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
The
following selected financial data should be read in conjunction with “Item 5 Operating and Financial Review and Prospects”
and the Financial Statements and Notes thereto included elsewhere in this Annual Report.
We
have derived the consolidated statement of operations data for the years ended December 31, 2016, 2015 and 2014 and the balance
sheet data as of December 31, 2016 and 2015 from our audited financial statements included elsewhere in this Annual Report. We
have derived the balance sheet data as of December 31, 2014 and 2013 and the consolidated statement of operations data for the
year ended December 31, 2013 from our audited financial statements not included in this Annual Report. Selected financial data
as of, and for the year ended, December 31, 2012 has been omitted from this Annual Report because of our status as an emerging
growth company under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and as per related guidance
provided by the SEC. Our financial statements have been prepared in accordance with US GAAP.
In
our consolidated financial statements for the year ended December 31, 2015, our consolidated financial statements as of December
31, 2014 and for the two years in the period then ended were restated to reflect correction of errors with respect to previously
unrecognized commissions due to a vendor on revenues that were recognized in 2014, 2013 and 2012; improper allocation and timing
of revenue recognition from connection to supportive infrastructure in multiple element sale transactions recognized in 2014,
2013 and 2012; and previously unrecognized commissions due to a third party on cost of revenues that were recognized in 2014.
Certain
factors that affect the comparability of the information set forth in the following table are described in “Item 5 Operating
and Financial Review and Prospects” and the Financial Statements and related notes thereto included elsewhere in this Annual
Report.
(U.S. dollars; in thousands, except per share data)
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
16,508
|
|
|
|
52,151
|
|
|
|
21,444
|
|
|
|
5,903
|
|
Cost of revenues
|
|
|
8,616
|
|
|
|
29,654
|
|
|
|
13,968
|
|
|
|
4,785
|
|
Gross profit
|
|
|
7,892
|
|
|
|
22,497
|
|
|
|
7,476
|
|
|
|
1,118
|
|
Sales and marketing expenses
|
|
|
5,323
|
|
|
|
3,305
|
|
|
|
3,064
|
|
|
|
665
|
|
General and administrative expenses
|
|
|
9,662
|
|
|
|
1,317
|
|
|
|
469
|
|
|
|
419
|
|
Operating income (loss)
|
|
|
(7,094
|
)
|
|
|
17,875
|
|
|
|
3,943
|
|
|
|
34
|
|
Financial expenses (income) net
|
|
|
(127
|
)
|
|
|
99
|
|
|
|
(269
|
)
|
|
|
371
|
|
Income (loss) before income tax
|
|
|
(6,967
|
)
|
|
|
17,776
|
|
|
|
4,212
|
|
|
|
(337
|
)
|
Income tax expenses (benefit)
|
|
|
1,086
|
|
|
|
3,023
|
|
|
|
1,090
|
|
|
|
(57
|
)
|
Net and comprehensive income (loss)
|
|
|
(8,053
|
)
|
|
|
14,753
|
|
|
|
3,122
|
|
|
|
(280
|
)
|
Weighted-average ordinary shares outstanding - basic and diluted
|
|
|
24,582,874
|
|
|
|
24,582,874
|
|
|
|
24,582,874
|
|
|
|
24,582,874
|
|
Basic and diluted income (loss) per share*
|
|
|
(0.33
|
)
|
|
|
0.60
|
|
|
|
0.13
|
|
|
|
(0.01
|
)
|
Dividends paid**
|
|
|
—
|
|
|
|
(14,951
|
)
|
|
|
(817
|
)
|
|
|
(231
|
)
|
|
|
As of December 31,
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|
|
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2016
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|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Balance Sheet Data:
|
|
|
|
|
|
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|
|
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Cash and cash equivalents
|
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11,840
|
|
|
|
25,829
|
|
|
|
11,709
|
|
|
|
376
|
|
Total current assets
|
|
|
30,247
|
|
|
|
33,820
|
|
|
|
14,262
|
|
|
|
2,977
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|
Total non-current assets
|
|
|
1,588
|
|
|
|
12,769
|
|
|
|
870
|
|
|
|
1,007
|
|
Total assets
|
|
|
31,835
|
|
|
|
46,589
|
|
|
|
15,132
|
|
|
|
3,984
|
|
Total current liabilities
|
|
|
21,888
|
|
|
|
16,552
|
|
|
|
13,150
|
|
|
|
4,972
|
|
Total non-current liabilities
|
|
|
245
|
|
|
|
12,282
|
|
|
|
257
|
|
|
|
409
|
|
Total liabilities
|
|
|
22,133
|
|
|
|
28,834
|
|
|
|
13,407
|
|
|
|
5,381
|
|
Total shareholders’ equity (deficit)
|
|
|
9,702
|
|
|
|
17,755
|
|
|
|
1,725
|
|
|
|
(1,397
|
)
|
Total liabilities and shareholders’ equity
|
|
|
31,835
|
|
|
|
46,589
|
|
|
|
15,132
|
|
|
|
3,984
|
|
*
|
We compute basic earnings
or loss per share by dividing net income by the weighted-average number of ordinary shares outstanding during the period.
However, consistent with the accounting for the Business Combination as a reverse merger, the calculation of the weighted-average
number of ordinary shares (i) includes 24,582,874 ordinary shares assumed to be outstanding as of January 1, 2013 (which include
480,000 ordinary shares that were issued to the former ASM shareholder upon exercise of his put option in respect of the ASM
shares that were not acquired by us at the consummation of the Business Combination); and (ii) excludes 1,173,267 outstanding
ordinary shares that are subject to the put option of Messrs. Hurgin and Aurovsky. For purposes of diluted income (loss) per
share, as our outstanding warrants to purchase 8,557,125 ordinary shares are “out- of- the- money” and the issuance
of up to 8,450,000 additional ordinary shares pursuant to the earn-out under the merger agreement was not probable at any
given period, such shares and warrants were excluded from the calculation of diluted income (loss) per share. For additional
information, see Note 2.l. to the audited consolidated financial statements for the year ended December 31, 2016 included
elsewhere in this Annual Report.
|
**
|
Dividends paid by
Ability prior to the consummation of the Business Combination on December 23, 2015.
|
B.
Capitalization and Indebtedness
Not
applicable.
C.
Reasons for the Offer and Use of Proceeds
Not
applicable.
D.
Risk Factors
You
should consider carefully the risks and uncertainties described below, together with all of the other information in this Annual
Report, including the consolidated financial statements and the related notes included elsewhere in this Annual Report. The risks
and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or
that we currently believe are not material, may also become important factors that adversely affect our business. If any of the
following risks actually occurs, our business, financial condition, results of operations and future prospects could be materially
and adversely affected.
Risk
Related to our Business and Our Financial Position
The report of our independent
registered public accounting firm contains an explanatory paragraph regarding substantial doubt about our ability to continue as
a going concern.
Our audited financial
statements for the year ended December 31, 2016 were prepared under the assumption that we would continue our operations as a
going concern. Our independent registered public accounting firm has included a “going concern” explanatory paragraph
in its report on our financial statements for the year ended December 31, 2016, indicating that there is a substantial doubt about
our ability to continue as a going concern. As of December 31, 2016, we had total cash and cash equivalents of $11.8 million and
working capital of $8.4 million. See “Item 5.B Liquidity and Capital Resources”. If we are not successful in implementing
our cost reduction program described below or are otherwise unable to improve our liquidity position, by, among others things,
increasing our revenues, raising capital through public or private offerings or reducing our expenses, we may exhaust our cash
resources and will be unable to continue our operations. If we cannot continue as a viable entity, our shareholders would likely
lose most or all of their investment in us.
We
are currently implementing a cost reduction program, which there is no certainty that will be successful.
We
are currently implementing a cost reduction program that focuses on efficiently reducing our operational expenses, including our
engagements with our various service providers. Such plan reflects assumptions and analyses based on our experience and perception
of current conditions and expected future developments as well as other factors that we consider appropriate under the circumstances.
We cannot assure you that we will be successful in implementing such cost reduction program or that the outcome of such program
will be as we expect.
Our
revenues highly depend on the successful implementation and customer adoption of ULIN, the customer adoption of which has been
limited.
In
November 2015, we introduced ULIN, a product based on a new technology allowing for the interception of communication in GSM,
UMTS and LTE cellular networks without, in most cases, the involvement of mobile network operators. We expected that ULIN would
be a major growth driver of our sales and revenues. However, since the introduction of ULIN, customer adoption of ULIN has been
much slower than we had anticipated, and while we have seen significant interest in ULIN and its advanced capabilities, we had
completed only one ULIN sale as of December 31, 2016. We believe that the limited customer adoption to date of ULIN, notwithstanding
its competitive advantages over tactical interception solutions, is primarily due to its increased costs compared to such tactical
interception solutions, as well as the market’s desire for a product capable of intercepting data communication in addition
to cellular communication, and ULIN’s inability to intercept cellular communication within some network operators. We believe
that continued increase in usage of new communication channels and the technological developments in the cellular communications
industry (such as an increased number of cellular networks, mobile operators and frequencies), which have resulted in tactical
cellular interception systems becoming more complex and expensive, will contribute to the competitive strength and distinctiveness
of ULIN, which in turn will result in an increased demand for ULIN. However, we cannot assure you that the market or demand for
ULIN will grow as we believe (if at all). See Item 5.D “Trend Information” for a more complete discussion regarding
the changes in the cellular interception industry.
Furthermore,
ULIN sales cycles have taken longer than expected to complete. We believe that the significant increase in the length of the ULIN
sales cycle compared to our legacy tactical interception solutions is primarily due to the difficulties described above and the
lengthy purchasing approval processes for ULIN, oftentimes requiring the approval of the most senior levels of government.
Our
ULIN offering has and will continue to require significant attention from our management and other key personnel and may require
expansion of our sales network to accommodate the higher value and complexity of ULIN sales as well as the currently expected
demand.
Furthermore,
since the introduction of ULIN, while we have continued to offer our legacy tactical cellular interception solutions, we have
experienced a significant decline in sales of our existing portfolio of solutions and products within the cellular interception
category and we cannot assure you that ULIN will not render a substantial percentage of our existing product portfolio obsolete.
In addition, increased usage of new communication channels and technological developments in the cellular communications industry
(such as an increased number of cellular networks, mobile operators and frequencies) have resulted in cellular interception systems
becoming more complex, expensive and limited in their interception capabilities, which we believe in turn have also had an adverse
effect on sales of our legacy tactical cellular interception solutions. If we are unable to achieve increased customer adoption
of ULIN, our business, financial condition and results of operations would be materially adversely affected.
Slow
customer adoption and extended sales cycles of ULIN, as well as decline in sales of our existing portfolio of solutions and products,
resulted in a 68% decrease in revenues for the year ended on December 31, 2016 compared to the year ended on December 31, 2015.
For more information, see “Item 5. Operating and Financial Review and Prospects.”
ULIN
sales are depended on a reseller agreement with one supplier, which automatically terminates in October 2018.
Our
ULIN sales are based on a reseller agreement granting us a worldwide exclusive right to sell ULIN, which agreement automatically
terminates in October 2018 and may be terminated by either party under certain specific circumstances. We may not be able to extend
the agreement or may not be able to do so on terms favorable to us. See “Item 4. Information on the Company - Business Overview
- Manufacturing and Suppliers” for a description of the agreement. The ULIN supplier is a third party supplier and, as such,
we have no ability to exert any influence over the business or employees of the supplier. Further, the supplier is a recently
established corporation with a short operating history and is unknown in the industry. If the supplier ceases operations or is
unable to deliver ULIN in the quantities and requisite quality required by us, is unable to attract or retain its key personnel
or fails to adequately upgrade and develop ULIN in order for it to remain competitive, our business, financial condition and results
of operations could be materially adversely affected. Further, during the term of the reseller agreement, we must obtain the supplier’s
consent to, among other things, manufacture, sell or market any product which is competitive with ULIN. If the supplier does not
give its timely consent to any such action, our business, financial condition and results of operations would be materially adversely
affected.
We
are under an investigation by the SEC, which could divert management's focus, result in substantial investigation expenses, monetary
fines and other possible remedies and have an adverse impact on our reputation and financial condition and results of operations.
As
we disclosed in our Report on Form 6-K submitted to the SEC on February 16, 2017, we received a subpoena from the SEC. The subpoena
requests, among other things, information regarding the transaction with Cambridge Capital Acquisition Corporation, the restatement
that occurred in May 2016, and financial and business information. As a result of the investigation, we may incur significant
legal and accounting expenses. Furthermore, we cannot predict what, if any, actions the SEC may take, or the timing or duration
of the investigation. While the SEC has informed us that this investigation and the subpoena do not mean that the SEC has concluded
that anyone has broken the law or that the SEC has a negative opinion of any person, entity or security, publicity surrounding
the foregoing, or any SEC enforcement action or settlement as a result of the SEC's investigation, even if ultimately resolved
favorably for us, could have an adverse impact on our reputation, business, financial condition, results of operations or cash
flows.
Adverse
outcomes in our outstanding litigation matters, or in new litigation matters that arise in the future, could
negatively affect our business, results of operations, financial condition and cash flows.
Our
financial condition could be negatively affected by unfavorable results in our outstanding litigation matters or in
lawsuits that may be initiated in the future. For our outstanding litigation matters see “Item 8A. Financial Information
— Consolidated Statements and Other Financial Information — Legal Proceedings.”, any of which, if adversely
decided, could negatively affect our business, results of operations, financial condition and cash flows.
We
face risks relating to government spending and contracts with governments and governmental agencies.
All
of our revenues to date have been generated from engagements with various governments around the world, including national, regional
and local governmental agencies, either directly or through resellers or integrators. We expect that sales to governments and
governmental agencies, including through resellers or integrators, will continue to be the primary source of our revenues for
the foreseeable future. Slowdowns, recessions, economic instability, political unrest, government changes, armed conflicts or
natural disasters around the world may cause governments and governmental agencies to delay, reduce or even cancel planned spending,
reduce the scope of or terminate projects, even if already budgeted, or decide to change priorities and reallocate budgets, all
of which could adversely affect our business.
Sales
to governments and governmental agencies, including through resellers or integrators, are subject to special risks, such as delays
in funding, termination of contracts or sub-contracts at the convenience of the government or applicable governmental agency,
reduction or modification of contracts or sub-contracts in the event of changes in the government’s policies or priorities,
as a result of budgetary constraints or for other reasons, collection difficulties, increased or unexpected costs resulting in
losses or reduced profits under fixed price contracts, and governmental agencies’ right to audit and investigate government
contractors.
In
addition, the market for the solutions and products we sell is highly dependent on the spending cycle and scope of federal, state,
local and municipal governments, as well as those of security organizations in international markets. We cannot assure you that
these spending cycles will materialize as we expect and that we will be positioned to benefit from these potential opportunities.
Furthermore,
our engagements provide for customer acceptance of our solutions with a right of return, regardless of any previous partial acceptance.
Failure to obtain customer acceptance for the complete solutions or if the customer exercises its right of return, or, generally,
termination of the engagement, would generally not entitle us to reimbursement for our incurred costs for work performed. While
such occurrences have not happened in the past, we cannot be certain that we will not experience problems in the future in our
performance of such government engagements.
For
most solutions and products, we rely on third party suppliers, manufacturers and partners, and if these relationships are interrupted
we may not be able to obtain substitute suppliers, manufacturers or partners on favorable terms or at all and we may be subject
to other adverse effects.
We
rely on non-affiliated suppliers and original equipment manufacturer, or OEM, partners for most non-standard products or components
which may be critical to our solutions, including both hardware and software, and on manufacturers of assemblies that are incorporated
into our solutions. During the years ended December 31, 2016, 2015 and 2014, expenses incurred with respect to our three largest
suppliers comprised 72%, 70% and 79% of cost of revenues, respectively, and one supplier accounted for 40%, 43% and 33% of cost
of revenues in such periods, respectively.
In
October 2015, we entered into an agreement with a third party supplier who designs and licenses ULIN. This agreement may in the
future account for a significant portion of our vendor costs as well as our revenue generation. See the risk factor
“ULIN
sales are depended on a reseller agreement with one supplier, which automatically terminates in October 2018.”
Our
competitiveness, business and future growth is highly dependent on our ability to retain access to these suppliers and contractors
as well as their technology. Our reliance on a limited number of suppliers involves risks. In the event that a key supplier, including
in particular the supplier of ULIN, ceases operations or otherwise ceases to do business with us, it may take a substantial amount
of time and expense for us to secure substitute suppliers. Certain of our suppliers also offer products that compete with our
solutions. We may also purchase technology, license intellectual property rights and oversee third party development and localization
of certain products and components, in some cases, by or from companies that may compete with us or work with our competitors.
In addition, in certain cases, we may be dependent on sole-source suppliers for some components. If any of these sole-source suppliers
fails to meet our needs, we may not have readily available alternatives. Our ability to fill our supply needs could jeopardize
our ability to satisfactorily and timely complete our obligations under our government and other contracts.
If
these suppliers, manufacturers or partners experience financial, operational, manufacturing capacity or quality assurance difficulties,
cease production and sale of the products we buy from them entirely, or there is any other disruption, including loss of license,
OEM or distribution rights, including as a result of the acquisition of a supplier or partner by a competitor, we may be required
to locate alternative sources of supply or manufacturing, to internally develop the applicable technologies, or to redesign and/or
remove certain features from the products and solutions we offer, any of which would be likely to increase expenses, create delivery
delays and negatively impact our sales. Although we endeavor to put in place contracts with key providers, and attempt to identify
redundant suppliers, we may not be able to enter into such contracts or purchase from redundant suppliers. If we are able to enter
into such contracts, we may not be successful in obtaining adequate protections, these agreements may be short-term in duration
and the counterparties may be unwilling or unable to stand behind such protections. Moreover, these types of contractual protections
offer limited practical benefits to us in the event our relationship with a key provider is interrupted. In addition, by utilizing
third party suppliers, manufacturers and partners, we run the risks that the reputation and competitiveness of the products, solutions
and services we offer may deteriorate as a result of the reduction of our control over quality and delivery schedules and the
consequent risk that we will experience supply interruptions and be subject to escalating cost; and our competitiveness may be
harmed by the failure of our subcontractors to develop, implement or maintain manufacturing methods appropriate for our product
portfolio and our customers.
Further,
as suppliers discontinue their products, modify them in manners incompatible with our current use or use manufacturing processes
and tools that could not be easily migrated to other vendors, we could have significant delays in product availability, which
would have a significant adverse impact on our results of operations and financial condition. Although we believe that we can
obtain alternative sources of supply in the event our suppliers are unable to meet our requirements in a timely manner, we cannot
assure you that our alternative sources of supply would be sufficient to avoid a material interruption or delay in deliveries
and in availability.
If
we cannot retain and recruit key personnel, our business may suffer and our ability to operate and grow our business may be impaired.
We
depend on the continued service and performance of our senior management and key personnel, including Anatoly Hurgin, our Chief
Executive Officer, and Alexander Aurovsky, our Chief Technology Officer, to run and grow our business. As of December 31, 2016,
we employed 20 individuals on a full-time basis and 3 individuals on a part-time basis, comprised of administrators, marketing
and technical personnel. We may not be able to continue to retain and attract such personnel and the loss of the services of these
persons could adversely affect our business. Members of our senior management team may resign at any time (subject to applicable
contractual advance notice periods). At present, the pending litigations to which we and our executives and certain of our former
directors are a party and the SEC investigation, as well as the implementation of procedures relating to compliance with the United
States Foreign Corrupt Practices Act and Section 404(a) of the Sarbanes-Oxley Act of 2002, require significant management time
and could divert the attention of our management from our business operations.
To
remain successful and to grow, we also need to retain existing employees and attract new employees who understand and/or have
experience with the solutions and products we offer and our markets, especially new markets and growth areas we may enter. As
we grow, we must also enhance and expand our management team to execute on new and larger agendas and challenges and recruit and
retain qualified personnel, such as project managers, to execute, commercialize, market and sell the solutions and products we
offer. The market for qualified personnel is limited in the areas of emerging technology and recruitment of qualified personnel
is competitive in the geographic markets in which we operate. We may be at a competitive disadvantage to companies with greater
brand recognition or financial resources in recruiting. An inability to attract and retain highly qualified employees may have
a material adverse effect on our results of operations and financial position. Moreover, if we are not able to properly balance
investment in personnel with growth in our business, our profitability may be adversely affected. There can be no assurance that
we will be able to successfully recruit and integrate new employees. There is often intense competition to recruit highly skilled
employees in the technology industry, and we may not be able to offer current and potential employees a compensation package that
is satisfactory in order to retain or recruit them.
We
face risks related to the concentration of customers with whom we do business and, if we are unable to establish and maintain
our relationships with such customers, our business and ability to grow could be materially adversely affected.
We
conduct business with a relatively small number of customers, including third party resellers and agents, each of which could
be material to our business. With respect to sales in many regions and countries, we sell to third party resellers that, in turn,
resell the products and solutions we offer to various security and intelligence agencies, military forces, law enforcement agencies
and homeland security agencies. For the years ended December 31, 2016, 2015 and 2014, one significant reseller accounted for 47%,
66% and 33% of our revenues, respectively, and one other reseller in each such periods accounted for 32%, 13% and 29% of our revenues,
respectively. Our sales to relatively few significant resellers and customers could continue to account for a substantial percentage
of our sales in the foreseeable future. There can be no assurance that we will be able to retain these key resellers and customers
or that such resellers and customers will not cancel purchase orders, reschedule or decrease their level of purchases. Loss, cancellation,
deferral of business by, or failure to receive new contracts, renewals or follow-on contracts from, such resellers and customers
could have a material adverse effect on our business and operating results.
To
remain successful, we must maintain our existing relationships as well as identify and establish new relationships with other
customers, including third party resellers and agents. We must often compete with other suppliers for these relationships and
our competitors often seek to establish exclusive relationships with these sales channels or to become a preferred partner for
them. Our ability to establish and maintain our relationships is based on, among other things, factors that are similar to those
on which we compete for end customers, including features, functionality, ease of use, installation, maintenance and price.
As
our market opportunities change, our reliance on particular distribution channels may increase or we may need to create new channels
to address changing market needs, which may negatively impact our growth and gross margins. Certain of our current distribution
channels currently compete with us or may enter into markets in competition with us, which could result in the termination of
our relationship with them or lead to a significant reduction in sales through such channels. There can be no assurance that we
will be successful in maintaining, creating or expanding these distribution channels.
In
addition, the execution of our growth strategy also depends on our ability to create new alliances with certain market players
in certain markets. Even if we are able to enter into such alliances, it may be under terms that are not favorable to us, or we
may not be able to realize the benefits that are anticipated through such alliances. If we are not successful at these efforts,
we may lose sales opportunities, customers and market share, which may have a material adverse effect on our business and results
of operations.
The
industry in which we operate is characterized by rapid technological changes, evolving industry standards and changing market
potential from area to area, and if we cannot anticipate and react to such changes, our financial results may suffer.
The
markets for the products and solutions we sell are characterized by rapidly changing technology and evolving industry standards.
The introduction of products and solutions embodying new technology, new delivery platforms and the commoditization of older technologies,
together with the emergence of new industry standards, technological hurdles and protection measures, can exert pricing pressure
on existing products and solutions and/or render them unmarketable or obsolete. For example, new industry standards for cellular
networks are introduced from time to time, such as the proposed 5G networks. Moreover, the market potential and growth rates of
the markets we serve are not uniform and are rapidly evolving.
It
is critical to our success that we are able to anticipate and respond to changes in technology and industry standards and new
customer challenges by consistently offering new, innovative, high-quality products and solutions that meet the changing needs
of our customers. See the risk factor “
For most solutions and
products
, we rely on third party suppliers, manufacturers
and partners, and if these relationships are interrupted we may not be able to obtain substitute suppliers, manufacturers or partners
on favorable terms or at all and we may be subject to other adverse effects.
” We must also successfully identify, enter
into and prioritize areas of growing market potential, including by launching and driving demand for new and enhanced solutions
and products. If we are unable to execute on these strategic priorities, or if our competitors are able to do so more rapidly,
we may lose market share or experience slower growth, and our profitability and other results of operations may be materially
adversely affected.
We
cannot assure you that the market or demand for the products and solutions we sell will be sustained or grow as rapidly as we
expect (if at all), that we will successfully introduce new products or solutions, or new applications for existing products and
solutions, that such new products, solutions or applications will achieve market acceptance or that the introduction of new products
or technological developments by others will not render the products and solutions in our current portfolio obsolete. See the
risk factor “
Our revenues depend on the successful implementation and customer adoption of ULIN, the customer adoption
of which has been limited.”
In addition, certain of the solutions and products we sell must readily integrate with major
third party security, telephone, front-office and back-office systems. Any changes to these third party systems could require
such products to be redesigned, and any such redesign might not be possible on a timely basis or may not achieve market acceptance.
Furthermore, some of the solutions and products we sell rely on weaknesses of commonly used protocols and if such weakness were
identified and patched and we were unable to respond to such technological challenges in a timely manner, our business may be
adversely affected. If we are unable to offer solutions and products that are competitive in technology and price and responsive
to customer needs, there would be a material adverse effect on our business, financial condition and results of operations.
In
order to successfully compete in all sectors of our business, including security projects awarded through competitive bids, we
may commit to provide certain technologies and solutions which are still under development or which will have to be developed
(including by third parties), licensed or acquired specifically for that customer. This may increase the risk of technological
difficulties that may prevent us from complying with our contractual obligations, expose us to possible penalties and legal claims,
and affect the profitability of a project, which may have a negative impact on our business, financial condition and results of
operations.
We
face risks relating to large projects.
The
larger and more complex our customers’ projects are, the greater the risks associated with such projects. Moreover, these
risks are increased due to our need to custom design our solutions to meet each customer’s specific needs. These risks may
include exposure to penalties and liabilities resulting from a breach of contract, inability to fully integrate the needed products
with any third party products and inability to effectively combine various technologies into customized solutions. In some of
these projects we may use domestic or foreign subcontractors for various planning aspects, solution development, integration,
delivery and successful and timely completion. We may be held liable for the failure of our subcontractors, from whom we may have
no or limited recourse. Additionally, to the extent that we cannot engage such subcontractors, partners or specialists or cannot
engage them on a competitive basis, our ability to complete a project in a timely fashion or at a profit may be impaired.
We
may experience fluctuations in being selected for such large projects, which correspondingly may result in substantial fluctuations
in our income and results of operations, as revenues from large projects are likely to be a single occurrence and nonrecurring.
In addition, there may be fluctuations in cash collection and revenue recognition with respect to such projects due to, among
other things, a substantial period of time often elapsing from the time we enter into negotiations until we actually sell the
project to the specific customer.
The
sophisticated nature of the solutions and products we sell, customization of solutions based on specific customer needs, sales
cycle and unpredictable sales terms and timing may create uncertainty in, or negatively impact, our operating results and make
such results more volatile and difficult to predict.
The
timing of our sales cycle ranges from as little as a few weeks to more than a year. Our larger sales, which we emphasize in our
sales strategy, typically require a minimum of a few months to consummate. As the length or complexity of a sales process increases,
so does the risk of not successfully closing the sale. Larger sales are often made by competitive bid, which also increases the
time and uncertainty associated with such opportunities. In addition, because many of our solutions are sophisticated, customers
may also require education on the value and functionality of our solutions as part of the sales process, further extending the
time frame and uncertainty of the process. Longer sales cycles, competitive bid processes, customizing solutions based on specific
customer needs and the need to educate customers means that:
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There
is greater risk of customers deferring, scaling back or cancelling sales as a result of, among other things, their receipt
of a competitive proposal, changes in budgets and purchasing priorities or the introduction or anticipated introduction of
new or enhanced products and solutions either by us or our competitors during the process.
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We
may make a significant investment of time and money in opportunities that do not come to fruition, which investment may not
be usable or recoverable in future projects.
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We
may be required to bid on a project in advance of the completion of its design or be required to begin implementation of a
project in advance of finalizing a sale, in either case, increasing the risk of unforeseen technological difficulties or cost
overruns.
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We
face greater downside risks if we do not correctly and efficiently deploy limited personnel and financial resources and convert
such sales opportunities into orders.
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Additionally,
after the completion of a sale of a specific solution or a more sophisticated product, our customers may need assistance from
us in making full use of the functionality of these solutions or products, in realizing all of their benefits or in implementation
generally. If we are unable to assist our customers in realizing the benefits they expect from the solutions and products that
we sell, demand for such solutions and products may decline and our operating results may be adversely affected.
Our
uneven sales patterns could significantly impact our revenues and earnings.
The
timing in which transactions are entered into may shift from one quarter to another, due to, among other things, a shifting by
our buyers of their buying decisions, resulting in the shifting of bookings and revenues from one quarter to another. Additionally,
because we emphasize larger transactions with a higher value in our sales strategy, a substantial period of time often elapses
from the time we enter into negotiations until we actually sell the product to the specific customer, and the deferral or loss
of one or more significant orders or a delay in a large implementation could therefore materially adversely affect our operating
results, especially in a given quarter.
In
addition to the foregoing, our ability to forecast our operating results from quarter to quarter and from year to year is impacted
by the fact that pricing, margins and other deal terms may vary substantially from transaction to transaction, especially across
business lines. The extended time frame and uncertainty associated with many of our sales opportunities also make it difficult
for us to accurately forecast our revenues (and attendant budgeting and guidance decisions) and increases the volatility of our
operating results from period to period. Further, we expect our revenues to be more weighted towards ULIN sales. As ULIN is a
new solution with unpredictable sales cycles, with multiple pricing models, our revenue visibility is significantly reduced, which
makes it harder to provide adequate forecasts. Until we have clarity on the sales cycle, and a better understanding of the timing
and implementation for a relatively small number of larger deals, we shall not provide forecasts.
We
have not always met, and we might not meet in the future, our expectations or those of industry analysts in a particular future
quarter or a fiscal year, including as a result of the factors described in these Risk Factors.
We
are subject to complex, evolving regulatory requirements that may be difficult and expensive to comply with and that could negatively
impact our business.
Our
business and operations are subject to regulatory requirements in Israel and elsewhere, including, among other things, with respect
to government contracts, export control, labor, tax, anti-bribery, anti-corruption, data privacy and protection, and communications
monitoring and interception. Regulatory requirements are subject to constant change that may have a material impact on our operations.
Compliance with these regulatory requirements may be onerous, time-consuming, and expensive, especially where these requirements
vary from jurisdiction to jurisdiction or where the jurisdictional reach of certain requirements is not clearly defined or seeks
to reach across national borders. Regulatory requirements in one jurisdiction may make it difficult or impossible to do business
in another jurisdiction. We may also be unsuccessful in obtaining permits, licenses or other authorizations required to operate
our business, such as for the marketing or sale or import or export of products, solutions and services that we offer.
We
cannot assure you that our methods of and policies for doing business will be adequate for new markets, including the United States,
or that we will be able to modify such methods or policies in a manner that allows us to enter into specific markets, including
the United States. Violations of applicable laws or regulations, including by our officers, employees, contractors or agents,
may harm our reputation and deter governments and governmental agencies and other existing or potential customers or partners
from purchasing our solutions. Furthermore, non-compliance with applicable laws or regulations could result in fines, damages,
criminal sanctions against us, our officers or our employees, restrictions on the conduct of our business, and damage to our reputation.
Our
business, results of operations and financial condition could be materially adversely affected by changes in the legal and regulatory
environment.
Our
business, results of operations and financial condition could be materially adversely affected if laws, regulations or standards
relating to our business (including the solutions and products that we offer), our company or our employees (including labor laws
and regulations) are implemented or changed. Among these laws and regulations, there are requirements in Israel and other territories
in relation to import and export controls, data privacy and protection, anti-bribery and anti-corruption, labor, tax and environmental
and social issues. While we make efforts to comply with such requirements, we cannot assure you that we will be fully successful
in our efforts. Failure to comply with applicable laws and regulations could result in fines, damages, civil liability and criminal
sanctions against us, our officers and our employees and prohibit us from conducting our business and damage our reputation.
The
occurrence of privacy or information security breaches (or the belief that any such breach has occurred) in the operation of our
business, or by third parties using a product or solution obtained through us, could harm our business, financial condition and
operating results. Some of our customers use the solutions and products that we offer to compile and analyze highly sensitive
or confidential information. We may come into contact with such information or data when we perform service or maintenance functions
for our customers. The perception or fact that any of our employees has improperly handled sensitive information of a customer
or a customer’s end user could negatively impact our business. If, in handling this information, we fail to comply with
applicable privacy legislation or procedures, we could incur civil liability to governments or governmental agencies or any customers
and individuals whose privacy was compromised.
Further,
governments around the world are adopting a growing number of compliance and regulatory initiatives that are driven by events
and concerns such as accounting scandals, security threats and economic conditions. We cannot assure you that we will be successful
in our efforts to effectively respond to new initiatives and standards, that such changes will not negatively affect the demand
for the products, solutions and services we offer, or that our competitors will not be more successful or prepared than us in
responding to these new initiatives and standards.
We
may be limited in our ability to transfer or outsource certain aspects of our business to certain jurisdictions, and may be limited
in our ability to undertake development activities in certain jurisdictions, which may impede our efficiency and adversely affect
our business results of operations.
Our
solutions may contain defects or may be vulnerable to cyber-attacks, which could expose us to both financial and non-financial
damages.
Many
of our existing solutions are, and future solutions are expected to be, sophisticated and may develop operational problems. New
products and new product versions, and the incorporation of third party products into our solutions, also give rise to the risk
of defects or errors. These defects or errors may relate to the operation or the security of the products and solutions we sell
and could result in product returns, loss of or delay in market acceptance of the products and solutions, loss of our competitive
position or claims by customers or others, which would seriously harm our revenues, financial condition and results of operations.
Moreover, even well-designed and tested products and solutions may be vulnerable to cyber-attacks. If we do not discover and remedy
such defects, errors or other operational or security problems until after a product or solution has been released to customers,
we may incur significant costs to correct such problems and/or become liable for substantial damages for product liability claims
or other liabilities. Furthermore, correcting and repairing such errors, failures or defects could also require significant expenditures
of our capital and other resources and could cause interruptions, delays or cessation of our product licensing. The identification
of errors in the products and solutions we sell, the detection of bugs by our customers, or a successful cyber-attack on one of
the products and solutions even absent a defect or error, may damage our reputation in the market as well as our relationships
with existing customers, which may result in our inability to retain our customers or attract new customers, which could have
a material adverse effect on our results or financial condition.
We
are dependent on the efforts of contractors for projects in which we serve as subcontractor.
For
certain projects, we act as subcontractors and depend on the conduct of and our relationship with the relevant general contractor.
If one or more of these contractors experience financial or operational difficulties, we could experience an interruption in our
operations. There is a risk that we may have disputes with our contractors arising from, among other things, the quality and timeliness
of work performed by us, in which case our operating results could temporarily suffer until such disputes are resolved. Furthermore,
disagreements with our contractors could lead to the assertion of rights and remedies under their contracts and increase the cost
of the project or result in a contractor’s unwillingness to perform further work on the project. If any contractor is unable
or unwilling to perform according to the negotiated terms and timetable of its own agreement for any reason or terminates the
agreement, we may be required to be engaged by a substitute contractor in order to continue our work on the project, which would
likely result in significant project delays and increased costs.
Our
employees or other third parties may engage in misconduct or other improper activities, including noncompliance with regulatory
standards and requirements, which could cause significant liability for us, harm our reputation or otherwise result in other consequences
that may have a material adverse effect on our business, financial condition and results of operations.
We
are exposed to the risk that our employees, resellers, agents or independent contractors may engage in fraudulent conduct or other
illegal activities. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of
unauthorized activities to us that violates export control laws or other regulations or manufacturing standards. Furthermore,
the protection of our proprietary data and that of our customers is critical to our reputation and the success of our business.
Our customers have a high expectation that we will adequately protect their confidential information. If any person, including
any of our employees, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise
mismanages or misappropriates that data, we could be subject to monetary damages, fines and/or criminal prosecution. Unauthorized
disclosure of sensitive or confidential data, whether through systems failure, employee negligence, fraud or misappropriation,
could damage our reputation and cause us to lose customers.
We
are subject to the United States Foreign Corrupt Practices Act, or FCPA, which generally prohibits U.S. companies, as well as
foreign companies with a class of securities listed on a national securities exchange in the United States or quoted on the over-the-counter
market in the United States, such as us, from engaging in bribery or other prohibited payments to foreign officials for the purpose
of obtaining or retaining business. We operate in parts of the world that are recognized as having governmental and commercial
corruption and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices.
We cannot assure you that our internal policies and procedures will always protect us from improper conduct by our employees,
resellers, agents or independent contractors. In the event that we believe or have reason to believe that our employees or agents
have or may have violated applicable laws, including anti-corruption laws, we may be required to investigate or have outside counsel
investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior
management. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties, and curtailment
of operations in certain jurisdictions, and might adversely affect our business, financial condition or results of operations.
In addition, actual or alleged violations could damage our reputation. Furthermore, detecting, investigating, and resolving actual
or alleged violations is expensive and can consume significant time and attention of our senior management.
In
connection with ongoing implementation of internal controls to comply with applicable anti-corruption laws regarding distributors,
resellers and agents, we identified press reports that one of our resellers in Latin America may be subject to local law enforcement
investigations concerning price manipulation and corruption in the reseller's sale of software products to government entities,
although the local press reports do not identify us and we have not been able to confirm the investigations or whether any investigations
implicate sales of our solutions. We are conducting a review of the reseller and pending the completion of the review we
have ceased accepting orders from the reseller. Ceasing future sales to such reseller could have a material impact our future
revenue.
The
confidential nature of our engagements and the technologies incorporated into the products and solutions we sell may restrict
us in our public disclosures and marketing efforts.
To
date, all our revenues have been generated from engagements with governments and governmental agencies, including through resellers
or integrators. Such governments and governmental agencies restrict us from identifying them as our customers due to the sensitive
nature of the products and solutions that we sell and the projects we undertake on their behalf. Furthermore, our engagements
with such governments and governmental agencies, or with the applicable resellers or integrators, oftentimes contain information,
including information concerning specific aspects of the technologies incorporated into the products and solutions we sell, which
information is either classified or sensitive, in each case, due to ongoing military operations, homeland security issues or criminal
prevention activity and is largely classified under such governments’ and governmental agencies’ guidelines. Accordingly,
in our marketing and sales materials, we may not be able to identify our customers, the purpose for which certain products or
solutions were sold or the projects we are involved in. Moreover, the classified nature of our engagements may require us to be
more conservative in our public disclosures regarding such engagements, and in some instances apply for confidential treatment
under Rule 24b-2 of the Exchange Act. These limitations could adversely affect our marketing and sales efforts.
We
are subject to risks associated with doing business globally.
The
countries and regions in which we have our most significant operations include Latin America and Asia, and we intend to continue
to expand our operations internationally. We sell throughout the world and intend to continue to increase our penetration of international
markets. Our operations are subject to risks inherent in conducting business globally and under the laws, regulations and customs
of various jurisdictions and geographies. We believe our business may suffer if we are unable to successfully expand into new
regions, as well as maintain and expand our existing foreign operations. In addition to risks related to currency exchange rate
fluctuations, risks that affect our foreign operations include changes in exchange controls, changes in taxation and potentially
adverse tax consequences in operating in certain countries, import limitations, policies and procedures that protect local suppliers,
recruitment and retention of foreign employees, export control restrictions, changes in or violations of applicable law or regulations,
economic and political instability, disputes between countries, diminished or insufficient protection of intellectual property,
competition in foreign countries, product customization or localization issues, challenges in collection of accounts receivable
and longer payment cycles, and disruption or destruction of operations in a significant geographic region regardless of cause,
including war, terrorism, riot, civil insurrection or social unrest. Any of these risks could have an adverse effect on our business,
results of operations and financial condition.
As
we continue to explore the expansion of our global reach, an increasing focus of our business may be in emerging markets. In many
emerging markets we may face risks that are more significant than if we were to do business in developed countries, including
risks relating to underdeveloped legal systems, unstable governments and economies, and potential governmental actions affecting
the flow of goods and currency. We cannot assure you that one or more of these factors will not have a material adverse effect
on our international operations, business, financial condition and results of operations.
Intense
competition in our markets and competitors with greater resources than us may limit our market share, profitability and growth.
