(Name, Telephone, E-mail and/or Facsimile
number and Address of Company Contact Person)
Securities registered or to be registered
pursuant to Section 12(b) of the Act:
Securities registered or to be registered
pursuant of Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock at the close of the period covered by the annual report:
3,356,689 Ordinary Shares, nominal value
NIS 80.00 per share, as of December 31, 2017
and 3,356,689 Ordinary Shares, nominal value NIS 80.00 per share, as of February 28, 2018.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “accelerated
filer , large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked
in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
This report on Form 20-F is being incorporated
by reference into all effective Registration Statements filed by us under the Securities Act of 1933, as amended, to the extent
not superseded by documents or reports subsequently filed or furnished.
This Annual Report
on Form 20-F contains forward-looking statements that are intended to be, and are hereby identified as, forward looking statements
for the purposes of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements address,
among other things: our strategy; the anticipated development of our products; the results of completed acquisitions and our ability
to make future acquisitions; our projected capital expenditures and liquidity; our development of additional revenue sources; our
development and expansion of relationships; the market acceptance of our products; our technological advancement; our compliance
with regulatory requirements; and our ability to operate due to political, economic and security conditions. Actual results could
differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the
risks discussed below and elsewhere in this report.
We urge you to consider
that statements that use the terms “believe”, “do not believe”, “expect”, “plan”,
“intend”, “estimate”, “anticipate”, “projections”, “forecast”, “may”,
“continue”, “should”, “predict”, “potential” or the negative of these terms or
similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect
to future events. These statements are based on assumptions and are subject to risks and uncertainties. These risk factors and
uncertainties include, amongst others, the dependency of sales being generated from one or few major customers, the uncertainty
of BOS being able to maintain current gross profit margins, inability to keep up or ahead of technology and to succeed in a highly
competitive industry, inability to maintain marketing and distribution arrangements and to expand our overseas markets, uncertainty
with respect to the prospects of legal claims against BOS, the effect of exchange rate fluctuations, general worldwide economic
conditions and continued availability of financing for working capital purposes and to refinance outstanding indebtedness; and
additional risks and uncertainties set forth in this Annual Report, including under the heading “Risk Factors.” Except
as required by applicable law, including the federal securities laws of the United States, we do not intend to update or revise
any forward-looking statements, whether as a result of new information, future events or otherwise.
Market data and forecasts
used in this report have been obtained from independent industry sources that we believe to be reliable. We have not independently
verified the data obtained from these sources and we cannot assure you of the accuracy or completeness of the data. Forecasts and
other forward-looking information obtained from these sources are subject to the same qualifications and additional uncertainties
accompanying any estimates of future market size.
PART I
Item 1:
Identity
of Directors, Senior Management and Advisors
Not applicable.
Item 2:
Offer Statistics
and Expected Timetable
Not applicable.
Item 3:
Key Information
Regarding BOS
Unless the context
in which such terms are used would require a different meaning, all references to “BOS”, “we”, “our”
or the “Company” refer to B.O.S. Better Online Solutions Ltd. and its subsidiaries.
|
3A.
|
Selected Consolidated Financial Data
|
The selected consolidated
statement of operations data for B.O.S. Better Online Solutions Ltd. set forth below with respect to the years ended December 31,
2017, 2016 and 2015, and the selected consolidated balance sheet data as of December 31, 2017 and 2016, have been derived from
our audited Consolidated Financial Statements listed in Item 18, which have been prepared in accordance with generally accepted
accounting principles in the United States (“U.S. GAAP”). The selected consolidated statement of operations data set
forth below with respect to the years ended December 31, 2014 and 2013, and the consolidated balance sheet data as of December
31, 2015, 2014 and 2013, are derived from other consolidated financial statements not included herein and have been prepared in
accordance with U.S. GAAP. The financial statements for the year ended December 31, 2017 were audited by Fahn Kanne & Co. Grant
Thornton Israel, an independent registered public accounting firm and a member of Grant Thornton. The financial statements for
the years ended December 31, 2016, 2015, 2014 and 2013 were audited by Kost Forer Gabbay & Kasierer, an independent registered
public accounting firm and a member of Ernst & Young Global. The selected consolidated financial data presented below should
be read in conjunction with and is qualified entirely by reference to Item 5: “Operating and Financial Review and Prospects”
and the Notes to the Financial Statements included in this Annual Report on Form 20-F.
Statement of Operations Data: (in U.S.
thousands of dollars with the exception of per share data)
Year ended December 31,
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
25,903
|
|
|
|
27,601
|
|
|
|
25,599
|
|
|
|
27,427
|
|
|
|
28,932
|
|
Cost of revenues
|
|
|
20,872
|
|
|
|
22,556
|
|
|
|
20,462
|
|
|
|
22,112
|
|
|
|
22,587
|
|
Gross profit
|
|
|
5,031
|
|
|
|
5,045
|
|
|
|
5,137
|
|
|
|
5,315
|
|
|
|
6,345
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
2,924
|
|
|
|
3,043
|
|
|
|
2,768
|
|
|
|
3,111
|
|
|
|
3,389
|
|
General and administrative
|
|
|
1,523
|
|
|
|
1,882
|
|
|
|
1,681
|
|
|
|
1,498
|
|
|
|
1,870
|
|
Total operating expenses
|
|
|
4,447
|
|
|
|
4,925
|
|
|
|
4,449
|
|
|
|
4,609
|
|
|
|
5,259
|
|
Operating income
|
|
|
584
|
|
|
|
120
|
|
|
|
688
|
|
|
|
706
|
|
|
|
1,086
|
|
Financial expense, net
|
|
|
(549
|
)
|
|
|
(444
|
)
|
|
|
(376
|
)
|
|
|
(339
|
)
|
|
|
(297
|
)
|
Income (loss) before taxes on income
|
|
|
13
|
|
|
|
(325
|
)
|
|
|
312
|
|
|
|
367
|
|
|
|
789
|
|
Taxes on income (tax benefit)
|
|
|
13
|
|
|
|
108
|
|
|
|
(22
|
)
|
|
|
7
|
|
|
|
16
|
|
Net income (loss)
|
|
|
-
|
|
|
|
(433
|
)
|
|
|
334
|
|
|
|
360
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share
|
|
|
-
|
|
|
$
|
(0.30
|
)
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
|
$
|
0.24
|
|
Weighted average number of shares used in computing basic net income (loss) per share
|
|
|
1,172
|
|
|
|
1,449
|
|
|
|
1,970
|
|
|
|
2,587
|
|
|
|
3,171
|
|
Weighted average number of shares used in computing diluted net income (loss) per share
|
|
|
1,172
|
|
|
|
1,449
|
|
|
|
1,970
|
|
|
|
2,593
|
|
|
|
3,171
|
|
Consolidated Balance Sheet Data:
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
|
1,005
|
|
|
|
1,522
|
|
|
|
1,419
|
|
|
|
1,286
|
|
|
|
1,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital (*)
|
|
|
(500
|
)
|
|
|
634
|
|
|
|
5,246
|
|
|
|
6,099
|
|
|
|
7,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
19,187
|
|
|
|
16,261
|
|
|
|
16,825
|
|
|
|
18,144
|
|
|
|
21,407
|
|
Short-term banks loan and current maturities of long-term bank loans
|
|
|
5,924
|
|
|
|
4,867
|
|
|
|
400
|
|
|
|
400
|
|
|
|
505
|
|
Long-term liabilities
|
|
|
1,305
|
|
|
|
383
|
|
|
|
3,653
|
|
|
|
2,943
|
|
|
|
2,809
|
|
Shareholders’ equity
|
|
|
3,703
|
|
|
|
5,297
|
|
|
|
6,505
|
|
|
|
8,584
|
|
|
|
10,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) Working capital comprises of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
13,679
|
|
|
|
11,215
|
|
|
|
11,913
|
|
|
|
12,716
|
|
|
|
15,722
|
|
Less: current liabilities
|
|
|
14,179
|
|
|
|
10,581
|
|
|
|
6,667
|
|
|
|
6,617
|
|
|
|
8,380
|
|
|
|
|
(500
|
)
|
|
|
634
|
|
|
|
5,246
|
|
|
|
6,099
|
|
|
|
7,342
|
|
|
3B.
|
Capitalization and Indebtedness
|
Not applicable.
|
3C.
|
Reasons for the Offer and Use of proceeds
|
Not applicable.
The following risk
factors, in addition to other information contained or incorporated by reference in this Form 20-F, should be considered carefully.
Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The risks
described below are not the only risks facing our Company. Additional risks and uncertainties that we are not aware of or that
we currently believe are immaterial may also adversely affect our business, financial condition, results of operation and liquidity.
The trading price of our Ordinary Shares could decline due to any of these risks, and you may lose all or part of your investment.
Risks relating to our financial results and capital structure:
We
require a significant amount of cash to satisfy our debt obligations. If we fail to generate sufficient cash flow from operations,
we may need to renegotiate or refinance our debt, obtain additional financing, postpone capital expenditures or sell assets.
As of December 31,
2017, we had $3.03 million in long-term debt (including current maturities of $505,000) and no short term bank loans.
We depend mainly on
cash generated by continuing operating activities to make payments on our debt. We cannot assure you that we will generate sufficient
cash flow from operations to make the scheduled payments on our debt. Our ability to meet our debt obligations will depend on whether
we can successfully implement our business strategy, as well as on economic, financial, competitive and technical factors (See
“Item 5B. Liquidity and Capital Resources” below).
Some of the factors
are beyond our control, such as economic conditions in the markets where we operate or intend to operate, changes in our customers’
demand for products that we sell, and pressure from existing and new competitors. Also, because part of our loans bear interest
at floating rates, we are susceptible to an increase in interest rates (See “Item 11. Quantitative and Qualitative Disclosures
about Market Risk” below).
If we cannot generate
sufficient cash flow from operations to make scheduled payments on our debt obligations, we may need to renegotiate the terms of
our debt, refinance our debt, obtain additional financing, delay planned capital expenditures or sell assets.
If our lenders decline
to renegotiate the terms of our debt in these circumstances, the lenders could declare all amounts borrowed and all amounts due
to them under the agreements due and payable.
We
have had a history of losses and our future levels of sales and ability to achieve profitability are unpredictable.
