Perion Network — Interim / Quarterly Report 2016

Sep 7, 2016

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 under the Securities Exchange Act of 1934

For the month of September 2016 (Report No. 1)

Commission File Number: 000-51694

Perion Network Ltd.

(Translation of registrant's name into English)

1 Azrieli Center, Building A, 4th Floor 26 HaRokmim Street, Holon, Israel 5885849 (Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F ☒ Form 40-F ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): N/A

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): N/A

Contents

This Report on Form 6-K of the registrant consists of the following documents, which are attached hereto, and incorporated by reference herein and into the registrant's Registration Statements on Form F-3 (Registration Nos. 333-208785 and 333-195794) and Form S-8 (Registration Nos. 333-208278, 333-203641, 333-193145, 333-192376, 333-188714, 333-171781, 333- 152010 and 333-133968).

Exhibit 99.1: Unaudited Interim Consolidated Financial Statements as of June 30, 2016.

Exhibit 99.2: Operating Results and Financial Review for the six months ended June 30, 2016.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Perion Network Ltd.

By: /s/ Limor Gershoni Levy

Name: Limor Gershoni Levy Title: Corporate Secretary & General Counsel

Date: September 7, 2016

Exhibit Index

Exhibit 99.1: Unaudited Interim Consolidated Financial Statements as of June 30, 2016.

Exhibit 99.2: Operating Results and Financial Review for the six months ended June 30, 2016.

Exhibit 99.1

PERION NETWORK LTD. AND ITS SUBSIDIARIES

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2016

IN U.S. DOLLARS

UNAUDITED

INDEX

	Page
Consolidated Balance Sheets as of December 31, 2015 and June 30, 2016 (unaudited)	F-1
Interim Consolidated Statements of Income for the Six Months Ended June 30, 2015 (unaudited) and 2016 (unaudited)	F-2
Interim Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2015 (unaudited) and 2016 (unaudited)	F-3
Interim Statements of Changes in Shareholders' Equity for the Year Ended December 31, 2015 and Six Months Ended June 30, 2016 (unaudited)	F-4
Interim Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 (unaudited) and 2016 (unaudited)	F-5
Notes to the Interim Consolidated Financial Statements	F-6 - F-21

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands (except share and per share data)

	December 31, 2015		June 30, 2016
		Audited	Unaudited
Assets
Current Assets:
Cash and cash equivalents	\$	17,519	\$ 31,665
Short-term bank deposits		42,442	12,375
Accounts receivable (net of allowance of \$1,063 and \$493 at December 31, 2015 and June 30, 2016)		66,662	54,868
Prepaid expenses and other current assets		17,396	28,556
Total Current Assets		144,019	127,464
Property and equipment, net		12,714	13,659
Intangible assets, net		66,072	54,521
Goodwill		203,693	202,027
Deferred taxes		12,344	4,425
Other assets		3,456	2,041
Total Assets	\$	442,298	\$ 404,137
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable	\$	40,388	\$ 39,492
Accrued expenses and other liabilities		22,857	18,462
Short-term loans and current maturities of long-term loans and convertible debt		23,756	20,740
Deferred revenues		7,731	6,146
Payment obligation related to acquisitions		11,893	20,170
Total Current Liabilities		106,625	105,010
Long-Term Liabilities:
Long- term debt, net of current maturities		46,920	43,724
Convertible debt, net of current maturities		28,371	21,703
Payment obligation related to acquisitions		37,231	22,365
Deferred taxes		19,456	6,591
Other long-term liabilities		3,858	4,652
Total Liabilities		242,461	204,045
Commitments and Contingencies
Shareholders' Equity:
Ordinary shares of ILS 0.01 par value - Authorized: 120,000,000 shares; Issued: 76,157,506 and 76,672,607 shares at December 31, 2015 and
June 30, 2016, respectively; Outstanding: 75,811,487 and 76,326,588 shares at December 31, 2015 and June 30, 2016, respectively		206	207
Additional paid-in capital		227,258	231,654
Treasury shares at cost (346,019 shares at December 31, 2015 and June 30, 2016)		(1,002)	(1,002)
Accumulated other comprehensive income (loss)		(794)	87
Accumulated deficit		(25,831)	(30,854)
Total Shareholders' Equity		199,837	200,092
Total Liabilities and Shareholders' Equity	\$	442,298	\$ 404,137

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

INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

U.S. dollars in thousands (except share and per share data)

	Six months ended June 30,
	2015		2016
Revenues:
Search	\$ 83,712	\$	82,193
Advertising and other	16,994		71,599
Total Revenues	100,706		153,792
Costs and Expenses:
Cost of revenues
Customer acquisition costs and media buy	2,921		8,191
	35,091		69,075
Research and development	10,610		14,503
Selling and marketing	9,252		29,744
General and administrative Depreciation and amortization	10,704		16,796
Impairment, net of change in fair value of contingent consideration	4,432 (2,397)		13,647 -
Restructuring charges	-		728
Total Costs and Expenses	70,613		152,684
Income from Operations	30,093		1,108
Financial expense, net	1,058		5,456
Income (Loss) before Taxes on Income	29,035		(4,348)
Taxes on income	(6,522)		3,993
Net Income (Loss) from Continuing Operations	22,513		(355)
Net loss from discontinued operations	(3,559)		(4,668)
Net Income (Loss)	\$ 18,954	\$	(5,023)
Net Earnings (Loss) per Share - Basic:
Continuing operations	0.32		(0.00) *)
Discontinued operations	(0.05)		(0.06)
Net Earnings (Loss) per Share - Diluted:
Continuing operations	0.32		(0.00) *)
Discontinued operations	(0.05)		(0.06)
Weighted average number of shares continuing and discontinued operations
Basic	70,623,006		76,247,269
Diluted	70,764,019		76,271,789

*) Less than \$0.01

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

INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

U.S. dollars in thousands

	Six months ended June 30,
	2015		2016
Net income (loss)	\$	18,954	\$	(5,023)
Other comprehensive income (loss):
Cash Flow Hedge:
Unrealized gain from cash-flow hedges, net of taxes		435		131
Less: reclassification adjustment for net gains included in net income		-		(102)
Net change		435		29
Change in foreign currency translation		(6)		852
Other comprehensive income:		429		881
Comprehensive Income (loss)	\$	19,383	\$	(4,142)

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

INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

U.S. dollars in thousands (except share data)

