PART
I
|
ITEM
1.
|
IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not
applicable.
|
ITEM
2.
|
OFFER
STATISTICS AND EXPECTED TIMETABLE
|
Not
applicable.
A.
Selected Financial Data
We
derived the following consolidated statements of operations data for the years ended December 31, 2016, 2017 and 2018 and the
consolidated balance sheet data as of December 31, 2017 and 2018 from our audited consolidated financial statements, included
elsewhere in this annual report. We derived the consolidated statements of operations data for the years ended December 31, 2014
and 2015, and the consolidated balance sheet data as of December 31, 2014, 2015 and 2016 from our audited consolidated financial
statements that are not included in this annual report. (See Item 4A. “Discontinued Operations”).
|
|
|
Year Ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
(U.S. dollars in thousands)
|
|
|
Revenues
|
|
$
|
21,625
|
|
|
$
|
14,074
|
|
|
$
|
12,821
|
|
|
$
|
26,182
|
|
|
$
|
28,032
|
|
|
Cost of revenues
|
|
|
15,284
|
|
|
|
11,665
|
|
|
|
11,379
|
|
|
|
17,919
|
|
|
|
17,914
|
|
|
Gross profit
|
|
|
6,341
|
|
|
|
2,409
|
|
|
|
1,442
|
|
|
|
8,263
|
|
|
|
10,118
|
|
|
Research and development, net
|
|
|
789
|
|
|
|
693
|
|
|
|
758
|
|
|
|
1,575
|
|
|
|
3,092
|
|
|
Marketing and selling
|
|
|
2,392
|
|
|
|
2,357
|
|
|
|
2,269
|
|
|
|
2,137
|
|
|
|
2,860
|
|
|
General and administrative
|
|
|
1,667
|
|
|
|
1,513
|
|
|
|
1,814
|
|
|
|
2,568
|
|
|
|
4,001
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
587
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net loss from sale of fixed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
103
|
|
|
Operating income (loss)
|
|
|
1,493
|
|
|
|
(2,741
|
)
|
|
|
(3,399
|
)
|
|
|
1,983
|
|
|
|
62
|
|
|
Financial (income) expense, net
|
|
|
1,256
|
|
|
|
3,577
|
|
|
|
1,521
|
|
|
|
156
|
|
|
|
(119
|
)
|
|
Net income (loss) from continuing operations
|
|
|
237
|
|
|
|
(6,318
|
)
|
|
|
(4,920
|
)
|
|
|
1,827
|
|
|
|
181
|
|
|
Net income (loss) from discontinued operations
|
|
|
(36
|
)
|
|
|
(179
|
)
|
|
|
13
|
|
|
|
515
|
|
|
|
(404
|
)
|
|
Net income (loss)
|
|
|
201
|
|
|
|
(6,497
|
)
|
|
|
(4,907
|
)
|
|
|
2,342
|
|
|
|
(223
|
)
|
|
Net income (loss) attributable to non-controlling interest from discontinued operations
|
|
|
(7
|
)
|
|
|
(36
|
)
|
|
|
3
|
|
|
|
103
|
|
|
|
(386
|
)
|
|
Net income (loss) attributable to RADA Electronic Industries’ shareholders
|
|
$
|
208
|
|
|
$
|
(6,461
|
)
|
|
$
|
(4,910
|
)
|
|
$
|
2,239
|
|
|
$
|
163
|
|
|
Basic net income (loss) per Ordinary share attributable for RADA Electronic Industries’ shareholders
|
|
$
|
0.02
|
|
|
$
|
(0.53
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
Diluted net income (loss) per Ordinary share attributable for RADA Electronic Industries’ shareholders
|
|
$
|
0.02
|
|
|
$
|
(0.53
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
0.06
|
|
|
$
|
0.02
|
|
|
Weighted average number of shares used to compute basic net income (loss) per share
|
|
|
8,945
|
|
|
|
11,904
|
|
|
|
14,029
|
|
|
|
24,957
|
|
|
|
33,185
|
|
|
Weighted average number of shares used to compute diluted net income (loss) per share
|
|
|
8,945
|
|
|
|
11,904
|
|
|
|
14,029
|
|
|
|
28,127
|
|
|
|
33,717
|
|
|
|
|
As of December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
(U.S. dollars in thousands)
|
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
35
|
|
|
$
|
6,522
|
|
|
$
|
11,106
|
|
|
$
|
25,641
|
|
|
$
|
37,840
|
|
|
Total assets
|
|
|
20,097
|
|
|
|
18,576
|
|
|
|
20,987
|
|
|
|
36,030
|
|
|
|
53,502
|
|
|
Short-term credits and current maturities of long-term loans
|
|
|
6,709
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Convertible note - short term
|
|
|
3,000
|
|
|
|
3,090
|
|
|
|
3,175
|
|
|
|
-
|
|
|
|
-
|
|
|
Shareholders’ equity
|
|
$
|
3,547
|
|
|
$
|
8,507
|
|
|
$
|
10,516
|
|
|
$
|
28,526
|
|
|
$
|
42,213
|
|
B.
Capitalization and Indebtedness
Not
applicable.
C.
Reasons for the Offer and Use of Proceeds
Not
applicable.
D.
Risk Factors
Investing
in our Ordinary Shares involves a high degree of risk and uncertainty. You should carefully consider the risks and uncertainties
described below before investing in our Ordinary Shares. Our business, prospects, financial condition and results of operations
could be adversely affected due to any of the following risks. In that case, the value of our Ordinary Shares could decline, and
you could lose all or part of your investment.
Risks
Related to Our Business and Our Industry
We
have a history of operating losses and although we returned to operating profitability in 2017, we may not be able to sustain
profitable operations in the future. To the extent that we incur operating losses in the future, we may not have sufficient working
capital to fund our operations.
We
incurred operating losses in three of the five years ended December 31, 2018 and may not be able to achieve or sustain profitable
operations in the future or generate positive cash flows from operations. As of December 31, 2018, our accumulated deficit was
$77 million, and we had cash, cash equivalents and short-term bank deposits of $20.8 million, compared to cash, cash equivalents
and short-term bank deposits of $12.4 million as of December 31, 2017. Based on our current operations, we believe our existing
funds will be sufficient to fund our operations in 2019. To the extent that we incur operating losses in the future or are unable
to generate free cash flows from our business, we may not have sufficient working capital to fund our operations and will be required
to obtain additional financing. Such financing may not be available, or if available, may not be on terms satisfactory to us.
If adequate funds are not available to us, our business, and results of operations and financial condition will be adversely affected.
While
we have met with initial success in the introduction of our advanced ground radars for tactical applications such as defense forces
protection and border protection, there can be no assurance that we will succeed in obtaining general market acceptance or that
we will ever recover our investment in this new product family.
We
have developed a number of radar hardware platforms for use in combat vehicles and tactical protection applications for defense
forces and border protection. In December 2014, we announced the first significant order for this product family, a $4.5 million
order from the Israel Ministry of Defense. To date, we have received over $ 35 million in orders for our ground radar products,
but cannot assure you that our ground radars will achieve broad market acceptance.
We
may be required to obtain financing for strategic opportunities, which financing may not be available for us in a timely manner
or on favorable terms, and which may dilute the holdings of our shareholders and/or require us to incur additional debt.
In
order to invest in strategic opportunities in support of our growth plans and/or business development activities, we may be required
to obtain funds from financing sources, including through debt vehicles or re-financing, sale of new securities or other financing
alternatives. There is no assurance that we will be able to obtain sufficient funding, if at all, from the financing sources detailed
above or other sources in a timely manner (or on commercially reasonable terms) in order to allow us to fund our growth plans
and/or business development activities, which may adversely affect our financial position and operations, may dilute the holdings
of our shareholders or require us to incur additional debt.
Competition
in the market for defense electronics is intense. Our products may not achieve market acceptance, which could adversely affect
our business, financial condition and results of operations.
The
market for our products is highly competitive and we may not be able to compete effectively in our market. Our principal competitors
in the defense electronics market, include Israel Aerospace Industries Ltd., or IAI, Raytheon Company, Northrop Grumman Corporation,
Thales Group, and SRC Inc. We expect to continue to face competition from these and other competitors. Most of our competitors
are larger and have substantially greater resources than us, including financial, technological, marketing and distribution capabilities,
and enjoy greater market recognition than we do. These competitors are able to achieve greater economies of scale and may be less
vulnerable to price competition than us. We may not be able to offer our products as part of integrated systems to the same extent
as our competitors or successfully develop or introduce new products that are more cost effective or offer better performance
than those of our competitors. Failure to do so could adversely affect our business, financial condition and results of operations.
We
may not be able to implement our growth strategy which could adversely affect our business, financial condition and results of
operations.
In
line with our growth strategy, we entered into a number of strategic relationships with Embraer S.A., or Embraer, Hindustan Aeronautics
Ltd., or HAL, IAI, Lockheed Martin Corporation, or Lockheed Martin, Boeing Defense, Space & Security, or Boeing, Rafael Advanced
Defense Systems Ltd., or Rafael, Elbit Systems Ltd., or Elbit, and Leonardo DRS, or DRS and SAZE Technologies LLC., or SAZE, to
increase our penetration into the defense electronics market. We are currently investing and intend to continue to invest significant
resources to develop these relationships and additional new relationships. Should our relationships fail to materialize into significant
agreements or should we fail to work efficiently with these companies, we may lose sales and marketing opportunities and our business,
results of operations and financial condition could be adversely affected.
Our
growth is dependent in part on the development of new products, based on internal research and development. We may not accurately
identify market needs before we invest in the development of a new product. In addition, we might face difficulties or delays
in the development process that will result in our inability to timely offer products that satisfy the market and competing products
may emerge during the development and certification process.
Reductions
in defense budgets worldwide may cause a reduction in our revenues, which would adversely affect our business, operating results
and financial condition.
Substantially
all of our revenues are derived from the sale of products with military applications. These revenues totaled approximately $28
million, or 100% of our revenues in 2018, $26.1 million, or 100% of our revenues, in the year ended December 31, 2017 and $12.8
million, or 100% of our revenues, in the year ended December 31, 2016. The defense budgets of a number of countries have declined
and may be reduced in the future. Declines in defense budgets may result in reduced demand for our products and manufacturing
services. This would result in reduction in our core business’ revenues and adversely affect our business, results of operations
and financial condition.
Unfavorable
national and global economic conditions could have a material adverse effect on our business, operating results and financial
condition.
During
periods of slowing economic activity, our customers may reduce their demand for our products, technology and professional services,
which would reduce our sales, and our business, operating results and financial condition may be adversely affected. Significant
portions of our operations are conducted outside the markets in which our products and solutions are manufactured or generally
sold, and accordingly, we often export a substantial number of products into such markets. We may, therefore, be denied access
to potential customers or suppliers or denied the ability to ship products from any of our subsidiaries into the countries in
which we currently operate or wish to operate, as a result of economic, legislative, political and military conditions, including
hostilities and acts of terrorism, in such countries.
The
global macroeconomic environment is facing challenges, including the economic slowdown in China and the Eurozone, the end of quantitative
easing by the U.S. Federal Reserve and the uncertain impact of “Brexit.” There is considerable uncertainty over the
long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some
of the world’s leading economies, including the U.S. There have been concerns over conflicts, unrest and terrorist threats
on a global level, which have resulted in volatility in oil and other markets. The U.S. and China have recently been involved
in controversy over trade barriers in China that threatened a trade war between the countries and have implemented or proposed
to implement tariffs on certain imported products. Sustained tension between the U.S. and China over trade policies could significantly
undermine the stability of the global economy. It is unclear whether these challenges and uncertainties will be contained or resolved,
and what effects they may have on the global political and economic conditions in the long term.
Any
slowdown or instability in the global economy could impact income, purchasing power and consumption levels among other things,
which could limit growth, increase delinquency rates and ultimately have a material adverse effect on us. In addition, any global
economic slowdown or uncertainty may result in volatile conditions in the global financial markets, which could have a material
adverse effect on us, including on our ability to access capital and liquidity on financial terms acceptable to us, if at all.
Any such adverse effect on capital markets funding availability or costs or in deposit rates could have a material adverse effect
on our interest margins and liquidity.
We
may also be required in the future to increase our reserves for doubtful accounts. In addition, the fair value of some of our
assets may decrease as a result of an uncertain economy and as a result, we may be required to record impairment charges in the
future. If global economic and market conditions or economic conditions in key markets remain uncertain or weaken further, our
financial condition and operating results may be materially adversely affected.
Sales
of our products are subject to governmental procurement procedures and practices; termination, reduction or modification of contracts
with our customers or a substantial decrease in our customers’ budgets may adversely affect our business, operating results
and financial condition.
Our
products are primarily sold to governmental agencies, governmental authorities and government-owned companies, many of which have
complex and time-consuming procurement procedures. A substantial time often elapses from the time we begin marketing a product
until we actually sell that product to a particular customer. In addition, our sales to governmental agencies, authorities and
companies are directly affected by these customers’ budgetary constraints and the priority given in their budgets to the
procurement of our products. A decrease in governmental funding for our customers’ budgets would adversely affect our results
of operations. This risk is heightened during periods of global economic slowdown. Accordingly, governmental purchases of our
systems, products and services may decline in the future as the governmental purchasing agencies may terminate, reduce or modify
contracts or subcontracts if:
|
|
●
|
their
requirements or budgetary constraints change;
|
|
|
|
|
|
|
●
|
they
cancel multi-year contracts and related orders if funds become unavailable;
|
|
|
|
|
|
|
●
|
they
shift spending priorities into other areas or for other products; or
|
|
|
|
|
|
|
●
|
they
adjust contract costs and fees on the basis of audits.
|
Any
such event may have a material adverse effect on us.
Further,
our business with the State of Israel and other governmental entities is, in general, subject to delays in funding and performance
of contracts and the termination for convenience (among other reasons) of contracts or subcontracts with governmental entities.
The termination, reduction or modification of our contracts or subcontracts with the Government of Israel in the event of change
in requirements, policies or budgetary constraints would have an adverse effect on our business, operating results and financial
condition.
If
we do not receive the governmental approvals necessary for the export of our products, our revenues may decrease. Similarly
,
if our suppliers and partners do not receive government approvals necessary to export their products or designs to us, our
revenues may decrease, and we may fail to implement our growth strategy.
Israel’s
defense export policy regulates the sale of our systems and products. Current Israeli policy encourages export to approved customers
of defense systems and products, such as ours, as long as the export is consistent with Israeli government policy. A license is
required to initiate marketing activities. We are also required to obtain a specific export license for any hardware exported
from Israel. We may not be able to receive all the required permits and licenses for which we may apply in the future. If we do
not receive the required permits for which we apply, our revenues may decrease.
We
are subject to laws regulating export of “dual use” items (items that are typically sold in the commercial market,
but that also may be used in the defense market) and defense export control legislation. Additionally, our participation in governmental
procurement processes in Israel and other countries is subject to specific regulations governing the conduct of the process of
procuring defense contracts. Furthermore, solicitations for procurements by governmental purchasing agencies in Israel and other
countries are governed by laws, regulations and procedures relating to procurement integrity, including avoiding conflicts of
interest and corruption in the procurement process. We may not be able to respond quickly and effectively to changing laws and
regulations and any failure to comply with such laws and regulations may subject us to significant liability and penalties.
We
depend on sales to key customers and the loss of one or more of our key customers would result in a loss of a significant amount
of our revenues, which would adversely affect our business, financial condition and results of operations.
A
significant portion of our revenues is derived from a small number of customers. During the years ended December 31, 2018 and
2017, 72
%
and
77
% of our revenues, respectively,
were attributable to nine customers. We anticipate that a significant portion of our future revenues will continue to be derived
from sales to a small number of customers. No assurances can be given that our customers will continue to purchase our products,
that we will be successful in any bid for new contracts to provide such products, or that if we were granted subsequent orders,
such orders would be of a scope comparable to the sales that we have experienced to date. If our principal customers do not continue
to purchase products from us at current levels or if we do not retain such customers and we are not able to derive sufficient
revenues from sales to new customers to compensate for their loss, our revenues would be reduced and adversely affect our business,
cash flows, financial condition and results of operations.
We
depend on suppliers of components for our products and if we are unable to obtain these components when needed, we could experience
delays in the manufacturing of our products and our financial results could be adversely affected.
We
acquire most of the components for the manufacturing of our products from suppliers and subcontractors, most of whom are located
in Israel and the U.S. A number of these suppliers are currently the sole source of one or more components upon which we are dependent.
Suppliers of some of the components for manufacturing require us to place orders with significant lead-time to assure supply in
accordance with our manufacturing requirements. Delays in supply may significantly hurt our ability to fulfill our contractual
obligations and may significantly hurt our business and result of operations. In addition, we may not be able to continue to obtain
such components from these suppliers on satisfactory commercial terms. Temporary disruptions of our manufacturing operations would
ensue if we were required to obtain components from alternative sources, which may have an adverse effect on our financial results.
Rapid
technological changes may adversely affect the market acceptance of our products and could adversely affect our business, financial
condition and results of operations.
The
defense electronics market in which we compete is subject to technological changes, introduction of new products, change in customer
demands and evolving industry standards. Our future success will depend upon our ability to keep pace with technological developments
and to timely address the increasingly sophisticated needs of our customers by supporting existing and new technologies and by
developing and introducing enhancements to our current products and new products. We may not be successful in developing and marketing
enhancements to our products that will respond to technological change, evolving industry standards or customer requirements.
In addition, we may experience difficulties that could delay or prevent the successful development, introduction and sale of such
enhancements and such enhancements may not adequately meet the requirements of the market and may not achieve any significant
degrees of market acceptance. If release dates of our new products or enhancements are delayed or, if when released, they fail
to achieve market acceptance, our business, operating results and financial condition may be adversely affected.
We
enter into fixed-price contracts that could expose us to losses in the event we fail to properly estimate our costs.
We
enter into firm fixed-price contracts. If our initial cost estimates are incorrect, we can lose money on these contracts. Because
many of these contracts involve new technologies, unforeseen events, such as technological difficulties and other cost overruns,
can result in the contract pricing becoming less favorable or even unprofitable to us and have an adverse impact on our financial
results.
Breaches
of network or information technology security
,
natural disasters or terrorist attacks could have an adverse effect
on our business.
Cyber-attacks
or other breaches of network or IT security, natural disasters, terrorist acts or acts of war may cause equipment failures or
disrupt our systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure
through cyber-attack, malware, computer viruses and other means of unauthorized access. The potential liabilities associated with
these events could exceed the insurance coverage we maintain. Our inability to operate our facilities as a result of such events,
even for a limited period of time, may result in significant expenses or loss of market share to other competitors in the defense
electronics market. In addition, a failure to protect the privacy of customer and employee confidential data against breaches
of network or IT security could result in damage to our reputation. To date, we have not been subject to cyber-attacks or other
cyber incidents which, individually or in the aggregate, resulted in a material impact to our operations or financial condition.
We
are subject to risks associated with international operations; we generate a significant portion of our sales from customers located
in countries that may be adversely affected by political or economic instability and corruption.
We
are aviation and defense company with worldwide operations. Although
79%
of our sales
are in Israel and North America, we expect to derive an increasing portion of our sales and future growth from other regions such
as Latin America, India and Central and Eastern Europe, which may be more susceptible to political or economic instability. In
addition, in many less-developed markets, we rely heavily on third-party representatives, consultants and other agents for business
development, marketing and distribution of our products. Many of these third parties do not have internal compliance resources
comparable to ours. Business activities in many of these markets have historically been more susceptible to corruption. If our
efforts to screen third party agents and detect cases of potential misconduct fail, we could be held responsible for the noncompliance
of these third parties under applicable laws and regulations, which may adversely affect our reputation and our business, financial
condition or results of operations.
Exports
(whether direct sales or sales through our Israeli customers) accounted for 63% of our revenues in 2018, 76% of our revenues in
2017 and 43% of our revenues in 2016. Our reliance on export sales subjects us to many risks inherent in engaging in international
business, including:
|
|
●
|
Limitations
and disruptions resulting from the imposition of government controls;
|
|
|
|
|
|
|
●
|
Changes
in regulatory requirements;
|
|
|
|
|
|
|
●
|
Export
license requirements;
|
|
|
|
|
|
|
●
|
Economic
or political instability;
|
|
|
|
|
|
|
●
|
Trade
restrictions;
|
|
|
|
|
|
|
●
|
Changes
in tariffs;
|
|
|
|
|
|
|
●
|
Currency
fluctuations;
|
|
|
|
|
|
|
●
|
Longer
receivable collection periods and greater difficulty in accounts receivable collection;
|
|
|
|
|
|
|
●
|
Greater
difficulty in safeguarding intellectual property;
|
|
|
|
|
|
|
●
|
Difficulties
in managing overseas subsidiaries and international operations; and
|
|
|
|
|
|
|
●
|
Potential
adverse tax consequences.
|
We
may not be able to sustain or increase revenues from international operations and may encounter significant difficulties, in connection
with the sale of our products in international markets. Any of those events may adversely affect our business, operating results
and financial condition.
In
addition, as a company registered with the SEC, we are subject to the regulations imposed by the Foreign Corrupt Practices Act,
or FCPA, which generally prohibits registrants and their intermediaries from making improper payments to foreign officials, for
the purpose of obtaining or keeping business or obtaining an improper business benefit. We have adopted proactive procedures to
promote compliance with the FCPA, but we may be held liable for actions taken by our strategic or local partners or agents even
though these partners may not themselves be subject to the FCPA. Any determination that we have violated the FCPA could materially
and adversely affect our business, results of operations, and cash flows.
Currency
exchange rate fluctuations in the world markets in which we conduct business could have a material adverse effect on our business,
results of operations and financial condition.
Most
of our revenues are in dollars or are linked to the dollar, while a portion of our expenses, principally salaries and related
personnel expenses, are incurred in other currencies, particularly in NIS. Therefore, our costs in such other currencies, as expressed
in dollars, are influenced by the exchange rate between the dollar and the relevant currency. We are also exposed to the risk
that the rate of inflation in Israel will exceed the rate of depreciation of the NIS in relation to the dollar or that the timing
of this depreciation lags behind inflation in Israel. This would have the effect of increasing the dollar cost of our operations.
In the past, the NIS exchange rate with the dollar and other foreign currencies has fluctuated, generally reflecting inflation
rate differentials. We cannot predict any future trends in the rate of inflation in Israel or the rate of depreciation or appreciation
of the NIS against the dollar. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations
will be adversely affected. We engage in currency hedging transactions intended to partly reduce the effect of fluctuations in
foreign currency exchange rates on our results of operations. However, such transactions may not materially reduce the effect
of fluctuations in foreign currency exchange rates on our results of operations.
Claims
that our products infringe upon the intellectual property of third parties may require us to incur significant costs, enter into
licensing agreements or license substitute technology.
Third
parties may assert infringement claims against us or claims that we have violated a patent or infringed on a copyright, trademark
or other proprietary right belonging to them. Any infringement claim, even one without merit, could result in the expenditure
of significant financial and managerial resources to defend against the claim. Moreover, a successful claim of product infringement
against us or a settlement could require us to pay substantial amounts or obtain a license to continue to use the technology that
is the subject of the claim, or otherwise restrict or prohibit our use of the technology. We might not be able to obtain a license
from the third party asserting the claim on commercially reasonable terms, if at all. We also may not be able to obtain a license
from another provider of suitable alternative technology to permit us to continue offering the product. Infringement claims asserted
against us could have a material adverse effect on our business, operating results and financial condition.
Regulations
related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs of certain
metals used in the manufacturing of our solutions.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act imposes disclosure requirements regarding the use in components of our
products of “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries, whether the components
of our products are manufactured by us or third parties. These requirements could affect the pricing, sourcing and availability
of minerals used in the manufacture of components we use in our products. Although the SEC has provided guidance with respect
to a portion of the conflict mineral filing requirements that may somewhat reduce our reporting practices, there are costs associated
with complying with the disclosure requirements and customer requests, such as costs related to our due diligence to determine
the source of any conflict minerals used in our products. We may face difficulties in satisfying customers who may require that
all of the components of our products are certified as conflict mineral free or free of numerous other hazardous materials.
We
may fail to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, which could
have an adverse effect on our financial results and the market price of our Ordinary Shares.
The
Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements
of Section 404(a) of the Sarbanes-Oxley Act of 2002 governing internal controls and procedures for financial reporting, which
started, in connection with our 2007 Annual Report on form 20-F, have resulted in increased general and administrative expense
and a diversion of management time and attention, and 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 controls over financial
reporting. Failure to maintain effective internal controls over financial reporting could result in investigation 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.
Risk
Factors Related to Our Ordinary Shares
Because
one of our shareholders, DBSI, holds approximately 25.1% of our outstanding shares, investors may not be able to affect the outcome
of shareholder votes.
DBSI
currently beneficially owns
9,5477,088
of our Ordinary Shares, or approximately
25.1
%
of our outstanding shares. For as long as DBSI, or any shareholder, holds a significant interest in our company, it may have the
ability to exercise a controlling influence over our business and affairs, including any determinations with respect to potential
mergers or other business combinations involving us, our acquisition or disposition of assets, our incurrence of indebtedness,
our issuance of any additional Ordinary Shares or other equity securities, our repurchase or redemption of Ordinary Shares and
our payment of dividends. Similarly, as long as DBSI has a controlling interest in our company, it will have the power to determine
or significantly influence the outcome of matters submitted to a vote of our shareholders, including the power to elect all of
the members of our board of directors (except external directors, within the meaning of Israeli law), or prevent an acquisition
or any other change in control of us. Because the interests of our controlling shareholders may differ from the interests of our
other shareholders, actions taken by it with respect to us may not be favorable to our other shareholders.
Our
share price has been volatile in the past and may decline in the future.
Our
Ordinary Shares have experienced significant market price and volume fluctuations in the past and may experience significant market
price and volume fluctuations in the future in response to factors such as the following, some of which are beyond our control:
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Quarterly
variations in our operating results;
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Operating
results that vary from the expectations of securities analysts and investors;
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Changes
in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
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Announcements
of technological innovations or new products by us or our competitors;
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Announcements
by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
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Changes
in the status of our intellectual property rights;
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Announcements
by third parties of significant claims or proceedings against us;
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Additions
or departures of key personnel;
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Future
sales of our Ordinary Shares;
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Delisting
of our shares from the NASDAQ Capital Market; and
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Stock
market price and volume fluctuations.
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Domestic
and international stock markets often experience extreme price and volume fluctuations. Market fluctuations, as well as general
political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events or hostilities
in or surrounding Israel, could adversely affect the market price of our Ordinary Shares.
In
the past, securities class action litigation has often been brought against companies following periods of volatility in the market
price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial
costs and divert management’s attention and resources both of which could have a material adverse effect on our business
and results of operations.
In
addition, to continue to be listed on the NASDAQ Capital Market, we need to satisfy a number of conditions, including a minimum
closing bid price per share of $1.00. At times in the past we were not in compliance with this requirement, although we managed
to regain compliance by a reverse stock split. If in the future, our share price drops again (for 30 consecutive days under a
bid price per share of $1.00), we may be eventually delisted from NASDAQ and trading in our Ordinary Shares would be conducted
on a market where an investor would likely find it significantly more difficult to dispose of, or to obtain accurate quotations
as to the value of our Ordinary Shares.
Substantial
future sales of our Ordinary Shares by our principal shareholders may depress our share price.
If
our principal shareholders sell substantial amounts of their Ordinary Shares, including shares registered under effective registration
statements and shares issuable upon the exercise of outstanding warrants, or if the perception exists that our principal shareholders
may sell a substantial number of our Ordinary Shares, the market price of our Ordinary Shares may fall. Any substantial sales
of our shares in the public market also might make it more difficult for us to sell equity or equity related securities in the
future at a time and on terms we deem appropriate.
We
do not intend to pay dividends.
We
have never declared or paid cash dividends on our Ordinary Shares and do not expect to do so in the foreseeable future. The declaration
of dividends is subject to the discretion of our board of directors and will depend on various factors, including our operating
results, financial condition, future prospects and any other factors deemed relevant by our board of directors. You should not
rely on an investment in our company if you require dividend income from your investment in our company. The success of your investment
will likely depend entirely upon any future appreciation of the market price of our Ordinary Shares, which is uncertain and unpredictable.
There is no guarantee that our Ordinary Shares will appreciate in value or even maintain the price at which you purchased your
Ordinary Shares.
We
may be classified as a passive foreign investment company, or PFIC, which would subject our U.S. investors to adverse tax rules.
U.S.
holders of our Ordinary Shares may face income tax risks. We have been advised that we may have been a “passive foreign
investment company” (“PFIC”) for the 2018 taxable year. Our treatment as a PFIC could result in a reduction
in the after-tax return to U.S. Holders (as defined below in Item 10E. “Additional Information – Taxation”)
of our Ordinary Shares and would likely cause a reduction in the value of such shares. A foreign corporation will be treated as
a PFIC for U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain
types of “passive income,” or (2) at least 50% of the average value of the corporation’s gross assets produce,
or are held for the production of, such “passive income.” For purposes of these tests, “passive income”
includes dividends, interest, gains from the sale or exchange of investment property and rents and royalties other than rents
and royalties that are received from unrelated parties in connection with the active conduct of a trade or business. For purposes
of these tests, income derived from the performance of services does not constitute “passive income.” If we are treated
as a PFIC, U.S. Holders of Ordinary Shares would be subject to a special adverse U.S. federal income tax regime with respect to
the income derived by us, the distributions they receive from us, and the gain, if any, they derive from the sale or other disposition
of their Ordinary Shares. In particular, dividends paid by us, if any, would not be treated as “qualified dividend income,”
eligible for preferential tax rates in the hands of non-corporate U.S. shareholders. Since PFIC status depends upon the composition
of our income and the market value of our assets from time to time, even if we were not a PFIC in 2018, there can be no assurance
that we will not become a PFIC in any future taxable year. U.S. Holders should carefully read Item 10E. “Additional Information
– Taxation” for a more complete discussion of the U.S. federal income tax risks related to owning and disposing of
our Ordinary Shares.
Risks
Relating to Our Location in Israel
Political,
economic and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our
results of operations and adversely affect our share price.
We
are incorporated under the laws of, and our principal executive offices and manufacturing and research and development facilities
are located in the State of Israel. As a result, political, economic and military conditions affecting Israel directly influence
us. Any major hostilities involving Israel, a full or partial mobilization of the reserve forces of the Israeli army, the interruption
or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial
condition of Israel could adversely affect our business, financial condition and results of operations.
Conflicts
in North Africa and the Middle East, including in Egypt and Syria which border Israel, have resulted in continued political uncertainty
and violence in the region. Efforts to improve Israel’s relationship with the Palestinian Authority have failed to result
in a permanent solution, and there have been numerous periods of hostility in recent years. In addition, relations between Israel
and Iran continue to be seriously strained, especially with regard to Iran’s nuclear program.
Such
instability may affect the local and global economy, could negatively affect business conditions and, therefore, could adversely
affect 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 our business, financial condition and results of operations in the future.
Furthermore,
we could be adversely affected by the interruption or reduction of trade between Israel and its trading partners. Some countries,
companies and organizations continue to participate in a boycott of Israeli companies and others doing business with Israel or
with Israeli companies. As a result, we are precluded from marketing our products to these countries, companies and organizations.
Foreign government defense export policies towards Israel could also make it more difficult for us to obtain the export authorizations
necessary for our activities. Also, over the past several years there have been calls in Europe and elsewhere to reduce trade
with Israel. Restrictive laws, policies or practices directed towards Israel or Israeli businesses may have an adverse impact
on our operations, our financial results or the expansion of our business.
Our
results of operations may be negatively affected by the obligation of our personnel to perform military service.
Some
of our employees in Israel are obligated to perform annual military reserve duty and are subject to being called for active duty
under emergency circumstances. If a military conflict or war arises, these individuals could be required to serve in the military
for extended periods of time. Our operations could be disrupted by the absence for a significant period of one or more of our
executive officers or key employees or a significant number of other employees due to military service. Any disruption in our
operations could adversely affect our business.
We
may not be able to enforce covenants not-to-compete under current Israeli law.
We
have non-competition agreements with most of our employees, many of which are governed by Israeli law. These agreements generally
prohibit our employees from competing with us or working for our competitors for a specified period following termination of their
employment. However, Israeli courts are reluctant to enforce non-compete undertakings of former employees and tend, if at all,
to enforce those provisions for relatively brief periods of time in restricted geographical areas and only when the employee has
unique value specific to that employer’s business and not just regarding the professional development of the employee. Any
such inability to enforce non-compete covenants may cause us to lose any competitive advantage resulting from advantages provided
to us by such confidential information.
We
may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could
result in litigation and adversely affect our business.
A
significant portion of our intellectual property has been developed by our Israeli employees in the course of their employment
for us. Under the Israeli Patent Law, 5727-1967, or Israeli Patent Law, inventions conceived by an employee during the term and
as part of the scope of his or her employment with a company are regarded as “service inventions,” which belong to
the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The
Israeli Patent Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation
and Royalties Committee, or C&R Committee, a body constituted under the Israeli Patent Law, shall determine whether the employee
is entitled to remuneration for his inventions. The C&R Committee (decisions of which have been upheld by the Israeli Supreme
Court) has held that employees may be entitled to remuneration for their service inventions despite having specifically waived
any such rights. Further, the C&R Committee has not yet set specific guidelines regarding the method for calculating this
remuneration or the criteria or circumstances under which an employee’s waiver of his right to remuneration will be disregarded.