As of December 31,
2017, we had an accumulated deficit of $69.8 million. Although we had net income of $773,000 in 2017, $360,000 in 2016 and $334,000
in 2015, we had a net loss of $433,000 in 2014 and operated on a break even basis in 2013. In addition, we have had net losses
in prior fiscal years, including in 2011 and 2012. Our ability to maintain and improve future levels of sales and profitability
depends on many factors, which include:
|
●
|
delivering products in a timely manner;
|
|
|
|
|
●
|
successfully implementing our business strategy;
|
|
|
|
|
●
|
increased demand for existing products; and
|
|
|
|
|
●
|
controlling costs.
|
There
can be no assurance that we will be able to meet our challenges and continue to be profitable in the future or that the level of
historic sales will continue in the future.
We
may be unable to maintain our gross profit margins.
Our sales and profitability
may vary in any given year, and from quarter to quarter. In order to increase sales or to enter into new markets with new products
or services or due to competition we may find it necessary to decrease prices in order to be competitive. Additionally, our gross
profit margin tends to fluctuate mainly due to variety and mix of products and changing suppliers prices. We may not be able to
maintain current gross profit margins in the future, which would have a material adverse effect on our business.
We
depend on one bank for our credit facilities.
We rely on the First
International Bank of Israel (“Bank Beinleumi”) to provide all of the credit facilities to our subsidiaries. As of
December 31, 2017, we had $3.03 million in long term debt to Bank Beinleumi.
Our
assets are subject to a security interest in favor of Bank Beinleumi. Our failure to repay the bank loan, if required, could result
in legal action against us, which could require the sale of all of our assets.
The repayment of our
debt to Bank Beinleumi is secured by a first priority floating charge on the present and future assets of the Company and its Israeli
subsidiaries, and by a first priority fixed charge on their goodwill, unpaid share capital and any insurance entitlements pertaining
to assets underlying these charges. In addition, the Company and its Israeli subsidiaries entered into a series of intercompany
guarantees in favor of Bank Beinleumi.
If we are unable to
repay the bank loan when due, the bank could foreclose on our assets in order to recover the amounts due. Any such action might
require us to curtail or cease operations (See “Item 5B. Liquidity and Capital Resources” below).
Our
debt obligations may hinder our growth and put us at a competitive disadvantage.
Our debt obligations
require us to use a substantial portion of our operating cash flow to repay the principal and interest on our loans. This reduces
funds available to grow and expand our business, limits our ability to pursue business opportunities and makes us more vulnerable
to economic and industry downturns. The existence of debt obligations and covenants also limits our ability to obtain additional
financing on favorable terms.
Due
to restrictions in our loan agreements, we may not be able to operate our business as we desire.
Our loan agreements
contain a number of conditions and limitations on the way in which we can operate our business, including limitations on our ability
to raise debt, sell or acquire assets and pay dividends. These limitations may force us to pursue less than optimal business strategies
or forgo business arrangements, which could have been financially advantageous to our shareholders and us. Our debt obligations
also contain various covenants, which require that we maintain certain financial ratios related to shareholders’ equity and
EBITDA and capital to balance sheet ratio. Our failure to comply with the restrictions and covenants contained in our loan agreements
could lead to a default under the terms of these agreements (See “Item 5B. Liquidity and Capital Resources”).
If
our shareholders do not approve an increase in our authorized share capital, our ability to make future acquisitions and to fund
our operations through the issuance of Ordinary Shares will be constrained, which may have a material adverse effect on our business
and financial condition.
As of February 28,
2018, we had approximately 329,000 authorized, but unissued Ordinary Shares that are available to make acquisitions and to raise
capital for general corporate purposes. If our shareholders do not approve an increase in our authorized share capital, our ability
to make future acquisitions and to fund our operations through the issuance of Ordinary Shares will be constrained, which may have
a material adverse effect on our business and financial condition.
Risks related to our business:
We
depend on key personnel for the success of our business.
Our success depends,
to a significant extent, on the continued active participation of our executive officers and other key personnel. In addition,
there is significant competition for employees with technical, operational and sales expertise in our industry.
In order to succeed
we would need to be able to:
|
●
|
retain the executive officers and key personnel who have been involved in the development of our two operating divisions; and
|
|
|
|
|
●
|
attract and retain highly skilled personnel in various functions of our business.
|
We
cannot make assurances that we will be successful in attracting, integrating, motivating and retaining key personnel. If we are
unable to retain our key personnel and attract additional qualified personnel, as and when needed, our business may be adversely
affected.
We
may be unable to effectively manage our growth and expansion, and as a result, our business results may be adversely affected.
Our
goal is to grow over the next few years. The management of our growth, if any, will require the continued expansion of our operational
and financial control systems, as well as a significant increase in our financial resources and in our delivery and service capabilities.
These factors could place a significant strain on our resources.
Our
growth increases the complexity of our operations, places significant demands on our management and our operational, financial
and marketing resources and involves a number of challenges, including:
|
●
|
retaining and motivating key personnel of the acquired businesses;
|
|
|
|
|
●
|
assimilating different corporate cultures;
|
|
|
|
|
●
|
preserving the business relationships with existing key customers and suppliers;
|
|
|
|
|
●
|
maintaining uniform standards, controls, procedures and policies;
|
|
|
|
|
●
|
introducing joint products, solutions and service offerings; and
|
|
|
|
|
●
|
having sufficient working capital to finance growth.
|
In
addition, our inability to meet our delivery commitments in a timely manner (as a result of unexpected increases in orders, for
example) could result in losses of sales, exposure to contractual penalties, costs or expenses, as well as damage to our reputation
in the marketplace.
Our
inability to manage growth effectively could have a material adverse effect on our business, financial condition and results of
operations.
We
may expand our business through acquisitions that could result in diversion of resources and extra expenses. This could disrupt
our business and adversely affect our financial condition.
In
January 2016, we completed the acquisition of the business operations of iDnext Ltd. and its subsidiary Next-Line Ltd. We may expand
our services through additional acquisitions. The negotiation of acquisitions, investments or joint ventures, as well as the integration
of acquired or jointly developed businesses or technologies, could divert our management’s time and resources. There can
be no assurance that we will be able to consume this acquisition or successfully integrate and manage future acquisitions, if they
occur.
Furthermore,
once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity which existed prior
to the acquisitions or otherwise perform as expected. The occurrence of any of these events could harm our business, financial
condition or results of operations.
We
do not have collateral or credit insurance for all of our customers’ debt, and our allowance for bad debts may increase.
Our
customers’ debt is derived from sales to customers located primarily in Israel, India, the Far East and Europe. We do not
generally require collateral; however, a certain portion of our debt of customers outside of Israel is insured against customer
nonpayment through the Israeli Credit Insurance Company Ltd.
The
balance of allowance for bad debt as of December 31, 2017 amounted to $75,000 which was determined by our management to be sufficient.
However, in the event of a global economic slowdown or if a local or global recession reoccurs, we may be required to record additional
and significant allowances for bad debts.
A
substantial part of the sales of our Supply Chain Solutions division is to the Indian market. A decline in our sales to India would
have a material adverse effect on our business and financial results.
In
2017, revenues derived from the sales of our Supply Chain Solutions division to India accounted to US $4.5 million, or 16% of our
total revenues. Sales to India could decline due to changes in market demand or for political reasons. Should our sales to India
reduce substantially, our business and financial results will be adversely affected.
Certain
customers of our Supply Chain Solutions division may cancel purchase orders they placed before the delivery.
Supply
chain programs for the sale of electronic components, including the programs offered by our Supply Chain Solutions division, are
designed to accommodate the preference of customers to work with a limited number of suppliers that are able to provide a wide
range of electronic components under one order. In the event we are not able to provide all of the components required by a customer,
such customer could elect to terminate the entire order before its delivery. In addition, certain of our individual product orders
provide a right of termination prior to delivery.
In
the event substantial orders are so cancelled, there is no assurance that we will be able to sell the pre-purchased inventory at
a profit, or at all. This could result in excess and obsolete inventory and could have a material adverse effect on our results
of operations.
The
electronic components provided by our Supply Chain Solutions division need to meet certain industry standards and for some customers
we need to be the manufacturers’ authorized distributors.
The
main business of our Supply Chain Solutions division is the provision of electronic components to the aerospace and defense industry.
These components need to be in compliance with Aviation Standard number 9120 which was adopted by the International Aerospace Quality
Group. Noncompliance with these standards could limit our sales.
In
addition, in the face of an increased number of refurbished or non-original components offered in the marketplace, certain customers
have begun to insist on only purchasing components directly from authorized distributors of the manufacturers. This could impair
our ability to sell components of manufacturers for which we do not serve as authorized dealers and may have a substantial adverse
effect on our business.
Our
products may contain defects that may be costly to correct, delay market acceptance of our products, harm our reputation and expose
us to litigation.
Despite
testing by us, errors may be found in our software products and services. If defects are discovered, we may not be able to
successfully correct them in a timely manner, or at all. Defects and failures in our products could result in a loss of, or
delay in, market acceptance of our products and could damage our reputation. Although our standard license agreement with
our customers contains provisions designed to limit our exposure to potential product liability claims, it is possible that these
provisions may not be effective or enforceable under the laws of certain jurisdictions and we could fail to realize revenues and
suffer damage to our reputation as a result of, or in defense of, a substantial claim.
Our
products may infringe on the intellectual property rights of others.
Third
parties may assert claims that we have violated a patent, trademark, copyright or other proprietary intellectual property right
belonging to them. As is characteristic of our industry, there can be no assurance that our products do not or will not infringe
on the proprietary rights of third parties, that third parties will not claim infringement by us with respect to patents or other
proprietary rights or that we would prevail in any such proceedings. Any infringement claims, whether or not meritorious, could
result in costly litigation or arbitration and divert the attention of technical and management personnel. Any adverse outcome
in litigation alleging an infringement could require us to develop non-infringing technology or enter into royalty or licensing
agreements. If, in such situations, we are unable to obtain licenses on acceptable terms, we may be prevented from selling products
that infringe on such intellectual property of a third party. In addition, an unfavorable outcome or settlement regarding one or
more of these matters could have a material adverse effect on our business and operating results.
The
Supply Chain Solutions division engages in a number of business activities governed by U.S. Government Laws and Regulations, which
if violated, could subject the Company to civil or criminal fines and penalties.
The
Supply Chain Solutions division engages in a number of business activities governed by U.S. Government procurement laws and regulations
which change frequently, including regulations relating to import-export control and technology transfer restrictions. In addition,
the U.S. Foreign Corrupt Practices Act, or the FCPA, and similar anti-corruption laws in other jurisdictions, include anti-bribery
provisions. If we, or our sales representatives, fail to comply with these laws and regulations, we could be subject to administrative,
civil, or criminal liabilities that could have a material adverse effect on our business and results of operations. We may not
always be protected in cases of the violation of the FCPA or other anti-corruption laws by our employees or third-parties acting
on our behalf and such violations may have a material adverse effect on our reputation operating results and financial condition.