	Common stock		Additional paid-in capital	Accum. other comprehensive income (loss)	Retained earnings	Treasury shares	Total shareholders' equity
	Number of Shares	\$	\$	\$	\$	\$	\$
Balance as of December 31, 2014 (audited)	69,202,431	189	203,984	-	42,826	(1,002)	245,997
Issuance of shares related to acquisitions	1,798,837	5	5,574	-	-	-	5,579
Issuance of shares in private placement, net of
issuance cost of \$105	4,436,898	11	10,009	-	-	-	10,020
Stock-based compensation	-	-	7,679	-	-	-	7,679
Exercise of stock options and vesting of restricted
stock units	373,321	1	12	-	-	-	13
Other comprehensive loss	-	-	-	(794)	-	-	(794)
Net loss	-	-	-	-	(68,657)	-	(68,657)
Balance as of December 31, 2015 (audited)	75,811,487	206	227,258	(794)	(25,831)	(1,002)	199,837
Issuance of shares related to acquisitions	290,981	-	675	-	-	-	675
Stock-based compensation	-	-	3,721	-	-	-	3,721
Exercise of stock options and vesting of restricted
stock units	224,120	1	-	-	-	-	1
Other comprehensive income	-	-	-	881	-	-	881
Net loss	-	-	-	-	(5,023)	-	(5,023)
Balance as of June 30, 2016 (unaudited)	76,326,588	207	231,654	87	(30,854)	(1,002)	200,092

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

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

U.S. dollars in thousands

		Six months ended June 30,
	2015		2016
Operating activities:
Net income (loss)	\$ 18,954		\$ (5,023)
Loss from discontinued operations, net	(3,559)		(4,668)
Net income (loss) from continuing operations	22,513		(355)
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,432		13,647
Impairment of intangible assets	4,167		-
Stock-based compensation expense	3,033		3,528
Issuance of ordinary shares related to employees' retention		63	-
Foreign currency translation		-	926
Accrued interest, net	(71)		137
Deferred taxes, net	941		(4,972)
Change in payment obligation related to acquisition	(5,577)		1,207
Fair value revaluation - convertible debt	1,780		1,120
Net changes in operating assets and liabilities:
Accounts receivable, net	12,148		11,470
Prepaid expenses and other	(2,204)		(9,907)
Accounts payable	(5,199)		(570)
Accrued expenses and other liabilities	(13,134)		(2,566)
Deferred revenues	206		(1,576)
Net cash provided by continuing operating activities	23,098		12,089
Net cash used in discontinued operating activities	(3,134)		(4,232)
Net cash provided by operating activities	\$ 19,964		\$ 7,857
Investing activities:
Purchases of property and equipment	\$ (1,387)		\$ (904)
Capitalization of development costs	(1,228)		(2,596)
Charge in restricted cash, net		50	-
Short-term deposits, net	(40,656)		30,067
Cash paid for acquisition, net of cash acquired	(4,533)		-
Net cash provided by (used in) investing activities	\$ (47,754)		\$ 26,567
Financing activities:
Exercise of stock options and restricted share units		14	1
Payments made in connection with acquisition		-	(6,125)
Proceed from short-term loans		-	10,000
Repayment of convertible debt		-	(7,620)
Repayment of short-term loans		-	(13,000)
Repayment of long-term loans	(1,150)		(3,565)
Net cash used in financing activities	\$ (1,136)		\$ (20,309)
Effect of exchange rate changes on cash and cash equivalents	(15)		31
Net increase (decrease) in cash and cash equivalents	\$ (25,807)		\$ 18,378
Decrease in cash and cash equivalents - discontinued activities	(3,134)		(4,232)
Cash and cash equivalents at beginning of period	101,183		17,519
Cash and cash equivalents at end of period	\$ 72,242		\$ 31,665
Supplemental Disclosure of Cash Flow Activities:
Non-cash financing activity of issuance of shares in connection with acquisitions	\$ 4,558		\$ 675
Cash paid during the period for purchase of property and equipment on credit	\$	9	\$ 58

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

U.S. dollars in thousands (except share and per share data)

NOTE 1: GENERAL

• a. Perion Network Ltd. ("Perion") and its wholly-owned subsidiaries (collectively referred to as the "Company"), is a global technology company, providing highquality advertising solutions to brands and publishers, high-impact ad formats that capture consumer attention and drives engagement, branded search providing publishers with engagement and monetization solutions and a unified social and mobile programmatic platform for acquiring and engaging app users.
• b. On February 10, 2015, the Company completed the acquisition of Make Me Reach SAS ("MMR") and on November 30, 2015, completed the acquisition of Interactive Holding Corp and its subsidiaries (collectively referred to as "Undertone").
• c. In March 2016, management has decided to shut down the mobile self-serve side of the business and put up for sale the Growmobile Engagement ("GME") business (see Note 14); Accordingly, the statements of income and statements of cash flow, related to the mobile self-serve and mobile engage operations are classified as discontinued operations for all periods presented. As of June 30, 2015 and 2016, the carrying amounts of the assets and liabilities discontinued were immaterial.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

a. Interim Financial Statements

The accompanying consolidated balance sheet as of June 30, 2016, the consolidated statements of income, the consolidated statements of comprehensive income and the consolidated statements of cash flows for the six months ended June 30, 2015 and 2016, as well as the statement of changes in shareholders' equity for the six months ended June 30, 2016, are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. In the management's opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company's financial position as of June 30, 2016, as well as its results of operations and cash flows for the six months ended June 30, 2015 and 2016. The results of operations for the six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016.

The accompanying unaudited interim financial statements should be read in conjunction with the Company's Annual Report on Form 20-F filed with the Securities and Exchange Commission (the "SEC") on March 24, 2016.

There have been no changes to the significant accounting policies described in the Annual Report on Form 20-F for the fiscal year ended December 31, 2015 that have had a material impact on the unaudited interim consolidated financial statements and related notes.

U.S. dollars in thousands (except share and per share data)

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

b. Use of estimates

The preparation of the consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles ("GAAP") requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, the Company's management evaluates its estimates, including those related to accounts receivable, fair values and useful lives of intangible assets, fair values of stock-based awards, income taxes, and contingent liabilities, among others. Such estimates are based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of the Company's assets and liabilities.

• c. Impact of recently issued accounting standard not yet adopted
  • · In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09) "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)", and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. As currently issued and amended, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, though early adoption is permitted for annual reporting periods beginning after December 15, 2016. The Company is currently in the process of evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements.
  • · 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. The standard is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
  • · In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08) which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. This guidance will be effective for the Company in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. The Company is currently in the process of evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures.