We
face aggressive competition from numerous and varied competitors in all of our markets, making it difficult to maintain our market
share, remain profitable, invest and grow. We will also encounter new competitors as we expand into new markets. Our competitors
may be able to more quickly develop or adapt to new or emerging technologies, better respond to changes in customer needs or preferences,
better identify and enter into new areas of growth or devote greater resources to the development, promotion and sale of their
products. Some of our competitors have, in relation to us, longer operating histories, larger customer bases, longer standing
relationships with customers, superior brand recognition and significantly greater financial, technical, marketing, customer service,
public relations, distribution or other resources, especially in new markets we may enter. Consolidation among our competitors
may also improve their competitive position. In addition, system integrators, as well as infrastructure vendors, may decide in
the future to enter our market space and compete with us by comprehensive solutions. We also face competition from solutions developed
independently by our customers. To the extent that we cannot compete effectively, our market share and, therefore, results of
operations could be materially adversely affected.
Because
price and related terms are key considerations for many of our customers, we may, from time to time, have to accept less-favorable
payment terms, lower our sales prices, and/or reduce our cost structure. If we are forced to take these kinds of actions to remain
competitive in the short-term, such actions may adversely impact our ability to compete in the long-term.
New
potential entrants to our markets may lead to the widespread availability and standardization of some of the products, solutions
and services we offer, which could result in the commoditization of such products, solutions and services and drive us to lower
our prices.
Incorrect
or improper use of the products and solutions in our portfolio or failure to properly provide professional services and maintenance
services could result in negative publicity and legal claims.
The
products and solutions we sell are complex and are deployed in a wide variety of network environments. The proper use of these
products and solutions requires training and, if the products and solutions are not used correctly or as intended, insufficient
results may be produced. The products and solutions may also be intentionally misused or abused by our customers. The incorrect
or improper use of these products and solutions or our failure to properly provide professional services and maintenance services,
including installation, training, project management, product customizations and consulting to our customers may result in losses
suffered by our customers, which could result in negative publicity or other legal claims against us. Furthermore, the use of
our solutions by a government to conduct interception in violation of such government’s laws could result in negative publicity
or even legal claims against us.
For
certain solutions, we rely on software from third parties. If we lose the right to use that software, we would have to spend additional
capital to either redesign our existing solutions or acquire new software from third parties.
We
integrate and utilize various third party software products as components of our solutions. Our business could be disrupted if
functional versions of these software products were either no longer available to us on commercially reasonable terms or at all.
In addition, some of our third party vendors use proprietary technology and software code that could require significant redesign
of our solutions in the case of a change in vendor. If we lost the right to use such third party software, we would be required
to spend additional capital to either redesign our solutions, or acquire or license new software from third parties. As a result,
we might be forced to limit the features available in our current or future offerings and commercial releases of our solutions
could be delayed.
Furthermore,
if we were required to or otherwise determined to utilize software components from certain jurisdictions, such as Israel, local
export control laws would impose a regulatory burden that may materially affect our business and operations.
Political
or public perception factors may adversely affect our business.
We
may experience negative publicity or other adverse impacts on our business if we sell to countries that are considered disfavored
by the media or political or social rights organizations even though such transactions may be permissible under applicable law.
Our
business may be impacted by changes in general economic conditions.
Our
business is subject to risks arising from changes in domestic and global economic conditions, and adverse economic conditions
in markets in which we operate may harm our business. If our clients significantly reduce spending in areas in which our solutions
are utilized, or prioritize other expenditures over our solutions, our business, results of operations and financial condition
would be materially adversely affected.
Disruption
to the global economy could also result in a number of follow-on effects on our business, including a possible slow-down resulting
from lower customer expenditures; inability of customers to pay for products, solutions or services on time, if at all; more restrictive
export regulations which could limit our potential customer base; negative impact on our liquidity, financial condition and share
price, which may impact our ability to raise capital in the market, obtain financing and secure other sources of funding in the
future on terms favorable to us.
In
addition, the occurrence of catastrophic events, such as hurricanes, storms, earthquakes, tsunamis, floods and other catastrophes
that adversely affect the business climate in any of our markets could have a material adverse effect on our business, financial
condition and results of operations. Some of our operations are located in areas that have been in the past, and may be in the
future, susceptible to such occurrences.
Our
future success depends on our ability to enhance our existing operations, execute on our growth strategy and properly manage investment
in our business and operations.
A
key element of our strategy is to continue to invest in, enhance and secure our business and operations and grow organically.
Investments in, among other things, new markets, new solutions, technologies, infrastructure and systems, geographic expansion
and headcount may all be considered in order to execute this strategy. Our ability to implement this portion of our growth strategy
is dependent on our ability to market solutions and products on a larger scale, increase our brand recognition and enter into
distribution and other strategic arrangements with third party suppliers and distributors, as well as manage growth in administrative
overhead and distribution costs likely to result from our possible geographic expansion.
However,
such investments and efforts may not be successful, especially in new areas or new markets in which we have little or no experience,
and even if successful, may negatively impact our short-term profitability. Our success depends on our ability to effectively
and efficiently enhance our existing operations and execute on our growth strategy, balance the extent and timing of investments
with the associated impact on expenses and profitability, balance our focus between new areas or new markets and the operation
and servicing of our legacy businesses and customers, capture efficiencies and economies of scale and compete in the new areas
or new markets and with the new solutions in which we have invested. If we are unable to effectively and efficiently enhance our
existing operations, execute on our growth strategy and properly manage our investments, focus and expenditures, our results of
operations and market share may be materially adversely affected.
Acquisition
and investment activities present certain risks to our business, operations and financial position.
Acquisitions
and investments may be a part of our growth strategy. Successful execution following the closing of an acquisition or investment
is paramount to achieving the anticipated benefits of the transaction. The process for acquiring a company may take from several
months up to a year and costs can vary greatly. We may also compete with others to acquire companies, and such competition may
result in decreased availability of, or an increase in price for, suitable acquisition candidates. In addition, we may not be
able to consummate acquisitions or investments that we have identified as crucial to the implementation of our strategy for other
commercial or economic reasons. As a result, it may be more difficult for us to identify suitable acquisition or investment targets
or to consummate acquisitions or investments on acceptable terms or at all. If we are not able to execute on any acquisition,
we may not be able to achieve a future growth strategy and may lose market share.
The
process of integrating an acquired company’s business or new technologies is challenging and may result in expected or unexpected
operating or compliance challenges, which may require significant expenditures and a significant amount of our management’s
attention that would otherwise be focused on the ongoing operation of our business.
Acquisitions
and/or investments may also result in the expenditure of available cash and amortization expenses or write-downs related to intangible
assets such as goodwill, any of which could have a material adverse effect on our operating results or financial condition. Investments
in immature businesses with unproven track records and technologies have an especially high degree of risk, with the possibility
that we may lose the value of our entire investment or incur additional unexpected liabilities. Large or costly acquisitions or
investments may also diminish our capital resources and liquidity or limit our ability to engage in additional transactions for
a period of time.
All
of the foregoing risks may be magnified as the cost, size or complexity of an acquisition or acquired company increases, or where
the acquired company’s products, market or business are materially different from ours, or where more than one integration
is occurring simultaneously or within a concentrated period of time.
We
may not be able to obtain the necessary regulatory approvals, including those of antitrust authorities and foreign investment
authorities, in countries where we seek to consummate acquisitions or make investments. For those and other reasons, we may ultimately
fail to consummate an acquisition, even if we announce the intended acquisition.
In
addition, we may require significant financing to complete an acquisition or investment, whether through bank loans, raising of
debt or otherwise. We cannot assure you that such financing options will be available to us on reasonable terms, or at all. If
we are not able to obtain such necessary financing, it could have an impact on our ability to consummate a substantial acquisition
or investment and execute a future growth strategy. Alternatively, we may issue a significant number of shares as consideration
for an acquisition, which would have a dilutive effect on our existing shareholders.
The
mishandling or the perceived mishandling of sensitive information could harm our business.
The
products we sell are in some cases used by customers to compile and analyze highly sensitive or confidential information and data,
including information or data used in intelligence gathering or law enforcement activities. While our customers’ use of
the products in no way affords us access to the customer’s sensitive or confidential information or data, we or our partners
may receive or come into contact with such information or data, including personally identifiable information, when we are asked
to perform services or support functions for our customers. We or our partners may also receive or come into contact with such
information or data in connection with the use of our solutions. While employee contracts generally contain standard confidentiality
provisions, we cannot assure the proper handling or processing of sensitive or confidential data by our employees. The improper
handling of sensitive or confidential data, or even the perception of such mishandling (whether or not valid), or other security
lapses by us or our partners or within the products, could reduce demand for such products or otherwise expose us to financial
or reputational harm or legal liability.
We
may consider entering into the U.S. market, which may expose our business to additional risks.
We
may consider entry into the U.S. market. The entrance into the U.S. market would subject us to U.S. regulatory requirements, including
regarding customer use of our solutions. As we anticipate that our future sales in the United States would be made primarily to
U.S. governmental agencies, we would be further exposed to all of the risks related to government contracts. See the risk factor
“
We face risks relating to government spending and contracts with governments and governmental agencies
” above.
We would also need to develop a strategy to differentiate the solutions we offer for sale within the United States from those
outside of the United States so that any non-U.S. products do not fall under U.S. export control restrictions. There can be no
assurance that we will develop a successful strategy to enter the U.S. market, or that we will be able to enter or successfully
compete in that market. As a result of the foregoing, we plan to be conservative in our approach to the U.S. market.
Risks
Related to our Operations in Israel
Conditions
in Israel affect our operations and may limit our ability to produce and sell our products.
Our
headquarters is located in the State of Israel. Political, economic and military conditions in Israel directly affect our operations.
Since the State of Israel was established in 1948, the State of Israel and its economy had experienced significant growth and
expansion, coupled with an increase in the standard of living, and has developed one of the most advanced high-tech industries
in the world. However, it continues to face many geo-political and other challenges that may affect companies located in Israel,
such as ours. For example, a number of armed conflicts have occurred between Israel and its Arab neighbors. Although Israel has
entered into various peace agreements with Egypt and Jordan as well as comprehensive agreements with the Palestinian Authority,
there continues to be unrest and terrorist activity in Israel with varying levels of severity, as well as ongoing hostilities
and armed conflicts between Israel and the Palestinian Authority and other groups in the West Bank and Gaza Strip. The effects
of these hostilities and violence on the Israeli economy and our operations are unclear, and we cannot predict the effect on us
of a further increase in these hostilities or any future armed conflict, political instability or violence in the region. We could
be harmed by any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners,
boycotts or a significant downturn in the economic or financial condition of Israel. In the event of war, we and our Israeli aftermarket
product subcontractors and suppliers may cease operations, which may cause delays in the distribution and sale of our aftermarket
products. In the event that our principal executive office is damaged as a result of hostile action, or hostilities otherwise
disrupt the ongoing operation of our offices, our ability to operate could be materially adversely affected. The impact of Israel’s
relations with its Arab neighbors in general, or on our operations in the region in particular, remains uncertain. The establishment
of new fundamentalist Islamic regimes or governments more hostile to Israel could have serious consequences for the stability
in the region, place additional political, economic and military confines upon Israel, materially adversely affect our operations
and limit our ability to sell our products to countries in the region.
Additionally,
several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional
countries and groups have imposed or may impose restrictions on doing business with Israel and Israeli companies if hostilities
in Israel or political instability in the region continues or increases. These restrictions may limit our ability to obtain manufactured
components and raw materials from these countries or sell our products to companies in these countries. Furthermore, the Boycott,
Divestment and Sanctions Movement, a global campaign attempting to increase economic and political pressure on Israel to comply
with the stated goals of the movement, may gain increased traction and result in a boycott of Israeli products and services. Any
hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant
downturn in the economic or financial condition of Israel, could adversely affect our business, results of operations and financial
condition.
We
are subject to stringent export control regulations.
The
Israeli government has adopted and amended laws and regulations regarding military and defense export controls, as well as the
export of “dual use” items, and many of our suppliers are subject to national export regimes. Some of the solutions
we offer incorporate decryption technology, which is subject to Israeli export control and may also be subject to non-Israeli
export control when supplied from non-Israeli suppliers. If the required government approvals are not obtained, our ability to
market, sell and export the products could be negatively impacted, which would result in a reduction in our revenues.
Certain
of our activities are exempt from Israeli export control under the current export control regime as these activities do not involve
the export of Israeli-controlled items from Israel, but rather the sale by us of items of non-Israeli origin to non-Israeli entities,
which items are not exported from Israel (these activities are referred to as “Brokerage” under the Israeli Defense
Export Control Law, 5766-2007 (the “2007 Law”). This exemption is due to the fact that the chapter of the 2007 Law
relating to Brokerage transactions has not entered into force to date. If such chapter were to enter into force and apply to Brokerage
transactions (even if such Brokerage does not involve the export of controlled goods from Israel), we may be required to obtain
additional licenses or modify our method of doing business in the future. If we are unable to obtain such licenses or modify our
method of doing business, our business, results of operations and financial condition could be adversely affected.
The
tax benefits that are available to Ability under Israeli law require it to meet various conditions and may be terminated or reduced
in the future, which could increase its Israeli tax liability.
Ability
is eligible for certain tax benefits provided to “Preferred Enterprises” under the Israeli Law for the Encouragement
of Capital Investments, 1959 (the “Investment Law”). The standard corporate tax rate for Israeli companies was 26.5%
for 2015 and was reduced to 25% for 2016, 24% for 2017 and 23% for 2018 and thereafter. Due to Ability’s “Preferred
Enterprise” status, Ability expects to benefit from a reduced tax rate of 14.6% in 2015 and 2016 (based on a blended tax
rate) and a reduced tax rate, not yet determined (but up to 16%), in 2017 and thereafter with respect to taxable income generated
by the Preferred Enterprise, and all other taxable income will be subject to the standard corporate tax rate. If these tax benefits
are reduced, cancelled or discontinued, for whatever reason, including lack of compliance with the requirements of the Investment
Law, Ability’s Israeli taxable income would be subject to standard Israeli corporate tax rates and it may be required to
pay incremental taxes over the reduced tax rates under the Preferred Enterprise, plus indexation, interest and possibly penalties
thereon. Additionally, if Ability increases its activities outside of Israel through acquisitions, for example, Ability’s
expanded activities outside of Israel might not be eligible for inclusion in future Israeli tax benefit programs. The Israeli
government may furthermore independently determine to reduce, phase out or eliminate entirely the benefits available under the
Investment Law, which could also adversely affect Ability’s global tax rate and the results of its operations.
Risks
Relating to Incorporation in the Cayman Islands
As
we are a Cayman Islands exempted company, it could be difficult for investors to effect service of process on and recover against
us or our directors and officers, and our shareholders may face difficulties in protecting their interest and rights through the
U.S. federal courts.
We
are a Cayman Islands exempted company, and most of our officers and directors are residents of various jurisdictions outside the
United States. A substantial portion of our assets and the assets of our officers and directors, at any one time, are and may
be located in jurisdictions outside the United States. Further, we have no agent for service of process within the United States,
which would make it difficult for investors to effect service of process in the United States on us or our directors and officers
who reside outside the United States, or to recover against us or our directors and officers on judgments of U.S. courts, including
judgments predicated upon the civil liability provisions of U.S. federal securities laws.
Our
corporate affairs are governed by our charter documents, consisting of our amended and restated memorandum and articles of association,
by the Companies Law (2016 Revision) of the Cayman Islands (as supplemented or amended from time to time) (the “Companies
Law”) and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our
directors are governed by Cayman Islands law and are different as under statutes or judicial precedent in jurisdictions such as
the United States. The common law of the Cayman Islands is derived, in part, from relatively limited judicial precedent in the
Cayman Islands as well as from English common law, the decisions of whose courts are of persuasive authority, but are not binding
in the Cayman Islands. In particular, the Cayman Islands has a different body of securities laws compared to the United States,
and certain states, such as Delaware, may have more fully developed and judicially interpreted bodies of corporate law. While
there is some case law in the Cayman Islands on these matters, it is not as developed as, for example, in the United States. In
addition, the laws of the Cayman Islands relating to the protection of the interests of minority shareholders differ in some respects
from those established under statutes or judicial precedent in the United States. Such differences may mean that our minority
shareholders may have less protection than they would have had under the laws of the United States. The less protective nature
of such laws in the Cayman Islands may make it more difficult for our shareholders to protect their interests in the face of actions
by our management or directors than shareholders of a corporation incorporated in other jurisdictions. In addition, Cayman Islands
companies may not have standing to initiate a shareholders derivative action in a federal court of the United States.
We
have been advised by our Cayman Islands legal counsel that the courts of the Cayman Islands are unlikely (i) to recognize or enforce
against us judgments of courts of the United States predicated upon the civil liability provisions of the federal securities laws
of the United States or any state; and (ii) in original actions brought in the Cayman Islands, to impose liabilities against us
predicated upon the civil liability provisions of the federal securities laws of the United States or any state, so far as the
liabilities imposed by those provisions are penal in nature. In those circumstances, although there is no statutory enforcement
in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will recognize and enforce
a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the principle that
a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been
given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be
final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman
Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and or be of a kind
the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple
damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent
proceedings are being brought elsewhere.
As
a result of all of the above, our shareholders may have more difficulty in protecting their interests in the face of actions taken
by management, members of the board of directors or controlling shareholders than they would as shareholders of a U.S. company.
If
we are characterized as a passive foreign investment company for U.S. federal income tax purposes, our U.S. shareholders may suffer
adverse tax consequences.
If
75% or more of our gross income in a taxable year, including our pro-rata share of the gross income of any company, U.S. or foreign,
in which we are considered to own, directly or indirectly, 25% or more of the shares by value, is passive income, then we will
be a passive foreign investment company, or “PFIC,” for U.S. federal income tax purposes. Alternatively, we will be
considered to be a PFIC if at least 50% of our assets in a taxable year, averaged over the year and ordinarily determined based
on fair market value and including our pro-rata share of the assets of any company in which we are considered to own, directly
or indirectly, 25% or more of the shares by value, are held for the production of, or produce, passive income. Once treated as
a PFIC, for any taxable year, a foreign corporation will generally continue to be treated as PFIC for all subsequent taxable years.
If we were to be a PFIC, and a U.S. Holder (as defined in “Item 10E. Taxation-United States Federal Income Taxation”)
does not make an election to treat us as a “qualified electing fund,” or QEF, or a “mark-to-market” election,
“excess distributions” to a U.S. Holder, and any gain recognized by a U.S. Holder on a disposition of our ordinary
shares, would be taxed in an unfavorable way. Among other consequences, our dividends, to the extent that they constituted excess
distributions, would be taxed at the regular rates applicable to ordinary income, rather than the 20% maximum rate applicable
to certain dividends received by an individual from a qualified foreign corporation, and certain “interest” charges
may apply. In addition, gains on the sale of our shares would be treated in the same way as excess distributions. The tests for
determining PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, which
are relevant to the determination of PFIC status. In addition, under the applicable statutory and regulatory provisions, it is
unclear whether we would be permitted to use a gross loss from sales (sales less cost of goods sold) to offset our passive income
in the calculation of gross income. As a result of our substantial cash position, if the value of our operating business assets
declines, there is a substantial risk that we will be classified as a PFIC under the asset test described above. There can be
no assurance that we will not be classified as a PFIC by the U.S. Internal Revenue Service. Although we do not believe that we
were a PFIC in 2016, in light of the periodic asset and income tests applicable in making this determination, no assurance can
be given that we will not become a PFIC in any future year. A U.S. Holder who makes a QEF election is taxed currently on such
holder’s proportionate share of our earnings. If the U.S. Internal Revenue Service (“IRS”) determines that we
are a PFIC for a year with respect to which we have determined that we were not a PFIC, however, it might be too late for a U.S.
Holder to make a timely QEF election, unless the U.S. Holder qualifies under the applicable Treasury regulations to make a retroactive
(late) election. U.S. Holders who hold ordinary shares during a period when we are a PFIC will be subject to the foregoing rules,
even if we cease to be a PFIC, subject to exceptions for U.S. Holders who made a timely QEF or mark-to-market election, or certain
other elections. We do not currently intend to prepare or provide the information that would enable you to make a QEF election.
Accordingly, our shareholders are urged to consult their tax advisors regarding the application of PFIC rules.
Certain
provisions of our amended and restated memorandum and articles of association may make it difficult for shareholders to change
the composition of our board of directors and may discourage, delay or prevent a merger or acquisition that some shareholders
may consider beneficial.
Certain
provisions of our amended and restated memorandum and articles of association may have the effect of delaying or preventing changes
in control if our board of directors determines that such changes in control are not in the best interests of our company and
our shareholders. The provisions in our amended and restated memorandum and articles of association include, among other things,
those that:
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authorize
our board of directors to issue preference shares and to determine the price and other terms, including preferences and voting
rights, of those shares without shareholder approval;
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establish
advance notice procedures for nominating directors or presenting matters at shareholder meetings; and
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limit
the persons who may call extraordinary general meetings of shareholders.
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While
these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board
of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of the shareholders
may believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent
directors.
These
provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management members by making
it more difficult for shareholders to replace members of our board of directors, which is responsible for appointing the members
of our management.
We
are a foreign private issuer and, as a result, we are not subject to U.S. proxy rules and are subject to the Securities Exchange
Act of 1934 reporting obligations that, to some extent, are more lenient and less frequent than those applicable to a U.S. issuer
.
We
report under the Securities Exchange Act of 1934 (the “Exchange Act”) as a foreign private issuer. Because we qualify
as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the Exchange Act that are applicable
to U.S. public companies, including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations
in respect of a security registered under the Exchange Act; (ii) the sections of the Exchange Act requiring insiders to file public
reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period
of time; and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing
unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant
events. We intend to furnish quarterly reports to the SEC on Form 6-K for so long as we are subject to the reporting requirements
of Section 13(g) or 15(d) of the Exchange Act, although the information we furnish may not be the same as the information that
is required in quarterly reports on Form 10-Q for U.S. domestic issuers. In addition, while U.S. domestic issuers that are not
large accelerated filers or accelerated filers are required to file their Annual Reports on Form 10-K within 90 days after the
end of each fiscal year, foreign private issuers are not required to file their Annual Report on Form 20-F until 120 days after
the end of each fiscal year. Foreign private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing
issuers from making selective disclosures of material information. Accordingly, you may not have the same protections afforded
to shareholders of companies that are not foreign private issuers.
As
a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of otherwise
applicable NASDAQ requirements, which may result in less protection than under rules applicable to domestic U.S. issuers
.
As
a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise
required under the Listing Rules of the NASDAQ Stock Market for domestic U.S. issuers. For instance, we have elected to follow
home country practice in the Cayman Islands with regard to quorum requirements at general meetings of our shareholders. In addition,
we have elected to follow our home country law instead of the Listing Rules of the NASDAQ Stock Market that require us to obtain
shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity based compensation
plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving
issuances of a 20% or greater interest in the company, and certain acquisitions of the stock or assets of another company. We
may also elect to follow home country practice in the Cayman Islands with regard to the number of independent directors appointed
to our board of directors and maintaining compensation and nominating committees of the board of directors. Following our home
country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on NASDAQ
may provide less protection to you than what is accorded to investors under the Listing Rules of the NASDAQ Stock Market applicable
to domestic U.S. issuers.
Risks
Related to our Company
We
are a “controlled company” within the meaning of NASDAQ listing standards and, as a result, qualify for exemptions
from certain corporate governance requirements.
As
a result of the number of shares jointly owned by Messrs. Hurgin and Aurovsky, we are a “controlled company” under
the NASDAQ corporate governance rules. A “controlled company” is a company of which more than 50% of the
voting power for the election of director is held by an individual, group or another company. Pursuant to the “controlled
company” exemption, we may elect not to comply with the requirements that a majority of our board of directors consists
of independent directors and that we have a compensation committee and a nominating committee, in each case, composed entirely
of independent directors with a written charter addressing each committee’s purpose and authorities. Although we qualified
for the “controlled company” exemption, we have not relied on such exemption. However, we may in the future rely on
such exemption. Relying on the “controlled company” exemption, as opposed to the requirements that would otherwise
apply, may provide less protection to our investors than what is accorded to investors under the Listing Rules of the NASDAQ Stock
Market applicable to issuers which do not qualify as “controlled companies”.
We
may not meet NASDAQ’S continued listing requirements.
Failure
to meet the applicable quantitative and/or qualitative maintenance requirements of NASDAQ could result in our ordinary shares
being delisted from NASDAQ. As we disclosed in our Report on Form 6-K submitted to the SEC on April 24, 2017, we received a notification
from the Listings Qualifications Department of the NASDAQ Capital Market that as a result of the resignation of all of our former
independent directors from the board of directors, we were not in compliance with NASDAQ Listing Rules 5605(b)(1), 5605(c)(2),
5605(d)(2) and 5605(e), as our board of directors was not comprised of a majority of independent directors nor did we have an
audit committee, compensation committee or a nominating committee. The foregoing notification further requested that we submit
a plan to NASDAQ to regain compliance with the above listing rules as well as additional information regarding the events and
circumstances that led to the simultaneous resignation of the former independent directors as well as certain corporate documentation.
On May 15, 2017 we appointed Levi Ilsar, Brigadier General (Ret.) Eli Polak and Nimrod Schwartz to serve as independent directors
on our board of directors and the audit, compensation and nominating committees thereof, in each case effective as of May 17,
2017. We therefore expect to regain compliance with the applicable NASDAQ Listing Rules upon such appointment entering into effect.
Furthermore,
for continued listing, NASDAQ requires, among other things, that listed securities maintain a minimum bid price of not less than
$1.00 per share. If the bid price falls below the $1.00 minimum for more than 30 consecutive trading days, an issuer will typically
have 180 days to satisfy the $1.00 minimum bid price, which must be maintained for a period of at least ten trading days in order
to regain compliance. Commencing as of April 24, 2017, through the date of this Annual Report, the bid price for our ordinary
shares has been less than the $1.00 minimum bid price.
If
we are delisted from NASDAQ, our ordinary shares may be eligible for trading on an over-the-counter market in the United States.
In the event that we are not able to obtain a listing on another U.S. stock exchange or quotation service for our ordinary shares,
it may be extremely difficult or impossible for shareholders to sell their ordinary shares in the United States. Moreover, if
we are delisted from NASDAQ, but obtain a substitute listing for our ordinary shares in the United States, it will likely be on
a market with less liquidity, and therefore experience potentially more price volatility than experienced on NASDAQ. Shareholders
may not be able to sell their ordinary shares on any such substitute U.S. market in the quantities, at the times, or at the prices
that could potentially be available on a more liquid trading market. As a result of these factors, if our ordinary shares are
delisted from NASDAQ, the price of our ordinary shares is likely to decline.
We
have received various requests for advancement and indemnification from present and former officers, directors and service providers.
We
have received various requests for advancement and indemnification from present and former officers, directors and service providers
of ours in connection with the various ongoing investigations and legal proceedings to which such officers, directors and service
providers were either named as defendants or were requested to take actions. See “Item 8A. Financial Information —
Consolidated Statements and Other Financial Information — Legal Proceedings.” If found to be indemnifiable pursuant
to our engagements with such officers, directors and service providers, these claims may be significant.
We
are an “emerging growth company” and we intend to take advantage of reduced disclosure and governance requirements
applicable to emerging growth companies, which could result in our ordinary shares being less attractive to investors.
We
are an “emerging growth company” as defined in the JOBS Act, and we intend to continue to take advantage of certain
exemptions from various reporting and governance requirements that are applicable to other public companies that are not emerging
growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404
of the Sarbanes-Oxley Act of 2002. Investors may find our ordinary shares less attractive because we rely on such exemptions.
We may take advantage of these reporting and governance exemptions until we are no longer an emerging growth company.
In
addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition
period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other
words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise
apply to private companies. However, we have chosen to “opt out” of such extended transition period, and, as a result,
we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required
for companies that are not “emerging growth companies.” Section 107 of the JOBS Act provides that our decision to
opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
We
have identified
material weaknesses
in our internal controls over financial reporting and
if we fail to establish and maintain an effective system of internal control over financial reporting, we may not be able to accurately
report our financial condition, results of operations or cash flows, which may adversely affect investor confidence in us.
The Sarbanes-Oxley Act
of 2002 requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls
and procedures. In particular, we are required, under Section 404 of the Sarbanes-Oxley Act of 2002, to perform
system and process evaluations and testing of our internal control over financial reporting to allow management to report on the
effectiveness of our internal control over financial reporting. This assessment must include disclosure of any material weaknesses in
our internal control over financial reporting identified by our management. A material weakness is a control deficiency, or combination
of control deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that
a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Section 404 of the Sarbanes-Oxley of 2002 Act also generally requires an attestation from our independent registered
public accounting firm on the effectiveness of our internal control over financial reporting. However, for as long as we remain
an emerging growth company as defined in the JOBS Act, we intend to take advantage of the exemption permitting us not to comply
with the independent registered public accounting firm attestation requirement. See risk factor “We are an “emerging
growth company” and we intend to take advantage of reduced disclosure and governance requirements applicable to emerging
growth companies, which could result in our ordinary shares being less attractive to investors.” At the time when we are
no longer an emerging growth company, our independent registered public accounting firm may issue a report that is adverse in
the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts
may not enable us to avoid a material weakness in the future.
We
have identified the need to improve our information and internal control systems and have commenced implementing internal control
procedures to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We have engaged an external consultant
to assist us with the improvement of our information and control systems and to assist in our compliance with Section 404 of the
Sarbanes-Oxley Act of 2002. Nevertheless, during the evaluation and testing process, we identified material weaknesses in
our internal control over financial reporting, and concluded that our internal control over financial reporting was not effective
as of December 31, 2016. See “Item 15. Controls and Procedures.” We cannot assure you that we will be able to
remedy the material weaknesses in a timely fashion, or that there will not be material weaknesses or significant
deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial
reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows.
If we are unable to remedy the material weaknesses and conclude that our internal control over financial reporting is
effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency
in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial
reports, the market price of our ordinary shares could decline, and we could be subject to sanctions or investigations by the
NASDAQ Stock Market, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control
over financial reporting, or to implement or maintain other effective control systems required of public companies, could also
restrict our future access to the capital markets.
Material
weaknesses were noted in our financial reporting closing process for the year ended December 31, 2015 with respect to cut-off
procedures relating to expenses and revenue recognition in multiple element transactions, which resulted in a restatement to our
consolidated financial statements as of December 31, 2014 and for the two years in the period then ended and as of June 30 and
September 30 in 2015 and 2014 and for the six and nine month periods then ended, respectively.
As
part of our financial reporting closing process for the year ended December 31, 2015, material weaknesses in our internal control
over financial reporting were identified with respect to cut-off procedures relating to expenses, as certain amounts due to two
third parties had not been timely expensed, and revenue recognition in multiple element sale transactions had not been properly
allocated and timely deferred, which resulted in a restatement of the financial statements in our annual report on Form 20-F for
the year ended December 31, 2015 and the consolidated financial statements as of December 31, 2014 and for the two years in the
period then ended and as of June 30 and September 30 in 2015 and 2014 and for the six and nine month periods then ended, respectively.
Further, it was discovered that certain amounts were outstanding as of December 31, 2015, which could be deemed a violation of
Section 402 of the Sarbanes-Oxley Act of 2002. The outstanding balance was repaid in full by our controlling shareholders. Further,
in 2015, Ability was a victim of fraud committed by an outside, unrelated third party resulting in an unauthorized outgoing transfer
of $0.5 million.
Our
management has concluded that our disclosure controls and procedures were ineffective, and due to inherent limitations, there
can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors
or fraud or in informing management of all material information in a timely manner in the future.
Our
management has concluded that our disclosure controls and procedures for the fiscal year ended December 31, 2016, were ineffective.
See “Item 15. Controls and Procedures.” Our disclosure controls and internal controls and procedures may not prevent
all errors and all fraud. A control system, no matter how well-conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of a control system reflects
that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all our control
issues and instances of fraud, if any, have been or will be detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur simply because of error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by circumvention of
the internal control procedures. The design of any system of controls also is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under
all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be detected.
The
price of our ordinary shares may be volatile.
The
price of our ordinary shares may fluctuate due to a variety of factors, including:
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actual
or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry;
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initiation
or settlement of litigation by or against us or the threat of potential litigation;
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mergers
and strategic alliances in the intelligence gathering and cyber security industries;
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market
prices and conditions in the intelligence gathering and cyber security markets;
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changes
in government regulation;
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potential
or actual military conflicts or acts of terrorism;
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the
failure of securities analysts to publish research about us, or shortfalls in our operating results compared to levels forecast
by securities analysts;
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announcements
concerning us or our competitors; and
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the
general state of the securities markets.
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These
market and industry factors may materially reduce the market price of our ordinary shares, regardless of our operating performance.
Our
international operations subject us to currency exchange risk.
We
earn revenues, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar, including
(among others) the NIS and Euro. Because our functional currency is the U.S. dollar, we must translate revenues, expenses, assets
and liabilities denominated in non-U.S. dollar functional currencies into U.S. dollars using currency exchange rates in effect
during or at the end of each reporting period. Therefore, changes in currency exchange rates affect our consolidated operating
income. In addition, our net income is further impacted by the revaluation and settlement of monetary assets and liabilities denominated
in currencies other than the functional currency, gains or losses on which are recorded within income (expense), net.
Our
income tax rate is complex and subject to uncertainty.
Computations
of our taxes on income and withholding obligations are complex because they are based on the laws of numerous tax jurisdictions.
These computations require significant judgment on the application of complicated rules governing accounting for tax provisions
under GAAP. The international nature of our structure and operations creates uncertainties. Taxes on income for interim periods
are based on a forecast of Ability’s reduced tax rate of 14.6% in 2015 and 2016 with respect to its income generated by
its Preferred Enterprise, which includes forward looking financial projections. Such financial projections are based on numerous
assumptions, including the expectations of profit and loss. We may not accurately forecast the various items that comprise the
projections.
From
time to time, we may be subject to income and other tax audits (including in Israel), the timing of which are unpredictable. While
we believe we comply with applicable tax laws, there can be no assurance that a governing tax authority will not have a different
interpretation of the law and assess us with additional taxes. Any additional taxes could have a material adverse effect on our
results of operations and financial condition.
In
recent years, we have seen changes in tax laws resulting in an increase in applicable tax rates, in part stemming from public
pressure to increase tax liabilities of corporations and to limit the ability to gain from strategic tax planning, with a focus
on international corporations. Such legislative changes in one or more jurisdictions in which we operate may have implications
on our tax liability and have a material adverse effect on our results of operations and financial condition. In 2014 and 2015,
the Israeli corporate tax rate increased until its reduction in 2016 and thereafter. Furthermore, the Israeli government may determine
to reduce, phase out or eliminate entirely tax benefits currently available under certain government programs. If corporate tax
rates increase or the tax benefits under such government programs were to be reduced or eliminated, our effective tax rate may
increase, which could have a negative impact on our results of operations.
Our
shareholder composition may make it difficult for shareholders to significantly influence the decisions of the general meeting.
As
of the date of this Annual Report, more than 64% of our ordinary shares are held by our controlling shareholders, Anatoly Hurgin,
our Chief Executive Officer, and Alexander Aurovsky, our Chief Technology Officer. Consequently, Messrs. Hurgin and Aurovsky may
have the ability, either acting alone or jointly, to significantly influence or determine the outcome of specific matters submitted
to the general meeting for approval, including amendments to our articles of association and election of members to our board
of directors, and may make it difficult for other shareholders to significantly influence the outcome of a general meeting.
The
interests of our major shareholders may not always be aligned with those of our other shareholders. In addition, conflict of interests
may exist or occur between our major shareholders. Any material conflicts of interests between our major shareholders and other
stakeholders may have a material adverse effect on our future performance, results of operations, cash flows and financial position.
We
incur significant costs and obligations as a result of being a public company.
As
a publicly traded company, we will incur significant legal, accounting and other expenses, particularly after we are no longer
an “emerging growth company” as defined under the JOBS Act. In addition, new and changing laws, regulations and standards
relating to corporate governance and public disclosure, including the Dodd Frank Wall Street Reform and Consumer Protection Act
and the rules and regulations promulgated and to be promulgated thereunder, as well as under the Sarbanes-Oxley Act of 2002, the
JOBS Act, and the rules and regulations of the SEC and the NASDAQ Stock Market have created uncertainty for public companies and
increased the costs and the time that our board of directors and management must devote to complying with these rules and regulations.
We expect these rules and regulations to increase our legal and financial compliance costs and lead to a diversion of management
time and attention from revenue generating activities, which could prevent us from improving our business, results of operations
and financial condition. We have made, and will continue to make, changes to our internal controls and procedures for financial
reporting and accounting systems to meet our reporting obligations as a publicly traded company. However, the measures we take
may not be sufficient to satisfy our obligations.
If
we are unable to develop and implement adequate required accounting practices and policies, we may be unable to provide the financial
information required of a U.S. publicly traded company in a timely and reliable manner.
As
a U.S. publicly traded company, the implementation of all required accounting practices and policies and the hiring of additional
financial staff will increase our operating costs and could require significant time and resources from our management and employees.
If we are unable to develop and maintain effective internal controls and procedures and disclosure procedures and controls, we
may be unable to provide financial information and required SEC reports that a U.S. publicly traded company is required to provide
in a timely and reliable fashion. Any such delays or deficiencies could penalize us, including by limiting our ability to obtain
financing, either in the public capital markets or from private sources and hurt our reputation and could thereby impede our ability
to implement our growth strategy. In addition, any such delays or deficiencies could result in our failure to meet the requirements
for continued listing of our ordinary shares on the NASDAQ Capital Market.
Reports
published by analysts, including projections in those reports that differ from our actual results, could adversely affect the
price and trading volume of our ordinary shares.
Securities
research analysts may establish and publish their own periodic projections for our business. These projections may vary widely
and may not accurately predict the results we actually achieve. Our share price may decline if our actual results do not match
the projections of these securities research analysts. Similarly, if one or more of the analysts who write reports on us downgrades
our stock or publishes inaccurate or unfavorable research about our business, our share price could decline. If one or more of
these analysts ceases coverage of us or fails to publish reports on us regularly, our share price or trading volume could decline.
While we do expect research analyst coverage, if no analysts choose to cover us, the trading price and volume for our ordinary
shares could be adversely affected.
We
may issue additional ordinary shares or other equity securities without shareholder approval, which would dilute your ownership
interests and may depress the market price of our ordinary shares.
We
may issue additional ordinary shares or other equity securities of equal or senior rank in the future in connection with, among
other things, our equity incentive plan or future vessel acquisitions or repayment of outstanding indebtedness, without shareholder
approval, in a number of circumstances.
Issuance
of additional ordinary shares or other equity securities of equal or senior rank would have the following effects:
|
●
|
dilution of our existing
shareholders’ proportionate ownership interest;
|
|
●
|
the amount of cash
available per share, including for payment of dividends, may decrease;
|
|
●
|
the relative voting
strength of each previously outstanding ordinary share may be diminished; and
|
|
●
|
the market price of
our ordinary shares may decline.
|
We
currently do not intend to declare or pay cash dividends in the near future. Any return on investment may be limited to the value
of our securities.
We
currently do not anticipate declaring or paying cash dividends on our ordinary shares in the near future. Our board of directors
has discretion to declare and pay dividends on our ordinary shares and will make any determination to do so based on a number
of factors, such as our operating results, financial condition, current and anticipated cash needs and other business and economic
factors that our board of directors may deem relevant. In accordance with the laws of the Cayman Islands, no dividend or other
distribution shall be paid except out of our realized or unrealized profits, out of the share premium account or as otherwise
permitted by law. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will
only occur if the trading price of our securities appreciates. You should not rely on an investment in us if you require dividend
income from your investments.
We
have granted certain veto rights with respect to a private placement of our securities which could prevent us from increasing
capital when needed.
Pursuant
to the Business Combination agreement, we granted each of Anatoly Hurgin, our Chief Executive Officer and Chairman and the former
Chief Executive Officer and director of Ability, and Alexander Aurovsky, our Chief Technology Officer and a director and the former
Chief Technology Officer and director of Ability, the right during the two year period following the closing of the Business Combination
to veto a private placement of our ordinary shares (i) to any persons or entities which were holders of Cambridge stock on the
closing date of the Business Combination, or (ii) that would result in a number of ordinary shares being issued equal to or in
excess of 20% of our then outstanding ordinary shares (based on pre-money valuation), except if any such private placement is
then allowable under the Israeli Tax Authority rulings. Each of Messrs. Hurgin and Aurovsky may exercise their veto right in their
sole and absolute discretion and they will likely have interests that are different from our interests, which could result in
their prohibiting us from completing a private placement that would be beneficial to us. If either of Messrs. Hurgin or Aurovsky
were to prohibit us from completing a private placement at a time when we require funds, our cash flows and operations could be
mutually adversely affected and we could be prohibited from completing an acquisition, repaying indebtedness, expanding our operations
or taking other actions contemplated at such time.
