If the only securities being registered
on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. ☐
If any of the securities being registered
on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check
the following box. ☒
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securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering. ☐
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pursuant to General Instruction I.C. or a post-effective amendment thereto that shall become effective upon filing with the Commission
pursuant to Rule 462(e) under the Securities Act, check the following box. ☐
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to a registration statement filed pursuant to General Instruction I.C. filed to register additional securities or additional classes
of securities pursuant to Rule 413(b) under the Securities Act, check the following box. ☐
Indicate by check mark whether the registrant is an emerging
growth company as defined in Rule 405 of the Securities Act of 1933.
If an emerging growth company that prepares
its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B)
of the Securities Act . ☐
† The term “new or revised financial accounting
standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification
after April 5, 2012.
RISK FACTORS
You should carefully consider the risks
described below and all the information contained or incorporated by reference into this prospectus before making an investment
decision regarding our Ordinary Shares. The risks described below are not the only risks facing our company. Additional risks and
uncertainties that we are not aware of or that we currently believe are immaterial may also adversely affect our business, financial
condition, results of operation and liquidity. The trading price of our Ordinary Shares could decline due to any of these risks,
and you may lose all or part of your investment.
Risks relating to our financial results
and capital structure:
We require a significant amount of
cash to satisfy our debt obligations. If we fail to generate sufficient cash flow from operations, we may need to renegotiate or
refinance our debt, obtain additional financing, postpone capital expenditures or sell assets.
As of December 31, 2018 we had $2.3 million
in long-term debt (including current maturities of $467,000) and no short term bank loans.
We depend mainly on cash generated by continuing
operating activities to make payments on our debt. We cannot assure you that we will generate sufficient cash flow from operations
to make the scheduled payments on our debt. Our ability to meet our debt obligations will depend on whether we can successfully
implement our business strategy, as well as on economic, financial, competitive and technical factors (See “Item 5B. Liquidity
and Capital Resources” in our Annual Report on Form 20-F for the fiscal year ended December 31, 2018 (our “
Form
20-F
”).
Some of the factors are beyond our control,
such as economic conditions in the markets where we operate or intend to operate, changes in our customers’ demand for products
that we sell, and pressure from existing and new competitors. Also, because part of our loans bear interest at floating rates,
we are susceptible to an increase in interest rates (See “Item 11. Quantitative and Qualitative Disclosures about Market
Risk” in our Form 20-F).
If we cannot generate sufficient cash flow
from operations to make scheduled payments on our debt obligations, we may need to renegotiate the terms of our debt, refinance
our debt, obtain additional financing, delay planned capital expenditures or sell assets.
If our lenders decline to renegotiate the
terms of our debt in these circumstances, the lenders could declare all amounts borrowed and all amounts due to them under the
agreements due and payable.
We have had a history of losses and
our future levels of sales and ability to achieve profitability are unpredictable.
As of December 31, 2018 we had an accumulated
deficit of $68.8 million. Although we had net income of $990,000 in 2018, $773,000 in 2017, $360,000 in 2016 and $334,000 in 2015,
we had a net loss of $433,000 in 2014. In addition, we have had net losses in prior fiscal years. Our ability to maintain and improve
future levels of sales and profitability depends on many factors, which include:
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delivering products in a timely manners;
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successfully implementing our business strategy;
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increased demand for existing products; and
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controlling costs.
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There can be no assurance that we will be
able to meet our challenges and continue to be profitable in the future or that the level of historic sales will continue in the
future.
We may be unable to maintain our gross
profit margins.
Our sales and profitability may vary in
any given year, and from quarter to quarter. In order to increase sales or to enter into new markets with new products or due to
competition we may find it necessary to decrease prices in order to be competitive. Additionally, our gross profit margin tends
to fluctuate mainly due to variety and mix of products and changing suppliers prices. We may not be able to maintain current gross
profit margins in the future, which would have a material adverse effect on our business.
We depend on one bank for our credit
facilities.
We rely on the First International Bank
of Israel (“Bank Beinleumi”) to provide all of the credit facilities to our subsidiaries. As of December 31, 2018,
we had $1.87 million in long term debt to Bank Beinleumi, net of current maturities.
Our assets shall subject to a security
interest in favor of Bank Beinleumi. Our failure to repay the bank loan, if required, could result in legal action against us,
which could require the sale of all of our assets.
The repayment of our debt to Bank Beinleumi
is secured by a first priority floating charge on all of the present and future assets of the Company and its Israeli Subsidiaries
and by a first priority fixed charge on the their - goodwill, unpaid share capital and any insurance entitlements pertaining to
assets underlying these charges. In addition, the Company and its Israeli subsidiaries entered into a series of intercompany guarantees
in favor of Bank Beinleumi.