We generally enter into intellectual property assignment agreements with our employees pursuant to which such employees assign
to us all rights to any inventions created in the scope of their employment or engagement with us. Although our employees have
agreed to assign to us service invention rights and have specifically waived their right to receive any special remuneration for
such assignment beyond their regular salary and benefits, we may face claims demanding remuneration in consideration for assigned
inventions. As a consequence of such claims, we could be required to pay additional remuneration or royalties to our current or
former employees, or be forced to litigate such claims, which could negatively affect our business.
Service
and enforcement of legal process on us and our directors and officers may be difficult to obtain.
Service
of process upon our directors and officers and the Israeli experts named in this annual report, most of who reside outside the
U.S., may be difficult to obtain within the U.S. Furthermore, since substantially most our assets, our directors and officers
and the Israeli experts named in this annual report are located outside the U.S., any judgment obtained in the U.S. against us
or these individuals or entities may not be collectible within the U.S.
There
is doubt as to the enforceability of civil liabilities under the Securities Act and the Securities Exchange Act in original actions
instituted in Israel. However, subject to certain time limitations and other conditions, Israeli courts may enforce final judgments
of U.S. courts for liquidated amounts in civil matters, including judgments based upon the civil liability provisions of those
Acts.
The
rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from those of a typical
U.S. corporation.
We
are incorporated under Israeli law and the rights and responsibilities of holders of our Ordinary Shares are governed by our articles
of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities
of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith
in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain
from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain
matters. Israeli law provides that these duties are applicable to shareholder votes at the general meeting with respect to, among
other things, amendments to a company’s articles of association, increases in a company’s authorized share capital,
mergers and actions and transactions involving interests of officers, directors or other interested parties which require the
shareholders’ approval. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that he
or she possesses the power to determine the outcome of a vote at a meeting of our shareholders, or who has, by virtue of the company’s
articles of association, the power to appoint or prevent the appointment of an office holder in the company, or any other power
with respect to the company, has a duty of fairness toward the company. However, Israeli law does not define the substance of
this duty of fairness. There is little case law available to assist in understanding the implications of these provisions that
govern shareholder behavior.
Israeli
government programs and tax benefits may be terminated or reduced in the future, which could increase our tax expenses.
We
participate from time to time in programs of the Israeli
Innovation
Authority (formerly the Office of the Chief Scientist) of the Israeli Ministry of Economy
,
or
Innovation Authority
, for which we receive funding for the development of technologies
and products.
We may benefit from certain Israeli government programs and tax benefits, particularly from tax exemptions
and cash incentives, including “Approved Enterprise” status due to our manufacturing facilities in Israel. To be eligible
for these programs and tax benefits or similar programs in the future, we must meet certain conditions, including making specified
investments in fixed assets and equipment.
For more information about these programs see
Item 5. “
Operating and financial review and prospects – Research & Developments –
Israeli
Innovation
Authority
.
” If we fail to comply with these conditions, we may be required
to pay additional penalties,
make
refunds and may be denied future benefits. From
time to time, the government of Israel has discussed reducing or eliminating the benefits available under
these programs,
and therefore these benefits may not be available to us in the future at their current levels or at all.
As
a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we may follow certain home country corporate governance
practices instead of certain NASDAQ requirements.
As
a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we are permitted to follow certain home country
corporate governance practices instead of certain requirements of The NASDAQ Stock Market Rules. Among other things, as a foreign
private issuer we may follow home country practice with regard to the composition of the board of directors, director nomination
procedure, and quorum at shareholders’ meetings. In addition, we may follow our home country law, instead of the NASDAQ
Stock Market Rules, which require that we obtain shareholder approval for certain dilutive events such as for 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 more interest in the company, and certain acquisitions
of the stock or assets of another company. A foreign private issuer that elects to follow a home country practice instead of NASDAQ
requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country
certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private
issuer must disclose in its annual reports filed with the SEC each such requirement that it does not follow and describe the home
country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the
same protection as provided under NASDAQ’s corporate governance rules.
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ITEM
4.
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INFORMATION
ON THE COMPANY
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A.
History and Development of the Company
We
were incorporated under the laws of the State of Israel on December 8, 1970. We are a public limited liability company under the
Israeli Companies Law 1999-5759, or the Israeli Companies Law, and operate under this law and associated legislation. Our registered
offices and principal place of business are located at 7 Giborei Israel Street, Netanya 4250407, Israel, and our telephone number
is: +972-9-892-1111. Our website address is
www.rada.com
. The information on our website is not incorporated by reference
into this annual report.
We
develop, manufacture and sell defense electronics, including avionics solutions (including avionics for unmanned aerial vehicles
and airborne inertial navigation systems), airborne data/video recording and management systems and tactical land-based radars
for defense forces and for border protection systems. In addition, while we continue to sell and support our legacy commercial
products and services
, in 2016 we decided to actively pursue the
sale of our Chinese
subsidiary
,
Beijing Hua Rui Aircraft Maintenance and Service, Co., Ltd., known as
CACS, which is the main platform of
our test and repair shop activity. On December 2018, we signed an agreement to sell
CACS, which sale is expected to close later in 2019.
The results presented in this annual
report were adjusted to present CACS’ results in a separate line as “Discontinued Operations.”
In
March 2018, we announced the formation of a joint venture company with SAZE Technologies LLC of Silver Spring, MD. The new company,
RADA Technologies LLC, or RTL is based in Silver Spring, MD and is focused on the adaption of our tactical radar technology for
the U.S. market. Initially, the joint venture will adapt our technology to meet U.S. customer requirements, certifying the radars
to U.S. standards, establishing production capabilities and providing infrastructure for maintenance and support.
B.
Business Overview
Industry
Overview
Our
activity is primarily focused on the defense electronics market. This is a growing market and is currently a large part of the
defense industry. The defense electronics market reflects two contradictory trends, the proliferation of defense electronics,
which has been offset by the significant reduction in the price of electronic systems which is reducing the dollar value of the
market. Today, new military vehicles of all kinds are equipped with significantly more electronic systems than they used to carry
in the past. The increasing usage of advanced electronics in modern vehicles, including upgrades of existing technology and the
growing use of unmanned vehicles of all kinds, have provided significant growth to the market.
Today’s
advanced defense electronics systems typically incorporate components that are derived from the industrial or the consumer electronics
markets, especially from the telecom and automotive markets. Most of the defense electronics systems are built with commercial
components and even with sub-systems, which reduce the overall price, and at the same time generate complex obsolescence issues.
Purchasers
of defense electronics products are either governments or major integrators. Engagement in business relationships with these customers
is complex, has a long sales cycle and requires long-term commitments for future support of delivered hardware. Production batches
of such products are usually small.
Suppliers
of defense electronic systems are either providers of sub-systems to major integrators and platform manufacturers or are providers
of integrated systems to the industry or to the armed forces. These companies are typically very large and have diversified product
offerings.
New
products in the defense electronic market are usually developed utilizing internal and customer sponsored research and development
funds and are tailored to specific customer needs. In many cases, the customer who pays for the design and adaptation, limits
the use of intellectual property that was funded by it for other applications, due to either commercial or security reasons.
Products
and Services
We
primarily sell state-of-the-art defense electronics products. We may also provide end-to-end solutions for one or more systems
or sub-systems. Our current product lines are:
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Military
Avionics (Data/video recorders, core avionics for aircraft and UAVs) and airborne Inertial Navigation Systems;
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Tactical
Radars for defense forces and border protection systems (land based).
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While
we continued to support our legacy commercial aviation test stations, in 2016 we decided to sell CACS, our main platform for our
test and repair shop activity. We signed an agreement to sell CACS in December 2018.
Military
Avionics
We
are active in the field of mission data & video recording, management, and post-mission analysis and debriefing for fighter
and trainer aircrafts. Over the past 25 years we have developed, fielded and supported a wide range of solid-state digital recorders,
cameras and debriefing systems for aerospace and military applications, including:
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Flight
data recorders, or FDR, for fighter aircraft;
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Digital
video/audio/data recorders, or DVDR (with data transfer functions);
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High-rate
(no compression) data recorders, or HRDR, for aircraft and airborne pods;
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Video
recorders and airborne data servers, or VRDS, the latest approach to avionic data management;
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HD-DVDR,
high definition digital video/audio/data recording for fighter and trainer aircrafts.
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A
wide range of head-up-displays color video cameras, or HCVC, for fighter aircraft; and
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A
variety of ground debriefing solutions, or GDS.
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Featuring
state-of-the-art technologies, our digital recorders are designed for military applications. Our high-performance recorders provide
simultaneous, high-capacity video (both analog and digital/HD), audio and data recording, high throughput and mass storage handling
capabilities, supporting rapid dissemination and real-time playback. Our video recorders implement MPEG-2 and/or MPEG-4 (H.264)
compression formats, supporting up to 128GB of solid-state memory, facilitating continuous recording over extended mission durations.
Recent upgrades to our recorders provide the ability to record high-definition video formats such as HD-SDI.
Our
GDS feature synchronized video, audio, data, and air combat maneuvering debriefing. GDS vary from personal, laptop-size debriefing
units, through robust desktop multi-channel systems supporting the mission debriefing of four-aircraft formations up to large-scale
simultaneous debriefing systems. These network-based systems support large numbers of participants operating from different locations,
and provide advanced data management features.
We
have been a developer and manufacturer of core avionics systems for over 30 years. We currently offer a wide spectrum of military
avionics systems designed for integration in new and upgraded military aircraft and UAVs worldwide. Our avionics solutions range
from fully integrated avionics suites, through core avionics subsystems, to tailor-made “built-to-spec” units, backed
by our teams of experts dedicated to providing global technical and maintenance support.
Our
avionics systems are easily adapted to western, eastern, and indigenous-origin platforms of all kinds. In particular, our avionics
for UAVs are extremely compact through modern board connectivity solutions, use of innovative conductive cooling techniques, withstand
extreme environmental conditions and are very reliable and affordable.
We
offer the following avionics solutions:
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Mission
data recorders and debriefing solutions (as described above);
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Weapon
management systems;
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Data
interface and processing computers;
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HUD
video cameras;
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Avionics
for UAVs (Interface control processors, engine control computers, Payload management computers and others);
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R-100F:
FOG-based, navigation-grade embedded GPS-INS for fighters and helicopters;
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R-200M:
Compact, MEMS-based, multiple-sensor aided INS for UAVs and backup INS for manned aircraft;
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MAVINS
– Modular Avionics and MEMS-Based INS: A specially-designed, compact integrated solution for UAVs.
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Our
airborne products and system solutions are fully qualified and operated by leading air forces and prime integrators worldwide,
such as the Israeli Air Force, or IAF, Lockheed Martin, Boeing Company, HAL, Embraer, IAI, Rafael, the Chilean Air Force, Indra
Systemas S.A., and many others. Our units are installed onboard F-16, F-15, T-6, A-4, Jaguar, MiG-27, Su-30MKI, Dhruv Helicopter,
MiG-29, Super-Tucano and other aircraft, and onboard a continuously-growing number of UAVs.
Tactical
Radars for Defense Forces and Border Protection Systems (land based).
We
develop advanced ground-based radars for tactical applications such as defense forces protection and border protection. Our pulse
Doppler, software-defined radars are solid-state, fully digital, incorporate active electronically scanned array, or AESA antenna,
are compact, mobile and highly reliable, provide hemispheric spatial coverage and multi-mission capabilities, operate on-the-move,
or OTM, and demonstrate unprecedented performance-to-price ratio.
The
conflicts in which modern armies are engaged in recent years dictate the needs for instantaneous and real-time intelligence, minimal
cycle time for target acquisition, highly accurate weapons with minimal collateral damage and discrimination between hostiles
and civilians. Our tactical radars, which move with the maneuvering combat units in the field and operate OTM, provide the real-time
knowledge of whether and from where they are threatened, detect all relevant threats, whether unfriendly fire or drones/UAVs/fighters/helicopters
from any angle (including very high angles), discriminate among threats and provide the needed intelligence for any course of
action, whether counter-fire or avoidance. The performance-over-price ratio of our radars makes them ideal solutions to the current
needs and requirements of the maneuver forces.
We
have developed various radar hardware platforms: the compact hemispheric radar, or CHR, and the enhanced CHR, or eCHR, which are
tailored for use in combat vehicles and short-range protection applications; and a family of multi-mission hemispheric radars,
or MHRs, which are tailored for use in force and border protection applications. We offer the MHR and the improved and enhanced
MHR, or ieMHR; all share the same basic characteristics, but differ in range, size, weight, and price. For each radar platform
we implement several operational missions by changing the radar operational parameters.
The
current operational missions of the CHR and eCHR are the following:
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The
RPS-10/60 radar sensors for active protection systems, or APS, detect all relevant threats that may be fired at combat vehicles,
including RPGs, anti-tank guided missiles (ATGMs) and projectiles and provide 360° hemispheric coverage. The system delivers
threat data to the APS, enabling it to neutralize threats.
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The
RPS-12/62 short-range hemispheric air surveillance radar system can detect, classify and track aerial vehicles, with emphasis
on small UAVs. Mobile or stationary, the system can be integrated with any C4I system and other radars and sensors, and can
operate either as a stand-alone, or as part of a large-scale surveillance system.
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The
RPS-14/64 radar system for perimeter and border protection can detect, identify, and track aerial and surface intruders including
slow and small aircraft, vehicles, vessels, and pedestrians at tactical ranges. The RPS-14 can operate either as a stand-alone,
or as part of a large-scale surveillance system.
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The
RPS-15/65 comprehensive hostile fire management system for combat vehicle detects, tracks, classifies and locates direct and
elevated threats fired at combat vehicles, allowing the mobile force to successfully complete its mission while operating
in a hostile environment.
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The
current operational missions of the MHR family of radar platforms are the following:
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The
RPS-40/70/80 hostile fire detection radar systems detect, track, classify and locate direct and elevated threats fired at
stationary or mobile forces. They compute the Point-of-Origin (POO) and Point-of-Impact (POI) of the threats, which may be
rockets, artillery, mortars, ATGMs, RPGs, and more other threats. The systems can be integrated with any protection and Command,
Control, Communications, Computers and Intelligence (C4I) system and be installed at stationary bases and posts, or onboard
fighting vehicles.
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The
RPS-42/72/82 tactical hemispheric air surveillance radar systems can detect, classify and track all types of aerial vehicles,
including fighters, helicopters, UAVs, transport aircraft, etc. at tactical ranges. Mobile or stationary, the systems can
be integrated with any C4I system and other radars and sensors, and can operate either as a stand-alone, or as part of a large-scale
surveillance system.
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The
RHS-44/74/84 radar systems for border protection can detect, identify, and track aerial and surface border intruders including
slow and small aircraft, vehicles, vessels, and pedestrians at tactical ranges. The systems can operate either as a stand-alone,
or as part of a large-scale surveillance system.
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Among
our customers and users of our radar systems are leading defense forces and defense contractors worldwide, including the Israeli
MOD, IMI (an Elbit Systems subsidiary), Artis, Lockheed Martin, Boeing, Leonardo DRS, SAZE, the U.S. Marine Corps and Navy, the
U.S. Air Force, Indian Security Forces, MBDA, Rheinmetall, Rafael and other prime integrators and end-users. Some of our customers
have purchased a small number of radars for evaluation and integration in their air defense and/or other systems. These initial
purchases may turn into larger production orders upon evaluation.
Business
Development, Sales and Marketing
Strategy
Our
business development strategy is based on the following principles:
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Becoming
a reliable and trusted supplier of sensors and sub-systems to defense system integrators and major platforms manufacturers
with global sales, such as Lockheed Martin, Boeing, Elbit, IAI, Rafael, Leonardo DRS, Embraer, HAL and others.
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Establishing
strategic joint venture companies in the primary target markets (i.e. U.S.) for local presence, direct market development,
localization of the technology, production and customer support.
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Expanding
our global business development efforts and potential customer base, by engaging business development consultants and service
providers in the countries and territories in which our products may be used, and actively managing this global network; and
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Establishing
strategic partnerships with leading integrators in the prime target markets for tactical radars, i.e. U.S. Europe, India;
such partnerships may involve indigenization and localization of our technologies to enable sales in significant quantities
in these markets.
|
Strategic
Relationships and Customers
As
part of our strategy, we have established a number of strategic relationships with leading global defense contractors and several
air forces. We have focused our marketing and sales efforts to support these relationships.
Lockheed
Martin.
Lockheed Martin is the manufacturer of the F-16 aircraft, one of the most popular fighter aircraft in the western
world today. We are supplying the DVDR, HD-DVDR and GDS for new F-16 aircraft production and for F-16 upgrade programs led by
Lockheed Martin. In 2015, Lockheed Martin ordered a single radar system for integration in their internally funded high energy
laser research and development program.
IMI
Systems.
IMI (a subsidiary of Elbit Systems) is a world leader in the field of APS for land platforms and is the developer
and manufacturer of the “Iron Fist” APS. We are teamed with IMI on the integration and production of our RPS-10 radars
as part of their “Iron Fist” APS solution for local and global customers. During 2016 there was a global increase
in the interest of major forces in APS. As a result, in 2017 and 2018 we engaged in extensive efforts with IMI to integrate, test
and provide its “Iron Fist” APS to customers in Europe and North America, along with our on-going support. We have
sold dozens of CHR radars to IMI to support these activities. We anticipate that these testing efforts will mature into acquisition
programs.
Boeing
Defense, Space and Security.
Boeing, a provider of air defense and high-energy laser systems, acquired our MHR in 2013 for
evaluation of its use as part its directed energy tactical systems, and in 2017 has acquired our ieMHR to be integrated into critical
infrastructure surveillance solutions. We also provide Boeing with recorders and debriefing stations for the T-45 VMTS and have
received follow-on orders from Boeing.
Leonardo
DRS.
DRS is a major player in the defense electronics market in North America, with a focus on tactical systems and radars.
In 2017, we signed a cooperation agreement with DRS to market and sell our tactical radars in the North American market for counter-UAV,
short-range air defense, and other solutions. DRS has acquired a few MHR radars and is actively promoting our radars as part of
their system solutions. In 2018, DRS was selected by the US Army as the mission equipment package provider for the Army’s
IMSHORAD program, which includes our MHR radars as onboard search sensors. This program has the potential for sale of 144 vehicles,
each with 4 MHR radars on board.
SAZE
Technologies LLC.
SAZE is the first customer and user of our MHR radars, and provided support and market access to various
radar programs and demonstrations that we were involved with. We and SAZE established a joint venture company, RADA Technologies
LLC, based in Silver Spring Maryland, in order to seek special security agreements and to perform market development, localization
of the technology, customer support, production and maintenance in the U.S. We are in the process of recruiting personnel for
the joint venture and are engaged in the build-up of our production capability in the US in 2019.
European
Air Defense Integrators.
Two major European air defense integrators have purchased radars for integration and testing. We
have signed a value-added representation agreement with one of the integrators for certain countries where it has a dominant position
in sales of air defense and other solutions.
Rafael
Advanced Defense Systems Ltd.
Rafael is a world leader in the development and supply of missiles, smart weapons and pods of
various types. Rafael has become a strategic customer of ours as a result of our development and production of a few advanced
built-to-specification products in recent years. Recently, Rafael selected the MHR as the radar for the “Drone Dome”
system that is designed to counter UAVs and drones and is purchasing radars from us for their customers.
Military
Forces.
We are the sole providers of digital recorders and debriefing solutions to an air force in Latin America. We are the
primary provider of recorders and debriefing solutions to a major Asian air force. Our tactical radars for air defense are under
evaluation by a Far-East country’s army that has acquired f a few units, while two other Asian forces have purchased radars
for air surveillance and counter-mortar applications. Our tactical radars are used by the U.S. Navy and Marines as part of their
ground-based air defense advanced technology development program. We believe that these strategic relationships with military
forces provide us with the potential for prolonged cooperation.
Israel
Aerospace Industries
. We actively supply avionics and test equipment to four different divisions of IAI, and in particular
to the LAHAV and MALAT divisions, who are major aircraft integrators and utilize our products and services for repeated follow-on
orders.
Hindustan
Aeronautics Ltd.
HAL is the major aerospace integrator in India. We are currently cooperating with four divisions of HAL and
supply DVDRs, HCVCs, GDS, support equipment and other services in growing numbers.
Embraer
S.A.
The Military Aircraft Division of the Brazilian aircraft manufacturer is a strategic customer. In addition to supplying
avionics such as DVDR, INS and HCVC to Embraer, we are participating to a greater degree in Embraer’s programs through the
development and supply of avionic units per their specifications and their training and support activities.
Business
Development and Marketing
Our
Chief Executive Officer, Mr. Dov Sella, together with Mr. Gil Schwartz, our VP Business Development & Marketing and Mr. Ronen
Ofek, our VP Business Development for Israel, lead our business development and marketing efforts from Israel. Mr. Bill Watson,
Ms. Charlene Caputo and Mr. Max Cohen are responsible for our business development and marketing efforts in North America. We
currently employ twelve additional professionals (seven of whom are part-time consultants) in business development and the sales
of our products. Our program managers, chief technology officer, VP Products and our engineering departments support our marketing
and sales efforts with respect to proposal preparations and products demonstrations. In addition, we have business development
consultants in Europe, South America and Asia who receive success fees for sales generated by them. Our U.S. JV is gradually taking
over the business development role in the North-American market and works directly and in cooperation with our US partners on
the exploitation of the large U.S. opportunities. Four of our seven part-time consultants are supporting this activity.
The
Israeli Ministry of Defense has historically supported, and continues to support, our marketing efforts through its defense export
assistance branch and through various projects for the IDF and its related divisions. There is no guarantee that this type of
assistance will be available to us in the future.
We
take part and present our tactical radars at the major land systems exhibitions on a regular basis, such as the (AUSA) Annual
Meetings, D.C., Eurosatory in Paris, DSEI in London, and in regional exhibitions such as Seoul Aerospace & Defense, MSPO in
Poland, DefExpo in India and others.
Fixed
Price Contracts
Some
of our contracts are fixed-price contracts, under which the price is not subject to adjustment by reason of the costs incurred
in the performance of the contracts, as long as the costs incurred and work performed fall within governmental guidelines. Under
our fixed-price contracts, we assume the risk of increased or unexpected costs that may reduce our profits or even generate losses.
This risk can be particularly significant under fixed-price contracts for research and development involving new technologies.
Our
books and records may be subject to audits by the Israeli Ministry of Defense and other governmental agencies, including the U.S.
Department of Defense. These audits may result in adjustments to contract costs and profits.
Principal
Customers
Generally,
we complete a few major transactions each year, each in an amount comprising more than 10% of our revenues for such year. As a
result, each year a significant portion of our revenues is derived from a small number of customers. The following table sets
forth our principal customers in 2016, 2017 and 2018:
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Percentage of Revenues
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|
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|
2016
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2017
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|
2018
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Israel Aerospace Industries
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|
20
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%
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|
|
7
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%
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|
|
7
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%
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|
Ministry of Defense (Israel)
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|
17
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%
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|
|
9
|
%
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|
|
5
|
%
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RAFAEL
|
|
|
16
|
%
|
|
|
2
|
%
|
|
|
11
|
%
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|
Embraer S.A.
|
|
|
13
|
%
|
|
|
3
|
%
|
|
|
4
|
%
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|
Hindustan Aeronautics Ltd
|
|
|
11
|
%
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|
|
5
|
%
|
|
|
11
|
%
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|
Lockheed Martin Corporation
|
|
|
6
|
%
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|
|
13
|
%
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|
|
6
|
%
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|
Leonardo DRS
|
|
|
1
|
%
|
|
|
35
|
%
|
|
|
4
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%
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|
Customer in Israel
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
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|
SAZE Technologies LLC
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|
|
-
|
|
|
|
3
|
%
|
|
|
12
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%
|
Although
we continually strive to increase the number of our customers, we anticipate that a significant portion of our future revenues
will continue to be derived from a small number of customers. Because of our dependency on a small number of customers and on
government contracts, we are subject to business risks, including changes in governmental appropriations and changes in national
defense policies and priorities. Although many of the programs in which we participate as a contractor or subcontractor may extend
for several years, our business is dependent upon annual appropriations and funding of new and existing contracts. Most of the
contracts are subject to termination for the convenience of the customer, pursuant to which the customer pays only for reimbursement
of costs incurred and the applicable profit on work performed. The Israeli government or any other government may discontinue
funding purchases of our products over the long term.
Geographical
Markets
We
sell our products to various air forces and companies worldwide. The following table presents our revenues by geographical markets
for the periods indicated:
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|
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2016
|
|
|
2017
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|
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2018
|
|
|
Israel
|
|
|
57
|
%
|
|
|
24
|
%
|
|
|
37
|
%
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|
South and Latin America
|
|
|
10
|
%
|
|
|
2
|
%
|
|
|
4
|
%
|
|
Asia
|
|
|
19
|
%
|
|
|
17
|
%
|
|
|
11
|
%
|
|
North America
|
|
|
13
|
%
|
|
|
55
|
%
|
|
|
42
|
%
|
|
Europe
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
6
|
%
|
|
Australia
|
|
|
-
|
|
|
|
1
|
%
|
|
|
-
|
%
|
Competition
The
markets for our products are highly competitive. Our principal competitors on the avionics and recorders include Elbit Systems
Ltd., Honeywell International Inc., IAI, Northrop Grumman Corporation, Sagem Avionics LLC., Thales Group and Zodiac Aerospace
Group. Our principal competitors on tactical radars are IAI (through its subsidiary, Elta), SRC Inc., SAAB, Thales and Leonardo
Selex. We expect to continue to face competition from these and other competitors. Currently, all of our competitors are larger
and have substantially greater resources than us, including financial, technological, marketing and distribution capabilities,
and enjoy greater market recognition than we do. These competitors may be able to achieve greater economies of scale and may be
less vulnerable to price competition than us. We may not be able to offer our products as part of integrated systems to the same
extent as our competitors or successfully develop or introduce new products that are more cost effective or offer better performance
than those of our competitors. Failure to do so could adversely affect our business, financial condition and results of operations.
Government
Regulations
Israel’s
defense export policy regulates the sales of our systems and products. Current Israeli policy encourages export to approved customers
of defense systems and products, such as ours, as long as the export is consistent with Israeli government policy.
A
license is required to initiate marketing activities. We are also required to obtain a specific export license for any hardware
exported from Israel. We are regulated by an Israeli law regulating export of “dual use” items (items that are typically
sold in the commercial market, but that also may be used in the defense market) and the Defense Export Control Law and its supplemental
regulations. Those laws and regulations govern the enforcement of export control and defined certain new areas of licensing, particularly
with respect to transfer of technology. It is not certain that we will receive all the required permits and licenses for which
we may apply in the future. Our participation in governmental procurement processes in Israel and other countries is subject to
specific regulations governing the process of procuring defense contracts. Furthermore, solicitations for procurements by governmental
purchasing agencies in Israel and other countries are governed by laws, regulations and procedures relating to procurement integrity,
including avoiding conflicts of interest and corruption in the procurement process.
In
addition, antitrust laws and regulations in Israel and other countries often require governmental approvals for transactions that
are considered to limit competition. Such transactions may include cooperative agreements for specific programs or areas, as well
as mergers and acquisitions.
Proprietary
Information
We
generally do not consider patent protection significant to our current operations and rely upon a combination of security devices,
trade secret laws and contractual restrictions to protect our rights in our products. Our policy is to require employees and consultants
to execute confidentiality agreements upon the commencement of their relationships with us. These measures may not be adequate
to protect our technology from third-party infringement, and our competitors might independently develop technologies that are
substantially equivalent or superior to ours. Additionally, our products may be sold in foreign countries that provide less protection
for intellectual property rights than that provided under U.S. or Israeli laws.
The
Israeli government usually retains certain rights in technologies and inventions resulting from our performance as a prime contractor
or subcontractor under Israeli government contracts and may generally disclose such information to third parties, including other
defense contractors. When the Israeli government funds research and development, it may acquire rights to proprietary data and
title to inventions; we may retain a non-exclusive, royalty-free license for such inventions. However, if the Israeli government
purchases only the end product, we may retain the principal rights and the government may use the data and take an irrevocable,
non-exclusive, royalty-free license.
Manufacturing
and Quality Control
Our
production plant is located in Beit She’an, Israel. The plant is equipped to handle most of our manufacturing processes
and testing requirements. For some processes we utilize outsourced resources. This structure allows us flexibility and versatility.
To support the growth in radar production, we are in the process of establishing a supply chain of board assembly providers and
chassis/casting providers, while final assembly, calibration and testing is kept internally. We are also in process of physically
duplicating our Israeli assembly facilities in the U.S. and adapting them for the U.S. market. These efforts are currently planned
to be completed in 2019.
We
place great emphasis on quality control in our production processes. Commencing with customer requirements and expectations, via
raw material inspection through completion, specifications are repeatedly checked. We maintain a quality assurance team that participates
in every stage of the design and manufacturing of the products. Our quality management system is certified by the Standards Institute
of Israel, or SII, pursuant to ISO 9001:2015 for hardware design and production and ISO 90003:2014 for software design. SII performs
quality system audits twice a year and various customers perform audits four to six times a year. Our environmental management
system is certified by SII to ISO 14001:2004. Our quality management system is also certified according to AS-9100D, a quality
management system for aerospace requirements.
According
to the standard warranty incorporated in most of our sales contracts, we warrant that our products will be free from defects in
design, materials or workmanship, and guarantee repair or replacement of defective parts typically for periods between one to
two years following delivery of a product to a customer. We also provide maintenance services to customers who sign maintenance
contracts.
Source
and Availability of Raw Materials
We
acquire most of the components for the manufacturing of our products from suppliers and subcontractors, most of whom are located
in Israel and the U.S. Some of these suppliers are currently the sole source of one or more components upon which we are dependent.
Since many of our purchases require long lead-times, a delay in supply of an item can significantly delay the delivery of a product.
To date, we have not experienced any particular difficulties in obtaining timely deliveries of necessary components. We depend
on a limited number of suppliers of components for our products and if we are unable to obtain these components when needed, we
would experience delays in manufacturing our products and our financial results could be adversely affected.
C.
Organizational Structure
We
indirectly own 75% of RADA Technologies LLC which is primarily engaged in the localization, sales and marketing of our Tactical
Radars in the U.S. Our Chinese subsidiary
,
Beijing Hua Rui Aircraft Maintenance and Service, Co., Ltd., known as CACS,
is the main platform for our test and repair shop activity. On December 2018, we signed an agreement to sell CACS, which sale
is expected to close later in 2019.
D.
Property, Plants and Equipment
We
own a 30,000 square feet industrial building in Beit She’an, Israel. The building, which includes manufacturing facilities
and warehouse space, is situated on land leased from the Israel Land Authority for a period of 49 years ending in 2034. The plant
has sufficient capacity to meet our current requirements.
Our
executive offices, sales and marketing and research and development facilities are located in a 17,782 square feet office facility
in Netanya, Israel. The lease for this facility expires in January 2022. The aggregate annual rent for our offices in Israel was
approximately $
370,000
in 2018.
Our
U.S. joint venture leases 1,522 square feet of office space in Silver Spring, MD. The lease for this facility expires in April
2019. RTL is currently in final negotiations to lease approximately 25,000 square feet in Germantown MD. The aggregate annual
rent for our offices in Maryland was approximately $31,700 in 2018.
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ITEM
4A.
|
UNRESOLVED
STAFF COMMENTS
|
Not
applicable.
|
ITEM
5.
|
OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
|
A.
Operating Results
The
following discussion of our results of operations should be read together with our consolidated financial statements and the related
notes, which appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect
our current plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ materially from those
discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed
below and elsewhere in this annual report.
Overview
We develop,
manufacture and sell defense electronics including
tactical land radars for force and border protection applications,
mili
tary
avionics systems for manned and unmanned aircraft and inertial
navigation
systems,
or INS.
We have a
Chinese subsidiary
,
Beijing
Hua Rui Aircraft
Maintenance and Service, Co., Ltd., known as CACS. CACS was established with a Chinese third party. We
owned 80% of CACS and the Chinese third party owned the remaining 20% equity interest. In October 2018, a transaction with non-controlling
interest occurred and as a result, as of December 31, 2018, we owned 100% of CACS. In December 2018 we signed an agreement to sell
our entire shareholdings in CACS. Our U.S. subsidiary, RTL, is focused on adapting our tactical radar technology for the U.S. market
by altering its technology towards US customer requirements, certifying the radars to US standards, building production capabilities
and providing a maintenance and support infrastructure.
General
Our
consolidated financial statements appearing in this annual report are prepared in dollars and in accordance with U.S. GAAP. Transactions
and balances originally denominated in dollars are presented at their original amounts. Transactions and balances in other currencies
are re-measured into dollars in accordance with the principles set forth in the Financial Accounting Standards Board, or FASB,
Accounting Standards Codification, or ASC 830. The majority of our sales are made outside of Israel and a substantial part of
them are in dollars. In addition, a substantial portion of our costs are incurred in dollars. Since the dollar is the primary
currency of the economic environment in which we operate, the dollar is our functional and reporting currency and, accordingly,
monetary accounts maintained in currencies other than the dollar are re-measured using the foreign exchange rate at the balance
sheet date. Operational accounts and non-monetary balance sheet accounts are measured and recorded at the exchange rate in effect
at the date of the transaction. All monetary balance sheet accounts have been re-measured using the exchange rates in effect at
the balance sheet date. Statement of operations amounts have been re-measured using the average exchange rate for the period.