Future
resales of our ordinary shares issued to our controlling shareholders may cause the market price of our securities to drop significantly,
even if our business is performing well.
Under
the Business Combination agreement, Messrs. Hurgin and Aurovsky received, among other things, an aggregate of: (i) 16,213,268
of our ordinary shares; (ii) $18,150,000 in cash; and (iii) an additional number of ordinary shares to be issued upon and subject
to Ability achieving certain net income targets. Messrs. Hurgin and Aurovsky entered into lock-up agreements restricting them,
subject to certain exceptions, from selling any of the shares that they received as a result of the Share Exchange for a period
of 24 months from the closing of the Business Combination. See “Item 4A. Information on the Company - History and Development
of the Company - Our History - Lock-Up Agreements.” The ordinary shares held by Messrs. Hurgin and Aurovsky are “restricted
securities” as defined under Rule 144 promulgated under the Securities Act and may only be sold pursuant to an effective
registration statement or an exemption from registration, if available. Messrs. Hurgin and Aurovsky may rely on the exemption
from registration provided by Rule 144, if available, in which case, resales must meet the criteria and conform to the requirements
of the rule, including compliance with the applicable holding period, volume limitations and availability of current public information.
Thus, following expiration of the applicable lock-up periods, and upon satisfaction of the requirements of Rule 144, Messrs. Hurgin
and Aurovsky may sell large amounts of our shares in the open market or in privately negotiated transactions, which could have
the effect of increasing volatility in our share price or putting significant downward pressure on the price of our shares.
Intellectual
Property and Data/Systems Security
The
products and solutions we sell may infringe or may be alleged to infringe on the intellectual property rights of others, which
could lead to costly disputes or disruptions for us and may require us to indemnify our customers and resellers for any damages
they suffer.
The
technology industry is characterized by frequent allegations of intellectual property infringement. Any allegation of infringement
against us could be time consuming and expensive to defend or resolve, result in substantial diversion of management resources,
cause shipment delays or force us to enter into royalty or license agreements. If patent holders or other holders of intellectual
property initiate legal proceedings against us either with respect to our own intellectual property or intellectual property we
license from third parties, we may be forced into protracted and costly litigation, regardless of the merits of these claims.
On November 12, 2015, a lawsuit alleging patent infringement, violation of a non-disclosure agreement, trade secret misappropriation
and unjust enrichment, was submitted to the Lod District Court in Israel by a company and an individual against Ability and our
controlling shareholders. The amount sought in the lawsuit for registration fee purposes is NIS 5 million (approximately $1.3
million), however the plaintiffs did not specify the amount of the compensation demanded. The plaintiffs allege that certain GSM
interception and decryption systems sold by Ability apparently fall within the claim of an Israeli patent owned by the plaintiffs.
Furthermore, the plaintiffs demanded that Ability and/or its controlling shareholders immediately cease any patent infringement
as well as cease from any further use of the claimed technology, including the further manufacture, export, sale or marketing
of the alleged infringing products. We believe the allegations are without merit and intend to vigorously defend against them.
See “Item 8A. Financial Information — Consolidated Statements and Other Financial Information — Legal Proceedings.”
We may not be successful in defending such litigation, including the pending litigation, in part due to the complex technical
issues and inherent uncertainties in intellectual property litigation, and may not be able to procure any required royalty or
license agreements on terms acceptable to us, or at all.
Third
parties may also assert infringement claims against our customers. We sometimes undertake to indemnify our customers and resellers
for infringement by our products of the proprietary rights of third parties, which, in some cases, may not be limited to a specified
maximum amount and for which we may not have sufficient insurance coverage or adequate indemnification in the case of intellectual
property licensed from a third party. If any of these claims succeed, we may be forced to pay damages, be subject to injunction
with respect to the use or sale of certain products and solutions, be required to obtain licenses for the products our customers
or partners use, which may not be available on reasonable terms, or incur significant expenses in developing non-infringing alternatives.
We
face risks relating to our use of certain “open source” software tools.
Certain
of the products and solutions we sell may contain a limited amount of 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 of the open source code provide no warranties
on such code. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source code
and we may incur expenses in defending claims that we did not abide by the open source code license. In addition, third party
licensors do not provide intellectual property protection with respect to the open source components of their products, and therefore
we may not be indemnified by such third 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 we are not successful in defending against any such claims that
may arise, we may be subject to injunctions and/or monetary damages or the open source code would need to be removed from the
products and solutions we sell. Such events could disrupt our operations and the sales of such products and solutions, which would
negatively impact our revenues and cash flow.
Moreover,
under certain conditions, the use of open source code to create derivative code may obligate us to make the resulting derivative
code available to others at no cost. The circumstances under which the use of open source code would compel the offer of derivative
code at no cost are subject to varying interpretations. If we are required to publicly disclose the source code for such derivative
products or to license our derivative products that use an open source license, our previously proprietary software products may
be available to others without charge. If this happens, our customers and our competitors may have access to our products without
cost to them, which could harm our business.
The
use of such 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 our development efforts.
We
may be subject to information technology system failures or disruptions that could harm our operations, financial condition or
reputation.
We
rely extensively on information technology systems to operate and manage our business and to process, maintain and safeguard information,
including information belonging to our customers, partners, and personnel.
These
systems may be subject to failures or disruptions as a result of, among other things, natural disasters, accidents, power disruptions,
telecommunications failures, new system implementations, acts of terrorism or war, physical security breaches, computer viruses,
or other cyber-attacks. Cyber-attacks are becoming increasingly sophisticated and in many cases may not be identified until a
security breach actually occurs. We have experienced cyber-attacks in the past and may experience them in the future, potentially
with greater frequency. While we are continually working to maintain secure and reliable systems, our security, redundancy, and
business continuity efforts may be ineffective or inadequate. We must continuously improve our design and coordination of security
controls. Despite our efforts, it is possible that our security controls and other procedures that we follow may not prevent systems
failures or disruptions. Such system failures or disruptions could subject us to delays in our ability to process orders, delays
in our ability to provide products, solutions and services to customers, delays or errors in financial reporting, compromise,
disclosure, or loss of sensitive or confidential information or intellectual property, destruction or corruption of data, financial
losses from remedial actions, theft, liabilities to customers or other third parties, or damage to our reputation. Information
system failures at one of our suppliers or partners may also result in similar adverse consequences.
Any
of the foregoing could harm our competitive position, result in a loss of customer confidence and materially and adversely affect
our results of operations or financial condition.
Item
4. Information on the Company
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A.
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History
and Development of the Company
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Our
History
We
were
incorporated under the laws of the Cayman Islands
under the name “Cambridge
Holdco Corp.”,
as an exempted company on September 1, 2015
. We were formed
as a wholly-owned subsidiary of Cambridge, a company formed in order to effect a merger, capital stock exchange, asset acquisition
or other similar business combination with one or more businesses or entities. Cambridge was incorporated under the laws of Delaware
on October 1, 2013. On December 23, 2013, Cambridge closed its initial public offering and a simultaneous private placement.
On
December 23, 2015, Cambridge merged with and into Holdco with Holdco surviving the merger and becoming the public entity, and
Holdco consummated the Business Combination by acquiring Ability, following which Ability became a wholly-owned subsidiary of
Holdco, as further described below.
Effective
as of the closing of the Business Combination, Holdco changed its name to “Ability Inc.” We are now a holding company
operating through our wholly-owned subsidiaries Ability and ASM. Upon the closing of the Business Combination, our ordinary shares
and warrants began trading on the NASDAQ Capital Market under the symbol “ABIL” and “ABILW,” respectively.
Our warrants were delisted on April 18, 2016 and since such date have traded on the “Pink Sheets” under the symbol
“ABIWF.” Our ordinary shares have been listed for trading on the Tel Aviv Stock Exchange since January 12, 2016 under
the symbol “ABIL.”
We
are subject to the provisions of the laws of the Cayman Islands. Our principal executive offices are located at Yad Harutzim 14,
Tel Aviv, Israel, 6770007, our telephone number is +972-3-6879777, and our website is www.interceptors.com (the information contained
therein or linked thereto shall not be considered incorporated by reference into this Annual Report). We have no U.S. agent for
service of process.
Merger
Agreement
On
December 23, 2015, Cambridge merged with and into Holdco in the Redomestication Merger with Holdco surviving the merger and becoming
the public entity, and Holdco consummated a business combination whereby it acquired Ability by way of the Share Exchange, following
which Ability became a wholly-owned subsidiary of Holdco, pursuant to Agreement and Plan of Reorganization, dated as of September
6, 2015 (the “Merger Agreement”).
In
the Redomestication Merger, Holdco issued one ordinary share for each outstanding share of Cambridge and as of the closing of
the Redomestication Merger, each outstanding warrant of Cambridge automatically represents the right to purchase one ordinary
share of Holdco in lieu of one share of Cambridge common stock. Additionally, upon consummation of the Business Combination, (i)
the holders of outstanding unit purchase options of Cambridge, which represented the right to acquire up to 420,000 ordinary shares
and 420,000 warrants of Cambridge, exchanged such unit purchase options for an aggregate of 150,000 ordinary shares of Holdco
and (ii) the holder of outstanding promissory notes of Cambridge converted the entire principal amount of notes into an aggregate
of 35,000 ordinary shares and 35,000 warrants of Holdco in accordance with the terms of such promissory notes. Upon consummation
of the Redomestication Merger, holders of 2,136,751 shares of Cambridge common stock sold in its initial public offering converted
those shares, at their election, to cash at a conversion price of approximately $10.10 per share, or an aggregate of approximately
$21.6 million. The aggregate conversion price was paid out of Holdco’s trust account, which had a balance immediately prior
to the closing of the Business Combination of approximately $81.3 million. Of the remaining funds in the trust account: (i) approximately
$2.0 million was used to pay Ability’s transaction expenses in connection with the Business Combination, (ii) $18.1 million
was used to pay the cash portion of the merger consideration payable to Messrs. Hurgin and Aurovsky, as described below, (iii)
$11.9 million is being reserved and was deposited in escrow for the put option of Messrs. Hurgin and Aurovsky, as described below,
(iv) approximately $7.8 million was used to pay the outstanding accounts payable and accrued expenses of Cambridge, (v) $0.9 million
was used to purchase 16% of the shares in ASM from Eyal Tzur, as described below, and (vi) the balance of approximately $19 million
was released to Ability.
In
connection with the Share Exchange, as consideration for their outstanding ordinary shares of Ability, Messrs. Hurgin and Aurovsky
received an aggregate of 16,213,268 of our ordinary shares and $18.1 million in cash. In addition, Messrs. Hurgin and Aurovsky
have (or had) the right to receive an additional number of our ordinary shares to be issued upon and subject to us achieving certain
net income targets in the fiscal years ending December 31, 2015, 2016, 2017 and 2018, as set forth in table below.
In
the event that we fail to satisfy the net income target for any fiscal year but net income for such fiscal year is ninety percent
(90%) or more of the net income target for such fiscal year, then we shall issue to Messrs. Hurgin and Aurovsky, in the aggregate,
such number of our ordinary shares equal to the product obtained by (x) the number of our ordinary shares that would have been
issued to Messrs. Hurgin and Aurovsky had the net income target been achieved
multiplied by
(y) the quotient obtained by
(A) the net income for such fiscal year
divided by
(B) the net income target for such fiscal year.
Under
the Merger Agreement, in the event that the 2015 net income target is not achieved but the 2016 net income target is achieved,
then we shall issue to Messrs. Hurgin and Aurovsky, in addition to the ordinary shares required to be issued by us as a result
of us achieving the 2016 net income target, the ordinary shares relating to the 2015 net income target. In addition, if the 2015
net income target is not achieved and net income is less than ninety percent (90%) of the 2015 net income target but net income
for 2016 is ninety percent (90%) or more of the 2016 net income target, then we shall issue to Messrs. Hurgin and Aurovsky, in
addition to the pro rata of ordinary shares relating to the 2016 net income target, such number of our ordinary shares for 2015
based on the same percentage of net income for 2016 as compared to the 2016 net income target. The net income targets for 2015
and 2016 were not achieved.
To
the extent any ordinary shares are issuable to Messrs. Hurgin and Aurovsky upon Ability’s achievement of the above-described
net income targets, 3% of such shares shall be issuable to each of (i) Migdal Underwriting & Business Initiatives Ltd. as
an additional portion of its fee in connection with the Business Combination, and (ii) Mr. Tzur as further consideration for the
exercise of the put right related to ASM. Accordingly, the number of ordinary shares issuable to Messrs. Hurgin and Aurovsky in
the Business Combination shall be reduced ratably between Messrs. Hurgin and Aurovsky by the total number of ordinary shares issuable
to Mr. Tzur and Migdal Underwriting & Business Initiatives Ltd.
The
following table sets forth the net income targets and the number of our ordinary shares issuable upon the achievement of such
targets:
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Number of Ordinary Shares
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Year ending December 31
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Net Income
Target
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Messrs. Hurgin and Aurovsky
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Migdal Underwriting & Business Initiatives Ltd
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Eyal Tzur
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Total
|
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2015
|
|
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$
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27,000,000
|
|
|
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3,384,000
|
|
|
|
108,000
|
|
|
|
108,000
|
|
|
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3,600,000
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2016
|
|
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$
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40,000,000
|
|
|
|
1,739,000
|
|
|
|
55,500
|
|
|
|
55,500
|
|
|
|
1,850,000
|
|
2017
|
|
|
$
|
60,000,000
|
|
|
|
1,880,000
|
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
2,000,000
|
|
2018
|
|
|
$
|
80,000,000
|
|
|
|
940,000
|
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
1,000,000
|
|
Under
the Merger Agreement, each of Messrs. Hurgin and Aurovsky has the right, on one occasion during the 60 day period immediately
following the two year anniversary of the end of the full fiscal year in which the closing occurred, to put to us all or part
of his pro rata portion of 1,173,267 of our ordinary shares that he received in the Share Exchange for an amount in cash equal
to (1) (x) the number of shares being put multiplied by (y) $10.10 per share plus (2) his pro rata portion of interest, if any,
and subject to the pre-ruling granted by the Israel Tax Authority, as generated in the put option escrow account that was established.
$11.9 million was deposited into an escrow account, referred to as the put option escrow account, by us at closing of the Business
Combination to fund the payment of the purchase price for the put if it is exercised.
Indemnity
Escrow Agreement
Of
our ordinary shares issued to Messrs. Hurgin and Aurovsky as consideration for the Share Exchange, an aggregate of 948,515 of
such shares (the “Escrow Shares”) were placed in escrow at the closing of the Business Combination pursuant to an
indemnity escrow agreement, dated as of December 23, 2015 (the “Indemnity Escrow Agreement”), by and among us, Messrs.
Hurgin and Aurovsky, Mr. Ben Gordon in his capacity as a representative of ours (the “Company Representative”) and
Continental Stock Transfer & Trust Company, as escrow agent. The Escrow Shares were set aside to fund post-closing indemnification
claims related to breaches of representations and warranties made by, or breaches of covenants and other obligations of, Ability
in the Merger Agreement. The Escrow Shares are our sole and exclusive remedy for our rights to indemnification under the Merger
Agreement. No indemnification claims are payable from the Escrow Shares until the aggregate amount of our damages exceeds a $1,500,000
deductible. Once the aggregate amount of our damages exceeds such $1,500,000 deductible, all our damages in excess of such amount
are reimbursable, subject to certain exceptions. According to the Indemnity Escrow Agreement, on December 23, 2016, fifty percent
(50%) of the Escrow Shares were to be released to Messrs. Hurgin and Aurovsky, less amounts previously applied in satisfaction
of, or reserved with respect to indemnification claims made prior to that date. The remaining Escrow Shares would be released
on the date that is the earlier of (x) June 23, 2017 and (y) the thirtieth (30th) day after we file our Annual Report for the
year ended December 31, 2016 with the SEC.
Pursuant
to a tolling agreement, dated as of November 30, 2016, by and among us, Messrs. Hurgin and Aurovsky, the Company Representative
and the Escrow Agent, Messrs. Hurgin and Aurovsky agreed to delay the release of the Escrow Shares until after June 30, 2017 in
order to, among other things, allow our board of directors or an authorized committee thereof an opportunity to review certain
specified claims, including certain restatements of our financial reports filed with the SEC, certain alleged discrepancies between
our financial projections and our actual results, certain of our disclosures provided to investors relating to our pipeline and
backlog and certain of our disclosures related to ULIN.
JV
Share Purchase Agreement
In
connection with and as a condition to the consummation of the Merger Agreement, Cambridge, Holdco, Ability, Messrs. Hurgin and
Aurovsky, ASM and Eyal Tzur, ASM’s sole shareholder, entered into a share purchase agreement (the “JV Share Purchase
Agreement”), dated as of September 6, 2015, pursuant to which (a) at the closing of the Business Combination, Holdco purchased
16 shares, or 16%, of ASM for $900,000 in cash and (b) Mr. Tzur had the right to put all, but not less than all, of the remaining
shares of ASM to us (or our designated entity) during the 14 month period following the closing of the Business Combination in
exchange for 480,000 of our ordinary shares, plus 3% of any earn-out consideration (i.e., the net income shares) that may otherwise
become payable to Messrs. Hurgin and Aurovsky under the terms of the merger agreement following the consummation of the Business
Combination. If this right was not exercised by Mr. Tzur, then we had the right exercisable during the 90 days immediately following
the put option period, to call all, but not less than all, of the remaining ASM shares in exchange for 432,000 of our ordinary
shares. The parties entered into an escrow agreement, pursuant to which all of the shares of ASM, other than those purchased at
the closing of the Business Combination, were placed in escrow to secure the obligations of Mr. Tzur under the terms of the JV
Share Purchase Agreement prior to exercise of the put or call rights thereunder. In addition, the parties entered into an escrow
agreement with respect to our ordinary shares issuable to Mr. Tzur upon exercise of the put or call rights, under which (a) all
of the up to 480,000 ordinary shares issuable to him upon exercise of such rights were placed in escrow at the closing of the
Business Combination and (b) 5% of any such ordinary shares issued to him upon exercise of the put or call right shall be held
in escrow for not less than one year following closing of the put or call right to secure his indemnification obligations under
the JV Share Purchase Agreement. On January 24, 2016, Mr. Eyal Tzur exercised his put option, as a result of which ASM became
our wholly-owned subsidiary, in exchange for 456,000 of our ordinary shares that were released from escrow to Mr. Tzur and 24,000
of our ordinary shares were held in escrow until January 24, 2017 (i.e., one year following the closing of the put option) to
secure Mr. Tzur’s indemnification obligations under the JV Share Purchase Agreement.
Lock-Up
Agreements
At
the closing of the Business Combination, Messrs. Hurgin and Aurovsky entered into lock-up agreements pursuant to which they agreed
not to sell any of our ordinary shares that they received as a result of the Business Combination (subject to limited exceptions)
until the second anniversary of the closing of the Business Combination.
Principal
Capital Expenditures
For
a discussion of our capital expenditures, see “Item 5. Operating and Financial Review and Prospects—Liquidity and
Capital Resources—Cash Flows—Investing Activities.”
Overview
We
are a holding company operating through our wholly-owned subsidiaries, Ability and ASM, which provide advanced interception, geolocation
and cyber intelligence products and solutions that serve the needs and increasing challenges of security and intelligence agencies,
military forces, law enforcement agencies and homeland security agencies worldwide. We believe that our advanced comprehensive
capabilities in both the areas of interception of communications and geolocation set us apart from our competitors.
Founded
in 1994, Ability has 16 years of proven experience in the fields of interception and geolocation. We specialize in off-air interception
of voice, SMS and data communication from both cellular (GSM/CDMA/UMTS/LTE) and satellite communication networks and deciphering
solutions for both cellular and satellite communications.
Our
portfolio of cellular communications solutions includes, in addition to interception of voice, SMS, and data, an advanced geolocation
system and cyber solutions. The geolocation solutions we offer geographically target mobile phones and are sold independently
or as an additional feature within other systems. The cyber solutions provide the user with the ability to extract and view information
from mobile phones. We also offer a system that can detect the existence of active interception systems (such as active cellular
interception systems, fake SMS advertising systems and IMSI/IMEI catchers), can prevent interception by such systems and “intercept
the interceptor,” allowing the user to listen to and manipulate the intercepted information.
Our
portfolio of satellite solutions includes advanced interception systems for Iridium, Thuraya, IsatPhone and VSAT communications.
Both
our cellular and satellite interception solutions can be used either as portable stand-alone tactical systems or can be integrated
into larger scale fixed strategic systems.
We
believe that the products and solutions we offer enable security agencies, law enforcement agencies and armed forces to gain a
tactical and situational advantage over highly mobile and covert adversaries and we believe that we are among the few companies
with an offering and suite of solutions that targets all segments of the lawful interception market.
We
sell to our customers a variety of products and also offer customized solutions designed to meet their specific needs. Our solutions
include both tactical and strategic systems. We work closely with our customers to design solutions for their specific configuration
needs, including facilitating integration with larger scale systems. Most of these systems are scalable in functionality, capacity,
coverage area and communications protocol types in order to meet the budgets and needs of our customers. The systems are available
either as tactical, transportable solutions or as strategic, fixed installations and can be installed in many fixed or transportable
configurations, including in vehicles, ships, aerial platforms and on personnel.
Our
headquarters, operations and sales office are located in Tel Aviv, Israel.
Industry
The
increasing threat of global terrorism as well as ordinary criminal activity over the past few decades has created a demand for
the increased ability of military intelligence agencies and law enforcement agencies to intercept communications upon which such
activity is based and to decipher these communications. We believe interception of communications has become the most crucial
task in intelligence and surveillance. Reliable, portable, robust solutions are critical to the success of any such operation.
In
response to this need, we have integrated solutions to cover the many facets of communications interception and decryption. We
provide solutions to a variety of customer needs, with both off-the-shelf and customized systems for customers around the world.
Our
customers’ operational demands are becoming increasingly diverse and extensive due to advances in technology of the targeted
communications, requiring industry participants to enhance their offerings to include advanced location and cyber solutions as
well as solutions for new generations of cellular communications, such as 4G/LTE and the proposed 5G networks.
The
tactical lawful interception industry is dominated by a limited number of international suppliers, including us. We believe that
entry into this market by new participants is limited due to the nature of the government agencies that comprise the market and
its customers. Although this market has continually grown, we believe that the number of suppliers has not grown materially due
to the significant barriers to entry into the market as a result of the nature of governmental agencies, privacy laws and the
complexity of the required technology.
Our
Portfolio of Solutions and Products
In
the area of cellular communications, we offer turnkey integrated solutions for all cellular communications standards (GSM, CDMA,
UMTS and LTE). These solutions provide real-time interception, robust, ultra-portable design and user-friendly operations. We
offer strategic and tactical cellular interception systems, which are used for intercepting mobile phone traffic and tracking
mobile phone users.
With
respect to satellite communications, we offer field-proven, cutting-edge solutions for Iridium, Thuraya, IsatPhone Pro and other
satellite links.
Cellular
Interception and Geolocation
ULIN
ULIN
(Ultimate Interceptor), introduced in November 2015, which we believe is the first-to-market SaaS strategic system for interception
and geolocation in GSM, UMTS and LTE cellular networks. Unlike any other strategic lawful interception system known to us, ULIN
does not require, in most cases, the involvement of mobile network operators. Unlike tactical interception systems, ULIN does
not need to be in the vicinity of intercepted targets. In most instances, ULIN requires only the mobile device’s phone number
or IMSI to start the interception, however, there are some network operators for which ULIN is currently not capable of intercepting
cellular communication. ULIN detects dialing/dialed phone numbers and provides the geographic location of participating mobile
devices. ULIN incorporates our legacy Hunter geolocation solution. All our ULIN sales are based on a reseller agreement granting
us a worldwide exclusive right to sell ULIN, which automatically terminates in October 2018 and may be terminated by either party
under certain specific circumstances. See “Item 4. Information on the Company - Business Overview - Manufacturing and Suppliers”
for a description of the agreement.”
ULIN
represents a new technological approach to cellular interception and provides operational capabilities that we believe did not
previously exist, primarily the ability to intercept cellular communications without the need to be in the vicinity of intercepted
targets. In 2016, we completed our first ULIN sale to a Latin American government and expect that ULIN will be a material growth
driver for our company, however, customer adoption of ULIN has been much slower than we had anticipated. While we have seen significant
interest in ULIN and its advanced capabilities, we believe that the limited customer adoption to date of ULIN, notwithstanding
its competitive advantage over tactical interception solutions, is primarily due to its increased costs compared to tactical interception
solutions, as well as the market’s desire for a product capable of intercepting data communication in addition to cellular
communication, and ULIN’s inability to intercept cellular communication within some network operators. For additional information,
see “Item 3D. Risk Factors - Key Information -O
ur revenues depend on the successful implementation and customer adoption
of ULIN, the customer adoption of which has been limited.
” and “Item 5D. Operating and Financial Review and Prospects
- Trend Information.”
IBIS
IBIS
(In-Between Interception System) is a tactical stand-alone solution used for off-air interception of GSM, UMTS and LTE cellular
communications in a seamless way, without requiring involvement from the cellular network provider on which the targeted mobile
device is operated. IBIS is an advanced integrated solution that includes all relevant sub-systems in a single unit, allows the
user to scan, analyze, monitor, record, track and intercept cellular mobile devices for voice, SMS, data traffic and call-related
information, regardless of implemented encryption type.
The
IBIS system can operate with a variety of power sources, which enables it to be installed and operated in many types of applications
and environments, in fixed or transportable installations, including in vehicles, and ships, or can be carried in backpacks. We
also provide an IBIS system compatible for airborne platforms. Applications of the IBIS airborne system include surveillance missions,
border control, tracking of kidnappers and drug dealers and detection of active mobile devices in disaster areas. The latest version
of IBIS incorporates all the technological capabilities and functionalities of our legacy TouchDown solution.
ACIS
ACIS
(Advanced CDMA Interception System) is a fast, reliable, portable and undetectable interception device for cellular CDMA network
traffic that intercepts and records off-the-air voice communication, SMS and other call-related data. ACIS automatically searches
for active CDMA cellular network frequencies and active channels. Cooperation from network providers is not required. ACIS works
with all CDMAone and CDMA 2000 networks and supports all CDMA frequency bands, including 450 MHz, 800 MHz and 1900 MHz.
IMSI
Catchers
We
offer a variety of GSM/UMTS/LTE/IMSI catchers, in different installations and configurations, which can be customized to customer
needs.
AGIS
AGIS
(Advanced GSM Interception System) provides real-time GSM interception. The AGIS system is integrated into a small unit, making
it easily portable, and be installed and operated in many types of applications and environments, either in fixed or transportable
installations, including in vehicles, ships, helicopters and on personnel.
Satellite
Interception
IRIS
IRIS
(Iridium Interception System) is a portable tactical system that intercepts voice, SMS and data in Iridium communication channels.
The Iridium satellite is a system of active communication satellites in orbit and on the ground, which allows voice and data communications
across the globe. IRIS is completely passive and does not interfere with satellite communication. IRIS can be easily installed
in vehicles, ships, helicopters and on personnel.
ATIS
ATIS
(Advanced Thuraya Interception System) intercepts information transmitted through Thuraya network channels. The Thuraya network
is an advanced communication network of two satellites that covers the majority of Europe, Asia and Africa. ATIS provides interception
of voice, facsimile, SMS, data and call-related information, as well as a determination of the geographical position of Thuraya
terminals.
ATIS
intercepts uplink and downlink, and accordingly, both sides of a satellite call can be monitored, depending on interception conditions.
All communications intercepted by ATIS and related data are stored in the system database for off-line analysis and playback.
In addition to the call-related data, when an uplink is intercepted, the user can obtain the handset location. ATIS is offered
in both tactical (L-band only) and strategic configuration (C-band with one or multiple L-band posts) and can be provided in various
portable, remote control and fixed formats.
SLIS
SLIS
(Satellite Link Interception System) monitors information transmitted through satellite communication channels. The information
monitored by this system includes the satellite systems Intelsat, Eutelsat, Arabsat, Domsat, Indosat and other global or regional
satellite communication operators. SLIS has the capacity to intercept the following communication links:
|
●
|
E1/T1
standard, and their derivatives with various types of compression, including DCME and many others;
|
|
●
|
public
and private computer networks;
|
|
●
|
different
standards of the global VSAT system; and
|
|
●
|
GSM-operators,
including GSM-A and Abis.
|
The
type of information that can be monitored from these sources include voice communications, facsimile messages (analogue or digital),
SMS, videoconferences and communication sessions using the Internet or private networks.
Cyber
Our
IBIS solution incorporates offensive cyber capabilities. IBIS can remotely control mobile devices and extract information that
is not typically transmitted over cellular networks.
Intellectual
Property
General
As
a company that operates within a rapidly changing technological environment, the protection of the proprietary technology embedded
in the products and solutions that we sell may have a significant impact on our business. We and our suppliers and technology
providers rely on a both trade secret laws and confidentiality and non-disclosure restrictions to protect the proprietary interests
in the products and solutions that we sell.
On
November 12, 2015, a lawsuit was submitted to the Lod District Court in Israel by a company and an individual against Ability
and our controlling shareholders. The lawsuit amount for registration fee purposes is NIS 5 million (approximately $1.3 million),
however the plaintiffs did not specify the demanded compensation amount. The plaintiffs allege that certain of Ability’s
GSM interception and decryption systems apparently fall within the claim of an Israeli patent owned by the plaintiffs. Furthermore,
the plaintiffs demand that Ability and or its shareholders immediately cease any patent infringement as well as cease from any
further use of the claimed technology, including the further manufacture, export, sale or marketing of the alleged infringing
products. We believe the allegations are without merit and intend to vigorously defend against them. For additional information
see “Item 3D. Key Information - Risk Factors - Intellectual Property and Data/Systems Security
- The products and solutions
we sell may infringe or may be alleged to infringe on the intellectual property rights of others, which could lead to costly disputes
or disruptions for us and may require us to indemnify our customers and resellers for any damages they suffer
” and “Item
8A. Consolidated Statement and Other Financial Information - Legal Proceedings”. Defending against infringement claims or
other intellectual property claims could involve substantial costs and diversion of management resources. In addition, to the
extent we are not successful in defending such claims, we may be subject to injunctions with respect to the use or sale of certain
of the products in our portfolio or to liabilities for damage and may be required to obtain licenses which may not be available
or available on reasonable terms.
Licenses
We
engage in inbound licensing of certain components for our solutions. While it may be necessary in the future to seek or renew
licenses relating to various aspects of the solutions we offer, we believe, based on industry practice, such licenses generally
could be obtained from alternative sources on commercially reasonable terms.
Trademarks
and Service Marks
We
have not registered any trademarks or service marks.
Customers
The
principal customers for our solutions are governments and governmental agencies, such as security and intelligence agencies, military
forces, law enforcement agencies and homeland security agencies worldwide. We have sold to governments and government agencies
in over 50 countries, many of which are repeating customers.
The
following unaudited table presents our revenues for the years ended December 31, 2016, 2015 and 2014 by geographical region.
(U.S. dollars; in thousands)
|
|
Year Ended December 31,
|
|
Region
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Asia
|
|
$
|
9,230
|
|
|
$
|
8,373
|
|
|
|
5,973
|
|
Latin America
|
|
$
|
5,320
|
|
|
$
|
34,603
|
|
|
$
|
6,130
|
|
Europe
|
|
$
|
1,750
|
|
|
$
|
495
|
|
|
$
|
1,236
|
|
Israel
(1)
|
|
$
|
—
|
|
|
$
|
8,365
|
|
|
$
|
7,000
|
|
Africa
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
1,105
|
|
Other
|
|
$
|
208
|
|
|
|
315
|
|
|
$
|
—
|
|
Total
|
|
$
|
16,508
|
|
|
$
|
52,151
|
|
|
$
|
21,444
|
|
(1)
|
Sales
in Israel in 2015 and 2014 include sales to Israeli integrators that have been sold to end users in Asia and Africa, which
represented 16% and 33% of revenues during such periods, respectively.
|
For
the years ended December 31, 2016, 2015 and 2014, one significant reseller accounted for 47%, 66% and 33% of our revenues, respectively,
and one other reseller in each such fiscal period accounted for 32%, 13% and 29% of our revenues, respectively. Our sales to relatively
few significant resellers and customers could continue to account for a substantial percentage of our sales in the foreseeable
future.
Substantially
all of our resellers and customers do not permit us to identify them due to the sensitive nature of the solutions we sell to them
and projects we undertake on their behalf. Accordingly, we are not able to identify our customers in our marketing and sales materials
or the specific purpose for which certain solutions were sold or projects were undertaken. Moreover, we are unable to use substantially
all of our customers as referral sources. These limitations could adversely affect our marketing and sales efforts.
The
timing in which transactions are entered into may shift from one quarter to another
.
Among other things, this is due to
our customers choosing to shift their buying decisions, which may result in the shifting of bookings and revenues from one quarter
to another.
Customer
Service
We
typically provide our customers with on-site training for our products and solutions. Our standard warranty period is 12 months
and is included in the price. Support and maintenance is offered upon the expiry of the warranty period to the customer on an
annual basis for a fee equal to between 7% and 15% of the price. This technical support is provided over the phone, by email or
by remote access (subject to end user consent) in the first instance and, if an issue is not resolved, technical teams are sent
to the customer’s premises.
Marketing
and Sales
Sales
are generated through three principal channels:
(i)
Sales through resellers in various regions. We have a network of independent sales representatives active in most regions in which
we sell.
(ii)
A direct sales channel. Our direct sales efforts are led by our Chief Executive Officer, Chief Technology Officer and two additional
senior sales executives on a worldwide basis from our Tel Aviv headquarters.
(iii)
Sales to integrators as a component of larger projects, in which case we act as subcontractor to the integrator who acts as the
prime contractor.
Our
wholly-owned subsidiary, ASM, an Israeli company registered with the Israeli Defense Export Controls Agency as a certified exporter,
promotes and executes sales of our solutions that involve technologies controlled by the Israeli Defense Export Controls Agency.
In October 2013, Ability entered into a joint venture agreement with ASM, pursuant to which ASM exclusively provided contract
management services to Ability. At the closing of the Business Combination, we acquired 16% of ASM from Eyal Tzur, formerly ASM’s
sole shareholder, and Mr. Tzur had the right to put all, but not less than all, of the remaining shares of ASM to us (or our designated
entity) during the 14 month period following the closing of the Business Combination in exchange for 480,000 of our ordinary shares
and, if same was not exercised by Mr. Tzur, then, we had the right exercisable during the 90 days immediately following the foregoing
option period, to purchase all of the remaining ASM shares in exchange for 432,000 of our ordinary shares. On January 24, 2016,
Mr. Eyal Tzur exercised the foregoing put option, as a result of which ASM became our wholly-owned subsidiary, in exchange for
456,000 of our ordinary shares that were released from escrow to Mr. Tzur and 24,000 of our ordinary shares were held in escrow
until January 24, 2017 (i.e., one year following closing of the put option) to secure Mr. Tzur’s indemnification obligations
under the JV Share Purchase Agreement. For additional information see “Item 4A. Information on the Company – Merger
Agreement – JV Share Purchase Agreement.”
Competition
We
believe that the solutions and products we sell have several competitive advantages, including:
|
●
|
product
performance, functionality and portability;
|
|
●
|
product
quality, stability and reliability;
|
|
●
|
customization
of solutions to meet customer demands;
|
|
●
|
breadth
of product portfolio;
|
|
●
|
global
presence and high-quality, responsive customer service and support;
|
|
●
|
specific
industry knowledge and experience; and
|
We
believe that our flexibility and ability to react quickly to our customers’ requirements and needs provide us with a competitive
advantage.
Despite
these competitive advantages, we face competition in most of our markets. In each of our markets, we face competition from companies
with products that compete with the solutions or products we sell.
In
the cellular interception market, our principal competitors include Neosoft Technologies, Inc. and Verint Systems, Inc.
In
the satellite interception market, our principal competitors include Arpege Defence SAS, L3 TRL Technology Ltd. and Rohde &
Schwarz GmbH & Co KG.
In
the cyber market, our principal competitors include Gamma International GmbH, Hacking Team S.r.L., Magen Ltd., NSO Group Wintego
Systems Ltd. and several others.
Certain
of these competitors are also suppliers and/or customers of ours. We believe that our competitive success depends primarily on
our ability to provide technologically advanced and cost-effective solutions and services.
Research
and Development
We
do not conduct any research and development by ourselves, however, oftentimes, we assist and are involved in research and development
performed by third parties, mainly suppliers or contractors of ours. Such assistance and involvement may enable us to gain access
to new and advanced products, strengthens our relationships with our suppliers and contractors and ultimately introduce to the
market more suitable and advanced products and solutions, as well as enhance our existing products and solutions.
We
believe that the introduction of advanced products and solutions and the enhancement of existing products and solutions are essential
to our future success and depend on a number of factors, including among others, our ability to:
|
●
|
attract,
recruit and retain highly skilled and experienced personnel, as well as engaging suitable contractors and suppliers;
|
|
●
|
identify
and respond to emerging technological trends and areas of growth in our markets; and
|
|
●
|
continue
to offer and maintain competitive solutions and enhance our existing solutions to respond to our customers’ changing
needs and challenges and differentiate our solutions from those of our competitors.
|
Our
business strategy involves rolling out initial releases of the products and solutions in our portfolio and typically over time
features are added or enhanced. Product feedback received from our customers is incorporated into the development process.
Manufacturing
and Suppliers
During
the years ended December 31, 2016, 2015 and 2014, expenses incurred with respect to our three largest suppliers comprised 72%,
70% and 79% of cost of revenues, respectively, and one supplier accounted for 40%, 43% and 33% of costs of revenues in such periods,
respectively.
On
October 20, 2015, we entered into an agreement with a third party supplier who develops and licenses ULIN. This agreement may
account for a significant portion of our vendor costs, see “Item 5F. Operating and Financial Review and Prospects—Tabular
Disclosure of Contractual Obligations,” as well as a significant part of our revenues, see “Item 3D. Key Information
- Risk Factors -
Our revenues depend on the successful implementation and customer adoption of ULIN, the customer adoption
of which has been limited”
and “Item 3D. Key Information - Risk Factors -
ULIN sales are depended on a reseller
agreement with one supplier, which automatically terminates in October 2018
.” According to the agreement, the supplier
(an unrelated company) granted Ability an exclusive and non-transferable right and license to market, promote, advertise, sell
and distribute its products, none of which is sold or marketed under the supplier’s trademark, directly to customers worldwide
in consideration for 50% of Ability’s revenue relating to those sales, net of commissions. The agreement provides for minimum
annual sales of ULIN by Ability in the amount of $10 million revenues, net of commissions. If Ability does not satisfy this minimum
commitment at the end of any contract year, Ability is required to pay such supplier a 15% penalty against any shortfall, up to
a maximum penalty of $1.5 million per year. Under the agreement, Ability is required to pay the supplier $125,000 each month on
account of the minimum commitment (which may be set-off against any sales over the duration of the three-year contract term).
The agreement has a three year term and automatically terminates in October 2018, and may be terminated by a party in case of
the other party’s material breach, bankruptcy, insolvency, creditor assignment, liquidation, receivership or loss of control
of all or substantially all of its business. We may not be able to extend the agreement or may not be able to do so on terms favorable
to us. Further, during the term of the agreement, we must obtain the supplier's consent to, among other things, manufacture, sell
or market any product which competes with ULIN.
As
of December 31, 2016, we have completed one ULIN sale, and in order to support marketing efforts of ULIN in the relevant region,
the ULIN supplier waived its right to receive the excess of the 50% of the net revenues generated from such sale over the $1.5
million minimum commitment amount paid during the year ended in December 31, 2016.
Our
reliance on a limited number of suppliers involves risks. In the event that a key supplier ceases operations or otherwise ceases
to do business with us, it may take a substantial amount of time and expense for us to secure other suppliers.
We
have long-term relationships with most of our suppliers. Although we do not have redundant and immediate procurement solutions
for ULIN, we do have such solutions for most of the other products and solutions we sell. To date, we have been able to obtain
adequate supplies of all components in a timely manner from our suppliers or alternative sources, when necessary.
Ability’s
quality management system is certified under the ISO 9001:2015 standards promulgated by the International Organization for Standardization
for assembling (installation) of interception systems.
Export
Control Regulatory Matters
General
Ability
and some of its suppliers are subject to export control regulations in countries from which they export goods and services. These
controls may apply by virtue of the country from which the products or components are exported. If the export controls of a particular
country apply, the level of control generally depends on the nature of the goods and services in question as well as the identity
of the end user.
