agreement; provided,however, that the Borrower may maintain a balance of $2000 at all times in the Excluded Account to pay wiring and other banking fees toComerica Bank."(h) The Credit Agreement is hereby further amended by deleting Section 6.1 thereof (Total Leverage Ratio) in its entirety and substituting inlieu thereof the following:"Section 6.1. Total Leverage Ratio. The Borrower will not permit the Total Leverage Ratio, as of the last day of each Fiscal Quarter specifiedbelow, to exceed the ratio set forth below opposite such corresponding Fiscal Quarter: Fiscal QuarterTotal Leverage Ratio Each Fiscal Quarter ending on or2.50:1.00 prior to March 31, 2016 Fiscal Quarter ending2.50:1.00 June 30, 2016 Fiscal Quarter ending2.75:1.00 September 30, 2016 Fiscal Quarter ending2.95:1.00 December 31, 2016 Fiscal Quarter ending2.95:1.00 March 31, 2017 Fiscal Quarter ending2.75:1.00 June 30, 2017 Fiscal Quarter ending2.50:1.00 September 30, 2017 - 4 - Fiscal Quarter ending2.50:1.00 December 31, 2017 Fiscal Quarter ending2.25:1.00 March 31, 2018 Fiscal Quarter ending2.00:1.00 June 30, 2018 Fiscal Quarter ending1.75:1.00 September 30, 2018 Fiscal Quarter ending1.75:1.00 December 31, 2018 and each Fiscal Quarter thereafter" (i)The Credit Agreement is hereby further amended by deleting Section 6.2 thereof (Fixed Charge Coverage Ratio) in its entirety andsubstituting in lieu thereof the following:"Section 6.2. Fixed Charge Coverage Ratio. The Borrower will not permit the Fixed Charge Coverage Leverage Ratio, as of the last day of eachFiscal Quarter specified below, to be less than the ratio set forth below opposite such corresponding Fiscal Quarter: Fiscal QuarterFixed Charge Coverage Ratio Each Fiscal Quarter ending on or2.00:1.00 prior to March 31, 2016 Fiscal Quarter ending2.00:1.00 June 30, 2016 Fiscal Quarter ending1.50:1.00 September 30, 2016 Fiscal Quarter ending1.50:1.00 December 31, 2016 Fiscal Quarter ending1.50:1.00 March 31, 2017 Fiscal Quarter ending1.50:1.00 June 30, 2017 Fiscal Quarter ending1.55:1.00 September 30, 2017 - 5 - Fiscal Quarter ending1.60:1.00 December 31, 2017 Fiscal Quarter ending1.60:1.00 March 31, 2018 Fiscal Quarter ending1.75:1.00 June 30, 2018 Fiscal Quarter ending1.75:1.00 September 30, 2018 Fiscal Quarter ending2.00:1.00 December 31, 2018 and each Fiscal Quarter thereafter" (j) The Credit Agreement is hereby further amended by deleting Section 7.4(d) thereof in its entirety and substituting in lieu thereof thefollowing:(d) Investments made by the Borrower in or to any Subsidiary of the Borrower and by any Subsidiary of the Borrower to theBorrower or in or to another Subsidiary of the Borrower; provided that the aggregate amount of Investments by the Borrower Loan Parties inor to, and Guarantees by the Borrower Loan Parties of Indebtedness of, any Subsidiary of the Borrower that is not a Subsidiary Loan Partyshall not exceed $2,000,000 in the aggregate at any time outstanding (the "Investment Cap"); provided further that Investments made priorto the Third Amendment Effective Date by the Borrower Loan Parties in or to, and Guarantees by the Borrower Loan Parties of Indebtednessof, any Subsidiary of the Borrower that is not a Subsidiary Loan Party, and that are described on Schedule 7.4(a) (which Schedule shallinclude the outstanding amount of all such Investments set forth on such Schedule as of the Third Amendment Effective Date) shall beexcluded for purposes of determining compliance with this clause (d) as it relates to the Investment Cap.(k) The Credit Agreement is hereby further amended by adding ", 5.11(c)" immediately after the reference therein to "5.9" in Section 8.1(d)thereof.(l) The Credit Agreement is hereby further amended by deleting Section 8.1(h) thereof in its entirety and substituting in lieu thereof thefollowing:"(h) Holdings or any of its Subsidiaries (other than Foreign Subsidiaries that are Immaterial Subsidiaries liquidated anddissolved in accordance with Section 7.3(a)(iv)) shall (i) commence a voluntary case or other proceeding or file any petition seekingliquidation, reorganization or other relief under any federal, state or foreign bankruptcy, insolvency or other similar law now or hereafter ineffect or seeking the appointment of a custodian, trustee, receiver, liquidator or other similar official of it or any substantial part of itsproperty, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described insubsection (i) of this Section, (iii) apply for or consent to the appointment of a custodian, trustee, receiver, liquidator or other similar officialfor Holdings or any such Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petitionfiled against it in any such proceeding, (v) make a general assignment for the benefit of creditors, or (vi) take any action for the purpose ofeffecting any of the foregoing; or"- 6 -(m) The Credit Agreement is hereby further amended by adding Schedule 7.4(a) attached hereto.Section 3. Waiver and Acknowledgment.