We
rely on certain key suppliers
.
Most
of our sales rely on products of certain key suppliers, which we represent on a non-exclusive basis. 33% of our Supply Chain Solutions
division purchases in the year 2017 were sourced from five key suppliers and 39% of our RFID and Mobile Solutions division purchases
in the year 2017 were sourced from six other key suppliers (including a software supplier). In the year 2016, 39% of our Supply
Chain Solutions division purchases were sourced from five key suppliers and 42% of our RFID and Mobile Solutions purchases were
sourced from six other key suppliers.
In
the event that any of our key suppliers becomes unable to fulfill our requirements in a timely manner or if we cease our business
relationship with any of these suppliers, we may experience an interruption in delivery and a decrease in our business until an
alternative supplier can be procured.
Future
changes in industry standards may have an adverse effect on our business.
New
industry standards in the aviation and defense industry could cause a portion of our Supply Chain Solutions division’s inventory
to become obsolete and unmarketable, which would adversely affect our results of operations.
Recent
changes in Israeli law in respect of minimum wage and work and rest hours may increase our labor related expenses.
In
December 2017, the mandatory minimum wage in Israel was raised by approximately 6%, to NIS 5,300. In addition, commencing April
2018, the 43-hour workweek shall be shortened by one hour (at a pre-determined day), without a reduction in the monthly salary.
An employee that will continue to work 43 hours per week shall be entitled to overtime payment. As a result, we may suffer an increase
in our labor costs in Israel, which could adversely affect our profitability.
If
revenue levels for any quarter fall significantly below our expectations, our results of operations will be adversely affected.
Our
revenues in any quarter are substantially dependent on orders received and delivered in that quarter. We base our decisions regarding
our operating expenses on anticipated revenue trends, and our expenses levels are relatively fixed, or require some time for adjustment.
As a result, revenue levels falling significantly below our expectations will adversely affect our results of operations.
The
rate of inflation in Israel may negatively impact our costs if it exceeds the rate of devaluation of the NIS against the U.S. dollar.
Similarly, the U.S. dollar cost of our operations in Israel will increase to the extent increases in the rate of inflation in Israel
are not offset by a devaluation of the NIS in relation to the U.S. dollar.
A
substantial amount of our revenues is denominated in U.S. dollars (“U.S. dollars” or “dollars”) or is U.S.
dollar-linked. However, we incur a significant portion of our expenses, principally salaries and related personnel expenses in
Israel and rent for our facilities in Israel, in NIS. As a result, we are exposed to the risk that the rate of inflation in Israel
will exceed the rate of devaluation of the NIS in relation to the U.S. dollar or that the timing of this devaluation lags behind
inflation in Israel. In any such event, the U.S. dollar cost of our operations in Israel will increase and our U.S. dollar-measured
results of operations will be adversely affected.
Similarly,
we are exposed to the risk that the NIS, after adjustment for inflation in Israel, will appreciate in relation to the U.S. dollar.
In that event, the dollar-measured costs of our operations in Israel will increase and our dollar-measured results of operations
will be adversely affected. In 2017, the NIS appreciated against the dollar by approximately 9.8%, while in 2016 this percentage
amounted to 1.5%. In 2015 and 2014, the NIS depreciated by approximately 0.3% and 12%, against the U.S. dollar, respectively. In
the year ended December 31, 2017, the inflation rate in Israel was 0.4%. In 2016, 2015 and 2014, the annual deflation was 0.2,
1% and 0.2%, respectively. Therefore, the U.S. dollar cost of our Israeli operations increased in 2017 and 2016 and decreased in
2015 and 2014. We cannot predict any future trends in the rate of inflation in Israel and whether the NIS will appreciate against
the U.S. dollar or vice versa. Any increase in the rate of inflation in Israel, unless the increase is offset on a timely basis
by a devaluation of the NIS in relation to the U.S. dollar, will increase our labor and other costs, which will increase the U.S.
dollar cost of our operations in Israel and harm our results of operations (see “Item 5A. Results of Operation - Impact of
Inflation and Currency Fluctuations” below).
If
we are unsuccessful in introducing new products, we may be unable to expand our business.
The
market for some of our products is characterized by rapidly changing technology and evolving industry standards. The introduction
of products embodying new technology and the emergence of new industry standards can render existing products obsolete and unmarketable
and can exert price pressures on existing products.
Our
ability to anticipate changes in technology and industry standards and successfully market new and enhanced products as well as
additional applications for existing products, in each case on a timely basis, will be critical in our ability to grow and remain
competitive. If we are unable, for technological or other reasons, to market products that are competitive in technology and price
and responsive to customer needs, our business will be materially adversely affected.
Disruptions
to our IT systems due to system failures or cyber security attacks may impact our operations, result in sensitive customer information
being compromised, which would negatively materially affect our reputation and materially harm our business.
Our
servers and equipment may be subject to computer viruses, break-ins, and similar disruptions from unauthorized tampering with computer
systems. Our systems have been, and are expected to continue to be, the target of malware and other cyber-attacks. Although we
have invested in measures to reduce these risks, there can be no assurance that our current information technology (IT) systems
are fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats.
A cyber-attack that bypasses our IT security systems causing an IT security breach may lead to a material disruption of our IT
business systems and/or the loss of business information. A cyber-attack on our systems or networks that impairs our IT systems
could disrupt our business operations and our ability to sell our products. Any such event could have a material adverse effect
on our business. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or shipment
of our products, or in theft, destruction, loss, misappropriation or release of our confidential information or our intellectual
property, our business, financial condition, results of operations and prospects could be materially adversely affected.
Our
Supply Chain division has significant sales worldwide and could encounter problems if conditions change in the places where we
market products.
We
have sold and intend to continue to sell products in overseas markets, including in India, the Far East and Europe. A number of
risks are inherent in engaging in international transactions, including:
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possible problems in collecting receivables;
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the imposition of governmental controls, or export license requirements;
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political and economic instability in foreign companies;
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foreign currency exchange rate risk;
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trade restrictions or changes in tariffs being imposed; and
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laws and legal issues concerning foreign countries.
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If
we should encounter such difficulties in conducting our international operations, they may adversely affect our business condition
and results of operations.
Unfavorable
global economic conditions could have a material adverse effect on our business, operating results and financial condition.
A
financial and economic downturn in Israel, India or in one or more of our overseas markets may cause revenues of our customers
to decrease. This may result in reductions in sales of products and services in some markets, longer sales cycles, slower
adoption of new technologies and increased price competition. In addition, weakness in the end-user market could negatively affect
the cash flow of our customers who could, in turn, delay paying their obligations to us. This could increase our credit risk exposure
and cause delays in our recognition of revenues on future sales to these customers.
We
may be obligated to indemnify our directors and officers
.
The
Company has agreements with its directors and senior officers which provide, subject to Israeli law, indemnification by the Company
for its directors and senior officers for: (a) monetary liability imposed upon a director or officer in favor of a third party
by a judgment, including a settlement or an arbitral award confirmed by the court, as a result of an act or omission of such person
in his or her capacity as a director or officer of the Company, (b) reasonable litigation expenses, including attorney’s
fees, incurred by a director or officer (A) pursuant to an investigation or a proceeding commenced against him or her by a competent
authority, provided that (i) it was terminated without an indictment and without having a monetary charge imposed on them in lieu
of criminal proceedings (as such terms are defined in the Israeli Companies Law 1999 – 5759 (the “Israeli Companies
Law”)); or (ii) it was terminated without the filing of an indictment but with a monetary charge imposed on him or her in
lieu of criminal proceedings for a crime that does not require proof of criminal intent; (B) or in connection with a financial
sanction, as a result of an act or omission of such person in its capacity as a director or officer of the Company, (c) reasonable
litigation expenses, including attorney’s fees, incurred by a director or officer or imposed on him or her by a court, in
a proceeding brought against him or her by or on behalf of the Company or by a third party, or in a criminal action in which he
or she was acquitted, or in a criminal action which does not require criminal intent in which he was convicted, in each case relating
to acts or omissions of such person in its capacity as a director or officer of the Company, (d) expenses, including reasonable
litigation expenses and legal fees, incurred by such a director or officer as a result of a proceeding instituted against him in
relation to (A) infringements that may result in imposition of financial sanction pursuant to the provisions of Chapter H’3
under the Israeli Securities Law 5728 – 1968 (the “Israeli Securities Law”) or (B) administrative infringements
pursuant to the provisions of Chapter H’4 under the Israeli Securities Law or (C) infringements pursuant to the provisions
of Chapter I’1 under the Israeli Securities Law; and (e) payments to an injured party of infringement under Section 52ND(a)(1)(a)
of the Israeli Securities Law. Payments pursuant to such indemnification obligation may materially adversely affect our financial
condition.
There
can be no assurance that we will not be classified as a passive foreign investment company (a “PFIC”).
Based upon our current
and projected income, assets and activities, we do not believe that at this time BOS is a passive foreign investment company for
U.S. federal income tax purposes, but there can be no assurance that we will not be classified as such in the future. Such classification
may have materially adverse tax consequences for our U.S. shareholders. One method of avoiding such tax consequences is by making
a “qualified electing fund” election for the first taxable year in which the Company is a PFIC. However, such an election
is conditioned upon our furnishing our U.S. shareholders annually with certain tax information. We do not presently prepare or
provide such information, and such information may not be available to our U.S. shareholders if we are subsequently determined
to be a PFIC. You are advised to consult with your own tax advisor regarding the particular tax consequences related to the ownership
and disposition of our Ordinary Shares under your own particular factual circumstances.
A
decline in the value of our market capitalization or other factors could require us to write-down the value of our goodwill, which
could have a material adverse effect on our results of operations.
Our
balance sheet contains a significant amount of goodwill and other amortizable intangible assets in long-term assets, totaling about
$4.8 million at December 31, 2017. We review goodwill annually for impairment, or more frequently when indications for potential
impairment exist. We review other amortizable intangible assets for impairment when indicators for impairment exist. The volatility
of our share price can cause significant changes to our market capitalization.
If
our market capitalization experiences a significant decline and is below the value of our Shareholders’ equity, if the carrying
amount of a reporting unit exceeds its fair value, or if any other quantitative or qualitative indication of impairment of goodwill
arises in the future, we may be required to record impairment charges for our goodwill. Any such write-downs, if required, could
result in a significant non-cash expense on our income statement, which could have a material adverse effect on our results of
operations.
There
are substantial risks associated with the YA II Standby Equity Distribution Agreement, which could contribute to the decline of
our share price and have a dilutive impact on our existing shareholders.