If we are unable to repay the bank loan
when due, the bank could foreclose on our assets in order to recover the amounts due. Any such action might require us to curtail
or cease operations (See “Item 5B. Liquidity and Capital Resources” in our Form 20-F).
Our debt obligations may hinder our
growth and put us at a competitive disadvantage.
Our debt obligations require us to use a
substantial portion of our operating cash flow to repay the principal and interest on our loans. This reduces funds available to
grow and expand our business, limits our ability to pursue business opportunities and makes us more vulnerable to economic and
industry downturns. The existence of debt obligations and covenants also limits our ability to obtain additional financing on favorable
terms.
Due to restrictions in our loan agreements,
we may not be able to operate our business as we desire.
Our loan agreements contain a number of
conditions and limitations on the way in which we can operate our business, including limitations on our ability to raise debt,
sell or acquire assets and pay dividends. These limitations may force us to pursue less than optimal business strategies or forgo
business arrangements, which could have been financially advantageous to our shareholders and us. Our debt obligations also contain
various covenants, which require that we maintain certain financial ratios related to shareholders’ equity and EBITDA and
capital to balance sheet ratio. Our failure to comply with the restrictions and covenants contained in our loan agreements could
lead to a default under the terms of these agreements (See “Item 5B. Liquidity and Capital Resources” in our Form 20-F).
Risks related to our business:
We depend on key personnel for the
success of our business.
Our success depends, to a significant extent,
on the continued active participation of our executive officers and other key personnel. In addition, there is significant competition
for employees with technical, operational and sales expertise in our industry.
In order to succeed we would need to be
able to:
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retain the executive officers and key personnel who have been involved in the development of our two operating divisions; and
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attract and retain highly skilled personnel in various functions of our business.
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We cannot make assurances that we will be
successful in attracting, integrating, motivating and retaining key personnel. If we are unable to retain our key personnel and
attract additional qualified personnel as and when needed, our business may be adversely affected.
We may be unable to effectively manage
our growth and expansion, and as a result, our business results may be adversely affected.
Our goal is to grow over the next few years.
The management of our growth, if any, will require the continued expansion of our operational and financial control systems, as
well as a significant increase in our financial resources and in our delivery and service capabilities. These factors could place
a significant strain on our resources.
Our growth increases the complexity of our
operations, places significant demands on our management and our operational, financial and marketing resources and involves a
number of challenges, including:
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retaining and motivating key personnel of the acquired businesses;
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assimilating different corporate cultures;
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preserving the business relationships with existing key customers and suppliers;
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maintaining uniform standards, controls, procedures and policies;
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introducing joint products, solutions and service offerings; and
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having sufficient working capital to finance growth.
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In addition, our inability to meet our delivery
commitments in a timely manner (as a result of unexpected increases in orders, for example) could result in losses of sales, exposure
to contractual penalties, costs or expenses, as well as damage to our reputation in the marketplace.
Our inability to manage growth effectively
could have a material adverse effect on our business, financial condition and results of operations.
We may expand
our business through acquisitions that could result in diversion of resources and extra expenses. This could disrupt our business
and adversely affect our financial condition.
In January 2016,
we completed the acquisition of the business operations of iDnext Ltd. and its subsidiary Next-Line Ltd. and in June 2019 we completed
acquisition of the business operations of Imdecol Ltd. We may expand our services through additional acquisitions. The negotiation
of acquisitions, investments or joint ventures, as well as the integration of acquired or jointly developed businesses or technologies,
could divert our management’s time and resources. There can be no assurance that we will be able to consume this acquisition
or successfully integrate and manage future acquisitions, if they occur.
Furthermore, once
integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity which existed prior to the
acquisitions or otherwise perform as expected. The occurrence of any of these events could harm our business, financial condition
or results of operations.
We may not
be successful in achieving the potential benefits of the acquisition
of the business operations of Imdecol Ltd.
On June 1, 2019, the Company closed the
transaction for the acquisition of the business operations of Imdecol Ltd. This acquisition is subject to a variety of risks that
could seriously harm our business, financial condition, results of operations, and share price. These risks include, among others:
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incurrence of unexpected expenses associated with acquisition and integration of the acquired business into our Company;
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difficulties in the assimilation and integration of the acquired operations, personnel, technologies, products, and information systems;
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diversion of management’s attention from other business concerns;
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potential loss of key employees;
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incompatible business cultures;
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difficulties in implementing and maintaining uniform standards, controls and policies;
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the
impairment of relationships with employees and customers as a result of integration of new personnel; and
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potential inability to retain, integrate and motivate key management, marketing, technical sales and customer support personnel.