The financial statements of our foreign subsidiary, whose functional currency is not the dollar, have been translated into dollars.
All balance sheet amounts have been translated using the exchange rates in effect at balance sheet date. Statement of operation
amounts have been translated using the average exchange rate prevailing during the year. Such translation adjustments are reported
as a component of accumulated other comprehensive income (loss) in shareholders’ equity.
Discussion
of Critical Accounting Policies and Estimations
Our
critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the notes to our consolidated
financial statements. These policies have been consistently applied in all material respects. While the estimates and judgments
associated with the application of these policies may be affected by different assumptions or conditions, we believe the estimates
and judgments associated with the reported amounts are appropriate under the circumstances. We believe the following accounting
policies are the most critical in fully understanding and evaluating our financial condition and results of our operations under
U.S. GAAP.
Revenue
Recognition
. We account for revenue recognition when (or as) it satisfies performance obligations by transferring promised
goods or services to its customers in an amount that reflects the consideration the Company expects to receive. In order to achieve
that core principle, we apply the following five-step approach: (1) identify the contract with a customer, (2) identify the performance
obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations
in the contract, and (5) recognize revenue when a performance obligation is satisfied.
The Company generally satisfies performance
obligations at a point in time, once the customer has obtained the legal title to the items purchased or service provided. Revenues
from long-term and short-term fixed price contracts are usually recognized over time based on the cost-to-cost input method that
best depicts the transfer of control over the performance obligation to the customer. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
We
also generated revenues from repair services using our automated test equipment, mainly through CACS. We signed an agreement to
sell our interest in CACS in 2018 (classified as a discontinued operation) and expect that the transaction will close later this
year. Revenues from services are recognized when the service is performed.
Impairment
of Long-Lived Assets.
We are required to assess the impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. We assess the impairment of our assets based on a number of factors,
including any significant changes in the manner of our use of the respective assets or the strategy of our overall business and
significant negative industry or economic trends. Upon determination that the carrying value of a long-lived asset may not be
recoverable, based upon a comparison of expected undiscounted future cash flows to the carrying amount of the asset, an impairment
charge is recorded in the amount of the carrying value of the asset exceeds its fair value. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell. As of December 31, 2017, and 2016, no impairment losses
were identified.
Accounting
for income taxes
. On January 1, 2007, we adopted FASB ASC 740-10 “
Income Taxes,
” which contains a two-step
approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740-10. 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 ASC 740-10. We provided a valuation allowance in respect
to the deferred tax assets resulting from operating loss carryforwards and other temporary differences. Our management currently
believes that since our company has a history of losses, it is more likely than not that the deferred tax regarding the loss carryforwards
and other temporary differences will not be realized in the foreseeable future
.
Inventory
valuation.
The majority of our inventory consists of work in progress, raw materials
and components. Inventories are valued at the lower of cost or market. Cost of finished goods is determined on the basis of direct
manufacturing costs plus allocable indirect costs representing allocable operating overhead expenses and manufacturing costs.
Raw material is valued using the “FIFO” method. We assess the valuation of our inventory on a quarterly basis and
periodically write down the value for different finished goods and raw material items based on their potential utilization. If
we consider specific inventory to be damaged, we write such inventory down to zero. Inventory write-offs are provided to cover
risks arising from slow-moving items, discontinued products, and excess inventories. The process for evaluating these write-offs
often requires us to make subjective judgments and estimates concerning the future utilization of the inventory items. Inventory
write-offs were $39,000, $122,000 and $144,000 for the years ended December 31, 2018, 2017 and 2016
, respectively.
Allowance
for doubtful accounts.
Our trade receivables are derived from sales to customers all over the world. We perform ongoing credit
evaluations of our customers. In certain circumstances, we may require letters of credit or prepayments. We maintain an allowance
for doubtful accounts for estimated losses from the inability of our customers to make required payments that we have determined
to be doubtful of collection. We determine the adequacy of this allowance by regularly reviewing our accounts receivable and evaluating
individual customers’ receivables, considering customers’ financial condition, credit history and other current economic
conditions. If a customer’s financial condition were to deteriorate which might impact its ability to make payment, then
additional allowances may be required. Provisions for doubtful accounts are recorded in general and administrative expenses. Our
allowance for doubtful accounts was $
2,000
, $14,000 and $14,000
for
the years ended
December 31, 2018, 2017 and 2016,
respectively
.
Stock-based
compensation
. We account for stock-based compensation in accordance with the provisions of ASC 718, “Compensation -
Stock Compensation.” Under the fair value recognition provisions of ASC 718, stock-based compensation cost is estimated
at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period
of the award. We estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing model. Effective
as of January 1, 2017, we adopted a change in accounting policy in accordance with ASU 2016-09, “Compensation Stock
Compensation (Topic 718)” (“ASU 2016-09”) to account for forfeitures as they occur.
The
fair value of an award is affected by our stock price on the date of grant and other assumptions, including the estimated volatility
of our stock price over the term of the awards and the estimated period of time that we expect employees to hold their stock options.
Discontinued
Operations
.
Under ASC 205-20, “Presentation of Financial
Statements - Discontinued Operation” when a component of an entity, as defined in ASC 205-20, has been disposed of
or is classified as held for sale, the results of its operations, including the gain or loss on its component are classified as
discontinued operations and the assets and liabilities of such component are classified as assets and liabilities attributed to
discontinued operations; that is, provided that the operations, assets and liabilities and cash flows of the component have been
eliminated from the company’s consolidated operations and the company will have no significant continuing involvement in
the operations of the component. Subsequent to our determination to sell our interest in CACS, CACS’ results are accounted
as discontinued operation and appear in this annual report in a separate line item as “Discontinued Operations.” As
of December 31, 2018, a provision of $159,000 was accrued for the sale of CACS.
Explanation
of Key Income Statement Items
Revenues.
Our revenues are mainly derived from sales of defense electronics and their supporting ground systems.
Cost
of Revenues
. Cost of revenues consists primarily of salaries, raw materials, subcontractor expenses, related depreciation
costs, inventories write-downs and overhead allocated to cost of revenues activities.
Research
and Development Expenses, net.
Research and development expenses consist primarily of salaries for research and development
personnel, use of subcontractors and other costs incurred in the process of developing product prototypes.
Marketing
and Selling Expenses.
Marketing and selling expenses consist primarily of salaries for marketing and business development
personnel, marketing activities, public relations, promotional materials, travel expenses, trade show exhibit expenses, and success
fees to business development consultants.
General
and Administrative Expenses
. General and administrative expenses consist primarily of salaries and related expenses for executive,
accounting, legal, administrative personnel, professional fees, provisions for doubtful accounts and other general corporate expenses.
Financial
Expenses, Net.
Financial expenses consist of interest and bank expenses, interest on convertible note and loans, amortization
expenses of discount on convertible note, deferred charges and currency re-measurement losses. Financial income consists of interest
on cash and cash equivalent balances and currency re-measurement gains.
Results
of Operations
The
following table presents certain financial data expressed as a percentage of total revenues for the periods indicated:
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Cost of revenues
|
|
|
88.7
|
%
|
|
|
68.4
|
%
|
|
|
63.9
|
%
|
|
Gross profit
|
|
|
11.3
|
%
|
|
|
31.6
|
%
|
|
|
36.1
|
%
|
|
Research and development, net
|
|
|
5.9
|
%
|
|
|
6.0
|
%
|
|
|
11.0
|
%
|
|
Marketing and selling
|
|
|
17.7
|
%
|
|
|
8.2
|
%
|
|
|
10.2
|
%
|
|
General and administrative
|
|
|
14.1
|
%
|
|
|
9.8
|
%
|
|
|
14.3
|
%
|
|
Net loss from sale of fixed assets
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0.4
|
%
|
|
Operating income (loss)
|
|
|
(26.5
|
)%
|
|
|
7.6
|
%
|
|
|
0.2
|
%
|
|
Financial (expenses) income, net
|
|
|
(11.9
|
)%
|
|
|
(0.6
|
)%
|
|
|
0.4
|
%
|
|
Net income (loss) from continuing operations
|
|
|
(38.4
|
)%
|
|
|
7.0
|
%
|
|
|
0.6
|
%
|
|
Net income (loss) from discontinued operations
|
|
|
0.1
|
%
|
|
|
1.9
|
%
|
|
|
(1.4
|
)%
|
|
Net income (loss)
|
|
|
(38.3
|
)%
|
|
|
8.9
|
%
|
|
|
(0.8
|
)%
|
|
Net income (loss) attributable to non-controlling interest
|
|
|
0.0
|
%
|
|
|
0.3
|
%
|
|
|
(1.4
|
)%
|
|
Net income (loss) attributable to RADA Electronic Industries’ shareholders
|
|
|
(38.3
|
)%
|
|
|
8.6
|
%
|
|
|
0.6
|
%
|
Year
Ended December 31, 2018 Compared with Year Ended December 31, 2017
Revenues
.
Our revenues increased
by 7% to $28.0
million in 2018 from $26.2 million in 2017
mainly due to the increase in sales of our radars.
Cost
of Revenues
. Cost of revenues were $17.9 million in both 2018, and 2017.
Gross
Profit
. Our gross profit increased by 22% to $10.1 million in 2018 from $8.3 million in 2017. Our gross profit margin was
approximately 36.1% in 2018 and 31.6% in 2017. The increase in our gross profit and gross profit margin in 2018 was mainly
attributable to the increase in revenues and especially to the higher gross margin generated from the sale of radars.
Research
and Development Expenses, Net.
Our research and development expenses, net increased by 96.3% to $3.1 million in 2018 from
$1.6 million in 2017. The increase in expenditures is a result of our strategy to achieve and maintain a technological edge for
our products in the market.
Marketing
and Selling Expenses.
Marketing and selling expenses increased by 33.8% to approximately
$2.9
million
in 2018 from $2.1 million in 2017. We increased our level of marketing and selling expenses primarily due to our
efforts to sell our radar products, mainly reflected in the costs incurred as part of our participation in field demonstrations
requested by our potential customers as well as because of the costs associated with establishing our joint venture in the U.S.
General
and Administrative Expenses
. General and administrative expenses increased
by 55.8%
to
approximately $4.0 million in 2018 from $2.6 million in 2017
. The increase is
attributable mainly to the
establishment of our joint venture in the U.S.
as well
as to the increase in the non-cash expense associated with employee option compensation.
Financial
Expenses (Income), Net
. We incurred financial expenses of $0.2 million in 2017 while we had $0.1 million of financial income
in 2018. The decrease in financial expenses is attributed mainly to
the lower level of borrowings
in 2018 as result of the conversion of a convertible loan into equity and the repayment of bank credits, during 2017. As a result
of our improved financial condition, we were able to record net interest income on our cash and cash equivalents in 2018
.
Our non-cash financial expense resulting from the amortization of the discount on a convertible loan and loans from shareholders
was $0 in 2018 compared to $0.103 million in 2017.
Year
Ended December 31, 2017 Compared with Year Ended December 31, 2016
Revenues
.
Our revenues increased
by 104% to $
26.2 million in 2017 from $12.8 million in 2016,
mainly due to the increase in sales of our radars.
Cost
of Revenues
. Cost of revenues increased by 57% to $17.9 million in 2017 from $11.4 million in 2016. The increase in our cost
of revenues is attributable to the increase in revenues
.
Gross
Profit
. Our gross profit increased by 473% to $8.3 million in 2017 from $1.4 million in 2016. Our gross profit margin was
approximately 31.6% in 2017 and 11.2% in 2016. The increase in our gross profit and gross profit margin in 2017 was mainly attributable
to the increase in revenues and especially to the higher gross margin generated from the sale of our radars.
Research
and Development Expenses, Net.
Our research and development expenses increased by 107.8% to $1.6 million in 2017 from $0.8
million in 2016. The increase in expenditures is a result of our strategy to achieve and maintain a technological edge for our
products in the market.
Marketing
and Selling Expenses.
Marketing and selling expenses decreased by 5.8% to approximately
$2.1
million
in 2017 from $2.3 million in 2016. We maintained a similar level of marketing and selling expenses primarily with
respect to our efforts to sell our radar products.
General
and Administrative Expenses
. General and administrative expenses increased
by 41% to
approximately $
2.6
million in 2017 from $1.8 million in 2016
.
The increase is attributable mainly to the increase in the non-cash expense associated with employee option compensation.
Financial
Expenses, Net
. Our financial expenses, net, decreased by 90% to $0.2 million in 2017 compared to $1.5 million in 2016. The
decrease is mainly attributable to
our lower level of debt in 2017.
The financial
expense resulting from the amortization of the discount on a convertible loan and loans from shareholders was $0.103 million in
2017 compared to $1.1 million in 2016. The convertible loan was converted into equity in 2017. As were all loans from shareholders.
Our interest expense, net, was $
0.164
million in 2017 compared to $0.3 million in
2016.
Our
Location in Israel
We
are incorporated under the laws of the State of Israel, and our principal executive offices and principal manufacture, research
and development facilities are located in Israel. See Item 3D
“Key Information – Risk Factors – Risks Relating
to Our Location in Israel”
for a description of governmental, economic, fiscal, monetary or political polices or factors
that have materially affected or could materially affect our operations.
Corporate
Tax Rate
Israeli
companies were generally subject to corporate tax at a rate of 23% in 2018. The corporate tax as of January 1, 2019 is 23%.
As
of December 31, 2018, our net operating loss carry forward for Israeli tax purposes was approximately $
62
million, including capital loss carry forwards of approximately $
3.8
million.
Trade
Relations
Israel
is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development,
and the International Finance Corporation. Israel is a member of the World Trade Organization and is a signatory to the General
Agreement on Tariffs and Trade. Israel is a member of the Organization for Economic Co-operation and Development, or the OECD,
an international organization whose members are governments of mostly developed economies. The OECD’s main goal is to promote
policies that will improve the economic and social well-being of people around the world. In addition, Israel has been granted
preferences under the Generalized System of Preferences from the U.S., Australia, Canada and Japan. These preferences allow Israel
to export the products covered by such programs either duty-free or at reduced duties.
Israel
and the E.U. concluded a Free Trade Agreement in July 1975 that confers some advantages with respect to Israeli exports to most
European countries and obligates Israel to lower its tariffs with respect to imports from these countries over a number of years.
In 1985, Israel and the U.S. entered into an agreement to establish a Free Trade Area. The Free Trade Area has eliminated all
tariff and some non-tariff barriers on most trade between the two countries. On January 1, 1993, an agreement between Israel and
the European Free Trade Association, known as the “EFTA,” established a free-trade zone between Israel and the EFTA
nations. In November 1995, Israel entered into a new agreement with the E.U., which includes a redefinition of rules of origin
and other improvements, such as allowing Israel to become a member of the Research and Technology programs of the E.U.
Impact
of Currency Fluctuation and of Inflation
A
significant portion of the cost of our Israeli operations, primarily personnel and facility-related, is incurred in NIS. Therefore,
our NIS related costs, as expressed in dollars, are influenced by the exchange rate between the dollar and the NIS. In addition,
if the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the dollar, or if the timing
of such devaluations were to lag considerably behind inflation, our cost as expressed in dollars may increase. NIS linked balance
sheet items, may also create foreign exchange gains or losses, depending upon the relative dollar values of the NIS at the beginning
and end of the reporting period, affecting our net income and earnings per share. Although we may use hedging techniques, we may
not be able to eliminate the effects of currency fluctuations. Therefore, exchange rate fluctuations could have a material adverse
impact on our operating results. The caption “Financial expenses, net” in our consolidated financial statements includes
the impact of these factors as well as traditional interest income or expense.
The
following table sets forth, for the periods indicated, (i) depreciation or appreciation of the NIS against the most important
currency for our business, the dollar, until December 31 each year and the year before, and (ii) inflation as reflected in changes
in the Israeli consumer price index.
|
|
|
Year Ended December 31,
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
NIS vs. U.S. Dollar
|
|
|
12
|
%
|
|
|
0
|
%
|
|
|
(1.0
|
)%
|
|
|
(9.8
|
)%
|
|
|
3.19
|
%
|
|
Israeli Consumer Price Index
|
|
|
(0.2
|
)%
|
|
|
(1.0
|
)%
|
|
|
(0.2
|
)%
|
|
|
1.5
|
%
|
|
|
0.8
|
%
|
Since
exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations, particularly larger periodic
devaluations, may have an impact on our profitability and period-to-period comparisons of our results. We cannot assure you that
in the future our results of operations may not be materially adversely affected by currency fluctuations.
Recently
Issued Accounting Standards
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will require lessees to recognize assets and liabilities
for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation
of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating
lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new guidance
will require both types of leases to be recognized on the balance sheet. A modified retrospective transition approach is required,
applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its
effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial
application. If an entity chooses the second option, the entity must recast its comparative period financial statements and provide
disclosures required by the new standard for the comparative periods.
The
Company will adopt the new standard effective January 1, 2019 using the modified retrospective approach. Consequently, financial
information will not be updated and disclosures required under the new standard will not be provided for dates and periods before
January 1, 2019. The standard provides a number of optional practical expedients in transition. The Company is electing the ‘package
of practical expedients’, which permits it not to reassess under the new standard its prior conclusions about lease identification,
lease classification and initial direct costs. The adoption of this new standard will affect the Company’s consolidated
balance sheets by recognizing new right-of-use (“ROU”) assets and lease liabilities for operating leases. The impact
on the Company’s results of operations and cash flows is not expected to be material. Adoption of the standard will result
in the recognition of additional ROU assets and lease liabilities for operating leases of approximately $2,032 as of January 1,
2019. The Company elects to account for a lease component of a contract and its associated non-lease components as a single lease
component, therefore the ROU and lease liabilities estimate includes non-cancelable operating lease agreements, parking spaces
and management fees.
In
November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies
to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling
beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the new standard
effective January 1, 2018 using the retrospectively method. The adoption of this new guidance had an immaterial impact on the
Company’s consolidated financial statements. Restricted cash is invested in short-term bank deposits (for three months),
which are mainly used as security for the Company’s guarantees to customers and lines of credits with banks.
On
January 1, 2018, the Company adopted the requirements of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),
using the modified retrospective method for contracts that were not completed as of January 1, 2018. Under the modified retrospective
method, the Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening
balance of retained earnings. This adjustment did not have a material impact on the Company’s consolidated financial statements.
Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not
adjusted and continue to be reported in accordance with our historic accounting under Revenue Recognition (“Topic 605”).
In
May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.”
ASU 2017-09 was issued to provide clarity and reduce both 1) diversity in practice and 2) cost and complexity when applying the
guidance in Topic 718 to a change in the terms or conditions of a share-based payment award. ASU 2017-09 provides guidance about
which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under
Topic 718. The amendments in ASU 2017-09 are effective for fiscal years, and interim periods within those years, beginning after
December 15, 2017. The Company adopted ASU 2017-09 effective January 1, 2018. The adoption of this new guidance had no material
impact on the Company’s consolidated financial statements.
B.
Liquidity and Capital Resources
We
have historically met our financial requirements primarily through cash generated by operations, funds generated by our public
offerings, private placements of our Ordinary Shares and debt securities, loans from our principal shareholders, short-term loans
and credit facilities from banks, research and development grants from the government of Israel and the Israel-U.S. Binational
Industrial Research and Development Foundation, investment grants for approved enterprise programs and marketing grants from the
government of Israel.
We
had working capital of $37.8 million as of December 31, 2018 compared with working capital of $25.6 million at December 31, 2017.
Cash and cash equivalents were $20.8 million as of December 31, 2018 compared to $12.4 million as of December 31, 2017.
As
of December 31, 2018, our banks provided $0.37 million of guarantees on our behalf, mainly to our customers and suppliers in the
ordinary course of business. The guarantees are secured by a first priority charge on our restricted cash total $0.42 million
as of December 31, 2018.
On
May 15, 2016, our shareholders approved the sale to DBSI of 8,510,638 of our Ordinary Shares in consideration for approximately
$4 million, reflecting a price per share of $0.47. In addition, we issued to DBSI warrants to purchase: (i) an additional 4,255,319
Ordinary Shares at an exercise price per share of $0.47 (resulting in an aggregate exercise price of $2 million), exercisable
for a period of 24 months following the date of the initial investment and (ii) warrants to purchase an additional 3,636,363 shares
at an exercise price per share of $0.55 (resulting in an aggregate exercise price of $2 million), exercisable for a period of
48 months following the date of the initial investment.
DBSI
also granted our company an option, exercisable by either us or DBSI, for us to obtain a three -year loan in the principal amount
of up to $3.175 million solely for the purpose of the repayment of the outstanding shareholders’ debt. We exercised such
option in June 2016 and used the funds to fully repay our outstanding shareholders’ debt.
During
the term of the loan, which had a three-year term, DBSI had the right, but not the obligation, at its sole discretion, to convert
the then remaining convertible loan amount into Ordinary Shares at a price per share equal to the lower of: (i) $2.40, or (ii)
a five percent (5%) discount to the FMV (the average of the closing prices of our Ordinary Shares over the 5 consecutive trading
days ending on the last trading day prior to the date of conversion), but in no event less than $0.47. In August 2017, DBSI converted
the entire principal of the loan and acquired 1,322,917 Ordinary Shares, reflecting a conversion price of $2.40 per share.
DBSI’s
exercise of warrants has resulted in proceeds to our company of $1.25 million in 2016, $1.95 million in 2017 and $0.8 million
in 2018. There are no outstanding warrant held by DBSI.
In
connection with the 2016 DBSI transaction, we issued warrants to purchase 255,319 Ordinary Shares to each of Legos Advisors Ltd.
and Mr. Avi Geffen as commission and finder’s fees. All of these warrants were exercised in 2017 for total consideration
of $0.24 million.
On
November 15, 2016, we completed a $2 million registered direct offering of 1,904,762 Ordinary Shares at a price per share of $1.05
to The Phoenix Insurance Company Ltd. and its affiliate, Shotfut-Menayot-Israel-HaPhoenix Amitim Ltd. At the same time, DBSI invested
an additional $1 million in our company through the exercise of 2,127,660 warrants.
On
August 20, 2017, we sold 4,604,500 of our Ordinary Shares to Israeli institutional investors, at a price of $2.15 per share pursuant
to our shelf registration statement.
On
November 13, 2018, one of our consultants exercised 111,000 warrants and was issued 62,601 Ordinary Shares in a cashless exercise.
On
December 6, 2018 we completed a $12.5 million registered direct offering of 4,545,454 Ordinary Shares at a price per share of
$2.75, of which $10 million was invested by Psagot and $2.5 million by The Phoenix, two Israeli institutional investors. In addition,
on January 16, 2019 we issued 545,454 Ordinary Shares to DBSI in a private placement for approximately $1.5 million, reflecting
a price per share of $2.75.
We
made capital expenditures of $ 1 million in the year ended December 31, 2018, primarily for machinery and equipment
.
We
currently do not have any significant capital spending or purchase commitments.
Cash
Flows
The
following table summarizes our cash flows for the periods presented:
|
|
|
Year ended December 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
(U.S. dollars in thousands)
|
|
|
Net cash provided by (used in) operating activities from continuing operations
|
|
|
(4,919
|
)
|
|
|
1,722
|
|
|
|
(3,858
|
)
|
|
Net cash used in investing activities from continuing operations
|
|
|
(336
|
)
|
|
|
(1,806
|
)
|
|
|
(948
|
)
|
|
Net cash provided by financing activities from continuing operations
|
|
|
5,442
|
|
|
|
11,292
|
|
|
|
12,798
|
|
|
Net cash provided by (used in) operating activities from discontinued operations
|
|
|
298
|
|
|
|
(644
|
)
|
|
|
1,186
|
|
|
Net cash used in investing activities from discontinued operations
|
|
|
(34
|
)
|
|
|
(101
|
)
|
|
|
(2
|
)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(133
|
)
|
|
|
(138
|
)
|
|
|
(420
|
)
|
|
Increase (decrease) in cash and cash equivalents and restricted cash
|
|
|
318
|
|
|
|
10,325
|
|
|
|
8,756
|
|
|
Cash and cash equivalents and restricted cash at beginning of the year
|
|
|
2,363
|
|
|
|
2,681
|
|
|
|
13,006
|
|
|
Cash and cash equivalents and restricted cash at end of the year
|
|
|
2,681
|
|
|
|
13,006
|
|
|
|
21,762
|
|
|
Less cash and cash equivalents of discontinued operation at the end of the year
|
|
|
1,159
|
|
|
|
267
|
|
|
|
526
|
|
|
|
|
|
1,522
|
|
|
|
12,739
|
|
|
|
21,236
|
|
Continuing
Operations:
Net
cash used in operating activities was $3,858,000 in 2018. This was primarily due to depreciation and amortization expenses of
$799,000, share based non-cash compensation to employees of $898,000, an increase in trade receivables of $6,096,000, an increase
in inventories of $3,865,000 and a net loss of $223,000. This was offset by an increase in trade payables of $ 2,610,000 and an
increase in other accounts payables of $1,693,000
.
Net cash provided by operating activities was $1,722,000 in 2017. This was primarily due
to depreciation and amortization of $638,000, share based non-cash compensation to employees of $559,000, an increase in trade
receivables of $2,280,000 and an increase in inventories of $890,000
. This was offset by
our
net income of $2,342,000 and a decrease in costs and estimated earnings in excess of billings of $809,000. Net cash used in operating
activities was $4,919,000 in 2016. This was primarily due to our loss of $4,907,000 in 2016, an increase in inventories of $1,503,000
and an increase in trade receivables of $1,360,000. This was offset by a decrease in costs and estimated earnings in excess of
billings of $403,000.
Net
cash used in investing activities was $948,000 in 2018, primarily due to the investment of $899,000 in property, plant and equipment
and construction-in-process of production
infrastructure
of $308,000. Net cash used in investing activities was approximately $1,806,000 in 2017,
primarily due to the investment of $1,041,000 in property, plant and equipment and construction-in-process of production
infrastructure
of $736,000. Net cash used in investing activities was approximately $336,000
in 2016, primarily due to change in restricted deposits, net of $75,000 which was
offset by the
investment
of $411,000 in property, plant and equipment.
Net
cash provided by financing activities was $
12,798,000
in 2018, reflecting the issuance
of Ordinary Shares in a registered direct offering that provided us with net proceeds of $
12,252,000
,
Net cash provided by financing activities was $11,292,000 in 2017, due to issuance of Ordinary Shares and exercise of warrants.
This was offset by a
decrease in short-term bank credit of $575,000. Net cash provided
by financing activities was $5,442,000 in 2016, reflecting net proceeds of $7,096,000, mainly from our transactions with DBSI
and The Phoenix Insurance Company Ltd. and its affiliate, offset by net repayment of $2,988,000 of shareholders loans and a decrease
in short-term bank credit of $1,841,000.
Discontinued
Operations:
Net
cash
provided by
operating
activities from
discontinued
operations was $1,186,000 in 2018. This was primarily
due to a decrease in trade receivables of $645,000. Net cash used in operating activities from discontinued operations was $644,000
in 2017. This was primarily due to an increase in trade receivables of $956,000. This was offset by depreciation of $ 391,000.
Net cash
provided by
operating activities from
discontinued
operations
was $298,000 in 2016. This was primarily due to a decrease in inventories of $29,000 and a decrease in trade receivables of $148,000.
This was offset by an increase in trade payables of $44,000.
Net
cash used in investing activities from discontinued operations was $2,000 in 2018, due to investment of $2,000 in property, plant
and equipment. Net cash used in investing activities from discontinued operations was $101,000 in 2017, due to investment of $101,000
in property, plant and equipment. Net cash used in investing activities from discontinued operations was $34,000 in 2016, due
to investment of $34,000 in property, plant and equipment.
As
a result of the foregoing, at December 31, 2018, we had working capital of $37,840,000 and cash and cash equivalents of $ 20,814,000
as compared to working capital of $25,641,000 and cash and cash equivalents of $12,417,000, at December 31, 2017.
We
expect to fund our short-term liquidity needs in 2019, including our obligations under, contractual agreements and any other working
capital requirements, from our cash and cash equivalents, and operating cash flow. We project that our current cash and cash equivalents
and our expected cash flow from operations, will be sufficient to meet our cash requirements in 2019.
C.
Research and Development, Patents and Licenses
Research
and Development
Our
research and development activities focus on improvements to our existing products, the development of complementary products
that would provide continued support for our current customers and would improve our capability to market our products to new
customers and keep a competitive edge over our main competitors. In 2018, 2017 and 2016 we incurred $3.1 million, $1.6 million
and $0.8 million, respectively, of research and development expenses, net. The majority of these expenses are attributable to
the development of our radars. In 2019, we intend to continue and expand our investment in the research and development of new
products. As of December 31, 2018, we employed
41
engineers (including
2
sub-contractors) in research and development who concentrate mainly on research and development activities.
The
Israel Innovation Authority, or the IIA, encourages research and development by providing grants to Israeli companies, pursuant
to the Law for the Encouragement of Industrial Research and Development, 1984, as amended. The terms of such grants prohibit the
manufacture of the developed products outside of Israel and the transfer of technologies developed using the grants to any person
without the prior written consent of the IIA. During recent years, we developed a new radar sensor for APS, partly financed by
the IIA. We received royalty bearing grants of $1.138 million from the IIA. Pursuant to applicable Israeli law, we are currently
required to pay royalties at the rate of 3% of sales of products developed with certain grants received from the IIA, up to 100%
of the amount of such grants, adjusted by the exchange rate with the dollar. As of December 31, 2018, our total obligation for
royalty payments, net of royalties paid or accrued was zero.
D.
Trend Information
In
2018, our revenues increased by approximately 7% compared to our revenues in 2017.
Our
future revenues will, in great measure, be dependent upon the success of our sales and marketing strategy. We are currently focusing
our sales efforts on:
|
|
●
|
Military
avionics and inertial navigation systems; and
|
|
|
|
|
|
|
●
|
Tactical
radar systems for force and border protection solutions.
|
We
cannot provide any assurances that we will be successful in meeting our targets in the future. As a result of the unpredictable
business environment in which we operate, we are unable to provide any specific guidance as to sales and profitability trends.
However, on February 4, 2019 we provided revenues guidance for 2019 of $40 million. If we are unsuccessful in our sales efforts,
it is unlikely that we will be able to achieve profitability in the future and we will require additional capital.
E.
Off-Balance Sheet Arrangements
We
are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing
or partnership entities that are likely to create material contingent obligations.
F.
Tabular Disclosure of Contractual Obligations
The
following table summarizes our minimum contractual obligations and commercial commitments, as of December 31, 2018 and the effect
we expect them to have on our liquidity and cash flow in future periods.
|
Contractual Obligations
|
|
Payments due by Period
|
|
|
|
|
(U.S. dollars in thousands)
|
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More than
5 years
|
|
|
Long-term debt obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Operating lease obligations
|
|
|
2,123
|
|
|
|
838
|
|
|
|
707
|
|
|
|
578
|
|
|
|
-
|
|
|
Total
|
|
|
2,123
|
|
|
|
838
|
|
|
|
707
|
|
|
|
578
|
|
|
|
-
|
|
We
have long-term liabilities for severance pay for certain employees that are calculated pursuant to Israeli law generally based
on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Under
Israeli law, employees are entitled to one month’s salary for each year of employment or a portion thereof upon termination
of employment in certain circumstances, including the retirement or death of an employee or the termination of employment of an
employee without due cause. As of December 31, 2018, our severance pay liability was $
0.7
million.
|
ITEM
6.
|
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
|
A.
Directors and Senior Management
Set
forth below are the name, age, principal position and a biographical description of each of our directors and executive officers:
|
Name
|
|
Age
|
|
Position
|
|
Yossi
Ben Shalom
(2)
|
|
62
|
|
Executive
Chairman of the Board of Directors
|
|
Nir
Cohen
|
|
46
|
|
Director
|
|
Prof. Alon Dumanis
(1)(2)
|
|
68
|
|
Director
|
|
Ben
Zion Gruber
|
|
60
|
|
Director
|
|
Israel
Livnat
(2)
|
|
68
|
|
Director
|
|
Tal
Misch Vered
(1)
|
|
51
|
|
External
Director
|
|
Elan
Sigal
(1)
|
|
51
|
|
External
Director
|
|
Kineret
Ya’ari
|
|
35
|
|
Director
|
|
Guy
Zur
|
|
57
|
|
Director
|
|
Dov
Sella
|
|
63
|
|
Chief
Executive Officer
|
|
Avi
Israel
|
|
54
|
|
Chief
Financial Officer
|
|
Oleg
Kiperman
|
|
65
|
|
Chief
Technology Officer
|
|
William
Watson
|
|
55
|
|
Chief
Executive Officer of RADA Technologies LLC (RTL)
|
|
Max
Cohen
|
|
46
|
|
Executive
Vice President for the US market
|
|
(1)
|
Member
of the Audit and Compensation Committee
|
|
(2)
|
Member
of the Business Development Committee
|
Messrs.