The
sale of our Ordinary Shares to YA II PN, Ltd. (or YA II) (formerly YA Global Master SPV Ltd.), pursuant to the Standby Equity Distribution
Agreement, dated as May 8, 2017, (the “2017 SEDA”), (see “Item 5B – Liquidity and Capital Resources”)
will have a dilutive impact on our shareholders. Under the 2017 SEDA, we have the right to sell, over a period of up to 4 years,
Ordinary Shares to YA II for up to a total purchase price of $2,000,000, all of which remained available as of February 28, 2018.
YA II may resell some, if not all of the shares we issue to it under the 2017 SEDA and such sales could cause the market price
of our Ordinary Shares to decline.
We
may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act
of 2002, which could have a material adverse effect on our operating results, investor confidence in our reported financial information,
and the market price of our Ordinary Shares.
Our
efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, governing internal control and procedures
for financial reporting have resulted in increased general and administrative expenses and a diversion of management time and attention.
We expect these efforts to require the continued commitment of significant resources. We may identify material weaknesses
or significant deficiencies in our assessments of our internal control over financial reporting. Failure to maintain effective
internal control over financial reporting could result in investigations or sanctions by regulatory authorities, and could have
a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price
of our Ordinary Shares.
If
our employees commit fraud or engage in other misconduct, including noncompliance with regulatory standards and requirements or
insider trading, our business may experience material adverse consequences.
During
the course of our operations, our directors, executives and employees may have access to material, nonpublic information regarding
our business, our results of operations or potential transactions we are considering. Despite the adoption of an Insider Trading
Policy, we may not be able to prevent a director, executive or employee from trading in our ordinary shares on the basis of, or
while having access to such information.
In
addition, while we have designed and operate an internal control system, we cannot provide absolute assurance that instances of
fraud, if any, shall be prevented or detected.
If
a director, an executive or an employee was to be investigated, or an action was to be brought against him or her for insider trading
or fraud, it could have a negative impact on our reputation and our share price. Such a claim, with or without merit, could also
result in substantial expenditures of time and money, and divert attention of our management team from other tasks important to
the success of our operations.
Risks related to our Ordinary Shares:
Our
share price has been and may continue to be volatile, which could result in substantial losses for individual shareholders.
The
market price of our Ordinary Shares has been and may continue to be highly volatile and subject to wide fluctuations. From January
1, 2017 through February 28, 2018, the daily closing price of our Ordinary Shares in NASDAQ has ranged from $1.67 to $2.46 per
share. We believe that these fluctuations have been in response to a number of factors including the following, some of which are
beyond our control:
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variations between actual results and projections;
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the limited trading volume in our stock;
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changes in our bank debts; and
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Nasdaq Capital Market Listing Standards non-compliance notices.
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In
addition, stock markets in general have from time to time experienced extreme price and volume fluctuations. This volatility is
often unrelated or disproportionate to the operating performance of the affected companies. These broad market fluctuations may
adversely affect the market price of our Ordinary Shares, regardless of our actual operating performance.
The
Company’s shares may be delisted from the NASDAQ Capital Market if it does not meet NASDAQ’s continued listing requirements.
Over
the years, the Company has received several notices from the NASDAQ Stock Market advising it of the non-compliance of its shares
with continued listing requirements on the NASDAQ Capital Market.
On
January 17, 2012, the Company received a notice from the Listing Qualifications Department of Nasdaq advising us that the Company
had failed to comply with Nasdaq’s requirement that listed securities maintain a minimum bid price of $1.00 per share as
set forth in Nasdaq Listing Rules.
On
July 19, 2012, the Company requested a hearing with the Nasdaq Hearings Panel, and a hearing was held on August 30, 2012. The Panel
determined that the continued listing of the Company’s securities on Nasdaq was contingent on the Company effecting a reverse
stock split in the ratio of 1 for 4 by not later than December 15, 2012, which it did.
On
January 2, 2013, the Company received a notice from the NASDAQ Office of General Counsel-Hearings, advising that the Company has
regained compliance with the applicable minimum bid price rule and is in compliance with all other applicable requirements for
listing on the NASDAQ Capital Market.
There
can be no assurance that the Company will continue to qualify for listing on the Nasdaq Capital Market. If the Company’s
Ordinary Shares are delisted from the Nasdaq Capital Market, trading in its Ordinary Shares could be conducted on the over-the-counter
market. In addition, if the Company’s Ordinary Shares were delisted from the Nasdaq Capital Market, it would be subject to
the so-called penny stock rules that impose restrictive sales practice requirements on broker-dealers who sell those securities.
Consequently, de-listing, if it occurred, could affect the ability of our shareholders to sell their Ordinary Shares in the secondary
market. The restrictions applicable to shares that are de-listed, as well as the lack of liquidity for shares that are traded on
an electronic bulletin board, may adversely affect the market price of such shares.
Risks
related to our location in Israel:
Political,
economic, and security conditions in Israel affect our operations and may limit our ability to produce and sell products or provide
our services.
We
are incorporated under the laws of the State of Israel, where we also maintain our headquarters and our principal research and
development and sales and marketing facilities. As a result, political, economic and military conditions affecting Israel directly
influence us.
Since
its establishment in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. In recent
years, these have included hostilities between Israel and Hezbollah in Lebanon, and Israel and Hamas in the Gaza Strip, both of
which resulted in rockets being fired into Israel causing casualties and disruption of economic activities. Recent political uprisings
and conflicts in various countries in the Middle East, including Egypt and Syria, are affecting the political stability of those
countries. Any armed conflicts, terrorist activities, political instability or hostilities in the region or that involve Israel
or the interruption or curtailment of trade within Israel or between Israel and its trading partners could adversely affect our
business, financial condition and results of operations and could make it more difficult for us to raise capital. In addition,
Israel faces threats from more distant neighbors, in particular, Iran that has threatened to attack Israel. Iran is also believed
to have a strong influence among extremist groups in areas that neighbor Israel, such as Hamas in Gaza and Hezbollah in Lebanon.
Additionally, the Islamic State of Iraq and Syria (ISIS), a violent jihadist group, is involved in hostilities in Iraq and Syria
and its stated purpose is to take control of the Middle East, including Israel.
Our
commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the
Middle East. Although the Israeli government has in the past covered the reinstatement value of certain damages that were caused
by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained, or if maintained, will
be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect
on our operations.
To
date, these matters have not had any material effect on our business and results of operations; however, the regional security
situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively
affect us in the future.
Furthermore,
several countries and companies restrict business with Israel and Israeli companies. Restrictive laws or policies directed towards
Israel or Israeli businesses may have an adverse impact on our operations, our financial results or the expansion of our business.
A
number of our key personnel in Israel have standing obligations to perform periodic reserve duty in the Israel Defense Forces and
are subject to be called up for active military duty at any time. If our key personnel are absent from our business for a significant
period of time, we may experience disruptions in our business that could affect the development, sales or technical support of
our products. As a result, we might not be able to compete in the market and our results of operations could be harmed.
The
anti-takeover effects of Israeli laws may delay or deter a change of control of the Company.
Provisions
of Israeli law may delay, prevent or make undesirable a merger or an acquisition of all or a significant portion of our shares
or assets. Israeli corporate law regulates acquisitions of shares through tender offers and mergers, requires special approvals
for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions.
These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult
for a third party to acquire us, even if doing so would be beneficial to our shareholders. These provisions may limit the price
that investors may be willing to pay in the future for our Ordinary Shares. Furthermore, Israeli tax considerations may make potential
transactions undesirable to us or to some of our shareholders.
These
laws may have the effect of delaying or deterring a change in control of the Company, thereby limiting the opportunity for shareholders
to receive a premium for their shares and possibly affecting the price that some investors are willing to pay for the Company’s
securities.
All
of our directors and officers are non-U.S. residents and enforceability of civil liabilities against them is uncertain.
All
of our directors and officers reside outside of the United States. Therefore, a judgment obtained against us, or any of these persons,
including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the
United States and may not be enforced by an Israeli court. It also may be difficult for you to effect service of process on these
persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may
refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate
forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli
law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must
be proven as a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also
be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result
of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded
by either a U.S. or foreign court.
Your
rights and responsibilities as our shareholder will be governed by Israeli law, which differ in some respects from the rights and
responsibilities of shareholders of United States corporations.
Since
we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association
and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders
in United States-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith towards
the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting
at the general meeting of shareholders on certain matters, such as an amendment to the company’s articles of association,
an increase of the company’s authorized share capital, a merger and approval of related party transactions that require shareholder
approval. In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote
or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness towards the company.
These provisions may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically
imposed on shareholders of U.S. corporations.
Our business could be impacted as
a result of actions by activist shareholders or others.
We may be subject,
from time to time, to legal and business challenges in the operation of our company due to actions instituted by activist shareholders
or others. Responding to such actions could be costly and time-consuming, may not align with our business strategies and could
divert the attention of our Board of Directors and senior management from the pursuit of our business strategies. Perceived uncertainties
as to our future direction as a result of shareholder activism may lead to the perception of a change in the direction of the business
or other instability and may affect our relationships with vendors, customers, prospective and current employees and others. For
additional information see Item 5: “Operating and Financial Review and Prospects - Legal Contingencies”
below.
As
a foreign private issuer whose shares are listed on the Nasdaq Capital Market, we follow and may in the future elect to follow
certain home country corporate governance practices instead of certain Nasdaq requirements.
We
are a foreign private issuer as such term is defined under U.S. federal securities laws. As a foreign private issuer, we have elected
to follow certain home country corporate governance practices instead of certain requirements of the Marketplace Rules of the Nasdaq
Capital Market, or the Nasdaq Marketplace Rules. We may in the future elect to follow Israeli corporate governance practices with
regard to, among other things, the composition of our board of directors (“Board of Directors”), compensation of officers,
director nomination procedures and quorum requirements at shareholders’ meetings. In addition, we may elect to follow Israeli
corporate governance practices instead of the Nasdaq requirements to obtain shareholder approval for certain dilutive events (such
as for the establishment or amendment of certain equity-based compensation plans, issuances that will result in a change of control
of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company
and certain acquisitions of the stock or assets of another company). Accordingly, our shareholders may not be afforded the same
protection as provided under Nasdaq’s corporate governance rules. Following our home country governance practices as opposed
to the requirements that would otherwise apply to a U.S. company listed on the Nasdaq Capital Market may provide less protection
than is accorded to investors of domestic issuers. See “Item 16G – Corporate Governance.”
If
we were to lose our foreign private issuer status under U.S. federal securities laws, we would incur additional expenses associated
with compliance with the U.S. securities laws applicable to U.S. domestic issuers.