Applicable
Israeli Laws
Israeli
Defense Export Regime.
The Israeli Defense Export Control Law, 5766-2007 (the “2007 Law”) regulates the marketing
and export of certain defense equipment, software, technology, services and the transfer of defense know-how (collectively, “Defense
Products”), taking into account national security considerations, foreign relations considerations, international obligations
and other interests of the State of Israel. The 2007 Law provides that the marketing, sale and export of Defense Products require
a license from the Israeli Ministry of Defense (“IMOD”) via the Israeli Defense Export Controls Agency (“DECA”).
These licenses are issued by the IMOD for a certain period of time and are non-transferable. Fines and criminal sanctions may
be imposed for non-compliance with the 2007 Law. The 2007 Law also includes the regulation of brokerage activity relating to Defense
Products; however, these regulations have not been implemented, as required, by executive order, and therefore have not entered
into force to date. The IMOD issued the Export Control Order (Military Equipment), 2008, which lists all of the items that are
controlled pursuant to the 2007 Law. The Ministry of Economy (“MOE”) has also promulgated the Export Control Order
(Dual-Use Controlled Equipment), 2008 (the “Dual Use Order”), which refers to commercial items that may also be used
for either military or defense purposes. The export of all these items are ordinarily regulated by the MOE, except in the case
of government end-users, in which case the IMOD (DECA) regulates the marketing and export of such items. The Dual Use Order also
incorporates annually the updated lists from Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods
and Technologies.
Israeli
Encryption Order.
Our activities may also be subject to the Order Governing the Control of Commodities and Services (Engagement
in Encryption Items) — 1974, as amended in 1998 (the “Encryption Order”) and the Declaration Regarding the Control
of Commodities and Services (Engagement in Encryption Items) 1974, as amended in 1998 (the “Declaration”), both of
which were issued under the authority of the Minister of Defense derived from the Law Governing the Control of Commodities and
Services — 1957 (the “1957 Law,” and collectively, the “Encryption Order”). The Encryption Order
regulates all activities relating to encryption and decryption in Israel and/or by Israelis, including the development of encryption
technology, as well as the marketing, import, export, sale and license of encryption products.
Applicable
Export Practices
Overview
.
ASM, a wholly-owned subsidiary of ours, is an Israeli company registered with DECA as a certified exporter. Ability’s solutions
that are subject to export control pursuant to the 2007 Law, as well as the Dual Use Order, are marketed, sold and exported exclusively
by ASM. Notwithstanding the foregoing, Ability and ASM apply directly to DECA for encryption permits, as required.
Encryption
Items
. Our interception systems that contain decryption capabilities are subject to the Encryption Order. Even though our
activities in this area rely on non-Israeli suppliers and are not developed in or exported from Israel (or related to Israeli
know-how), Ability has determined that all of its decryption items are regulated by the Israeli Encryption Order and each of Ability
and ASM requests and obtains the necessary licenses as needed on an ongoing basis.
Non-Israeli
Components
. Any components that are manufactured outside of Israel (and would be deemed Defense Products under the 2007 Law
if they were imported into Israel) are “drop-shipped” to the customers directly by the foreign suppliers of such components,
which are located outside of Israel. In cases where Ability and/or its non-Israeli suppliers supply foreign-sourced components
to an integrator in Israel and the export from Israel to the end-user is performed by the Israeli integrator, the integrator assumes
full responsibility to apply for the required marketing and export licenses from DECA.
Israeli
Components
. Any systems that include components that are imported into Israel and/or manufactured in Israel and are Defense
Products pursuant to the 2007 Law, are marketed and sold exclusively by ASM, except in certain cases as described above under
“Non-Israeli Components.”
Non-Israeli
Aspects
If
we expand our geographic scope, we may also be subject to applicable export control regulations in other countries from which
we export goods and services, including the United States. Such regulations may apply with respect to product components that
are developed or manufactured in, or shipped from, the United States. In the event that the products and services we offer are
subject to such additional controls and restrictions, we may be required to obtain an export license or authorization and comply
with other applicable requirements pursuant to such regulations.
Any
regulatory aspects of the export of goods and services by non-Israeli suppliers in relation to non-Israeli regulatory requirements
is the responsibility of the foreign supplier.
|
C.
|
Organizational
Structure
|
We
are a holding company operating through our wholly-owned subsidiaries, Ability Computer & Software Industries Ltd. and Ability
Security Systems Ltd., both Israeli companies.
At
the closing of the Business Combination, we purchased 16% of ASM from its former sole shareholder, Eyal Tzur. On January 24, 2016,
Eyal Tzur exercised his put option and we purchased the remaining shares of ASM, following which ASM became our wholly-owned subsidiary.
For additional information, see “Item 4A. Information on the Company – Merger Agreement – JV Share Purchase
Agreement.”
|
D.
|
Property,
Plants and Equipment
|
We
do not own any real property. We have entered into lease agreements for our headquarters and laboratory, each on the 7
th
floor of 14 Yad Harutzim Street, Tel Aviv, Israel, and installation and our quality assurance facility at 10/28-30 Havoda
Street, Ariel, Israel.
The
lease details are as follows:
Headquarters
:
400 square meters. The term of the lease is from December 1, 2012 through November 30, 2017, with an option to extend for an additional
60 months. The rent for the headquarters is NIS 25,000 (approximately $6,500) per month. If the option is exercised, the rent
will increase by 7%.
Laboratory
:
360 square meters. The term of the lease is from May 1, 2015 through November 30, 2017, with an option to extend for 60 months.
The rent for the laboratory is NIS 16,350 (approximately $4,250) per month. If the option is exercised, the rent will increase
by 7%.
Installation
and Quality Assurance Facility
: 60 square meters. The initial term of the lease was from August 15, 2015 through August 15,
2016 and the term was extended until April 1, 2018, and Ability has an option to extend the lease until August 15, 2019. The monthly
rent for the facility for the initial term and the option period is NIS 5,000 (approximately $1,300).
Item
4A. Unresolved Staff Comments
Not
applicable.
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 “Item 3. Key
Information—Selected Financial Data” and our consolidated financial statements and the related notes to those statements
included elsewhere in this Annual Report. In addition to historical consolidated financial information, the following discussion
and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing
of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors,
including those discussed under “Item 3. Key Information—D. Risk Factors” and elsewhere in this Annual Report.
The
audited consolidated financial statements for the years ended December 31, 2016, 2015 and 2014 in this Annual Report have been
prepared in accordance with U.S. GAAP.
Overview
We
are a holding company operating through our wholly-owned subsidiaries, Ability and ASM, which provide advanced interception, geolocation
and cyber intelligence products and solutions that to serve the needs and increasing challenges of security and intelligence agencies,
military forces, law enforcement agencies and homeland security agencies worldwide. We believe that our advanced comprehensive
capabilities in both the area of interception of communications and geolocation set us apart from our competitors.
Founded
in 1994, Ability has 16 years of proven experience in the fields of interception and geolocation. We specialize in off-air interception
of voice, SMS and data communication from both cellular (GSM/CDMA UMTS/LTE) and satellite communication networks and deciphering
solutions for both cellular and satellite communications. Our portfolio of cellular communications solutions includes, in addition
to interception of voice, SMS, and data, an advanced geolocation system and cyber solutions. The geolocation solutions we offer
geographically target mobile phones and are sold independently or as an additional feature within other systems. The cyber solutions
provide the user with the ability to extract and view information from mobile phones. We also offer a system that can detect the
existence of active interception systems (such as active cellular interception systems, fake SMS advertising systems and IMSI/IMEI
catchers), can prevent interception by such systems and “intercept the interceptor,” allowing the user to listen to
and manipulate the intercepted information. Our portfolio of satellite solutions includes advanced interception systems for Iridium,
Thuraya, IsatPhone and VSAT communications. Both our cellular and satellite interception solutions can be used either as portable
stand-alone tactical systems or can be integrated into larger scale fixed strategic systems. We believe that the products and
solutions we offer enable security agencies, law enforcement agencies and armed forces to gain a tactical and situational advantage
over highly mobile and covert adversaries and believe that we are among the few companies with an offering and suite of solutions
that targets all segments of the lawful interception market.
Accounting
Treatment of the Business Combination
We
were
incorporated under the laws of the Cayman Islands
under the name “Cambridge
Holdco Corp.”,
as an exempted company on September 1, 2015
. We were formed
as a wholly-owned subsidiary of Cambridge, a company formed in order to effect a merger, capital stock exchange, asset acquisition
or other similar business combination with one or more businesses or entities. Cambridge was incorporated under the laws of Delaware
on October 1, 2013. On December 23, 2013, Cambridge closed its initial public offering and a simultaneous private placement.
On
December 23, 2015, Cambridge merged with and into Holdco with Holdco surviving the merger and becoming the public entity, and
Holdco consummated the Business Combination by acquiring Ability, following which Ability became a wholly-owned subsidiary of
Holdco. For a more detailed description of the Business Combination, see “Item 4A. Information on the Company – History
and Development of the Company – Merger Agreement.”
The
Business Combination is accounted for as a reverse merger, whereby Cambridge is treated as the “acquired” company
for financial reporting purposes. This determination is primarily based on Ability comprising the ongoing operations of the combined
company, Ability’s senior management comprising the senior management of the combined company and Ability’s former
shareholders being the controlling shareholders of the combined company after the Business Combination. The Business Combination
is considered to be a capital transaction in substance. Accordingly, for accounting purposes, the Business Combination is treated
as the equivalent of Ability issuing shares for the net assets of Cambridge, accompanied by a recapitalization. The net assets
of Cambridge are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business
Combination are those of Ability; therefore, the historical consolidated financial statements presented are the historical consolidated
financial statements of Ability and the ordinary shares and the corresponding capital amounts pre-merger have been retroactively
restated as ordinary shares reflecting the exchange ratio in the merger.
Historically,
Ability’s financial statements include the financial information of ASM, which was viewed as a variable interest entity
of Ability prior our acquisition of the remaining 84% of the shares of ASM in January 2016. For additional information, see Note
1 to the audited consolidated financial statements for the year ended December 31, 2016 included elsewhere in this Annual Report.
Restatement
of Previous Financial Statements
In
our annual report on Form 20-F for the year ended December 31, 2015, our consolidated financial statements for the year ended
December 31, 2015, our consolidated financial statements as of December 31, 2014 and for the two years in the period then ended
were restated to reflect correction of errors with respect to previously unrecognized commissions due to a vendor on revenues
that were recognized in 2014, 2013 and 2012; improper allocation and timing of revenue recognition from connection to supportive
infrastructure in multiple element sale transactions recognized in 2014, 2013 and 2012; and previously unrecognized commissions
due to a third party on cost of revenues that were recognized in 2014.
We
have conducted an internal investigation, overseen by our audit committee, into the facts and circumstances surrounding the restatement.
The audit committee was assisted by external consultants. The SEC subsequently sent a subpoena requesting, among other things,
information regarding the transaction with Cambridge Capital Acquisition Corporation, the restatement that occurred in May 2016,
and financial and business information. See the risk factor “
We are under an investigation by the SEC, which could divert
management's focus, result in substantial investigation expenses, monetary fines and other possible remedies and have an adverse
impact on our reputation and financial condition and results of operations
.” To decrease the risk of future restatements,
we intend to continue to establish formal policies, processes and practices related to financial reporting, and intend to enhance
the formality and rigor of review and reconciliation of amounts due to major vendors as well as our review procedures with respect
to multiple element transactions. For additional information on the initiatives we are taking to improve our financial controls,
see “Item 15. Controls and Procedures - Remediation of Material Weaknesses.”
Summary
of Critical Accounting Policies
The
preparation of consolidated financial statements in conformity with general accepted accounting principles require management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Critical accounting policies are those that are the most important to the portrayal of our financial condition and results
of operations, and that require our most difficult, subjective and complex judgments. While our significant accounting policies
are described in more detail in the notes to our financial statements, our most critical accounting policies, discussed below,
pertain to revenue recognition and income taxes. Estimates, by their nature, are based upon judgments and information currently
available to us. The estimates that we make are based upon historical factors, current circumstances and the experience and judgment
of management. We evaluate our assumptions and estimates on an ongoing basis.
Revenue
recognition
We
generate revenues from sales of products, which include hardware, software, connection to supportive infrastructure, integration
services, training and warranty, as well as revenues from Software as a Service, or (“SaaS”). We sell products and
provide services directly to end users and resellers and also participate as a subcontractor of prime contractors in joint projects
and as a prime contractor in projects with resellers.
When
a sale arrangement contains multiple elements, we allocate revenues to each element based on a selling price hierarchy. The selling
price for a deliverable is based on its vendor-specific objective evidence (“VSOE”), if available, third party evidence
(“TPE”), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is available.
We establish VSOE of selling price using the price charged for a deliverable when sold separately. When VSOE cannot be established,
we attempt to establish selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables
when sold separately. Generally, our go-to-market strategy typically differs from that of our peers and our offerings contain
a significant differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore,
we are unable to reliably determine what similar competitor products’ selling prices are on a standalone basis. Therefore,
we are typically not able to determine TPE. The best ESP is established considering several external and internal factors including,
but not limited to, historical sales, pricing practices and geographies in which we offer products for sale. The determination
of ESP is based on the application of significant judgment in evaluating such factors.
Products
and Services
. Revenues from sales of products are recognized when we have delivered products to the customer and retained
final acceptance, the revenue can be reliably measured and collectability of the receivables is reasonably assured. Revenues from
sales of services are recognized ratably in the period in which the services are rendered. Services generally include connection
to a networked infrastructure for a period of at least one year.
Projects
.
Revenues from projects are recognized using the completed-contract method to determine the appropriate amount in a given period,
as we are unable to produce reasonably dependable estimates due to involvement of many subcontractors and lack of transparency
of prime contractors’ progress.
Under
the completed-contract method, costs are accumulated on the balance sheet until the contract is completed or substantially completed.
Similarly, amounts billed to customers are also deferred until the contract is completed or substantially completed. To the extent
that the amount of accumulated costs exceeds the amount of advance (or progress) payments received or billed by us, the excess
should be reflected on the balance sheet as a current asset, separated from inventory. To the extent that the amount of advance
(or progress) payments received or billed by us exceeds the amount of accumulated costs, the excess is reflected as a liability
on the balance sheet.
In
instances where revenues are derived from sales of third party vendors’ products or services, revenues are recognized on
a gross basis and the related costs are recognized within cost of revenues when we have the following indicators for gross reporting:
we are the primary obligor of the sales arrangements, we are subject to inventory risks of physical loss, have latitude in establishing
prices, have discretion when selecting suppliers and assume credit risks on receivables from customers.
SaaS
Revenues
. Our SaaS multiple-element arrangements are typically comprised of subscription and support fees from customers accessing
our software and set-up fees. We do not provide the customer the contractual right to take possession of the software at any time
during the hosting period under these arrangements. We recognize revenue for subscription and support services over the contract
period originating when the subscription service is made available to the customer and the contractual hosting period has commenced.
Usage
based fees
. Revenues are recognized in the period in which subscribers use the related services.
Income
Tax
Deferred
tax asset and liability accounts’ balances are determined based on differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Ability accounts for deferred taxes on non-distributed income that are subject to income taxes once distributed
and when there is an intent to distribute them.
Ability
applies the two-step approach in recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position
taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely
than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of
any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more
than 50% likely to be realized upon ultimate settlement.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 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 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 guidance permits the use of either a retrospective or cumulative effect transition method. We have not
yet selected a transition method. We are still finalizing the analysis to quantify the impact of the adoption of the provisions
of the new standard. The FASB has issued, and may issue in the future, interpretive guidance which may cause our evaluation to
change. Management believes that we are following an appropriate timeline to allow for proper recognition, presentation and disclosure
upon adoption effective the beginning of fiscal year 2018.
In
February 2016, the FASB issued ASU No. 2016-02, which supersedes the lease accounting guidance in ASC 840, Leases. The new guidance
requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception
of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement.
Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. The amendments
are effective for reporting periods (interim and annual) beginning after December 15, 2018 with early adoption permitted. The
amendments must be adopted using a modified retrospective approach. We are currently assessing the potential impact of this ASU
on our consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13, which replaces the incurred loss impairment methodology in current U.S. GAAP for recognizing
credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable
and supportable information to inform credit loss estimates. For trade and other receivables, the guidance requires the use of
a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses
that are probable. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for
credit losses rather than as a reduction in the amortized cost basis of the securities. The amendments are effective for reporting
periods (interim and annual) beginning after December 15, 2019. Early adoption is permitted as of reporting periods beginning
after December 15, 2018, including in interim periods. The amendments will be applied through a cumulative-effect adjustment to
retained earnings as of the beginning of the first reporting period in which the amendments are effective. We are currently assessing
the potential impact of this ASU on our consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15, which addresses whether to present certain specific cash flow items as operating,
investing or financing activities. The amendments are effective for reporting periods (interim and annual) beginning after December
15, 2017. Early adoption is permitted. The amendments will be applied retrospectively to each period presented. We are currently
assessing the potential impact of this ASU on our consolidated financial statements.
In
October 2016, the FASB issued ASU No. 2016-16, which removes the current exception in US GAAP prohibiting entities from recognizing
current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated
entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated
entity until it is sold to a third party remains unaffected. The amendments are effective for reporting periods (interim and annual)
beginning after December 15, 2017, with early adoption permitted. The amendments will be applied on a modified retrospective basis
through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently
assessing the potential impact of this ASU on our consolidated financial statements.
In
November 2016, the FASB issued ASU No.2016-18, which provides guidance on the classification and presentation of changes in restricted
cash or restricted cash equivalents in the statement of cash flows under Topic 230, Statement of Cash Flows. The amendments are
effective for reporting periods (interim and annual) beginning after December 15, 2017 with early adoption permitted. The amendments
will be applied retrospectively to each period presented. We are currently assessing the potential impact of this ASU on our consolidated
financial statements.
The
following table sets forth a summary of our operating results:
(U.S. dollars; in thousands, except per share data)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenues
|
|
|
16,508
|
|
|
|
52,151
|
|
|
|
21,444
|
|
Cost of revenues
|
|
|
8,617
|
|
|
|
29,654
|
|
|
|
13,968
|
|
Gross profit
|
|
|
7,891
|
|
|
|
22,497
|
|
|
|
7,476
|
|
Sales and marketing expenses
|
|
|
5,323
|
|
|
|
3,305
|
|
|
|
3,064
|
|
General administrative expenses
|
|
|
9,662
|
|
|
|
1,317
|
|
|
|
469
|
|
Operating income (loss)
|
|
|
(7,094
|
)
|
|
|
17,875
|
|
|
|
3,943
|
|
Finance expenses (income), net
|
|
|
(127
|
)
|
|
|
99
|
|
|
|
(269
|
)
|
Income (loss) before income tax
|
|
|
(6,967
|
)
|
|
|
17,776
|
|
|
|
4,212
|
|
Income tax expenses
|
|
|
1,086
|
|
|
|
3,023
|
|
|
|
1,090
|
|
Net and comprehensive income (loss)
|
|
|
(8,053
|
)
|
|
|
14,753
|
|
|
|
3,122
|
|
Basic and diluted income (loss) per share
|
|
|
(0.33
|
)
|
|
|
0.60
|
|
|
|
0.13
|
|
Year
ended December 31, 2016 compared to year ended December 31, 2015
Revenues
Revenues
for the year ended December 31, 2016 were $16.5 million, a decrease of $35.7 million, or 68%, compared to total revenues of $52.2
million for the year ended December 31, 2015.
The
table below sets forth Ability’s revenues by region for the periods presented:
(U.S. dollars; in thousands)
|
|
Year
Ended
December 31,
|
|
Region
|
|
2016
|
|
|
2015
|
|
Asia
|
|
$
|
9,230
|
|
|
$
|
8,373
|
|
Latin America
|
|
|
5,320
|
|
|
|
34,603
|
|
Europe
|
|
|
1,750
|
|
|
|
495
|
|
Israel
|
|
|
—
|
|
|
|
8,365
|
|
Other
|
|
|
208
|
|
|
|
315
|
|
Total
|
|
$
|
16,508
|
|
|
$
|
52,151
|
|
Revenues
for the year ended December 31, 2016 and 2015 were primarily attributed to sales of legacy tactical cellular interception systems
and during the year ended December 31, 2016, we completed one ULIN sale to a Latin American government, the revenues for which
are recognized ratably over a one year period commencing September 2016. The decrease in revenues for the year ended December
31, 2016 was primarily attributable to the project-oriented nature of our business and the completion of a number of large projects
in Latin America and Israel in 2015, as well as the ongoing transition to a revenue stream more focused on ULIN, which we introduced
in November 2015. We expected that ULIN would be a major growth driver of our sales and revenues. However, since the introduction
of ULIN, customer adoption of ULIN has been much slower than we had anticipated, and while we have seen significant interest in
ULIN and its advanced capabilities, we had only completed one ULIN sale as of December 31, 2016. We believe that the limited customer
adoption to date of ULIN, notwithstanding its competitive advantage over tactical interception solutions, is primarily due to
its increased costs compared to such tactical interception solutions, as well as the market’s desire for a product capable
of intercepting data communication in addition to cellular communication, and ULIN’s inability to intercept cellular communication
within some network operators. We believe that continued increase in usage of new communication channels and the technological
developments in the cellular communications industry (such as an increased number of cellular networks, mobile operators and frequencies),
which have resulted in tactical cellular interception systems becoming more complex and expensive, will contribute to the competitive
strength and distinctiveness of ULIN, which in turn will result in an increased demand for ULIN. We believe that the significant
increase in the length of the ULIN sales cycle compared to our legacy tactical interception solutions is primarily due to the
difficulties described above and lengthy purchasing approval processes for ULIN, oftentimes requiring the approval of the most
senior levels of government. Furthermore, since the introduction of ULIN, while we have continued to offer our legacy tactical
cellular interception solutions, we have experienced a significant decline in sales of our existing portfolio of solutions and
products within the cellular interception category and we cannot assure you that ULIN will not render a substantial percentage
of our existing product portfolio obsolete. In addition, increased usage of new communication channels and technological developments
in the cellular communications industry (such as an increased number of cellular networks, mobile operators and frequencies) have
resulted in cellular interception systems becoming more complex, expensive and limited in their interception capabilities, which
we believe in turn have also had an adverse effect on sales of our legacy tactical cellular interception solutions.
Although
with respect to certain periods in the past we provided guidance and projections, given that we were unable to accurately predict
our revenues during such periods, due to, among others things, the pricing, margins and other deal terms of our engagements which
may vary substantially from transaction to transaction, the extended time frame and uncertainty associated with many of our sales
opportunities, and the unpredictable sales cycles of ULIN, we ceased to, and shall not in the foreseeable future, provide guidance
or forecasts.
Cost
of Revenues
Cost
of revenues for the year ended December 31, 2016 were $8.6 million, a decrease of $21.1 million, or 71%, compared to cost of revenues
of $29.7 million for the year ended December 31, 2015. The decrease in cost of revenues was primarily due to decreased costs for
components for our solutions corresponding to the decrease in revenues in the period and also due to reduced cost of revenues
in connection with the first sale of ULIN in the year ended December 31, 2016, due to the waiver of the ULIN supplier to its right
to the excess of the 50% of the net revenues generated from such sale over the annual $1.5 million minimum commitment amount such
supplier is entitled to.
Gross
Profit
Gross
profit for the year ended December 31, 2016 was $7.9 million, a decrease of $14.6 million, or 65%, compared to gross profit of
$22.5 million for the year ended December 31, 2015. Gross profit as a percentage of total revenues increased to 48% for the year
ended December 31, 2016, compared to 43% for the year ended December 31, 2015, primarily due to the absence of cost of revenues
in connection with the first sale of ULIN in the year ended December 31, 2016, due to the waiver of the ULIN supplier to its right
to the excess of the 50% of the net revenues generated from such sale over the annual $1.5 million minimum commitment amount such
supplier is entitled to.
Sales
and Marketing Expenses
Sales
and marketing expenses for the year ended December 31, 2016, were $5.3 million, an increase of $2.0 million, or 61%, compared
to $3.3 million year ended December 31, 2015. The increase in sales and marketing expenses was primarily due to the $1.9 million
expense on account of our minimum commitment under the agreement with the ULIN supplier (including $1.5 million for 2016 and $0.4
million for the fourth quarter of 2015 which was initially recorded as current assets as of December 31, 2015 and subsequently
allocated to sales and marketing expenses in the absence of substantial ULIN sales that could be offset against the minimum commitment
amount) and a $0.5 million accrual on account of a discretionary bonus to one of our sales executives, which was partially offset
by a decrease in commissions accrued on revenues for 2016 due to the decrease in revenues year over year.
General
and Administrative Expenses
General
and administrative expenses were $9.7 million for the year ended December 31, 2016, an increase of $8.4 million, or 634%, compared
to $1.3 million for the year ended December 31, 2015. The increase in general and administrative expenses was primarily due a
$8.3 million increase in legal and professional services fees, including $2.6 million of legal expenses incurred in connection
with the internal investigation we conducted that was overseen by our audit committee, as well as a $2.0 million provision recorded
on account of an approved settlement in connection with a legal proceeding and related legal expenses.
Operating
Income (Loss)
We
had an operating loss of $7.1 million for the year ended December 31, 2016, a decrease of $25 million, or 140%, compared to operating
income of $17.9 million for the year ended December 31, 2015. The decrease in operating income was primarily due to the $35.7
million decrease in revenues and the increase of $2 million in sales and marketing expenses and $8.4 million in general and administrative
expenses, partially offset by the $21.1 million decrease in cost of revenues.
Finance
Expenses (Income), Net
Finance
income, net for the year ended December 31, 2016, was $0.1 million, an increase of $0.2 million compared to finance expenses,
net of $0.1 million for the year ended December 31, 2015. The change in finance expenses (income), net, related primarily to fluctuations
in the exchange rate between the US dollar and the New Israeli Shekel.
Income
Tax Expenses
Income
tax expenses for the year ended December 31, 2016 were $1.1 million, a decrease of $1.9 million, compared to $3.0 million for
the year ended December 31, 2015. This decrease was primarily due to the loss before income tax we incurred for the period. The
2016 income tax expenses consist of a one-time tax expense of $1.1 million that we incurred for the year ended December 31, 2016,
in connection with a tax assessment agreement for the three years ended December 31, 2014, reached on May 30, 2016, between the
Israel Tax Authority and Ability. In addition, we applied a full valuation allowance for the deferred tax assets previously recorded,
primarily on account of the net loss in the current period, as a result of the substantial doubt about our ability to continue
as a going concern (see “Item 3D. Key Information - Risk Factors - Risks Related to our Business and Our Financial Position
- “
The report of our independent registered public accounting firm contains an explanatory paragraph regarding substantial
doubt about our ability to continue as a going concern.”
and Note 1.f. to the audited consolidated financial statements
for the year ended December 31, 2016 included elsewhere in this Annual Report).
Net
and Comprehensive Income (Loss)
Net
and comprehensive loss was $8.1 million, or a loss of $0.33 per basic and diluted share, for the year ended December 31, 2016,
a decrease of $22.9 million, compared to net and comprehensive income of $14.8 million, or income of $0.60 per basic and diluted
share, for the year ended December 31, 2015. The decrease in net and comprehensive income (loss) was primarily due to the $25
million decrease in operating income, partially offset by the decrease of $0.2 million in finance expense (income) and $1.9 million
in income tax expenses.
Year
ended December 31, 2015 compared to year ended December 31, 2014
Revenues
Revenues
for the year ended December 31, 2015 were $52.2 million, an increase of $30.8 million, or 143%, compared to total revenues of
$21.4 million for the year ended December 31, 2014.
The
table below sets forth Ability’s revenues by region for the periods presented:
(U.S. dollars; in thousands)
|
|
Year
Ended
December 31,
|
|
Region
|
|
2015
|
|
|
2014
|
|
Asia
|
|
$
|
8,373
|
|
|
$
|
5,973
|
|
Africa
|
|
|
—
|
|
|
|
1,105
|
|
Latin America
|
|
|
34,603
|
|
|
|
6,130
|
|
Europe
|
|
|
495
|
|
|
|
1,236
|
|
Israel
|
|
|
8,365
|
|
|
|
7,000
|
|
Other
|
|
|
315
|
|
|
|
—
|
|
Total
|
|
$
|
52,151
|
|
|
$
|
21,444
|
|
Revenues
for the year ended December 31, 2014 were primarily attributed to sales of geolocation systems. The significant increase in revenues
for the year ended December 31, 2015 was attributable to Ability’s increased focus on the Latin American market and completion
of four large projects with a federal law enforcement agency in the region, of which two projects ($7.7 million and $7.6 million)
were fixed interception systems and two projects were portable interception systems ($10.0 million and $8.0 million). Furthermore,
there was a significant increase in revenues for the year ended December 31, 2015 from Asia, primarily due to a significant project
(totaling $6.1 million) of cyber systems with an intelligence agency in the region, which were introduced to the market in the
beginning of 2014.
Cost
of Revenues
Cost
of revenues for the year ended December 31, 2015 were $29.7 million, an increase of $15.7 million, or 112%, compared to cost of
revenues of $14.0 million for the year ended December 31, 2014. The significant increase in cost of revenues was primarily due
to increased costs for product components corresponding to the increase in revenues.
Gross
Profit
Gross
profit for the year ended December 31, 2015 was $22.5 million, an increase of $15.1 million, or 201%, compared to gross profit
of $7.4 million for the year ended December 31, 2014. Gross profit as a percentage of total revenues increased to 43.0% for the
year ended December 31, 2015, compared to 35.0% for the year ended December 31, 2014, primarily due to increased sales of higher
margin products and more complex projects completed during 2015.
Sales
and Marketing Expenses
Sales
and marketing expenses for the year ended December 31, 2015, were $3.3 million, an increase of $0.3 million, or 8%, compared to
$3.0 million year ended December 31, 2014. The increase in sales and marketing expenses is primarily due to an increase in commissions
accrued on revenues recognized for the period.
General
and Administrative Expenses
General
and administrative expenses were $1.3 million for the year ended December 31, 2015, an increase of $0.8 million, or 181%, compared
to $0.5 million for the year ended December 31, 2014. The increase in general and administrative expenses related primarily to
an expense incurred due to a loss of $0.5 million. Ability was a victim of fraud committed by an outside, unrelated third party
resulting in an unauthorized outgoing transaction of $0.5 million from Ability.
Operating
Income
Operating
income was $17.9 million for the year ended December 31, 2015, an increase of $14.0 million, or 353%, compared to $3.9 million
for the year ended December 31, 2014. The increase in operating income was primarily due to $30.8 million increase in revenues,
offset in part by an increase of $15.7 million of cost of revenues, a $0.3 million increase in sales and marketing expenses and
$0.8 million increase in general and administrative expenses.
Finance
Expenses (Income), Net
Finance
expenses, net for the year ended December 31, 2015, was $0.1 million, an increase of $0.4 million compared to a finance income,
net of $0.3 million for the year ended December 31, 2014. The change in finance expenses, net, related primarily to fluctuations
in the exchange rate between the US dollar and the New Israeli Shekel.
Income
Tax Expenses (Benefit)
Income
tax expenses for the year ended December 31, 2015 were $3.0 million, an increase of $1.9 million, compared to $1.1 million for
the year ended December 31, 2014. The increase was due to the increase in income before income tax, partially offset by a lower
tax rate. Ability’s effective tax rate was approximately 17% and 25% for the years ended December 31, 2015 and 2014, respectively.
Prior to 2015, Ability was granted an “Approved Enterprise” status under the Investment Law for the ten years ended
December 31, 2014 and it received a deferral of corporate income tax on non-distributed income generated by the Approved Enterprise,
and distributed income generated by the Approved Enterprise was subject to 25% corporate income tax at the Ability level. As all
income generated by the Approved Enterprise in 2014 was distributed, Ability was subject to a corporate tax rate of 25% in 2014.
Beginning January 1, 2015, Ability elected to participate in the “Preferred Enterprise” program under the amendment
to the Investment Law. Due to Ability’s “Preferred Enterprise” status, Ability expects to benefit from a reduced
tax rate of 16% in 2015 and thereafter with respect to taxable income generated by the Preferred Enterprise, regardless of whether
such income is distributed, and all other taxable income will be subject to the standard corporate tax rate.
Net
and Comprehensive Income (Loss)
Net
and comprehensive income was $14.8 million, or $0.60 per basic and diluted share, for the year ended December 31, 2015, an increase
of $11.7 million, compared to $3.1 million, or $0.13 per basic and diluted share, for the year ended December 31, 2014. The increase
in net and comprehensive income was primarily due to a $14.0 million increase in operating income, offset in part by a $0.4 million
increase in finance expenses and $1.9 million increase in income tax expenses.
Government
Policies
We
are incorporated in the Cayman Islands and our headquarters, operations and sales office are located in the State of Israel. Due
to the nature of our operations, we are subject to stringent requirements in terms of export controls for military, defense and
“dual use” items. See “Item 3D. Key Information – Risk Factors – Risks Relating to our Business
and Risk Relating to our Operations in Israel” and “Item 4B. Information on the Company – Business Overview
– Export Control Regulatory Matters” for a description of governmental, economic, fiscal, monetary and political policies
or factors that have materially affected or could materially affect our operations.
Government
Contracts
All
of our revenues to date have been generated, directly and indirectly, from contracts with national, regional and local governmental
agencies, authorities and security organizations, many of which have complex and time consuming procurement procedures. A substantial
period of time often elapses from the time we enter into negotiations until we actually deliver the product to the specific customer.
Government contracts are further subject to special risks, such as delays in funding, termination of contracts at the convenience
of the government, reduction or modification due to changes in the government’s policies or priorities. Our sales to these
customers are directly affected by their budgetary constraints, the priority given to the procurement of products and services
from us and the government’s normal spending cycle. A decrease or delay in governmental funding would adversely affect our
results of operations. This risk is heightened during periods of global economic slowdown, recession, economic instability, political
unrest, armed conflicts or natural disasters.
Preferred
Enterprise Program
We
are managed and controlled from Israel and are considered by the Israeli Tax Authority as a company domiciled in Israel and subject
to Israeli corporate tax, capital gains tax and any other relevant taxes. The Israeli corporate tax rate was 26.5% in 2014 and
2015. Beginning January 1, 2016, the Israeli corporate tax rate was reduced to 25%, beginning January 1, 2017 the corporate tax
rate was reduced to 24% and beginning January 1, 2018 the corporate tax will be reduced to 23%. Under the Investment Law, Ability
expects to be eligible for certain tax benefits provided to “Preferred Enterprises,” including a reduced tax rate
of 14.6% in 2015 and 2016 and a reduced tax rate, not yet determined, in 2017 and thereafter, with respect to taxable income generated
by the Preferred Enterprise. All other taxable income will be subject to the standard Israeli corporate tax rate. See “Item
10E. Additional Information – Taxation – Israeli Taxation” and “Item 3D. Key Information – Risk
Factors – Risks Relating to our Operations in Israel” for further details.
|
B.
|
Liquidity
and Capital Resources
|
Liquidity
Due
to a significant decline in revenues and an increase in legal and professional services fees, we have suffered losses from operations,
and we have a net capital deficiency that, among other reasons, raises substantial doubt about our ability to continue as a going
concern. At December 31, 2016, we had cash and cash equivalents of $11.8 million and working capital of $8.4 million, compared
to cash of $25.8 million and working capital of $17.3 million as of December 31, 2015. Our working capital as of December 31,
2016, is primarily comprised of cash and cash equivalents.
Cash
Flows
Operating
Activities
Net
cash used in operating activities for the year ended December 31, 2016 was $10.6 million, a decrease of $20.8 million, compared
to net cash provided by operating activities of $10.2 million for the year ended December 31, 2015, a decrease of $2.7 million
compared to net cash provided by operating activities of $12.9 million for the year ended December 31, 2014.
Net
cash used in operating activities for the year ended December 31, 2016, consisted primarily of net loss of $8.1 million and decreases
in income tax payable, accrued expenses and accounts payable with respect to projects and progress payments in excess of accumulated
costs with respect to projects of $2.7 million, $2.2 million and $1.2 million, respectively, and an increase in restricted deposits
of $1.4 million, partially offset by an increase of accounts payable, accrued expenses and other accounts payable of $3.1 million
and a decrease of other current assets of $1.5 million. Non-cash expenses during the year ended December 31, 2016 consisted primarily
of impairment of inventory, amortization, depreciation and impairment of fixed assets of $0.2 million, $0.2 million, $0.1 million
and $0.1 million, respectively. Net cash provided by operating activities for the year ended December 31, 2015, consisted primarily
of net income of $14.8 million and increases in income taxes payable and accrued expenses and accounts payable with respect to
projects of $2.4 million and $3.1 million, respectively, partially offset by an increase in accounts receivable and progress payments
in excess of accumulated costs with respect to projects of $3.8 million and $5.3 million respectively. Non-cash expenses during
the year ended December 31, 2015 consisted primarily of $0.1 million of depreciation.
Net
cash provided by operating activities in 2014 consisted primarily of net income of $3.1 million and increases in accrued expenses
and accounts payable with respect to projects and progress payments in excess of accumulated costs with respect to projects and
deferred taxes of $3.4 million and $4.9 million and $0.9 million, respectively, partially offset by an increase of $0.2 million
in inventory. Non-cash expenses for the year ended December 31, 2014 consisted primarily of $0.1 million of depreciation.
Investing
Activities
Net
cash used in investing activities for the year ended December 31, 2016 was $0.2 million, a decrease of $0.7 million, compared
to net cash provided by investing activities of $0.5 million for the year ended December 31, 2015, an increase of $1.1 million
compared to net cash used in investing activities of $0.6 million for the year ended December 31, 2014.
Net
cash used in investing activities for the year ended December 31, 2016, consisted primarily of $0.2 million of purchases of property
and equipment.
Net
cash provided by investing activities for the year ended December 31, 2015, consisted of a $0.7 million loan repayment by Alan
Ltd. (“Alan”), a company wholly-owned by Anatoly Hurgin, our Chief Executive Officer and a director, and $0.2 million
proceeds from the sale of property and equipment, partially offset by $0.4 million of purchases of property and equipment.
Net
cash used in investing activities for the year ended December 31, 2014, consisted of a $0.5 million loan that we provided to Alan
and $0.3 million of purchases of property and equipment, partially offset by $0.2 million proceeds from the sale of property and
equipment.
We
have no material commitments for capital expenditures as of December 31, 2016.
Financing
Activities
Net
cash used in financing activities for the year ended December 31, 2016 was $3.2 million, a decrease of $6.6 million, compared
to net cash provided by financing activities of $3.4 million for the year ended December 31, 2015, an increase of $4.3 million,
compared to net cash used in financing activities of $0.9 million for the year ended December 31, 2014.
Net
cash used in financing activities for the year ended December 31, 2016, consisted of $3.4 million of withholding taxes in respect
of dividends distributed to our controlling shareholders, Messrs. Anatoly Hurgin and Alexander Aurovsky, in 2015 and an additional
$1.0 million of withholding taxes on such distribution to the controlling shareholders paid by us to the Israel Tax Authority
according the tax assessment agreement for the three years ended December 31, 2014, reached between Ability and the Israel Tax
Authority on May 30, 2016, which was offset in part by $0.8 million paid to us by the controlling shareholders on account of their
outstanding tax obligation in connection with the 2015 dividend distributions following the tax assessment agreement, $0.2 million
due from controlling shareholders accrued on account of an arbitration proceeding and $0.6 million that was repaid to us by our
controlling shareholders on account of outstanding withdrawals.
Net
cash provided by financing activities for the year ended December 31, 2015, consisted of the $19 million proceeds from the Business
Combination, net of transaction costs, which was partially offset by $15 million of dividends distributed to our controlling shareholders
and $0.6 million in amounts withdrawn by the controlling shareholders during the period.
Net
cash used in financing activities for the year ended December 31, 2014, consisted primarily of $0.8 million of dividends distributed
to our controlling shareholders and $0.1 million of withholding taxes in respect of such dividend distribution.
|
C.
|
Research
and Development, Patents and Licenses, etc.
|
For
a description of our research and development activities, see “Item 4B. Information on Our Company—Business Overview—Research
and Development.”
The
increasing threat of global terrorism is a key driver in our growth, and the technological focus on counter-terrorism, as well
as combating ordinary criminal activity, supports our confidence in our business. Around the world, demand for the ability to
locate, intercept and decipher communications and encrypted data is significant and is growing. Industry sources have stated that
they believe that the global lawful interception market increased from approximately $5.8 billion in 2015 to approximately $6.6
billion in 2016 and is growing, and we believe that interception of communications is one of the most important tasks within intelligence
and surveillance.