Yossi Ben Shalom, Nir Cohen, Israel Livnat, Ben Zion Gruber, and Alon Dumanis, Ms. Kineret Ya’ari and Mr. Guy Zur will serve
as directors until our 2019 annual general meeting of shareholders. Ms. Misch and Mr. Sigal serve as our external directors and
each currently holds office for three-year terms until October 21, 2021, and August 30, 2019, respectively. On February 21, 2018,
Mr. Herzle Bodinger retired as a member of our Board of Directors for personal reasons and on October 21,2018, Ms. Nurit Mor retired
as a member of our Board of Directors
Yossi
Ben Shalom
was appointed as a director of RADA effective as of May 18, 2016 and has served as the Chairman of our Board
of Directors since June 14, 2016. Mr. Ben-Shalom was Executive Vice President and Chief Financial Officer of Koor Industries Ltd.
from 1998 through to 2000. Before that, Mr. Ben-Shalom served as Chief Financial Officer of Tadiran Ltd. Mr. Ben-Shalom was an
active director on numerous boards of directors, including: NICE Systems Ltd. (NASDAQ: NICE) (computer telephony); Machteshim
Agan (chemistry); and Investec Bank. He also participated in the creation of TDA VC fund (a joint venture between Templeton and
Tadiran) and was an active Chairman of Scopus – a technology company with sales of over $30 million. Yossi is a co-founder
of DBSI Investments Ltd. As such, he currently serves as the Chairman of Pointer Telocation Ltd. (NASDAQ: PNTR) and Chairman of
Shagrir Group Car Services Ltd. (TASE: SHGR). Mr. Ben-Shalom also serves as a director of Taldor Computer Systems (1986) Ltd.
(TASE: TALD) and several other privately held companies. Mr. Ben-Shalom holds a B.A. degree in Economics and an M.A. degree in
Business Management from Tel Aviv University.
Nir
Cohen
has served as a director of RADA since May 18, 2016. Mr. Cohen serves as Chief Financial Officer of DBSI Investments
Ltd. and of its affiliate – Shiraz DS Investments Ltd. As the CFO of both DBSI and Shiraz, Mr. Cohen serves as a director
in several public companies: Taldor Computer Systems (1986) Ltd. (TASE: TALD); Pointer Telocation Ltd. (NASDAQ: PNTR); and Shagrir
Group Vehicle Services Ltd. (TASE: SHGR). Before joining DBSI, Mr. Cohen served as partner and CFO of Argoquest Holdings, LLC,
a privately held U.S.-based investment company specializing in high-tech investments. Prior to joining Argoquest, Mr. Cohen served
as a senior associate at Kesselman & Kesselman, an Israeli affiliate of the global accounting firm PricewaterhouseCoopers
(PwC). Before joining PwC, Mr. Cohen worked as an auditor for the accounting firm KPMG in Israel. Mr. Cohen holds a B.A. degree
in Accounting and Business Management from the College of Management and is a Certified Public Accountant in Israel.
Prof
.
Alon Dumanis
has served as a director of RADA since 2015. Until December 31, 2015, Prof. Dumanis was the Chief
Executive Officer of Dumanis Investments Ltd and its affiliates. He is currently chairman of Aposense (TASE-APOS), Managing Partner
of Augmentum Ltd., CEO of ACS Air-Cyber Solutions Ltd. and advisory board member of Parazero Ltd. Prof. Dumanis was for
15 years (until 2015) the Chief Executive Officer of Docor International Management Ltd. and the General Manager of Crecor B.V.
and Docor International B.V., Dutch investment companies, subsidiaries of The Van-Leer Group Foundation. He was the chairman of
Van Leer Xenia (Jerusalem Technology Incubator), XSight Systems, Softlib, DNR Imaging, Clariton Networks, Bondx, and a member
of the board directors of Spectronix (TASE-SPCT), Collplant (TASE-CLPT), and a member of the board of directors of other high-tech
and bio tech companies in Docor’s investment portfolio. Prof. Dumanis is a former member of the board of directors
of El Al Israel Airlines (TASE-LY), Tadiran Communications (TASE-TDCM), Nova Measuring Instruments (NASDAQ-NVMI), Protalix Biotherapeutics
(NYSE-PLX) and Inventech Investments Co. Ltd. (TASE-IVTC). Previously, Prof. Dumanis was the Head of the Material Command
in the Israel Air Force at the rank of Brigadier General. Prof. Dumanis holds a Ph.D. in Aerospace Engineering from Purdue
University, West Lafayette, Indiana, USA. Prof. Dumanis is currently a faculty member in Azrieli Jerusalem College of Engineering
Jerusalem and serves as the head of the Technological Entrepreneurship graduates’ program. He has managed multi-billion-dollars
R&D programs, engineering, security, information technology, logistics and Acquisition, Air-Force infrastructure programs
and other projects. He was a member of various notable steering committees for the Minister of Defense and the Israel Defense
Forces, Chief of General Staff, for national level strategy, technological road mapping and information technology. Prof.
Dumanis has received prizes, honors and awards including the Purdue University “Outstanding Aerospace Engineer of 2001 Award”.
He is a chairperson and member of several national steering committees and is the author of many papers published locally and
internationally in a number of domains including technology and management. Prof. Dumanis also holds a Doctorate of Philosophy
degree in Aerospace Engineering from Purdue University.
Ben
Zion Gruber
has served as a director of RADA since June 2002. Mr. Gruber is a founder and manager of several real estate
and construction companies and an entrepreneur involved in several hi-tech companies. Mr. Gruber is a Br. General (Res.) of the
IDF serving today as deputy commander of an armored division. Mr. Gruber is a member of the Board of Employment Service of the
government of Israel. He also serves on the board of R. Riskin Ohr Tora institutions and the board of Har Etzyun Yeshiva, board
of Hertzog College, Association of Friends of Kefar Shaul Hospital. Mr. Gruber serves on the Ethics Committees of the Eitanim
and Kefar Shaul Hospitals as well as a director of several other charitable organizations. Mr. Gruber holds a B.Sc. degree in
Engineering of Microcomputers from JCT Jerusalem College of Technology. In addition, Mr. Gruber is a graduate of a summer course
in Business Administration at Harvard University, as well as several other courses and training in management, finance and entrepreneurship.
Israel
Livnat
has served as a director of RADA since May 18, 2016. Mr. Livnat was the founder and Chairman of Anteo WW AG, which
developed a software platform for physical-security, cyber-security safety and other business continuity applications. Mr. Livnat
serves as a director on the board of Mobilicom Ltd., a provider of advanced communication solutions. He serves also as Director
at Urban Aeronautics Leader in developing a compact VTOL vehicle with no exposed rotors that is tailored to meet FAA requirements
for powered lift vehicles and is also capable of flying and operating inside complex urban and natural environment. Mr. Livnat
was the President of the Security Group at Nice Systems Ltd. from May 2006 until August 2011. Prior to joining NICE and from 2001,
he served as the President and CEO of Elta Systems Ltd., the leading defense company in Israel for radar, signal intelligence
and communication systems. Prior to his position with Elta, Mr. Livnat headed the MLM division of Israeli Aircraft Industries,
leading the development of the Arrow weapons system, the Israeli Shavit satellite launcher and other airborne command and control
systems. Before that he was VP Engineering of the MLM division and director for hardware engineering at Daisy Systems of Mountain
View, California, a leading developer of hardware and software for large computer-embedded systems. Mr. Livnat holds a B.Sc. degree
and a M.Sc. degree in Electrical Engineering from the Technion-Israel Institute of Technology, and an Executive MBA degree from
Stanford University, California. He was awarded the prestigious Israeli Industry Prize for 2004.
Tal Misch Vered
has
served as an external directors of RADA since October 2018
Ms. Misch has served as an external director of Telsys Ltd.,
an Israeli company whose shares are traded on the TASE (since 2016), A.D.O. group, an Israeli company whose shares are traded
on the TASE (since 2018), the company for the Management of the Provident Fund of Ovdei Hamedina (since 2016), a government
fund, Mardechai Aviv Building Industries (1973) Ltd., an Israeli public company whose shares are traded on the TASE (since 2016),
Medi Power (Overseas) Ltd., an Israeli company whose shares are traded on the TASE (since 2015), and Opal Balance Ltd., an Israeli
company whose shares are traded on the TASE (since 2012). In addition, Ms. Misch served as a director of Roots Sustainable
Agricultural Technologies Ltd. an Israeli company whose shares are traded in Australia (since 2017-2018), Semicom Industries
Ltd. an Israeli public company (from 2013 to 2014), Arazim Investments Ltd. an Israeli public company (from 2011 to 2014), Ligad
Investment and Building Ltd., an Israeli public company (from 2012 to2013), Karden Automobiles Ltd., an Israeli public company
(from 2004 to2005) and Keshet Broadcast Ltd., an Israeli private company (from 2003 to 2004). Between 2006 and 2014, Ms. Misch
served as the co-CEO of Gmul Residential Real Estate Ltd, an Israeli public company. Prior to that, from 2004 to 2007 Ms. Misch
served as the CFO of Gmul Investment Ltd. an Israeli public company. Prior to that, Ms. Misch served in various managerial and
professional positions, including as a certified public accountant in Broyde KPMG & Co. Ms. Misch is a CPA and a member of
the Israeli Accountants Council as well as a licensed real estate appraiser. Ms. Misch has a B.A. degree in Economics and Accounting,
and an M.A. degree in Philosophy, Science and Digital Culture, from Tel Aviv University.
Elan
Sigal
has served as an external director of RADA since August 2013. From January 2013 to August 2017, Mr. Sigal served
as the Chief Financial Officer of Landa Corporation (Israel), an Israeli company that develops printing systems with proprietary
nanography technology for the commercial market. Between January 2008 and December 2012, Mr. Sigal was the Chief Financial Officer
of Objet Geometries Ltd., an Israeli company that is engaged in the design, development and manufacture of 3D printers. Between
2004 and December 2007, Mr. Sigal served as the Chief Financial Officer of our company. From May 2000 to December 2003, Mr. Sigal
worked as a management consultant in the London office of McKinsey & Co., a leading global management consulting firm. For
ten years Mr. Sigal served as a fighter pilot in the Israeli Air Force. Mr. Sigal holds a B.A. degree in Economics from Tel Aviv
University.
Kineret
Ya’ari
has served as a director of RADA since May 18, 2016. Mrs. Ya’ari serves as an analyst and economist
at DBSI Investments Ltd. Mrs. Ya’ari also serves as a director of Taldor Computer Systems (1986) Ltd. (TASE: TALD) and Shagrir
Group Vehicle Services Ltd. (TASE: SHGR). Before joining DBSI Investments, Mrs. Ya’ari served as a senior business analyst
at Giza-Singer-Even, a financial advisory and investment banking firm in Israel. Mrs. Ya’ari holds a B.A. degree in Economics
and Management and an M.B.A. degree in Accounting and Finance from Tel Aviv University.
Guy
Zur
has served as a director of RADA since March 27, 2017. Mr. Zur joined the IDF in 1980 and served in the military until
2016 in a variety of positions retiring with the rank of Major General. Mr. Zur served as the commander of the Ground Forces from
2013 until 2016. Between 2010 and 2013, Mr. Zur served as the Head of the IDF Planning Division. Between 2007 and 2010, Mr. Zur
served as the commander of the National Training Center for Ground Trainings (NTC). Mr. Zur is currently the CEO of some Taavura
Group subsidiaries, one of the largest logistics and transportation conglomerates in Israel, as well as a technology entrepreneur.
Mr. Zur holds an M.B.A. degree from Be’er Sheva University, a Bc.S. degree in Mechanical Engineering from Tel Aviv University,
and is an alumnus of the Royal College of Defense Studies, London.
Dov
Sella
has served as our Chief Executive Officer since November 2016 and previously, since July 2007, served as our chief
business development officer. Prior to that and from January 2003, Mr. Sella served as our chief operating officer. Mr. Sella
has over 20 years of senior management and product development experience. From 1982 until 1997, Mr. Sella worked for Elbit Systems
Ltd., a leading Israeli defense contractor. Among his positions at Elbit, he served as director of programs, director of avionics
engineering and director of business development. Between 1997 and 2000, Mr. Sella served as executive vice president and vice
president of business development and vice president of research and development of UltraGuide Ltd., a medical devices start-up.
During the three years prior to joining our company, Mr. Sella was the president of NeuroVision Inc., a medical technology start-up.
Mr. Sella has a B.Sc. degree (cum laude) in Computer Engineering from the Technion - Israeli Institute of Technology. Mr. Sella
served as a fighter aircraft navigator in the IAF.
Avi
Israel
has served as our Chief Financial Officer since November 2017. Prior to that and since 2014, Mr. Israel has served
as the CEO of Logisticare Ltd., a leading Israeli private company providing third-party logistics and supply chain services. Between
2010 and 2013, Mr. Israel served as the CEO of Brimag Communication Ltd., the Israeli importer and distributor of mobile phones
and other cellular products manufactured by LG Electronics. Prior to that and since 2004, Mr. Israel served in several positions
(including Deputy CEO and Finance Director) of Telit Communications PLC., an IoT (Internet of Things) company listed on AIM in
London. Between 1996 and 2004, Mr. Israel served in several positions in the Formula Systems Group, as the VP M&A in charge
of the international operations of Matrix Ltd. (TASE: MTRX), one of Israel’s largest software solutions companies, as well
as the CFO of New Applicom Ltd., an Israeli software company that merged with Matrix. Prior to that and since 1992, Mr. Israel
acted as the CFO of Burford International Application Ltd in the United Kingdom. Between 1989 and 1992, Mr. Israel was a certified
public accountant with Almagor & Co, (today Deloitte Israel). Mr. Israel also served between the years 2011-2017 as an external
director of Analyst Portfolio Management Ltd. and between 2004 and 2010 as an external director of Semicom Industries Ltd. Currently,
Mr. Israel is also an external director of Or Shay Ltd., whose bonds are traded on the TASE. Mr. Israel has a B.A. degree in Economics
and Accounting and an M.B.A. degree, both from Bar-Ilan University in Israel. Mr. Israel is a CPA and a member of the Israeli
Accountants Council.
Oleg
Kiperman
has served as our chief technology officer since July 2007. Mr. Kiperman joined us in 1984 as project manager
of several embedded avionics development programs and in 2000 was named as our director of engineering. From 1982 until 1984,
Mr. Kiperman served as a hardware development team leader at Tadiran Ltd. developing digital communication systems. From 1977
until 1982, Mr. Kiperman served as a senior engineer in the IAF Weapons Control Branch. Mr. Kiperman holds a B.Sc. degree in Electrical
Engineering from the Technion - Israeli Institute of Technology.
William
Watson
has served as the Chief Executive Officer of RADA Technologies LLC (RTL) since March 2018. Mr. Watson has over
30 years of experience in product and business development experience in the defense market. Prior to joining RADA, Mr. Watson
was responsible for worldwide sales and business development for L3 Technologies, GCS between 2017 and 2018. Mr. Watson also developed
a worldwide sales team for Safran Vectronix in 2015-2016. Prior he spent 27 years with DRS Technologies, a major US defense contractor,
in a variety of roles including P&L responsibilities as VP, Radar & Communication Systems; and also VP, Naval C4 Systems.
During his tenure with DRS, Mr. Watson also held leadership positions in Program Management, Engineering and Business Operations.
Mr. Watson has an M.B.A. degree in Business Administration and Management from Long Island University (C.W. Post) and also a Bachelor
of Engineering degree (BEng) in Mechanical Engineering from the State University of New York (Stony Brook).
Max
Cohen
has served as our Executive Vice President for the US market, since May 2018. In August 2018, Mr. Cohen relocated
to the U.S. Mr. Cohen retired from the Israeli Defense Forces (IDF) in March 2018 as a Lieutenant Colonel (LTC) after 26 Years
of service. Since his retirement, Mr. Cohen together with his partners, founded FLYON Aerosystems Ltd., a start-up company engaged
in the development of a new commercial flying platform. Mr. Cohen initiate and led major program during his services in the IDF.
From 2004 until 2017 as the head of the Sky Picture Department in the IAF, Mr. Cohen led the development of the air picture command
and control systems (C2) and the air picture Radars. During this period Mr. Cohen initiated a comprehensive national program to
deal with the emerging threat of the quadcopters. Mr. Cohen has a BSc in Electrical and Computer Engineering from Ben-Gurion University
during which he published two papers on multispectral imaging at the SPIE - the international society for optics and photonics.
He also finished all the required courses for a MSc degree in electrical engineering from Tel-Aviv University.
B.
Compensation
The
following table includes information for the year ended December 31, 2018 concerning the five (5) most highly compensated executive
officers of our company, (the figures below reflect the applicable cost of employment on an annual basis):
|
|
|
Dov
Sella
1
|
|
|
Oleg
Kiperman
|
|
|
Bill
Watson
|
|
|
Avi
Israel
|
|
|
Max
Cohen
|
|
|
Annual
salary cost and other benefits ($)
2
|
|
|
379,719
|
|
|
|
309,141
|
|
|
|
308,156
|
|
|
|
275,076
|
|
|
|
267,240
|
|
|
Non-cash
employees’ options compensation cost for 2018 ($)
3
|
|
|
403,786
|
|
|
|
59,488
|
|
|
|
34,136
|
|
|
|
98,755
|
|
|
|
13,654
|
|
|
Total
($)
|
|
|
783,505
|
|
|
|
368,629
|
|
|
|
342,292
|
|
|
|
373,831
|
|
|
|
280,894
|
|
|
|
(1)
|
In
January 2017, our shareholders approved a new employment agreement with our Chief Executive Officer, Mr. Dov Sella, who had
previously served as our
Chief Business Development Officer. From January 2017 until
December 31, 2018 Mr. Sella
received a monthly gross base salary of NIS 75,000. I
n
addition to the options to purchase 131,250 Ordinary Shares that were granted to him on June 14, 2016, our shareholders approved
an additional grant of options to Mr. Sella as follows: (i) options to purchase 68,750 Ordinary Shares at an exercise price
of $1.16 per ordinary share that vested ratably over a period of four (4) years and (ii) options to purchase 150,000 Ordinary
Shares at an exercise price of $1.16 per ordinary share that will vest immediately instead of 99 vacation days that had accrued
and were redeemable by Mr. Sella. In November 2017, our shareholders approved
the grant of additional options to Mr.
Sella as follows: options to purchase 500,000 Ordinary Shares at an exercise price of $2.96 per shares that vest ratably over
a period of four (4) years.
In June 2018, our shareholders approved
the grant
of additional options to Mr. Sella as follows: options to purchase 500,000 Ordinary Shares at an exercise price of $2.32 per
shares that vest over a period of four (4) years as follows: 25% will vest at the first anniversary of the grant date and
the balance shall vest in 12 equal and consecutive quarterly installments. In addition, on January 16, 2019 our shareholder
approved an increase of the monthly base-salary payable to Mr. Sella, effective as of January 1, 2019 to NIS100,000 as well
an additional bonus payment (not exceeding 6 base salaries) that are conditioned upon the Company and Mr. Sella satisfying
certain measurable business and quantitative milestones.
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(2)
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Includes
the gross salary of the five (5) most highly compensated executive officers plus payments of (i) salary bonus; (ii) social
benefits such as payments for savings funds, education funds, pension, severance, insurances, social security; and (iii) general
benefits such as company car (including maintenance and gas) and cell phone; and (iv) option compensation and other benefits
pursuant to our company’s policy.
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(3)
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Option
compensation pursuant to our company’s policy.
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Mr.
Yossi Ben Shalom has served as the Executive Chairman of our Board of Directors since May 18, 2016. In January 2017, our shareholders
approved that in addition to the directors’ fees to be paid to all of our directors commencing as of January 1, 2017, we
would pay DBSI a monthly payment of NIS 17,500 (approximately $4,600) for time devoted by Mr. Ben Shalom to such position. As
of 2017, the first calendar year in which our consolidated audited financial statements reflect net income (before taxes), the
additional monthly payment was increased to NIS 35,000 (approximately $10,000).
Mr.
Israel Livnat has served as a member of our Board of Directors since May 18, 2016. In January 2017, our shareholders approved
a new engagement letter with Mr. Livnat, pursuant to which he is entitled to receive a commission of 2.5% of the net revenues
received by our company with respect to specific transactions introduced to us by Mr. Livnat, subject to a detailed agreement
to be entered into by Mr. Livnat and the company and the prior approval of any such transaction by the Audit Committee. To date,
no such transactions were introduced.
Mr. Guy Zur has served as a member of our
Board of Directors since March 27, 2017. In June 2018, our shareholders approved a consulting agreement with Mr. Zur, pursuant
to which he is entitled to receive, in addition to his directors' fees, a monthly retainer of NIS 10,000 payable as of January
1, 2018 for business development consulting services. Pursuant to the consultancy agreement with Mr. Zur, both Mr. Zur and the
Company may terminate the engagement with or without reason by giving 30 days’ prior notice. In 2018 Mr. Zur received $33
thousand for his consulting services from the Company.
During
the year ended December 31, 2018, the aggregate compensation paid to our above-mentioned executive officers and directors as a
group was approximately $2,267,832. As of December 31, 2018, the aggregate amount set aside or accrued for pension, retirement,
recreation payments and vacation or similar benefits for our directors and executive officers was approximately $307,206.
During
the year ended December 31, 2018, we paid each of our external directors a per-meeting attendance fee of NIS 1,859 (approximately
$500) and an annual fee of NIS 29,239 (approximately $7,801).
Pursuant
to the Israeli Companies Law, we have adopted a compensation policy and are required to follow certain approval requirements with
respect to the compensation of our directors and executive officers. See below “Board of Directors – Compensation
Committee” and Item 10. Additional Information – Office Holders.
We
follow Israeli law and practice instead of the requirements of the NASDAQ Stock Market Rules regarding the compensation of our
Chief Executive Officer and other executive officers. See Item 16G. “Corporate Governance.”
C.
Board Practices
Introduction
According
to the Israeli Companies Law and our articles of association, the management of our business is vested in our board of directors.
The board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders.
Our executive officers are responsible for our day-to-day management. The executive officers have individual responsibilities
established by our Chief Executive Officer and board of directors. Executive officers are appointed by and serve at the discretion
of the board of directors, subject to any applicable agreements.
Election
of Directors
Our
Articles of Association provide for a board of directors consisting
no less than four (4)
and no more than twelve (12) members,
or such other number as may be determined from time to time at a general meeting
of shareholders. All the directors in the company must be qualified to serve as a director and the time required for such position,
taking into consideration the type and size of the company and the scope and complexity of its operation. The directors must provide
the electing general meeting with a detailed declaration as to the compliance with the above-listed requirements. Our board of
directors is currently composed of nine (9) directors.
Pursuant
to our Articles of Association, our directors, except for the External Directors, are elected at the Annual General Meeting by
the vote of the holders of a majority of the voting power represented at such meeting in person or by proxy and voting on the
election of directors, and each director generally serves until the Annual General Meeting next following the Annual General Meeting
at which such director was appointed, or his earlier vacation of office or removal. Except with respect to the removal of External
Directors, the shareholders are entitled to remove any director(s) from office, by a simple majority of the voting power of the
company represented at the meeting in person or by proxy and voting thereon. All the members of our board of directors (except
the external directors as detailed below) may be reelected upon completion of their term of office. The majority of directors
may appoint additional directors to fill any vacancies in the board of directors until the next annual general meeting; provided,
however that the total number of directors will not exceed the maximum number, if any, fixed by or in accordance with our Articles
of Association. We do not follow the requirements of the NASDAQ Marketplace Rules with regard to the nomination process of directors
and instead follow Israeli law and practice. See Item 16G. “Corporate Governance.”
External
and Independent Directors
External
Directors
. The Israeli Companies Law requires publicly held Israeli companies to appoint at least two external directors.
The Israeli Companies Law provides that a person may not be appointed as an external director if the person, or the person’s
relative, partner, employer or an entity under that person’s control, has or had during the two years preceding the date
of appointment any affiliation with the company, or any entity controlling, controlled by or under common control with the company.
The term “relative” means a spouse, sibling, parent, grandparent, child or child of spouse or spouse of any of the
above as well as a sibling, brother, sister or parent of the foregoing relatives. In general, the term “affiliation”
includes an employment relationship, a business or professional relationship maintained on a regular basis, control and service
as an office holder. Furthermore, if the company does not have a controlling shareholder or a shareholder holding at least 25%
of the voting rights “affiliation” also includes a relationship, at the time of the appointment, with the chairman
of the board, the Chief Executive Officer, a substantial shareholder or the most senior financial officer of such company. Regulations
promulgated under the Israeli Companies Law include certain additional relationships that would not be deemed an “affiliation”
with a company, for the purpose of service as an external director. In addition, no person may serve as an external director if
the person’s position or other activities create, or may create, a conflict of interest with the person’s responsibilities
as director or may otherwise interfere with the person’s ability to serve as director. If, at the time an external director
is appointed, all current members of the board of directors are of the same gender, then that external director must be of the
other gender. A director of one company may not be appointed as an external director of another company if a director of the other
company is acting as an external director of the first company at such time.
At
least one of the elected external directors must have “accounting and financial expertise” and any other external
director must have “accounting and financial expertise” or “professional qualification,” as such terms
are defined by regulations promulgated under the Israeli Companies Law. However, Israeli companies listed on certain stock exchanges
outside Israel, including the NASDAQ Capital Market, such as our company, are not required to appoint an external director with
“accounting and financial expertise” if a director with accounting and financial expertise who qualifies as an independent
director for purposes of audit committee membership under the laws of the foreign exchange serves on its board of directors. All
of the external directors of such a company must have “professional qualification.”
The
external directors are elected by shareholders at a general meeting. The shareholders voting in favor of their election must include
at least a simple majority of the shares voted by shareholders other than controlling shareholders or shareholders who have a
personal interest in the election of the external director (unless such personal interest is not related to such person’s
relationship with the controlling shareholder). This majority requirement will not be required if the total number of shares of
such non-controlling shareholders and disinterested shareholders who vote against the election of the external director represent
2% or less of the voting rights in the company.
In
general, under the Israeli Companies Law, external directors serve for a three-year term and may be reelected to two additional
three-year terms, at the nomination of either the board of directors or any shareholder(s) holding at least 1% of the voting rights
in the company. If the board of directors proposed the nominee, the reelection must be approved by the shareholders in the same
manner required to appoint external directors for an initial term, as described above. If such reelection is proposed by shareholders,
such reelection requires the approval of the majority of the shareholders voting on the matter, excluding the votes of any controlling
shareholder and other shareholders having a personal interest in the matter as a result of their relationship with the controlling
shareholder(s), provided that, the aggregate votes cast by shareholders who are not controlling shareholders and do not have a
personal interest in the matter as a result of their relationship with the controlling shareholder(s) who voted in favor of the
nominee constitute more than 2% of the voting rights in the company and provided further that, at the time of the appointment,
such reelected external director is not (i) a related or competitor shareholder, or (ii) a relative of such related or competitor
shareholder or otherwise affiliated with a related or competitor shareholder either at the time of appointment or at any time
during the two years period prior to such appointment. A related or competitor shareholder is defined by the Israeli Companies
Law as the shareholder that proposed the reelection or a holder of 5% or more of the outstanding share capital of the company,
provided that at the time of appointment (i) such shareholders, their controlling shareholder or any entity controlled by either
of them has business relations with company, or (ii) such shareholders, their controlling shareholder or any entity controlled
by either of them are competitors of the company. External directors can be removed from office only by the same special percentage
of shareholders that can elect them, or by a court order, and then only if the external directors cease to meet the statutory
qualifications with respect to their appointment or if they violate their fiduciary duty to the company.
Each
committee of the board of directors that is authorized to exercise powers vested in the board of directors must include at least
one external director and the audit committee and the Compensation Committee must include all the external directors. An external
director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited
from receiving any other compensation, directly or indirectly, in connection with such service.
Independent
Directors
. In general, NASDAQ Stock Market Rules require that the board of directors of a NASDAQ-listed company have a majority
of independent directors and its audit committee must have at least three members and be comprised only of independent directors,
each of whom satisfies the respective “independence” requirements of NASDAQ and the SEC. However, foreign private
issuers, such as our company, may follow certain home country corporate governance practices instead of certain requirements of
the NASDAQ Stock Market Rules. We do not follow the requirement of the NASDAQ Stock Market Rules to maintain a majority of independent
directors on our board and instead follow Israeli law and practice (see Item 16G. “Corporate Governance”). However,
we have the mandated three independent directors on our audit committee, in accordance with the rules of the SEC and NASDAQ Stock
Market.
Pursuant
to the Israeli Companies Law, a director may be qualified as an independent director if such director is either (i) an external
director; or (ii) a director that serves as a board member for less than nine years and the audit committee has approved that
he or she meets the independence requirements of an external director. A majority of the members serving on the audit committee
and the compensation committee must be independent under the Israeli Companies Law.
Our
board of directors has determined that Ms. Misch, Mr. Sigal, Mr. Dumanis and Mr. Zur qualify as independent directors under the
SEC and NASDAQ requirements and that Ms. Misch, Mr. Sigal and Mr. Dumanis qualify as independent directors under the Israeli Companies
Law requirements.
We
do not follow the requirements of the NASDAQ Stock Market Rules with regard to regularly scheduled meetings of independent directors.
Under Israeli law, external directors are not required to hold executive sessions. See Item 16G. “Corporate Governance
.
”
Committees
of the Board of Directors
Audit
Committee
. Under the Israeli Companies Law, the board of directors of any public company must establish an audit committee.
The audit committee must be comprised of at least three directors, the majority of which must be independent directors. Such independent
directors must meet all of the standards required of an external director and may not serve as a director for more than consecutive
nine years (a cessation of service as a director for up to two years during any nine years period will not be deemed to interrupt
the nine years period). The audit committee may not include the chairman of the board of directors; any director employed by the
company or providing services to the company on an ongoing basis; a controlling shareholder or any of the controlling shareholder’s
relatives; and any director who rendered services to the controlling shareholder or an entity controlled by the controlling shareholder.
Any person who is not permitted to be a member of the audit committee may not be present in the meetings of the audit committee
unless the chairman of the audit committee determines that such person’s presence is necessary in order to present a specific
matter. However, an employee who is not a controlling shareholder or relative of a controlling shareholder may participate in
the audit committee’s discussions but not in any vote, and at the request of the audit committee, the secretary of the company
and its legal counsel may be present during the meeting. The chairman of the audit committee must be an external director.
Under
Israeli law, an audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder,
unless at the time of approval two external directors are serving as members of the audit committee and at least one of the external
directors was present at the meeting in which an approval was granted.
The
role of the audit committee, pursuant to the Israeli Companies Law, includes:
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monitoring
deficiencies in the management of the company, including in consultation with the independent auditors or the internal auditor,
and to advise the board of directors on how to correct such deficiencies. If the audit committee finds a material deficiency,
it will hold at least one meeting regarding such material deficiency, with the presence of the internal auditor or the independent
auditors but without the presence of the senior management of the company. However, a member of the company’s senior
management can participate in the meeting in order to present an issue which is under his or her responsibility;
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determining,
on the basis of detailed arguments, whether to classify certain engagements or transactions as material or extraordinary,
as applicable, and therefore as requiring special approval under the Israeli Companies Law. The audit committee may make such
determination according to principles and guidelines predetermined on an annual basis;
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determining
if transactions (excluding extraordinary transactions) with a controlling shareholder, or in which a controlling shareholder
has a personal interest, are required to be rendered pursuant to a competitive procedure;
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deciding
whether to approve engagements or transactions that require the audit committee approval under the Israeli Companies Law;
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determining
the approval procedure of non-extraordinary transactions, following classification as such by the audit committee, including
whether such specific non-extraordinary transactions require the approval of the audit committee;
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examining
and approving the annual and periodical working plan of the internal auditor;
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overseeing
the company’s internal auditing and the performance of the internal auditor; confirm that the internal auditor has sufficient
tools and resources at his disposal, taking into account, among other, the special requirements of the company and its size;
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examining
the scope of work of the independent auditor and its pay, and bringing such recommendations on these issue before the Board;
determining the procedure of addressing complaints of employees regarding shortcomings in the management of the company and
ensure the protection of employees who have filed such complaints;
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determining
with respect to transactions with the controlling shareholder or in which such controlling shareholder has personal interest,
whether such transactions are extraordinary or not, an obligation to conduct competitive process under supervisions of the
audit committee or determination that prior to entering into such transactions the company shall conduct other process as
the audit committee may deem fit, all taking into account the type of the company. The audit committee my set such qualifications
for one year in advance; and
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determining
the manner of approval of transactions with the controlling shareholder or in which it has personal interest which (i) are
not negligible transactions (pursuant to the committee’s determination) and (ii) are not qualified by the committee
as extraordinary transactions.
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In
addition, the NASDAQ Stock Market Rules require us to establish an audit committee comprised of at least three members, all of
whom must be financially literate, satisfy the respective “independence” requirements of the SEC and NASDAQ and one
of whom must have an accounting or related financial management expertise at senior levels within a company.
Pursuant
to recent amendment to the Israeli companies Law, effective as of February 2016, an audit committee that complies with the requirements
of the Israeli Companies Law may act also as compensation committee. Our board of directors has determined that our audit committee
complies with such requirements and therefore, commencing as of May 2016, it shall serve also as compensation committee.
The current members of our audit and compensation
committee are Ms. Tal Misch Vered, Mr. Elan Sigal and Prof. Alon Dumanis, each of whom satisfies the “independence”
requirements of both the SEC and NASDAQ. We also comply with Israeli law requirements for audit committee members. The audit committee
meets at least once each quarter.