As
a foreign private issuer, we are exempt from the rules and regulations under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), related to the furnishing and content of proxy statements, and our officers, directors, and principal
shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements
with the Securities and Exchange Commission as frequently or as promptly as domestic companies whose securities are registered
under the Exchange Act.
The
regulatory and compliance costs to us under U.S. securities laws, if we are required to comply with the reporting requirements
applicable to a U.S. domestic issuer, may be significantly higher than the cost we currently incur as a foreign private issuer.
As
a public company in the United States, we incur significant accounting, legal and other expenses as a result of listing our Ordinary
Shares on the Nasdaq Capital Market, and we may need to devote substantial resources to address new compliance initiatives and
reporting requirements.
As
a public company in the United States, the Exchange Act requires that we file periodic reports with respect to our business and
financial condition and maintain effective disclosure controls and procedures and internal control over financial reporting. In
addition, subsequent rules implemented by the SEC and the NASDAQ Stock Market may also impose various additional requirements on
public companies. As a result, we incur significant accounting, legal and other expenses as a result of listing our Ordinary Shares
on the Nasdaq Capital Market. These include costs associated with corporate governance requirements of the SEC and the Marketplace
Rules of Nasdaq, as well as requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002. Any future changes
in the laws and regulations affecting public companies in the United States and Israel, will result in increased costs to us as
we respond to such changes. These laws, rules and regulations could make it more difficult or more costly for us to obtain
certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements
could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board
committees or as executive officers.
Item 4:
Information
on the Company
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4A.
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History and Development of the Company
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We were incorporated
in Israel in 1990 and are subject to the Israeli Companies Law. Our executive offices, shipping and service operations are located
in Israel. Our address in Israel is 20 Freiman Street, Rishon LeZion, 7535825, Israel.
Our address in the
United States is B.O.S. Better Online Solutions Ltd. c/o Ruby-tech, Inc. 147-20 184th St., Jamaica NY 11413, USA.
Our telephone number
is 972-3-954-2000 and our website address is
www.boscom.com
. Our subsidiaries’ websites are: BOS-Odem Ltd (“Odem”).
-
www.odem.co.il;
BOS-Dimex Ltd. (“Dimex”) –
www.dimex.co.il
. and
www.idnext.co.il.
The
information contained on, or linked from, our websites is not a part of this report.
We operate our business
through two divisions:
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Supply Chain Solutions – conducted through our wholly owned subsidiary, Odem. Our Supply Chain Solutions business offers mainly electro mechanical components to customers in the defense, high technology industry and supply chain services for aviation customers that prefer to consolidate their component acquisitions through a supplier that is able to provide a comprehensive solution to their components-supply needs.
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RFID and Mobile Solutions – conducted through our wholly owned subsidiary, Dimex. Our RFID and Mobile Solutions offerings form a comprehensive turn-key solution for Automatic Identification and Data Collection (AIDC), combining mobile infrastructure and a software application of manufacturers that we represent. In addition, following the acquisition in January 2016 by Dimex of the business operations of iDnext Ltd. and its subsidiary Next-Line Ltd., Dimex also offers on-site inventory count services in the fields of apparel, food, convenience and pharma, and asset tagging and counting services for corporate and governmental entities.
|
In March 2008, Dimex
purchased the assets and activities of Dimex Systems, which was an integrator of AIDC solutions based on RFID and barcode technology.
The consideration was NIS 44.6 million (approximately $12.4 million). The consideration was comprised of cash, payable over a 24-month
period and of 25,011 BOS shares (equal to approximately 4.4% of the then outstanding shares of BOS).
In the years 2009 through
2012, the Company entered into several amendments to the purchase agreement for the purchase of the assets and activities of Dimex
Systems, or the Dimex Systems Asset Purchase Agreement. The amendments revised the payment schedule of the consideration payable
to Dimex Systems. The debt was paid in full as of December 31, 2015.
On January 1, 2016,
Dimex consummated the acquisition of the business operations of iDnext Ltd. (“iDnext”) and its subsidiary Next-Line
Ltd. (“Next-Line”), for a total consideration of $886,000. The consideration was comprised of a loan conversion in
the amount of $256,000, initially advanced as a loan to iDnext and Next-Line in December 2015 and applied towards the consideration
upon the closing of the acquisition, a cash payment of $154,000 and the issuance of 162,734 Ordinary Shares of the Company for
a value of $298,000. Additionally, Dimex has recorded a liability in the amount of $178,000, reflecting its commitment to make
additional contingent payments based on the annual operational profit of the acquired business in the calendar years 2016 and 2017.
In 2016, this liability was fully written off due to insufficient operating profit of the acquired business in the year ended December
31, 2016. In the year 2017 the acquired business did not meet the profitability targets that would trigger the additional contingent
payments.
The Company’s
Ordinary Shares are currently listed on the NASDAQ Capital Market. Following the Company’s request, on May 12, 2009 the Company’s
Ordinary Shares were delisted from trading on the Tel Aviv Stock Exchange (the “TASE”). The delisting of the Ordinary
Shares from the TASE did not affect the continued listing of the Ordinary Shares on the NASDAQ Capital Market under the symbol
BOSC. As a result of the delisting of the Company’s Ordinary Shares from the TASE, the Company is no longer subject to reporting
requirements in Israel, under the Israeli Securities Law.
On November 23, 2010,
the Company's two U.S. subsidiaries that are part of its Supply Chain Solutions division, Lynk and its subsidiary BOS Supply Chain
Solutions (Summit) Inc. (“Summit”), filed a Chapter 7 petition with the US Bankruptcy Court. In March 2011, the Lynk
case was closed. In April 2014, the Summit case was closed.
BOS manages its business
in two reportable divisions: RFID and Mobile Solutions (through its subsidiary Dimex), and Supply Chain Solutions (through its
subsidiary Odem).
The Company’s
customers represent a cross-section of industry leaders, from the avionics, defense, retail, manufacturers, government and livestock
markets. The Company’s Supply Chain Solutions customers include, among others, Cyient DLM Private Limited,, Centum Electronics
Limited and Fokker Elmo Sasmos Interconnection Systems Ltd. from the Indian market, and Refael and the Israel Aerospace Industries
from the Israeli market. The Company is continuing to expand its Supply Chain Solutions into the Indian market. The Company’s
RFID and Mobile Solutions currently has all of its sales in Israel and its customers include, among others, Shufersal Ltd., Fox
Vizel Ltd., The Central Company for Sales and Distribution Ltd., The Ministry of Agriculture & Rural Development and Tnuva
Ltd.
In its RFID and Mobile
Solutions division, the Company continues to invest in efforts to expand its product offerings.
BOS Product Offerings
RFID and Mobile Solutions
RFID (Radio Frequency
Identification) refers to the use of an automatic identification method to remotely retrieve data using devices called RFID tags.
An RFID tag is an object such as a pendant, bead, nail, label, micro wire or fiber, which can be applied to or incorporated into
a product, animal, or person for the purpose of identification using radio waves.
BOS’ RFID and
Mobile Solutions division offers the integration of turnkey solutions as well as stand-alone products, including best-of-breed
RFID and Automatic Identification Data Capture (AIDC) hardware, communications, equipment and industry-specific software applications.
Customers can opt for a full solution comprised of hardware and software, or choose to purchase specific items as a stand-alone
product or service.
The Company’s
RFID and Mobile Solutions division purchases AIDC equipment based on RFID and the barcode technology of leading global manufacturers.
Such manufacturers include Zebra Technologies Corp., M3 Mobile, DLog GmbH, Honeywell International Inc., Tadbik Ltd., Bibliotheca
RFID Libary Systems AG and Unique Technology Europe BV.
Specifically, the Company’s
RFID and Mobile Solutions division offers the following products and services:
|
○
|
Thermal and barcode printers;
|
|
○
|
RFID and barcode scanners and readers;
|
|
○
|
Wireless, mobile and forklift terminals;
|
|
○
|
Wireless infrastructure;
|
|
○
|
Active and passive RFID tags (HF & UHF); and
|
|
○
|
Consumables (ribbons, labels, tags)
|
|
○
|
Implementation and integration of a Warehouse Management System ("WMS"), which is proprietary software of Mantis Informatics S.A
.
that is licensed by the Company. WMS is an optimized data collection solution for logistics management in logistic centers and warehouses. The solution is based on RFID tags or bar codes, and is intended to provide customers with greater visibility into a retailer’s stock management and warehouse/logistics operations. The System enables storeroom managers to receive advanced delivery notifications and system alerts for delivery discrepancies, and provides them with the ability to locate inventory in their stockroom. It provides inventory managers with a direct communication link to the sales floor and assists them in minimizing inventory loss or theft. It also enables sales floor representatives to instantly check on the availability of a product, offer alternatives if the product is out of stock and provide the customer with up-to-date product information.
|
|
|
|
|
○
|
In August 2012, the Company entered into a cooperation agreement with an independent software development company for developing tailor made software solutions according to customers demand.
|
The Company provides systems for
comprehensive solution for inventory/assets tracking. The system is comprised from hardware, software and integration with the
customers' information system. The Company has provided systems for varied solutions which includes among others:
|
○
|
RFID system for libraries. The system is comprised of automatic self-service stations, staff stations, security gates, and RFID tags that are affixed to the books. The system was developed by Bibliotheca and the Company is the integrator in Israel.
|
|
○
|
RFID-based system for tracking inventory in a produce packing house. The RFID system enables automatic tracking of fruit pallets from the sorting machine through the various cold storage rooms and until the truck loading. It continuously shows the location of the pallets in the various stations in the packing house and interfaces with the ERP of the packing house. The system was designed using BOS' experience and knowledge of the working processes in a packing house, and is comprised of RFID readers, RFID tags, the Company tailor-made software, and an interface with the ERP of SAP, Priority and SBO.
|
|
○
|
Automatic system for industrial packing
lines, that matches between a product and its packaging. The system is designed to be deployed mainly in production lines of food
producers and pharmaceutical manufacturers. The system uses machine vision readers of Cognex Corporation together with Company’s
software and integration.
|
|
○
|
Automatic system for production line whereby manufacturing companies can track the progress and status of items on a production line. The solution is based on RFID tags or bar codes, and is intended to provide greater visibility into a customer’s manufacturing process, as well as traceability for critical parts. With this system, items entering the manufacturing plant are labeled with RFID tags or bar codes, which allow fixed readers, located along the production line, to record the product’s progress through the production line stations. Mobile readers may also be used to collect data from the parts labeled with RFID tags or bar codes.
|
|
○
|
Automatic system to identify and track vehicles in a variety of transportation-related settings, such as automobile dealers, importers or distributors. By using RFID tags on their vehicles it enables companies to effectively manage, track, support and plan all day-to-day vehicle-related activities.
|
The Company’s RFID and Mobile
Solutions division also provides complementary services such as:
|
○
|
A service lab that offers maintenance and repair services to data collection equipment, as well as warehouse and on-site service plans; and
|
|
○
|
Dimex offers on-site inventory count services
in the fields of apparel, food, convenience and pharma, and asset tagging and counting services for corporate and governmental
entities.