U.S. dollars in thousands (except share and per share data)

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

• · In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-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 the statement of cash flows. This guidance will be effective for the Company in the first quarter of 2017, and early adoption is permitted. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements.
• · In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606). ASU 2016-10 amends ASC 606, Revenue from Contracts with Customers, to clarify two aspects of ASC 606, identifying performance obligations and the licensing implementation guidance, while retaining the related principles of those areas. The amendments in ASU 2016-10 do not change the core principle of the guidance in ASC 606. The amendments in ASU No. 2016-10 affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in ASU No. 2016-10 are the same as the effective date and transition requirements in ASC 606 and any other Topic amended by ASU 2014-09. ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of ASU 2014-09 by one year to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company is currently evaluating the effect that the adoption of ASU 2016-10 will have on its financial statements.
• · In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606). ASU 2016-12 amends ASC 606 to address certain issues in the guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The amendments in ASU 2016-12 do not change the core principle of the guidance in ASC 606. The amendments in ASU No. 2016-12 affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in ASU No. 2016-12 are the same as the effective date and transition requirements in ASC 606 and any other Topic amended by ASU 2014-09. ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of ASU 2014-09 by one year to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company is currently evaluating the effect that the adoption of ASU 2016-12 will have on its financial statements.

U.S. dollars in thousands (except share and per share data)

NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of financial instruments carried at cost, including cash and cash equivalents, short-term deposits, restricted cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses and other liabilities approximate their fair value due to the short-term maturities of such instruments.

The following table present assets and liabilities measured at fair value on a recurring basis as of June 30, 2016:

	June 30, 2016
	Fair value measurements using input type
	Level 1		Level 2		Level 3		Total
Assets:
Derivative assets	\$ -	\$	875	\$	-	\$	875
Total financial assets	\$ -	\$	875	\$	-	\$	875
Liabilities:
Payment obligation in connection with acquisitions	\$ -	\$	-	\$	42,535	\$	42,535
Derivative liabilities	-		49		-		49
Convertible debt	29,309		-		-		29,309
Total financial liabilities	\$ 29,309	\$	49	\$	42,535	\$	71,893

The following table present assets and liabilities measured at fair value on a recurring basis as of December 31, 2015:

		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

U.S. dollars in thousands (except share and per share data)

NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont.)

The following table summarizes the changes in the Company's liabilities measured at fair value using significant unobservable inputs (Level 3), during the six months ended June 30, 2016:

Total fair value as of January 1, 2016	\$ 49,124
Accretion of payment obligation related to acquisition	1,207
Change to payment obligation as a result of working capital adjustment	(1,666)
Settlements	(6,125)
Reclassification to accrued expenses	(5)
Total fair value as of June 30, 2016	\$ 42,535

NOTE 4: GOODWILL

The changes in the carrying amount of goodwill in the six months ended June 30, 2016 were as follows:

Balance as of January 1, 2016	\$ 203,693
Working capital final adjustment as calculated 90 days after closing, pursuant to the Merger Agreement in connection with the Undertone acquisition	(1,666)
Balance as of June 30, 2016 (unaudited)	\$ 202,027

NOTE 5: DERIVATIVES AND HEDGING ACTIVITES

The Company follows the requirements of ASC No. 815, "Derivatives and Hedging" ("ASC 815"), which requires companies to recognize all of their derivative instruments as either assets or liabilities on the balance sheet at fair value. The accounting for changes in fair value (i.e. gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging transaction and further, on the type of hedging transaction. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

To protect against the increase in value of forecasted foreign currency cash flow resulting mainly from salaries and related benefits and taxes paid in New Israeli Shekels ("ILS") during the year, the Company hedges portions of its anticipated payroll denominated in ILS for a period of one to twelve months with forward and options contracts (the "Hedging Contracts"). Accordingly, when the USD strengthens against the ILS, the decline in present value of future ILS currency expenses is offset by losses in the fair value of the Hedging Contracts. Conversely, when the USD weakens, the increase in the present value of future ILS expenses is offset by gains in the fair value of the Hedging Contracts. These Hedging Contracts are designated as cash flow hedges.

U.S. dollars in thousands (except share and per share data)

NOTE 5: DERIVATIVES AND HEDGING ACTIVITES (Cont.)

Additionally, in order to mitigate the potential adverse impact of the fluctuations in the ILS-USD exchange rate in connection with the convertible debt (see note 7), the Company has entered into a cross currency interest rate SWAP agreement (the "SWAP") in order to hedge the future interest and principal payments, which are all denominated in ILS. However, since the convertible debt is measured at fair value at each reporting date, the SWAP does not qualify and was not designated as a cash flow hedge under ASC 815.

In order to limit the Company's interest expenses derives from the secured credit agreement of \$50,000 in which the Company entered concurrently with the closing of the 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 option is designated as cash flow hedge under ASC 815.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any gain or loss on a derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item is recognized in current earnings during the period of change.

As of June 30, 2016 and December 31, 2015, the notional value of the Company's derivative instruments was \$65,452 and \$57,052, respectively.

The fair value of the Company's outstanding derivative instruments is as follows:

	December 31,		June 30,
	2015		2016
	Audited		Unaudited
Derivative assets:
SWAP - convertible debts	\$ 366	\$	750
Option contracts	242		106
Other		-	19
Total assets	\$ 608	\$	875
Derivative liabilities:
Option contracts	\$ 214	\$	49
Total liabilities	\$ 214	\$	49

The Company recorded the fair value of derivative assets in Prepaid expenses and other current assets, and the fair value of derivative liabilities in Accrued expenses and other liabilities on its interim consolidated balance sheets.

U.S. dollars in thousands (except share and per share data)

NOTE 5: DERIVATIVES AND HEDGING ACTIVITES (Cont.)

The increase in unrealized gains recognized in accumulated other comprehensive income on derivatives, is as follows:

		Six months ended June 30,
		2015 Unaudited		2016
				Unaudited
Option contracts	\$	150	\$	131
Forward contracts		285		-
Total unrealized gain	\$	435	\$	131

The net losses reclassified from accumulated other comprehensive loss to the operating expenses are as follows:

		Six months ended June 30,
	2015		2016 Unaudited
	Unaudited
Option contracts	\$	(20)	\$	(16)
Forward contracts		(18)		(86)
Total realized loss	\$	(38)	\$	(102)

NOTE 6: LONG TERM DEBT

1. On March 4, 2016, Undertone entered into an amendment to the secured credit agreement. The amendment to the credit agreement added a \$10,000 revolving loan facility (which includes a \$3,000 swing line loan commitment and \$3,000 letter of credit commitment). Additionally, the amendment postpones the commencement date of a few of Undertone's undertaking and covenants and increases Undertone's ability to invest in some of its subsidiaries. The unpaid principal balance of the credit agreement was \$47,750 as of June 30, 2016.