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We do not
have collateral or credit insurance for all of our customers’ debt, and our allowance for bad debts may increase.
Our customers’
debt is derived from sales to customers located primarily in Israel, India, the Far East and Europe. We do not generally require
collateral; however, a certain portion of our debt of customers outside of Israel is insured against customer nonpayment through
the Israeli Credit Insurance Company Ltd.
The balance of
allowance for bad debt as of December 31, 2018 amounted to $31,000, which was determined by our management to be sufficient. However,
in the event of a global economic slowdown or if a local or global recession reoccurs, we may be required to record additional
and significant allowances for bad debts.
A substantial
part of the sales of our Supply Chain Solutions division is to the Indian market. A decline in our sales to India would have a
material adverse effect on our business and financial results.
In 2018, revenues
derived from the sales of our Supply Chain Solutions division to India accounted to US $4.2 million, or 12.9% of our total revenues.
Sales to India could decline due to changes in market demand or for political reasons. Should our sales to India be subject to
substantial declines, our business and financial results will be adversely affected.
Certain customers
of our Supply Chain Solutions division may cancel purchase orders they placed before the delivery.
Supply chain programs
for the sale of electronic components, including the programs offered by our Supply Chain Solutions division, are designed to accommodate
the preference of customers to work with a limited number of suppliers that are able to provide a wide range of electronic components
under one order. In the event we are not able to provide all of the components required by a customer, such customer could elect
to terminate the entire order before its delivery. In addition, certain of our individual product orders provide a right of termination
prior to delivery.
In the event substantial
orders are so cancelled, there is no assurance that we will be able to sell the pre-purchased inventory at a profit, or at all.
This could result in excess and obsolete inventory and could have a material adverse effect on our results of operations.
The electronic
components provided by our Supply Chain Solutions division need to meet certain industry standards and for some customers we need
to be the manufacturers’ authorized distributors.
The main business
of our Supply Chain Solutions division is the provision of electronic components to the aerospace and defense industry. These components
need to be in compliance with Aviation Standard number 9120 which was adopted by the International Aerospace Quality Group. Noncompliance
with these standards could limit our sales.
In addition, in
the face of an increased number of refurbished or non-original components offered in the marketplace, certain customers have begun
to insist on only purchasing components directly from authorized distributors of the manufacturers. This could impair our ability
to sell components of manufacturers for which we do not serve as authorized dealers and may have a substantial adverse effect on
our business.
Our products
may contain defects that may be costly to correct, delay market acceptance of our products, harm our reputation and expose us to
litigation.
Despite testing
by us, errors may be found in our software products and services. If defects are discovered, we may not be able to successfully
correct them in a timely manner, or at all. Defects and failures in our products could result in a loss of, or delay in,
market acceptance of our products and could damage our reputation. Although our standard license agreement with our customers
contains provisions designed to limit our exposure to potential product liability claims, it is possible that these provisions
may not be effective or enforceable under the laws of certain jurisdictions and we could fail to realize revenues and suffer damage
to our reputation as a result of, or in defense of, a substantial claim.
Our products
may infringe on the intellectual property rights of others.
Third parties may
assert claims that we have violated a patent, trademark, copyright or other proprietary intellectual property right belonging to
them. As is characteristic of our industry, there can be no assurance that our products do not or will not infringe on the proprietary
rights of third parties, that third parties will not claim infringement by us with respect to patents or other proprietary rights
or that we would prevail in any such proceedings. Any infringement claims, whether or not meritorious, could result in costly litigation
or arbitration and divert the attention of technical and management personnel. Any adverse outcome in litigation alleging an infringement
could require us to develop non-infringing technology or enter into royalty or licensing agreements. If, in such situations, we
are unable to obtain licenses on acceptable terms, we may be prevented from selling products that infringe on such intellectual
property of a third party. In addition, an unfavorable outcome or settlement regarding one or more of these matters could have
a material adverse effect on our business and operating results.
The Supply
Chain Solutions division engages in a number of business activities governed by U.S. Government Laws and Regulations, which if
violated, could subject the Company to civil or criminal fines and penalties.