In 2017, 47% of our revenues were attributed
to sales generated from the Company’s RFID and Mobile Solutions division.
|
Supply Chain Solutions
The Company’s
Supply Chain Solutions division provides electronic components, telecommunications equipment and components consolidation services
to the aerospace, defense, medical and telecommunications industries as well as enterprise customers worldwide.
These services include:
|
●
|
The representation of global manufacturers and distribution of their electronics components and communications products (see below);
|
|
●
|
For aerospace customers:
|
|
○
|
Consolidation services – offering customers with one contact point for a wide range of electromechanical components of various manufacturers;
|
|
○
|
Kitting services – Performing inventory and quality control management of components entering production lines; and
|
|
○
|
Inventory management for ongoing projects, including all warehouse functions such as storage and operations.
|
The Company’s
Supply Chain Solutions division represents and distributes engineering designs for sale on a non-exclusive basis to, among others,
International Rectifier Inc., Sensata Technologies Inc., Integrated Power Designs, Inc., Positronic Global Connector Solutions,
Netpower, Switchcraft Inc., First Sensor A.G., Fema Electronics Corporation, SGC Technologies Inc. and Civue Optotech Inc.
In 2017, 53% of our
revenues were attributed to sales of the Supply Chain Solutions division.
Marketing, Distribution and Sales
RFID and Mobile Solutions
The Company markets
its RFID and Mobile Solutions primarily to medium and large sized corporations in Israel through a combination of direct sales
and sales agents.
Supply Chain Solutions
The Company markets
its Supply Chain Solutions directly to customers or through distributors worldwide. The Company’s sales force is comprised
of direct sales teams and sales agents.
Seasonality
The Company’s
sales are subject to seasonality. The revenues of the first and fourth quarter are usually relatively higher than the revenues
for the second and third quarter. The seasonality is attributable mainly to inventory counting services which generate a majority
of their revenues in the fourth and first quarter of the year.
The following tables
set forth the Company’s revenues (in thousands of $), by major geographic areas and by divisions, for the periods indicated
below:
Sales by major geographic areas ($ in
thousands)
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
2015
|
|
|
%
|
|
Israel
|
|
$
|
21,870
|
|
|
|
75
|
|
|
$
|
20,619
|
|
|
|
75
|
|
|
$
|
19,044
|
|
|
|
74
|
|
India
|
|
$
|
4,497
|
|
|
|
16
|
|
|
$
|
3,119
|
|
|
|
11
|
|
|
$
|
3,140
|
|
|
|
12
|
|
Far East
|
|
$
|
1,416
|
|
|
|
5
|
|
|
$
|
2,964
|
|
|
|
11
|
|
|
$
|
1,390
|
|
|
|
6
|
|
America
|
|
$
|
918
|
|
|
|
3
|
|
|
$
|
411
|
|
|
|
2
|
|
|
$
|
855
|
|
|
|
3
|
|
Europe
|
|
$
|
231
|
|
|
|
1
|
|
|
$
|
314
|
|
|
|
1
|
|
|
$
|
1,170
|
|
|
|
5
|
|
Total Revenues
|
|
$
|
28,932
|
|
|
|
100
|
|
|
$
|
27,427
|
|
|
|
100
|
|
|
$
|
25,599
|
|
|
|
100
|
|
Sales by quarters
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
2015
|
|
|
%
|
|
Q1
|
|
$
|
7,064
|
|
|
|
24
|
|
|
$
|
8,067
|
|
|
|
29
|
|
|
$
|
5,827
|
|
|
|
23
|
|
Q2
|
|
$
|
6,716
|
|
|
|
23
|
|
|
$
|
6,308
|
|
|
|
23
|
|
|
$
|
6,101
|
|
|
|
24
|
|
Q3
|
|
$
|
7,227
|
|
|
|
25
|
|
|
$
|
6,275
|
|
|
|
23
|
|
|
$
|
6,295
|
|
|
|
25
|
|
Q4
|
|
$
|
7,925
|
|
|
|
28
|
|
|
$
|
6,777
|
|
|
|
25
|
|
|
$
|
7,376
|
|
|
|
28
|
|
Total Revenues
|
|
$
|
28,932
|
|
|
|
100
|
|
|
$
|
27,427
|
|
|
|
100
|
|
|
$
|
25,599
|
|
|
|
100
|
|
Sales by divisions
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
2015
|
|
|
%
|
|
|
2014
|
|
RFID and Mobile Solutions
|
|
$
|
13,666
|
|
|
|
47
|
|
|
$
|
12,197
|
|
|
|
44
|
|
|
$
|
9,270
|
|
|
|
36
|
|
|
$
|
11,328
|
|
Supply Chain Solutions
|
|
$
|
15,495
|
|
|
|
53
|
|
|
$
|
15,291
|
|
|
|
56
|
|
|
$
|
16,336
|
|
|
|
64
|
|
|
$
|
16,317
|
|
Intercompany
|
|
$
|
(229
|
)
|
|
|
-
|
|
|
$
|
(61
|
)
|
|
|
-
|
|
|
$
|
(7
|
)
|
|
|
-
|
|
|
$
|
(44
|
)
|
Total Revenues
|
|
$
|
28,932
|
|
|
|
100
|
|
|
$
|
27,427
|
|
|
|
100
|
|
|
$
|
25,599
|
|
|
|
100
|
|
|
$
|
27,601
|
|
Competition
RFID and Mobile Solutions
The RFID and Mobile
Solutions market is subject to rapidly changing technology and evolving standards incorporated into mobile equipment, Enterprise
Resource Planning systems, computer networks and host computers. As the market grows, so does the number of competitors. A few
of the competitors in Israel have greater financial, marketing and technological resources than BOS.
In Israel, the Company’s
main competitors in the RFID and Mobile Solutions market are Soft Solutions Ltd., eWave Ltd., Dangot Computers Ltd., Dannet Advanced
Technologies Ltd., LogiTag Systems Ltd., Globe Tag Ltd., Infosystem and Isics.
Supply Chain Solutions
The Company holds several
representation agreements with major manufacturers. The representation agreements are not entered into on an exclusive basis.
The Company’s
Israeli competitors for distribution to the electronic industry include the publicly traded Telsys Ltd. and STG International Electronics
(1981) Ltd., as well as Nisco Projects Ltd., Eastronics Ltd., Elimec Engineering Ltd. and Teder Electro Mechanical Engineering
Ltd.
In the international
market, the Company’s competitors consist of mainly Arrow Electronics International Inc., Avnet Electronics Marketing, TTI
Inc., PEI-Genesis Inc., Weco Electrical Connectors Inc., Electro Enterprises Inc., Flame Enterprise Inc., Norstan Electronics Inc.,
Peerless Electronics Inc. and Future Electronics.
Strategy
The Company’s
vision is to become a leading integrator in the field of RFID and Mobile Solutions and global provider of electronic components
with supply chain added value services.
The key elements of
the Company’s strategy are as follows:
|
●
|
Expand its RFID and Mobile product and solutions offerings, mainly through acquisitions of complementary solutions. This will include the sale and integration of new complementary hardware and software to its existing customer base and sales to new customers. As part of implementing our growth strategy Dimex acquired in January 2016, the business operations of iDnext Ltd. and its subsidiary Next-Line Ltd. Following this acquisition, Dimex offers on-site inventory count services in the fields of apparel, food, convenience and pharma, and asset tagging and counting services for corporate and governmental entities;
|
|
●
|
Expand the Supply Chain Solutions product offerings and sales outside of Israel and mainly into India. Sales to the Far East, including India, amounted to $5.9 million in years 2017 and 2016.
|
Exchange Controls
See “Item 10D.
Exchange Controls.”
For other government
regulations affecting the Company’s business, see “Item 5A. Results of Operations - Grants and Participation.”
|
4C.
|
Organizational
Structure
|
The Company’s
wholly owned subsidiaries include:
In Israel:
(1) Dimex,
an Israeli corporation, representing the RFID and Mobile Solutions division;
(2) Odem,
an Israeli corporation, representing the Supply Chain Solutions division;
In the United States:
(1) Ruby-Tech,
a New York corporation, is a wholly owned subsidiary of Odem and a part of the Supply Chain Solutions division.
4D.
|
Property, Plants and Equipment
|
Our offices are located
in the following facility in Israel:
Location
|
|
Size (square meters)
|
|
Lease period
|
Rishon LeZion
|
|
2,725
|
|
January 2018 through November 2019
|
Our average monthly
rental fee for the year 2017 and for the year 2016 amounted to $14,405 and $12,999, respectively.
In November 2017 we
started renovation works for our warehouses and lab at the new location at the same building in Rishon LeZion. Currently, we lease
2,725 square meters that include the current and the new facilities. Following the completion of the renovation expected to take
place in April 2018, we will use only 1,651 square meters.
Item 4A:
Unresolved
Staff Comments
Not Applicable.
Item 5:
Operating
and Financial Review and Prospects
The following management’s
discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements
and notes thereto. Certain matters discussed below and throughout this Annual Report are forward-looking statements that are based
on our beliefs and assumptions as well as information currently available to us. Such forward-looking statements may be identified
by the use of the words “anticipate”, “believe”, “do not believe”, “estimate”,
“expect”, “plan”, “intend”, “projections”, “forecast”, “may”,
“continue”, “should”, “predict”, “potential” or the negative of these terms or
similar expressions. Such statements reflect our current views with respect to future events and are subject to certain risks and
uncertainties. While we believe such forward-looking statements are based on reasonable assumptions, should one or more of the
underlying assumptions prove incorrect, or these risks or uncertainties materialize, our actual results may differ materially from
those described herein.
Overview
BOS is a provider of
turnkey AIDC mobility solutions and a global distributor of electronic components for the civil aircraft industry, defense industry
and high technology equipment manufacturers.
The Company’s
RFID and Mobile products and services assist customers in improving the efficiency of their enterprise logistics, enhancing and
automating their data collection processes and improving asset tracking.
BOS manages its business
in two reportable divisions: RFID and Mobile Solutions (through its subsidiary Dimex), and Supply Chain Solutions (through its
subsidiary Odem).