(a)Subject to the satisfaction of the conditions set forth in Section 4 below, in reliance on the representations and warranties set forth inSections 5 and 7 below, and subject to the limitations set forth in Section 8 below, the Lenders hereby waive the Specified Defaults. The Borroweracknowledges and agrees that the waiver contained in this Section 3 shall not waive or amend (or be deemed to be or constitute an amendment to or waiverof) any other covenant, term or provision in the Credit Agreement or hinder, restrict or otherwise modify the rights and remedies of the Lenders and theAdministrative Agent following the occurrence of any other present or future Default or Event of Default under the Credit Agreement or any other LoanDocument. The waiver of each Specified Default set forth above is solely with respect to the period(s) corresponding to such Specified Default prior to thedate hereof.(b)Notwithstanding anything to the contrary contained in the Credit Agreement (as amended by this Amendment), the AdministrativeAgent and the Required Lenders acknowledge and agree that (i) they have received notice that U.U.U.I. Undertone Israel Ltd., a private limited liabilitycompany organized under the laws of Israel ("U.U.U.I."), has been designated by the Borrower as an Immaterial Subsidiary, (ii) the liquidation and dissolutionof U.U.U.I. is not materially disadvantageous to the Lenders and (iii) the proposed conversion of intercompany loans in the aggregate amount ofapproximately $12,000,000 made by Intercept Interactive Inc. to each of World Web Network Ltd. and World Web Network GmbH to equity will not be aDefault and, if such conversion has occurred prior to the effectiveness of this Amendment, is not a Default, under the Credit Agreement (as amended by thisAmendment), including but not limited to Section 7.4(d) thereof; provided, that, such acknowledgment and agreement are conditioned upon there being noadverse effect on the Lenders as a result of such conversion (other than the fact that Intercept Interactive Inc. would no longer hold an intercompanyreceivable in the amount of approximately $12,000,000).- 7 -Section 4. Conditions Precedent to Effectiveness. The effectiveness of this Amendment is subject to the truth and accuracy of the warranties andrepresentations set forth in Sections 5 and 7 below and receipt by the Administrative Agent of each of the following, each of which shall be in form andsubstance satisfactory to Administrative Agent:(a)This Amendment, duly executed and delivered by the Borrower, Holdings, the Subsidiary Loan Parties, the Required Lenders and theAdministrative Agent;(b)A certificate of the Borrower dated as of the date hereof signed by a Responsible Officer of the Borrower certifying that, immediatelybefore and after giving effect to this Amendment (i) the representations and warranties contained in Article IV of the Credit Agreement and the other LoanDocuments are true and correct on and as of the date hereof, except to the extent that such representations and warranties specifically refer to an earlier date,in which case they shall have been true and correct as of such earlier date; (ii) since December 31, 2015, there has been no event, development orcircumstance, either individually or in the aggregate, that has had or could reasonably be expected to have, either individually or in the aggregate, a MaterialAdverse Effect; and (iii) no Default or Event of Default (other than such Default or Event of Default expressly waived by Section 3 above) has occurred and iscontinuing as of the date hereof and no Default or Event of Default will exist after giving effect to the amendments contemplated by this Amendment;(c)A certified copy of resolutions adopted by the Board of Directors of the Borrower authorizing and approving the transactionscontemplated by this Amendment;(d)Evidence that the Borrower shall have received an indirect cash equity contribution from the Parent immediately prior to theeffectiveness of this Amendment in the amount of $4,000,000 and payment by the Borrower in an amount equal to $2,000,000 in immediately availablefunds to be applied as a prepayment to the outstanding principal amount of the Term Loans in accordance with Section 6 of this Amendment;(e)A Reaffirmation of Obligations Under Loan Documents (the "Reaffirmation") dated as of the date hereof duly executed by each LoanParty and the Parent, in the form of Exhibit I attached hereto;(f) The payment of all fees and other amounts due and payable on or prior to the effective date of this Amendment, including reimbursementor payment of all out-of-pocket expenses (including reasonable fees, charges and disbursements of counsel to the Administrative Agent in connection withthe preparation, negotiation, execution and delivery of this Amendment and the other documents and agreements executed and delivered in connectionherewith) required to be reimbursed or paid by the Borrower and Holdings hereunder; and(g)Such other documents as the Administrative Agent may reasonably request.Section 