The Supply Chain
Solutions division engages in a number of business activities governed by U.S. Government procurement laws and regulations which
change frequently, including regulations relating to import-export control and technology transfer restrictions. In addition, the
U.S. Foreign Corrupt Practices Act, or the FCPA, and similar anti-corruption laws in other jurisdictions, include anti-bribery
provisions. If we, or our sales representatives, fail to comply with these laws and regulations, we could be subject to administrative,
civil or criminal liabilities that could have a material adverse effect on our business and results of operations. We may not always
be protected in cases of the violation of the FCPA or other anti-corruption laws by our employees or third-parties acting on our
behalf and such violations may have a material adverse effect on our reputation, operating results and financial condition.
We rely on
certain key suppliers
.
Most of our sales
rely on products of certain key suppliers, which we represent on a non-exclusive basis. 37% of our Supply Chain Solutions division
purchases in the year 2018 were sourced from five key suppliers and 44% of our Intelligent Robotics and RFID division purchases
in the year 2018 were sourced from six other key suppliers (including a software supplier). In the year 2017, 33% of our Supply
Chain Solutions division purchases were sourced from five key suppliers and 39% of our Intelligent Robotics and RFID purchases
were sourced from six other key suppliers.
In the event that
any of our key suppliers becomes unable to fulfill our requirements in a timely manner or if we cease our business relationship
with any of these suppliers, we may experience an interruption in delivery and a decrease in our business until an alternative
supplier can be procured.
Future changes
in industry standards may have an adverse effect on our business.
New industry standards
in the aviation and defense industry could cause a portion of our Supply Chain Solutions division’s inventory to become obsolete
and unmarketable, which would adversely affect our results of operations.
Recent changes
in Israeli law in respect of minimum wage and work and rest hours may increase our labor related expenses.
In December 2017,
the mandatory minimum wage in Israel was raised by approximately 6%, to NIS 5,300. In addition, commencing April 2018, the 43-hour
workweek was shortened by one hour (at a pre-determined day), without a reduction in the monthly salary. An employee that continues
to work 43 hours per week is now entitled to overtime payment. As a result, we may suffer an increase in our labor costs in Israel,
which could adversely affect our profitability.
If revenue
levels for any quarter fall significantly below our expectations, our results of operations will be adversely affected.
Our revenues in
any quarter are substantially dependent on orders received and delivered in that quarter. We base our decisions regarding our operating
expenses on anticipated revenue trends and our expenses levels are relatively fixed or require some time for adjustment. As a result,
revenue levels falling significantly below our expectations will adversely affect our results of operations.
The rate
of inflation in Israel may negatively impact our costs if it exceeds the rate of devaluation of the NIS against the U.S. dollar.
Similarly, the U.S. dollar cost of our operations in Israel will increase to the extent increases in the rate of inflation in Israel
are not offset by a devaluation of the NIS in relation to the U.S. dollar.
A substantial amount
of our revenues is denominated in U.S. dollars (“
U.S. Dollars
” or “
Dollars
”) or is U.S. dollar-linked.
However, we incur a significant portion of our expenses, principally salaries and related personnel expenses in Israel and rent
for our facilities in Israel, in NIS. As a result, we are exposed to the risk that the rate of inflation in Israel will exceed
the rate of devaluation of the NIS in relation to the U.S. dollar or that the timing of this devaluation lags behind inflation
in Israel. In any such event, the U.S. dollar cost of our operations in Israel will increase and our U.S. dollar-measured results
of operations will be adversely affected.
Similarly, we are
exposed to the risk that the NIS, after adjustment for inflation in Israel, will appreciate in relation to the U.S. dollar. In
that event, the dollar-measured costs of our operations in Israel will increase and our dollar-measured results of operations will
be adversely affected. In 2018, the NIS depreciated against the dollar by approximately 8.1%, while in 2017 the NIS appreciated
against the dollar by 9.8%. In 2016 the NIS appreciated against the dollar by 1.5%, and in 2015 the NIS depreciated by approximately
0.3% against the U.S. dollar. In the years ended December 31, 2018 and 2017, the inflation rate in Israel was 0.8% and 0.4%, respectively.
In 2016 and 2015 the annual deflation was 0.2% and 1%, respectively. Therefore, the U.S. dollar cost of our Israeli operations
decreased in 2018 and 2015, and increased in 2017 and 2016. We cannot predict any future trends in the rate of inflation in Israel
and whether the NIS will appreciate against the U.S. dollar or vice versa. Any increase in the rate of inflation in Israel, unless
the increase is offset on a timely basis by a devaluation of the NIS in relation to the U.S. dollar, will increase our labor and
other costs, which will increase the U.S. dollar cost of our operations in Israel and harm our results of operations (see “Item
5A. Results of Operation - Impact of Inflation and Currency Fluctuations” in our Form 20-F).