2. The Company was in compliance with all its financial covenants as of June 30, 2016.

$$_{\mathbb{P}-12}$$

U.S. dollars in thousands (except share and per share data)

NOTE 6: LONG TERM DEBT (Cont.)

1. As of June 30, 2016, the aggregate principal annual maturities are as follows:

	Repayment amount
2016 (six months ending December 31)	\$ 11,650
2017	4,150
2018	5,000
2019	37,750
Total principal payments	58,550
Less: unamortized original issue discount	(1,320)
Present value of principal payments	57,230
Less: current portion	(13,506)
Long-term debt	\$ 43,724

NOTE 7: CONVERTIBLE DEBT

In September 2014, the Company completed a public offering in Israel of its Series L Convertible Bonds (the "Bonds"). The Company issued Bonds with an aggregate par value of approximately ILS 143,500 thousands, out of which, as of June 30, 2016 approximately ILS 114,800 thousands are outstanding, (approximately \$29,846 as of June 30, 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. The proceeds of the offering, before issuance costs of \$741, amounted to \$37,852. The principal of the Bonds, denominated in ILS, is repaid in five equal annual installments commencing 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 on June 30, 2016) from the date of issuance and until March 15, 2020. The ordinary shares issued upon conversion of the Bonds will be listed on the NASDAQ Stock Market ("Nasdaq") and the Tel-Aviv Stock Exchange ("TASE"), to extent that the Company's ordinary shares are listed thereon at the time of conversion. The conversion price is subject to adjustment in the event that the Company effects a share split or reverse share split, a rights offering or a distribution of bonus shares or a cash dividend.

The Company may redeem the Bonds upon delisting of the Bonds from the TASE, subject to certain conditions. In addition, the Company may redeem the Bonds or any part thereof at its discretion after December 1, 2014, subject to certain conditions.

The Company elected to apply the fair value option in accordance with ASC No. 825, "Financial Instruments", to the Bonds and therefore all unrealized gains and losses are recognized in earnings. As of June 30, 2016, the fair value of the Bonds, based on its quoted price at the TASE and including accrued interest of \$372, was \$29,309.

U.S. dollars in thousands (except share and per share data)

NOTE 7: CONVERTIBLE DEBT (Cont.)

The changes of the convertible debt in the six months ended June 30, 2016 were as follows:

Balance as of January 1, 2016	\$ 35,926
Change in accrued interest	835
Change in fair value	1,120
Payment of interest	(952)
Payment of principal	(7,620)
Balance as of June 30, 2016 *	\$ 29,309

* Includes accrued interest of \$372

In order to mitigate the potential adverse impact of the fluctuations in the ILS-USD exchange rate, the Company has entered into a cross currency interest rate SWAP agreement (the "SWAP") in order to hedge the future interest and principal payments, which are all denominated in ILS.

As of June 30, 2016, the Company satisfies all of the financial covenants associated with both, the Bonds and the SWAP.

As of June 30, 2016, the aggregate principal annual payments of the Bonds are as follows:

	Repayment amount
2017	\$ 7,462
2018	7,461
2019	7,462
2020	7,461
	\$ 29,846

NOTE 8: COMMITMENTS AND CONTINGENT LIABILITIES

a. Office lease commitments

In January 2014, the Company entered into a lease agreement for new corporate offices in Holon, Israel. The lease expires in January 2025, with an option for the Company to extend for two additional terms of 24 months each. Additionally, the Company may choose an early termination in November 2019. On September 1, 2014, the Company moved all of its Israeli personnel to Holon.

Certain facilities of the Company are rented under operating lease agreements, which expire on various dates, the latest of which is in 2022. The Company recognizes rent expense under such arrangements on a straight-line basis.

U.S. dollars in thousands (except share and per share data)

NOTE 8: COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

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 June 30, 2016 are as follows:

2016 (six months ending December 31)	\$ 2,996
2017	5,922
2018	5,820
2019	3,548
Thereafter	17,349
	\$ 35,635

b. Contingent purchase obligation

On November 30, 2012, the Company completed the acquisition of 100% of SweetIM's shares. Pursuant to the terms of the Share Purchase Agreement ("SPA") between the Company and SweetIM, the Company was obligated to pay SweetIM's shareholders, among other payments, a payment of up to \$ 7,500 in cash in May 2014, if certain milestones were met (the "Contingent Payment"). The milestones were based on the Company's revenues in 2013, and the absence of certain changes in the industry in which the Company operates. On May 28, 2014, the Company paid \$2,500 on account of the Contingent Payment. Following such payment, on June 22, 2014, SweetIM's Shareholders' representative notified the Company claiming that the Company owes SweetIM's shareholders the entire Contingent Payment. 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 Matters

1. On December 22, 2015, Adtile Technologies Inc. filed a lawsuit against Perion and Intercept Interactive Inc. ("Intercept"), a subsidiary of Interactive Holding Corp., in the United States District Court for the District of Delaware. The lawsuit alleges various causes of action against Perion and Intercept related to Intercept's alleged unauthorized use and misappropriation of Adtile's proprietary information and trade secrets. Adtile is seeking injunctive relief and, unspecified monetary damages. On June 23, 2016, the Court denied Adtile's motion for a preliminary injunction. On June 24, 2016, the Court (i) granted Perion's motion to dismiss, and (ii) granted Intercept's motion to stay the action and compel arbitration. The Company is unable to predict the outcome or range of possible loss at this stage and believes it has strong defenses against this lawsuit and intends to defend against it vigorously.

U.S. dollars in thousands (except share and per share data)

NOTE 8: COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

1. In November 2013, MyMail, Ltd., a non-practicing entity, filed a lawsuit in the Eastern District of Texas alleging that ClientConnect's toolbar technology infringes one of its U.S. patents issued in September 2012 and demanding an injunction and monetary payments. On November 2014, ClientConnect Ltd. filed a petition for inter partes review ("IPR") in the United States Patent & Trademark Office, challenging the patentability of the asserted claims of the patent in question. On January 5, 2016, the parties entered into a settlement agreement regarding, inter alia, the patent claim between the parties, and the case was dismissed on January 8, 2016.