Over
the last few years, cellular interception systems have become more complex and expensive as a result of increased usage of new
communication channels and technological developments in the cellular communications industry, such as an increased number of
cellular networks, mobile operators and frequencies. We believe that these developments had an adverse impact on sales of our
legacy tactical cellular interception solutions in 2016, which significantly declined in such period.
The
ULIN, a strategic cellular interception system that we introduced in November 2015, has strategic capabilities allowing for the
interception of all generations of cellular communication. We expected that ULIN would be a major growth driver of our sales and
revenues and continue to believe that our revenues for 2017 will be weighted towards ULIN sales; however, customer adoption of
ULIN has been much slower than we had anticipated. While we have seen significant interest in ULIN and its advanced capabilities,
we had only completed one ULIN sale as of December 31, 2016. We believe that the limited customer adoption to date of ULIN, notwithstanding
its competitive advantage over tactical interception solutions, is primarily due to its increased costs compared to such tactical
interception solutions, as well as the market’s desire for a product capable of intercepting data communication in addition
to cellular communication, and ULIN’s inability to intercept cellular communication within some network operators. We believe
that continued increase in usage of new communication channels and the technological developments in the cellular communications
industry (such as an increased number of cellular networks, mobile operators and frequencies), which have resulted in tactical
cellular interception systems becoming more complex and expensive, will contribute to the competitive strength and distinctiveness
of ULIN, which in turn will result in an increased demand for ULIN. Furthermore, ULIN sales cycles have taken longer than expected
to complete. We believe that the significant increase in the length of the ULIN sales cycle compared to our legacy tactical interception
solutions is primarily due to the difficulties described above and lengthy purchasing approval processes for ULIN, oftentimes
requiring the approval of the most senior levels of government.
Our
non-operational expenses increased significantly in 2016, primarily due to legal and professional expenses incurred in connection
with the internal investigation conducted by the audit committee and pending legal proceedings. We expect non-operational expenses
to remain elevated and may increase further in 2017, primarily due to legal expenses related to the pending SEC investigation
and pending legal proceedings.
|
E.
|
Off-balance
Sheet Arrangements
|
We
have no material off-balance sheet arrangements.
|
F.
|
Tabular
Disclosure of Contractual Obligations
|
The
following table summarizes our contractual obligations as of December 31, 2016:
|
|
Payments due by period (U.S. dollars in thousands)
|
|
|
|
Total
|
|
|
Less than
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
More than 5-Years
|
|
Obligations with respect to minimum purchases
1
|
|
|
2,625
|
|
|
|
1,500
|
|
|
|
1,125
|
|
|
|
—
|
|
|
|
—
|
|
Lease Obligations
2
|
|
|
139
|
|
|
|
135
|
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
2,764
|
|
|
|
1,635
|
|
|
|
1,129
|
|
|
|
—
|
|
|
|
—
|
|
1
|
Relates
to minimum commitments under an agreement with a third party supplier entered into on October 20, 2015. For additional information,
see “Item 4B. Information on the Company—Business Overview—Manufacturing and Suppliers.”
|
2
|
Relates
to obligations under lease agreements for our headquarters and laboratory. For additional information, see “Item
4D. Information on the Company—Property, Plants and Equipment.”
|
Item
6. Directors, Senior Management and Employees
|
A.
|
Directors
and Senior Management
|
On
April 9, 2017, we received letters from each of Amnon Dick, Efraim Halevy, Amos Malka, Meir Moshe and Shalom Singer, representing
all our former independent directors, tendering his resignation as a member of our board of directors and committees thereof,
effective immediately. At the time of their resignations, Mr. Dick was Chairman of our board of directors and a member of the
audit and compensation committees; Mr. Halevy was a member of the nominating committee; Mr. Malka was a member of the compensation
committee; Mr. Moshe was Chairman of the audit committee and Chairman of the nominating committee; and Mr. Singer was Chairman
of the compensation committee and a member of the audit and nominating committees. Each of Messrs. Dick, Malka, Moshe and Singer
stated in his respective resignation letter that his resignation was due to his approach to risk assessment and management of
our affairs not being aligned with that of our founding directors and controlling shareholders, which made him unable to contribute
to us in a productive way. Each noted that, in view of the various challenges that we are currently facing, a shared vision and
broad cooperation among our controlling shareholders and directors is required and that in view of the foregoing, and especially
as he served as a director for only a few months, he does not believe it would be appropriate to continue to serve as a director.
Mr. Halevy did not state any reason for his resignation in his resignation letter. Following the resignation of the former independent
directors, on May 15, 2017 we appointed Levi Ilsar, Brigadier General (Ret.) Eli Polak and Nimrod Schwartz to serve as independent
directors on our board of directors and the audit, compensation and nominating committees thereof, in each case effective as of
May 17, 2017.
The
following table sets forth certain information relating to our executive officers and directors as of the date of this Annual
Report or as of the date stated below.
Name
|
|
Age
|
|
Position
|
Anatoly
Hurgin
|
|
58
|
|
Chief
Executive Officer and Director
|
Alexander
Aurovsky
|
|
64
|
|
Chief
Technology Officer and Director
|
Avi
Levin
|
|
42
|
|
Chief
Financial Officer
|
Levi
Ilsar
(1)(2)
|
|
71
|
|
Director
|
Brigadier
General (Ret.) Eli Polak
(1)(2)
|
|
51
|
|
Director
|
Nimrod
Schwartz
(1)(2)
|
|
57
|
|
Director
|
|
(1)
|
Appointment
to be become effective as of May 17, 2017
|
|
(2)
|
As
of May 17, 2017, shall become a member of our Audit Committee, Compensation Committee and Nominating Committee
|
Executive
Officers and Directors
Anatoly
Hurgin
has served as our Chief Executive Officer and a director since the closing of the Business Combination, and has
served as the Chief Executive Officer and a director of Ability since 1994. Mr. Hurgin served as the Chairman of our board of
directors from the closing of the Business Combination until December 2016. Mr. Hurgin has served as a director of ASM since March
2016. Additionally, Mr. Hurgin has served as Chief Executive Officer of Active Intelligence Labs Ltd., a company that develops
solutions for the cyber security market, since August 2011, and Chief Executive Officer of UAB Communication Technologies Ltd.,
a company formed for the purpose of purchasing equipment from a Cypriote supplier, since September 2013. Mr. Hurgin holds a Master’s
degree in radio electronics from the High Military College of Radio-electronics of Air Defense Troops in Vilnius, Lithuania.
Alexander
Aurovsky
has served as our Chief Technology Officer and a director since the closing of the Business Combination, and
has served as the Chief Technology Officer and a director of Ability since 1994. Mr. Aurovsky has served as a director of ASM
since March 2016. Mr. Aurovsky holds a Master’s degree in radio electronics from the Bonch-Bruevich Saint Petersburg State
University of Telecommunications in Russia.
Avi
Levin
has served as our Chief Financial Officer since November 2015. Mr. Levin has served as a director of ASM since March
2016. Previously, Mr. Levin served as an investment banker at Credit Suisse Securities, a multinational financial services institution.
Prior to that, Mr. Levin served in corporate finance positions at Broadridge Financial Solutions, Inc. a software company that
provides services to banks and other financial institutions, and at Overseas Shipholding Group, Inc., a global company engaged
in ocean transportation of oil, natural gas. Mr. Levin started his career at the international accounting firm, PricewaterhouseCoopers,
where he worked at the Tel Aviv, Israel and San Jose, California offices. Mr. Levin is a CPA in the United States and Israel.
Mr. Levin has an undergraduate degree in Economics and Accounting from Ben-Gurion University of the Negev in Israel, and an MBA
degree from New York University Stern School of Business.
Levi Ilsar
was appointed as a director on May 15, 2017 with such appointment becoming effective as of May 17, 2017. Upon his appointment
becoming effective, Mr. Ilsar will serve as the Chairman of both our audit and compensation committees and will be a member of
our nominating committee. From 1979 to 2007, Mr. Ilsar served as Chief Financial Officer of U. Dori Engineering Works Co Ltd.,
a company listed on the Tel Aviv Stock Exchange. Mr. Ilsar serves as a director on the board of directors of U. Dori Engineering
Works Co Ltd. and certain of its subsidiaries. Since 2007, Mr. Ilsar provides financial and business consulting services to a
number of companies. Mr. Ilsar holds a B.Sc in Economics and Management and a Master of Science Program in Economics, both from
the Technion, Israel institute of Technology, as well as a Bachelors of Arts Program in Art History from the Tel Aviv University
in Israel.
Brigadier
General (Ret.) Eli Polak
was appointed as a director on May 15, 2017 with such appointment becoming effective as of May
17, 2017. Upon his appointment becoming effective, Mr. Polak will serve as the Chairman of our nominating committee and will be
a member of both our audit and compensation committees. From 1984 to 2013, Mr. Polak served in the Israeli Defense Forces, until
retiring with the rank of a Brigadier General. In his recent position in the army, Mr. Polak served as Chief Combat Collection
Officer and prior to that he served as Geospatial Intelligence Agency (IGA) Commander. Since 2013, Mr. Polak founded and managed
E.SOOF, Ltd., a startup company specializing in solving the distraction problem resulting from texting while driving. Since 2013,
Mr. Polak has founded and managed a company engaged in conducting Homeland Security projects, specializing in field intelligence,
visual intelligence (IMINT), Geospatial Intel, ISR, intelligence analysis and utilization. Mr. Polak holds an MA in political
science, specializing in national security at the University of Haifa and the Israel National Defense College (INDC), and a B.A
in HR Management from Ben Gurion University (Graduated with Honors).
Nimrod
Schwartz
was appointed as a director on May 15, 2017 with such appointment becoming effective as of May 17, 2017. Upon
his appointment becoming effective, Mr. Schwartz will serve as a member of our audit, compensation and nominating committees.
Since 2014, Mr. Schwartz has served as President and Chief Business Officer of Nuviad, Ltd., a company that offers a data-driven
and location-aware personalized advertising product. From 2010 to 2013, Mr. Schwartz served as Senior Vice President of AGT International,
a company engaged in large scale home land security projects worldwide. From 2008 to 2010, Mr. Schwartz was a partner in StageOne
Venture, an Israeli-based venture capital fund which operates in Israel, the United States and Europe. From 1997 to 2008, Mr.
Schwartz was a partner in Cedar Fund, an Israeli-based venture capital fund. From 1994 to 1998, Mr. Schwartz co-founded and was
Vice President of 013 NewVision, which was Israel’s largest internet service provider and became a leading communication
services group in Israel.
Arrangements
Concerning Election of Directors; Family Relationships
We
are not a party to, and are not aware of, any voting agreements among our shareholders. In addition, there are no family relationships
among our executive officers and directors.
B.
|
Compensation
of Executive Officers
|
The
aggregate compensation incurred or accrued by us in relation to our executive officers, for the year ended December 31, 2016,
was approximately $1.15 million. This amount includes approximately $204,000 set aside or accrued to provide pension, severance,
retirement or similar benefits or expenses, but does not include business travel, professional and business association dues and
expenses reimbursed to executive officers.
This
amount above also includes NIS 135,000 (approximately $35,100) accrued on account of Mr. Levin’s annual bonus for the year
ended December 31, 2016. Anatoly Hurgin, our Chief Executive Officer, and Alexander Aurovsky, our Chief Technology Officer, are
not entitled to an annual bonus for the year ended December 31, 2016.
We
will pay each of our directors (other than our executive directors) an annual fee of $55,000 and a per meeting fee of $2,000 for
attendance in person and $1,250 for attendance by telephone and for written consents. In addition, we will pay the Chairman of
our Audit Committee an annual fee of $15,000 and pay all other members of our Audit Committee an annual fee of $6,000, and pay
all members of our Audit Committee a per meeting fee of $1,500 for attendance in person and $1,250 for attendance by telephone
and for written consents. We will pay the Chairman of each of our Nominating Committee and Compensation Committee an annual fee
of $5,000 and pay all other members of such committees an annual fee of $3,000, and pay all members of such committees a per meeting
fee of $1,500 for attendance in person and $1,250 for attendance by telephone and for written consents. We will pay such fees
on a quarterly basis. In addition, we reimburse directors for reasonable travel and other expenses in connection with the services
rendered in such capacity.
We
do not have any written agreements with our current or incoming directors providing for benefits upon the termination of such
director’s relationship with us.
To
our knowledge, there are no agreements and arrangements between our current or incoming directors and any third party relating
to compensation or other payment in connection with their candidacy or service on our board of directors.
Employment
Agreements with Executive Officers
On
September 6, 2015, simultaneously with the execution of the Merger Agreement, Ability entered into an employment agreement with
each of (i) Anatoly Hurgin for Mr. Hurgin to serve as its Chief Executive Officer, and (ii) Alexander Aurovsky for Mr. Aurovsky
to serve as its Chief Technology Officer. Each of the employment agreements will remain in effect unless terminated as described
below. Pursuant to the employment agreements, the executives’ gross salary is NIS 120,000 (approximately $31,200) per month;
however, each of the executives agreed to a temporary 50% reduction in their salaries, effective as of May 2017. Each executive
is also entitled to receive the following benefits:
|
●
|
Ability
will pay to an insurance company or a pension fund for such executive, as amount equal to 8.33% of his salary which shall
be allocated to a fund for severance pay, and an additional 5% of salary in the case of an insurance policy (or an additional
6% in the case of a pension fund) which shall be allocated to a provident fund or pension plan. In addition, if the executive
elects to allocate his pension payments (5% of salary in case of an insurance policy or 5.5% in case of a pension plan, either
case, which will be deducted from the executive’s salary), Ability will contribute an amount up to 2.5% of the executive’s
salary for disability insurance, provided that such insurance is available for the executive;
|
|
●
|
Ability
will contribute to a recognized educational fund an amount equal to 7.5% of such month’s salary for the benefit of each
executive; and
|
|
●
|
Ability
will provide such executive with a luxury motor vehicle and pay or reimburse the executive for all reasonable expenses relating
to the use of the motor vehicle.
|
Each
employment agreement provides that the executive shall be entitled to receive an annual performance bonus of up to NIS 360,000
(approximately $93,600) based on annual performance goals agreed upon by Ability and the executive. Each employment agreement
may be terminated by Ability or the executive upon 120 days’ prior written notice, in which case the executive shall be
entitled to receive salary and benefits during such 120 days and for a period of eight months thereafter. The executive will be
entitled to accept new employment after the expiration of such eight month period. In addition, Ability, by resolution of its
board of directors, may terminate the employment agreements at any time by written notice for cause (as defined in the employment
agreements).
In
November 2015, Ability retained Avi Levin to serve as its Chief Financial Officer. Under the employment agreement entered into
with Mr. Levin in December 2015, effective as of November 8, 2015, Ability agreed to pay Mr. Levin a gross salary of NIS 45,000
(approximately $11,700) per month. In addition, Mr. Levin will be eligible to receive an annual performance-based bonus of up
to NIS 135,000 (approximately $35,100). Mr. Levin is also entitled to the following benefits:
|
●
|
Ability
will pay to an insurance company or a pension fund for Mr. Levin, as amount equal to 8.33% of his salary which shall be allocated
to a fund for severance pay, and an additional 5% of salary in the case of an insurance policy (or an additional 6% in the
case of a pension fund) which shall be allocated to a provident fund or pension plan. In addition, if Mr. Levin elects to
allocate his pension payments (5% of salary in case of an insurance policy or 5.5% in case of a pension fund, either case,
which will be deducted from Mr. Levin’s salary), Ability will contribute an amount up to 2.5% of Mr. Levin’s salary
for disability insurance, provided that such insurance is available for the executive;
|
|
●
|
Ability
will contribute to a recognized educational fund an amount equal to 7.5% of such month’s salary for the benefit of Mr.
Levin; and
|
|
●
|
Ability
will provide Mr. Levin with a motor vehicle and pay or reimburse him for all reasonable expenses relating to the use of the
motor vehicle.
|
The
employment agreement may be terminated by Ability or Mr. Levin upon 60 days’ prior written notice, in which case Mr. Levin
shall be entitled to receive salary and benefits during such 60 day period. In addition, Ability, by resolution of its board of
directors, may terminate the employment agreement at any time by written notice for cause (as defined in the employment agreement).
Board
Practices
Board
of Directors
Following
the resignation of our former independent directors on April 9, 2017, our board of directors has been comprised of two directors.
See “Item 6A – Directors and Senior Management”. On May 15, 2017, we appointed additional three directors to
serve on our board of directors and the audit, compensation and nominating committees thereof, in each case effective as of May
17, 2017. All the directors shall serve until our next annual general meeting.
Under
Cayman Islands law, directors owe the following fiduciary duties:
(i)
a duty to act in good faith in what the director believes to be in the best interests of the company as a whole;
(ii)
a duty to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose;
(iii)
directors should not improperly fetter the exercise of future discretion; and
(v)
a duty not to put themselves in a position in which there is a conflict between their duty to the company and their personal interests;
In
addition to the above, directors also owe a duty of care, diligence and skill which is not fiduciary in nature. This duty has
been defined as a requirement to act as a reasonably diligent person having the general knowledge, skill and experience that may
reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company
and the general knowledge, skill and experience which that director has.
As
described above, directors have a duty not to put themselves in a position of conflict and this includes a duty not to engage
in self-dealing, or to otherwise benefit as a result of their position. However, in some instances what would otherwise be a breach
of this duty can be forgiven and/or authorized in advance by the shareholders, provided that there is full disclosure by the directors.
This can be done by way of permission granted in the amended and restated memorandum and articles of association or alternatively
by shareholder approval at general meetings.
Audit
Committee
Following
the resignation of our former independent directors on April 9, 2017, we have not had an audit committee. See “Item 6A –
Directors and Senior Management”. On May 15, 2017, we appointed additional three directors to serve on our board of directors
and the audit, compensation and nominating committees thereof, in each case effective as of May 17, 2017. Following such date,
our audit committee will consist of Levi Ilsar, Brigadier General (Ret.) Eli Polak and Nimrod Schwartz. Levi Ilsar will serve
as the Chairman of our audit committee. Under SEC rules and the NASDAQ Listing Rules, we are required to maintain an audit committee
consisting of at least three independent directors, within the meaning of SEC rules and the NASDAQ Listing Rules, each of whom
must be able to read and understand fundamental financial statements, including the company’s balance sheet, income statement
and cash flow statement (and one of whom has had past employment experience in finance or accounting, requisite professional certification
in accounting or other comparable experience or background that leads to financial sophistication) and none of whom has participated
in the preparation of our or any of our subsidiary’s financial statements at any time during the prior three years. All
members who have been appointed to our audit committee meet the requirements for financial literacy under the applicable rules
and regulations of the SEC and the NASDAQ Listing Rules. Our board of directors has determined that Mr. Levi Ilsar is an “audit
committee financial expert,” as defined by SEC rules and has the requisite financial sophistication required by the NASDAQ
Listing Rules.
Our
audit committee generally provides assistance to our board of directors in fulfilling its legal and fiduciary obligations in matters
involving our accounting, auditing, financial reporting and internal control functions by reviewing the services of our independent
accountants and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting.
Our audit committee also oversees the audit efforts of our independent accountants. Our board of directors has adopted an audit
committee charter setting forth the specific responsibilities of the audit committee consistent with the rules and regulations
of the SEC and the NASDAQ listing requirements, which include: retaining and terminating our independent auditors; pre-approval
of audit and non-audit services to be provided by the independent auditors; and reviewing and recommending to the board of directors
approval of our quarterly and annual financial reports.
Compensation
Committee
Following
the resignation of our former independent directors on April 9, 2017, we have not had a compensation committee. See “Item
6A – Directors and Senior Management”. On May 15, 2017, we appointed additional three directors to serve on our board
of directors and the audit, compensation and nominating committees thereof, in each case effective as of May 17, 2017. Following
such date, our compensation committee will consist of Levi Ilsar, Brigadier General (Ret.) Eli Polak and Nimrod Schwartz. Levi
Ilsar will serve as the Chairman of our compensation committee. Under the NASDAQ Listing Rules, we are required to maintain a
compensation committee consisting of at least two directors, each of whom is an independent director within the meaning of the
NASDAQ Listing Rules. Our board of directors has affirmatively determined that each member of our compensation committee qualifies
as an “independent director” under the NASDAQ Listing Rules. The purpose of the compensation committee is to review
and approve compensation paid to our officers and directors and to administer our incentive compensation plans, including the
authority to make and modify awards under such plans. Our board of directors has adopted a compensation committee charter setting
forth the specific responsibilities of the compensation committee, consistent with the requirements of the NASDAQ Listing Rules.
Nominating
Committee
Following
the resignation of our former independent directors on April 9, 2017, we have not had a nominating committee. See “Item
6A – Directors and Senior Management”. On May 15, 2017, we appointed additional three directors to serve on our board
of directors and the audit, compensation and nominating committees thereof, in each case effective as of May 17, 2017. Following
such date, our nominating committee will consist of Levi Ilsar, Brigadier General (Ret.) Eli Polak and Nimrod Schwartz. Eli Polak
will serve as the Chairman of our nominating committee. Under the NASDAQ Listing Rules, director nominees must be either selected,
or recommended for selection by the board of directors, by a nomination committee comprised solely of independent directors within
the meaning of the NASDAQ Listing Rules. Our board of directors has affirmatively determined that each member of our nominating
committee qualifies as an “independent director” under the NASDAQ Listing Rules. The nominating committee is responsible
for overseeing the selection of persons to be nominated to serve on our board of directors. Our board of directors has adopted
a nominating committee charter setting forth the specific responsibilities of the compensation committee and addressing the nominating
process, consistent with the requirements of the NASDAQ Listing Rules.
The
nominating committee will consider persons identified by its members, management, shareholders, investment bankers and others.
The guidelines for selecting nominees, which are specified in the nominating committee charter, generally provide that persons
to be nominated:
|
●
|
should
be accomplished in his or her field and have a reputation, both personal and professional, that is consistent with our image
and reputation;
|
|
●
|
should
have relevant experience and expertise and would be able to provide insights and practical wisdom based upon that experience
and expertise; and
|
|
●
|
should
be of high moral and ethical character and would be willing to apply sound, objective and independent business judgment, and
to assume broad fiduciary responsibility.
|
The nominating committee will consider a number of qualifications relating to management and leadership experience,
background and integrity and professionalism in evaluating a person’s candidacy for membership on the board of directors.
The nominating committee may require certain skills or attributes, such as financial or accounting experience, to meet specific
board needs that arise from time to time and will also consider the overall experience and makeup of its members to obtain a broad
and diverse mix of board members. The nominating committee will not distinguish among nominees recommended by shareholders and
other persons.
Indemnification and Insurance of Officers
and Directors
Cayman
Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers
and directors, except to the extent that a provision may be held by the Cayman Islands courts to be contrary to public policy,
such as to provide indemnification against civil fraud or the consequences of committing a crime. Our amended and restated memorandum
and articles of association provide for indemnification of officers and directors for any liability, action, proceeding, claim,
demand, costs, damages or expenses, including legal expenses, whatsoever which they or any of them may incur as a result of any
act or failure to act in carrying out their functions other than such liability (if any) that they may incur by reason of their
own actual fraud or willful default. No indemnified person is liable to us for any loss or damage incurred by us as a result (whether
direct or indirect) of the carrying out of their functions unless that liability arises through the actual fraud or willful default
of such indemnified person. No person is found to have committed actual fraud or willful default unless or until a court of competent
jurisdiction has made a finding to that effect. Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers or persons controlling us pursuant to these provisions, we have been informed that, in
the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable.
Under our amended and
restated memorandum and articles of association, our directors, on behalf of our company, may purchase and maintain insurance for
the benefit of any director or other officer of our company against any liability which, by virtue of any rule of law, would otherwise
attach to such person in respect of any negligence, default, breach of duty or breach of trust of which such person may be guilty
in relation to our company. We have procured a directors’ and officers’ liability & company reimbursement insurance
policy for officers and directors of our company and our wholly-owned subsidiaries, with an aggregate limit of liability for all
losses of $ 20 million.
As of December 31, 2016,
we employed 20 individuals on a full-time basis and 3 individuals on a part-time basis, comprised of administrators and marketing
and technical personnel, all of whom were located in Israel. In addition to our employees, we utilize the services of a number
of independent contractors worldwide for sales and marketing.
As of December 31, 2015,
we employed 17 individuals on a full-time basis and 3 individuals on a part-time basis, comprised of administrators and marketing
and technical personnel, all of whom were located in Israel.
As of December 31, 2014,
Ability employed 12 individuals on a full-time basis and 2 individuals on a part-time basis, all of whom were located in Israel.
We consider our relationship
with our employees to be good and a critical factor in our success. While we are not a party to any collective bargaining or other
agreement with any labor organization in Israel, certain provisions of the collective bargaining agreements between the Histadrut
(General Federation of Laborers in Israel) and the Coordinating Bureau of Economic Organizations (including the Manufacturers’
Association of Israel) may be applicable to our Israeli employees by virtue of expansion orders of the Israeli Ministry of Industry,
Trade and Labor.
Under Israeli law, Israeli
employees are required to make, and employers are required to pay and withhold, certain payments to the National Insurance Institute
(similar, to some extent, to the United States Social Security Administration), on account of social security and health tax payments.
In addition, Ability is required to maintain employee benefit plans for the benefit of its employees. Each month, both Ability
and its employees contribute sums to the employee benefit plans. The employee benefit plans provide a combination of savings plan
(for pension), insurance and severance pay to the Israeli employees. Some of the sums Ability contributes monthly to the employee
benefit plans are used to satisfy severance pay to which the employees may be entitled under Israeli law. Since the end of 2015,
Ability’s agreements with its employees are in accordance with Section 14 of Israel’s Severance Pay Law, according
to which its monthly contributions for severance pay for its employees are in lieu of its severance liability. Ability has set
aside additional reserves for severance pay of $245,000, $270,000 and $99,000 as of December 31, 2016, December 31, 2015 and December
31, 2014, respectively, for potential future obligations to make severance payments to Ability’s employees with respect to
periods prior to the application of Section 14 of Israel’s Severance Pay Law.
Share Ownership of
Executive Officers and Directors
For information concerning
the beneficial ownership of our ordinary shares by our executive officers and directors, see the table in “Item 7A. Major
Shareholders and Related Party Transactions—Major shareholders.”
2015 Long-Term Equity
Incentive Plan
On November 18, 2015,
our board of directors approved and adopted a 2015 Long-Term Equity Incentive Plan (the “2015 Plan”), which became
effective upon the consummation of the Business Combination. On April 25, 2016, our board of directors approved and adopted the
Israeli Sub-Plan to the Ability Inc. 2015 Long-Term Equity Incentive Plan (the “Israeli Sub-Plan” and together with
the 2015 Plan, the “Plan”). The purpose of the Plan is to attract and retain personnel of the highest caliber, provide
incentive for officers, directors, employees and other key persons and to provide to officers, directors, employees, consultants
and other independent contractors who perform services for our company, through the granting of stock options, restricted stock,
deferred stock or other stock-based awards, the opportunity to participate in the value and/or appreciation in value of the our
ordinary shares.
Awards.
The
Plan provides for the grant of any or all of the following types of awards (collectively, “Awards”): (a) stock options,
(b) restricted stock, (c) deferred stock and (d) other stock-based awards. Awards may be granted singly, in combination, or in
tandem, as determined by our board of directors or the Committee (as defined below). Subject to anti-dilution adjustments as provided
in the Plan, (i) the Plan provides for a total of 8% of the outstanding ordinary shares following the closing of the Business Combination
to be available for distribution pursuant to the Plan (i.e., 2,060,491 ordinary shares), and subject to the provisions of the immediately
preceding paragraph, all of such shares may be granted or measured to any participant under the Plan during any calendar year or
part thereof. If any outstanding Award is canceled, forfeited, delivered to us as payment for the exercise price or surrendered
to us for tax withholding purposes, ordinary shares allocable to such Award may again be available for Awards under the Plan.
Administration.
The Plan may be administered by our board of directors or a committee (the “Committee”) consisting of two or
more members of the board of directors appointed by the board of directors. The board of directors or the Committee will determine,
among other things, the persons to whom Awards will be granted, the type of Awards to be granted, the number of shares subject
to each Award and the share price. The board of directors or the Committee will also determine the term of each Award, the restrictions
or limitations thereon, and the manner in which each such Award may be exercised or, if applicable, the extent and circumstances
under which ordinary shares and other amounts payable with respect to an Award will be deferred. The board of directors or Committee
may delegate some of the functions referred to above to our Chief Executive Officer or Chief Financial Officer. No Award shall
be granted pursuant to the Plan on or after the tenth anniversary of the effective date of the Plan.
Eligibility and
Participation.
Officers and other employees of our company or any parent or subsidiary (but excluding any person whose
eligibility would adversely affect the compliance of the Plan with the requirements of Rule 16b-3) who are at the time of the grant
of an award under the Plan employed by us or any parent or subsidiary of ours, and who are responsible for or contribute to the
management, growth and/or profitability of our business or any parent or subsidiary of ours are eligible to be granted options
or other Awards under the Plan. In addition, non-qualified stock options and other Awards may be granted under the Plan to any
person, including, but not limited to, directors, independent agents, consultants and attorneys who the board of directors or the
Committee, as the case may be, believes has contributed or will contribute to the success of our company. Eligibility under the
Plan shall be determined by our board of directors or the Committee, as the case may be. A participant’s right, if any, to
continue to serve as a director, executive officer, other key employee, or otherwise, will not be enlarged or otherwise affected
by his or her designation as a participant under the Plan. Participants may receive one or more Awards under the Plan.
Forms of Awards
Stock Options.
The Plan provides for the grant of incentive stock options and non-qualified stock options. The board of directors or the Committee,
as the case may be, shall determine those persons to whom stock options may be granted.
Incentive stock options
granted pursuant to the Plan are nontransferable by the optionee during his lifetime. Options granted pursuant to the Plan will
expire if not exercised within 10 years of the grant (five years in the case of incentive stock options granted to an eligible
employee owning stock possessing more than 10% of the total combined voting power of all our shares or the shares of a parent or
subsidiary of our company immediately before the grant (a “10% Stockholder”)), and under certain circumstances set
forth in the Plan, may be exercised within three (3) months following termination of employment (one year in the event of death,
retirement at normal retirement age or disability of the optionee), unless the term of the option, pursuant to the stock option
agreement, expires earlier or unless the board of directors or the Committee determines to shorten or extend the exercise periods.
Options may be granted to optionees in such amounts and at such prices as may be determined, from time to time, by the board of
directors or the Committee. The exercise price of an incentive stock option will not be less than the fair market value of the
shares underlying the option on the date the option is granted, provided, however, that the exercise price of an incentive stock
option granted to a 10% Stockholder may not be less than 110% of such fair market value. The exercise price of a non-qualified
stock option may be less than such fair market value on the date of grant.
Under the Plan, we may
not, in the aggregate, grant incentive stock options that are first exercisable by any optionee during any calendar year (under
all such plans of the optionee’s employer corporation and its “parent” and “subsidiary” corporations,
as those terms are defined in Section 424 of the Code) to the extent that the aggregate fair market value of the underlying stock
(determined at the time the option is granted) exceeds $100,000.
The Plan contains anti-dilution
provisions authorizing appropriate adjustments in certain circumstances. Shares subject to Awards which expire without being exercised
or which are cancelled as a result of the cessation of employment are available for further grants. No ordinary shares may be issued
upon the exercise of any option granted under the Plan until the full option price has been paid by the optionee. The board of
directors or the Committee may grant individual options under the Plan with more stringent provisions than those specified in the
Plan.
Options become exercisable
in such amounts, at such intervals and upon such terms and conditions as the board of directors or the Committee provides. Stock
options granted under the Plan are exercisable until the earlier of (i) a date set by the board of directors or Committee at the
time of grant or (ii) the close of business on the day before the tenth anniversary of the stock option’s date of grant (the
day before the fifth anniversary in the case of an incentive stock option granted to a 10% Stockholder).
Restricted and Deferred
Stock Awards
.
Under the Plan, the board of directors or the Committee may grant restricted ordinary shares either alone
or in tandem with other Awards. Restricted and deferred stock give the recipient the right to receive a specified number of ordinary
shares, subject to such terms, conditions and restrictions as the board of directors or the Committee deems appropriate. Restrictions
may include limitations on the right to transfer the stock until the expiration of a specified period of time and forfeiture of
the stock upon the occurrence of certain events such as the termination of employment prior to expiration of a specified period
of time. In addition, a participant in the Plan who has received a deferred stock Award may request, under certain conditions,
the board of directors or the Committee to defer the receipt of an Award (or an installment of an Award) for an additional specified
period or until the occurrence of a specified event.
Performance-Based
Awards and Performance Goals.
Certain Awards made under the Plan may be granted so that they qualify as “performance-based
compensation” (as this term is used in Code Section 162(m) and the regulations thereunder) and are exempt from the deduction
limitation imposed by Code Section 162(m) (these Awards are referred to as “Performance-Based Awards”). Under Code
Section 162(m), our tax deduction may be limited to the extent total compensation paid to the Chief Executive Officer, or any of
the four most highly compensated executive officers (other than the Chief Executive Officer) exceeds $1,000,000 in any one tax
year. Among other criteria, Awards only qualify as performance-based awards if at the time of grant the Committee is administrating
the Plan and the Committee is comprised solely of two or more “outside directors” (as this term is used in Section
162(m) of the U.S. Internal Revenue Code of 1986, as amended, (the “Code”) and the regulations thereunder). The board
of directors or the Committee may use certain performance measures set forth in the Plan (either individually or in any combination)
to set performance targets with respect to Awards intended to qualify as performance-based Awards.
All stock options and
certain stock Awards, performance Awards, and other Awards granted under the Plan, and the compensation attributable to such Awards,
are intended to (i) qualify as performance-based Awards or (ii) be otherwise exempt from the deduction limitation imposed by Code
Section 162(m).
Other Stock Based
Awards.
Other stock-based Awards, which may include performance shares and shares valued by reference to the performance of
our company or any parent or subsidiary of our company, may be granted either alone or in tandem with other Awards.
Effect of a Change
of Control.
Upon a “Change of Control” (as defined in the Plan), unless a majority of the board of directors
determines otherwise prior to such Change of Control, generally, all outstanding options which have been outstanding for at least
one year shall become exercisable in full, and shall remain exercisable in full until it expires pursuant to its terms and all
restrictions and deferral limitations contained in any restricted stock Award, deferred stock Award and other stock-based Award
granted under the Plan shall lapse. All restrictions and deferral limitations with respect to a 409A deferred stock Award or with
respect to a participant’s deferred restricted stock account shall not lapse unless the “Change of Control” qualifies
as a “409A Change” (as defined in the Plan).
Termination of
Employment.
The Plan provides for certain periods after termination of employment during which a participant may exercise
an option if the participant’s employment is terminated due to death or disability or normal retirement (as defined in the
Plan). A participant whose employment is terminated for any reason, including, without limitation, retirement, death or disability,
forfeits all unvested, unexercisable and unearned Awards granted to the participant. Except as set forth above, the board of directors
or Committee, as the case may be, determines the post-employment rights of a participant with respect to an Award that was vested
or earned prior to termination. The Plan’s provisions relating to termination of employment may be modified in the discretion
of the board of directors or the Committee.
Term and Amendment.
The Plan became effective as of consummation of the Business Combination and no award will be granted more than ten years after
the effective date. The board of directors may at any time, and from time to time, amend any of the provisions of the Plan, and
may at any time suspend or terminate the Plan; provided, however, that no such amendment is effective unless and until it has been
duly approved by the holders of the outstanding shares if the failure to obtain such approval would adversely affect the compliance
of the Plan with the requirements of Rule 16b-3 or any other applicable law, rule or regulation. The board of directors or the
Committee, as the case may be, may amend the terms of any option or other Award granted under the Plan; provided, however, that
subject to certain provisions of the Plan, no such amendment may be made by the board of directors or the Committee, as the case
may be, which in any material respect impairs the rights of a participant without the participant’s consent, except for such
amendments which are made to cause the Plan to qualify for the exemption provided by Rule 16b-3. Moreover, no option previously
granted under the Plan may be amended to reduce the exercise price of the option. Additionally, the board of directors or the Committee
may amend the Plan in order to comply with local regulations as may be required for certain employees in other jurisdictions.
Israeli Sub-Plan
.
The Israeli Sub-Plan will apply to, and modify, awards granted to our
employees, directors
and officers
who are resident in the State of Israel (“Israeli Participants”) so that any such Award granted
under the Plan will be governed by the terms of the Israeli Sub-Plan in order to comply with the requirements of Israeli law, including,
without limitation, Sections 102 and 3(i) of the Israeli Income Tax Ordinance (New Version) 1961 (the “Ordinance”).
Awards
granted under the Israeli Sub-Plan to Israeli Participants
who are employees or office holders
of ours or our affiliates and who are not controlling shareholders (within the meaning of the Ordinance)
will be granted
pursuant to the provisions of Section 102 of the Ordinance, and may be awarded either pursuant to (i) Section 102(b) of the Ordinance,
in which case such Awards are granted or issued to a trustee and are to be held by the trustee for at least two years from the
date of grant. We may elect to designate such Awards to qualify for either capital gains tax treatment or ordinary income tax treatment,
and such election shall apply to all Awards made pursuant to Section 102(b) of the Ordinance and cannot be changed until after
the passage of time prescribed in Section 102; or (ii) Section 102(c) of the Ordinance, which Awards are not required to be held
in trust by a trustee. Under the Israeli Sub-Plan, Israeli Participants who are either non-employee consultants, advisers or service
providers of our company or our affiliates or controlling shareholders
(within the meaning
of the Ordinance)
(whether or not an employee of ours or an affiliate) may only be granted Awards under Section 3(i) of
the Ordinance, which does not provide for similar tax benefits as Section 102.
As
of the date hereof, we have not granted any Awards under the Plan.
Item 7. Major Shareholders and Related
Party Transactions
The following table
sets forth information with respect to the beneficial ownership of our ordinary shares as of the date of this Annual Report or
as of the date stated below by (i) each of our executive officers and directors individually; (ii) all of our executive officers
and directors as a group; (iii) each other person or entity known to us to beneficially own more than 5% of our outstanding ordinary
shares.
Name of Beneficial Owner
|
|
Amount and
Nature of
Beneficial
Ownership
|
|
|
Approximate
Percentage
of
Outstanding
Ordinary
Shares
(1)
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
Anatoly Hurgin
|
|
|
8,324,992
|
(2)
|
|
|
32.32
|
%
|
Alexander Aurovsky
|
|
|
8,324,993
|
(3)
|
|
|
32.32
|
%
|
Avi Levin
|
|
|
3,138
|
|
|
|
*
|
|
Levi Ilsar**
|
|
|
—
|
|
|
|
—
|
|
Brigadier General (Ret.) Eli Polak**
|
|
|
—
|
|
|
|
—
|
|
Nimrod Schwartz**
|
|
|
—
|
|
|
|
—
|
|
All directors and executive officers as a group (6 individuals)
|
|
|
16,653,122
|
|
|
|
64.65
|
%
|
**
|
Appointment to be become effective as of May 17, 2017
|
|
(1)
|
The percentage of beneficial ownership of our ordinary shares is based on 25,756,142 ordinary shares outstanding as of April 30, 2017. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting power or investment power with respect to securities.
|
|
(2)
|
Does not include ordinary shares which may become issuable to Anatoly Hurgin pursuant to the earn-out under the Merger Agreement.
|
|
(3)
|
Does not include ordinary shares which may become issuable to Alexander Aurovsky pursuant to the earn-out under the Merger Agreement.
|
From our incorporation
on September 1, 2015 and until December 23, 2015, we were a wholly-owned subsidiary of Cambridge. On December 23, 2015, as part
of completion of the Business Combination, we merged with Cambridge, and acquired Ability by way of a share exchange. Effective
as of the closing of the Business Combination, Mr. Hurgin, our Chief Executive Officer, and Mr. Aurovsky, our Chief Technology
Officer, each received 8,106,634 ordinary shares, corresponding to 31.5% of our issued and outstanding shares. Between June 2016
and October 2016, Mr. Hurgin and Mr. Aurovsky repurchased an aggregate 218,358 ordinary shares and 218,359, ordinary shares, respectively,
increasing each of their holdings to 32.32% of our issued and outstanding shares as of such date. To our knowledge, there have
been no other significant changes in the percentage ownership held by any of our major shareholders since our incorporation.