If we are
unsuccessful in introducing new products, we may be unable to expand our business.
The market for
some of our products is characterized by rapidly changing technology and evolving industry standards. The introduction of products
embodying new technology and the emergence of new industry standards can render existing products obsolete and unmarketable and
can exert price pressures on existing products.
Our ability to
anticipate changes in technology and industry standards and successfully market new and enhanced products as well as additional
applications for existing products, in each case on a timely basis, will be critical in our ability to grow and remain competitive.
If we are unable, for technological or other reasons, to market products that are competitive in technology and price and responsive
to customer needs, our business will be materially adversely affected.
Disruptions
to our IT systems due to system failures or cyber security attacks may impact our operations, result in sensitive customer information
being compromised, which would negatively materially affect our reputation and materially harm our business.
Our servers and
equipment may be subject to computer viruses, break-ins, and similar disruptions from unauthorized tampering with computer systems.
Our systems have been, and are expected to continue to be, the target of malware and other cyber-attacks. Although we have invested
in measures to reduce these risks, there can be no assurance that our current information technology (IT) systems are fully protected
against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats. A cyber-attack that
bypasses our IT security systems causing an IT security breach may lead to a material disruption of our IT business systems and/or
the loss of business information. A cyber-attack on our systems or networks that impairs our IT systems could disrupt our business
operations and our ability to sell our products. Any such event could have a material adverse effect on our business. To the extent
that such disruptions or uncertainties result in delays or cancellations of customer orders or shipment of our products, or in
theft, destruction, loss, misappropriation or release of our confidential information or our intellectual property, our business,
financial condition, results of operations and prospects could be materially adversely affected.
We have significant
sales worldwide and could encounter problems if conditions change in the places where we market products.
We have sold and
intend to continue to sell products in overseas markets, including in India, the Far East, America and Europe. A number of risks
are inherent in engaging in international transactions, including:
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possible problems in collecting receivables;
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the imposition of governmental controls, or export license requirements;
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political and economic instability in foreign companies;
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foreign currency exchange rate risk;
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trade restrictions or changes in tariffs being imposed; and
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laws and legal issues concerning foreign countries.
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Should we encounter
such difficulties in conducting our international operations, they may adversely affect our business condition and results of operations.
Unfavorable
global economic conditions could have a material adverse effect on our business, operating results and financial condition.
A financial and
economic downturn in Israel, India or in one or more of our overseas markets may cause revenues of our customers to decrease. This
may result in reductions in sales of products and services in some markets, longer sales cycles, slower adoption of new technologies
and increased price competition. In addition, weakness in the end-user market could negatively affect the cash flow of our customers
who could, in turn, delay paying their obligations to us. This could increase our credit risk exposure and cause delays in our
recognition of revenues on future sales to these customers.
We may be
obligated to indemnify our directors and officers
.
The Company has
agreements with its directors and senior officers which provide, subject to Israeli law, indemnification by the Company for its
directors and senior officers for: (a) monetary liability imposed upon a director or officer in favor of a third party by a judgment,
including a settlement or an arbitral award confirmed by the court, as a result of an act or omission of such person in his or
her capacity as a director or officer of the Company, (b) reasonable litigation expenses, including attorney’s fees, incurred
by a director or officer (A) pursuant to an investigation or a proceeding commenced against him or her by a competent authority,
provided that (i) it was terminated without the filing of an indictment and without having a monetary charge imposed them in lieu
of criminal proceedings (as such terms are defined in the Israeli Companies Law; or (ii) it was terminated without the filing
of an indictment but with a monetary charge imposed on him or her in lieu of criminal proceedings for a crime that does not require
proof of criminal intent; (B) or in connection with a financial sanction, as a result of an act or omission of such person in
its capacity as a director or officer of the Company, (c) reasonable litigation expenses, including attorney’s fees, incurred
by a director or officer or imposed on him or her by a court, in a proceeding brought against him or her by or on behalf of the
Company or by a third party, or in a criminal action in which he or she was acquitted, or in a criminal action which does not
require criminal intent in which he was convicted, in each case relating to acts or omissions of such person in its capacity as
a director or officer of the Company, (d) expenses, including reasonable litigation expenses and legal fees, incurred by such
a director or officer as a result of a proceeding instituted against him in relation to (A) infringements that may result in imposition
of financial sanction pursuant to the provisions of Chapter H'3 under the Israeli Securities Law 5728 – 1968 (the “Israeli
Securities Law”) or (B) administrative infringements pursuant to the provisions of Chapter H'4 under the Israeli Securities
Law or (C) infringements pursuant to the provisions of Chapter I'1 under the Israeli Securities Law; and (e) payments to an injured
party of infringement under Section 52ND(a)(1)(a) of the Israeli Securities Law. Payments pursuant to such indemnification obligation
may materially adversely affect our financial condition.