U.S. dollars in thousands (except share and per share data)

NOTE 9: SHAREHOLDERS' EQUITY

a. Ordinary shares

The ordinary shares of the Company entitle their holders to voting rights, the right to receive cash dividend and the right to a share in excess assets upon liquidation of the Company.

b. Private placement

On December 3, 2015 (the "Effective date"), the Company completed a private placement of 4,436,898 ordinary shares for gross proceeds of \$10,125 pursuant to a Securities Purchase Agreement (the "SPA") with Investors. The purchase price per share was \$2.282, which was the average closing 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 the SPA, 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 Investors 782,981 additional ordinary shares (the "Share Settlement"). Under ASC 480 "Distinguish Liabilities from Equity" as the investors could not sell, dispose of or otherwise transfer, directly or indirectly, the Ordinary Shares and retain the right for Share Settlement, it was concluded that the Share Settlement is considered legally as embedded financial instrument. In addition, according to ASC 815-40 "Contracts in Entity's Own Equity", because the only variable that can affect the potential settlement amount is the Company's share price, and since the Company has sufficient authorized and unissued shares exists at the Effective Date and as of June 30, 2016 after taking into account the maximum number of shares that could have been required to be delivered during the contract period under existing commitments, the Share Settlement is classified as a shareholders' equity.

On November 30, 2015, the Company entered into Registration Rights Agreement (the "Agreement") with the Purchaser, pursuant to which the Company shall 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 within timeframe as detailed in the Agreement. If it does not meet the abovementioned registration obligations, the Company may incur liquidated damages equal to the product of 1.0% multiplied by the aggregate Subscription Amount up to 10% of the Subscription Amount. In 2016 the Company paid an amount of \$50 as liquidated damages.

c. Stock Options, Restricted Stock Units and Warrants

The Company's Equity Incentive Plan (the "Plan") was initially adopted in 2003 and had an initial term of ten years from adoption. On December 9, 2012, the Company's Board of Directors extended the term of the Plan for an additional ten years. In addition, on August 7, 2013, the Company's Board of Directors approved amendments to the Plan to 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 is between 1 and 3 years from the date of grant. The rights of the ordinary shares obtained from the

U.S. dollars in thousands (except share and per share data)

NOTE 9: SHAREHOLDERS' EQUITY (Cont.)

exercise of stock options or RSUs are identical to those of the other ordinary shares of the Company.

As of June 30, 2016, there were 5,584,251 ordinary shares reserved for future stock-based awards under the Plan.

The following table summarizes the activities for the Company's service-based stock options for the six months ended June 30, 2016:

				Weighted average
	Number of options		Exercise price	Remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at January 1, 2016	5,467,337	\$	5.30	3.17	\$	1,709
Granted	1,142,000	\$	2.86
Exercised	(200)	\$	2.00
Cancelled	(1,171,407)	\$	4.94
Outstanding at June 30, 2016	5,437,730	\$	4.87	2.67	\$	21
Exercisable at June 30, 2016	1,588,060	\$	8.49	1.78	\$	5

There was no change in the activities for the Company's performance-based stock options for the six months ended June 30, 2016. The outstanding balance at June 30, 2016 is 3,550,000 at a weighted average exercise price of \$2.38 with remaining contractual term of 3.26 years and no intrinsic value.

The following table summarizes the activities for the Company's RSUs for the six months ended June 30, 2016:

	Number of RSUs	Weighted average grant date fair value
Unvested at January 1, 2016	692,320	\$	12.64
Granted	-
Vested	(223,920)	\$	12.64
Cancelled	(9,000)	\$	12.64
Unvested at June 30, 2016	459,400	\$	12.64

In connection with the Undertone acquisition, the Company granted warrants to purchase 200,000 ordinary shares, at a weighted average exercise price of \$3.03 to a third-party vendor that provides development services to Undertone. The weighted average grant date fair value of the warrants granted was \$1.23.

U.S. dollars in thousands (except share and per share data)

NOTE 10: INCOME TAXES

Taxable income of Israeli companies is generally subject to corporate tax at the rate of 26.5%. The corporate tax rate is scheduled to remain at a rate of 26.5% for future tax years.

Israeli companies are entitled to Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (the "Law"). Commencing 2011, Perion and its Israeli subsidiary elected to apply the new Preferred Enterprise benefits under the Law which include reduced tax rates of currently 16.0%.

A significant portion of the Company's income is taxed in Israel and in the U.S. pursuant to the Undertone acquisition on November 30, 2016. The federal statutory income tax rate in the U.S. is 35.0%. Foreign subsidiaries in Europe are taxed according to the tax laws in their respective countries of residence.

The Company recorded an income tax benefit of \$3,993 and tax expenses of \$6,522 for the six months ended June 30, 2016 and 2015, respectively. The decrease in income taxes is primarily a result of the decrease in the income before tax which is attributable to three factors; the transition to the current search rev-share model, replacing the search revenues that were without expense in 2015, a \$9,215 increase in depreciation and amortization expenses, primarily from intangible assets acquired with Undertone, a \$4,398 increase in financial expenses also primarily associated with financing the Undertone operation.

The effective tax rate was 91.8% and 34.8% for the six months ended June 30, 2016 and 2015, respectively. The comparison of our effective tax rate between periods is significantly impacted by the level of pre-tax income earned and the mix between the different jurisdictions.

U.S. dollars in thousands (except share and per share data)

NOTE 11: EARNINGS PER SHARE

The table below presents the computation of basic and diluted net earnings per common share:

	Six months ended June 30,
		2015		2016
Numerator:
Net income (loss) attributable to ordinary shares - basic and diluted	\$	22,513	\$	(355)
Net loss from discontinued operations - basic and diluted		(3,559)		(4,668)
	\$	18,954	\$	(5,023)
Denominator:
Number of ordinary shares outstanding during the period		70,623,006		76,247,269
Weighted average effect of dilutive securities:
Shares to be issued in connection with acquisition		64,697		-
Employee stock options and restricted stock units		76,316		24,520
Diluted number of ordinary shares outstanding - Continuing and discontinued operations		70,764,019		76,271,789
Basic and diluted net earnings (loss) per ordinary share:
Continuing operations	\$	0.32	\$	(0.00) *)
Discontinuing operations		(0.05)		(0.06)
Net income (loss)	\$	0.27	\$	(0.06)
Ordinary shares equivalents excluded because their effect would have been anti-dilutive		9,967,014		13,040,436

*) Less than \$0.01

NOTE 12: MAJOR CUSTOMER

The following table sets forth one customer that represented more than 10% of the Company's total revenues in each of the periods presented below:

	Six months ended June 30,
2015	2016
90%	52%

U.S. dollars in thousands (except share and per share data)

NOTE 13: GEOGRAPHIC INFORMATION

The following table presents the total revenues for the six months ended June 30, 2015 and 2016, allocated to the geographic areas in which it was generated:

		Six months ended June 30,
		2015		2016
	Unaudited		Unaudited
North America (mainly U.S.)	\$	78,592	\$	138,866
Europe		17,952		7,077
Other		4,162		7,849
	\$	100,706	\$	153,792

Revenues are attributed to geographic areas based on the location of the end-users.