To our knowledge, based
on information provided to us by our transfer agent in the United States, as of May 8, 2017, we had 14 shareholders of record who
are registered with an address in the United States, holding approximately 35.19% of our outstanding ordinary shares. Such number
is not representative of the portion of our shares held in the United States nor is it representative of the number of beneficial
holders residing in the United States, since 8,237,149 ordinary shares or 31.98% of our outstanding ordinary shares are held of
record by one U.S. nominee company, CEDE & Co.
None of our shareholders
has different voting rights from other shareholders. To our knowledge, our company is jointly controlled by Mr. Hurgin, our Chief
Executive Officer, and Mr. Aurovsky, our Chief Technology Officer, who held a total of 16,649,985 ordinary shares, corresponding
to 64.64% of our issued and outstanding shares giving a right to vote as of April 30, 2017. We are not aware of any arrangement
that may, at a subsequent date, result in a change of control of our company.
B.
|
Related Party Transactions
|
Anatoly Hurgin, our
Chairman and Chief Executive Officer, owns 100% of Alan, which holds a 60% interest in Active Intelligence Labs Ltd. (Israel) (“AIL”).
Ability purchased an aggregate of $780,000 and $420,000 of equipment from AIL during the years ended December 31, 2015 and December
31, 2014, respectively.
On October 24, 2013,
Ability entered into a loan agreement with Alan, pursuant to which Ability agreed to loan Alan an aggregate of $760,000. Ability
made advances to Alan of $205,000 and $555,003 during the years ended December 31, 2013 and 2014, respectively. The loan accrued
interest at the rate of 3.3%, subject to adjustment based on changes to the Israeli consumer price index. The loan (including accrued
interest) was repaid in full in December 2015 upon the consummation of the Business Combination.
On March 22, 2016, we
entered into an employment agreement with Daniel Hurgin, the son of Mr. Hurgin, pursuant to which Daniel Hurgin was employed by
us until June 20, 2016 in a pre-sale and post-sales support position, for a monthly gross salary of NIS 10,000 (approximately $2,600)
and social benefits.
Prior to the completion
of the Business Combination on December 23, 2015, Ability was a privately held company owned by Mr. Hurgin and Mr. Aurovsky. During
the period from 2012 to 2015, each of Mr. Hurgin and Mr. Aurovsky withdrew funds from Ability on a monthly basis and certain other
times, in addition to their respective salaries. From 2012 to 2014, the monthly withdrawal amounts totaled approximately NIS 20,000
and in 2015 totaled approximately NIS 25,000. No interest accrued on the outstanding balances. Since completion of the Business
Combination on December 23, 2015, no such additional amounts have been withdrawn by our executives. The withdrawn amounts were
recorded in Ability’s accounts and subsequently recognized in the financial statements as “Due from Controlling Shareholders.”
As of December 31, 2015, a total of NIS 2,239,162 was outstanding, of which approximately $251,000 was owed by Mr. Hurgin and approximately
$323,000 was owed by Mr. Aurovsky. Such amounts remained outstanding at the time that the Business Combination was completed. Section
402 of the Sarbanes-Oxley Act of 2002 prohibits SEC reporting companies from extending or maintaining personal loans to their directors
or executive officers. On February 25, 2016, our audit committee determined that the outstanding withdrawals could potentially
be deemed a violation of Section 402. As a result, we immediately sought repayment of the outstanding balance of the withdrawals
in full. The outstanding balance was repaid in full that day.
On March 30, 2017, and
as clarified on April 13, 2017, a legal expert determined that a settlement amount of NIS 9,527,000, including VAT, shall be allocated
as follows: 70% of the settlement amount and the VAT shall be paid by us and the remaining 30% of the settlement amount shall be
paid by Messrs. Hurgin and Aurovsky. On April 19, 2017, each of Messrs. Hurgin and Aurovsky paid to us NIS 376,410 (approximately
$98,000), or a total of NIS 752,820 (approximately 196,000) in compliance with the arbitral award. For additional information,
see “-Legal Proceedings.”
Employment Agreements
We have entered into
employment agreements with each of our executive officers. See “Item 6B. Directors, Senior Management and Employees —
Compensation of Executive Officers - Employment Agreements with Executive Officers.”
Item 8. Financial Information
A.
|
Consolidated Statements and Other Financial Information.
|
Financial Statements
Consolidated financial
statements are set forth under “Item 18. Financial Statements.”
Legal Proceedings
On October 15, 2015,
Ability was added to a derivative complaint, originally filed by a stockholder of Cambridge, against Cambridge, the members of
the Cambridge board of directors and others. The complaint generally alleges, among other things, that the members of the Cambridge
board of directors breached their fiduciary duties to Cambridge stockholders by approving the contemplated merger with Ability
and that Ability was aiding and abetting the Cambridge board of directors in the alleged breach of their fiduciary duties. The
action seeks injunctive relief, damages and reimbursement of fees and costs, among other remedies. On February 17, 2016, Ability
filed a motion and supporting memorandum of law to dismiss the plaintiff’s amended complaint on the grounds that the court
lacks personal jurisdiction over Ability; the derivative aiding and abetting claim was extinguished by the closing of the Business
Combination and the claims against Ability are insufficiently pleaded. On September 15, 2016, the court granted the defendants’
motion to dismiss in its entirety without prejudice, and the Judge dismissed the amended complaint. However, the court provided
the plaintiff with 45 days within which to file a further amended complaint. On October 22, 2016, a second amended complaint was
filed by the plaintiff. On January 17, 2017, the defendants filed a motion to dismiss the second amended complaint on multiple
grounds, including various pleading deficiencies that the plaintiff has failed to adequately correct. On March 9, 2017, the plaintiff
filed a response to the motion to dismiss. The court has scheduled a hearing for argument on the motion to dismiss for June 14,
2017. Given that these proceedings are in the preliminary stage, the timing or outcome of this matter cannot be predicted at this
time.
On October 27, 2015,
Ability received a notice alleging that its GSM interception and decryption systems apparently fall within the claims of an Israeli
patent owned by the claimants. The notice demands an accounting of all such products manufactured, exported, sold or otherwise
commercialized by Ability and/or any entity on its behalf. On November 12, 2015, a lawsuit alleging patent infringement, violation
of a non-disclosure agreement, trade secret misappropriation and unjust enrichment, was filed with the Lod District Court in Israel
by a company and an individual against Ability and our controlling shareholders. The amount sought in the lawsuit for registration
fee purposes is NIS 5 million (approximately $1.3 million), however the plaintiffs did not specify the amount of the compensation
demanded. Furthermore, the plaintiffs demanded that Ability and/or its controlling shareholders immediately cease any infringement
of the patent as well as any further use of the claimed technology, including the further manufacture, export, sale or marketing
of the alleged infringing products. We filed a statement of defense on April 5, 2016 and a preliminary hearing was held on April
13, 2016. On May 23, 2016, the plaintiffs filed a petition to join us, Ability Limited, a company wholly-owned by Anatoly Hurgin,
and ASM as defendants and to amend the statement of claim (this petition is still pending). The parties then agreed to appoint
a mediator in an attempt to settle the dispute out of court, and agreed, with the approval of the court, on a stay of proceedings
until September 2016. However, the parties did not reach an agreement by that time. On October 9, 2016, upon Ability’s application
and with the plaintiffs’ consent, the court decided to stay the proceedings until a decision is handed down on a related
pending application to the Israeli Patent Registrar to revoke the patent in dispute. We believe that the allegations in the notice
and the lawsuit are without merit and we intend to vigorously defend against them. Given that the proceeding is in the preliminary
stage and is currently suspended, the timing or outcome of this matter cannot be predicted at this time.
On May 25, 2016, a purported
class action lawsuit was filed against us, Anatoly Hurgin and Avi Levin in the Southern District of New York in the United States.
The complaint asserts claims pursuant to Section 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder on behalf
of a putative class of all purchasers of our ordinary shares between September 8, 2015 and April 29, 2016. The complaint broadly
alleges that certain of our public statements were false, and that we materially overstated our income and failed to disclose that
we had material weaknesses in our internal controls. The complaint does not specify the amount of damages sought. On July 25, 2016,
a second purported class action lawsuit was filed against us, Anatoly Hurgin and Avi Levin in the Southern District of New York
in the United States. The complaint asserts claims pursuant to Section 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated
thereunder on behalf of a putative class of all purchasers of our ordinary shares between September 8, 2015 and April 29, 2016.
The complaint broadly alleges that our financial statements were false and misleading and were not prepared in conformity with
GAAP, nor was the financial information a fair presentation of our operations. The complaint does not specify the amount of damages
sought. These two putative class actions have been consolidated into one action and co-lead plaintiffs have been appointed. In
accordance with a schedule adopted by the Court, co-lead plaintiffs filed an amended complaint on April 28, 2017. In the amended
complaint, co-lead plaintiffs have added Benjamin Gordon and BDO Ziv Haft as defendants. The amended complaint asserts claims pursuant
to Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder against all defendants, a claim pursuant to Section
20(a) of the Exchange Act against Messrs. Hurgin, Levin and Gordon, a claim pursuant to Section 11 of the Securities Act against
us, BDO Ziv Haft and Messrs. Hurgin and Gordon, and a claim pursuant to Section 15 of the Securities Act against Messrs. Hurgin,
Levin and Gordon on behalf of a putative class of all purchasers of our ordinary shares between September 8, 2015 and April 29,
2016. The amended complaint does not specify the amount of damages sought. The complaint broadly alleges that certain of our public
statements were false, that we had material weaknesses in our internal controls, that our financial statements were false and misleading
and were not prepared in conformity with GAAP, nor was the financial information a fair presentation of our operations, and that
our registration statement contained material misstatements and omissions. Pursuant to a schedule approved by the Court, co-lead
plaintiffs must file a second amended consolidated complaint no later than 30 days after the date on which this Form 20-F is filed.
We intend to defend the action. The matter is in its preliminary stages. Thus, the timing or outcome of this matter cannot be predicted
at this time.
On May 4, 2016, we
were served with a lawsuit and a motion for the certification of the lawsuit as class action in the Tel Aviv District Court in
Israel, filed, against us, Anatoly Hurgin, Alexander Aurovsky, and our former directors, Benjamin Gordon and Mitchell Gordon,
that had been filed on May 3, 2016. The claim alleges, (among other things) that we misled the public in our public filings with
regard to our financial condition and included misleading information (or omitted to include relevant information) in our financial
statements published in connection with the January 12, 2016 listing of shares for trading on the Tel Aviv Stock Exchange. In
addition, the claim alleges that the defendant directors breached their fiduciary duty under Israeli law towards our company and
its public shareholders. The claim alleges that the plaintiff suffered personal damages of NIS 137.7 (approximately $36.0), and
estimates that our shareholders suffered damages of approximately NIS 23.3 million (approximately $6.05 million). On September
15, 2016, we filed a motion for a stay of proceedings, due to other pending class action lawsuits in the United States that also
relates (among other things) to the stated causes of action and based on similar claims. On September 16, 2016, the Court accepted
the motion to stay proceedings. The parties were required to update the Court on the status of the United States class actions
by March 15, 2017. On March 15, 2017, the plaintiff filed an update and requested that proceedings be stayed until the completion
of the internal investigation of the audit committee. On the same day, we filed a separate update with respect to the United States
class actions, together with filing a motion for a stay of proceedings pending resolution of the consolidated United States class
actions. On March 16, 2017, the Court held that the plaintiff must respond to the motion to stay proceedings pending resolution
of the consolidated United States class actions. On March 26, 2017, the plaintiff filed a partial response, asking for an extension
until May 15, 2017 to file a full response, alleging that the publication of our annual financial statements, together with the
findings of the internal investigation, would affect its position on our motion to stay proceedings. On March 26, 2017, the Court
granted the plaintiff the requested extension. On May 15, 2017, the plaintiff filed a motion asking for an additional three month
extension to file a full response, among other things, as we had not yet filed our annual financial statements or published the
findings of the internal investigation. Given that these proceedings are in its preliminary stage, the timing or outcome of this
matter cannot be predicted at this time.
On December 13, 2016,
a complaint was filed in the 15th Circuit, Palm Beach County, Florida in the United States, against us, our former director, Benjamin
Gordon, BG Strategic Advisors, LLC, Cambridge Capital, LLC and Jonathan Morris, in his capacity as trustee of the Gordon Family
2007 Trust. The complaint alleges violations of Florida State securities laws, common law fraud, negligent misrepresentation and
conspiracy. Mr. Gordon and BG Strategic Advisors, LLC are also alleged to have breached their fiduciary duty to the plaintiff.
On January 23, 2017, the plaintiff filed an amended complaint alleging the same violations as the initial complaint. On March 2,
2017, we filed a motion to dismiss all of the claims asserted against us in the compliant. On the same day, Mr. Gordon and BG Strategic
Advisors also filed motions seeking the dismissal of the amended complaint in its entirety. On March 9, 2017, we filed a motion
to stay all proposed discovery in the action pending the resolution of the motions to dismiss. These motions are all currently
pending. Given that these proceedings are in the preliminary stage, the timing or outcome of this matter cannot be predicted at
this time.
In January 2015, Ability,
Messrs. Anatoly Hurgin and Alexander Aurovsky, and a third party plaintiff entered into an arbitration process, following a claim
filed with the Tel Aviv Magistrates Court (the “Court”) in October 2014 by the plaintiff against Ability and its former
shareholders, claiming a right to review Ability’s accounts and reserving the right to file a monetary claim. On September
14, 2016, the plaintiff presented the defendants with a settlement proposal for the resolution of all claims against the defendants
and any entity affiliated with them in exchange of the full and final payment of an amount of NIS 8,450,000 (approximately $2,200,000),
which was subsequently approved by our board of directors. On or about the time of the board meeting at which (among things) the
settlement proposal was approved, the plaintiff made claims that the proposal did not include VAT and that a settlement agreement
has not been entered into between the parties. This dispute was referred to a new arbitration process, at the conclusion of which,
a settlement was reached, according to which the parties agreed that the plaintiff would receive a total of NIS 8,142,000 (approximately
$2,120,000), plus VAT. Thereafter, on February 20, 2017, such settlement was approved by the arbitrator and was made an arbitral
award. Following the arbitral award and according to the determination of our board of directors, we and Messrs. Hurgin and Aurovsky
appointed an independent legal expert acting as an arbitrator to make a final determination as to the allocation of the settlement
amount between us and Messrs. Hurgin and Aurovsky. On March 30, 2017, and as clarified on April 13, 2017, the legal expert determined
that we shall be required to pay 70% of the settlement amount and the VAT and the remaining 30% of the settlement amount shall
be paid by Messrs. Hurgin and Aurovsky. On April 19, 2017, each of Messrs. Hurgin and Aurovsky paid to us NIS 376,410 (approximately
$98,000), or a total of NIS 752,820 (approximately $196,000) in compliance with the arbitral award.
Dividend Policy
Our board of directors
currently intends to retain all earnings, if any, for use in our business operations and, accordingly, does not anticipate declaring
any dividends in the near future. Payment of dividends is within the discretion of our board of directors and will be contingent
upon our future revenues and earnings, if any, capital requirements and general financial condition. In accordance with the laws
of the Cayman Islands, no dividend or other distribution shall be paid except out of our realized or unrealized profits, out of
the share premium account or as otherwise permitted by law.
Payment of dividends
may be subject to Israeli withholding taxes. See “Item 10E. Additional Information—Taxation—Israeli Taxation—
Taxation of non-Israeli stockholders on receipt of dividends.”
Except as disclosed
elsewhere in this Annual Report, there have been no other significant changes in the period from December 31, 2016, and until the
date of the filing of this Annual Report.
Item 9. The Offer and Listing
On December 24, 2015,
our ordinary shares and warrants began trading on the NASDAQ Capital Market under the symbol “ABIL” and “ABILW,”
respectively. Our warrants were delisted on April 18, 2016 and since such date have traded on “Pink Sheets” under the
symbol “ABIWF.” Since January 12, 2016, our ordinary shares have also traded on the Tel Aviv Stock Exchange under the
symbol “ABIL.”
NASDAQ Capital Market
The following table
sets forth, for the periods indicated, the high and low sales prices of our ordinary shares as reported by the NASDAQ Capital Market
since December 24, 2015.
|
|
Ordinary Shares ($)
|
|
|
|
High
|
|
|
Low
|
|
Annual:
|
|
|
|
|
|
|
2016
|
|
10.16
|
|
|
2.60
|
|
2015 (from December 24, 2015)
|
|
9.90
|
|
|
9.00
|
|
|
|
|
|
|
|
|
Quarterly:
|
|
|
|
|
|
|
First Quarter 2017
|
|
|
3.49
|
|
|
|
1.98
|
|
Fourth Quarter 2016
|
|
|
3.84
|
|
|
|
2.60
|
|
Third Quarter 2016
|
|
|
5.56
|
|
|
|
3.71
|
|
Second Quarter 2016
|
|
|
7.46
|
|
|
|
2.70
|
|
First Quarter 2016
|
|
|
10.16
|
|
|
|
6.02
|
|
Fourth Quarter 2015
|
|
|
9.90
|
|
|
|
9.00
|
|
|
|
|
|
|
|
|
|
|
Most Recent Six Months:
|
|
|
|
|
|
|
|
|
May 2017 (Until May 10)
|
|
|
0.81
|
|
|
|
0.75
|
|
April 2017
|
|
|
1.90
|
|
|
|
0.77
|
|
March 2017
|
|
|
2.67
|
|
|
|
1.98
|
|
February 2017
|
|
|
3.49
|
|
|
|
2.65
|
|
January 2017
|
|
|
3.45
|
|
|
|
2.88
|
|
December 2016
|
|
|
3.45
|
|
|
|
2.60
|
|
November 2016
|
|
|
3.56
|
|
|
|
2.70
|
|
On May 10, 2017, the last reported sale prices
of our ordinary shares on the NASDAQ Capital Market was $0.75.
Tel Aviv Stock Exchange
The following table sets forth, for the periods
indicated since January 12, 2016, the reported high and low sales prices of our ordinary shares on the TASE in NIS and U.S. dollars
at the exchange rate published by the Bank of Israel on the date of the reported high or low sales price, as applicable.
|
|
NIS
|
|
|
$
|
|
|
|
Price Per Ordinary Share
|
|
|
Price Per Ordinary Share
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
Annual
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 (from January 12, 2016)
|
|
38.21
|
|
|
10.21
|
|
|
9.69
|
|
|
2.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly:
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter 2017
|
|
|
13.65
|
|
|
|
7.74
|
|
|
|
3.57
|
|
|
|
2.14
|
|
Fourth Quarter 2016
|
|
|
13.31
|
|
|
|
10.21
|
|
|
|
3.47
|
|
|
|
2.67
|
|
Third Quarter 2016
|
|
|
17.10
|
|
|
|
14.47
|
|
|
|
4.54
|
|
|
|
3.83
|
|
Second Quarter 2016
|
|
|
16.65
|
|
|
|
10.83
|
|
|
|
4.32
|
|
|
|
2.80
|
|
First Quarter 2016 (from January 12, 2016)
|
|
|
38.21
|
|
|
|
23.19
|
|
|
|
9.69
|
|
|
|
6.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Most Recent Six Months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2017 (Until May 10)
|
|
|
2.94
|
|
|
|
2.70
|
|
|
|
0.81
|
|
|
|
0.75
|
|
April 2017
|
|
|
7.32
|
|
|
|
2.82
|
|
|
|
2.02
|
|
|
|
0.77
|
|
March 2017
|
|
|
9.67
|
|
|
|
7.74
|
|
|
|
2.66
|
|
|
|
2.14
|
|
February 2017
|
|
|
12.98
|
|
|
|
9.71
|
|
|
|
3.46
|
|
|
|
2.64
|
|
January 2017
|
|
|
13.65
|
|
|
|
10.83
|
|
|
|
3.57
|
|
|
|
2.81
|
|
December 2016
|
|
|
13.31
|
|
|
|
10.21
|
|
|
|
3.47
|
|
|
|
2.67
|
|
November 2016
|
|
|
13.62
|
|
|
|
11.36
|
|
|
|
3.55
|
|
|
|
2.98
|
|
On May 10, 2017 the
last reported sale price of our ordinary shares on the TASE was NIS 2.70 per share, or $0.75 per share (based on the exchange rate
reported by the Bank of Israel on such date, which was NIS 3.603 = $1.00).
Not applicable.
C.
|
Markets for Ordinary Shares
|
On December 24, 2015,
our ordinary shares and warrants began to trade on the NASDAQ Capital Market under the symbol “ABIL” and “ABILW,”
respectively. Our warrants were delisted on April 18, 2016 and since such date have traded on the “Pink Sheets” under
the symbol “ABIWF.” Since January 12, 2016, our ordinary shares have also traded on the Tel Aviv Stock Exchange under
the symbol “ABIL.”
Not applicable.
Not applicable.
Not applicable.
Item 10. Additional Information
Not applicable.
B.
|
Memorandum and Articles of Association
|
Registered Office and Objectives
We are registered with
the Cayman Island's Registrar of Companies under registration number 303448. The objects and purposes for which our company is
established, as set forth in Article 3 of our amended and restated memorandum of association, are unrestricted and we shall have
full power and authority to carry out any object not prohibited by the laws of the Cayman Islands.
Ordinary Shares
Voting
.
Holders of our ordinary shares have one vote per ordinary share on all matters submitted to a vote of shareholders at a shareholder
meeting. Shareholders may vote at shareholder meetings either in person or by proxy.
Transfer of Shares
.
Fully paid ordinary shares are issued in registered form and may be freely transferred under our amended and restated articles
of association unless the transfer is restricted or prohibited by another instrument, Cayman Islands law or the rules of a stock
exchange on which the shares are traded by an instrument of transfer-in the usual or common form or any other form approved by
our board of directors. Our board of directors may, in its absolute discretion, decline to register any transfer of shares without
assigning any reason therefor. If our board of directors refuses to register a transfer they shall notify the transferee within
two months of such refusal.
Variation of Rights
.
If at any time our share capital is divided into different classes of shares, all or any of the rights attached to any class may
be varied without the consent of the holders of the issued shares of such class where such variation is considered by the board
of directors not to have a material adverse effect upon such rights. Otherwise, any such variation shall be made with either:
|
(i)
|
the consent in writing of the holders of not less than two thirds of the issued shares of that class; or
|
|
(ii)
|
the sanction of a resolution passed by a majority of not less than two thirds of the votes cast at a separate meeting of the holders of the shares of that class. For any such meeting, the necessary quorum shall be one person holding or representing by proxy at least one third of the issued shares of the class.
|
Alteration of
Capital
. We may by ordinary resolution: (a) increase our share capital; (b) consolidate and divide all or any of our share
capital into shares of larger amount than our existing shares; (c) convert all or any of our paid-up shares into stock, and reconvert
that stock into paid-up shares of any denomination; (d) by subdivision of our existing shares or any of them, divide the whole
or any part of our share capital into shares of smaller amounts or into shares without par value; and (e) cancel any shares that
at the date of the passing of the ordinary resolution have not been taken or agreed to be taken by any person and diminish the
amount of our share capital by the amount of the shares so cancelled.
Subject to the provisions
of the Companies Law, we may by special resolution reduce our share capital or any capital redemption reserve fund.
Redemption of
Shares
. Subject to the provisions of the Companies Law, we may issue shares that are to be redeemed or are liable to be
redeemed at the option of the shareholder or us. The redemption of such shares shall be effected in such manner and upon such other
terms as we may, by special resolution, determine before the issue of the shares.
Call on Shares
and Forfeiture of Shares.
Subject to the terms of the allotment and issue of any shares, the directors may make calls upon
the shareholders in respect of any monies unpaid on their shares (whether in respect of par value or premium), and each shareholder
shall (subject to receiving at least 14 clear days' notice specifying the time or times of payment) pay to us at the time or times
so specified the amount called on the shares. A call may be revoked or postponed, in whole or in part, as the directors may determine.
A person upon whom a call is made shall remain liable for calls made upon him notwithstanding the subsequent transfer of the shares
in respect of which the call was made.
If a call or installment
of a call remains unpaid after it has become due and payable, the directors may give to the person from whom it is due not less
than 14 clear days' notice requiring payment of the amount unpaid together with any interest which may have accrued and any expenses
incurred by us by reason of such non-payment. The notice shall specify where payment is to be made and shall state that if the
notice is not complied with the shares in respect of which the call was made will be liable to be forfeited.
Appointment of Directors
Our ordinary shares
do not have cumulative voting rights for the appointed of directors. Rather, under our amended and restated articles of association,
our directors are appointed by the holders of a simple majority of our ordinary shares at a general shareholder meeting (excluding
abstentions). As a result, the holders of our ordinary shares that represent more than 50% of the voting power represented at a
shareholder meeting and voting thereon (excluding abstentions) have the power to appoint any or all of our directors whose positions
are being filled at that meeting. In addition, under our amended and restated articles of association, vacancies on our board of
directors may be filled by a vote of a simple majority of the directors then in office.
A director is not required
to hold any shares in the company by way of qualification. A director may vote with respect to any contract, proposed contract
or arrangement in which he is materially interested (provided that such director has provided prior notice). The directors may
exercise all the powers of the company to borrow money, mortgage its undertakings, property and uncalled capital, and issue debentures
or other securities whenever money is borrowed or as security for any obligation of the company or of any third party. The remuneration
to be paid to the directors is determined by the board of directors, which has currently delegated such authority to the compensation
committee with respect to directors who are not independent directors. There is no age limit requirement for directors.
Dividend and Liquidation Rights
The
holders of our ordinary shares are entitled to receive the dividends that are declared and approved by the board of directors.
Dividends may be paid only out of profits, which include net earnings and retained earnings undistributed in prior years, and out
of share premium, a concept analogous to paid-in-surplus in the United States, subject to a statutory solvency test. Any dividend
or other distribution which cannot be paid to a member and/or which remains unclaimed after six months from the date on which such
dividend or other distribution becomes payable may, in the discretion of the directors, be paid into a separate account in our
company’s name, provided that we shall not be constituted as a trustee in respect of that account and the dividend or other
distribution shall remain as a debt due to the shareholder. Any dividend or other distribution which remains unclaimed after a
period of six years from the date on which such dividend or other distribution becomes payable shall be forfeited and shall revert
to us.
On
liquidation, a liquidator may divide our assets, among the shareholders, in cash or in kind, in whole or in part, in a manner proportionate
to their shareholdings.
Shareholder Meetings
Each
ordinary share entitles the holder thereof to one vote on a show of hands and one vote in respect to each ordinary share held by
that shareholder on a poll, on all matters upon which the ordinary shares are entitled to vote, including the election of directors.
Voting at any meeting of shareholders is by a poll. A poll shall be taken as the chairman directs, and the result of the poll shall
be deemed to be the resolution of the general meeting at which the poll was demanded. Votes may be cast either personally or by
proxy (or in the case of a corporation or other non-natural person by its duly authorized representative or proxy). A shareholder
may appoint more than one proxy or the same proxy under one or more instruments to attend and vote at a meeting. Where a shareholder
appoints more than one proxy the instrument of proxy shall state which proxy is entitled to vote on a show of hands and shall specify
the number of shares in respect of which each proxy is entitled to exercise the related votes.
No
business shall be transacted at any general meeting unless a quorum is present. Two shareholders being individuals present in person
or by proxy or, if a corporation or other non-natural person, by its duly authorized representative or proxy, shall be a quorum
unless we have only one shareholder entitled to vote at such general meeting in which case the quorum shall be that one shareholder
present in person or by proxy or (in the case of a corporation or other non-natural person) by its duly authorized representative
or proxy. If a quorum is not present within half an hour from the time appointed for the meeting to commence or if during such
a meeting a quorum ceases to be present, the meeting, if convened upon a shareholder’s requisition, shall be dissolved and
in any other case it shall stand adjourned to the same day in the next week at the same time and/or place or to such other day,
time and/or place as the directors may determine, and if at the adjourned meeting a quorum is not present within half an hour from
the time appointed for the meeting to commence, the shareholders present shall be a quorum. Under the amended and restated memorandum
and articles of association, we may, but are not obliged to (unless required by the Companies Law), in each year hold a general
meeting as our annual general meeting. However, we intend to hold shareholders’ meetings annually and shareholders’
meetings may be convened by the board of directors on its own initiative. Subject to the amended and restated memorandum and articles
of association, advance notice of at least five clear days is required for the convening of shareholders’ meetings. Every
notice shall specify the place, the day and the hour of the meeting and the general nature of the business to be conducted at the
general meeting
Any
ordinary resolution to be made by the shareholders requires the affirmative vote of a simple majority of the votes attaching to
the ordinary shares cast, while a special resolution requires the affirmative vote of at least two-thirds of the votes cast attaching
to the ordinary shares. Holders of ordinary shares have the power, among other things, to appoint directors, appoint auditors and
make changes in the amount of our authorized share capital.
Material
issues that require a special resolution of the shareholders under the Companies Law include resolutions to alter the amended and
restated memorandum of association with respect to any objects, powers or other matters specified therein, any alteration of the
amended and restated articles of association, any reduction of capital, any change of name, the appointment of an inspector for
examining the affairs of the company, requiring the company to be wound up by a court, any voluntary winding up, delegating to
creditors the power of appointing liquidators, making binding arrangements between the company and its creditors, and sanctioning
the transfer of the business or property of the company being wound up to another company whether established in the Cayman Islands
or in any other jurisdiction.
Inspection
of Books and Records.
No
holders of our ordinary shares who is not a director shall have any right of inspecting any of our accounts, books or documents
except as conferred by the Companies Law or authorized by the directors or by us in general meeting. However, we will make this
Annual Report, which contains our audited financial statements, available to shareholders
Differences in Corporate Law
The
Companies Law of the Cayman Islands is modeled after that of England but does not follow recent United Kingdom statutory enactments
and differs from laws applicable to United States corporations and their shareholders. The following paragraphs are a summary of
the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated
in the United States and to their shareholders.
Mergers
and Similar Arrangements
. The Companies Law provides that a merger or consolidation may occur between any of the following:
(a) one or more companies incorporated in the Cayman Islands under the Companies Law and one or more companies incorporated under
the laws of a jurisdiction outside the Cayman Islands; or (b) two or more companies incorporated in the Cayman Islands under the
Companies Law. For these purposes, (i) “merger” means the merging of two or more constituent companies and the vesting
of their undertaking, property and liabilities in one of such companies as the surviving company and (ii) “consolidation”
means the combination of two or more constituent companies into a consolidated company and the vesting of the undertaking, property
and liabilities of such companies to the consolidated company. Such a merger or consolidation does not need court approval for
a company limited by shares (but not segregated portfolio companies).
A
merger or consolidation will involve, amongst other things, the directors of each constituent company participating in a merger
or consolidation approving a written plan of merger or consolidation on behalf of that company which complies with the requirements
of the Companies Law. The written plan of merger or consolidation approved by the directors must generally be authorized by resolution
of the shareholders of each constituent company participating in the merger or consolidation, subject to and in accordance with
the Companies Law. The consent of each holder of a fixed or floating security interest of a constituent company participating in
a proposed merger or consolidation should also be obtained, although the courts of the Cayman Islands have a discretion to waive
such requirement upon such terms as to the security to be issued by the consolidated or surviving company as the court considers
reasonable.
A
dissenting member of a Cayman Islands company proposing to participate in a merger or consolidation has a limited entitlement to
provide a written objection to the proposed action and to receive payment of the fair value of his shares in accordance with the
provisions of the Companies Law.
If
a merger or consolidation is effected in accordance with the Companies Law:
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the rights, property, business, undertaking, goodwill, benefits, immunities and privileges of each of the constituent companies immediately vest in the surviving or consolidated company;
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subject to any specific arrangements entered into by the relevant parties, the surviving or consolidated company is liable for and subject, in the same manner as the constituent companies, to all mortgages, charges or security interests, and all contracts, obligations, claims, debts, and liabilities of each of the constituent companies;
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an existing claim, cause or proceeding, whether civil (including arbitration) or criminal pending at the time of the merger or consolidation by or against a constituent company, is continued by or against the surviving or consolidated company; and
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a conviction, judgment, ruling, order or claim, due or to become due, against a constituent company, applies to the surviving or consolidated company instead of to the constituent company.
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Cayman
Islands law also provides statutory provisions which facilitate the reconstruction and amalgamation of companies, provided that
the arrangement in question is approved by a majority in number of each class of shareholders and creditors with whom the arrangement
is to be made, and who must in addition represent three-fourths in value of each class of shareholders or creditors, as the case
may be, that are present and voting either in person or by proxy at a meeting or meetings convened for that purpose. The convening
of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting
shareholder would have the right to express to the court the view that the transaction ought not to be approved, the court can
be expected to approve the arrangement if it satisfies itself that:
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the parties have complied with the statutory provisions regarding majority vote;
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the shareholders have been fairly represented at the meeting in question; and
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the arrangement is one that a businessman would reasonably approve.
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When
a take-over offer is made and accepted by holders of 90% in value of the shares within four months, the offeror may, within a two-month
period require the holders of the remaining shares to transfer these shares on the terms of the offer. An objection can be made
to the Grand Court of the Cayman Islands but this is unlikely to succeed unless there is evidence of fraud, bad faith or collusion.
If
the arrangement and reconstruction is approved, the dissenting shareholder would have no rights comparable to appraisal rights,
which would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to receive
payment in cash for the judicially determined value of the shares.
Shareholders’
Suits
. Our Cayman Islands counsel is not aware of any reported class action having been brought in a Cayman Islands court.
Derivative actions have been brought in the Cayman Islands courts, and the Cayman Islands courts have confirmed the availability
for such actions. In most cases, we will be the proper plaintiff in any claim based on a breach of duty owed to us, and a claim
against (for example) our officers or directors usually may not be brought by a shareholder. However, based on English authorities,
which would in all likelihood be of persuasive authority and be applied by a court in the Cayman Islands, exceptions to the foregoing
principle apply in circumstances in which:
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a company is acting, or proposing to act, illegally or beyond the scope of its authority;
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the act complained of, although not beyond the scope of the authority, could be effected if duly authorized by more than the number of votes which have actually been obtained; or
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those who control the company are perpetrating a “fraud on the minority.”
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A
shareholder may have a direct right of action against us where the individual rights of that shareholder have been infringed or
are about to be infringed.
We have not entered
into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information
on the Company” or elsewhere in this Annual Report.
Under
Cayman Islands law, non-residents of the Cayman Islands may freely hold, vote and transfer ordinary shares in the same manner as
Cayman Islands residents, subject to the provisions of the Companies Law and our amended and restated memorandum and articles of
association. There is no exchange control legislation in the Cayman Islands or any laws or regulations which affect the remittance
of dividends, interest or other payments to non-resident holders of our securities.
The following description
is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition
of our ordinary shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as
well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
Cayman Islands
Taxation
The
Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there
is no taxation similar to inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government
of the Cayman Islands except for stamp duties that may be applicable on instruments executed in, or after execution brought within,
the jurisdiction of the Cayman Islands. There are no exchange control regulations or currency restrictions in the Cayman Islands.
We
have received an undertaking from the Governor-in-Cabinet of the Cayman Islands that, in accordance with Section 6 of the Tax Concessions
Law (2011 Revision) of the Cayman Islands, for a period of 20 years from the date of the undertaking, no law which is enacted in
the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to our company or its operations
and, in addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty
or inheritance tax shall be payable (i) on or in respect of the shares, debentures or other obligations of our company or (ii)
by way of the withholding in whole or in part of a payment of dividend or other distribution of income or capital by our company
to its members or a payment of principal or interest or other sums due under a debenture or other obligation of our company.
No
stamp duties are payable on the issue or transfer of shares. An agreement to transfer shares may be subject to stamp duty if the
agreement is executed in the Cayman Islands or, if executed outside the Cayman Islands, subsequently brought into the Cayman Islands.
The Stamp Duty Law (2013 Revision) does not provide who is liable to pay stamp duty on any document but, in practice, the person
who seeks to rely on the document in any civil court proceedings will be required to pay stamp duty in order to have the document
admitted in evidence.
United States Federal Income Taxation
The following is a description
of the material U.S. federal income tax consequences to a U.S. Holder (as defined below) of the acquisition, ownership and disposition
of our ordinary shares. This description addresses only the U.S. federal income tax consequences to holders of our ordinary shares
in the United States that will hold our ordinary shares as capital assets for U.S. federal income tax purposes. This description
does not address many of the tax considerations applicable to holders that may be subject to special tax rules, including, without
limitation:
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banks, certain financial institutions or insurance companies;
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real estate investment trusts, regulated investment companies or grantor trusts;
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dealers or traders in securities, commodities or currencies;
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certain former citizens or long-term residents of the United States;
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persons that received our shares as compensation for the performance of services;
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persons that will hold our shares as part of a “hedging,” “integrated” or “conversion” transaction or as a position in a “straddle” for U.S. federal income tax purposes;
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partnerships (including entities classified as partnerships for U.S. federal income tax purposes) or other pass-through entities, or holders that will hold our shares through such an entity;
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persons whose “functional currency” is not the U.S. Dollar;
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persons that own directly, indirectly or through attribution 10% or more of the voting power or value of our shares; or
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persons holding our ordinary shares in connection with a trade or business conducted outside the United States.
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Moreover, this description
does not address the U.S. federal estate, gift or alternative minimum tax consequences, or any state, local or foreign tax consequences,
of the acquisition, ownership and disposition of our ordinary shares.
This description is
based on the U.S. Internal Revenue Code of 1986, as amended, (the “Code”), existing, proposed and temporary U.S. Treasury
Regulations and judicial and administrative interpretations thereof, in each case as available on the date hereof. All of the foregoing
is subject to change, which change could apply retroactively and could affect the tax consequences described below. There can be
no assurance that the U.S. Internal Revenue Service (“IRS”) will not take a different position concerning the tax consequences
of the acquisition, ownership and disposition of our ordinary shares or that the IRS’s position would not be sustained.
For purposes of this
description, a “U.S. Holder” is a beneficial owner of our ordinary shares that, for U.S. federal income tax purposes,
is:
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a citizen or resident of the United States;
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a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or any jurisdiction thereof; or
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a trust or estate the income of which is subject to United States federal income taxation regardless of its source.
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If a partnership (or
any other entity treated as a partnership for U.S. federal income tax purposes) holds our ordinary shares, the tax treatment of
a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a
partner or partnership should consult its tax advisor as to its tax consequences.
Holders should consult
their tax advisors with respect to the U.S. federal, state, local and foreign tax consequences of acquiring, owning and disposing
of our ordinary shares.
Distributions
Subject to the discussion
below under “Passive Foreign Investment Company Considerations,” the gross amount of any distribution made to a U.S.
Holder with respect to our ordinary shares before reduction for any Israeli taxes withheld therefrom, other than certain pro rata
distributions of our ordinary shares to all our shareholders, generally will be includible in the U.S. Holder’s income as
dividend income to the extent the distribution is paid out of our current or accumulated earnings and profits as determined under
U.S. federal income tax principles. Subject to the discussion below under “Passive Foreign Investment Company Considerations,”
non-corporate U.S. Holders may qualify for the lower rates of taxation with respect to dividends on ordinary shares applicable
to long-term capital gains (i.e., gains from the sale of capital assets held for more than one year) provided that certain conditions
are met, including certain holding period requirements and the absence of certain risk reduction transactions. However, dividends
on our ordinary shares will not be eligible for the dividends received deduction generally allowed to corporate U.S. Holders. Subject
to the discussion below under “Passive Foreign Investment Company Considerations,” to the extent that the amount of
any distribution by us exceeds our current and accumulated earnings and profits as determined under U.S. federal income tax principles,
it will be treated first as a tax-free return of tax basis in our ordinary shares and thereafter as capital gain. We do not expect
to maintain calculations of our earnings and profits under U.S. federal income tax principles and, therefore, U.S. Holders should
expect that the entire amount of any distribution generally will be reported as dividend income.
Dividends paid to U.S.
Holders with respect to our ordinary shares will be treated as foreign source income, which may be relevant in calculating a U.S.
Holder’s foreign tax credit limitation. Subject to certain conditions and limitations, Israeli tax withheld on dividends
may be deducted from taxable income or credited against U.S. federal income tax liability. An election to deduct foreign taxes
instead of claiming foreign tax credits applies to all foreign taxes paid or accrued in the taxable year. The limitation on foreign
taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends that
we distribute generally should constitute “passive category income,” or, in the case of certain U.S. Holders, “general
category income.” A foreign tax credit for foreign taxes imposed on distributions may be denied if certain minimum holding
period requirements are not satisfied. The rules relating to the determination of the foreign tax credit are complex, and U.S.