There can
be no assurance that we will not be classified as a passive foreign investment company (a “PFIC”).
Based on our current and projected income,
assets and activities, we do not believe that, at this time, BOS is a passive foreign investment company for U.S. federal income
tax purposes, but there can be no assurance that we will not be classified as such in the future. Such classification may have
materially adverse tax consequences for our U.S. shareholders. One method of avoiding such tax consequences is by making a “qualified
electing fund” election for the first taxable year in which the Company is a PFIC. However, such an election is conditioned
upon our furnishing our U.S. shareholders annually with certain tax information. We do not presently prepare or provide such information,
and such information may not be available to our U.S. shareholders if we are subsequently determined to be a PFIC. You are advised
to consult with your own tax advisor regarding the particular tax consequences related to the ownership and disposition of our
Ordinary Shares under your own particular factual circumstances.
A decline
in the value of our market capitalization or other factors could require us to write-down the value of our goodwill, which could
have a material adverse effect on our results of operations.
Our balance sheet
contains a significant amount of goodwill and other amortizable intangible assets in long-term assets, totaling about $4.76 million
at December 31, 2018. We review goodwill annually for impairment, or more frequently when indications for potential impairment
exist. We review other amortizable intangible assets for impairment when indicators for impairment exist. The volatility of our
share price can cause significant changes to our market capitalization.
If our market capitalization
experiences a significant decline and is below the value of our Shareholders’ equity, if the carrying amount of a reporting
unit exceeds its fair value or if any other quantitative or qualitative indication of impairment of goodwill arises in the future,
we may be required to record impairment charges for our goodwill. Any such write-downs, if required, could result in a significant
non-cash expense on our income statement, which could have a material adverse effect on our results of operations.
There are
substantial risks associated with the YA II Standby Equity Distribution Agreement, which could contribute to the decline of our
share price and have a dilutive impact on our existing shareholders.
The sale of our Ordinary Shares to YA II
PN, Ltd. (or YA II) (formerly YA Global Master SPV Ltd.), pursuant to the Standby Equity Distribution Agreement, dated as May 8,
2017, (the “
2017 SEDA
”), (see “Item 5B – Liquidity and Capital Resources” in our Form 20-F)
will have a dilutive impact on our shareholders. Under the 2017 SEDA, we have the right to sell, over a period of up to 4 years,
Ordinary Shares to YA II for up to a total purchase price of $2,000,000, out of which $1,100,000 remain available as of June 30,
2019. YA II may resell some, if not all of the shares we issue to it under the 2017 SEDA and such sales could cause the market
price of our Ordinary Shares to decline.
Our business could be impacted as
a result of actions by activist shareholders or others.
We may be subject, from time to time, to
legal and business challenges in the operation of our company due to actions instituted by activist shareholders or others. Responding
to such actions could be costly and time-consuming, may not align with our business strategies and could divert the attention of
our Board of Directors and senior management from the pursuit of our business strategies. Perceived uncertainties as to our future
direction as a result of shareholder activism may lead to the perception of a change in the direction of the business or other
instability and may affect our relationships with vendors, customers, prospective and current employees and others.
We may fail to maintain effective
internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, which could have a
material adverse effect on our operating results, investor confidence in our reported financial information and the market price
of our Ordinary Shares.
Our efforts to comply with the requirements
of Section 404 of the Sarbanes-Oxley Act of 2002, governing internal control and procedures for financial reporting have resulted
in increased general and administrative expenses and a diversion of management time and attention. We expect these efforts to require
the continued commitment of significant resources. We may identify material weaknesses or significant deficiencies in our assessments
of our internal control over financial reporting. Failure to maintain effective internal control over financial reporting could
result in investigations or sanctions by regulatory authorities and could have a material adverse effect on our operating results,
investor confidence in our reported financial information and the market price of our Ordinary Shares.
If our employees
commit fraud or engage in other misconduct, including noncompliance with regulatory standards and requirements or insider trading,
our business may experience material adverse consequences.
During the course of our operations, our
directors, executives and employees may have access to material, nonpublic information regarding our business, our results of operations
or potential transactions we are considering. Despite the adoption of an Insider Trading Policy, we may not be able to prevent
a director, executive or employee from trading in our ordinary shares on the basis of, or while having access to, such information.
In addition, while we have designed and
operate an internal control system, we cannot provide absolute assurance that instances of fraud, if any, shall be prevented or
detected.