The following table presents the locations of the Company's property and equipment as of December 31, 2015 and June 30, 2016:

		December 31, 2015		June 30, 2016
	Audited			Unaudited
Israel	\$	9,161	\$	8,589
U.S.		3,071		4,733
Europe		482		337
	\$	12,714	\$	13,659

NOTE 14: SUBSEQUENT EVENTS

• 1. On July 25, 2016, the Company executed an Asset Purchase Agreement, according to which, the Company sold GME business operation including the intellectual property, know-how and technology primarily related to GME, for a total consideration of \$1.75 million, as part of the Company's execution of its decision during March 2016, to re-focus its business (see note 2d).
• 1. On August 2, 2016, the Company executed an amendment to the Agreement and Plan of Merger dated November 30, 2015 in connection with the Undertone acquisition (the "Merger Agreement"), pursuant to which, the Company paid \$22 million and eliminated approximately \$36 million of future payment obligations due under the Merger Agreement.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS IN CONNECTION WITH THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2016

In this report, as used herein, and unless the context suggests otherwise, the terms "Perion," "Company," "we," "us" or "ours" refer to Perion Network Ltd. and subsidiaries. References to "dollar" and "\$" are to U.S. dollars, the lawful currency of the United States, and references to "ILS" are to New Israeli Shekels, the lawful currency of the State of Israel. This report contains translations of certain ILS amounts into U.S. dollars at specified rates solely for your convenience. 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 exchange rate of ILS 3.846 to \$1.00, the representative exchange rate reported by the Bank of Israel on June 30, 2016.

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements as of and for the six months ended June 30, 2015 and 2016 and the notes thereto (the "Financial Statements"), which were filed with the Securities and Exchange Commission (the "SEC") on this report on Form 6-K on September 7, 2016. In addition to historical financial information, the following discussion and analysis contains forward looking statements within the meaning of Section 27A of the Securities Act 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 looking statements involve risks, uncertainties and assumptions. Our actual results, including the timing of future events, may differ materially from those anticipated in these forward looking statements as a result of many factors, including those discussed in our 2015 annual report on Form 20-F filed with the SEC on April 16, 2016 (the "Annual Report") and elsewhere in this report.

Overview

Perion is a global technology company that delivers high-quality advertising solutions to brands and publishers. Perion is committed to providing outstanding execution, from high-impact ad formats to branded search and a unified social and mobile programmatic platform.

On February 10, 2015, the Company completed the acquisition of Make Me Reach SAS ("MMR") and on November 30, 2015, completed the acquisition of Interactive Holding Corp. and its subsidiaries (collectively referred to as "Undertone").

Our headquarters and primary research and development facilities are located in Israel, and we have other offices located in the United States and Europe.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with Generally Accepted Accounting Principles in the United States ("U.S. GAAP"). In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors.

Please see Note 2 of this report on Form 6-K for a summary of significant accounting policies. In addition, please see Part I, Item 5, "Critical Accounting Policies and Estimates" in the Annual Report.

Recently Adopted and Issued Accounting Pronouncements

See the notes to the Financial Statements.

Legal Proceedings

We are involved in various litigation and other legal proceedings. For a discussion of these matters, see "Contingencies" included in note 8 to the Financial Statements.

Results of Operations

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Revenues

The following table shows our revenues by category (in thousands of U.S. dollars):

	Six months ended June 30,
	2015		2016
Search	\$ 83,712	\$	82,193
Advertising and other	16,994		71,599
Total Revenues	\$ 100,706	\$	153,792

Revenues increased by 53% in the first half of 2016 from the first half of 2015, primarily due to the addition of the Undertone operation since the acquisition on November 30, 2015 as discussed below:

Search revenues. Search revenues have been substantially stable since the first quarter of 2015 albeit at a different mix, decreasing by 2%, in the first half of 2016 from the first half of 2015. The decision to reduce customer acquisition costs starting from the third quarter of 2014, reduced the tail of revenues going into 2015 and 2016 and we expect further decline in the tail of revenues over time. However, we have substantially offset that decrease through our search syndication services based on a revenue sharing basis, revenues from which have increased.

We expect search revenues to continue and contribute a substantial part of our revenues in the second half of 2016 and beyond.

Advertising and other revenues. Advertising and other revenues increased by 321%, primarily as a result of the Undertone acquisition on November 30, 2015. Undertone, through its proprietary cross screen formats, quality media and innovative technology, delivers standout brand experiences.

As we look forward, we expect most of our future growth to come from differentiated advertising.

Costs and Expenses

The following table shows costs and expenses by category (in thousands of U.S. dollars):

	Six months ended June 30,
		2015		2016
Cost of revenues	\$	2,921	\$	8,191
Customer acquisition costs and media buy		35,091		69,075
Research and development		10,610		14,503
Selling and marketing		9,252		29,744
General and administrative		10,704		16,796
Depreciation and amortization		4,432		13,647
Restructuring costs		-		728
Impairment, net of change in fair value of contingent consideration		(2,397)		-
Total Costs and Expenses	\$	70,613	\$	152,684

Cost of revenues

Cost of revenues consists primarily of salaries and related expenses, license fees and payments for content and server maintenance.

Cost of revenues increased from 3% of revenues in the six months ended June 30, 2015, to 5% of revenues in the six months ended June 30, 2016, primarily due to the cost of revenues associated to the Undertone operation. Looking forward, we expect cost of revenues to remain at its current level.

Customer acquisition costs and media buy

Customer acquisition costs ("CAC") consist primarily of payments to publishers and developers who distribute our search properties together with their products, as well as the cost of distributing our own products. These amounts are primarily based on revenue share agreements with our traffic sources. Media buy costs consist mainly of the costs of advertising inventory incurred to deliver ads.

CAC and media buy increased from 35% of revenues in the six months ended June 30, 2015 to 45% of revenues in the six months ended June 30, 2016, primarily due to our transitioning to the current search revenue-share model, replacing the search revenues that were without expense in 2015, and have substantially decreased since then. The nominal increase was also due to the media buy costs associated with the Undertone revenues included in the results for the first half of 2016.