Compensation
Committee
. Our Board of Directors is required to appoint a compensation committee, whose role is to: (i) recommend to the
board on a compensation policy for office holders and to recommend to the board, once every three years, on the approval of the
continued validity of the compensation policy that was determined for a period exceeding three years; (ii) recommend an update
the compensation policy from time to time and to examine its implementation; (iii) determine whether to approve the Terms of Service
and Employment of Office Holders that require the committee’s approval; and (iv) exempt a transaction from the requirement
for shareholders’ approval. The compensation committee also has oversight authority over the actual terms of employment
of directors and officers and may make recommendations to the board of directors and the shareholders (where applicable) with
respect to deviation from the compensation policy that was adopted by the company. Under Israeli law, our compensation committee
must consist of no less than three members, including all of our external directors (who must constitute a majority of its members
of the committee), and the remainder of the members of the compensation committee must be directors whose terms of service and
employment were determined pursuant to the applicable regulations. The same restrictions on the actions and membership in the
audit committee apply to the compensation committee with respect to, among other things, the requirement that an external director
serve as the chairman of the committee and the list of persons who may not serve on the committee. Our board of directors established
a compensation committee composed of Ms. Tal Misch Vered, Mr. Elan Sigal and Prof. Alon Dumanis. In August 2016,
our shareholders approved an updated
compensation policy for an additional period of three
years.
Business
Development Committee.
In November 2016, our Board of Directors established a Business Development Committee whose role is
to review and make recommendations to the Board of Directors with respect to business development strategies, plans and targets.
The Business Development Committee is composed of Messrs. Yossi Ben Shalom, Israel Livnat and Prof. Alon Dumanis.
Internal
Audit
The
Israeli Companies Law also requires the board of directors of a publicly held company to appoint an internal auditor nominated
by the audit committee. An internal audit must satisfy the Israeli Companies Law’s independence requirements. The role of
the internal auditor is to examine, among other things, the compliance of the company’s conduct with applicable law and
orderly business practice. Under the Companies Law, the internal auditor may not be an interested party or an office holder, or
a relative of any of the foregoing, nor may the internal auditor be the company’s independent accountant or its representative.
Our internal auditor complies with the requirements of the Israeli Companies Law.
Approval
of Related Party Transactions under Israeli Law
Fiduciary
Duties of Office Holders
The
Israeli Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers,
owe to a company. An “office holder” is defined in the Israeli Companies Law as a director, general manager, chief
business manager, deputy general manager, vice general manager, other manager directly subordinated to the general manager or
any other person assuming the responsibilities of any of the foregoing positions without regard to such person’s title.
An office holder’s fiduciary duties consist of a duty of care and a fiduciary duty. The duty of care requires an office
holder to act at a level of care that a reasonable office holder in the same position would employ under the same circumstances.
This includes the duty to utilize reasonable means to obtain (i) information regarding the appropriateness of a given action brought
for his approval or performed by him by virtue of his position and (ii) all other information of importance pertaining to the
foregoing actions. The fiduciary duty includes (i) avoiding any conflict of interest between the office holder’s position
in the company and any other position he holds or his personal affairs, (ii) avoiding any competition with the company’s
business, (iii) avoiding exploiting any business opportunity of the company in order to receive personal gain for the office holder
or others, and (iv) disclosing to the company any information or documents relating to the company’s affairs that the office
holder has received due to his position as an office holder.
Disclosure
of Personal Interests of an Office Holder; Approval of Transactions with Office Holders
The
Israeli Companies Law requires that an office holder promptly and no later than the first board meeting at which such transaction
is considered, disclose any personal interest that he or she may have, and all related material information known to him or her
and any documents in their position, in connection with any existing or proposed transaction by us. In addition, if the transaction
is an extraordinary transaction, that is, a transaction other than in the ordinary course of business, other than on market terms,
or likely to have a material impact on the company’s profitability, assets or liabilities, the office holder must also disclose
any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants
and the spouses of any of the foregoing, or by any corporation in which the office holder or a relative is a 5% or greater shareholder,
director or general manager or in which he or she has the right to appoint at least one director or the general manager.
Some
transactions, actions and arrangements involving an office holder (or a third party in which an office holder has an interest)
must be approved by the board of directors or as otherwise provided for in a company’s articles of association, however,
a transaction that is adverse to the company’s interest may not be approved. In some cases, such a transaction must be approved
by the audit committee and by the board of directors itself, and under certain circumstances shareholder approval may also be
required. A director who has a personal interest in a transaction that is considered at a meeting of the board of directors or
the audit committee may not be present during the board of directors or audit committee discussions and may not vote on the transaction,
unless the transaction is not an extraordinary transaction or the majority of the members of the board or the audit committee
have a personal interest, as the case may be. In the event the majority of the members of the board of directors or the audit
committee have a personal interest, then the approval of the general meeting of shareholders is also required.
Approval
of a Compensation Policy for Office Holders
The
Israeli Companies Law and the regulations adopted thereunder require the compensation committee to adopt a policy for director
and office holders.
The
compensation policy needs to be re-approved every three years by the board of directors, following the recommendation of the compensation
committee, and by the company’s shareholders, by a Special Majority (as defined below). In the event that the compensation
policy is not so approved by the shareholders, the board of directors may nonetheless approve it, provided that the compensation
committee and the board of directors, following further discussion of the matter and for specified reasons, determine that the
approval of the compensation policy is in the best interests of the company.
Special
Majority means: (a) a majority of the shareholders who are not controlling shareholders of the Company and do not have a “Personal
Interest” in the approval of the respective resolution who participate in the vote, in person, by proxy or by a voting instrument
vote to approve it (abstentions will not be taken into account) or (b) the total number of votes of the shareholders referred
to in (a) above that are voted against the proposed resolution does not exceed two percent (2%) of the company’s total voting
rights.
The
compensation policy serves as the basis for decisions concerning the financial terms of employment or engagement of officer holders,
including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or
engagement.
In
addition, compensation of the directors and the Chief Executive Officer is also subject to the approval of the compensation /audit
committee, the board of directors and the shareholders at a general meeting. The approval of the compensation of the Chief Executive
Officer is subject to the Special Majority requirements
Any
deviations from the compensation policy in respect of the compensation of the office holders require the approval of the compensation/audit
committee, the board of directors and the shareholders by Special Majority.
Under
the Israeli Companies Law, all arrangements as to compensation of office holders who are not directors require the approval of
the compensation/audit committee prior and in addition to the approval of the board of directors. However, if the company duly
adopts a compensation plan for its office holders, the approval of the board of directors is not required if the new arrangement
only modifies an existing arrangement and the compensation committee determines that such modification is not material.
Disclosure
of Personal Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders
Pursuant
to the Israeli Companies Law, the disclosure requirements regarding personal interests that apply to directors and executive officers
also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to
direct the activities of a company, but excludes a shareholder whose power derives solely from its position on the board of directors
or any other position at the company. A person is presumed to be a “controlling shareholder” if it holds or controls,
by itself or together with others, one half or more of any one of the “Means of Control” of the company. “Means
of Control” is defined as any one of the following: (i) the right to vote at a General Meeting of the company, or (ii) the
right to appoint directors of the company or its Chief Executive Officer. For the purpose of related party translations, under
the Israeli Companies Law, a controlling shareholder is also a shareholder who holds 25% or more of the voting rights if no other
shareholder who holds more than 50% of the voting rights. For this purpose, the holdings of all shareholders who have a personal
interest in the same transaction will be aggregated. As of Admission, the company does not have a controlling shareholder.
Certain
shareholders also have a duty of fairness toward the company. These shareholders include any controlling shareholder, together
with any shareholder who knows that it has the power to determine the outcome of a shareholder vote and any shareholder who has
the power to appoint or to prevent the appointment of an office holder of the company or exercise any other rights available to
it under the company’s articles of association with respect to the company. The Israeli Companies Law does not define the
substance of this duty of fairness, except to state that the remedies generally available upon a breach of contract will also
apply in the event of a breach of the duty of fairness.
An
extraordinary transaction between a public company and a controlling shareholder, or in which a controlling shareholder has a
personal interest, including a private placement in which the controlling shareholder has a personal interest, and the terms of
engagement of the company, directly or indirectly, with a controlling shareholder or a controlling shareholder’s relative
(including through a corporation controlled by a controlling shareholder), regarding the company’s receipt of services from
the controlling shareholder, and if such controlling shareholder is also an office holder of the company, regarding his or her
terms of employment, require the approval of a company’s audit committee (or compensation committee with respect to compensation
arrangements), board of directors and shareholders, in that order. Such transaction must be elected by a majority vote of the
Ordinary Shares present and voting at a shareholders’ meeting, provided that either: (i) such majority includes at least
a majority of votes held by all shareholders who do not have a personal interest in such transaction, present and voting at such
meeting (excluding abstentions); or (ii) the total number of votes of shareholders who do not have a personal interest in such
transaction voting against the approval of the transaction, does not exceed 2% of the aggregate voting rights in the company.
Pursuant
to the Israeli Companies Law, the audit committee of the company should determine in connection with such transaction if it requires
rendering pursuant to a competitive procedure or pursuant to other proceedings.
See “Audit Committee” above.
To
the extent that any such transaction with a controlling shareholder or his relative is for a period extending beyond three years,
shareholder approval is required once every three years, unless, in respect to certain transactions, the audit committee determines
that the longer duration of the transaction is reasonable under the circumstances.
Pursuant
to regulations promulgated pursuant to the Israeli Companies Law, a transaction with a controlling shareholder that would otherwise
require approval of the shareholders is exempt from shareholders’ approval if each of the audit committee and the board
of directors determine that the transaction meets certain criteria that are set out in specific regulations promulgated under
the Israeli Companies Law. Under these regulations, a shareholder holding at least 1% of the issued share capital of the company
may require, within 14 days of the publication of such determination, that despite such determination by the audit committee and
the board of directors, such transaction will require shareholder approval under the same majority requirements that otherwise
apply to such transactions.
The
Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as
a result of the acquisition the purchaser would become a 25% or greater shareholder of the company. This rule does not apply if
there is already another 25% or greater shareholder of the company. Similarly, the Israeli Companies Law provides that an acquisition
of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would hold
greater than a 45% interest in the company, unless there is another shareholder holding more than a 45% interest in the company.
These requirements do not apply if, in general, (i) the acquisition was made in a private placement that received shareholder
approval, (ii) was from a 25% or greater shareholder of the company which resulted in the acquirer becoming a 25% or greater shareholder
of the company, if there is not already a 25% or greater shareholder of the company, or (iii) was from a shareholder holding a
45% interest in the company which resulted in the acquirer becoming a holder of a 45% interest in the company if there is not
already a 45% or greater shareholder of the company.
If,
as a result of an acquisition of shares, the acquirer will hold more than 90% of a public company’s outstanding shares or
a class of shares, the acquisition must be made by means of a tender offer for all of the outstanding shares or a class of shares.
If less than 5% of the outstanding shares are not tendered in the tender offer, all the shares that the acquirer offered to purchase
will be transferred to the acquirer. If more than 5% of the outstanding shares are not tendered in the tender offer, then the
acquirer may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding shares.
The Israeli Companies Law provides for appraisal rights if any shareholder files a request in court within six months following
the consummation of a full tender offer. However, in the event of a full tender offer, the offeror may determine that any shareholder
who accepts the offer will not be entitled to appraisal rights. Such determination will be effective only if the offeror or the
company has timely published all the information that is required to be published in connection with such full tender offer pursuant
to all applicable laws.
Exculpation,
Indemnification and Insurance of Directors and Officers
Exculpation
of Office Holders
The
Israeli Companies Law provides that an Israeli company cannot exculpate an office holder from liability with respect to a breach
of his or her duty of loyalty. If permitted by its articles of association, a company may exculpate in advance an office holder
from his or her liability to the company, in whole or in part, with respect to a breach of his or her duty of care. However, a
company may not exculpate in advance a director from his or her liability to the company with respect to a breach of his duty
of care in the event of distributions.
Insurance
of Office Holders
The
Israeli Companies Law provides that a company may, if permitted by its articles of association, enter into a contract to insure
office holders in respect of liabilities incurred by the office holder with a respect to an act performed in his or her capacity
as an office holder, as a result of:
|
|
●
|
a
breach of the office holder’s duty of care to the company or to another person;
|
|
|
|
|
|
|
●
|
a
breach of the office holder’s duty of loyalty to the company, provided that the office holder acted in good faith and
had reasonable cause to assume that his or her act would not prejudice the company’s interests; or
|
|
|
|
|
|
|
●
|
a
financial liability imposed upon the office holder in favor of another person.
|
Indemnification
of Office Holders
The
Israeli Companies Law provides that a company may, if permitted by its articles of association, indemnify an office holder for
acts or omissions performed by the office holder in such capacity for:
|
|
●
|
a
monetary liability imposed on the office holder in favor of another person by any judgment, including a settlement or an arbitrator’s
award approved by a court;
|
|
|
|
|
|
|
●
|
reasonable
litigation expenses, including attorney’s fees, actually incurred by the office holder as a result of an investigation
or proceeding instituted against him or her by a competent authority, provided that such investigation or proceeding concluded
without the filing of an indictment against the office holder or the imposition of any monetary liability in lieu of criminal
proceedings, or concluded without the filing of an indictment against the office holder and a monetary liability was imposed
on the officer holder in lieu of criminal proceedings with respect to a criminal offense that does not require proof of criminal
intent; and
|
|
|
|
|
|
|
●
|
reasonable
litigation expenses, including attorneys’ fees, incurred by the office holder or which were imposed on him or her by
a court, in an action instituted by the company or on the company’s behalf or by another person, against the office
holder, or in a criminal charge from which he was acquitted, or in a criminal proceeding in which the office holder was convicted
of a criminal offense which does not require proof of criminal intent.
|
In
accordance with the Israeli Companies Law, a company’s articles of association may permit the company to:
|
|
●
|
prospectively
undertake to indemnify an office holder, except that with respect to a monetary liability imposed on the office holder by
any judgment, settlement or court-approved arbitration award, the undertaking must be limited to types of events which the
company’s board of directors deems foreseeable considering the company’s actual operations at the time of the
undertaking, and to an amount or standard that the board of directors has determined as reasonable under the circumstances.
|
|
|
|
|
|
|
●
|
retroactively
indemnify an office holder of the company.
|
Limitations
on Exculpation, Insurance and Indemnification
The
Israeli Companies Law provides that neither a provision of the articles of association permitting the company to enter into a
contract to insure the liability of an office holder, nor a provision in the articles of association or a resolution of the board
of directors permitting the indemnification of an office holder, nor a provision in the articles of association exculpating an
office holder from duty to the company shall be valid, where such insurance, indemnification or exculpation relates to any of
the following:
|
|
●
|
a
breach by the office holder of his duty of loyalty unless, with respect to insurance coverage or indemnification, the office
holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
|
|
|
|
|
|
|
●
|
a
breach by the office holder of his duty of care if such breach was committed intentionally or recklessly, unless the breach
was committed only negligently;
|
|
|
|
|
|
|
●
|
any
act or omission done with the intent to unlawfully yield a personal benefit; or
|
|
|
|
|
|
|
●
|
any
fine or forfeiture imposed on the office holder.
|
Pursuant
to the Israeli Companies Law, exculpation of, procurement of insurance coverage for, and an undertaking to indemnify or indemnification
of, our office holders must be approved by our audit committee and our board of directors and, if the office holder is a director,
also by our shareholders.
Our
Articles of Association allow us to insure, indemnify and exempt our office holders to the fullest extent permitted by law, subject
to the provisions of the Israeli Companies Law. Up until August 2017 we maintained directors and officers liability insurance
policy with per claim and aggregate coverage limit of $7.5 million. On August 2017, our Compensation Committee and Board of Directors
approved an increase in the per claim coverage and aggregate coverage of up to $10 million under its directors and officers liability
insurance policy. Pursuant to resolutions adopted by our shareholders on May 15, 2016, we have also entered into agreements with
our directors and officeholders providing for their indemnification and exemption from the duty of care.
D.
Employees
As
of December 31, 2018, we employed 117 persons, of whom 41 persons were employed in research, development and engineering, 57 persons
in manufacturing and logistics, 8 persons in sales and marketing, and 11 persons in administration, management and finance. All
of these employees are located in Israel. In addition, RTL employed 9 persons, of whom 3 persons were employed in research and
development, 1 person in logistics and engineering, 2 persons in sales and marketing, and 3 persons in administration, management
and finance. All of these employees are located in the U.S.
As
of December 31, 2017, we employed 112 persons, of whom 38 persons were employed in research, development and engineering, 60 persons
in manufacturing and logistics, 5 persons in sales and marketing, and 9 persons in administration, management and finance. All
of these employees were located in Israel. In addition, CACS, our subsidiary at that time, employed 17 persons in China.
As
of December 31, 2016, we employed 93 persons, of whom 35 persons were employed in research, development and engineering, 48 persons
in manufacturing and logistics, 3 persons in sales and marketing, and 7 persons in administration, management and finance. All
of these employees were located in Israel. In addition, CACS, our subsidiary at that time, employed 16 persons in China.
Our
technical employees have signed nondisclosure agreements covering all proprietary information that they might possess or to which
they might have access. Employees are not organized in any union, although they are employed according to provisions established
by the Israeli Ministry of Economy and Industry. Certain provisions of the collective bargaining agreements between the General
Federation of Labor in Israel (Histadrut) and the Coordination Bureau of Economic Organizations (including the Industrialists
Association) are applicable to our Israeli employees by order of the Israeli Ministry of Economy and Industry. These provisions
primarily concern the length of the workday, minimum daily wages for professional workers, contributions to a pension fund, insurance
for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment.
We generally provide our employees with benefits and working conditions beyond the required minimums.
Israeli
law generally requires severance pay upon the retirement or death of an employee or termination of employment without due cause.
Further, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute; such amounts
also include payments for national health insurance. Most of our ongoing severance obligations for our Israeli employees are provided
for by monthly payments made by us for insurance policies to cover these obligations.
|
E.
|
Beneficial
Ownership of Executive Officers and Directors
|
The
following table sets forth certain information as of March 29, 2019 regarding the beneficial ownership by each of our directors
and executive officers:
|
Name
|
|
Number
of Ordinary
Shares or Options
Beneficially Owned
(1)
|
|
|
Percentage of
Ownership
(2)
|
|
|
Yossi
Ben Shalom
(3)
|
|
|
9,547,088
|
|
|
|
25.1
|
%
|
|
Nir
Cohen
|
|
|
-
|
|
|
|
-
|
|
|
Alon
Dumanis
|
|
|
-
|
|
|
|
-
|
|
|
Ben
Zion Gruber
|
|
|
-
|
|
|
|
-
|
|
|
Israel
Livnat
|
|
|
-
|
|
|
|
-
|
|
|
Tal
Misch Vered
|
|
|
-
|
|
|
|
-
|
|
|
Elan
Sigal
|
|
|
-
|
|
|
|
-
|
|
|
Kineret
Ya’ari
|
|
|
-
|
|
|
|
-
|
|
|
Guy
Zur
|
|
|
-
|
|
|
|
-
|
|
|
Dov
Sella
|
|
|
500,000
|
|
|
|
1.3
|
%
|
|
Avi
Israel
|
|
|
75,000
|
|
|
|
*
|
|
|
Oleg
Kiperman
|
|
|
84,813
|
|
|
|
*
|
|
|
Bill
Watson
|
|
|
-
|
|
|
|
*
|
|
|
Max
Cohen
|
|
|
-
|
|
|
|
*
|
|
|
All
directors and executive officers as a group (13 persons)
|
|
|
707,063
|
|
|
|
1.8
|
%
|
*
Less than 1%
Except
as otherwise indicated, the business address of all directors and executive officers is c/o RADA Electronic Industries Ltd., 7
Giborei Israel Street, Netanya, 4250407, Israel.
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect
to securities. Ordinary shares relating to options and warrants currently exercisable or exercisable within 60 days of the
date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed
outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property
laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares
shown as beneficially owned by them.
|
|
|
|
|
(2)
|
The
percentages shown are based on 38,067,024 Ordinary Shares issued and outstanding as of March 29, 2019.
|
|
|
|
|
(3)
|
Mr.
Yossi Ben Shalom and Mr. Barak Dotan, by virtue of their relationship with and indirect interests in DBSI may be deemed to
control DBSI and consequently share the beneficial ownership of the 9,547,088
Ordinary
Shares of the company beneficially owned by DBSI, including the right to jointly direct the voting of, and disposition of,
such shares. Mr. Barak Dotan holds his shares of DBSI through his control of B.R.Y.N. Investments Ltd., or BRYN. Mr. Barak
Dotan controls BRYN pursuant to the terms of a power of attorney granted to him by Mr. Boaz Dotan and Mrs. Varda Dotan (collectively
referred to as the Dotans). Pursuant to the power of attorney, Barak Dotan is entitled to take all actions to which the Dotans
would be entitled by virtue of their shareholdings in BRYN, with the exception of the disposition of such shares. According
to the terms of the power of attorney, the Dotans are required to give notice of not less than 90 days to (i) revoke the power
of attorney, thereby acquiring the ability to vote the shares of BRYN; and (ii) dispose of the shares of BRYN. Mr. Yossi Ben
Shalom holds his shares of DBSI through his control of White Condor Holdings Ltd. and Pulpit Rock Investments Ltd. The address
of DBSI is 85 Medinat Hayehudim Street, Herzliya 4676670, Israel.
|
|
ITEM
7.
|
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
A.
Major Shareholders
The
following table sets forth certain information as of March
29
,
2019, regarding the beneficial ownership by all shareholders known to us to own beneficially 5% or more of our Ordinary Shares:
|
Name
|
|
Number
of Ordinary
Shares Beneficially
Owned
(1)
|
|
|
Percentage of
Ownership
(2)
|
|
|
DBSI
Investments Ltd.
(3) (4)
|
|
|
9,547,088
|
|
|
|
25.1
|
%
|
|
Yelin
Lapidot Holdings Management Ltd.
(5)
|
|
|
3,113,873
|
|
|
|
8.32
|
%
|
|
Psagot
Investment House Ltd.
(6)
|
|
|
2,424,883
|
|
|
|
6.4
|
%
|
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect
to securities. Ordinary Shares relating to options and notes currently exercisable or convertible or exercisable or convertible
within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities
but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table above have sole voting and investment power with
respect to all shares shown as beneficially owned by them.
|
|
|
|
|
(2)
|
The
percentages shown are based on 38,067,024 Ordinary Shares issued and outstanding as of March 29, 2019.
|
|
(3)
|
As
reported by DBSI in its latest Schedule 13D/A, dated January 29, 2019, it is currently the beneficial owner of 9,547,088 Ordinary
Shares, constituting 25.1% of our issued and outstanding Ordinary Shares.
|
|
(4)
|
Mr.
Yossi Ben Shalom and Mr. Barak Dotan, by virtue of their relationship with and indirect interests in DBSI may be deemed to
control DBSI and consequently share the beneficial ownership of the 9,547,088
Ordinary
Shares of the company beneficially owned by DBSI, including the right to jointly direct the voting of, and disposition of,
such shares. Mr. Barak Dotan holds his shares of DBSI through his control of B.R.Y.N. Investments Ltd., or BRYN. Mr. Barak
Dotan controls BRYN pursuant to the terms of a power of attorney granted to him by Mr. Boaz Dotan and Mrs. Varda Dotan (collectively
referred to as the Dotans). Pursuant to the power of attorney, Barak Dotan is entitled to take all actions to which the Dotans
would be entitled by virtue of their shareholdings in BRYN, with the exception of the disposition of such shares. According
to the terms of the power of attorney, the Dotans are required to give notice of not less than 90 days to (i) revoke the power
of attorney, thereby acquiring the ability to vote the shares of BRYN; and (ii) dispose of the shares of BRYN. Mr. Yossi Ben
Shalom holds his shares of DBSI through his control of White Condor Holdings Ltd. and Pulpit Rock Investments Ltd. The address
of DBSI is 85 Medinat Hayehudim Street, Herzliya 4676670, Israel.
|
|
|
|
|
(5)
|
Based
on the Schedule 13G/A filed by Yelin Lapidot Holdings Management Ltd. jointly with Yelin Lapidot Mutual Funds Management Ltd.
and Messrs. Dov Yelin, Yair Lapidot with the SEC on February 11, 2019. The address of Yelin Lapidot is 50 Dizengoff St., Dizengoff
Center, Gate 3, Top Tower, 13th floor, Tel Aviv 64332, Israel.
|
|
|
|
|
(6)
|
Based
on the Schedule 13G/A filed on February 25, 2019 by Psagot Investment House Ltd. jointly with Ordinary Shares
owned
by portfolio accounts managed by Psagot Securities Ltd
and Ordinary Shares
owned
by portfolio accounts managed by owned by provident funds and pension funds managed by Psagot Provident Funds and Pension
Ltd. and
Ordinary Shares owned Psagot Index Funds Ltd managed by Psagot Index Funds Ltd. (all are
wholly-owned
subsidiary of Psagot Investment House Ltd.).
The address of
Psagot Investment
House Ltd. is 14 Ahad Ha’am Street, Tel Aviv 65142,
Israel.
|
Significant
Changes in the Ownership of Major Shareholders
In
2016, DBSI purchased 8,510,638 newly issued Ordinary Shares as well as warrants to purchase up to 4,255,319 shares, at an exercise
price of $0.47 per share, exercisable within 24 months following the closing on May 18, 2016, and warrants to purchase up to 3,636,363
shares, at an exercise price of $0.55 per share exercisable within 48 months, as well as the right to acquire additional Ordinary
Shares pursuant to the conversion of a $3,175,000 convertible loan. These holdings amounted to the beneficial ownership 67.4%
of our Ordinary Shares at that time. On June 15, 2016, DBSI purchased the $3,175,000 convertible note at the request of a special,
independent committee of our board of directors and subsequently converted the loan into
1,322,917
Ordinary Shares, reflecting a conversion price of $2.40 per share.
DBSI
has since regularly reported on Form 13D/A sales of our Ordinary Shares and of exercises of warrants. On January 25, 2017, DBSI
reported that it had sold an aggregate of 1,402,389 additional Ordinary Shares and that it had exercised warrants to purchase
531,915 Ordinary Shares. The aggregate impact of these transactions reduced DBSI’s beneficial ownership from 61.3% to 56.0%.
As of December 31, 2017, DBSI held 9,327,088 Ordinary Shares and as of December 31, 2018, DBSI held 9,001,634 Ordinary Shares.
On January 2019, our shareholders approved in
a private placement the issuance of 545,454 Ordinary Shares to DBSI, reflecting a price per share of $2.75.
On
January 29, 2019 DBSI reported on Schedule 13D/A that it holds 9,547,088 Ordinary Shares, constituting 25.1% of our issued and
outstanding Ordinary Shares.
On
February 8, 2017,
Yelin Lapidot Holdings Management Ltd.,
jointly with Messrs. Dov
Yelin and Yair Lapidot, filed a Schedule 13G/A with the SEC reflecting ownership of
1,790,284
,
or 4.04%, of our ordinary shares as of December 31, 2016. On September 5, 2017,
Yelin Lapidot
filed a Schedule 13G/A with the SEC reflecting ownership of
1,620,000
, or
5.55%, of our Ordinary Shares. On January 31, 2018,
Yelin Lapidot
filed a Schedule
13G/A with the SEC reflecting ownership of
1,663,942
, or 5.55%, of our Ordinary Shares
as of December 31, 2017. On February 11, 2019,
Yelin Lapidot
filed a Schedule 13G/A
with the SEC reflecting ownership of 3,113,873, or 8.30%, of our Ordinary Shares as of December 31, 2018.
On
January 19, 2017,
Sphera Capital Ltd., an investment management company for Sphera Small
Cap Fund Ltd., and the portfolio manager of Sphera Capital, Mr. Ron Senator, reported that they purchased 1,260,504 ordinary shares
of our company for a total beneficial ownership of 6.78% of our company. On February 13, 2018, Sphera reported on Schedule 13/G
that it owns 973,032
, or 3.25%, of our Ordinary Shares. As of December 31, 2018, Sphera Capital Ltd. held less than 5%
of our Ordinary Shares.
On
August 23, 2017, the Phoenix Insurance Company Ltd. and its affiliate, Shotfut-Menayot-Israel-HaPhoenix Amitim Ltd., reported
that it held 1,904,762, or 8.97%, of our Ordinary Shares as of December 31, 2016. On August 28, 2017, the Phoenix Insurance Company
reported that it held 2,601,418, or 11.20%, of our Ordinary Shares. On December 27, 2017, it reported that it held 1,455,870,
or 4.86%, of our Ordinary Shares.
As of December
31, 2018,
the Phoenix Insurance Company Ltd. and its affiliate, Shotfut-Menayot-Israel-HaPhoenix
Amitim Ltd. held
less than 5% of our Ordinary Shares.
On
August 8, 2016, Mr. Howard Yeung reported that the secured convertible notes in the amount of $3,000,000 issued to him on December
10, 2007 were fully repaid on June 16, 2016, which reduced Mr. Yeung’s holdings on a beneficial basis, taking into account
the termination of the conversion feature of the note. In addition, the issuance of 8,510,638 ordinary shares to DBSI Investments
Ltd. in a transaction which closed on May 18, 2016, significantly diluted Mr. Yeung’s holdings to 10.85% based on 16,460,120
Ordinary Shares issued and outstanding as of June 14, 2016. As a result of subsequent issuances of Ordinary Shares by the Company,
as of December 31, 2018, Mr. Yeung held less than 5% of our Ordinary Shares.
On
January 7, 2019, Psagot Investment House Ltd. jointly with
Psagot Securities Ltd
and
Psagot Provident Funds and Pension Ltd. and
Psagot Index Funds Ltd. (all are
wholly-owned
subsidiaries of Psagot Investment House Ltd.) filed a Schedule 13G with the SEC
reflecting ownership of
2,423,326
,
or 6.46%, of our Ordinary Shares. On February 19, 2019 Psagot filed a Schedule 13G/A, reflecting ownership of 2,424,883, or 6.46%,
of our Ordinary Shares as of December 31, 2018.
Shareholders
Voting Rights
Our
major shareholders do not have different voting rights.
Record
Holders
Based
on a review of the information provided to us by American Stock Transfer & Trust Company, our transfer agent, as of March
26, 2019
, there were
70 holders of record of our Ordinary Shares, of which 61 record
holders holding approximately 75
%
of our Ordinary Shares had registered addresses
in the U.S., including banks, brokers and nominees. These numbers are not representative of the number of beneficial holders of
our shares nor are they representative of where such beneficial holders reside, since many of these Ordinary Shares were held
of record by banks, brokers or other nominees.
B.
Related Party Transactions
On
May 18, 2016, we completed the sale to DBSI of 8,510,638 of our Ordinary Shares in consideration for approximately $4,000,000,
reflecting a price per share of $0.47. In addition, we issued to DBSI warrants to purchase 4,255,319 Ordinary Shares at an exercise
price per share of $0.47 (resulting in an aggregate exercise price of $2,000,000), exercisable for a period of 24 months following
the date of the initial investment and warrants to purchase an additional 3,636,363 shares at an exercise price per share of $0.55
(resulting in an aggregate exercise price of $2,000,000), exercisable for a period of 48 months following the date of the initial
investment.
DBSI
also granted our Company an option, exercisable either by us or DBSI, for us to receive a convertible loan in the principal amount
of up to $3,175,000 solely for the purpose of the repayment of outstanding shareholders’ debt. We exercised such option
in June 2016. In August 2017, DBSI converted the entire principal loan into 1,322,917 Ordinary Shares reflecting a conversion
price of $2.40 per share.
On
January 2019 our shareholders approved the issuance of additions 545,454 Ordinary Shares to DBSI, at a price per share of $2.75
and approximately $1.5 million in the aggregate.
Form
F-3 Registration Statements
Pursuant
to the registration rights agreements we entered into with DBSI in 2016 and 2017, we filed Registration Statements
on
Form F-3 with the SEC on June 15, 2016, March 27, 2017, September 1, 2017, and on August 10, 2018, for the public resale by DBSI
of up to 2,649,828, 4,351,568, 3,549,071 and 6,133,564 Ordinary Shares, respectively, giving effect to a reverse split effected
on September 13, 2016.
C.
Interests of Experts and Counsel
Not
applicable.
|
ITEM
8.
|
FINANCIAL
INFORMATION
|
A.
Consolidated Statements and Other Financial Information
Export
Sales
Export
sales constitute a significant portion of our sales. In 2018, we had approximately $17.6 million of export sales, constituting
approximately 63% of our total sales. For further information regarding the allocation of our revenues by geographic region see
Item 4 – “
Information on the Company-Markets.
”
Legal
Proceedings
Currently,
we are not a party to any material legal proceedings; however, from time to time we are involved in legal proceedings arising
from the operation of our business. Based on the advice of our legal counsel, management believes such current proceedings, if
any, will not have a material adverse effect on our financial position or results of operations.
Dividend
Distribution Policy
We
have never paid cash dividends to our shareholders. We intend to retain future earnings for use in our business and do not anticipate
paying cash dividends on our Ordinary Shares in the foreseeable future. Any future dividend policy will be determined by the board
of directors and will be based upon conditions then existing, including our results of operations, financial condition, current
and anticipated cash needs, contractual restrictions and other conditions as the board of directors may deem relevant.