If a director, an executive or an employee
was to be investigated, or an action was to be brought against him or her for insider trading or fraud, it could have a negative
impact on our reputation and our share price. Such a claim, with or without merit, could also result in substantial expenditures
of time and money and divert attention of our management team from other tasks important to the success of our operations.
Risks related
to our Ordinary Shares:
Our share
price has been and may continue to be volatile, which could result in substantial losses for individual shareholders.
The market price of our Ordinary Shares
has been and may continue to be highly volatile and subject to wide fluctuations. From January 1, 2018 through August 5, 2019,
the daily closing price of our Ordinary Shares in NASDAQ has ranged from $1.93 to $3.94 per share. We believe that these fluctuations
have been in response to a number of factors including the following, some of which are beyond our control:
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variations between actual results and projections;
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the limited trading volume in our stock;
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changes in our bank debts; and
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Nasdaq Capital Market Listing Standards non-compliance notices;
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In addition, stock
markets in general have, from time to time, experienced extreme price and volume fluctuations. This volatility is often unrelated
or disproportionate to the operating performance of the affected companies. These broad market fluctuations may adversely affect
the market price of our Ordinary Shares, regardless of our actual operating performance.
The Company’s
shares may be delisted from the NASDAQ Capital Market if it does not meet NASDAQ’s continued listing requirements.
Over the years,
the Company has received several notices from the NASDAQ Stock Market advising it of the non-compliance of its shares with continued
listing requirements on the NASDAQ Capital Market.
There can
be no assurance that the Company will continue to qualify for listing on the Nasdaq Capital Market. If the Company’s Ordinary
Shares are delisted from the Nasdaq Capital Market, trading in its Ordinary Shares could be conducted on the over-the-counter market.
In addition, if the Company’s Ordinary Shares were delisted from the Nasdaq Capital Market, it would be subject to the so-called
penny stock rules that impose restrictive sales practice requirements on broker-dealers who sell those securities. Consequently,
de-listing, if it occurred, could affect the ability of our shareholders to sell their Ordinary Shares in the secondary market.
The restrictions applicable to shares that are de-listed, as well as the lack of liquidity for shares that are traded on an electronic
bulletin board, may adversely affect the market price of such shares.
Risks related
to our location in Israel:
Political,
economic, and security conditions in Israel affect our operations and may limit our ability to produce and sell products or provide
our services.
We are incorporated
under the laws of the State of Israel, where we also maintain our headquarters and our principal research and development and sales
and marketing facilities. As a result, political, economic and military conditions affecting Israel directly influence us.
Since its establishment
in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. In recent years, these have
included hostilities between Israel and Hezbollah in Lebanon, and Israel and Hamas in the Gaza Strip, both of which resulted in
rockets being fired into Israel causing casualties and disruption of economic activities. Recent political uprisings and conflicts
in various countries in the Middle East, including Egypt and Syria, are affecting the political stability of those countries. Any
armed conflicts, terrorist activities, political instability or hostilities in the region or that involve Israel or the interruption
or curtailment of trade within Israel or between Israel and its trading partners could adversely affect our business, financial
condition and results of operations and could make it more difficult for us to raise capital. In addition, Israel faces threats
from more distant neighbors, in particular, Iran that has threatened to attack Israel. Iran is also believed to have a strong influence
among extremist groups in areas that neighbor Israel, such as Hamas in Gaza and Hezbollah in Lebanon. Additionally, the Islamic
State of Iraq and Syria (ISIS), a violent jihadist group, is involved in hostilities in Iraq and Syria and its stated purpose is
to take control of the Middle East, including Israel.
Our
commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in
the Middle East. Although the Israeli government has in the past covered the reinstatement value of certain damages that were
caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained, or if
maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a
material adverse effect on our operations.
To date, these
matters have not had any material effect on our business and results of operations; however, the regional security situation and
worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect
us in the future.
Furthermore, several
countries and companies restrict business with Israel and Israeli companies. Restrictive laws or policies directed towards Israel
or Israeli businesses may have an adverse impact on our operations, our financial results or the expansion of our business.
A number of our
key personnel in Israel have standing obligations to perform periodic reserve duty in the Israel Defense Forces and are subject
to be called up for active military duty at any time. If our key personnel are absent from our business for a significant period
of time, we may experience disruptions in our business that could affect the development, sales or technical support of our products.
As a result, we might not be able to compete in the market and our results of operations could be harmed.
The anti-takeover
effects of Israeli laws may delay or deter a change of control of the Company.