Holders should consult their tax advisors to determine whether and to what extent they will be entitled to this credit.
The amount of a distribution
will equal the U.S. dollar value of any foreign currency received, calculated by reference to the exchange rate in effect
on the date that distribution is received, whether or not a U.S. holder in fact converts any such foreign currency received into
U.S. dollars at that time. If the foreign currency is converted into U.S. dollars on the date of receipt, a U.S. holder generally
will not be required to recognize foreign currency gain or loss with respect to the distribution. A U.S. holder may have foreign
currency gain or loss if the foreign currency is converted into U.S. dollars after the date of receipt, depending on the exchange
rate at the time of conversion. Any gains or losses resulting from the conversion of foreign currency into U.S. dollars generally
will be treated as ordinary income or loss, as the case may be, and generally will be treated as U.S. source.
Sale, Exchange or Other Disposition
of Ordinary Shares
Subject to the discussion
below under “Passive Foreign Investment Company Considerations,” U.S. Holders generally will recognize gain or loss
on the sale, exchange or other disposition of our ordinary shares equal to the difference between the amount realized on the sale,
exchange or other disposition and the holder’s tax basis in our ordinary shares, and any gain or loss will be capital gain
or loss. The tax basis in an ordinary share generally will be equal to the cost of the ordinary share. For non-corporate U.S. Holders,
capital gain from the sale, exchange or other disposition of ordinary shares is generally eligible for a preferential rate of taxation
in the case of long-term capital gain. The deductibility of capital losses for U.S. federal income tax purposes is subject to limitations
under the Code. Any gain or loss that a U.S. Holder recognizes generally will be treated as U.S. source income or loss for foreign
tax credit limitation purposes.
Passive Foreign Investment Company
Considerations
If we were to be classified
as a “passive foreign investment company” (“PFIC”), in any taxable year, a U.S. Holder would be subject
to special rules generally intended to reduce or eliminate any benefits from the deferral of U.S. federal income tax that a U.S.
Holder could derive from investing in a non-U.S. company that does not distribute all of its earnings on a current basis.
A non-U.S. corporation
will be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which, after applying certain look-through
rules, either
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at least 75% of its gross income is “passive income”, or
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at least 50% of the average quarterly value of its gross assets is attributable to assets that produce passive income or are held for the production of passive income.
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Passive income for this
purpose generally includes dividends, interest, royalties, rents, gains from commodities and securities transactions, the excess
of gains over losses from the disposition of assets which produce passive income and amounts derived by reason of the temporary
investment of funds raised in offerings of our ordinary shares. If a non-U.S. corporation owns at least 25% by value of the stock
of another corporation, the non-U.S. corporation is treated for purposes of the PFIC tests as owning its proportionate share of
the assets of the other corporation and as directly receiving its proportionate share of the other corporation’s income.
If we are classified as a PFIC in any year with respect to which a U.S. Holder owns our ordinary shares, we generally will continue
to be treated as a PFIC with respect to that U.S. Holder in all succeeding years during which the U.S. Holder owns our ordinary
shares, regardless of whether we continue to meet the tests described above.
However, our PFIC status
for each taxable year may be determined only after the end of such year and will depend on the composition of our income and assets,
our activities and the value of our assets (which may be determined in large part by reference to the market value of our ordinary
shares, which may be volatile) from time to time. If we are a PFIC then unless a U.S. Holder makes one of the elections described
below, a special tax regime will apply to both (i) any “excess distribution” by us to that U.S. Holder (generally,
the U.S. Holder’s ratable portion of distributions in any year which are greater than 125% of the average annual distribution
received by the holder in the shorter of the three preceding years or its holding period for our ordinary shares) and (ii) any
gain realized on the sale or other disposition of the ordinary shares.
Under this regime, any
excess distribution and realized gain will be treated as ordinary income and will be subject to tax as if (i) the excess distribution
or gain had been realized ratably over the U.S. Holder’s holding period, (ii) the amount deemed realized in each year had
been subject to tax in each year of that holding period at the highest marginal rate for that year (other than income allocated
to the current period or any taxable period before we became a PFIC, which will be subject to tax at the U.S. Holder’s regular
ordinary income rate for the current year and will not be subject to the interest charge discussed below), and (iii) the interest
charge generally applicable to underpayments of tax had been imposed on the taxes deemed to have been payable in those years. In
addition, dividend distributions made to a U.S. Holder will not qualify for the lower rates of taxation applicable to long-term
capital gains discussed above under “Distributions.” Certain elections may be available that would result in an alternative
treatment (such as mark-to-market treatment) of our ordinary shares. We do not intend to provide the information necessary for
U.S. Holders to make qualified electing fund elections if we are classified as a PFIC. U.S. Holders should consult their tax advisors
to determine whether any of these elections would be available and if so, what the consequences of the alternative treatments would
be in their particular circumstances.
If we are determined
to be a PFIC, the general tax treatment for U.S. Holders described in this paragraph would apply to indirect distributions and
gains deemed to be realized by U.S. Holders in respect of any of our subsidiaries that also may be determined to be PFICs.
In addition, all U.S.
Holders may be required to file tax returns (including on IRS Form 8621) containing such information as the U.S. Treasury may require.
For example, if a U.S. Holder owns ordinary shares during any year in which we are classified as a PFIC and the U.S. Holder recognizes
gain on a disposition of our ordinary shares or receives distributions with respect to our ordinary shares, the U.S. Holder generally
will be required to file an IRS Form 8621 with respect to the company, generally with the U.S. Holder’s federal income tax
return for that year. The failure to file this form when required could result in substantial penalties.
Based on the financial
information currently available to us and the nature of our business, we do not believe that we were a PFIC for the taxable year
ending December 31, 2016. However, this determination could be subject to challenge by the IRS. If, contrary to our expectations,
we were to be classified as a PFIC for 2016, U.S. Holders of ordinary shares may be required to file form 8621 with respect to
their ownership of our ordinary shares in the year in which we were a PFIC. U.S. Holders of our ordinary shares should consult
their tax advisors in this regard.
Backup Withholding and Information
Reporting Requirements
U.S. backup withholding
and information reporting requirements may apply to payments to holders of our ordinary shares. Information reporting generally
will apply to payments of dividends on, and proceeds from the sale of, our ordinary shares made within the United States, or by
a U.S. payor or U.S. middleman, to a holder of our ordinary shares, other than an exempt recipient (including a corporation). A
payor may be required to backup withhold from payments of dividends on, or the proceeds from the sale or redemption of, ordinary
shares within the United States, or by a U.S. payor or U.S. middleman, to a holder, other than an exempt recipient, if the holder
fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from,
the backup withholding tax requirements. Any amounts withheld under the backup withholding rules generally should be allowed as
a credit against the beneficial owner’s U.S. federal income tax liability, if any, and any excess amounts withheld under
the backup withholding rules may be refunded, provided that the required information is timely furnished to the IRS.
Additional Medicare Tax
Certain U.S. Holders
who are individuals, estates or trusts may be required to pay an additional 3.8% Medicare tax on, among other things, dividends
and capital gains from the sale or other disposition of shares of common stock for taxable years beginning after December 31, 2012.
For individuals, the additional Medicare tax applies to the lesser of (i) “net investment income” or (ii) the excess
of “modified adjusted gross income” over $200,000 ($250,000 if married and filing jointly or $125,000 if married and
filing separately). “Net investment income” generally equals the taxpayer’s gross investment income reduced by
the deductions that are allocable to such income. U.S. Holders will likely not be able to credit foreign taxes against the 3.8%
Medicare tax.
Foreign Asset Reporting
Certain U.S. Holders
who are individuals (and under proposed regulations, certain entities) may be required to report information relating to an interest
in our ordinary shares, subject to certain exceptions (including an exception for shares held in accounts maintained by U.S. financial
institutions). U.S. Holders are urged to consult their tax advisors regarding their information reporting obligations, if any,
with respect to their ownership and disposition of our ordinary shares.
Foreign Account Tax Compliance Act
The Foreign Account
Tax Compliance Act (“FATCA”) encourages foreign financial institutions to report information about their U.S. account
holders (including holders of certain equity interests) to the IRS. Foreign financial institutions that fail to comply with the
withholding and reporting requirements of FATCA and certain account holders that do not provide sufficient information under the
requirements of FATCA are subject to a 30% U.S. withholding tax on certain payments they receive, including foreign passthru payments
(which may include payments made by us with respect to our ordinary shares). The term “foreign passthru payment” is
not currently defined in U.S. Treasury Regulations, and therefore, the future application of FATCA withholding tax on foreign pass-thru
payments to holders of ordinary shares is uncertain. If a holder of ordinary shares is subject to withholding, there will be no
additional amounts payable by way of compensation to the holder of such securities for the deducted amount. Holders of ordinary
shares should consult their own tax advisors regarding this legislation in light of such holder’s particular situation.
The above description
is not intended to constitute a complete analysis of all tax consequences relating to acquisition, ownership and disposition of
our ordinary shares. Holders should consult their tax advisors concerning the tax consequences of their particular situations.
Israeli Taxation
The following is a brief
summary of the material Israeli tax laws applicable to us and certain Israeli Government programs that benefit us. This section
also contains a brief discussion of material Israeli tax consequences concerning the ownership and disposition of our securities
by non-Israeli resident shareholders. This summary does not discuss all the aspects of Israeli tax law that may be relevant to
a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special
treatment under Israeli law. The discussion below is subject to change, including due to amendments under Israeli law or changes
to the applicable judicial or administrative interpretations of Israeli law, which change could affect the tax consequences described
below.
Company Taxation
Ability Inc. is managed
and controlled from Israel and is considered by the Israeli Tax Authority as a company resident in Israel and subject to Israeli
corporate tax, capital gains tax and any other relevant taxes.
The standard corporate
tax rate for Israeli companies was 26.5% for 2015 and was reduced to 25% for 2016, 24% for 2017 and 23% for 2018 and thereafter.
Prior to 2015, Ability
was granted an “Approved Enterprise” status under the Investment Law for the ten years ended December 31, 2014. Ability
received a deferral of corporate income tax on non-distributed income generated by the Approved Enterprise (“Approved Income”).
Distributed Approved Income is subject to 25% corporate income tax at the Ability level.
Beginning January 1,
2015, Ability elected to participate in the “Preferred Enterprise” program under the amendment to the Investment Law.
Due to Ability’s “Preferred Enterprise” status, Ability expects to benefit from a reduced tax rate of 14.6% in
2015 and 2016 (based on a blended tax rate) and a reduced tax rate, not yet determined (but up to 16%), in 2017 and thereafter
with respect to taxable income generated by the Preferred Enterprise (“Preferred Income”) regardless of whether such
Preferred Income is distributed, and all other taxable income will be subject to the standard corporate tax rate. If Ability does
not meet the requirements for a Preferred Enterprise, it will be subject to tax at the ordinary corporate income tax rate, which
is 25% in 2016 and may be required to pay incremental taxes over the reduced tax rates under the Preferred Enterprise as discussed
above, plus indexation, and interest thereon, and possibly penalties thereon.
Taxation of non-Israeli shareholders
on receipt of dividends
Shareholders are expected
to be subject to a 15% withholding tax with respect to dividends from Approved Income and 20% with respect to dividends from Preferred
Income, both subject to any applicable tax treaty between Israel and the country of residence of the shareholder. Dividends distributed
out of income which is not Approved Income or Preferred Income are expected to be subject to withholding tax of 25% or 30%, subject
to any applicable tax treaty between Israel and the country of residence of the shareholder.
Taxation of non-Israeli shareholders on disposition of securities
Subject to certain conditions
set forth in the Ordinance, the disposition of our securities by non-Israeli resident shareholders should be exempt from tax in
Israel.
F.
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Dividends and Paying Agents
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Not applicable.
Not applicable.
You may inspect our
securities filings, including this Annual Report and the exhibits and schedules thereto, without charge at the offices of the SEC
at 100 F Street, N.E., Washington, D.C. 20549. You may obtain copies of all or any part of the Annual Report from the Public Reference
Section of the SEC, 100 F Street, NE, Washington, D.C. 20549 upon the payment of the prescribed fees. You may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov
that contains reports, proxy and information statements and other information regarding registrants like us that file electronically
with the SEC. You can also inspect the Annual Report on this website.
A copy of each document
concerning our company that is referred to in this Annual Report is available for public view (subject to confidential treatment
of certain agreements pursuant to applicable law) at our principal executive offices.
I.
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Subsidiary Information
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Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market
Risk
Foreign Currency Exchange Risk
The U.S. dollar is our
functional and reporting currency. We conduct business primarily in U.S. dollars and to a lesser extent, in NIS and Euro. This
exposes us to risk associated with exchange rate fluctuations vis-à-vis the U.S. dollar. For example, salaries and related
expenses for Israeli employees and payables to Israeli suppliers are paid in NIS. A devaluation of the NIS in relation to the U.S.
dollar has the effect of reducing the U.S. dollar amount of our expenses and payables that are payable in NIS, unless those expenses
or payables are linked to the U.S. dollar. Conversely, any increase in the value of the NIS in relation to the U.S. dollar has
the effect of increasing the U.S. dollar value of our unlinked NIS expenses. On the other hand, we also own assets that are denominated
in NIS. A devaluation of the NIS in relation to the U.S. dollar has the effect of reducing the U.S. dollar amount of our assets.
Conversely, any increase in the value of the NIS in relation to the U.S. dollar has the effect of increasing the U.S. dollar value
of our NIS denominated assets. For the years ended December 31, 2016, 2015 and 2014, loss (gain) from currency fluctuations was
$(163,000), $64,000 and ($274,000), respectively. We expect that an increase of ten percent (10%) in the exchange rate of the NIS
to U.S. dollar will decrease our operating expenses expressed in U.S. dollar terms by approximately $0.1 million in 2017 and vice
versa. For additional information see “Item 3D Key Information - Risk Factors – Risks Related to our Company -
Our
international operations subject us to currency exchange risk
.”
Item 12. Description of Securities Other Than Equity Securities
Not applicable.
Not applicable.
Not applicable.
D.
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American Depositary Shares
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Not applicable.
Ability
Inc.
Consolidated Statements of Balance Sheets
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December 31,
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2016
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2015
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(U.S. dollar in thousands)
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LIABILITIES & SHAREHOLDERS' EQUITY:
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
Accrued payroll and other compensation related accruals
|
|
|
270
|
|
|
|
60
|
|
Trade accounts payable, accrued expenses and other accounts payable
|
|
|
4,952
|
|
|
|
1,844
|
|
Put options liability
|
|
|
11,900
|
|
|
|
-
|
|
Income tax payable
|
|
|
32
|
|
|
|
6,062
|
|
Accrued expenses and accounts payable with respect to Projects (VIE - $588 thousand as of December 31, 2015)
|
|
|
4,734
|
|
|
|
6,967
|
|
Due to related company
|
|
|
-
|
|
|
|
600
|
|
Progress payments in excess of accumulated costs with respect to Projects
|
|
|
-
|
|
|
|
1,019
|
|
Total Current Liabilities
|
|
|
21,888
|
|
|
|
16,552
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Other accounts payable
|
|
|
-
|
|
|
|
112
|
|
Put option liability
|
|
|
-
|
|
|
|
11,900
|
|
Accrued severance pay
|
|
|
245
|
|
|
|
270
|
|
Total Non-Current Liabilities
|
|
|
245
|
|
|
|
12,282
|
|
Total Liabilities
|
|
|
22,133
|
|
|
|
28,834
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Preferred shares $0.0001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding at December 31, 2016 and 2015
|
|
|
-
|
|
|
|
-
|
|
Ordinary shares $0.0001 par value, 200,000,000 shares authorized, 25,756,142 and 25,276,142 shares issued and outstanding at December 31, 2016 and 2015, respectively
|
|
|
3
|
|
|
|
3
|
|
Additional paid in capital
|
|
|
18,560
|
|
|
|
18,560
|
|
Accumulate deficit (VIE - $906 thousand as of December 31, 2015)
|
|
|
(8,861
|
)
|
|
|
(808
|
)
|
Total Shareholders' Equity
|
|
|
9,702
|
|
|
|
17,755
|
|
Total Liabilities and Shareholders' Equity
|
|
|
31,835
|
|
|
|
46,589
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
Ability
Inc.
Consolidated
Statements of Comprehensive Income (Loss)
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(U.S. dollar in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
16,508
|
|
|
|
52,151
|
|
|
|
21,444
|
|
Cost of revenues
|
|
|
8,617
|
|
|
|
29,654
|
|
|
|
13,968
|
|
Gross profit
|
|
|
7,891
|
|
|
|
22,497
|
|
|
|
7,476
|
|
Sales and marketing expenses
|
|
|
5,323
|
|
|
|
3,305
|
|
|
|
3,064
|
|
General and administrative expenses
|
|
|
9,662
|
|
|
|
1,317
|
|
|
|
469
|
|
Operating income (loss)
|
|
|
(7,094
|
)
|
|
|
17,875
|
|
|
|
3,943
|
|
Finance expenses (income), net
|
|
|
(127
|
)
|
|
|
99
|
|
|
|
(269
|
)
|
Income (loss) before income tax
|
|
|
(6,967
|
)
|
|
|
17,776
|
|
|
|
4,212
|
|
Income tax expenses
|
|
|
1,086
|
|
|
|
3,023
|
|
|
|
1,090
|
|
Net and comprehensive income (loss)
|
|
|
(8,053
|
)
|
|
|
14,753
|
|
|
|
3,122
|
|
Earnings (loss) per ordinary basic and diluted (U.S. dollar)
|
|
|
(0.33
|
)
|
|
|
0.60
|
|
|
|
0.13
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
Ability
Inc.
Consolidated
Statements of Changes in Shareholders' Equity (Deficit)
|
|
Preferred shares
|
|
|
Ordinary Shares
|
|
|
Additional paid in
|
|
|
Retained earnings (accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit)
|
|
|
Total
|
|
|
|
|
|
|
(U.S. dollar in thousands)
|
|
|
|
|
|
(U.S. dollar in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2014
|
|
|
-
|
|
|
|
-
|
|
|
|
25,276,142
|
|
|
|
3
|
|
|
|
32
|
|
|
|
(1,432
|
)
|
|
|
(1,397
|
)
|
Net and comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,122
|
|
|
|
3,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014
|
|
|
-
|
|
|
|
-
|
|
|
|
25,276,142
|
|
|
|
3
|
|
|
|
32
|
|
|
|
1,690
|
|
|
|
1,725
|
|
Recapitalization of Cambridge accumulated deficit and
issuance of ordinary shares as part of the Reverse Merger
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,528
|
|
|
|
-
|
|
|
|
18,528
|
|
Dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,251
|
)
|
|
|
(17,251
|
)
|
Net and comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,753
|
|
|
|
14,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
25,276,142
|
|
|
|
3
|
|
|
|
18,560
|
|
|
|
(808
|
)
|
|
|
17,755
|
|
Issuance of shares as part of the Reverse Merger
|
|
|
-
|
|
|
|
-
|
|
|
|
480,000
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
Net and comprehensive loss
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,053
|
)
|
|
|
(8,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
25,756,142
|
|
|
|
3
|
|
|
|
18,560
|
|
|
|
(8,861
|
)
|
|
|
9,702
|
|
*
Less than $0.5 thousand
The
accompanying notes are an integral part of the consolidated financial statements.
Ability
Inc.
Consolidated
Statements of Cash Flows
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(U.S. dollar in thousands)
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(8,053
|
)
|
|
|
14,753
|
|
|
|
3,122
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
149
|
|
|
|
132
|
|
|
|
128
|
|
Amortization
|
|
|
193
|
|
|
|
—
|
|
|
|
—
|
|
Impairment of inventory
|
|
|
201
|
|
|
|
—
|
|
|
|
—
|
|
Impairment of property and equipment
|
|
|
114
|
|
|
|
—
|
|
|
|
—
|
|
Capital (gain) loss
|
|
|
(10
|
)
|
|
|
18
|
|
|
|
7
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted deposits
|
|
|
(1,433
|
)
|
|
|
162
|
|
|
|
259
|
|
Accounts receivable
|
|
|
631
|
|
|
|
(3,756
|
)
|
|
|
161
|
|
Inventory
|
|
|
(311
|
)
|
|
|
(799
|
)
|
|
|
(247
|
)
|
Deferred tax
|
|
|
—
|
|
|
|
(423
|
)
|
|
|
938
|
|
Other current assets
|
|
|
1,459
|
|
|
|
(1,180
|
)
|
|
|
(140
|
)
|
Restricted deposit for put option
|
|
|
(128
|
)
|
|
|
—
|
|
|
|
—
|
|
Accrued payroll and other compensation related accruals
|
|
|
210
|
|
|
|
(291
|
)
|
|
|
294
|
|
Trade accounts payable, accrued expenses and other accounts payable
|
|
|
3,108
|
|
|
|
1,030
|
|
|
|
(30
|
)
|
Income tax payable
|
|
|
(2,674
|
)
|
|
|
2,426
|
|
|
|
104
|
|
Accrued expenses and accounts payable with respect to Projects
|
|
|
(2,233
|
)
|
|
|
2,618
|
|
|
|
3,407
|
|
Due to related company
|
|
|
(600
|
)
|
|
|
600
|
|
|
|
—
|
|
Progress payments in excess of accumulated costs with respect to Projects (accumulated costs with respect to projects in excess of progress payments)
|
|
|
(1,170
|
)
|
|
|
(5,304
|
)
|
|
|
4,916
|
|
Accrued severance pay
|
|
|
(25
|
)
|
|
|
171
|
|
|
|
(32
|
)
|
Total Adjustments
|
|
|
(2,519
|
)
|
|
|
(4,596
|
)
|
|
|
9,765
|
|
Net cash provided by (used in) operating activities
|
|
|
(10,572
|
)
|
|
|
10,157
|
|
|
|
12,887
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
Ability
Inc.
Consolidated
Statements of Cash Flows
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(U.S. dollar in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(182
|
)
|
|
|
(353
|
)
|
|
|
(277
|
)
|
Proceeds from sale of property and equipment
|
|
|
10
|
|
|
|
158
|
|
|
|
159
|
|
Loans repaid by (granted to) related company, net
|
|
|
-
|
|
|
|
709
|
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(172
|
)
|
|
|
514
|
|
|
|
(618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the Reverse Merger, net of transaction costs
|
|
|
-
|
|
|
|
18,995
|
|
|
|
-
|
|
Dividends paid
|
|
|
-
|
|
|
|
(14,951
|
)
|
|
|
(817
|
)
|
Due from / to controlling shareholders, net
|
|
|
378
|
|
|
|
(595
|
)
|
|
|
6
|
|
Withholding tax paid by the Company on behalf of the Controlling Shareholders' with respect to dividend distributed
|
|
|
(4,393
|
)
|
|
|
-
|
|
|
|
(125
|
)
|
Withholding tax paid by the Controlling Shareholders' to the company with respect to dividend distributed, to be paid by the company to the Israeli tax authorities
|
|
|
770
|
|
|
|
-
|
|
|
|
-
|
|
Net cash provided by (used in) financing activities
|
|
|
(3,245
|
)
|
|
|
3,449
|
|
|
|
(936
|
)
|
Net Change In Cash
|
|
|
(13,989
|
)
|
|
|
14,120
|
|
|
|
11,333
|
|
CASH AT BEGINNING OF THE YEAR
|
|
|
25,829
|
|
|
|
11,709
|
|
|
|
376
|
|
CASH AT END OF THE YEAR
|
|
|
11,840
|
|
|
|
25,829
|
|
|
|
11,709
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(U.S. dollar in thousands)
|
|
Cash paid:
|
|
|
|
|
|
|
|
|
|
Interest and banks' charges
|
|
|
36
|
|
|
|
40
|
|
|
|
30
|
|
Income tax
|
|
|
3,758
|
|
|
|
568
|
|
|
|
338
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
1 - organization and business operation:
Ability
Inc. (“Inc”) was incorporated under the laws of the Cayman Islands on September 1, 2015, originally as Cambridge Holdco
Corp., an exempted company. Inc was formed as a wholly-owned subsidiary of Cambridge Capital Acquisition Corporation (“Cambridge”),
a special purpose acquisition corporation, incorporated under the laws of Delaware on October 1, 2013. Cambridge closed its initial
public offering and a simultaneous private placement on December 23, 2013. On December 23, 2015, upon a merger of Cambridge into
Inc, with Inc surviving the merger and becoming the public entity, Inc consummated a business combination whereby it acquired
Ability Computer & Software Industries, Ltd., an Israeli company (the “Company”), by way of a share exchange (the
“Reverse Merger”), following which the Company became Inc’s wholly-owned subsidiary. Upon the closing of the Reverse
Merger, Inc’s ordinary shares and warrants began trading on the NASDAQ Capital Market under the symbols “ABIL” and
“ABILW”, respectively. Inc’s warrants were delisted on April 18, 2016 and since such date have traded on the
“Pink Sheets” under the symbol “ABIWF”. On January 12, 2016 its ordinary shares were listed for trading
on the Tel Aviv Stock Exchange. Inc, the Company and Ability Security Systems Ltd. (“ASM”) are jointly defined as the
“Group”.
|
1.
|
The
Company’s shareholders prior to the closing of the Reverse Merger, Anatoly Hurgin and
Alexander Aurovsky, (the “Controlling Shareholders”) received in the Reverse
Merger: 16,213,268 ordinary shares of Inc (reflecting approximately 63% of Inc’s issued
and outstanding ordinary shares immediately following the Reverse Merger); $18.1 million
in cash and an additional number of ordinary shares of Inc to be issued upon and subject
to the Company achieving certain net income targets following the share exchange, as
described below (the “Net Income Shares”), as consideration for their shares
of the Company. Furthermore, of the ordinary shares received, each of the Controlling
Shareholders have the right, on one occasion during the 60 day period following the second
anniversary of the closing of the Reverse Merger, to put to Inc all or part of his pro
rata portion of 1,173,267 ordinary shares that he received in the share exchange for
an amount in cash equal to (1) (x) the number of shares being put multiplied by (y) $10.10
per share plus (2) his pro rata portion of interest, if any, on $11.9 million deposited
into an escrow account by Inc to fund the payment of the purchase price for the put option
if it is exercised.
|
|
2.
|
Migdal
Underwriting and Business Initiatives Ltd. (“Migdal”) received in the Reverse
Merger: 480,000 ordinary shares of Inc; $1.2 million in cash and up to 253,500 Net Income
Shares, all in consideration for services provided by them with respect to the Reverse
Merger.
|
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
1 - ORGANIZATION AND BUSINESS OPERATION (CONT.):
b.
|
The Reverse Merger (cont.)
|
|
3.
|
Inc
acquired from the sole shareholder of ASM, Eyal Tzur, (the “ASM Former Shareholder”)
16% of the shares of ASM, a variable interest entity with the Company as its primary
beneficiary, for $0.9 million in cash and a put option to sell his remaining holdings
to Inc in exchange for 480,000 of Inc’s ordinary shares and up to 253,500 Net Income
Shares. The put option was exercised in January 2016.
|
|
4.
|
The
Company’s transaction costs with respect to the Reverse Merger were $6.3 million and
include Migdal’s service fees ($1.2 million in cash and ordinary shares valued at $4.3
million as detailed above) and other consulting expenses (the “Transaction Costs”).
|
|
5.
|
The
Controlling Shareholders, Migdal and ASM Former Shareholder will be entitled to receive
Net Income Shares based on the Company’s achievement of specified net income targets
in the fiscal years 2015 to 2018 as set out below:
|
|
|
|
|
|
|
|
Number of Inc’s ordinary shares
|
|
|
Fiscal year
|
|
|
Net Income
Target
|
|
|
Controlling Shareholders
|
|
|
Migdal
|
|
|
ASM Former Shareholder
|
|
|
Total
|
|
|
2015
|
|
|
$
|
27,000,000
|
|
|
|
3,384,000
|
|
|
|
108,000
|
|
|
|
108,000
|
|
|
|
3,600,000
|
|
|
2016
|
|
|
$
|
40,000,000
|
|
|
|
1,739,000
|
|
|
|
55,500
|
|
|
|
55,500
|
|
|
|
1,850,000
|
|
|
2017
|
|
|
$
|
60,000,000
|
|
|
|
1,880,000
|
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
2,000,000
|
|
|
2018
|
|
|
$
|
80,000,000
|
|
|
|
940,000
|
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
1,000,000
|
|
In
the event that the Group fail to satisfy the net income target for any fiscal year but net income for such fiscal year is ninety
percent (90%) or more of the net income target for such fiscal year, then Inc is required to issue to the Controlling Shareholders,
Migdal and ASM Former Shareholder, the pro rata portion of Net Income Shares relating to the percentage achieved.
The
Group net income targets for 2016 and 2015 were not achieved.
|
6.
|
The
remaining funds in the restricted trust account of Cambridge amounted to $81.3 million
of which: $21.6 million was paid to the holders of 2,136,751 ordinary shares of Cambridge
who elected to convert their shares into cash upon consummation of the Reverse Merger;
$18.1 million and $11.9 million were paid to the Controlling Shareholders and deposited
in an escrow account to secure their put option, respectively; $0.9 million was paid
to ASM Former Shareholder; $7.8 million was used to pay outstanding accounts payable
and accrued expenses of Cambridge; $2 million was used to pay for the Company’s Transaction
Costs. The balance of $19 million was released to the Company.
|
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
1 - ORGANIZATION AND BUSINESS OPERATION (CONT.):
The
Group provides advanced interception, geolocation, monitoring and cyber intelligence tools to serve the needs and increasing challenges
of security and intelligence agencies, military forces, law enforcement and homeland security agencies worldwide.
The
Israeli Control Order Regarding the Engagement in Encryption Items - 1998 regulated under the Encryptions Export Control Department
in the Israeli Ministry of Defense (“IMOD”) controls development, import, export, and sale of all encrypted items
(the “Decryption Regime”).
The
Israeli Defense Export Control Law - 2007 (the “2007 Law”) regulated under DECA (the Defense Export Control Agency in
IMOD) regulates the marketing and export of defense equipment, transfer of defense know-how and the provision of defense services,
taking into account national security considerations, foreign relations considerations, international obligations and other interests
of the State of Israel.
ASM,
a wholly owned subsidiary of Inc, is an Israeli company registered with DECA as a certified exporter for the marketing and export
of “controlled” products of Israeli origin, or products that are exported from Israel.
However,
for the most part, the Group’s products are manufactured outside of Israel and therefore are not subject to the general provisions
of the 2007 Law. Thus, the Company strives that components of the Company’s systems (that otherwise would be subject to DECA control)
are sent to the customers directly by the foreign suppliers of such components, which are located outside of Israel, and are installed
or integrated there by the Company or others under its responsibility.
The
Group’s interception systems that contain decryption capabilities may be subject to the Decryption Regime and therefore have obtained
necessary licenses thereunder.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
1 - ORGANIZATION AND BUSINESS OPERATION (CONT.):
The
Company and the ASM Former Shareholder were parties to a long-term agreement (the “JV Agreement”) pursuant to which
the Company contributed substantial business efforts while ASM was responsible mainly for the regulatory aspects of pursuing business
opportunities in the field of DECA controlled products. The JV Agreement could be terminated and/or the activities could be transferred
to the Company’s full ownership at any time, subject to the Company’s exclusive discretion.
The
Company and the Controlling Shareholders were significantly involved in the redesign of ASM’s operations, in such manner
that in essence, the operations are conducted only in favor of the Company (ASM has no other activities other than on behalf of
the Company). Moreover, according to the JV Agreement, ASM is required to negotiate and determine any project terms and sign contracts
with the clients - all with full transparency, coordination and advance consent from the Company, as applicable. Upon the closing
of the Reverse Merger, the JV agreement was terminated while maintaining its terms for the existing projects. As mentioned above,
in January 2016, ASM Former Shareholder exercised his put option, resulting in ASM becoming a wholly-owned subsidiary of Inc.
The Company had the power to govern ASM’s operations through the provision requiring its consent of any new client which ASM wishes
to accept. The Company is entitled to all but 3% commission (the return that ASM Former Shareholder is entitled to as a service
provider) of ASM’s net results which are transferred to the Company, and is fully responsible for indemnifying ASM for any losses
incurred as part of their joint operations (ASM Former Shareholder does not have any obligation to absorb ASM’s losses)
or any negative consequences with respect to the performance of a project.
When
the activities of ASM commenced (following conclusion of the JV agreement) it did not have equity at risk (no equity and no subordinated
loans). All the equity that ASM has achieved is based on transactions involving the Company. There are no restrictions on ASM’s
assets. Any required financial guarantees are provided by the Company.
Given
the Company’s exposure and rights to the outcome of ASM’s operations, among other factors described above, the Company
concluded that ASM is a Variable Interest Entity (“VIE”) prior to the time the ASM Former Shareholder exercised his
put option and that the Company is its primary beneficiary. Therefore, the consolidated financial statements as of December 31,
2015 include the financial information of all three entities (Inc, the Company and ASM).
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
1 - ORGANIZATION AND BUSINESS OPERATION (CONT.):
The Group has an accumulated
deficit of $8,861 thousand and has cash and cash equivalents of $11,840 thousand as of December 31, 2016 and recorded a net loss
of $8,053 thousand for the year ended December 31, 2016 which along with other matters, raises substantial doubt about its ability
to continue as a going concern.
The
net loss for the year ended December 31, 2016 includes significant legal and professional expenses such as fees in connection
with the internal investigation conducted by the Group’s audit committee and settlement and related legal expenses incurred
in connection with one of the legal proceedings.
Management
is investing significant marketing efforts in order to generate additional revenue and simultaneously is continuing to decrease
its expenses, primarily its legal and professional services fees in order to regain profitability.
NOTE
2 - Summary of Significant Accounting Policies:
a.
|
Basis
of presentation:
|
The
accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting
principles (“GAAP”) and include all adjustments necessary for the fair presentation of the Group’s financial
position, results of operations, changes in shareholders’ equity (deficit) and cash flows for the periods presented.
The
Reverse Merger is accounted for as a reverse merger whereby Inc is treated as the “acquired” company for financial
reporting purposes. This determination was primarily based on the Company comprising the ongoing operations of the combined company,
the Company’s senior management comprising the senior management of the combined company, and that the former shareholders
of the Company are the controlling shareholders of Inc after the Reverse Merger. The Reverse Merger is considered to be a capital
transaction in substance. Accordingly, for accounting purposes, the Reverse Merger is treated as the equivalent of the Company
issuing shares for the net assets of Inc, accompanied by a recapitalization. The net assets of Inc are stated at historical cost,
with no goodwill or other intangible assets recorded. Operations prior to the Reverse Merger are those of the Company, and therefore
the historical consolidated financial statements presented are the consolidated financial statements of the Company and the ordinary
shares and the corresponding capital amounts pre-merger have been retroactively restated as ordinary shares reflecting the exchange
ratio in the merger.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (CONT.):
b.
|
Principles
of consolidation:
|
The
consolidated financial statements include the accounts of Inc, the Company and ASM. All intercompany accounts and transactions
have been eliminated in the consolidation.
The
preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates, judgments
and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates
and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions
on an ongoing basis using historical experience and other factors and adjusts such estimates and assumptions when facts and circumstances
dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from
these estimates.
The
currency of the primary economic environment in which the operations of the Group is conducted is the U.S. dollar (“Dollar”
or “$”); thus, the Dollar is the functional currency of the Group. Therefore, the Group’s transactions and balances
denominated in Dollars are presented at their original amounts, while non-Dollar transactions and balances have been re-measured
to Dollars and the relating gains and losses are reflected in the statements of comprehensive income (loss) as finance income
or expenses, as appropriate.
All
amounts are presented in Dollars, unless otherwise indicated, rounded to the nearest thousands.
The
Group generates revenues from sales of products, which include hardware, software, connection to supportive infrastructure, integration
services, training and warranty, as well as revenues from Software as a Service (“SaaS”). The Group sells its products
(the “Products”) and provides services (the “Services”) directly to end users and resellers and also participates
as a subcontractor of prime contractors in joint projects and as a prime contractor in projects with resellers (the “Projects”).
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (CONT.):
e.
|
Revenue recognition (cont.):
|
When
a sale arrangement contains multiple elements, the Group allocates revenues to each element based on a selling price
hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence (“VSOE”), if
available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”)
if neither VSOE nor TPE is available. The Group establishes VSOE of selling price using the price charged for a deliverable
when sold separately. When VSOE cannot be established, the Group attempts to establish selling price of each element based on
TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Group’s
go-to-market strategy typically differs from that of its peers and its offerings contains a significant differentiation such
that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Group is unable to
reliably determine what similar competitor products’ selling prices are on a standalone basis. Therefore, the Group is
typically not able to determine TPE. The best ESP is established considering several external and internal factors including,
but not limited to, historical sales, pricing practices and geographies in which the Group offers its products. The
determination of ESP is based on applying significant judgment to weigh such factors.
Products
and Services:
Revenues
from sales of Products are recognized when the Group has delivered the Products to the customer and received final acceptance,
the revenue can be reliably measured and collectability of the receivables is reasonably assured.
Revenues
from sales of Services are recognized ratably in the period in which the services are rendered (connection to supportive infrastructure
is generally over one year).
The
Group provides a one year warranty for the majority of its Products. Based on the Group’s experience, the provision is deminimis.
Projects:
Revenues
from Projects are recognized using the completed-contract method to determine the appropriate amount in a given period, as the
Group is unable to produce reasonably dependable estimates due to involvement of many subcontractors and lack of transparency
of prime contractors’ progress.
Under
the completed-contract method, costs are accumulated on the balance sheet until the contract is completed or substantially completed.
Similarly, amounts billed to customers are also deferred until the contract is completed or substantially completed. To the extent
that the amount of accumulated costs exceeds the amount of advance (or progress) payments received or billed by the Group, the
excess should be reflected on the balance sheet as a current asset, separated from inventory. To the extent that the amount of
advance (or progress) payments received or billed by the Group exceeds the amount of accumulated costs, the excess is reflected
as a liability on the balance sheet.
In
instances where revenues are derived from sales of third-party vendors’ products or services, revenues are recognized on a gross
basis and the related costs are recognized within cost of revenues when the Company has the following indicators for gross reporting:
it is the primary obligor of the sales arrangements, it is subject to inventory risks of physical loss, has latitude in establishing
prices, has discretion in suppliers’ selection and assumes credit risks on receivables from customers.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (Cont.):
e.
|
Revenue recognition (cont.):
|
SaaS
Revenues:
Our
SaaS multiple-element arrangements are typically comprised of subscription and support fees from customers accessing our software
and set-up fees. We do not provide the customer the contractual right to take possession of the software at any time during the
hosting period under these arrangements. We recognize revenue for subscription and support services over the contract period originating
when the subscription service is made available to the customer and the contractual hosting period has commenced.
Usage
based fees:
Revenues
are recognized in the period in which subscribers use the related services.
Advertising
costs are expensed as incurred. In 2016, 2015 and 2014, advertising expenses were $24 thousand, $26 thousand and $7 thousand,
respectively.
Related
parties include the Controlling Shareholders and entities controlled by them.
h.
|
Fair
value measurements:
|
Fair
value is defined as the price that would be received by selling an asset or paid to transfer a liability (i.e. the ‘exit
price’) in an arms’ length transaction between willing market participants at the measurement date. The applicable
financial accounting rules establish a hierarchy for inputs used in measuring fair value. The hierarchy is divided into three
levels based on the reliability of inputs:
Level
1 - Valuations based on quoted prices in active markets for identical assets or liabilities that the Group has the ability to
access.
Level
2 - Valuations based on quoted prices in markets that are not active but for which all significant inputs are observable, either
directly or indirectly.
Level
3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The
Group’s financial assets and liabilities as of December 31, 2016 and 2015 are measured based on Level 1 inputs.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (Cont.):
The
inventory items consist of purchased systems and are stated at the lower of cost or market. Cost is determined using the First-In,
First-Out method of inventory accounting. The valuation of inventory items requires the Group to make estimates regarding excess
or obsolete inventories. During 2016 the Group recorded an inventory impairment of $201 thousand.
The
purchased systems are utilized typically for one of the following purposes: (A) Future projects, (B) Demo and (C) Spare parts
for installed systems. The first utilization suggests that the systems should be classified as inventory while the second and
third suggest it should be classified as property and equipment. In order to reflect those utilizations appropriately between
the inventory and property and equipment line items, the Group performed an aggregated analysis which suggested that such systems
should be classified as inventory for the first year from date of purchase, on such date tested for impairment and then classified
to property and equipment and amortized for four years from that date, see also note 2j. for the amortization period.
j.
|
Property
and equipment, net:
|
Property
and equipment are stated at cost less accumulated depreciation and amortization. Upon the retirement or disposition of property
and equipment, the related costs, accumulated depreciation and amortization are removed and any related gain or loss is recorded
in the statements of comprehensive income (loss). Repairs and maintenance that do not extend the life or improve an asset are
expensed in the periods incurred.