5. Representations. Each of the Borrower and Holdings represents and warrants to the Administrative Agent and the Lenders that:(l) Power and Authority. Each of the Borrower and the other Loan Parties have the power and authority to execute, deliver and perform theterms and provisions of this Amendment and the Credit Agreement, as amended by this Amendment, and have taken all necessary corporate action to dulyauthorize the execution, delivery and performance of this Amendment. Each of this Amendment and the Credit Agreement, as amended by this Amendment,constitutes the legal, valid and binding obligation of the Borrower and Holdings enforceable in accordance with its terms, except to the extent that theenforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors'rights and by equitable principles.- 8 -(m) No Violation. The execution, delivery and performance by the Borrower and the other Loan Parties of this Amendment, and complianceby them with the terms and provisions of the Credit Agreement, as amended by this Amendment: (i) will not contravene any provision of any law, statute, ruleor regulation or any order, writ, injunction or decree of any court or federal, state or local Governmental Authority, (ii) will not conflict with or result in anybreach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation tocreate or impose) any lien upon any of the property or assets of any Loan Party pursuant to the terms of any indenture, mortgage, deed of trust, creditagreement or loan agreement, or any other agreement, contract or instrument, to which any Loan Party is a party or by which they or any of their property orassets is bound or to which they may be subject or (iii) will not violate any provision of the certificate or articles of incorporation or bylaws of the Borrower,Holdings or any other Loan Party.(n)Governmental Approvals. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with(except for those that have otherwise been obtained or made on or prior to the date of the effectiveness of this Amendment and which remain in full force andeffect on such date), or exemption by, any Governmental Authority, is required to authorize, or is required in connection with, (i) the execution, delivery andperformance of this Amendment by the Borrower or Holdings or (ii) the legality, validity, binding effect or enforceability of the Credit Agreement, asamended by this Amendment against the Borrower or Holdings.(o)No Default. No Default or Event of Default (other than such Default or Event of Default expressly waived by Section 3 above) hasoccurred and is continuing as of the date hereof and no Default or Event of Default will exist immediately after giving effect to this Amendment.(p)No Impairment. The execution, delivery, performance and effectiveness of this Amendment will not: (a) impair the validity,effectiveness or priority of the Liens granted pursuant to any Loan Document, and such Liens continue unimpaired with the same priority to securerepayment of all of the applicable Obligations, whether heretofore or hereafter incurred, and (b) require that any new filings be made or other action taken toperfect or to maintain the perfection of such Liens.Section 6. Common Equity Capital Contribution/Prepayment of Term Loans/Agreement regarding EBITDA Addback.(a)The parties hereto acknowledge and agree that (i) the prepayment made by the Borrower in the amount of $2,000,000 on September 29,2016 was irrevocable and was applied as a prepayment to the Term Loans on such date to the principal installments of the Term Loans in inverse order ofmaturity (notwithstanding anything to the contrary in the Credit Agreement) and (ii) the prepayment made by the Borrower in the amount of $2,000,000(described in Section 4(d) of this Amendment) shall be irrevocable and applied as a prepayment to the Term Loans on the date hereof to the principalinstallments of the Term Loans in inverse order of maturity (notwithstanding anything to the contrary in the Credit Agreement). Such prepayment describedin clause (ii) immediately above shall be made pro rata to the Lenders based on their Pro Rata Shares of the Term Loans. The Administrative Agent and theLenders waive any prior notice requirements under the Credit Agreement in respect of such prepayment.- 9 -(b)Each of Holdings and the Borrower acknowledge and agree that the $2,000,000 used to make the prepayment described in clause (a)(ii)immediately above (together with the additional $2,000,000 cash equity contribution that was received from the Parent at the same time) was received as acommon equity capital contribution from the Parent to Holdings, which in turn was used by Holdings to make a common equity capital contribution into theBorrower, and such contributions do not qualify as, and will not be included as, an "Excluded Equity Contribution" or a "Specified Equity Contribution"under and as defined in the Credit Agreement.