Provisions of Israeli
law may delay, prevent or make undesirable a merger or an acquisition of all or a significant portion of our shares or assets.
The Israeli Companies Law regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions
involving significant shareholders and regulates other matters that may be relevant to these types of transactions. These provisions
of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party
to acquire us, even if doing so would be beneficial to our shareholders. These provisions may limit the price that investors may
be willing to pay in the future for our Ordinary Shares. Furthermore, Israeli tax considerations may make potential transactions
undesirable to us or to some of our shareholders.
These laws may
have the effect of delaying or deterring a change in control of the Company, thereby limiting the opportunity for shareholders
to receive a premium for their shares and possibly affecting the price that some investors are willing to pay for the Company’s
securities.
All of our
directors and officers are non-U.S. residents and enforceability of civil liabilities against them is uncertain.
All of our directors
and officers reside outside of the United States. Therefore, a judgment obtained against us, or any of these persons, including
a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States
and may not be enforced by an Israeli court. It also may be difficult for you to effect service of process on these persons in
the United States or to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to
hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum in which
to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not
U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as
a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed
by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty
associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded by either a U.S.
or foreign court.
Your rights
and responsibilities as our shareholder will be governed by Israeli law, which differ in some respects from the rights and responsibilities
of shareholders of United States corporations.
Since we are incorporated
under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli
law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in United
States-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith towards the company
and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general
meeting of shareholders on certain matters, such as an amendment to the company’s articles of association, an increase of
the company’s authorized share capital, a merger and approval of related party transactions that require shareholder approval.
In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to
appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness towards the company.
These provisions may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically
imposed on shareholders of U.S. corporations.
As
a foreign private issuer whose shares are listed on the Nasdaq Capital Market, we follow and may in the future elect to follow
certain home country corporate governance practices instead of certain Nasdaq requirements.
We are a foreign
private issuer as such term is defined under U.S. federal securities laws. As a foreign private issuer, we have elected to follow
certain home country corporate governance practices, instead of certain requirements of the Marketplace Rules of the Nasdaq Capital
Market, or the Nasdaq Marketplace Rules. We may in the future elect to follow Israeli corporate governance practices with regard
to, among other things, the composition of our board of directors (“
Board of Directors
”), compensation of officers,
director nomination procedures and quorum requirements at shareholders’ meetings. In addition, we may elect to follow Israeli
corporate governance practices instead of the Nasdaq requirements to obtain shareholder approval for certain dilutive events (such
as for the establishment or amendment of certain equity-based compensation plans, issuances that will result in a change of control
of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company
and certain acquisitions of the stock or assets of another company). Accordingly, our shareholders may not be afforded the same
protection as provided under Nasdaq’s corporate governance rules. Following our home country governance practices as opposed
to the requirements that would otherwise apply to a U.S. company listed on the Nasdaq Capital Market may provide less protection
than is accorded to investors of domestic issuers. See “Item 16G – Corporate Governance” in our Form 20-F.
If we were
to lose our foreign private issuer status under U.S. federal securities laws, we would incur additional expenses associated with
compliance with the U.S. securities laws applicable to U.S. domestic issuers.
As a foreign private
issuer, we are exempt from the rules and regulations under the Securities and Exchange Act of 1934, as amended (the “
Exchange
Act
”), related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders
are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition,
we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the Securities
and Exchange Commission as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.
The regulatory
and compliance costs to us under U.S. securities laws, if we are required to comply with the reporting requirements applicable
to a U.S. domestic issuer, may be significantly higher than the cost we currently incur as a foreign private issuer.
As a public company in the United
States, we incur significant accounting, legal and other expenses as a result of listing our Ordinary Shares on the Nasdaq Capital
Market, and we may need to devote substantial resources to address new compliance initiatives and reporting requirements.
As a public company
in the United States, the Exchange Act requires that we file periodic reports with respect to our business and financial condition
and maintain effective disclosure controls and procedures and internal control over financial reporting. In addition, subsequent
rules implemented by the SEC and the NASDAQ Stock Market may also impose various additional requirements on public companies. As
a result, we incur significant accounting, legal and other expenses as a result of listing our Ordinary Shares on the Nasdaq Capital
Market. These include costs associated with corporate governance requirements of the SEC and the Marketplace Rules of Nasdaq,
as well as requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002. Any future changes in the laws
and regulations affecting public companies in the United States and Israel, will result in increased costs to us as we respond
to such changes. These laws, rules and regulations could make it more difficult or more costly for us to obtain certain types
of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage
or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make
it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board committees or as
executive officers.