The
Group evaluates its property and equipment for indicators of possible impairment when events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. Impairment exists if the carrying amounts of such assets exceed the estimates
of future net undiscounted cash flows expected to be generated by such assets. Should impairment exist, the impairment loss would
be measured based on the excess carrying value of the asset over the asset’s estimated fair value. During 2016 the Group
recorded software systems impairment of $114 thousand.
Depreciation
and amortization are calculated using the straight-line method over the estimated useful lives of the assets, at the following
annual rates:
|
|
|
%
|
|
|
Useful life (years)
|
|
|
Software systems (from classified date, see also note 2i.)
|
|
|
25
|
|
|
|
4
|
|
|
Vehicles
|
|
|
15
|
|
|
|
7
|
|
|
Leasehold improvements
|
|
|
10-20
|
|
|
|
5-10
|
|
|
Office furniture and equipment
|
|
|
7-10
|
|
|
|
10-14
|
|
|
Computers, electronics and related
|
|
|
15-33
|
|
|
|
3-7
|
|
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (Cont.):
Deferred
tax asset and liability accounts’ balances are determined based on differences between the financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Group accounts for deferred tax on non-
distributed income that are subject
to income tax once distributed and when there is an intent to distribute them.
The
Group applies the two-step approach in recognizing and measuring uncertain tax positions. The first step is to evaluate the tax
position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is
more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution
of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more
than 50% likely to be realized upon ultimate settlement.
l.
|
Earnings (loss) per share:
|
The
Group computes basic earnings or loss per share by dividing net income by the weighted-average number of ordinary shares outstanding
during the period. However, consistent with the reverse merger accounting, the calculation of the weighted-average number of ordinary
shares includes 24,582,874 shares (which include also 480,000 ordinary shares that were issued to ASM former shareholder upon
exercise of its put option on its remaining ordinary shares of ASM) assumed to be outstanding as of January 1, 2013. Further,
the outstanding shares subject to put options were excluded, consistent with the accounting treatment of a put option liability.
Income
(loss) per share assuming dilution (diluted earnings (loss) per share) would give effect to dilutive warrants and other potential
ordinary shares outstanding during the period, considering the treasury stock method. The outstanding warrants were “out-of-the-money”
and the issuance of the Net Income Shares was not probable at any given period and therefore excluded from the calculation.
Basic
and diluted earnings (loss) per ordinary share data were computed as follows:
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (U.S. dollar in thousands)
|
|
|
(8,053
|
)
|
|
|
14,753
|
|
|
|
3,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average ordinary shares outstanding - Basic and diluted
|
|
|
24,582,874
|
|
|
|
24,582,874
|
|
|
|
24,582,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per ordinary basic and diluted (U.S. dollar)
|
|
|
(0.33
|
)
|
|
|
0.60
|
|
|
|
0.13
|
|
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (Cont.):
The
Group is involved in various commercial, government investigation and other legal proceedings that arise from to time. The Group
records accruals for these types of contingencies to the extent that the Group concludes their occurrence is probable and that
the related liabilities are estimable. When accruing these costs, the Group will recognize an accrual in the amount within a range
of loss that is the best estimate within the range. When no amount within the range is a better estimate than any other amount,
the Group accrues for the minimum amount within the range. The Group records anticipated recoveries under existing insurance contracts
that are virtually certain of occurring at the gross amount that is expected to be collected. Legal costs are expensed as incurred.
Certain
amounts in prior years’ consolidated financial statements have been reclassified to conform to the current year’s presentation.
o.
|
Recently Issued Accounting Pronouncements:
|
|
1.
|
Adopted
in current period:
|
In
August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-15, “Presentation of Financial statements – Going concern (subtopic 205-40), Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-14”). The new standard provides guidance
on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue
as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate
whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern
within one year from the date the financial statements are issued. ASU 2014-15 applies prospectively to annual periods ending
after December 15, 2016, and to annual periods thereafter. The Company analyze the going concern issue according to that new accounting
standard.
|
2.
|
Not
yet adopted in current period:
|
In
May 2014, the FASB issued ASU 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 guidance permits
the use of either a retrospective or cumulative effect transition method. The Company has not yet selected a transition method.
The Company is still finalizing the analysis to quantify the adoption impact of the provisions of the new standard. The FASB has
issued,
and
may issue in the future, interpretive guidance which may cause the Company’s evaluation to change. Management believes that the
Company is following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption effective
the beginning of fiscal year 2018.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (Cont.):
o.
|
Recently
Issued Accounting Pronouncements (cont.):
|
|
2.
|
Not
yet adopted in current period (cont.):
|
In
February 2016, the FASB issued ASU No. 2016-02, which supersedes the lease accounting guidance in ASC 840, Leases. The new guidance
requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception
of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement.
Lessor
accounting is similar to the current model but updated to align with certain changes to the lessee model. The amendments are effective
for reporting periods (interim and annual) beginning after December 15, 2018 with early adoption permitted. The amendments must
be adopted using a modified retrospective approach. The Company is currently assessing the potential impact of this ASU on its
consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13. This update replaces the incurred loss impairment methodology in current U.S. GAAP for
recognizing credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range
of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, the guidance requires
use of a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects
losses that are probable. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance
for credit losses rather than as a reduction in the amortized cost basis of the securities. The amendments are effective for reporting
periods (interim and annual) beginning after December 15, 2019. Early adoption is permitted as of reporting periods beginning
after December 15, 2018, including in interim periods. The amendments will be applied through a cumulative-effect adjustment to
retained earnings as of the beginning of the first reporting period in which the amendments are effective. The Company is currently
assessing the potential impact of this ASU on its consolidated financial statements.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
2 - Summary of Significant Accounting Policies (Cont.):
o.
|
Recently
Issued Accounting Pronouncements (cont.):
|
|
2.
|
Not
yet adopted in current period (cont.):
|
In
August 2016, the FASB issued ASU 2016-15. This update addresses whether to present certain specific cash flow items as operating,
investing or financing activities. The amendments are effective for reporting periods (interim and annual) beginning after December
15, 2017. Early adoption is permitted. The amendments will be applied retrospectively to each period presented. The Company is
currently assessing the potential impact of this ASU on its consolidated financial statements.
In
October 2016, the FASB issued ASU 2016-16. This update removes the current exception in US GAAP prohibiting entities from recognizing
current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated
entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated
entity until it is sold to a third party remains unaffected. The amendments are effective for reporting periods (interim and annual)
beginning after December 15, 2017, with early adoption permitted. The amendments will be applied on a modified retrospective basis
through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company
is currently assessing the potential impact of this ASU on its consolidated financial statements.
In
November 2016, the FASB issued ASU 2016-18. This update provides guidance on the classification and presentation of changes in
restricted cash or restricted cash equivalents in the statement of cash flows under Topic 230, Statement of Cash Flows. The amendments
are effective for reporting periods (interim and annual) beginning after December 15, 2017 with early adoption permitted. The
amendments will be applied retrospectively to each period presented. The Company is currently assessing the potential impact of
this ASU on its consolidated financial statements
NOTE
3 - Restricted DEPOSITS:
The
restricted deposits as of December 31, 2016 totaled NIS6,760 thousand ($1,758 thousand) and relates to a deposit in connection
with one of the legal proceedings, see note 8.a.1. for additional information.
The
restricted deposit as of December 31, 2015 totaled $325 thousand and relates to banks’ performance guarantees in certain
projects secured by deposits the Group was required to provide.
Regarding
the restricted deposits for put option- see note 1.b.1.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
4 - Property and Equipment, Net:
Composition:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(U.S. dollar in thousands)
|
|
|
|
|
|
|
|
|
Software Systems
|
|
|
1,105
|
|
|
|
-
|
|
Vehicles
|
|
|
606
|
|
|
|
488
|
|
Leasehold improvements
|
|
|
355
|
|
|
|
474
|
|
Office furniture and equipment
|
|
|
121
|
|
|
|
123
|
|
Computers, electronics and related
|
|
|
13
|
|
|
|
314
|
|
Property and equipment
|
|
|
2,200
|
|
|
|
1,399
|
|
Less: accumulated depreciation and amortization
|
|
|
612
|
|
|
|
642
|
|
Property and equipment, net
|
|
|
1,588
|
|
|
|
757
|
|
NOTE
5 - Accumulated costs with respect to projects in excess of progress payments (Progress payments in excess of accumulated costs
with respect to Projects):
Composition:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(U.S. dollar in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
548
|
|
|
|
2,630
|
|
Advanced payments from customers
|
|
|
(397
|
)
|
|
|
(3,649
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated costs with respect to projects in excess of progress payments (progress payments in excess of accumulated costs with respect to projects)
|
|
|
151
|
|
|
|
(1,019
|
)
|
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
6 - Related Parties:
a.
|
Purchases
from related parties, loans to related parties and due from Controlling Shareholders
:
|
|
1.
|
Anatoly
Hurgin owns 100% of Alan Ltd. (“Alan”) which holds a 60% interest in Active
Intelligence Labs Ltd. (Israel) (“AIL”). The Company purchased products which
are integrated into its innovative tailored solutions totaling $780 thousand and $420
thousand from AIL during the years ended December 31, 2015 and 2014, respectively. The
debt as of December 31, 2015 ($600 thousands) was repaid at August 2, 2016.
|
|
2.
|
In
2014 and 2013, the Company granted Alan loans aggregated to $555 thousand and $205 thousand,
respectively. The loans bear an annual interest of 3.3%, linked to the Israeli consumer
price index, and were repaid in December 2015.
|
|
3.
|
The
amounts due from the Controlling Shareholders as of December 31, 2016 and 2015, were
repaid to the Company in April 19, 2017 and February 25, 2016, respectively.
|
In
2011, the Company declared dividends of 10,760 thousand New Israeli Shekels (“NIS”) ($2,833 thousand) of which 15% income
tax was withheld (the “Net Amount”) and NIS1,140 thousand ($300 thousand) and NIS474 thousand ($125 thousand) were paid
to the Israeli Tax Authority in 2013 and 2014, respectively. NIS894 thousand ($197 thousand), NIS1,379 thousand ($231 thousand),
NIS2,350 thousand ($817 thousand) and NIS4,523 thousand ($1,163 thousand) of the Net Amount were paid to the Controlling Shareholders
in 2012, in 2013, 2014 and 2015, respectively.
Additionally,
in the fourth and the second quarters of 2015, the Company declared dividends of NIS42,825 ($11,000 thousand) and NIS23,560 thousand
($6,251 thousand), respectively, of which 20% income tax was withheld and outstanding as of December 31, 2015 (income tax of NIS13,277
thousand ($3,404 thousand) was paid to the Israeli Tax Authority in January 2016), while the net amounts were paid to the Controlling
Shareholders. It was agreed as part of the Company’s tax assessments for the three years ended December 31, 2014 that were
finalized on May 30, 2016 that the Controlling Shareholders withholding tax for the 2015 dividends should be NIS16,400 thousand
($4,260 thousand). The Company paid the difference to the Israeli tax authorities and the Controlling Shareholders compensated
the Company for such difference.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
6 - Related Parties (Cont.):
c.
|
Related
parties’ employment agreements and compensation:
|
|
1.
|
The
Company entered into new employment agreements with each of its two Controlling Shareholders.
One of the Controlling Shareholders is acting as a Director of the board (acted as the
chairman up to December 19, 2016) and the Chief Executive Officer and the other as a
Director of the Board and the Chief Technology Officer. Each of the employment agreements
will remain in effect unless terminated as described below. Pursuant to each employment
agreement, the executive’s gross salary is NIS120,000 ($31,200) per month commencing
at January 1, 2016. Each executive is also entitled to receive social benefits:
|
Each
employment agreement provides that the executive is entitled to receive an annual performance bonus of up to NIS360,000 ($93,600)
based on annual performance goals agreed upon by the Company and the executive (such performance goals were not met for 2016 and
therefore no performance bonus was recorded or paid). Each employment agreement may be terminated by the Company or the executive
upon 120 days’ prior written notice, in which case, the executive is entitled to receive salary and benefits during such
120 days and for a period of eight months thereafter. The executive will be entitled to accept new employment after the expiration
of such eight month period. In addition, the Company, by resolution of its board of directors, may terminate the employment agreements
at any time by a written notice with cause (as defined in the employment agreements).
The
executives’ compensation related expenses in 2016, 2015 and 2014 amounted to NIS3,562 thousand ($928 thousand), NIS487 thousand
($125 thousand) and NIS405 thousand ($113 thousand), respectively.
|
2.
|
The
Company entered into a new employment agreement with a Controlling Shareholder’s son
commencing March 22, 2016 and was employed by the Company until June 20, 2016. Based
on the agreement he was entitled to a monthly gross salary of NIS10,000 ($2,600) and
other related social benefits.
|
NOTE
7 - ordinary shares and warrants:
Inc
is authorized to issue 200,000,000 ordinary shares with a par value of $0.0001 per share, of which 25,276,142 were issued and
outstanding as of December 31, 2015. During January 2016 Inc issued 480,000 ordinary shares par value $0.0001 in connection with
ASM Former Shareholder’s exercising his put option on his remaining shares in ASM. As a result the ordinary shares issued
and outstanding during that date, as of December 31, 2016 and as of the date of this report were 25,756,142; and 5,000,000 preferred
shares with a par value of $0.0001 per share, of which none were issued and outstanding.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
7 - ordinary shares and warrants (CONT.):
b.
|
Warrants:
Since its inception, Cambridge have issued 8,577,125
warrants which were assumed by Inc in the merger (see note 1). Each warrant entitles its holder to purchase one ordinary share
at a price of $11.50 and is expiring on December 17, 2018. Inc may redeem the warrants in the event that the traded ordinary share
price is at least $17.50 per share (for any 20 trading days within a 30-day trading period) on a “cashless basis”.
|
On
March 21, 2016, Inc received a letter from NASDAQ informing that its warrants did not meet the minimum 400 Round Lot Holder requirement
for initial listing on the NASDAQ and that the Staff had determined to initiate procedures to delist Inc’s warrants from
NASDAQ. As Inc did not appeal this determination, Inc’s warrants were delisted from NASDAQ on April 18, 2016 and since such
date have traded on the “Pink Sheets” under the symbol “ABIWF.”
NOTE
8 - commitments and contingencies:
|
1.
|
In January 2015, Ability, Messrs. Anatoly Hurgin and Alexander Aurovsky, and a third party plaintiff entered into an arbitration process, following a claim filed with the Tel Aviv Magistrates Court (the “Court”) in October 2014 by the plaintiff against the Company and its former shareholders, claiming a right to review the Company’s accounts and reserving the right to file a monetary claim. On September 14, 2016, the plaintiff presented the defendants with a settlement proposal for the resolution of all claims against the defendants and any entity affiliated with them in exchange of the full and final payment of an amount of NIS8,450 thousand (approximately $2,200 thousand), which was subsequently approved by Inc’s board of directors. On or about the time of the board meeting at which (among other things) the settlement proposal was approved, the plaintiff made claims that the proposal did not include VAT and that a settlement agreement has not been entered into between the parties. This dispute was referred to a new arbitration process, at the conclusion of which, a settlement was reached, according to which the parties agreed that the plaintiff would receive a total of NIS8,142 thousand (approximately $2,120 thousand), plus VAT. Thereafter, on February 20, 2017, such settlement was approved by the arbitrator and was made an arbitral award. Following the arbitral award and according to the determination of Inc’s board of directors, Inc and Messrs. Hurgin and Aurovsky appointed an independent legal expert acting as an arbitrator to make a final determination as to the allocation of the settlement amount between us and Messrs. Hurgin and Aurovsky. On March 30, 2017, and as clarified on April 13, 2017, the legal expert determined that the Company shall be required to pay 70% of the settlement amount and the VAT (such amount was accrued for as of December 31, 2016) and the remaining 30% of the settlement amount shall be paid by Messrs. Hurgin and Aurovsky. On April 19, 2017, each of Messrs. Hurgin and Aurovsky paid to us NIS376,410 (approximately $98,000), or a total of NIS752,820 (approximately $196,000) in compliance with the arbitral award.
|
|
|
|
|
2.
|
On October 15, 2015 the Company was added to a derivative complaint, originally filed by a stockholder of Cambridge (the “Plaintiff”) against Cambridge, the members of the Cambridge board of directors and others. The complaint generally alleges, among other things, that the members of the Cambridge board of directors breached their fiduciary duties to Cambridge stockholders by approving the contemplated merger with the Company and that the Company is aiding and abetting the Cambridge board of directors in the alleged breaches of their fiduciary duties.
|
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
8 - commitments and contingencies (CONT.):
The action seeks injunctive relief, damages
and reimbursement of fees and costs, among other remedies. On February 17, 2016, the Company filed a motion and supporting memorandum
of law to dismiss the Plaintiff’s amended complaint arguing three primary grounds: i) the court lacked personal jurisdiction
over the Company; ii) Plaintiff’s derivative aiding and abetting claim was extinguished by the closing of the business combination;
and iii) Plaintiff’s direct aiding and abetting claims were insufficiently plead. On September 15, 2016, the court granted
the defendants’ motion to dismiss in its entirety without prejudice, and the Judge dismissed the amended complaint. However,
the court provided the plaintiff with 45 days within which to file a further amended complaint. On October 22, 2016, a second amended
complaint was filed by the plaintiff. On January 17, 2017, the defendants filed a motion to dismiss the second amended complaint
on multiple grounds, including various pleading deficiencies that the plaintiff has failed to adequately correct. On March 9, 2017,
the plaintiff filed a response to the motion to dismiss. The court has scheduled a hearing for argument on the motion to dismiss
for June 14, 2017.
Given
that these proceedings are in the preliminary stage, the timing or outcome of this matter cannot be predicted at this time.
|
3.
|
On October 27, 2015, the Company received a notice alleging that the Company’s GSM interception and decryption systems apparently fall within the claims of an Israeli patent owned by the claimants. On November 12, 2015, a lawsuit alleging patent infringement, violation of a non-disclosure agreement, trade secret misappropriation and unjust enrichment was filed with the Lod District Court in Israel by a company and an individual (the “Plaintiffs”), against the Company and its Controlling Shareholders. The amount sought in the lawsuit for registration fee purpose is NIS5 million (approximately $1.3 million), however the Plaintiffs did not specify amount of the compensation demanded. Furthermore, the Plaintiffs demanded that the Company and/or its Controlling Shareholders immediately cease the infringement of the patent as well as further use of the claimed technology and further manufacture, export, sale or marketing of the alleged infringing products.
|
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
8 - commitments and contingencies (CONT.):
The Company filed a statement
of defense on April 5, 2016 and a preliminary hearing was held on April 13, 2016. On May 23, 2016, the plaintiffs filed a petition
to join Inc, ASM and Ability Limited, an entity fully owned by Anatoly Hurgin as defendants and to amend the statement of claim
(this petition is still pending). The parties then agreed to appoint a mediator in an attempt to settle the dispute out of court,
and agreed, with the approval of the court, on a stay of proceedings until September 2016. However, the parties did not reach an
agreement by that time. On October 9, 2016, upon the Company’s application and with the plaintiffs’ consent, the court
decided to stay the proceedings until a decision is handed down on a related pending application to the Israeli Patent Registrar
to revoke the patent in dispute.
The Company believes that the
allegations in the notice and the lawsuit are without merit and the Company intend to vigorously defend against them.
Given that the proceeding is
in the preliminary stage and is currently suspended, the timing or outcome of this matter cannot be predicted at this time.
|
4.
|
On
May 25, 2016, a purported class action lawsuit was filed against Inc, Anatoly Hurgin
and Avi Levin, the Group Chief financial officer in the Southern District of New York
in the United States. The complaint asserts claims pursuant to Sections 10(b) and 20(a)
of the Securities Exchange Act and Rule 10b-5 promulgated thereunder on behalf of a putative
class of all purchasers of Inc ordinary shares between September 8, 2015 and April 29,
2016. The complaint broadly alleges that certain of Inc public statements were false
and that Inc materially overstated its income and failed to disclose that it had material
weaknesses in its internal controls. The complaint does not specify the amount of damages
sought. On July 25, 2016, a second purported class action lawsuit was filed against Inc,
Anatoly Hurgin and Avi Levin in the Southern District of New York in the United States.
The complaint asserts claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange
Act and Rule 10b-5 promulgated thereunder on behalf of a putative class of all purchasers
of Inc ordinary shares between September 8, 2015 and April 29, 2016.
|
The
complaint broadly alleges that Inc financial statements were false and misleading and were not prepared in conformity with GAAP,
nor was the financial information a fair presentation of its operations. The complaint does not specify the amount of damages
sought. These two putative class actions have been consolidated into one action and co-lead plaintiffs have been appointed. In
accordance with a schedule adopted by the court, co-lead plaintiffs filed an amended complaint on April 28, 2017. In the amended
complaint, co-lead plaintiffs have added Benjamin Gordon and BDO Ziv Haft as defendants.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
8 - commitments and contingencies (CONT.):
The
amended complaint asserts claims pursuant to Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder against all
defendants, a claim pursuant to Section 20(a) of the Exchange Act against Messrs. Hurgin, Levin and Gordon, a claim pursuant to
Section 11 of the Securities Act against Inc, BDO Ziv Haft and Messrs. Hurgin and Gordon, and a claim pursuant to Section 15 of
the Securities Act against Messrs. Hurgin, Levin and Gordon on behalf of a putative class of all purchasers of Inc’s ordinary
shares between September 8, 2015 and April 29, 2016. The amended complaint does not specify the amount of damages sought. The
complaint broadly alleges that certain of our public statements were false, that the Group had material weaknesses in the Group’s
internal controls, that the Group’s financial statements were false and misleading and were not prepared in conformity with
GAAP, nor was the financial information a fair presentation of the Group’s operations, and that Inc registration statement
contained material misstatements and omissions. Pursuant to a schedule approved by the Court, co-lead plaintiffs must file a second
amended consolidated complaint no later than 30 days after the date on which this Form 20-F is filed.
Inc
intends to defend the action.
Given
that these proceedings are in the preliminary stage, the timing or outcome of this matter cannot be predicted at this time.
|
5.
|
On
May 4, 2016, Inc was served with a lawsuit and a motion for the certification of the
lawsuit as a class action in the Tel Aviv District Court in Israel, filed, against Inc,
the Controlling shareholders, and two former directors, Benjamin Gordon and Mitchell
Gordon that had been filed on May 3, 2016. The claim alleges (among other things) that
Inc misled the public in its public filings with regard to its financial condition and
included misleading information (or omitted to include relevant information) in its financial
statements published in connection with the January 12, 2016 listing of shares for trading
on the Tel Aviv Stock Exchange. In addition, the claim alleges that the defendant directors
breached their fiduciary duty under Israeli law towards Inc and its public shareholders.
The claim alleges that the plaintiff suffered personal damages and estimates that Inc
shareholders suffered damages of approximately NIS23.3 million (approximately $6.13 million).
In addition, the plaintiff claims that damage was caused to people who held exchange
traded funds and other investment instruments that contained Inc shares and therefore
he could not evaluate those damages at this stage. On September 15, 2016, Inc filed a
motion for a stay of proceedings, due to other pending class action lawsuits in the United
States that also relate (among other things) to the stated causes of action and based
on similar claims.
|
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
8 - commitments and contingencies (cont.):
On
September 16, 2016, the Court accepted the motion to stay proceedings. The parties were required to update the Court on the status
of the United States class actions by March 15, 2017. On March 15, 2017, the plaintiff filed an update and requested that proceedings
be stayed until the completion of the internal investigation of the audit committee. On the same day, Inc filed a separate update
with respect to the United States class actions, together with filing a motion for a stay of proceedings pending resolution of
the consolidated United States class actions. On March 16, 2017, the Court held that the plaintiff must respond to the motion
to stay proceedings pending resolution of the consolidated United States class actions. On March 26, 2017, the plaintiff filed
a partial response, asking for an extension until May 15, 2017 to file a full response, alleging that the publication of our annual
financial statements, together with the findings of the internal investigation, would affect its position on our motion to stay
proceedings. On March 26, 2017, the Court granted the plaintiff the requested extension. On May 15, 2017 the plaintiff filed a
motion for an additional three month extension to file a full response, among other things, as the Company had not yet filed its
annual financial statements or published the results of the internal investigation.
Given
that these proceedings are in the preliminary stage, the timing or outcome of this matter cannot be predicted at this time.
|
6.
|
On
December 13, 2016, a complaint was filed in the 15th Circuit, Palm Beach County, Florida
in the United States, against Inc, our former director, Benjamin Gordon, BG Strategic
Advisors, LLC, Cambridge Capital, LLC and Jonathan Morris, in his capacity as trustee
of the Gordon Family 2007 Trust. The complaint
|
alleges
violations of Florida State securities laws, common law fraud, negligent misrepresentation and conspiracy. Mr. Gordon and BG Strategic
Advisors, LLC are also alleged to have breached their fiduciary duty to the plaintiff. On January 23, 2017, the plaintiff filed
an amended complaint alleging the same violations as the initial compliant. On March 2, 2017, Inc filed a motion to dismiss all
of the claims asserted against it in the compliant. On the same day, Mr. Gordon and BG Strategic Advisors also filed motions seeking
the dismissal of the amended complaint in its entirety. On March 9, 2017, Inc filed a motion to stay all proposed discovery in
the action pending the resolution of the motions to dismiss. These motions are all currently pending.
Given
that these proceedings are in the preliminary stage, the timing or outcome of this matter cannot be predicted at this time.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
8 - commitments and contingencies (cont.):
The
Company has the following lease agreements:
|
1.
|
A
5 year lease agreement, with respect to an office space, expiring on November 30, 2017.
The monthly rent is NIS25 thousand ($7 thousand) linked to the Israeli consumer products
index.
|
|
2.
|
A
2.5 year lease agreement with respect to an office space, expiring on November 30, 2017.
The monthly rent is NIS16 thousand ($4 thousand) linked to the Israeli consumer products
index.
|
|
3.
|
An
agreement with respect to an office space which was renewed in August 15, 2015 for 1
year, those terms were extended until April 1, 2018 and the Company has an option to
extend the lease until August 15, 2019. The monthly rent is NIS5 thousand ($1 thousand).
|
In
2016, 2015 and 2014, the rent expenses amounted to $152 thousand, $128 thousand and $114 thousand, respectively.
|
c.
|
Agreement
with a Provider:
|
On
October 20, 2015 (the “Effective Date”), the Company entered into an agreement with an unrelated company which is
a service provider and an owner and licensor of telecommunications solutions (the “Provider”). The Provider granted
the Company an exclusive and non-transferable right and license for 3 years to market, promote, advertise, sell and distribute
the Provider’s products directly to customers worldwide, in consideration for 50% of the Company’s net income relating to
those sales. The agreement sets minimum annual sales at $10 million. In case the Company does not satisfy this minimum commitment
at the end of any contract year, the Company is required to pay the Provider a 15% penalty against the shortfall amount (maximum
$1.5 million per year). In order to secure minimum sales and penalty, it was also agreed that the Company pays the Provider monthly
payments of $125 thousand. During 2015, the Company paid the Provider $375 thousand, those payments were recorded as prepayments
in the other current assets on the consolidated balance sheet as of December 31, 2015, as the Company believes it will satisfy
those sales. During 2016 the Company continued to pay the monthly payments and paid the Provider an aggregated amount of $1,500
thousand, those payments (along with the $375 thousand that were paid during 2015 and recorded initially as part of the balance
sheet) were recorded as part of the Sales and marketing expenses since the Company succeeded to sell only one of the provider
products during 2016. The Provider waived its rights to the 50% net income share in connection with that sole 2016 sale in order
to support his product marketing efforts in the relevant region.
During
2016 it was clarified between the Company and the Provider that the Company will be able to utilize the monthly payments through
the entire agreement period and not only on an annual basis.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
8 - commitments and contingencies (cont.):
d.
|
Contingency in connection with legal fees:
|
During
2016, a US legal firm reached out to the Company asking for a reimbursement for its legal fees incurred in connection with representing
Benjamin Gordon, former director for several issues, as a result, the Company recorded an accrued provision as of December 31,
2016 based on management best estimate, the amount that was not accrued totaled to $381 thousand.
e.
|
On-going internal investigation:
|
In connection with implementing
internal controls to comply with applicable anti-corruption laws regarding distributors, resellers and agents, the Group identified
press reports that its reseller in Latin America may be subject to local law enforcement investigations concerning price manipulation
and corruption in the reseller’s sale of software products to government entities, although the press reports do not identify
the Group and the Group has not been able to confirm the investigations or whether any investigations implicate sale of the Group’s
products. The Group is conducting a review of the reseller and pending the completion of the review the Group has ceased accepting
orders from the reseller. Ceasing future sales to such reseller could have a material impact on the Group’s future revenue.
During
the first quarter of 2015, through an internal investigation conducted by the Company, it was discovered that the Company was
a victim of fraud from an outside, unrelated third party. The fraud resulted in an unauthorized outgoing transfer to the third
party by the Company in the amount of $462 thousand. While the Company reported the fraud to the police and to its bank, there
can be no assurance that the funds will be recovered. Accordingly, the wire transfer amount has been recorded within general and
administrative expenses in the statement of comprehensive income for the year ended December 31, 2015.
NOTE
9 – rEVENUE BROKEN BY REGION:
Composition:
|
|
|
Year ended
December
31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
(U.S. dollar in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
|
|
|
9,230
|
|
|
|
8,373
|
|
|
|
5,973
|
|
|
Latin America
|
|
|
5,320
|
|
|
|
34,603
|
|
|
|
6,130
|
|
|
Europe
|
|
|
1,750
|
|
|
|
495
|
|
|
|
1,236
|
|
|
Israel (1)
|
|
|
-
|
|
|
|
8,365
|
|
|
|
7,000
|
|
|
Africa
|
|
|
-
|
|
|
|
-
|
|
|
|
1,105
|
|
|
Other
|
|
|
208
|
|
|
|
315
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,508
|
|
|
|
52,151
|
|
|
|
21,444
|
|
|
(1)
|
Sales
in Israel in 2015 and 2014 include sales to Israeli integrators that have been sold to
end users in Asia and Africa, which represented 16% and 33% of revenues during such periods,
respectively.
|
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
10 – Genreal and administrative expenses:
Composition:
|
|
|
Year ended
December
31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
(U.S. dollar in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal fees
|
|
|
3,849
|
|
|
|
36
|
|
|
|
17
|
|
|
Professional services fees
|
|
|
2,821
|
|
|
|
339
|
|
|
|
112
|
|
|
Settlement in connection in one of the legal proceedings
(see note 8a1.)
|
|
|
1,664
|
|
|
|
-
|
|
|
|
-
|
|
|
Salaries and related
|
|
|
681
|
|
|
|
224
|
|
|
|
137
|
|
|
Fraud from an unrelated third party (see note 8e.)
|
|
|
-
|
|
|
|
462
|
|
|
|
-
|
|
|
Impairment of fixed assets
|
|
|
114
|
|
|
|
-
|
|
|
|
-
|
|
|
Office maintenance (including rent)
|
|
|
98
|
|
|
|
59
|
|
|
|
46
|
|
|
Others
|
|
|
435
|
|
|
|
197
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.662
|
|
|
|
1,317
|
|
|
|
469
|
|
NOTE
11 - income tax:
The
Israeli corporate tax rates applicable to the Company and ASM:
2014
and 2015 - 26.5%
2016
– 25%
2017
– 24%
2018
onward – 23%
b.
|
“Approved
Enterprise” status
:
|
The
Company was granted an ‘approved enterprise’ status for the 10 years ended December 31, 2014, under the Israeli Law
for the Encouragement of Capital Investments, 1959 (the “Encouragement Law”). The tax benefit is a reduced corporate
income tax rate on non-distributed income generated in approved areas (“Approved Income”). Distributed Approved Income
is subject to 25% corporate income tax at the company level and 15% withholding income tax at the shareholder level.
As
of December 31, 2011, upon a tax assessment by the Israeli Tax Authority, all of the accumulated Approved Income was distributed
as dividends to the Controlling Shareholders and the applicable income tax was applied. As the Company distributes its Approved
Income to its Controlling Shareholders, a deferred tax liability was recorded on the non-distributed Approved Income as generated,
on the difference of the reduced
corporate
income tax rate applied and the regular corporate tax rates, as well as related deferred income tax expenses.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
11 - income tax (cont.):
b.
|
“Approved
Enterprise” status (Cont.):
|
On
May 30, 2016 the Company and the Israeli tax authorities signed a tax assessment agreement for the three years ended December
31, 2014, all of the accumulated Approved Income was distributed as dividends to the Controlling Shareholders and the applicable
income tax were applied. As part of that tax assessment the Company was also required to pay $1.1 million exceeding its accrued
tax provision for that period; such additional tax was recorded as part of the 2016 income tax.
The
Company has final tax assessments for the years up to 2014 inclusive.
c.
|
“Preferred
Enterprise” status
:
|
Commencing
on January 1, 2015, the Company has elected the “Preferred Enterprise” program under the amendment of the Encouragement
Law, whereby the Company is subject to corporate income tax rate on non-Preferred Income and 16% reduced income tax rate on its
Preferred Income generated in all areas other than Development Area A. As part of the tax assessment for the three years ended
December 31, 2014 as mentioned above, it was agreed that Company will be subject to a 14.6% (based on a blended tax rates) for
the years 2015 and 2016 and a reduced tax rate, not yet determined (but up to 16%) in 2017 and thereafter.
Composition:
|
|
|
Year
ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
(U.S. dollar in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
32
|
|
|
|
3,446
|
|
|
|
95
|
|
|
Previous year
|
|
|
1,054
|
|
|
|
-
|
|
|
|
-
|
|
|
Deferred
|
|
|
-
|
|
|
|
(423
|
)
|
|
|
995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses
|
|
|
1,086
|
|
|
|
3,023
|
|
|
|
1,090
|
|
In
assessing the realization of deferred tax assets, the Group considers whether it is more likely than not that all or some portion
of the deferred tax assets will not be realized. As described in note 1f regarding the raise of substantial doubt about the Group’s
ability to continue as a going concern, the Group applied a full valuation allowance for its deferred tax assets.
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
11 - income tax (cont.):
d.
|
Deferred income tax (Cont.):
|
Composition:
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(U.S. dollar in thousands)
|
|
|
|
|
|
|
|
|
|
|
Net and comprehensive loss
|
|
|
1,338
|
|
|
|
-
|
|
|
Timing difference of expense in connection with the working capital received as part of the reverse merger
|
|
|
271
|
|
|
|
-
|
|
|
Timing differences of expense in connection with employees benefits
|
|
|
42
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets before valuation allowance
|
|
|
1,651
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(1,651
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
e.
|
Reconciliation
of income tax expenses:
|
As
Inc and ASM stand-alone net results during 2016 are relatively immaterial, zero during 2015 and ASM net result during 2014 was
zero as well, the Group’s overall effective tax rate is attributable to Israeli income tax and therefore a reconciliation
between the theoretical income tax, assuming corporate tax rates and the actual income tax expenses (benefit) as reported in the
consolidated statements of comprehensive income (loss) is calculated based on the Israeli corporate tax rates and is as follows:
|
|
|
Year
ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
(U.S. dollar in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
|
(6,967
|
)
|
|
|
17,776
|
|
|
|
4,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israeli corporate income tax rate
|
|
|
25
|
%
|
|
|
26.5
|
%
|
|
|
26.5
|
%
|
|
Theoretical income tax expenses (benefit)
|
|
|
(1,742
|
)
|
|
|
4,711
|
|
|
|
1,116
|
|
|
Valuation allowance for deferred tax
|
|
|
1,109
|
|
|
|
-
|
|
|
|
-
|
|
|
Tax rates differences
|
|
|
725
|
|
|
|
(1,659
|
)
|
|
|
(63
|
)
|
|
Previous year
|
|
|
1,054
|
|
|
|
-
|
|
|
|
-
|
|
|
Other, net
|
|
|
(60
|
)
|
|
|
(29
|
)
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses
|
|
|
1,086
|
|
|
|
3,023
|
|
|
|
1,090
|
|
f.
|
Uncertain tax positions:
|
Following
is a roll-forward of the total amounts of the Group’s unrecognized tax benefits at the beginning and at the end of the years
ended on December 31, 2016, 2015 and 2014
:
|
|
|
Year ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
(U.S. dollar in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase as a result of tax position taken in prior period
|
|
|
1,054
|
|
|
|
-
|
|
|
|
-
|
|
|
Decrease due to settlement with the Israeli tax authorities
|
|
|
(1,054
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ability Inc.
Notes to the Consolidated Financial Statements
NOTE
12 - CONCENTRATION Risk:
Major
customers and vendors are defined as those from whom the Group derives at least 10% of its revenues and cost of revenues, respectively.
During
2016, 2015 and 2014, revenues from the major customers reflected 79% (two customers), 91% (three customers) and 83% (three customers)
of the total consolidated revenues, respectively.
During
2016, 2015 and 2014, the cost of revenues from major vendors reflected 72% (three vendors), 70% (three vendors) and 79% (three
vendors) of the total consolidated cost of revenues, respectively.
NOTE
13 – Subsequent events:
a.
|
On
February 9, 2017, Inc received a subpoena from the Securities and Exchange Commission (“SEC”).
The subpoena requests, among other things, information regarding the transaction with
Cambridge, the restatement that occurred in May 2016, and financial and business information.
Inc is fully cooperating with the investigation. The SEC has informed Inc that this investigation
and the subpoena do not mean that the SEC has concluded that anyone has broken the law
or that the SEC has a negative opinion of any person, entity or security.
|
b.
|
On
April 9, 2017, Inc received letters from each of Amnon Dick, Efraim Halevy, Amos Malka,
Meir Moshe and Shalom Singer, representing all of Inc’s independent directors,
tendering his resignation as a member of our Board of Directors (the “Board”)
and committees thereof, effective immediately (each, a “Resignation Letter”
and collectively, the “Resignation Letters”).
|
At
the time of their resignations, Mr. Dick was Chairman of the Board and a member of Inc’s audit committee and compensation
committee; Mr. Halevy was a member of Inc’s nominating committee; Mr. Malka was a member of Inc’s compensation committee;
Mr. Moshe was Chairman of Inc’s audit committee and Chairman of its nominating committee; and Mr. Singer was Chairman of
Inc’s compensation committee and a member of its audit committee and nominating committee.
Each
of Messrs. Dick, Malka, Moshe and Singer stated in his respective Resignation Letter that his resignation was due to his approach
to risk assessment and management of Inc’s affairs not being aligned with that of the Controlling Shareholders, which made
him unable to contribute to Inc in a productive way. Each noted that, in view of the various challenges that Inc is currently
facing, a shared vision and broad cooperation among Inc’s Controlling Shareholders and directors is required and that in
view of the foregoing, and especially as he served as a director for only a few months, he does not believe it would be appropriate
to continue to serve as a director of Inc. Mr. Halevy did not state any reason for his resignation in his Resignation Letter.
c.
|
On
April 19, 2017, Inc received notification from the NASDAQ Listings Qualifications Department
of the NASDAQ Capital Market (“NASDAQ” ) that as a result of the recent resignation
of all of Inc’s independent directors from Inc’s board of directors (the
“Board”), as Inc previously disclosed on April 10, 2017, Inc is no longer
in compliance with NASDAQ Listing Rules 5605(b)(1), 5605(c)(2), 5605(d)(2) and 5605(e)
(collectively, the “Rules”), as the Board is no longer comprised of a majority
of independent directors nor does it have an audit committee, compensation committee
or nominating committee.
|
Inc
had until May 3, 2017, a period shorter than normal, to submit a plan to regain compliance with the Rules (a “Plan”)
and if the Plan is accepted by NASDAQ, then NASDAQ can grant an extension until October 16, 2017 for Inc to regain compliance
with the Rules. In addition, NASDAQ requested that Inc submit a detailed narrative that provides additional information regarding
the events and circumstances that led to the simultaneous resignation of the independent directors and certain corporate documentation.
On
May 15, 2017 Inc appointed Levi Ilsar, Brigadier General (Ret.) Eli Polak and Nimrod Schwartz to serve as independent directors
on Inc’s board of directors and the audit, compensation and nominating committees thereof, in each case effective as of
May 17, 2017. Inc therefore expects to regain compliance with the Rules upon such appointment entering into effect.
F-36
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