According
to the Israeli Companies Law, a company may distribute dividends out of its profits, so long as the company reasonably believes
that such dividend distribution will not prevent the company from paying all its current and future debts. Profits, for purposes
of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two years. In
the event cash dividends are declared, such dividends will be paid in NIS.
B.
Significant Changes
Except
as otherwise disclosed in this annual report, no significant change has occurred since December 31, 2018.
|
ITEM
9.
|
THE
OFFER AND LISTING
|
A.
Offer and Listing Details
Our
capital consists of Ordinary Shares, which are traded on the NASDAQ Capital Market under the symbol “RADA”.
B.
Plan of Distribution
Not
applicable.
C.
Markets
Our
Ordinary Shares are traded on the NASDAQ Capital Market under the symbol “RADA”.
D.
Selling Shareholders
Not
applicable.
E.
Dilution
Not
applicable.
F.
Expense of the Issue
Not
applicable.
|
ITEM
10.
|
ADDITIONAL
INFORMATION
|
A.
Share Capital
Not
applicable.
B.
Memorandum and Articles of Association
Purposes
and Objectives of the Company
We
are registered with the Israeli Companies Registry and have been assigned company number 52-003532-0. Section 2 of our memorandum
of association provides that we were established for the purpose of engaging in the business of providing services of planning,
development, consultation and instruction in the electronics field. In addition, the purpose of our company is to perform various
corporate activities permissible under Israeli law.
On
February 1, 2000, the Israeli Companies Law came into effect and superseded most of the provisions of the Israeli Companies Ordinance
(New Version), 5743-1983, except for certain provisions which relate to liens, bankruptcy, dissolution and liquidation of companies.
Under the Israeli Companies Law, as recently amended, various provisions, some of which are detailed below, overrule the current
provisions of our articles of association.
The
Powers of the Directors
Under
the provisions of the Israeli Companies Law, and our articles of association, a director cannot participate in a meeting nor vote
on a proposal, arrangement or contract in which he or she is materially interested. In addition, our directors cannot vote compensation
to themselves or any members of their body without the approval of our audit committee and our shareholders at a general meeting.
The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except in the same manner as
any other transaction by us.
Under
our articles of association, retirement of directors from office is not subject to any age limitation and our directors are not
required to own shares in our company in order to qualify to serve as directors.
Rights
Attached to Shares
Our
authorized share capital consists of
100,000,000
Ordinary Shares of a nominal value
of NIS 0.03 each. All outstanding Ordinary Shares are validly issued, fully paid and non-assessable. The rights attached to the
Ordinary Shares are as follows:
Dividend
rights.
Holders of our Ordinary Shares are entitled to the full amount of any cash or share dividend subsequently declared.
The board of directors may declare interim dividends and propose the final dividend with respect to any fiscal year only out of
the retained earnings, in accordance with the provisions of the Israeli Companies Law. Our articles of association provide that
the declaration of a dividend requires approval of the board of directors. See Item 8A. “Financial Information – Consolidated
and Other Financial Information – Dividend Distribution Policy.” If after one year a dividend has been declared and
it is still unclaimed, the board of directors is entitled to invest or utilize the unclaimed amount of dividend in any manner
to our benefit until it is claimed. We are not obligated to pay interest or linkage differentials on an unclaimed dividend.
Voting
rights.
Holders of Ordinary Shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders.
Such voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential
rights that may be authorized in the future.
Except
as otherwise required by the Israeli Companies Law, a resolution of the Shareholders shall be deemed adopted if approved by the
holders of a simple majority of the voting power represented at the General Meeting in person or by proxy and voting thereon,
as one class, and disregarding abstentions from the count of the voting power present and voting.
Pursuant
to our Articles of Association, our directors, except for the external directors, shall be elected at the Annual General Meeting
by the vote of the holders of a majority of the voting power represented at such meeting in person or by proxy and voting on the
election of directors, and each director shall generally serve until the Annual General Meeting next following the Annual General
Meeting at which such director was appointed, or his earlier vacation of office or removal pursuant to the Articles of Association.
Except with respect to the removal of external directors, the shareholders shall be entitled to remove any director(s) from office,
by a simple majority of the voting power represented at the meeting in person or by proxy and voting thereon. All the members
of our Board of Directors (except the external directors) may be reelected upon completion of their term of office. For information
regarding the election of external directors, see Item 6C “Directors, Senior Management and Employees - Board Practices
-Election of Directors.”
Rights
to share in the company’s profits.
Our shareholders have the right, in accordance with the Board of Directors resolution,
to share in our profits distributed as a dividend and any other permitted distribution. See this Item 10B. “Additional Information
– Memorandum and Articles of Association – Rights Attached to Shares – Dividend Rights.”
Rights
to share in surplus in the event of liquidation.
In the event of our liquidation, after satisfaction of liabilities to creditors,
our assets will be distributed to the holders of Ordinary Shares in proportion to the nominal value of their holdings. This right
may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential
rights that may be authorized in the future.
Liability
to capital calls by the company.
Under our memorandum of association and the Israeli Companies Law, the liability of our shareholders
is limited to the par value of the shares held by them.
Limitations
on any existing or prospective major shareholder.
See
Item 6C. “Directors, Senior Management and Employees - Board Practices – Approval of Related Party Transactions under
Israeli Law.”
Changing
Rights Attached to Shares
According
to the Articles of Association, in order to change the rights attached to any class of shares, unless otherwise provided by the
terms of the class, such change must be adopted by a general meeting of the shareholders with a simple majority of the class of
shares so effected, and a simple majority vote of all classes of shares voting together as a single class at a General Meeting.
Annual
and Extraordinary General Meetings
The
board of directors must convene an annual meeting of shareholders at least once every calendar year, within 15 months of the last
annual meeting. Depending on the matter to be voted upon, notice of at least 21 days or 35 days prior to the date of the meeting
is required. Our board of directors may, in its discretion, convene additional meetings as “Extraordinary General Meetings.”
In addition, the board of directors must convene an Extraordinary General Meeting upon the demand of two of the directors, 25%
of the nominated directors, one or more shareholders having at least 5% of the outstanding share capital and at least 1% of the
voting power in the company, or one or more shareholders having at least 5% of the voting power in the company.
The
quorum required for a General Meeting of shareholders consists of at least two shareholders present in person or represented by
proxy who hold or represent, in the aggregate, at least 25% of the voting rights of the issued share capital. A meeting adjourned
for lack of a quorum is adjourned to the same day in the following week at the same time and place or any time and place as the
directors designate in a notice to the shareholders or to such day and at such time and place as the Chairman of the General Meeting
shall determine. At the reconvened meeting, if the original meeting was convened upon the demand of one or more shareholders having
at least 5% of the outstanding share capital and at least 1% of the voting power in the company, or one or more shareholders having
at least 5% of the voting power in the company, the quorum will be one or more Shareholders, present in person or by proxy, and
holding the number of shares required for making such requisition. In any other case the required quorum consists of any two members
present in person or by proxy.
Limitations
on the Rights to Own Securities in Our Company
Neither
our memorandum of association or our articles of association nor the laws of the State of Israel restrict in any way the ownership
or voting of shares by non-residents, except with respect to subjects of countries which are in a state of war with Israel.
Provisions
Restricting Change in Control of Our Company
The
Israeli Companies Law requires that mergers between Israeli companies be approved by the board of directors and general meeting
of shareholders of both parties to the transaction. The approval of the board of directors of both companies is subject to such
board’s confirmation that there is no reasonable doubt that after the merger the surviving company will be able to fulfill
its obligations towards its creditors. Each company must notify its creditors about the contemplated merger. Generally, under
the Israeli Companies Law, our articles of association are deemed to include a requirement that such merger be approved by a special
resolution of the shareholders, as explained above. The approval of the merger by the general meetings of shareholders of the
companies is also subject to additional approval requirements as specified in the Israeli Companies Law and regulations promulgated
thereunder. For purposes of the shareholders’ approval, the merger shall not be deemed as granted, unless the court determines
otherwise, if it is not supported by the majority of the shares represented at the general meeting, other than those shares that
are held by the other party to the merger or by any shareholder holding 25% or more of the outstanding share capital of the company
or the right to appoint 25% or more of the members of the board of directors. The Israeli Companies Law also provides that an
acquisition of shares of a public company must be made by means of a special tender offer if as a result of the acquisition the
purchaser would become a 25% or greater shareholder of the company and there is no existing 25% or greater shareholder in the
company. An acquisition of shares of a public company must also be made by means of a tender offer if as a result of the acquisition
the purchaser would become a 45% or greater shareholder of the company and there is no existing 45% or greater shareholder in
the company. These requirements do not apply if the acquisition (i) was made through a private placement that received shareholder
approval, (ii) was from a 25% shareholder of the company and resulted in the acquirer becoming a 25% shareholder of the company
or (iii) was from a 45% shareholder of the company and resulted in the acquirer becoming a 45% shareholder of the company. The
special tender offer must be extended to all shareholders, but the offer may include explicit limitations allowing the offeror
not to purchase shares representing more than 5% of the voting power attached to the company’s outstanding shares, regardless
of how many shares are tendered by shareholders. The special tender offer may be effected only if (i) at least 5% of the voting
power attached to the company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered
in the offer exceeds the number of shares whose holders objected to the offer.
If,
as a result of an acquisition of shares, the acquirer will hold more than 90% of the outstanding shares, the acquisition must
be made by means of a tender offer for the entire outstanding shares. In such event, if less than 5% of the outstanding shares
are not tendered in the tender offer, all the shares of the company will be deemed as tendered and sold. However, if more than
5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire any shares at all. The law
provides for appraisal allowing any shareholder to file a motion to the court within six months following the consummation of
a full tender offer. However, in the event of a full tender offer, the offeror may determine that any shareholder who accepts
the offer will not be entitled to appraisal rights. Such determination will be effective only if the offeror or the company has
timely published all the information that is required to be published in connection with such full tender offer pursuant to all
applicable laws.
In
addition, the purchase of 25% or more of the outstanding share capital of a company or the purchase of substantial assets of a
company requires, under certain conditions the approval of the Restrictive Practices Authority. Furthermore, if the target company
has received tax incentives of grants from the Innovation Authority, changes in ownership may require also the approval of the
tax authorities or the Innovation Authority, as applicable.
Disclosure
of Shareholders Ownership
The
Israeli Securities Law and regulations promulgated thereunder do not require a company whose shares are publicly traded solely
in a stock exchange outside of Israel, as in the case of our company, to disclose its share ownership.
Changes
in Our Capital
Changes
in our capital are subject to the approval of the shareholders at a general meeting by a simple majority of the votes of shareholders
participating and voting in the general meeting.
C
Material Contracts
We
do not deem any individual contract to be a material contract which is not already discussed and filed as an exhibit or in the
ordinary course of our business.
D
Exchange Controls
Israeli
law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our Ordinary Shares.
Non-residents
of Israel who purchase our Ordinary Shares will be able to convert dividends, if any, thereon, and any amounts payable upon our
dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our Ordinary Shares to an Israeli resident,
into freely repairable dollars, at the exchange rate prevailing at the time of conversion, provided that the Israeli income tax
has been withheld (or paid) with respect to such amounts or an exemption has been obtained.
E
Taxation
The
following is a discussion of Israeli and U.S. tax consequences material to us and our shareholders. To the extent that the discussion
is based on new tax legislation which has not been subject to judicial or administrative interpretation, the views expressed in
the discussion might not be accepted by the tax authorities in question. The discussion is not intended, and should not be construed,
as legal or professional tax advice and does not exhaust all possible tax considerations.
Holders
of our Ordinary Shares should consult their own tax advisors as to the U.S., Israeli or other tax consequences of the purchase,
ownership and disposition of Ordinary Shares, including, in particular, the effect of any foreign, state or local taxes.
Israeli
Tax Considerations
The
following is a summary of the current tax structure applicable to companies in Israel, with special reference to its effect on
us. The following also contains a discussion of the material Israeli tax consequences to purchasers of our Ordinary Shares and
Israeli government programs benefiting us. 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. Examples of this kind of investor include residents of Israel or traders in securities who are subject
to special tax regimes not covered in this discussion. Since some parts of this discussion are based on new tax legislation that
has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities
or the courts will accept the views expressed in this discussion.
General
Corporate Tax Rate
Generally,
Israeli companies were subject to corporate tax on taxable income and capital gains at the rate of 23%, 24% and 25% for the tax
years 2018, 2017 and 2016, respectively
.
Law
for the Encouragement of Industry (Taxes), 1969
We
qualify as an “Industrial Company” under the Law for the Encouragement of Industry (Taxes), 1969 (the “Industrial
Encouragement Law”). The Industrial Encouragement Law defines an “Industrial Company” as a company that is resident
in Israel and that derives at least 90% of its income in any tax year, other than income from defense loans, capital gains, interest
and dividends, from an enterprise whose major activity in a given tax year is industrial production.
The
principal benefit from the above law is the deduction of expenses in connection with a public offering. Also, under the industrial
Encouragement Law an “Industrial Company” is entitled to special rates of depreciation for industrial equipment and
in addition to amortization of the cost of purchased know-how and patents over an eight years period for tax purposes and an accelerated
depreciation rate on equipment.
Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
Capital
Gains Tax on Sales of Our Ordinary Shares
Capital
gains tax is imposed on the disposal of capital assets by an Israeli resident and on the disposal of such assets by a non-Israeli
resident if those assets are either (i) located in Israel; (ii) shares or rights to shares in an Israeli resident company, or
(iii) represent, directly or indirectly, rights to assets located in Israel. The Israeli Income Tax Ordinance distinguishes between
“Real Capital Gain” and “Inflationary Surplus.” The Real Capital Gain on the disposition of a capital
asset is the amount of total capital gain in excess of Inflationary Surplus. Inflationary Surplus is computed, generally, on the
basis of the increase in the Israeli Consumer Price Index between the date of purchase and the date of disposal of the capital
asset.
Under
income tax regulations shareholders that are not Israeli residents are generally exempt from Israeli capital gains tax on any
gains derived from the sale, exchange or disposition of our Ordinary Shares, provided that: (1) the securities were purchased
upon or after the registration of the securities on a stock exchange (this requirement generally does not apply to shares purchased
on or after January 1, 2009); (2) the seller of the securities does not have a permanent establishment in Israel to which the
generated capital gain is attributed; and (3) such gains did not derive from a permanent establishment or business activity of
such shareholders in Israel. However, non-Israeli corporations will not be entitled to the foregoing exemptions if an Israeli
resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary of or is entitled
to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
Under
the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our Ordinary Shares by a shareholder who is a U.S. resident (for
purposes of the U.S.-Israel Tax Treaty) holding the Ordinary Shares as a capital asset is exempt from Israeli capital gains tax
unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of our voting capital during
any part of the 12-month period preceding such sale, exchange or disposition, (ii) ) or the seller, if an individual, has been
present in Israel for more than 183 days (in the aggregate) during the taxable year, or (iii) the capital gains arising from such
sale are attributable to a permanent establishment of the shareholder located in Israel. However, under the U.S.-Israel Tax Treaty,
U.S. Residents would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to
such sale, exchange or disposition, subject to limitations in U.S. laws applicable to foreign tax credits. The treaty does not
relate to U.S. state or local taxes.
Individual
and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (a tax rate
of 25% for a corporation in 2012, 25% in 2013, 26.5% in 2014 and 2015, 25% in 2016 and 24% in 2017 and thereafter) and a marginal
tax rate of up to 48% for an individual in 2012 and thereafter. In 2014, an additional tax liability of 3% was added to the applicable
tax rate on the annual taxable income of individuals (whether any such individual is an Israeli resident or non-Israeli resident)
exceeding NIS 640,000.
Taxation
of Foreign Resident Holders of Shares
Non-residents
of Israel are generally subject to Israeli income tax on the receipt of dividends paid on our Ordinary Shares at the rate of 25%,
which tax will be withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder’s
country of residence. With respect to a substantial shareholder, the applicable tax rate is at 30% Under the U.S.-Israel Tax Treaty,
the maximum rate of tax withheld in Israel on dividends paid to a holder of our Ordinary Shares who is a U.S. resident (for purposes
of the U.S.-Israel Tax Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated by
our Approved Enterprise, that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital throughout
the tax year in which the dividend is distributed as well as the previous tax year, is 12.5%.
A
non-resident of Israel who receives dividends from which tax was withheld is generally exempt from the duty to file returns in
Israel in respect of such income; provided such income was not derived from a business conducted in Israel by the taxpayer, and
the taxpayer has no other taxable sources of income in Israel.
Foreign
Exchange Regulations
Dividends
(if any) paid to the holders of our Ordinary Shares, and any amounts payable with respect to our Ordinary Shares upon dissolution,
liquidation or winding up, as well as the proceeds of any sale in Israel of the Ordinary Shares to an Israeli resident, may be
paid in non-Israeli currency or, if paid in Israeli currency, may be converted into freely reparable U.S. dollars at the rate
of exchange prevailing at the time of conversion, however, Israeli income tax is required to have been paid or withheld on these
amounts.
Controlled
Foreign Corporation
In
general, and subject to the provisions of all relevant legislation, an Israeli resident who holds, directly or indirectly, 10%
or more of the rights in a foreign corporation whose shares are not publicly traded, in which more than 50% of the rights are
held directly or indirectly by Israeli residents, and a majority of whose income in a tax year is considered passive income (generally
referred to as a Controlled Foreign Corporation, or CFC), is liable for tax on the portion of his income attributed to holdings
in such corporation, as if such income was distributed to him as a dividend.
Share
Allocations to controlling shareholders
Controlling
shareholders will be taxable under section 3(i) to the Tax Ordinance, according to which, the grantee pays income tax rate (according
to the marginal tax rate of the grantee- up to 48% in 2012) on the profit upon the sale of the underlying shares. As of January
1, 2013, the marginal tax rate (48%) of an individual will increase in 3% in case his taxable income in a tax year exceed the
amount of NIS 640,000 (including capital gains from marketable securities, dividends and interest income).
United
States Federal Income Taxation
The
following is a general discussion of the material U.S. federal income tax consequences of the acquisition, ownership and disposition
of our Ordinary Shares. This description addresses only the U.S. federal income tax considerations that may be relevant to U.S.
Holders (as defined below) who hold our Ordinary Shares as capital assets. This summary is based on the U.S. Internal Revenue
Code of 1986, as amended, (the “Code”) Treasury regulations promulgated thereunder, judicial and administrative interpretations
thereof and the U.S.-Israel Tax Treaty (the “Treaty”), all as in effect on the date hereof and all of which are subject
to change either prospectively or retroactively or to differing interpretations. 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
or disposition of our Ordinary Shares or that such a position would not be sustained. This discussion does not address all tax
considerations that may be relevant to a U.S. Holder of Ordinary Shares. In addition, this description does not account for the
specific circumstances of any particular investor, such as:
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broker-dealers;
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financial
institutions or financial services entities;
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certain
insurance companies;
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investors
liable for alternative minimum tax;
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regulated
investment companies, real estate investment trusts, or grantor trusts;
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dealers
or traders in securities, commodities or currencies;
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tax-exempt
organizations;
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retirement
plans;
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corporations:
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pension
funds;
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certain
former citizens or long-term residents of the United States;
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non-resident
aliens of the United States or taxpayers whose functional currency is not the U.S. dollar;
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persons
who hold Ordinary Shares through partnerships or other pass-through entities;
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persons
who acquire their Ordinary Shares through the exercise or cancellation of employee stock options or otherwise as compensation
for services;
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direct,
indirect or constructive owners of investors that actually or constructively own at least 10% of the total combined voting
power of our shares or at least 10% of our shares by value; or
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investors
holding Ordinary Shares as part of a straddle, appreciated financial position, a hedging transaction or conversion transaction.
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If
a partnership or an entity treated as a partnership for U.S. federal income tax purposes owns our Ordinary Shares, the U.S. federal
income tax treatment of a partner in such a partnership will generally depend upon the status of the partner and the activities
of the partnership. A partnership that owns our Ordinary Shares and the partners in such partnership should consult their tax
advisors about the U.S. federal income tax consequences of holding and disposing of Ordinary Shares.
This
summary does not address the effect of any U.S. federal taxation (such as estate and gift tax) other than U.S. federal income
taxation. In addition, this summary does not include any discussion of state, local or non-U.S. taxation.
For
purposes of this summary the term “U.S. Holder” means a person that is eligible for the benefits of the Treaty and
is a beneficial owner of Ordinary Shares who is, for U.S. federal income tax purposes:
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an
individual who is a citizen or a resident of the United States;
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a
corporation or other entity taxable as a corporation for United States federal income tax purposes, created or organized in
or under the laws of the United States or any political subdivision thereof;
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an
estate the income of which is subject to U.S. federal income taxation regardless of its source; or
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a
trust if the trust has validly elected to be treated as a U.S. person for U.S. federal income tax purposes or if (1) a court
within the United States is able to exercise primary supervision over the trust’s administration and (2) one or more
U.S. persons have the authority to control all of the substantial decisions of the trust.
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Unless
otherwise indicated, it is assumed for the purposes of this discussion that the Company is not, and will not become, a “passive
foreign investment company” (“PFIC”) for U.S. federal income tax purposes. See
“—Passive Foreign
Investment Companies
” below.
Taxation
of Distributions
Subject
to the discussion below under the heading
“—Passive Foreign Investment Companies
,” the gross amount of
any distributions received with respect to our Ordinary Shares, including the amount of any Israeli taxes withheld therefrom,
will constitute dividends for U.S. federal income tax purposes when such distribution is actually or constructively received,
to the extent such distribution is paid out of our current and accumulated earnings and profits, as determined for U.S. federal
income tax purposes. Because we do not expect to maintain calculations of our earnings and profits under U.S. federal income tax
principles, it is expected that the entire amount of any distribution will generally be reported as dividend income to you. Dividends
are included in gross income at ordinary income rates, unless such dividends constitute “qualified dividend income,”
as set forth in more detail below. Distributions in excess of our current and accumulated earnings and profits would be treated
as a non-taxable return of capital to the extent of your adjusted tax basis in our Ordinary Shares and any amount in excess of
your tax basis would be treated as gain from the sale of Ordinary Shares. See “
—Sale, Exchange or Other Disposition
of Ordinary Shares
” below for a discussion of the taxation of capital gains. Our dividends would not qualify for the
dividends-received deduction generally available to corporations under section 243 of the Code.
Dividends
that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar
amount calculated by reference to the exchange rate in effect on the day such dividends are received, regardless of whether the
payment is in fact converted into U.S. dollars. A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at
an exchange rate other than the rate in effect on such day may have a foreign currency exchange gain or loss that would generally
be treated as U.S.-source ordinary income or loss. U.S. Holders should consult their own tax advisors concerning the U.S. tax
consequences of acquiring, holding and disposing of NIS.
Subject
to complex limitations, some of which vary depending upon the U.S. Holder’s circumstances, any Israeli withholding tax imposed
on dividends paid with respect to our Ordinary Shares, may be a foreign income tax eligible for credit against a U.S. Holder’s
U.S. federal income tax liability (or, alternatively, for deduction against income in determining such tax liability). Israeli
taxes withheld in excess of the applicable rate allowed by the Treaty (if any) will not be eligible for credit against a U.S.
Holder’s federal income tax liability. The limitation on foreign income taxes eligible for credit is calculated separately
with respect to specific classes of income. Dividends paid with respect to our common stock generally will be treated as foreign-source
passive category income or, in the case of certain U.S. Holders, general category income for U.S. foreign tax credit purposes.
Further, there are special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject
to a reduced tax rate. A U.S. Holder may be denied a foreign tax credit with respect to Israeli income tax withheld from dividends
received on our Ordinary Shares if such U.S. Holder fails to satisfy certain minimum holding period requirements or to the extent
such U.S. Holder’s position in Ordinary Shares is hedged. An election to deduct foreign taxes instead of claiming a foreign
tax credit applies to all foreign taxes paid or accrued in the taxable year. The rules relating to the determination of the foreign
tax credit are complex. You should consult with your own tax advisors to determine whether and to what extent you would be entitled
to this credit.
Subject
to certain limitations (including the PFIC rules discussed below), “qualified dividend income” received by a non-corporate
U.S. Holder may be subject to tax at the lower long-term capital gain rates (currently, a maximum rate of 20%). Distributions
taxable as dividends paid on our Ordinary Shares should qualify for a reduced rate if we are a “qualified foreign corporation,”
as defined in Code section 1(h)(11)(C). We will be a qualified foreign corporation if either: (i) we are entitled to benefits
under the Treaty or (ii) our Ordinary Shares are readily tradable on an established securities market in the United States and
certain other requirements are met. We believe that we are entitled to benefits under the Treaty and that our Ordinary Shares
currently are readily tradable on an established securities market in the United States. However, no assurance can be given that
our Ordinary Shares will remain readily tradable. The rate reduction does not apply unless certain holding period requirements
are satisfied, nor does it apply to dividends received from a PFIC (see discussion below), in respect of certain risk-reduction
transactions, or in certain other situations. U.S. Holders of our Ordinary Shares should consult their own tax advisors regarding
the effect of these rules in their particular circumstances.
Sale,
Exchange or Other Disposition of Ordinary Shares
Subject
to the discussion of the PFIC rules below, if you sell or otherwise dispose of our Ordinary Shares (other than with respect to
certain non-recognition transactions), you will generally recognize gain or loss for U.S. federal income tax purposes in an amount
equal to the difference between the amount realized on the sale or other disposition and your adjusted tax basis in our Ordinary
Shares, in each case determined in U.S. dollars. Such gain or loss will generally be capital gain or loss and will be long-term
capital gain or loss if you have held the Ordinary Shares for more than one year at the time of the sale or other disposition.
Long-term capital gain realized by a non-corporate U.S. Holder is generally eligible for a preferential tax rate (currently at
a maximum of 20%). In general, any gain that you recognize on the sale or other disposition of Ordinary Shares will be U.S.-source
for purposes of the foreign tax credit limitation; losses will generally be allocated against U.S. source income. Deduction of
capital losses is subject to certain limitations under the Code.
In
the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of our Ordinary Shares, the amount
realized will be based on the U.S. dollar value of the NIS received with respect to the Ordinary Shares as determined on the settlement
date of such exchange. A cash basis U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at a conversion
rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss, based on any appreciation
or depreciation in the value of NIS against the U.S. dollar, which would be treated as ordinary income or loss.
An
accrual basis U.S. Holder may elect the same treatment of currency exchange gain or loss required of cash basis taxpayers with
respect to a sale or disposition of our Ordinary Shares that are traded on an established securities market, provided that the
election is applied consistently from year to year. Such election may not be changed without the consent of the IRS. In the event
that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations
applicable to foreign currency transactions), such U.S. Holder is required to calculate the value of the proceeds as of the “trade
date” and may have a foreign currency gain or loss for U.S. federal income tax purposes in the event of any difference between
the U.S. dollar value of NIS prevailing on the trade date and on the settlement date. Any such currency gain or loss generally
would be treated as U.S.- source ordinary income or loss and would be subject to tax in addition to the gain or loss, if any,
recognized by such U.S. Holder on the sale or disposition of such Ordinary Shares.
Passive
Foreign Investment Companies
We
may have been a PFIC for U.S. federal income tax purposes for the 2018 taxable year. If we were a PFIC for any taxable year during
which a U.S. Holder owned Ordinary Shares, certain adverse consequences could apply to the U.S. Holder. Specifically, unless a
U.S. Holder makes one of the elections mentioned below, gain recognized by the U.S. Holder on a sale or other disposition of Ordinary
Shares would be allocated ratably over the U.S. Holder’s holding period for the Ordinary Shares. The amounts allocated to
the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The
amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations,
as appropriate, for that taxable year, and an interest charge would be imposed on the resulting tax liability. Further, any distribution
in excess of 125% of the average of the annual distributions received by the U.S. Holder on our Ordinary Shares during the preceding
three years or the U.S. Holder’s holding period, whichever is shorter, would be subject to taxation as described immediately
above. Certain elections (such as a mark-to-market election or a QEF election) may be available to U.S. Holders and may result
in alternative tax treatment. U.S. Holders should consult their tax advisors as to the availability and consequences of a mark-to-market
election or a QEF election with respect to their Ordinary Shares.
In
addition, if we were a PFIC for a taxable year in which we pay a dividend or the prior taxable year, the favorable dividend rates
discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply. If we were a PFIC for any
taxable year in which a U.S. Holder owned our shares, the U.S. Holder would generally be required to file annual returns with
the IRS on IRS Form 8621.
Additional
Tax on Investment Income
In
addition to the income taxes described above, U.S. Holders that are individuals, estates or trusts and whose income exceeds certain
thresholds may be subject to a 3.8% Medicare contribution tax on net investment income, which includes dividends and capital gains
from the sale or exchange of our Ordinary Shares
.
Backup
Withholding and Information Reporting
Payments
in respect of our Ordinary Shares may be subject to information reporting to the IRS and to U.S. backup withholding tax at the
rate (currently) of 24%. Backup withholding will not apply, however, if you (i) fall within certain exempt categories and demonstrate
the fact when required or (ii) furnish a correct taxpayer identification number and make any other required certification.
Backup
withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s
U.S. tax liability. A U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing
the appropriate claim for refund with the IRS.
U.S.
citizens and individuals taxable as resident aliens of the United States that (i) own “specified foreign financial assets”
(as defined in Section 6038D of the Code and the regulations thereunder) with an aggregate value in a taxable year in excess of
certain thresholds (as determined under rules in Treasury regulations) and (ii) are required to file U.S. federal income tax returns
generally will be required to file an information report with respect to those assets with their tax returns. IRS Form 8938 has
been issued for that purpose. “Specified foreign financial assets” include any financial accounts maintained by foreign
financial institutions, foreign stocks held directly, and interests in foreign estates, foreign pension plans or foreign deferred
compensation plans. Under those rules, our Ordinary Shares, whether owned directly or through a financial institution, estate
or pension or deferred compensation plan, would be “specified foreign financial assets.” Under Treasury regulations,
the reporting obligation applies to certain U.S. entities that hold, directly or indirectly, specified foreign financial assets.
Penalties can apply if there is a failure to satisfy this reporting obligation. In addition, in the event a U.S. Holder that is
required to file IRS Form 8938 does not file such form, the statute of limitations on the assessment and collection of U.S. federal
income taxes of such U.S. Holder for the related tax year may not close until three years after the date that the required information
is filed. A U.S. Holder is urged to consult the U.S. Holder’s tax advisor regarding the reporting obligation.
Any
U.S. Holder who acquires more than $100,000 of our Ordinary Shares or holds 10% or more of our Ordinary Shares by vote or value
may be subject to certain additional U.S. information reporting requirements.
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. You should consult your tax advisor concerning the tax consequences of your particular
situation.
F.
Dividend and Paying Agents
Not
applicable.
G.
Statement by Experts
Not
applicable.
H.
Documents on Display
We
are subject to certain of the reporting requirements of the Exchange Act, as applicable to “foreign private issuers”
as defined in Rule 3b-4 under the Exchange Act. As a foreign private issuer, we are exempt from certain provisions of the Exchange
Act. Accordingly, our proxy solicitations are not subject to the disclosure and procedural requirements of Regulation 14A under
the Exchange Act, and transactions in our equity securities by our officers and directors are exempt from reporting and the “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 periodic reports and financial statements as frequently or as promptly as U.S. companies whose securities are registered
under the Exchange Act. However, we file with the SEC an annual report on Form 20-F containing financial statements audited by
an independent accounting firm. We also submit to the SEC reports on Form 6-K containing (among other things) press releases and
unaudited financial information. We post our annual report on Form 20-F on our website (
www.rada.com
) promptly following
the filing of our annual report with the SEC. The information on our website is not incorporated by reference into this annual
report.
This
annual report and the exhibits thereto and any other document we file pursuant to the Exchange Act may be inspected without charge
and copied at prescribed rates at the SEC public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You
may obtain information on the operation of the SEC’s public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330.
The Exchange Act file number for our SEC filings is 000-15375.
The
SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding
registrants that make electronic filings with the SEC using its EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.
The
documents concerning our company that are referred to in this annual report may also be inspected at our offices located at 7
Giborei Israel Street, Netanya 4250407, P.O. Box 8606, Israel.
I.
Subsidiary Information
Not
applicable.
|
ITEM
11.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
|
Interest
Rate Risk
We
currently do not invest in or otherwise hold, for trading or other purposes, any financial instruments subject to market risks.
Generally, we pay interest on our credit facilities, convertible notes and short-term loans based on Libor, for dollar-denominated
loans, and Israeli prime or adjustment differences to the Israeli consumer price index, for some of our NIS-denominated loans.
As a result, changes in the general level of interest rates may affect the amount of interest payable by us under these facilities.
Foreign
Currency Exchange Risk
The
depreciation of the NIS against the dollar has the effect of reducing the dollar amount of any of our expenses or liabilities
which are payable in NIS (unless such expenses or payables are linked to the dollar). As of December 31, 2018, we had liabilities
payable in NIS which are not linked to the dollar in the amount of
$
5.5 million and cash and receivables in the amount
of $5.2 million denominated in NIS. Accordingly,
1%
appreciation of the NIS against
the dollar would increase our financing expenses by approximately $3,000.
A 1%
depreciation
of the NIS against the dollar would decrease our financing expenses by the same amount. However, the amount of liabilities payable
and/or cash and receivables in NIS is likely to change from time to time.