Revenues
The Company derives
its revenues mainly from the sale of products and supporting services.
In accordance with
ASC Topic 605 “Revenue Recognition”, the Company recognizes revenues from sale of products when the following fundamental
criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered;
(iii) the price to the customer is fixed or determinable; and (iv) collection of the resulting receivable is reasonably assured.
Revenues
from service contracts are recognized ratably over the service period
.
The Company applies
the provisions of ASC Topic 605-25, "Revenue Recognition - Multiple-Element Arrangements", as amended. ASC Topic 605-25
provides guidance on how to account for arrangements that involve the delivery or performance of multiple products and services.
For such arrangements, each element of the contract is accounted for as a separate unit when it provides the customer value on
a stand-alone basis.
The Company follows
the guidance in ASC 605-35, “Revenue Recognition - Construction-Type and Production-Type Contracts” (“ASC 605-35”),
with respect to revenues from customized software solutions, whereby the Company applies the completed contract method, since the
Company is unable to obtain reasonable dependable estimates of the total effort required for completion . Under the completed contract
method, all revenue and related costs of revenue are deferred and recognized upon completion. Provisions for estimated losses on
contracts in process are recognized in the period such losses are determined.
Deferred revenues include
unearned amounts received from customers (mostly for service contracts, software projects and advances from customers) but not
yet recognized as revenues. Deferred revenues from service contracts are recognized over the period of the contract and advances
are recognized once the delivery of the products is done.
Costs and Operating Expenses
Our costs associated
with a particular project may vary significantly depending on the specific requirements of the customer, the terms of the agreement,
as well as on the nature of the products. As a result, our gross profits from each project may vary significantly.
In August 2012, we
entered into a cooperation agreement with an independent software development company for the maintenance, development and support
of our software solutions. The selling and marketing of the software solutions continues to be performed by our RFID and Mobile
Solutions division.
Our selling and marketing
expenses consist primarily of salaries and related costs, commissions earned by sales, marketing and operational personnel, facilities
costs, trade show expenses, promotional expenses and overhead costs allocated to selling and marketing activities, as well as depreciation
expenses and travel costs.
Our general and administrative
expenses consist primarily of salaries and related costs earned by management and financial departments, professional service fees,
expenses related to our directors, Nasdaq fees, investor relations and legal fees.
Our operating results
are significantly affected by, among other things, the level of revenues. Our revenues in any quarter are substantially dependent
on orders received and delivered in that quarter. As a result, our revenues and income (loss) may fluctuate substantially from
quarter to quarter. Certain of our expenses are mainly fixed or partially fixed and any fluctuation in revenues will generate a
significant variation in gross profit and net income (loss).
Critical accounting policies
Our discussion and
analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements
in conformity with generally accepted accounting principles in the United States requires our management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These amounts
and disclosures could potentially be materially different under other assumptions and conditions. These are our management’s
best estimates based on experience and historical data, however, actual results could differ materially from these estimates. Our
significant accounting principles are presented within Note 2 to our Consolidated Financial Statements attached to this annual
report. While all the accounting policies impact the financial statements, certain policies may be viewed to be critical. Management
believes that the following policies are those that are most important to the portrayal of our financial condition, results of
operations and for fully understanding and evaluating our reported results:
|
●
|
Impairment of long-lived assets and intangible assets subject to amortization
|
|
●
|
Goodwill
|
|
|
|
|
●
|
Revenue recognition
|
Inventories are valued
at the lower of either cost or net realizable value. Cost is determined using the moving average cost method.
Inventory write-offs
and write-downs are provided to cover risks arising from slow-moving items or technological obsolescence.
b.
|
Impairment of long-lived assets and intangible assets subject to amortization:
|
The Company’s
long-lived assets are reviewed for impairment in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived
Asset, whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset (or asset group) to
the future undiscounted cash flows expected to be generated by the assets (or asset group). If such assets are considered to be
impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds their fair
value.
Recoverability of intangible
assets is measured by a comparison of the carrying amount of the asset to the undiscounted future cash flows expected to be generated
by the asset. If intangible assets are considered to be impaired, the amount of any impairment is measured as the difference between
the carrying value and the fair value of the impaired assets.
Intangible assets with
finite lives are amortized using the straight-line basis over their useful lives, to reflect the pattern in which the economic
benefits of the intangible assets are consumed or otherwise used up. As of December 31, 2017 the remaining intangible assets were
comprised of software and costumer relationship (see Note 8 to the Consolidated Financial Statements for the year ended December
31, 2017).
For each of the three
years ended on December 31, 2017, 2016 and 2015, no impairment losses were identified.
Goodwill represents
the excess of the costs over the net assets of businesses acquired. Under ASC 350,
Intangibles - Goodwill and Other
(“ASC
350”), goodwill is not amortized but, instead, is tested for impairment at least annually, or between annual tests, in certain
circumstances, and written-down when impaired.
The Company performs
its annual impairment analysis of goodwill as of December 31 of each year, or more often if indicators of impairment are present.
The provisions of ASC 350 require that a two-step impairment test be performed on goodwill at the level of the reporting units.
In the first step, or "Step 1", the Company compares the fair value of each reporting unit to its carrying value. If
the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired and the Company is not required
to perform further testing. If the carrying value of the net assets exceeds the fair value, then the Company must perform the second
step, or "Step 2", of the impairment test in order to determine the implied fair value of goodwill. To determine the
fair value used in Step 1, the Company uses discounted cash flows. If and when the Company is required to perform a Step 2 analysis,
determining the fair value of its net assets and its off-balance sheet intangibles would require it to make judgments that involve
the use of significant estimates and assumptions.
The Company operates
in two operating-based segments: RFID and Mobile Solutions and Supply Chain Solutions. The Company's goodwill is related to the
RFID and Mobile Solutions segment, which represents a reporting unit as a whole.
The Company determines
the fair value of the reporting unit using the Income Approach, which utilizes a discounted cash flow model, as it believes that
this approach best approximates the reporting unit’s fair value at this time. The impairment test was based on a valuation
performed by management with the assistance of a third party appraiser.
Judgments and assumptions
related to revenue, operating income, future short-term and long-term growth rates, weighted average cost of capital, interest,
capital expenditures, cash flows and market conditions are inherent in developing the discounted cash flow model. The material
assumptions used for the Income Approach for 2017 were five years of projected net cash flows, WACC of 15% and a long-term growth
rate of 2%. The Company considers historical rates and current market conditions when determining the discount and growth rates
to use in its analyses. If these estimates or their related assumptions change in the future, the Company may be required to record
impairment charges for its goodwill.
The aggregate fair
value of the RFID and Mobile Solutions segment depends on various factors, some of which are qualitative and involve management
judgment, including stable backlog coverage and experience in meeting operating cash flow targets.
During 2017, 2016 and
2015 no impairment losses have been identified.
The Company derives
its revenues mainly from the sale of products and supporting services.
In accordance with
ASC Topic 605 “Revenue Recognition”, the Company recognizes revenues from sale of products when the following fundamental
criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered;
(iii) the price to the customer is fixed or determinable; and (iv) collection of the resulting receivable is reasonably assured.
Revenues from service
contracts are recognized ratably over the service period.
The Company applies
the provisions of ASC Topic 605-25, "Revenue Recognition - Multiple-Element Arrangements", as amended. ASC Topic 605-25
provides guidance on how to account for arrangements that involve the delivery or performance of multiple products and services.
For such arrangements, each element of the contract is accounted for as a separate unit when it provides the customer value on
a stand-alone basis.
The Company follows
the guidance in ASC 605-35, “Revenue Recognition - Construction-Type and Production-Type Contracts” (“ASC 605-35”),
with respect to revenues from customized software solutions, whereby the Company applies the completed contract method, since the
Company is unable to obtain reasonable dependable estimates of the total effort required for completion . Under the completed contract
method, all revenue and related costs of revenue are deferred and recognized upon completion. Provisions for estimated losses on
contracts in process are recognized in the period such losses are determined.
Deferred revenues include
unearned amounts received from customers (mostly for service contracts, software projects and advances from customers) but not
yet recognized as revenues. Deferred revenues from service contracts are recognized over the period of the contract and advances
are recognized once the delivery of the products is done.
Legal Contingencies
The Company is not
a party to any legal proceedings.
On April 9, 2017 D.D.
Goldstein Properties and Investments Ltd., a shareholder of the Company (the “Plaintiff”) filed a claim against the
Company's Chairman Yosi Lahad, the Company's Co-CEO, Yuval Viner, the Company's Co-CEO and CFO, Eyal Cohen and Ms. Gabriela Jacobs,
an (indirect) shareholder of the Company.
The Plaintiff claims
that the defendants, acting in bad faith, breached their duties of loyalty and care and several laws, by inducing the Plaintiff
to purchase shares of the Company. The Plaintiff claims that he was led to believe that the defendants shall facilitate his becoming
a controlling shareholder of the Company. The claim is for a total amount of NIS 2,600,000 (approximately $750,000).
While the Company is
not a named defendant in these proceedings, the Company is party to indemnification agreements with the members of its management,
pursuant to which it pays the legal fees involved in the defense against the claim, and may be required to provide indemnification
in the event a ruling is handed against them. The Company expects such payments, if any, to be covered under its Directors and
Officers insurance policy (subject to a deductible).
Comparison of 2017 and 2016
Consolidated revenues
increased by 5% to $28.9 million in year 2017 from $27.4 million in year 2016. The increase is mainly related to an increase in
revenues of the RFID and Mobile division from $12.2 million in 2016 to $13.7 million in 2017. The growth in the RFID and Mobile
division is attributed mainly to inventory counting services.
Gross profit for 2017
was $6.35 million (gross margin of 21.9%) as compared to $5.3 million (gross margin of 19.3%) for 2016. The increase in gross profit
is attributable to the increase in revenues and increase in gross profit margins in both divisions. The increase in gross profit
margins in both divisions is mainly attributed to increase in sales price.
Operating expenses
increased to $5.26 million in 2017 from $4.6 million in 2016. The increase in expenses is attributed mainly to the following factors:
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●
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We incur a significant portion of our
expenses in NIS. Such costs are mainly attributed to salaries and lease of our facilities and cars. Hence, devaluation of US dollar
against the NIS during year 2017 in the rate of 9.8% increased our cost of our operations by approximately $192,000 as compared
to year 2016.
|
|
●
|
General and administrative expenses of
year 2016 include income in the amount of $178,000 that are attributed to the write-off in a contingent liability related to the
acquisition of the business operations of iDnext (see Note 3 to the Consolidated Financial Statements for the year ended December
31, 2017).
|
|
●
|
Increase of $170,000 in sales and marketing
expenses is attributed to sales agents and employees commission in year 2017 as compared to year 2016. Such increase results from
6% growth in year 2017 revenues as compared to year 2016.
|
Financial expenses
decreased to $297,000 in year 2017 from $339,000 in year 2016. The reduction in financial expenses, mainly in interest expenses,
is attributed to reduction of the bank loan amounts from $3.1 million (NIS 12.1 million) in December 31, 2016 to $3 million (NIS
10.5 million) in December 31, 2017.