Research and development expenses ("R&D")

R&D consists primarily of salaries and other personnel-related expenses for employees primarily engaged in developing our products, our search monetization tools and our advertising business, as well as allocated facilities costs, subcontractors and consulting fees in connection with our development activities.

R&D decreased from 11% of revenues in the six months ended June 30, 2015 to 9% of revenues in the six months ended June 30, 2016, primarily as a result of our decision to reduce somewhat our development efforts and shift our investments towards marketing. The nominal increase in R&D is primarily associated with our Undertone operation, partially offset by the capitalized expenses of \$2.6 million in the first half of 2016.

Selling and marketing expenses ("S&M")

S&M consists primarily of salaries and other personnel-related expenses for employees primarily engaged in sales and marketing activities, allocated facilities costs, as well as other outsourced marketing activity.

S&M increased from 9% of revenues in the first half of 2015, to 19% of revenues in the first half of 2016, primarily as a result of consolidating our Undertone operation, where S&M activity is much more substantial. Looking forward, we expect S&M to remain substantially at the current level as a percentage of revenues.

General and administrative expenses ("G&A")

G&A consists primarily of salaries and other personnel-related expenses for general executive, financial, legal, human resources, and other administrative personnel, as well as professional services, including investor relations, legal, accounting and other consulting services, insurance fees and other general corporate expenses.

G&A as percentage of revenues remained stable, representing 11% of revenues in both periods. The nominal increase is primarily attributable to G&A costs at Undertone, which was acquired on November 30, 2015. We expect G&A to decrease somewhat in the second half of 2016.

Restructuring costs

In October 2015, the Company initiated a restructuring plan of one of its consumer app development projects, reducing headcount, closing certain facilities and taking other cost saving measures. In the six months ended June 30, 2016, we incurred \$0.4 million in costs associated with these facilities and \$0.3 million of service-based payroll and related costs.

Depreciation and amortization

The increase in depreciation and amortization is primarily attributable to the amortization of the acquired intangible assets from the Undertone acquisition.

Impairment, net of change in fair value of contingent consideration

• · In July 2015, we entered into an agreement with Grow Mobile's former security holders and their representative, which amends the acquisition agreement that was signed in July 2014 (the "Amendment"). The Amendment canceled the additional milestone-based contingent consideration that could have been paid to Grow Mobile's security holders under certain conditions and, in exchange, we paid \$1.5 million in cash and \$1.0 million in the form of 315,263 shares (the "Release Payment"). As a result of the Amendment, we recorded a net gain of \$6.6 million, comprised of the reversal of the previously accrued contingent payment in the amount of \$9.1 million, net of the \$2.5 million accrual of the Release Payment.
• · In June 2015, we performed an impairment review of several intangible assets that were recognized in connection with the acquisition of Grow Mobile, which resulted in impairments of \$4.2 million.

Taxes on income

Taxable income of Israeli companies is generally subject to corporate tax at the rate of 26.5%. The corporate tax rate is scheduled to remain at a rate of 26.5% for future tax years.

Israeli companies are entitled to Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (the "Law"). Commencing on 2011, Perion and its Israeli subsidiary elected to apply the new Preferred Enterprise benefits under the Law which include reduced tax rates of 16.0%.

A significant portion of our income is taxed in Israel and in the U.S. pursuant to the Undertone acquisition on November 30, 2016. The federal statutory income tax rate in the U.S. is 35.0%. Foreign subsidiaries in Europe are taxed according to the tax laws in their respective countries of residence.

We recorded an income tax benefit of \$4.0 million and tax expenses of \$6.5 million for the six months ended June 30, 2016 and 2015, respectively. The decrease in income taxes is primarily a result of the decrease in the income before tax which is attributable to three factors; the aforementioned transition to the current search revenue-share model, replacing the search revenues that were without expense in 2015, a \$9.2 million increase in depreciation and amortization expenses, primarily from intangible assets acquired with Undertone, a \$4.4 million increase in financial expenses also primarily associated with financing the Undertone operation.

The effective tax rate was 91.8% and 34.8% for the six months ended June 30, 2016 and 2015, respectively. The comparison of our effective tax rate between periods is significantly impacted by the level of pre-tax income earned and the mix between the different jurisdictions.

Net income from continuing operations

Net income from continuing operations decreased by \$22.9 million, from \$22.5 million in the six months ended June 30, 2015 to a loss of \$0.4 million in the six months ended June 30, 2016. The decrease is due primarily to three factors: the aforementioned transition to the current search revenue share model, replacing the search revenues that were without expense in 2015, a \$9.2 million increase in depreciation and amortization expenses, primarily from intangible assets acquired with Undertone; and a \$4.4 million increase in financial expenses also primarily associated with financing our Undertone operation.

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 a result, we classified these operations as discontinued operations reported separately for all periods presented.

On July 25, 2016, the Company sold the mobile engage business, including the intellectual property, know-how and technology, for total consideration of \$1.75 million.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2016, we had \$44.0 million in cash, cash equivalents and short-term deposits, compared to \$60.0 million at December 31, 2015. The \$16.0 million decrease is the result of: \$14.2 million repayment of long term debt, \$6.1 million cash paid for the acquisition of Undertone; and \$3.5 million used in other investing activities partially offset by \$7.9 million cash provided by operating activities.

Our cash flows were in summary as follows (in thousands of U.S. dollars):

	Six months ended June 30,
	2015		2016
Net cash provided by continuing operating activities	\$ 23,098	\$	12,089
Net cash used in discontinued operating activities	(3,134)		(4,232)
Net cash provided by (used in) investing activities	(47,754)		26,567
Net cash used in financing activities	(1,136)		(20,309)
	\$ (28,926)	\$	14,115

Net cash provided by continuing operating activities

In the six months ended June 30, 2016, our continuing operating activities provided cash in the amount of \$12.1 million, primarily due to our net loss of \$0.4 million, increased by non-cash depreciation and amortization of \$13.6 million, non-cash share-based compensation expenses of \$3.5 million, non-cash payment obligations related to the acquisition of a \$1.2 million, non-cash foreign currency translation loss on inter-company balances, denominated in other currencies than U.S dollars, with subsidiaries of \$0.9 million, change in fair value of convertible debt of \$1.1 million and other non-cash operating expenses of \$0.6 million, partially offset by net changes of \$3.4 million in operating assets and liabilities and a decrease of \$5.0 million in deferred taxes.