(c)The Loan Parties acknowledge and agree that (i) the expenses described in clause (I) of the definition of "Consolidated EBITDA" shallnot be paid, repaid or reimbursed by any Loan Party to any other Person, whether in cash or otherwise, and (ii) the Loan Parties will not, and will not allow orpermit any of their Subsidiaries to, set off against any obligation or liability owing to such Loan Party, whether directly or indirectly, on account of, or inrespect of, any of the expenses described in clause (I) of the definition of "Consolidated EBITDA".Section 7. Reaffirmation of Representations. Each of the Borrower, Holdings and the Subsidiary Loan Parties hereby repeats and reaffirms allrepresentations and warranties made to the Administrative Agent and the Lenders in the Credit Agreement and the other Loan Documents on and as of thedate hereof (and after giving effect to this Amendment) with the same force and effect as if such representations and warranties were set forth in thisAmendment in full (except to the extent that such representations and warranties relate expressly to an earlier date, in which case such representations andwarranties were true and correct as of such earlier date).Section 8. No Further Amendments; Ratification of Liability. Except as expressly amended or waived hereby, the Credit Agreement and each ofthe other Loan Documents shall remain in full force and effect in accordance with their respective terms, and the Lenders and the Administrative Agenthereby require strict compliance with the terms and conditions of the Credit Agreement and the other Loan Documents in the future. Each of the Borrower,Holdings and the Subsidiary Loan Parties hereby (i) restates, ratifies, confirms and reaffirms its respective liabilities, payment and performance obligations(contingent or otherwise) and each and every term, covenant and condition set forth in the Credit Agreement and the other Loan Documents to which it is aparty, all as amended by this Amendment, and the liens and security interests granted, created and perfected thereby and (ii) acknowledges and agrees thatthis Amendment shall not in any way affect the validity and enforceability of any Loan Document to which it is a party, or reduce, impair or discharge theobligations of the Borrower, Holdings, the Subsidiary Loan Parties or the Collateral granted to the Administrative Agent and/or the Lenders thereunder. TheLenders' agreement to the terms of this Amendment or any other amendment of the Credit Agreement or any other Loan Document shall not be deemed toestablish or create a custom or course of dealing between the Borrower, Holdings, the Subsidiary Loan Parties or the Lenders, or any of them. ThisAmendment shall be deemed to be a "Loan Document" for all purposes under the Credit Agreement. After the effectiveness of this Amendment, eachreference to the Credit Agreement in any of the Loan Documents shall be deemed to be a reference to the Credit Agreement as amended by this Amendment.- 10 -Section 9. Other Provisions.(l) This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of whichwhen so executed and delivered shall be deemed to be an original, and all counterparts, taken together, shall constitute but one and the same document.(m)The Borrower agrees to reimburse the Administrative Agent on demand for all reasonable costs and expenses (including, withoutlimitation, reasonable and documented legal counsels' fees; provided that such counsel shall be limited to one legal counsel and, to the extent necessary, onelocal counsel in each relevant jurisdiction for the Administrative Agent and the Lenders, collectively, in each case selected by the Administrative Agent)incurred by the Administrative Agent in negotiating, documenting and consummating this Amendment, the other documents referred to herein, and thetransactions contemplated hereby and thereby.(n)THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH AND BEGOVERNED BY THE LAW (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF THAT WOULD RESULT IN THEAPPLICATION OF ANY LAW OTHER THAN THE LAW OF THE STATE OF NEW YORK) OF THE STATE OF NEW YORK.(o)THIS AMENDMENT CONSTITUTES THE ENTIRE CONTRACT AMONG THE PARTIES HERETO RELATING TO THE SUBJECTMATTER HEREOF AND SUPERSEDES ANY AND ALL PREVIOUS DISCUSSIONS, CORRESPONDENCE, AGREEMENTS AND OTHERUNDERSTANDINGS, WHETHER ORAL OR WRITTEN, RELATING TO THE SUBJECT MATTER HEREOF.(p)Each of the Borrower, Holdings and the Subsidiary Loan Parties agrees to take all further actions and execute such other documents andinstruments as the Administrative Agent may from time to time reasonably request to carry out the transactions contemplated by this Amendment, the LoanDocuments and all other agreements executed and delivered in connection herewith. THE LOAN PARTIES DO NOT INTEND THIS AMENDMENT NOR THE TRANSACTIONS CONTEMPLATED HEREBY TO BE, AND THISAMENDMENT AND THE TRANSACTION CONTEMPLATED HEREBY SHALL NOT BE CONSTRUED TO BE, A NOVATION OF ANY OF THEOBLIGATIONS OWING BY ANY LOAN PARTY UNDER OR IN CONNECTION WITH THE CREDIT AGREEMENT OR ANY OF THE OTHER LOANDOCUMENTS TO WHICH A LOAN PARTY IS A PARTY.