Because
exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations and especially larger periodic
devaluations will have an impact on our profitability and period-to-period comparisons of our results. The effects of foreign
currency re-measurements are reported in our consolidated financial statements in continuing operations.
|
ITEM
12.
|
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not
applicable.
CONSOLIDATED
BALANCE SHEETS
U.S.
dollars in thousands, except share and per share data
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
5,650
|
|
|
$
|
2,904
|
|
|
Other accounts payable and accrued expenses (Note 7)
|
|
|
3,842
|
|
|
|
2,814
|
|
|
Advances from customers
|
|
|
727
|
|
|
|
41
|
|
|
Contract liabilities (Note 3)
|
|
|
366
|
|
|
|
-
|
|
|
Current liabilities related to discontinued operations
|
|
|
366
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
10,951
|
|
|
|
6,087
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued severance pay and other long term liability
|
|
|
690
|
|
|
|
758
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
690
|
|
|
|
758
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENT LIABILITIES (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY:
|
|
|
|
|
|
|
|
|
|
Share capital (Note 9) -
|
|
|
|
|
|
|
|
|
|
Ordinary shares of NIS 0.03 par value - Authorized: 100,000,000 shares and 37,500,000 shares at December 31, 2018 and at December 31, 2017 respectively; Issued and outstanding: 37,516,891 and 31,392,040 at December 31, 2018 and at December 31, 2017 respectively.
|
|
|
386
|
|
|
|
335
|
|
|
Additional paid-in capital
|
|
|
118,568
|
|
|
|
104,923
|
|
|
Accumulated other comprehensive income
|
|
|
220
|
|
|
|
392
|
|
|
Accumulated deficit
|
|
|
(76,961
|
)
|
|
|
(77,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total RADA Electronic Industries shareholders’ equity
|
|
|
42,213
|
|
|
|
28,526
|
|
|
Non-controlling interest
|
|
|
(352
|
)
|
|
|
659
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity
|
|
|
41,861
|
|
|
|
29,185
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
53,502
|
|
|
$
|
36,030
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
U.S.
dollars in thousands, except share and per share data
|
|
|
Year ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
26,909
|
|
|
$
|
25,010
|
|
|
$
|
11,663
|
|
|
Services
|
|
|
1,123
|
|
|
|
1,172
|
|
|
|
1,158
|
|
|
|
|
|
28,032
|
|
|
|
26,182
|
|
|
|
12,821
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
17,771
|
|
|
|
17,807
|
|
|
|
10,594
|
|
|
Services
|
|
|
143
|
|
|
|
112
|
|
|
|
785
|
|
|
|
|
|
17,914
|
|
|
|
17,919
|
|
|
|
11,379
|
|
|
Gross profit
|
|
|
10,118
|
|
|
|
8,263
|
|
|
|
1,442
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
3,092
|
|
|
|
1,575
|
|
|
|
758
|
|
|
Marketing and selling
|
|
|
2,860
|
|
|
|
2,137
|
|
|
|
2,269
|
|
|
General and administrative
|
|
|
4,001
|
|
|
|
2,568
|
|
|
|
1,814
|
|
|
Net loss from sale of fixed asset
|
|
|
103
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
10,056
|
|
|
|
6,280
|
|
|
|
4,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
62
|
|
|
|
1,983
|
|
|
|
(3,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial (expenses) income, net (Note 11)
|
|
|
119
|
|
|
|
(156
|
)
|
|
|
(1,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
181
|
|
|
|
1,827
|
|
|
|
(4,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations
|
|
|
(404
|
)
|
|
|
515
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(223
|
)
|
|
$
|
2,342
|
|
|
$
|
(4,907
|
)
|
|
Net income (loss) attributable to non-controlling interest
|
|
|
(386
|
)
|
|
|
103
|
|
|
|
3
|
|
|
Net income (loss) attributable to RADA Electronic Industries’ shareholders
|
|
|
163
|
|
|
|
2,239
|
|
|
|
(4,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) from continuing operations per Ordinary share
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
(0.35
|
)
|
|
Diluted net income (loss) from continuing operations per Ordinary share
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
(0.35
|
)
|
|
Basic and diluted net income (loss) from discontinued operations per Ordinary share
|
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
|
$
|
0.00
|
|
|
Basic net income (loss) per Ordinary share
|
|
$
|
0.01
|
|
|
$
|
0.09
|
|
|
$
|
(0.35
|
)
|
|
Diluted net income (loss) per Ordinary share
|
|
$
|
0.01
|
|
|
$
|
0.08
|
|
|
$
|
(0.35
|
)
|
|
Weighted average number of Ordinary shares used for computing basic net income (loss) per share
|
|
|
33,184,570
|
|
|
|
24,956,915
|
|
|
|
14,029,346
|
|
|
Weighted average number of Ordinary shares used for computing diluted net income (loss) per share
|
|
|
33,716,931
|
|
|
|
28,126,509
|
|
|
|
14,029,346
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
U.S.
dollars in thousands
|
|
|
Year ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(223
|
)
|
|
$
|
2,342
|
|
|
$
|
(4,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustment
|
|
|
(251
|
)
|
|
|
213
|
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
(474
|
)
|
|
|
2,555
|
|
|
|
(5,114
|
)
|
|
Less: comprehensive income (loss) attributable to non-controlling interest
|
|
|
(465
|
)
|
|
|
146
|
|
|
|
(39
|
)
|
|
Comprehensive income (loss) attributable to RADA Electronic Industries’ shareholders
|
|
$
|
(9
|
)
|
|
$
|
2,409
|
|
|
$
|
(5,075
|
)
|
The
accompanying notes are an integral part of the consolidated financial statements.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
U.S.
dollars in thousands, except share data
|
|
|
Number of
|
|
|
|
|
|
Additional
|
|
|
Accumulated other
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
|
Ordinary
|
|
|
Share
|
|
|
paid-in
|
|
|
comprehensive
|
|
|
Accumulated
|
|
|
controlling
|
|
|
Total
|
|
|
|
|
shares (*)
|
|
|
capital
|
|
|
capital
|
|
|
income
|
|
|
deficit
|
|
|
interest
|
|
|
equity
|
|
|
Balance at January 1, 2016
|
|
|
7,949,444
|
|
|
$
|
146
|
|
|
$
|
82,427
|
|
|
$
|
387
|
|
|
$
|
(74,453
|
)
|
|
$
|
552
|
|
|
$
|
9,059
|
|
|
Beneficial conversion feature related to convertible loans from shareholders (Note 8)
|
|
|
-
|
|
|
|
-
|
|
|
|
123
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
123
|
|
|
Extinguishment of convertible loan
|
|
|
-
|
|
|
|
-
|
|
|
|
(359
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(359
|
)
|
|
Share-based compensation to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
111
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
111
|
|
|
Issuance of shares and warrants, net of issuance costs of $204
|
|
|
10,415,400
|
|
|
|
82
|
|
|
|
5,714
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,796
|
|
|
Exercise of warrants and conversion of convertible loan to Ordinary shares
|
|
|
2,881,658
|
|
|
|
22
|
|
|
|
1,391
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,413
|
|
|
Net income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,910
|
)
|
|
|
3
|
|
|
|
(4,907
|
)
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(165
|
)
|
|
|
-
|
|
|
|
(42
|
)
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
21,246,502
|
|
|
|
250
|
|
|
|
89,407
|
|
|
|
222
|
|
|
|
(79,363
|
)
|
|
|
513
|
|
|
|
11,029
|
|
|
Share-based compensation to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
559
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
559
|
|
|
Exercise of warrants
|
|
|
4,218,121
|
|
|
|
36
|
|
|
|
2,105
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,141
|
|
|
Conversion of convertible loan to Ordinary shares
|
|
|
1,322,917
|
|
|
|
11
|
|
|
|
3,164
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,175
|
|
|
Issuance of shares, net of issuance costs of $174
|
|
|
4,604,500
|
|
|
|
38
|
|
|
|
9,688
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,726
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,239
|
|
|
|
103
|
|
|
|
2,342
|
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
170
|
|
|
|
-
|
|
|
|
43
|
|
|
|
213
|
|
|
Balance at December 31, 2017
|
|
|
31,392,040
|
|
|
|
335
|
|
|
|
104,923
|
|
|
|
392
|
|
|
|
(77,124
|
)
|
|
|
659
|
|
|
|
29,185
|
|
|
Share-based compensation to employees
|
|
|
-
|
|
|
|
-
|
|
|
|
898
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
898
|
|
|
Exercise of warrants
|
|
|
1,454,546
|
|
|
|
13
|
|
|
|
787
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
800
|
|
|
Issuance of shares, net of issuance costs of $248
|
|
|
4,545,454
|
|
|
|
37
|
|
|
|
12,215
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,252
|
|
|
Exercise of Option
|
|
|
124,851
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
163
|
|
|
|
(386
|
)
|
|
|
(223
|
)
|
|
Transaction with non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
(254
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(546
|
)
|
|
|
(800
|
)
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(172
|
)
|
|
|
-
|
|
|
|
(79
|
)
|
|
|
(251
|
)
|
|
Balance at December 31, 2018
|
|
|
37,516,891
|
|
|
$
|
386
|
|
|
$
|
118,568
|
|
|
$
|
220
|
|
|
$
|
(76,961
|
)
|
|
$
|
(352
|
)
|
|
$
|
41,861
|
|
(*)
See Note 9a.
The
accompanying notes are an integral part of the consolidated financial statements.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
|
|
Year ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(223
|
)
|
|
$
|
2,342
|
|
|
$
|
(4,907
|
)
|
|
Adjustments required to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation to employees
|
|
|
898
|
|
|
|
559
|
|
|
|
111
|
|
|
Depreciation and amortization
|
|
|
799
|
|
|
|
638
|
|
|
|
554
|
|
|
Net Loss from sale of fixed asset
|
|
|
103
|
|
|
|
-
|
|
|
|
-
|
|
|
Extinguishment and amortization expenses related to beneficial conversion feature and discount of convertible loans
|
|
|
-
|
|
|
|
103
|
|
|
|
1,116
|
|
|
Severance pay, net
|
|
|
(47
|
)
|
|
|
93
|
|
|
|
37
|
|
|
Increase in trade receivables, net
|
|
|
(6,096
|
)
|
|
|
(2,280
|
)
|
|
|
(1,360
|
)
|
|
Decrease (increase) in other accounts receivable, long term receivable and prepaid expenses
|
|
|
(192
|
)
|
|
|
14
|
|
|
|
(135
|
)
|
|
Decrease in costs and estimated earnings in excess of billings
|
|
|
995
|
|
|
|
809
|
|
|
|
403
|
|
|
Increase in contract assets
|
|
|
(899
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Increase in contract liabilities
|
|
|
366
|
|
|
|
-
|
|
|
|
-
|
|
|
Increase in inventories
|
|
|
(3,865
|
)
|
|
|
(890
|
)
|
|
|
(1,503
|
)
|
|
Increase in trade payables
|
|
|
2,610
|
|
|
|
303
|
|
|
|
592
|
|
|
Increase in other accounts payable, accrued expenses, long term liabilities and advances from customers
|
|
|
1,693
|
|
|
|
31
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities from continuing operations
|
|
|
(3,858
|
)
|
|
|
1,722
|
|
|
|
(4,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(899
|
)
|
|
|
(1,041
|
)
|
|
|
(411
|
)
|
|
Construction-in-process
|
|
|
(308
|
)
|
|
|
(736
|
)
|
|
|
-
|
|
|
Consideration from fixed asset sale
|
|
|
254
|
|
|
|
-
|
|
|
|
-
|
|
|
Increase (decrease) in long-term receivables and deposits
|
|
|
5
|
|
|
|
(29
|
)
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities from continuing operations
|
|
|
(948
|
)
|
|
|
(1,806
|
)
|
|
|
(336
|
)
|
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
|
|
Year ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Ordinary shares, net
|
|
|
12,252
|
|
|
|
9,726
|
|
|
|
5,796
|
|
|
Exercise of warrants
|
|
|
800
|
|
|
|
2,141
|
|
|
|
1,300
|
|
|
Repayment of short-term bank credit, net
|
|
|
-
|
|
|
|
(575
|
)
|
|
|
(1,841
|
)
|
|
Transaction with non-controlling
interest
|
|
|
(254
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Proceeds from loans from shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities from continuing operations
|
|
|
12,798
|
|
|
|
11,292
|
|
|
|
5,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities from discontinued operations
|
|
|
1,186
|
|
|
|
(644
|
)
|
|
|
298
|
|
|
Net cash used in investing activities from discontinued operations
|
|
|
(2
|
)
|
|
|
(101
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes of discontinued operation on cash and cash equivalents
|
|
|
(420
|
)
|
|
|
(138
|
)
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents and restricted cash
|
|
|
8,756
|
|
|
|
10,325
|
|
|
|
318
|
|
|
Cash and cash equivalents and restricted cash at the beginning of the year
|
|
|
13,006
|
|
|
|
2,681
|
|
|
|
2,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash at the end of the year
|
|
|
21,762
|
|
|
|
13,006
|
|
|
|
2,681
|
|
|
Less cash and cash equivalents of discontinued operation at the end of the year
|
|
|
526
|
|
|
|
267
|
|
|
|
1,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continued operation at the end of the year
|
|
$
|
21,236
|
|
|
$
|
12,739
|
|
|
$
|
1,522
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
(a)
|
Supplemental disclosures of cash flow activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
17
|
|
|
$
|
17
|
|
|
$
|
16
|
|
|
|
Interest
|
|
$
|
18
|
|
|
$
|
173
|
|
|
$
|
658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
Non-cash transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible loan including unpaid interest
|
|
$
|
-
|
|
|
$
|
3,175
|
|
|
$
|
113
|
|
|
|
Transfer of inventory to property, plant and equipment
|
|
$
|
530
|
|
|
$
|
82
|
|
|
$
|
92
|
|
|
|
Purchase of property, plant and equipment in credit
|
|
$
|
136
|
|
|
$
|
44
|
|
|
$
|
14
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
|
a.
|
RADA
Electronic Industries Ltd. (the “Company”) is an Israeli based defense electronics contractor that specializes
in the design, development, production and sales of tactical land radars for ground forces and border protection and avionics
systems (including inertial navigation systems) for fighter aircraft and UAVs.
|
The Company operates a
test and repair shop using its automated test equipment (“ATE”) products in Beijing, China, through its 80% owned
Chinese subsidiary, Beijing Huari Aircraft Components Maintenance and Services Co. Ltd. (“CACS”). CACS was established
with a Chinese third party, which owned the remaining 20% equity interest. In October 2018, a transaction with non-controlling
interest occurred and as a result, as of December 31, 2018, the Company owned 100% of CACS (see Note 1b).
In
January 2018, the Company incorporated RADA Sensors Inc., a fully owned subsidiary of the Company. RADA Sensors Inc. is the holder
of 75% of the interests in RADA Technologies LLC, also organized in January 2018, together with ZASE Technologies LLC (the holder
of 25% of the interests in RADA Technologies LLC).
The
Company is organized and operates as one operating segment.
|
|
b.
|
Discontinued
operations
|
In December 2016, the
Company committed to a plan to sell its test and repair services activity (provided through the Company’s then 80% owned
subsidiary, CACS) in order to focus in its core business. In October 2018, a transaction with non-controlling interest occurred
and as a result, as of December 31, 2018, the Company owned 100% of CACS, which resulted in a $254 decrease in additional
paid in capital.
In
December 2018, the Company signed an agreement to sell its ownership interest in CACS for approximately $1,500 and received 70%
of the consideration as of the date of this report, which is currently held in a trust account in China. The Company recorded
a provision of $159 for the expected loss which will result from the sale, which amount was included in accrued expenses in the
consolidated balance sheets and in the net loss from discontinued operations in the consolidated statements of operations.
On
March 14, 2019, subsequent to balance sheet date, the ownership was transferred to the buyer while the remaining consideration
has yet to be received by the Company.
The
results of the discontinued operations including prior periods’ comparable results, assets and liabilities which have been
retroactively included in discontinued operations as separate line items in the statements of operations and balance sheets, are
presented below (the adoption of Topic 606 did not have a material impact on the results of the discontinued operations):
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
|
|
Year ended
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
750
|
|
|
$
|
1,729
|
|
|
$
|
909
|
|
|
Cost of sales
|
|
|
(787
|
)
|
|
|
(909
|
)
|
|
|
(698
|
)
|
|
Operating expenses
|
|
|
(208
|
)
|
|
|
(310
|
)
|
|
|
(197
|
)
|
|
Operating income (loss)
|
|
|
(245
|
)
|
|
|
510
|
|
|
|
14
|
|
|
Finance income (expenses), net
|
|
|
-
|
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(245
|
)
|
|
|
515
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from sale of subsidiary
|
|
|
(159
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Net income (loss) from discontinued operations
|
|
$
|
(404
|
)
|
|
$
|
515
|
|
|
$
|
13
|
|
The
major classes of assets and liabilities that were classified as discontinued operations were:
|
|
|
Year ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
526
|
|
|
$
|
267
|
|
|
Trade receivables
|
|
|
555
|
|
|
|
1,200
|
|
|
Other accounts receivable and prepaid expenses
|
|
|
42
|
|
|
|
61
|
|
|
Inventories
|
|
|
401
|
|
|
|
940
|
|
|
Property, plant and equipment, net
|
|
|
-
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets of discontinued operations
|
|
|
1,524
|
|
|
|
2,787
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables
|
|
|
55
|
|
|
|
4
|
|
|
Accrued expenses and other liabilities
|
|
|
311
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities of discontinued operations
|
|
$
|
366
|
|
|
$
|
328
|
|
|
|
c.
|
Liquidity
and Capital Resources:
|
On
May 15, 2016, the Company’s shareholders approved an investment transaction with a new investor (the “Investor”)
after which the Investor became the controlling shareholder of the Company. The Company issued 8,510,638 Ordinary shares in consideration
for approximately $4,000, or a price per share of $0.47 (the “Initial Investment”). The Company also issued to the
Investor, warrants to purchase: (i) 4,255,319 Ordinary shares at an exercise price per Ordinary share of $0.47 (having an aggregate
exercise price of $2,000) exercisable for a period of 24 months following the date of the Initial Investment and (ii) 3,636,363
Ordinary shares at an exercise price per Ordinary share of $0.55
(having
an aggregate exercise price of $2,000) exercisable for a period of 48 months following the date of the Initial Investment (collectively:
the “Warrants”).
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
As
of December 31, 2018, all of the Company’s outstanding Warrants were fully exercised.
In
addition, as part of the investment transaction, the Investor agreed to grant the Company an option, exercisable in the discretion
of either the Investor or the Company, to obtain a convertible loan from the Investor in the principal amount of up to $3,175,
which would be used solely for the purpose of the repayment of an outstanding convertible loan, including accrued interest, that
was due on August 31, 2016 and payable to the former controlling shareholder.
On
June 16, 2016, the Company obtained a $3,175 convertible loan from the Investor (convertible into Ordinary shares at a price per
share of $2.40) and repaid the outstanding loan balance owed to its former controlling shareholder in the amount of $2,988, including
accrued interest of $247.
In
August 2017, the Company entered into agreements with several Israeli institutional investors to purchase 4,604,500 Ordinary shares
at price per share of $2.15, for a total consideration of $9,900. Offering costs amounted to $174.
In
November 2018, the Company entered into agreements with several Israeli institutional investors to purchase 4,545,454 ordinary
shares at price per share of $2.75, for a total consideration of $12,500. Offering costs amounted to $248.
Since
incorporation, the Company has incurred an accumulated deficit of $76,961. As of December 31, 2018, the Company’s cash position
(cash and cash equivalents) totaled approximately $20,814. Management believes that its cash and cash equivalents are sufficient
for the Company to meet its obligations as they come due at least for a period of twelve months from the date of issuance of the
consolidated financial statements.
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
|
The
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States (“US GAAP”). The significant accounting policies followed in the preparation of the financial statements, applied
on a consistent basis, are as follows:
The
preparation of financial statements in conformity with (“US GAAP”) requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
Company’s management believes that the estimates, judgment and assumptions used are reasonable based upon information available
at the time they were made.
|
|
b.
|
Financial
statements in U.S. dollars:
|
The
majority of the revenues of the Company are generated in U.S. dollars. In addition, Financing activities are made in U.S. dollars.
The
Company’s management believes that the dollar is the currency of the primary economic environment in which the Company operates.
Thus, its functional and reporting currency is the dollar.
Accordingly,
monetary accounts maintained in currencies other than the dollar are re-measured into U.S. dollars in accordance with ASC 830,
“Foreign Currency Matters”. All transaction gains and losses of the re-measured monetary balance sheet items are reflected
in the statement of operations as financial income or expenses, as appropriate, in the period in which the currency exchange rate
changes.
The
financial statements of the Company’s foreign subsidiary (CACS), whose functional currency is not the U.S. dollar, have
been translated into dollars. All balance sheet amounts have been translated using the exchange rates in effect at balance sheet
date. Statement of operation amounts have been translated using the average exchange rate prevailing during the year. Such translation
adjustments are reported as a separate component of accumulated other comprehensive income (loss) in equity.
|
|
c.
|
Basis
of consolidation:
|
The
consolidated financial statements include the accounts of the Company and its subsidiaries. Inter-company transactions and balances
have been eliminated upon consolidation.
All
highly liquid investments that are readily convertible to cash and are not restricted as to withdrawal or use and the period to
maturity of which did not exceed three months at time of deposit, are considered cash equivalents.
Restricted
cash is invested in short-term bank deposits (less than twelve months), which are mainly used as security for the Company’s
guarantees to customers and lines of credits with banks. The deposits are in U.S. dollars and bear a variable annual interest
of up to 2.47%.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
Inventories
are stated at the lower of cost or market value. Inventory write-offs are provided to cover risks arising from slow-moving items,
excess inventories and for market prices lower than cost (see also Note 5).
Cost
is determined as follows:
Raw
materials and components - using the FIFO cost method.
Work
in progress and finished goods - represents the cost of manufacturing with the addition of allocable indirect manufacturing costs.
Costs
incurred on long-term contracts in progress include direct labor, material, subcontractors, other direct costs and an allocation
of overhead, which represent recoverable costs incurred for production.
|
|
g.
|
Property,
plant and equipment:
|
Property
plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method
over the estimated useful lives of the assets. Annual rates of depreciation are as follows:
|
|
|
%
|
|
|
|
|
|
|
|
Factory and other buildings
|
|
|
4
|
|
|
Machinery and equipment
|
|
|
7 - 33
|
|
|
Office furniture and equipment
|
|
|
6 - 15
|
|
Leasehold
improvements are depreciated over the shorter of the estimated useful life or the lease period.
Assets,
in respect of which investment grants have been received, are presented at cost less the related grant amount. Depreciation is
based on net cost.
|
|
h.
|
Impairment
of long-lived assets:
|
The
Company’s long-lived assets are reviewed for impairment in accordance with ASC 360, “Property, plant and equipment”,
whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash
flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to sell. As of December 31, 2018, 2017 and 2016,
no impairment losses have been identified.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
As
required by ASC 820, “Fair Value Measurement”, the Company applies assumptions that market place participations would
consider in determines the fair value of long-lived assets (or asset group).
|
|
i.
|
Research
and development costs:
|
Research
and development costs, net of participation grants, include costs incurred for research and development, are charged to the statement
of operations as incurred.
The
Company received royalty-bearing grants, from the Israeli Innovation Authority (“IIA”) for the purpose of partially
funding research and development projects. The grants are recognized as a deduction from research and development costs incurred
(see also Note 8b).
The
Company accounts for income taxes in accordance with ASC 740, “Income taxes”. This statement prescribes the use of
the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial
reporting and tax based 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
Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
The
Company implements a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC
740. 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. The adoption of ASC
740-10 did not result in a change in the Company’s accumulated deficit. The Company did not record any provision in connection
with ASC 740-10 as of December 31, 2018 and 2017.
The
Company’s agreements with most of its employees are in accordance with section 14 of the Severance Pay Law - 1963, under
which the Company’s contributions for severance pay shall be instead of severance compensation. Upon release of the policy
to the employee, no additional liability exists between the parties regarding the matter of severance pay and no additional payments
will be made by the Company to the employee.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
Company’s liability for severance pay for the employees that are not covered in section 14 is calculated pursuant to Israel’s
Severance Pay Law - 1963, based on the most recent salary of the employees as of the balance sheet date less monthly deposits
for insurance policies and/or pension funds. Employees are entitled to one month’s salary for each year of employment or
a portion thereof.
The
carrying value of deposited funds includes profits (losses) accumulated up to the balance sheet date. The deposited funds may
be withdrawn only upon the fulfillment of the obligations pursuant to Israeli severance pay law or labor agreements.
Severance
expense recorded in the statement of operations is net of interest and other income accumulated in the deposits. Severance expense
for the years ended December 31, 2018, 2017 and 2016 amounted to $33, $434 and $251, respectively.
|
|
l.
|
Accounting
for share-based compensation:
|
The
Company accounts for share-based payment in accordance with ASC 718, “Compensation - Stock Compensation”, which requires
the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made
to employees on the date of grant using an option-pricing model. The value of the portion of the award is recognized as an expense
over the requisite service periods in the Company’s statement of operations. The Company recognizes compensation expenses
for the value of its awards granted based on the straight-line method over the requisite service period of each of the awards.
Effective
as of January 1, 2017, the Company adopted a change in accounting policy in accordance with ASU 2016-09, “Compensation Stock
Compensation (Topic 718)” (“ASU 2016-09”) to account for forfeitures as they occur.
The
fair value for the Company’s stock options granted to employees and directors was estimated using a Black-Scholes option-pricing
model with the following weighted-average assumptions:
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Risk-free interest rate
|
|
|
2.70
|
%
|
|
|
1.78
|
%
|
|
Expected term (in years)
|
|
|
4.22
|
|
|
|
4.18
|
|
|
Volatility
|
|
|
78
|
%
|
|
|
79
|
%
|
The
dividend yield assumption is based on the Company’s historical experience and expectation of future dividend payouts and
may be subject to changes in the future.
The
computation of expected volatility is based on realized historical share price volatility of the Company’s Ordinary shares.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
risk-free interest rate assumption is the implied yield currently available on the U.S treasury yield zero-coupon issues with
a remaining term equal to the expected life term of the Company’s options.
The
expected term of the options represents the period of time that the options are expected to be outstanding and is based on the
simplified method, as allowed under Staff Accounting Bulletin No. 110, which is the mid-point between the vesting date and the
end of the contractual of the option.
|
|
m
.
|
Fair
value of financial instruments:
|
The
Company measures its financial instruments at fair value. Fair value is an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is
a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset
or a liability.
A
three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation
methodologies in measuring fair value:
|
|
Level
1 -
|
Valuations
based on quoted prices in active markets for identical assets that the Company has the ability to access. Valuation adjustments
and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and
regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
|
|
|
|
|
|
|
Level
2 -
|
Valuations
based on one or more quoted prices in markets that are not active or 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
availability of observable inputs can vary from investment to investment and is affected by a wide variety of factors, including,
for example, the type of investment, the liquidity of markets and other characteristics particular to the transaction. To the
extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of
fair value requires more judgment and the investments are categorized as Level 3.
The
carrying amount of cash and cash equivalents, restricted deposits, trade receivables, other accounts receivable, bank credit,
trade payables and other accounts payable approximate their fair value due to the short-term maturity of these instruments.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
Foreign
currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable
data of similar instruments. As of December 31, 2018 and 2017 the fair value of foreign currencies derivatives (liability) asset
were (71) and 19, respectively.
|
|
n
.
|
Concentrations
of credit risk:
|
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents,
restricted cash, trade receivables and long-term receivables.
The
Company’s cash and cash equivalents and restricted deposits are mainly held in U.S. dollars with major banks in Israel.
Management believes that the financial institutions that hold the Company’s investments are institutions with high credit
standing, and accordingly, minimal credit risk exists with respect to these investments.
The
Company’s trade receivables are derived from sales to large and solid organizations located mainly in the United States,
Asia, Latin America and Israel. The Company performs ongoing credit evaluations of its customers and to date has not experienced
any material losses. An allowance for doubtful accounts is determined with respect to these amounts that the Company has determined
to be doubtful of collection. The allowance is computed for specific debts and the collectability is determined based upon the
Company’s experience.
|
|
o
.
|
Comprehensive
income (loss):
|
The
Company accounts for comprehensive income in accordance with ASC 220, “Comprehensive Income”. This statement establishes
standards for the reporting and display of comprehensive income and its components.
Comprehensive
income generally represents all changes in shareholders’ equity during the period except those resulting from investments
by, or distributions to, shareholders. Accordingly, the Company presents a separate consolidated statement of comprehensive income
(loss).
The
following table summarizes the changes in accumulated balances of other comprehensive income, net of taxes for the years ended
December 31, 2018 and 2017:
|
|
|
Accumulated foreign currency translation differences
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
222
|
|
|
Net current period other comprehensive loss
|
|
|
170
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
392
|
|
|
Net current period other comprehensive loss
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
$
|
220
|
|
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
In
connection with the sale of its products, the Company provides product warranties for periods between one to two years. Based
on past experience and engineering estimates, the estimated liability from these warranties is $35 as of December 31, 2018 and
2017.
The
Company generates revenues mainly from the sale of products and from long-term fixed price contracts of defense electronics as
follows: data recording and management systems, inertial navigation systems for air and land applications, avionics solutions,
and avionics for UAVs, and land radar for defense forces and border protection applications. In addition, the Company provides
manufacturing, development and product support services.
The
Company also generates revenues (presented as Discontinued Operations) from repair services using its ATE mainly through CACS
(See Note 1b).
The
Company recognizes revenue when (or as) it satisfies performance obligations by transferring promised goods or services to its
customers in an amount that reflects the consideration the Company expects to receive.
The
Company applies the following five-step approach:
|
|
a)
|
Identify
the contract with a customer
|
A
contract with a customer exists when (i) the Company enters into a written agreement with a customer that defines each party’s
rights regarding the products or services to be transferred and identifies the payment terms related to these products or services,
(ii) both parties to the contract are committed to perform their respective obligations, (iii) the contract has commercial substance,
and (iv) the Company determines that collection of substantially all consideration for products or services that are transferred
is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in
determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s
payment history or, in the case of a new customer, published credit and financial information pertaining to the customer.
|
|
b)
|
Identify
the performance obligations in the contract
|
Performance
obligations promised in a contract are identified based on the products or services that will be transferred to the customer that
are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together
with other resources that are readily available from the Company, and are distinct in the context of the contract, whereby the
transfer of the products or services is separately identifiable from other promises in the contract.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
Company’s contracts contain a single performance obligation which includes sale of product or development and manufacturing
services and sale of product that are not separately identifiable and, therefore, not distinct. In situations when the Company’s
contract includes distinct goods or services that are substantially the same and have the same pattern of transfer to the customer
over time, they are recognized as a series of distinct goods or services.
When
contracts are modified to account for changes in contract specifications and requirements, the Company consider whether the modification
either creates new or changes the existing enforceable rights and obligations. Contract modifications that are for goods or services
that are not distinct from the existing contract, due to the significant integration with the original good or service provided,
are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price
and the Company’s measure of progress for the performance obligation to which it relates, is recognized as an adjustment
to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. When the modifications include
additional performance obligations that are distinct and at relative stand-alone selling price, they are accounted for as a new
contract and performance obligation, which are recognized prospectively.
|
|
c)
|
Determine
the transaction price
|
The
transaction price is the amount of consideration to which the Company is entitled in exchange for transferring promised goods
or services to a customer, excluding amounts collected on behalf of third parties. The Company doesn’t usually grant its
customers with a right to return the products sold. However, in some cases, the arrangements may include penalties if the Company
fails to deliver future goods on time. The above is accounted for as variable considerations, which may be considered as adjustments
to the transaction price.
As
the Company’s standard payment terms are less than one year, the contracts have no significant financing component.
|
|
d)
|
Allocate
the transaction price to performance obligations in the contract
|
If
the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
Standalone selling price is the price at which the Company would sell a promised good or service separately to a customer. Standalone
selling prices are established at contract inception and subsequent changes in transaction price are allocated on the same basis
as at contract inception. Contracts that contain multiple performance obligations require an allocation of the transaction price
to each performance obligation based on a relative standalone selling price basis unless a portion of the variable consideration
related to the contract is allocated entirely to a performance obligation.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
|
e)
|
Recognize
revenue when or as the Company satisfies a performance obligation
|
Revenue
is recognized based on the transaction price at the time the related performance obligation is satisfied by transferring a promised
product or service to a customer.
The
Company generally satisfies performance obligations at a point in time, once the customer has obtained the legal title to the
items purchased or service provided.
Revenues
from long-term and short-term fixed price contracts are usually recognized over time based on the cost-to-cost input method that
best depicts the transfer of control over the performance obligation to the customer. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
For
contracts with an estimated amortization period of less than one year, the Company elected the practical expedient and expenses
incremental costs immediately.
Contract
Estimates
- In estimating contract costs, the Company utilizes a profit-booking rate based upon performance expectations that
takes into consideration a number of assumptions and estimates regarding risks related to technical requirements, feasibility,
schedule, and contract costs. Management performs periodic reviews of the contracts to evaluate the underlying risks, which may
increase the profit-booking rate as the Company is able to mitigate and retire such risks. Conversely, if the Company is not able
to retire these risks, cost estimates may increase, resulting in a lower profit-booking rate.