In the six months ended June 30, 2015, our continuing operating activities provided cash in the amount of \$23.1 million, primarily due to our net income of \$22.5 million, increased by non-cash depreciation and amortization of \$4.4 million, impairment loss of \$4.2 million, non-cash share-based compensation expenses of \$3.0 million, a change in the fair value of convertible debt of \$1.8 million and other non-cash operating expenses of \$1.2 million, partially offset by a non-cash payment obligation related to acquisition of \$5.6 million and a decrease of \$8.4 million in deferred taxes.

Net cash provided by (used in) investing activities

In the six months ended June 30, 2016, our investing activities provided cash in the amount of \$26.6 million, primarily due to \$30.1 million proceeds from maturities of short-term bank deposits, partially offset by \$2.6 million invested in capitalized development costs and \$0.9 million invested in the purchase of property and equipment.

In the six months ended June 30, 2015, we used in our investing activities cash in the amount of \$47.8 million, primarily for \$40.7 million investments in short-term bank deposits, \$4.5 million used for the acquisition of MMR, \$1.4 million invested in the purchase of property and equipment and \$1.2 million for the capitalization of development costs.

Net cash used in financing activities

In the six months ended June 30, 2016, we used in our financing activities cash in the amount of \$20.3 million, primarily for \$7.6 million repayment of our convertible bonds, \$6.1 million used for the repayment of obligations related to the Undertone acquisition, \$3.6 million repayments of long-term loans and \$3 million repayments of short-term loans, net.

In the six months ended June 30, 2015, our financing activities used \$1.1 million for repayments of long-term loans.

Credit Facilities

On May 17, 2012, we entered into a loan agreement, with two Israeli banks, based on which we borrowed \$10.0 million. In December 2014 we executed 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 regards to the future interest and principal payments of our convertible bonds (described below), which are all denominated in ILS. In April 1, 2015, we amended the agreement in regards to the financial covenants to secure the fulfillment of all the obligations, liabilities and indebtedness, effective December 31, 2014. As of June 30, 2016, we have fully repaid one of the loans, and the outstanding balance in the amount of \$0.8 million will be repaid by April 2017. The agreement contains various provisions including compliance with certain financial covenants, restrictive covenants, including negative pledges, and other commitments, typically contained in facility agreements of this type.

On November 22, 2015, we secured \$19.9 million under a new credit facility from an Israeli bank. The credit facility is secured by a lien on the accounts receivable of ClientConnect, an Israeli subsidiary, from its current and future business clients and is guaranteed by Perion. The credit facility is available until November 2016. As of June 30, 2016, the unpaid balance of the credit facility was \$10.0 million bearing interest of LIBOR + 1.2%.

On November 30, 2015, concurrently with the closing of the Undertone acquisition, Interactive Holding Corp. entered into a new secured credit agreement for \$50.0 million, due in quarterly installments from March 2016 to November 2019. The installments start in the amount of \$0.6 million, increase to \$1.25 million in March 2018 and require a final payment upon maturity in the amount of \$35.0 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 in the Undertone group and by guarantees of such companies. The credit agreement is not guaranteed by Perion, but it is secured by a pledge on Perion's indemnification rights under the Undertone acquisition agreement. On March 4, 2016, Undertone entered into an amendment to the secured credit agreement. The amendment to the credit agreement added a \$10.0 million revolving loan facility (which includes a \$3.0 million swing line loan commitment and \$3.0 million letter of credit commitment). Additionally, the amendment postpones the commencement date of a few of Undertone's undertakings and covenants and increases Undertone's ability to invest in some of its subsidiaries. The loan is required to be prepaid in certain circumstances, such as from proceeds of asset sales or casualty insurance policies, debt or equity offerings, or from excess cash flow in the event that Undertone's total leverage ratio exceeds specified targets, and a pro rata portion of indemnification payments under our merger agreement with Undertone. As of June 30, 2016, the unpaid principal balance of the credit agreement was \$47.8 million.

Under the Undertone credit agreement, Undertone is required to maintain financial covenants as of the end of each fiscal quarter as defined in the agreement. In addition, the 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 leaseback transactions. It also contains customary events of default, including a "change in control", which is defined to include, among other things, the acquisition of record or beneficial ownership by any person or group of 35% or more of Perion's outstanding ordinary shares or the failure of continuing directors to constitute a majority of Perion's board of directors over a period of 24 consecutive months.

The Company was in compliance with all its financial covenants as of June 30, 2016.

On August 2, 2016, the Company executed an amendment to the Agreement and Plan of Merger dated November 30, 2015 in connection with the Undertone acquisition, pursuant to which, we paid \$22 million and eliminated approximately \$36 million of future payment obligations due under the agreement.

Series L Convertible Bonds

On September 23, 2014, we completed a public offering in Israel of Series L Convertible Bonds (the "Bonds"). We issued Bonds with an aggregate par value of approximately ILS 143.5 million, out of which, as of June 30, 2016 approximately ILS 114.8 million are outstanding (approximately \$29.8 million). The Bonds, which are listed on the Tel Aviv Stock Exchange, are convertible into an aggregate of approximately 3.42 million ordinary shares, at a conversion price of ILS 33.605 per share (approximately \$8.74 per share as of June 30, 2016). The principal of the Bonds is repayable in five equal annual 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, subject to increase to up to 6% in the event of downgrades of our debt rating. The interest is payable semi-annually on March 31 and September 30 of each of the years 2015 through 2019, as well as a final payment on March 31, 2020.

The Company may redeem the Bonds upon delisting of the Bonds from the TASE, subject to certain conditions. In addition, the Company may redeem the Bonds or any part thereof at its discretion, subject to certain conditions.

As of June 30, 2016, we were in compliance with all of the financial covenants governing the Bonds.

Private placement

On December 3, 2015, we completed a private placement of 4,436,898 ordinary shares for gross proceeds of \$10.1 million (\$10.0 million net of legal fees) pursuant to a securities purchase agreement with J.P. Morgan Investment Management Inc., as investment advisor to the National Council for Social Security Fund and 522 Fifth Avenue Fund L.P. (the "Investors"). According to a one-time price adjustment mechanism in the agreement, on September 1, 2016, the per share purchase price was adjusted downward by 15.0%, and the Company issued to the Investors 782,981 additional ordinary shares.

Financing Needs

We believe that our current working capital and cash flow from operations are sufficient to meet our operating cash requirements for at least the next twelve months, including payments required under our existing bank loans and convertible bonds.