[Signature Page Follows] - 11 -IN WITNESS WHEREOF, the Borrower, Holdings, the Subsidiary Loan Parties, the Lenders and the Administrative Agent have caused this ThirdAmendment to Credit Agreement and Waiver to be duly executed by their respective duly authorized officers and representatives as of the day and year firstabove written. INTERACTIVE HOLDING CORP.By :/s/ Yacov KaufmanName: Yacov KaufmanTitle: DirectorBy: /s/ Josef MandelbaumName: Josef MandelbaumTitle: DirectorINCREDITONE INC.By :/s/ Yacov KaufmanName: Yacov KaufmanTitle: Chief Financial OfficerBy: /s/ Josef MandelbaumName: Josef MandelbaumTitle: Chief Executive Officer[Signature Page to Third Amendment tCredit Agreement and Limited Waiver]  INTERCEPT INTERACTIVE INC.By: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial OfficerUUU HOLDING, LLCBy: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial OfficerSPARK FLOW LLCBy: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial OfficerJAMBO MEDIA LLCBy: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial OfficerWORLD WEB NETWORK HOLDING COMPANY, LLCBy: /s/ Michael Waxman-LenzName: Michael Waxman-LenzTitle: Chief Financial Officer [Signature Page to Third Amendment to Credit Agreement and Limited Waiver]  SUNTRUST BANK, in its capacities as a Lender and as Administrative AgentBy: /s/ Kevin CurtisName: Kevin CurtisTitle: Director [Signature Page to Third Amendment to Credit Agreement and Limited Waiver]  SILICON VALLEY BANK, as a Lender By: /s/ Michael Moretti Name: Michael Moretti Title: MD [Signature Page to Third Amendment to Credit Agreement and Limited Waiver]  CADENCE BANK, as a Lender By: /s/ Steve Prichett Name: Steve Prichett Title: EVP [End of Signatures] [Signature Page to Third Amendment to Credit Agreement and Limited Waiver] Exhibit 8 1.IncrediMail Inc., a Delaware corporation2.ClientConnect Ltd., an Israeli company3.Interactive Holding Corp., a Delaware corporation4.IncrediTone Inc., a Delaware corporation EXHIBIT 12.1CERTIFICATIONSI, Yacov Kaufman, certify that:1. I have reviewed this annual report on Form 20-F of Perion Network Ltd.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;4.The Company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the period covered bythe annual report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financialreporting; and5.The Company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internalcontrol over financial reporting.Date: March 7, 2017 /s/ Yacov Kaufman,Interim Chief Executive Officer EXHIBIT 12.2CERTIFICATIONSI, Yacov Kaufman, certify that:1.I have reviewed this annual report on Form 20-F of Perion Network Ltd.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;4.The Company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the period covered bythe annual report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financialreporting; and5.The Company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internalcontrol over financial reporting.Date: March 7, 2017/s/ Yacov KaufmanYacov KaufmanChief Financial Officer EXHIBIT 13.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 20-F of Perion Network Ltd., (the "Issuer"), for the period ended December 31, 2016, as filed with theSecurities and Exchange Commission on the date hereof (the "Report"), I, Yacov Kaufman, Interim Chief Executive Officer of the Issuer, certify, pursuant to18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:1.The Report containing the financial statements fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of1934; and2.Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. /s/ Yacov KaufmanYacov KaufmanInterim Chief Executive OfficerDate: March 7, 2017 EXHIBIT 13.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 20-F of Perion Network Ltd., (the "Issuer"), for the period ended December 31, 2016, as filed with theSecurities and Exchange Commission on the date hereof (the "Report"), I, Yacov Kaufman, Chief Financial Officer of the Issuer, certify, pursuant to 18 U.S.C.§ 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:1.The Report containing the financial statements fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of1934; and2.Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. /s/ Yacov KaufmanYacov KaufmanChief Financial OfficerDate: March 7, 2017  EXHIBIT 15.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements on Form F-3 (Registration Nos. 333-208785 and 333-195794) and FormS-8 (Registration Nos. 333-208278, 333-203641, 333-193145, 333-192376, 333-188714, 333-171781, 333-152010 and 333-133968), of our reports datedMarch 7, 2017, with respect to the consolidated financial statements of Perion Network Ltd. and its subsidiaries, which appear in this Annual Report on Form20-F for the year ended December 31, 2016. /s/ KOST FORER GABBAY & KASIERERTel Aviv, Israel KOST FORER GABBAY & KASIERERMarch 7, 2017 A member of Ernst & Young Global 

Continue reading text version or see original annual report in PDF format above