The
cost estimation process requires significant judgment and is based upon the professional knowledge and experience of the Company’s
engineers, program managers, and financial professionals. Factors considered in estimating the work to be completed and ultimate
contract recovery include the availability, productivity, and cost of labor, the nature and complexity of the work to be performed,
the effect of change orders, the availability of materials, the effect of any performance delays, the availability and timing
of funding from the customer, and the recoverability of any claims included in the estimates to complete.
Changes
in estimates of sales, costs, and profits on a performance obligation are recognized using the cumulative catch-up method of accounting,
which recognizes in the current period the cumulative effect of the changes in current and prior periods. When estimates of total
costs to be incurred exceed estimates of total revenue to be earned on a performance obligation related to a complex, construction-type
contract, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
Contract
Assets
- Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed
as of the reporting date when the right to payment is not just subject to the passage of time, including retention amounts. Contract
assets are classified as current assets and, in accordance with industry practice, include amounts that may be billed and collected
beyond one year due to the long-term nature of many of the Company’s contracts. Contract assets are transferred to accounts
receivable when the right to consideration becomes unconditional.
Contract
Liabilities
- Contract liabilities primarily consist of advance payments and billings in excess of costs incurred. Advances
represent deposits received from customers on an order. Billings in excess of revenues represents milestone billing contracts
where the billings of the contract exceed recognized revenues. Such billings are generally not considered a significant financing
component, because they are utilized to pay for contract costs within a one-year period. Contract liability amounts are recognized
as revenue once the requisite performance progress has occurred.
|
|
r
.
|
Basic
and diluted net income (loss) per share:
|
Basic
net income (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year.
Diluted net income (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each
year, plus dilutive potential Ordinary shares considered outstanding during the year in accordance with ASC 260, “Earnings
per share”.
For
the year ended December 31, 2016, all options, convertible notes and warrants have been excluded from the computation of diluted
net income (loss) per share, since their effect is anti-dilutive.
|
|
s
.
|
Derivatives
and hedging:
|
The
Company accounts for derivatives and hedging based on ASC 815, “Derivatives and hedging”, as amended and related Interpretations.
ASC 815 requires the Company to recognize all derivatives on the balance sheet at fair value. If a derivative meets the definition
of a hedge and is so designated, depending on the nature of the hedge, changes in the fair value of the derivative will either
be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings (for fair value
hedge transactions) or recognized in other comprehensive income (loss) until the hedged item is recognized in earnings (for cash
flow hedge transactions).
The
ineffective portion of a derivative’s change in fair value is recognized in earnings. If a derivative does not meet the
definition of a hedge, the changes in the fair value are included in earnings. Cash flows related to such hedges are classified
as operating activities.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
Company enters into forward exchange contracts and option contracts in order to limit the exposure to exchange rate fluctuation
associated with payroll expenses mainly incurred in NIS. Since the derivative instruments that the Company holds do not meet the
definition of hedging instruments under ASC 815, any gain or loss derived from such instruments is recognized immediately as financial
expenses, net.
As
of December 31, 2018 and 2017, the fair value of the outstanding forward contracts was $71, which was recorded in other payables
against financial expenses and $19, which was recorded in other receivables against financial income, respectively.
|
|
t
.
|
Recently
Issued Accounting Standards:
|
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will require lessees to recognize assets and liabilities
for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation
of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating
lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new guidance
will require both types of leases to be recognized on the balance sheet. A modified retrospective transition approach is required,
applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its
effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial
application. If an entity chooses the second option, the entity must recast its comparative period financial statements and provide
disclosures required by the new standard for the comparative periods.
The
Company will adopt the new standard effective January 1, 2019 using the modified retrospective approach. Consequently, financial
information will not be updated and disclosures required under the new standard will not be provided for dates and periods before
January 1, 2019. The standard provides a number of optional practical expedients in transition. The Company is electing the ‘package
of practical expedients’, which permits it not to reassess under the new standard its prior conclusions about lease identification,
lease classification and initial direct costs. The adoption of this new standard will affect the Company’s consolidated
balance sheets by recognizing new right-of-use (“ROU”) assets and lease liabilities for operating leases. The impact
on the Company’s results of operations and cash flows is not expected to be material. Adoption of the standard will result
in the recognition of additional ROU assets and lease liabilities for operating leases of approximately $2,032 as of January 1,
2019. The Company elects to account for a lease component of a contract and its associated non-lease components as a single lease
component, therefore the ROU and lease liabilities estimate includes non-cancelable operating lease agreements (see Note 8), parking
spaces and management fees.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
|
u
.
|
Recently
Adopted Accounting Pronouncements:
|
|
|
1.
|
In
November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires companies
to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when
reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted
the new standard effective January 1, 2018 using the retrospectively method. The adoption of this new guidance had an immaterial
impact on the Company’s consolidated financial statements. Restricted cash is invested in short-term bank deposits (for
three months), which are mainly used as security for the Company’s guarantees to customers and lines of credits with
banks.
|
The
following table provides a reconciliation of cash and cash equivalents and restricted deposits reported within the consolidated
balance sheets that sum to the total of such amounts in the consolidated statements of cash flows:
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
20,814
|
|
|
$
|
12,417
|
|
|
$
|
1,205
|
|
|
Restricted cash
|
|
|
422
|
|
|
|
322
|
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash
|
|
$
|
21,236
|
|
|
$
|
12,739
|
|
|
$
|
1,522
|
|
|
|
2.
|
On
January 1, 2018, the Company adopted the requirements of ASU 2014-09, “Revenue from Contracts with Customers (Topic
606) using the modified retrospective method for contracts that were not completed as of January 1, 2018. Under the modified
retrospective method, the Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment
to the opening balance of retained earnings. This adjustment did not have a material impact on the Company’s consolidated
financial statements. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior
period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Revenue Recognition
(“Topic 605”).
|
|
|
|
|
|
|
3.
|
In
May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.”
ASU 2017-09 was issued to provide clarity and reduce both 1) diversity in practice and 2) cost and complexity when applying
the guidance in Topic 718 to a change in the terms or conditions of a share-based payment award. ASU 2017-09 provides guidance
about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting
under Topic 718. The amendments in ASU 2017-09 are effective for fiscal years, and interim periods within those years, beginning
after December 15, 2017. The Company adopted ASU 2017-09 effective January 1, 2018.
|
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
adoption of this new guidance had no material impact on the Company’s consolidated financial statements.
The
adoption of Topic 606 did not have a material impact on the Company’s consolidated balance sheets as of December 31, 2018,
and its statements of operations and cash flows for the twelve months period ended December 31, 2018. In accordance with the new
standard, costs and estimated earnings in excess of billings on uncompleted contracts were reclassified as contract assets and
contract liabilities as of December 31, 2018, none of which resulted in a change to total current assets or total current liabilities.
Contract liabilities include advances from customers, which were presented separately in the Company’s consolidated balance
sheets as of December 31, 2017 and 2018.
The
following table summarizes the adjustments due to the adoption of ASC Topic 606:
|
|
|
December 31,
2017
|
|
|
ASC Topic
606
|
|
|
January 1,
2018
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
995
|
|
|
$
|
(995
|
)
|
|
$
|
-
|
|
|
Contract assets
|
|
|
-
|
|
|
|
1,140
|
|
|
|
1,140
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities
|
|
$
|
-
|
|
|
$
|
145
|
|
|
$
|
145
|
|
The
following table summarizes the Company’s contract assets and liabilities balances:
|
|
|
2018
|
|
|
|
|
|
|
|
Contract assets at January 1, 2018
|
|
$
|
1,140
|
|
|
Contract assets at December 31, 2018
|
|
$
|
899
|
|
|
|
|
|
|
|
|
Change in contract assets - decrease
|
|
$
|
241
|
|
|
|
|
|
|
|
|
Contract liabilities at January 1, 2018
|
|
$
|
186
|
|
|
Contract liabilities at December 31, 2018
|
|
$
|
1,093
|
|
|
|
|
|
|
|
|
Change in contract liabilities - increase
|
|
$
|
907
|
|
The
decrease in contract assets reflects the net impact of billed revenues in excess of recognized revenues during the period. For
the twelve months ended December 31, 2018, 17% of amount that was previously included in the beginning balance of contract assets
was recognized. The increase in contract liabilities reflects the net impact of additional deferred revenues recorded in excess
of revenue recognized during the period. For the twelve months ended December 31, 2018, 78% of amount that was previously included
in the beginning balance of contract liabilities was recognized.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
3:-
|
REVENUES
(Cont.)
|
The
Company’s unsatisfied performance obligations as of December 31, 2018 and the estimated revenue expected to be recognized
in the future related to long-term fixed price contracts amounts to $2,316. The Company expects to recognize approximately 75%
of this amount as revenues during the next 12 months and the rest thereafter.
For
information regarding disaggregated revenues, please refer to Note 13.b below.
|
NOTE
4:-
|
OTHER
ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
184
|
|
|
$
|
176
|
|
|
Government authorities
|
|
|
243
|
|
|
|
92
|
|
|
Advance payments to vendors
|
|
|
70
|
|
|
|
13
|
|
|
Deposits
|
|
|
9
|
|
|
|
30
|
|
|
Other accounts receivable
|
|
|
-
|
|
|
|
19
|
|
|
|
|
$
|
506
|
|
|
$
|
330
|
|
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
5,605
|
|
|
$
|
3,277
|
|
|
Work in progress, net
|
|
|
3,558
|
|
|
|
3,093
|
|
|
Finished goods
|
|
|
2,081
|
|
|
|
1,540
|
|
|
|
|
$
|
11,244
|
|
|
$
|
7,910
|
|
Write-offs
of inventories for the years ended December 31, 2018, 2017 and 2016 amounted to $39, $122 and $144, respectively. The write-offs
were due to slow-moving items and excess inventories and were recorded in cost of revenues. As of December 31, 2018, the Company
turned part of the slow-moving inventory provision due to sales and disposals of certain items in the amount of $129, which was
recorded as income in cost of revenues.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
6:-
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Factory building
|
|
$
|
2,081
|
|
|
$
|
2,054
|
|
|
Machinery and equipment *) **)
|
|
|
10,723
|
|
|
|
10,400
|
|
|
Office furniture and equipment
|
|
|
838
|
|
|
|
771
|
|
|
Leasehold improvements
|
|
|
455
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,097
|
|
|
|
13,611
|
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Factory building
|
|
|
2,006
|
|
|
|
1,990
|
|
|
Machinery and equipment *) **)
|
|
|
6,948
|
|
|
|
7,242
|
|
|
Office furniture and equipment
|
|
|
345
|
|
|
|
317
|
|
|
Leasehold improvements
|
|
|
166
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,465
|
|
|
|
9,696
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost
|
|
$
|
4,632
|
|
|
$
|
3,915
|
|
|
|
*)
|
As
of December 31, 2018, $1,044 relates to construction-in-process of production infrastructure.
|
|
|
|
|
|
|
**)
|
Capital
loss from sale of fixed asset amounted to $103, is due to machinery and equipment sales during November and December 2018.
|
Depreciation
expense amounted to $799, $641 and $554 (offset by depreciation write-offs for an amount of $1,030, $3 and $0 mainly due to assets
disposals) for the years ended December 31, 2018, 2017 and 2016, respectively.
|
NOTE
7:-
|
OTHER
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Payroll and related accruals
|
|
$
|
2,397
|
|
|
$
|
1,787
|
|
|
Accrued expenses - agents’ commissions
|
|
|
84
|
|
|
|
109
|
|
|
Accrued expenses
|
|
|
731
|
|
|
|
512
|
|
|
Royalties to IIA
|
|
|
393
|
|
|
|
406
|
|
|
Provision for loss from sale of subsidiary
|
|
|
159
|
|
|
|
-
|
|
|
Others
|
|
|
78
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,842
|
|
|
$
|
2,814
|
|
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
8:-
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
|
|
a.
|
As
of December 31, 2018, the Company was not a party to any material legal proceedings.
|
|
|
|
|
|
|
b.
|
The
Company’s research and development efforts have been partially financed through royalty-bearing programs sponsored by
the IIA. In return for the IIA’s participation, the Company is committed to pay royalties at a rate ranging from 3%
to 5% of sales of the products whose research was supported by grants received from the IIA, up to 100% of the amount of such
participation received linked to the U.S. dollar. The obligation to pay these royalties is contingent on actual sales of the
products and in the absence of such sales, no payment is required. As of December 31, 2018, the Company received total grants
from the IIA in the amount of $5,543.
|
|
|
|
|
|
|
|
The
total amount of royalties charged to operations for the years ended December 31, 2018, 2017 and 2016, were approximately $458,
$569 and $130, respectively. As of December 31, 2018, the Company’s contingent liability for royalties, net of royalties
paid or accrued, totaled approximately $347.
|
|
|
|
|
|
|
c.
|
The
Company’s offices in Netanya, Israel, are leased under a non-cancelable operating lease expiring on February 28, 2022.
In addition, the Company’s motor vehicles are leased under operating leases.
|
|
|
|
|
|
|
|
Annual
minimum future rental commitments under these leases, at exchange rates in effect on December 31, 2018, are approximately
as follows:
|
|
2019
|
|
$
|
838
|
|
|
2020
|
|
|
707
|
|
|
2021
|
|
|
505
|
|
|
2022
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
$
|
2,123
|
|
Lease
expenses for the years ended December 31, 2018, 2017 and 2016, were $958, $888 and $707, respectively.
|
|
d.
|
Specific
charges have been recorded on certain assets in respect of the Company’s liabilities to its banks
|
|
|
|
|
|
|
e.
|
The
Company provides bank guarantees to some of its customers and others, in the ordinary course of business. The guarantees are
to secure advances received at the commencement of a project or to secure performance of operational milestones. The total
amount of bank guarantees provided to customers and others as of December 31, 2018, is approximately $366.
|
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
9:-
|
SHAREHOLDERS’
EQUITY
|
Ordinary
shares confer upon their holders voting rights, the right to receive cash dividends and the right to share in excess assets upon
liquidation of the Company.
In
August 2017, the Company entered into agreements with several Israeli institutional investors to purchase 4,604,500 Ordinary shares
at price per share of $2.15, for a total consideration of $9,900. Offering costs amounted to $174.
In
June 2018, the Company’s shareholders approved an increase of the Company’s authorized share capital by NIS 1,875,000
and as a result the authorized share capital is equal to NIS 3,000,000 divided into 100,000,000 Ordinary Shares, par value NIS
0.03 each.
In
November 2018, the Company entered into agreements with several Israeli institutional investors to purchase 4,545,454 Ordinary
shares at price per share of $2.75, for a total consideration of $12,500. Offering costs amounted to $248.
In
April 2015, the Company’s Board of Directors adopted the “2015 Share Option Plan” (the “Plan”),
which authorized the grant of options to purchase up to an aggregate of 1,500,000 Ordinary Shares to officers, directors, consultants
and key employees of the Company and its subsidiaries. Options granted under the Plan expire within a maximum of ten years from
adoption of the plan. In November 2018, the Company’s Board of Directors extended the expiration date by ten additional
years, following that approval, the plan will expire in 2036.
In
June 2016, the Company granted options to certain employees and officers of the Company, to purchase a total 984,375 Ordinary
Shares at an exercise price of $0.90 per share. The options vest as follows: 25% of the options granted to each employee vested
in June 2017; the remaining 75% will vest in three equal annual installments of 25% each until June 2020. These options are exercisable
for 48 months following the date of vesting. As part of the grant, the Company’s former CEO was granted options to purchase
168,750 Ordinary Shares at an exercise price of $0.90 per Ordinary share. The former CEO resigned in November 2016. In November
2016, the Company’s Audit Committee (in its capacity as the Compensation Committee) and Board of Directors determined, subject
to shareholder approval, to extend until January 2017, the exercise date of options granted to the former CEO by accelerating
the vesting of 126,563 options as of December 31, 2016. Pursuant to the terms of the plan, the former CEO was eligible to exercise
such number of the options (or any part thereof) within 90 days of the date of his resignation. The Company recognized $71 of
share-based compensation expense related to this acceleration.
In
November 2016, the Company’s Audit Committee (in its capacity as the Compensation Committee) and Board of Directors determined,
subject to shareholders approval to grant its newly appointed CEO (i) options to purchase 68,750 Ordinary Shares at an exercise
price of $1.16 per Ordinary share that vest ratably over a period of four (4) years and
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
9:-
|
SHAREHOLDERS’
EQUITY (Cont.)
|
(ii)
options to purchase 150,000 Ordinary Shares at an exercise price of $1.16 per Ordinary share that vested immediately in lieu of
99 vacation days that had accrued and were redeemable. These options are exercisable for 48 months. On January 15, 2017, the Company’s
shareholders approved the grant of the options to the CEO and the acceleration of the option grant to the former CEO.
In
December 2016, the Company granted options to purchase 40,000 Ordinary Shares at an exercise price of $1.17 per Ordinary share
that vested immediately in lieu of 36 vacation days that were accrued and were redeemable. These options are exercisable for 48
months.
In
February 2017, the Company granted options to a new officer of the Company to purchase a total of 37,500 Ordinary Shares at an
exercise price of $1.26 per share. The options will vest as follows: 25% in February 2018; and 75% in three equal annual installments
of 25% each until February 2021. These options are exercisable for 48 months following the date of vesting.
In
March 2017, the Company granted options to a consultant to the Company to purchase a total of 222,000 Ordinary Shares at an exercise
price of $1.22 per share. The options vest in six equal semi-annual installments of 37,000 options starting August 2018 until
February 2020. These options are exercisable for 48 months following the date of vesting.
On
May 24, 2017, the Company’s Board of Directors approved an increase in the framework of the Plan to 2,000,000 options.
In
May and September 2017, the Company granted options to certain employees and officers of the Company to purchase a total of 100,000
and 613,750 options for Ordinary shares at exercise prices of $1.14 and $2.96 per share, respectively. The options vest as follows:
25% in May and September 2018; and 75% of in three equal annual installments of 25% each until May and September 2021. These options
are exercisable for 48 months following the date of vesting.
In
November 2017, the Company granted options to one of its officers to purchase a total of 200,000 Ordinary shares at an exercise
price of $3.39 per share. The options vest as follows: 25% in November 2018; 75% in three equal annual installments of 25% each
until November 2021. These options are exercisable for 48 months following the date of the vesting. In June 2018, the company’s
Board of Directors approved repricing of the grant and updated its exercise price to $2.43 per share and its vesting schedule
to 25% of the options granted will vest in one year; and 75% of the options will vest in twelve equal quarterly installments of
6.25% each until November 2021. The impact of the repricing resulted in an incremental value of the options repriced of approximately
$9, which is expected to be recorded through 2021, out of this amount $2 was recognized in the twelve months ended December 31,
2018.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
9:-
|
SHAREHOLDERS’
EQUITY (Cont.)
|
In
April 2018, the Company granted options to its CEO to purchase a total of 500,000 Ordinary Shares at an exercise price of $2.32
per share. The options will vest as follows: 25% of the options granted will vest in April 2019; and 75% of the options will vest
in twelve equal quarterly installments of 6.25% each until April 2022. These options will be exercisable for 48 months following
the date of vesting.
On
June 7, 2018, the Company’s shareholders approved the U.S. Taxpayers Appendix to its 2015 Share Option Plan and to reserve
1,000,000 of our Ordinary Shares for issuance thereunder. On August 15, 2018, the Company’s Board of Directors approved
an increase in the framework of the Plan to 750,000 options.
On
August 15 and 23, 2018, the Company granted options to its officers and employees to purchase a total of 732,500 and 35,000 Ordinary
shares, respectively, at exercise prices of $2.93 and $2.81 per share, respectively. The options will vest as follows: 25% will
vest in August 2019; and 75% will vest in twelve equal quarterly installments of 6.25% each until August 2022. These options will
be exercisable for 48 months following the date of vesting.
In
November 2018, the Company granted options to one of its officers to purchase a total of 217,500 Ordinary shares at an exercise
price of $2.81 per share. The options will vest as follows: 25% will vest in November 2019; and 75% will vest in twelve equal
quarterly installments of 6.25% each until November 2022. These options will be exercisable for 48 months following the date of
vesting.
As
of December 31, 2018, options to purchase 286,250 Ordinary Shares are available for future grant under the Plan.
A
summary of the Company’s activity for options granted to employees and directors under the Plan is as follows:
|
|
|
Twelve months ended December 31, 2018
|
|
|
|
|
Number of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
term
|
|
|
Aggregate
Intrinsic
Value Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of the period
|
|
|
1,847,500
|
|
|
$
|
1.91
|
|
|
|
8.88
|
|
|
$
|
2,159
|
|
|
Granted
|
|
|
1,485,000
|
|
|
|
2.70
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
(103,125
|
)
|
|
|
0.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the period
|
|
|
3,229,375
|
|
|
|
2.25
|
|
|
|
8.82
|
|
|
|
1,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
710,625
|
|
|
$
|
1.55
|
|
|
|
8.01
|
|
|
$
|
791
|
|
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
9:-
|
SHAREHOLDERS’
EQUITY (Cont.)
|
Aggregate
intrinsic value of exercisable options (the difference between the closing share price of the Company’s Ordinary Shares
on the last trading day in the period and the exercise price, multiplied by the number of in-the-money options) represents the
amount that would have been received by the employees and directors option holders had all option holders exercised their options
on December 31, 2018. This amount changes based on the fair market value of the Company’s Ordinary share.
As
of December 31, 2018, unrecognized compensation expenses related to employees and directors stock options to be recognized over
an average time of approximately 4 years is approximately $3,314.
During
the twelve months period ended December 31, 2018, the Company recognized compensation expenses related to employees and service
providers stock option in the amount of $898, as follows:
|
|
|
Year ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
204
|
|
|
$
|
104
|
|
|
Marketing and selling
|
|
|
123
|
|
|
|
149
|
|
|
General and administrative
|
|
|
571
|
|
|
|
306
|
|
|
|
|
$
|
898
|
|
|
$
|
559
|
|
On
May 18, 2016, the Company issued Warrants to the Investor (see Note 1c) to purchase: (i) 4,255,319 additional Ordinary shares
at an exercise price per Ordinary share of $0.47 (having an aggregate exercise price of $2,000), exercisable for a period of 24
months following the date of the Initial Investment and (ii) 3,636,363 Ordinary shares at an exercise price per Ordinary share
of $0.55 (having an aggregate exercise price of $2,000), exercisable for a period of 48 months following the date of the Initial
Investment. During 2016, the Investor exercised Warrants to purchase 2,659,575 Ordinary shares at an exercise price per share
of $0.47 for an aggregate total consideration of $1,250. During 2017, the Investor exercised Warrants to purchase 1,595,744 Ordinary
shares at an exercise price per share of $0.47 for an aggregate total consideration of $750, and an additional 2,181,818 Ordinary
shares at an exercise price per share of $0.55 for an aggregate total consideration of $1,200. In January 2018, the Investor exercised
Warrants to purchase an additional 1,454,545 Ordinary shares at an exercise price per share of $0.55 in consideration of $800.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
9:-
|
SHAREHOLDERS’
EQUITY (Cont.)
|
On
May 18, 2016, as part of the investment transaction, the Company issued to a consultant 510,638 Warrants to purchase Ordinary
shares at an exercise price per Ordinary share of $0.47, exercisable for a period of 18 months following the date of the Initial
Investment. During 2016, the consultant exercised Warrants to purchase 106,383 Ordinary shares at an exercise price per share
of $0.47, for an aggregate total consideration of $50. During 2017, the consultant exercised Warrants to purchase 404,255 Ordinary
Shares at an exercise price per share of $0.47, for an aggregate total consideration of $190.
As
of December 31, 2018, all of the Company’s outstanding Warrants were fully exercised.
|
NOTE
10:-
|
TAXES
ON INCOME
|
|
|
a.
|
The
Israeli corporate tax rate and real capital gains tax was 25% in 2016, 24% in 2017 and 23% in 2018.
|
|
|
|
|
|
|
|
The
Company’s subsidiary which was incorporated in China is subject to corporate tax rate of 25% in 2018 and 2017.
|
|
|
|
|
|
|
|
The
Company’s subsidiaries which were incorporated in U.S. are subject to federal tax rate of 21% in 2018.
|
|
|
|
|
|
|
b.
|
In
accordance with the Israeli tax laws, tax returns of the Company submitted up to and including the 2013 tax year can be regarded
as final.
|
|
|
|
|
|
|
|
The
Company’s subsidiaries did not receive final tax assessments since their incorporation.
|
|
|
|
|
|
|
c.
|
Tax
benefits under the Law for the Encouragement of Industry (Taxes), 1969:
|
|
|
|
|
|
|
|
The
Company qualifies as an “Industrial Company” under the Law for the Encouragement of Industry (Taxes), 1969 (the
“Industrial Encouragement Law”). The Industrial Encouragement Law defines an “Industrial Company”
as a company that is resident in Israel and that derives at least 90% of its income in any tax year, other than income from
defense loans, capital gains, interest and dividends, from an enterprise whose major activity in a given tax year is industrial
production.
|
|
|
|
|
|
|
|
The
principal benefit from the above law is the deduction of expenses in connection with a public offering. Also, under the industrial
Encouragement Law an “Industrial Company” is entitled to special rates of depreciation for industrial equipment
and in addition to amortization of the cost of purchased know-how and patents over an eight-year period for tax purposes and
an accelerated depreciation rate on equipment.
|
|
|
|
|
|
|
|
Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
|
|
|
|
|
|
|
d.
|
As
of December 31, 2018, the net operating tax loss carryforward relating to the Company in Israel amounted to approximately
$62,172, not including a carryforward capital loss amounting to approximately $3,788. Carryforward losses in Israel may be
carried forward indefinitely and may be offset against future taxable income.
|
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
10:-
|
TAXES
ON INCOME (Cont.)
|
As
of December 31, 2018, the U.S. subsidiaries have U.S. federal carryforward tax losses of approximately $1,420.
As
the Company believes that it is more likely than not that the deferred tax assets in respect of these carryforward losses will
not be utilized, the Company recorded a full valuation allowance for the entire balance of the deferred tax asset relating to
the carryforward losses.
|
|
e.
|
The
main reconciling items between the statutory tax rate of the Company and the effective tax rate is the valuation allowance
recorded in respect of the deferred tax assets relating to net operating loss carryforward and other temporary differences
due to the uncertainty of the realization of such tax assets.
|
Deferred
income taxes:
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets
are as follows:
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
14,598
|
|
|
$
|
17,490
|
|
|
Capital loss carryforward
|
|
|
871
|
|
|
|
918
|
|
|
Allowances and reserve
|
|
|
322
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets before valuation allowance
|
|
|
15,791
|
|
|
|
18,750
|
|
|
Valuation allowance
|
|
|
(15,791
|
)
|
|
|
(18,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of December 31, 2018 and 2017, the Company has provided valuation allowances in respect of deferred tax assets resulting from
the tax loss carryforward and other temporary differences, since it has a history of operating losses and the current uncertainty
concerning its ability to realize these deferred tax assets in the future.
The
Company accounts for its income tax uncertainties in accordance with ASC 740, which clarifies the accounting for uncertainties
in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
As
of December 31, 2018 and 2017, there were no unrecognized tax benefits that if recognized would affect the annual effective tax
rate.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
11:-
|
FINANCIAL
EXPENSES, NET
|
|
|
|
Year ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange differences
|
|
$
|
47
|
|
|
$
|
130
|
|
|
$
|
8
|
|
|
Interest on cash equivalents and restricted deposits
|
|
|
184
|
|
|
|
50
|
|
|
|
9
|
|
|
Other
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231
|
|
|
|
214
|
|
|
|
17
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of shareholders’ convertible loans discount and BCF
|
|
|
-
|
|
|
|
103
|
|
|
|
1,116
|
|
|
Interest on shareholders’ convertible note and loans
|
|
|
-
|
|
|
|
164
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank commissions and others
|
|
|
17
|
|
|
|
82
|
|
|
|
100
|
|
|
Foreign currency exchange differences
|
|
|
93
|
|
|
|
9
|
|
|
|
25
|
|
|
Interest on loans from banks and other credit balances
|
|
|
2
|
|
|
|
12
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
370
|
|
|
|
1,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial (expenses) Income, net
|
|
$
|
119
|
|
|
$
|
(156
|
)
|
|
$
|
(1,521
|
)
|
|
NOTE
12:-
|
RELATED
PARTY BALANCE AND TRANSACTIONS
|
In
January 2017, the Company’s shareholders approved that in addition to the directors’ fees to be paid to all of the
Company’s directors, commencing as of January 1, 2017, the Company will pay the Investor (see Note 1c) an additional monthly
payment of approximately $4.6 (NIS 17,500) for time devoted to the Company by the Executive Chairman of the Board of Directors,
who is also a co-owner of the Investor. Such payment would increase in the event the Company achieved profitable operations. In
2017, the Company’s consolidated audited financial statements reflected net income (before taxes), so such additional payment
increased to approximately $9 (NIS 35,000). In 2018, the total payments to the Investor with respect to the Executive Chairman
of the Board of Directors were $118.
In
addition, the Company’s shareholders approved a new engagement letter with a director of the Company (the “Director”),
according to which the Director will be entitled to receive a commission of 2.5% of the net revenues received by the Company with
respect to specific transactions introduced to the Company by the Director, subject to a detailed agreement to be entered into
by the Director and the Company and the prior approval of any such transactions by the Company and the Audit Committee. As of
December 31, 2018, no revenues were generated as a result of this agreement, therefore no commission paid.
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
12:-
|
RELATED
PARTY BALANCE AND TRANSACTIONS (Cont.)
|
See
also Note 9 for transactions with the Company’s shareholders.
Balances
with related parties:
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
43
|
|
|
$
|
71
|
|
Related
parties’ expenses:
|
|
|
Year ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and management fees
|
|
$
|
156
|
|
|
$
|
170
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of shareholders’ convertible loans discount and BCF
|
|
$
|
-
|
|
|
$
|
103
|
|
|
$
|
1,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on shareholders’ convertible note and loans
|
|
$
|
-
|
|
|
$
|
164
|
|
|
$
|
270
|
|
|
NOTE
13:-
|
MAJOR
CUSTOMERS AND GEOGRAPHIC INFORMATION
|
|
|
a.
|
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company
manages its business on the basis of one reportable segment, and derives revenues from develops, manufactures and sells land
radar for defense forces and border protection applications, avionics equipment and aviation data acquisition and debriefing
systems (see Note 1 above for a brief description of the Company’s business).
|
|
|
|
|
|
|
b.
|
Revenues
by geographic areas:
|
Revenues
are attributed to geographic area based on the location of the end customers as follows:
|
|
|
Year ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
11,686
|
|
|
$
|
14,446
|
|
|
$
|
1,553
|
|
|
Israel
|
|
|
10,446
|
|
|
|
6,363
|
|
|
|
7,358
|
|
|
Asia
|
|
|
3,093
|
|
|
|
4,372
|
|
|
|
2,499
|
|
|
South America
|
|
|
1,206
|
|
|
|
514
|
|
|
|
1,289
|
|
|
Europe
|
|
|
1,601
|
|
|
|
281
|
|
|
|
122
|
|
|
Australia
|
|
|
-
|
|
|
|
206
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,032
|
|
|
$
|
26,182
|
|
|
$
|
12,821
|
|
RADA
ELECTRONIC INDUSTRIES LTD.
AND
ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
13:-
|
MAJOR
CUSTOMERS AND GEOGRAPHIC INFORMATION (Cont.)
|
Revenues
from single customers that exceed 10% of the total revenues in the reported years as a percentage of total revenues are as follows:
|
|
|
Year ended December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
7
|
|
|
|
7
|
|
|
|
20
|
|
|
Customer B
|
|
|
5
|
|
|
|
9
|
|
|
|
17
|
|
|
Customer C
|
|
|
11
|
|
|
|
2
|
|
|
|
16
|
|
|
Customer D
|
|
|
4
|
|
|
|
3
|
|
|
|
13
|
|
|
Customer E
|
|
|
11
|
|
|
|
5
|
|
|
|
11
|
|
|
Customer F
|
|
|
6
|
|
|
|
13
|
|
|
|
6
|
|
|
Customer G
|
|
|
4
|
|
|
|
35
|
|
|
|
1
|
|
|
Customer H
|
|
|
12
|
|
|
|
3
|
|
|
|
1
|
|
|
Customer I
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
d.
|
Long-lived
assets (property, plant and equipment) by geographic areas:
|
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
4,318
|
|
|
$
|
3,915
|
|
|
China
|
|
|
-
|
|
|
|
319
|
|
|
USA
|
|
|
314
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,632
|
|
|
$
|
4,234
|
|
|
NOTE
14:-
|
SUBSEQUENT
EVENTS
|
On
January 2019 the Company’s shareholders approved the sale of 545,454 Ordinary Shares to DBSI at a price per share of $2.75,
approximately $1.5 million in the aggregate.
-
- - - - - - - - - - - - - - - - -
SIGNATURES
The
registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its behalf.
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RADA
ELECTRONIC INDUSTRIES LTD.
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By:
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/s/
Dov Sella
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Name:
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Dov
Sella
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Title:
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Chief
Executive Officer
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Dated:
April 1, 2019
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