Net income for year
2017 was $773,000 as compared to net income of $360,000 in 2016. The basic and diluted net income per share in 2017 was $0.24,
compared to basic and diluted net income per share of $0.14 in 2016.
Comparison of 2016 and 2015
Consolidated revenues
increased by 7% to $27.4 million in year 2016 from $25.6 million in year 2015 mainly due to the acquisition of the business operations
of iDnext and Next-Line.
Gross profit for 2016
was $5.3 million (gross margin of 19.3%) as compared to $5.1 million (gross margin of 20%) for 2015. The increase in gross profit
is attributable to the increase in revenues of the RFID and Mobile division from $9.3 million in year 2015 to $12.2 million in
2016.
Operating expenses
increased to $4.6 million in 2016 from $4.45 million in 2015. The increase in expenses is attributed mainly to the acquisition
of the business operations of iDnext and Next-Line.
Financial expenses
decreased to $339,000 in year 2016 from $376,000 in year 2015. The reduction in financial expenses is attributed to a reduction
and currency exchange expenses.
Tax expenses for year
2016 amounted to $7,000 as compared to a tax benefit of $22,000 for year 2015.
Net income for year
2016 was $360,000 as compared to net income of $334,000 in 2015. The basic and diluted net income per share in 2016 was $0.14,
compared to basic and diluted net income per share of $0.17 in 2015.
Variability of Quarterly Operating Results
Our revenues and profitability
may vary in any given year, and from quarter to quarter, depending on the mix of products sold. In addition, due to potential competition
and other factors, we may be required to reduce prices for our products and services in the future.
Our future results
will be affected by a number of factors including our ability to:
|
●
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establish effective sales channels and manage them;
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|
|
|
●
|
introduce and deliver new products on a timely basis;
|
|
|
|
|
●
|
anticipate accurately customer demand patterns;
|
|
●
|
manage future inventory levels in line with anticipated demand; and
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|
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|
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●
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successfully meet bank financial covenants.
|
These results may also
be affected by currency exchange rate fluctuations and interest rate and economic conditions in the geographical areas in which
we operate. There can be no assurance that our historical trends will continue, or that revenues, gross profit and net income in
any particular quarter will not be lower than those of the preceding quarters, including comparable quarters.
Impact of Inflation and Currency Fluctuations
We are exposed to the
risk that the NIS, after adjustment for inflation in Israel, will appreciate in relation to the U.S. dollar. In that event, the
dollar-measured costs of our operations in Israel will increase and our dollar-measured results of operations will be adversely
affected. In 2017, the NIS appreciated against the dollar by approximately 9.8%, while in 2016 this percentage amounted to 1.5%.
In 2015 and 2014, the NIS depreciated against the U.S. dollar by approximately 0.3% and 12%, respectively. In the year ended December
31, 2017, the inflation rate in Israel was 0.4%. In 2016, 2015 and 2014 the annual deflation rate in Israel was approximately 0.2%,
1% and 0.2%, respectively. Therefore, the U.S. dollar cost of our Israeli operations increased in 2017 and 2016 and decreased in
2015 and in 2014. We cannot predict any future trends in the rate of inflation in Israel and whether the NIS will appreciate against
the U.S. dollar or vice versa. Any increase in the rate of inflation in Israel, unless the increase is offset on a timely basis
by a devaluation of the NIS in relation to the U.S. dollar, will increase our labor and other costs, which will increase the U.S.
dollar cost of our operations in Israel and harm our results of operations.
Effective Corporate Tax Rate
The Israeli corporate
tax rate was 26.5% in 2015, 25% in 2016 and 24% in 2017. Effective January 1, 2018 the corporate tax rate is 23%.
Conditions in Israel
We are incorporated
under the laws of the State of Israel, where we also maintain our headquarters and our research and development and manufacturing
facilities. See Item 3D. “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.
5B.
|
Liquidity and Capital Resources
|
In the year ended on
December 31, 2017, the Company had net income of $773,000 as compared to $360,000 in the year 2016 and $334,000 in the year 2015.
In the year ended December 31, 2017, the Company generated a positive cash flow from operating activities amounting to $355,000,
as compared to a negative cash flow from operating activities amounting to $361,000 in 2016 and a positive cash flow from operating
activities amounting to $370,000 in 2015. The Company’s cash and cash equivalents amounted to $1.5 million as of December
31, 2017. The Company had a positive working capital of $7,342,000, $6,099,000, and $5,246,000 as of December 31, 2017, December
31, 2016, and December 31, 2015, respectively.
We finance our activities
by different means, including short and long-term loans, cash flow from operating activities and issuance of Company shares.
Working capital requirements
will vary from time-to-time and will depend on numerous factors, including but not limited to, the operating results, scope of
sales and supplier and customer credit terms.
As of December 31,
2017, we had $3.03 million in long-term debt (net of current maturities of $505,000) and no short term bank loans.
The Company’s
loans from Bank Beinleumi are secured by:
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●
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first ranking fixed charge on any unpaid share capital of the Company, the goodwill of the Company, and any insurance entitlements in the Company’s assets pledged thereunder; and
|
|
|
|
|
●
|
floating charges on all of the assets of the Company and our Israeli subsidiaries, owned now or in the future.
|
The Company also guarantees
the liabilities of its Israeli subsidiaries to Bank Beinleumi and each of its Israeli subsidiaries guarantees the Company’s
liabilities to Bank Beinleumi.
We rely on Bank Beinleumi
to provide all of the credit facilities to our subsidiaries. In October 2017 we replaced all our Bank Leumi credit facilities with
credit facilities from Bank Beinleumi, so that currently our outstanding bank debt, is owed to Bank Beinleumi.
In February 2014, the
Company entered into a Standby Equity Distribution Agreement (the “February 2014 SEDA”) with YA Global Master SPV,
Ltd. ("YA Global"). The 2014 SEDA provided that, upon the terms and subject to the conditions set forth therein, YA Global
was committed to purchase up to $2,000,000 of the Company’s Ordinary Shares over a three-year commitment period. The Company
issued 13,711 shares to YA Global as a commitment fee for this financing. The purchase price of the Ordinary Shares was set at
a 5% discount off the lowest daily VWAP (as such term is defined in the February 2014 SEDA) of the Ordina Shares during the five
consecutive trading days following the date of an advance notice from the Company (provided such VWAP is greater than or equal
to 90% of the last closing price of the Ordinary Shares at the time of delivery of the advance notice). The Company has drawn $1,916,000
on this equity line, for which it issued an aggregate of 693,434 Ordinary Shares.
In February 2014, in
addition to the February 2014 SEDA, the Company entered into a Note Purchase Agreement with YA Global, under which YA Global provided
the Company with a one year bridge loan in the amount of $500,000. The bridge loan was repayable in nine equal monthly installments
commencing three months after the receipt of the loan and was paid in full by February 2015. The Company issued 2,500 Ordinary
Shares to YA Global as a commitment fee for this bridge loan.
In February 2015, the
Company entered into the 2015 SEDA with YA Global. The 2015 SEDA provides that, upon the terms and subject to the conditions set
forth therein, YA Global is committed to purchase up to $1,300,000 of the Company’s Ordinary Shares over a 40-month commitment
period. The Company issued 28,930 shares to YA Global as a commitment fee for this financing. The purchase price of the Ordinary
Shares will be at a 7% discount off the average share trading price, calculated as described in the 2015 SEDA. The Ordinary Shares
to be issued to YA Global under the 2015 SEDA will be issued pursuant to an exemption from registration under the Securities Act
of 1933, as amended. Pursuant to the 2015 SEDA, the Company has an obligation to file a registration statement with the U.S.
Securities and Exchange Commission covering the resale by YA Global of any shares to be issued to YA Global under the 2015 SEDA.
As of March 29, 2018, $1,195,000 has been drawn on this equity line, for which the Company issued an aggregate of
628,229
Ordinary Shares.
In May 2017, the Company
entered into the 2017 SEDA with YA II. The 2017 SEDA provides that, upon the terms and subject to the conditions set forth therein,
YA II is committed to purchase up to $2,000,000 of the Company’s Ordinary Shares over a 4-year commitment period. The Company
issued 67,307 shares to YA Global II SPV, LLC as a commitment fee for this financing. The purchase price of the Ordinary Shares
will be at a 7% discount off the average share trading price, calculated as described in the 2017 SEDA. The Ordinary Shares to
be issued to YA II under the 2017 SEDA will be issued pursuant to an exemption from registration under the Securities Act of 1933,
as amended. Pursuant to the 2017 SEDA, the Company has an obligation to file a registration statement with the U.S. Securities
and Exchange Commission covering the resale by YA II of any shares to be issued to YA II under the 2017 SEDA. As of March 29, 2018,
the Company has not drawn any amount on this equity line. The Company has an effective registration statement covering the resale
by YA II of up to 878,161Ordinary Shares that the Company may sell to YA II under the 2017 SEDA. The registered Ordinary Shares
include 548,975 Ordinary Shares that have not yet been authorized and which will not be sold until our shareholders have approved
an amendment to our Memorandum of Association and Articles of Association to increase our authorized share capital by a corresponding
number of shares.
On June 10, 2015, the
Company entered into a Share Purchase Agreement with certain investors, including YA Global, members of management, and certain
business partners of the Company, under which the Company raised an aggregate net amount of $573,000, net of $16,000 issuance expenses,
at a price per share of $2.406.
On January 8, 2015,
the Company’s Board of Directors approved an increase of 1,500,000 Ordinary Shares in the Company's authorized share capital,
from 2,500,000 authorized shares to 4,000,000 authorized shares, which was approved by the Company’s shareholders.
On January 1, 2016
the Company issued 162,734 Ordinary Shares as part of the consideration in the iDnext business acquisition.
As of February 28,
2018, we had approximately 329,000 authorized, but unissued Ordinary Shares that are available to make acquisitions and to raise
capital for general corporate purposes. If our shareholders do not approve an increase in our authorized share capital, our ability
to make future acquisitions and to fund our operations through the issuance of Ordinary Shares will be constrained, which may have
a material adverse effect on our business and financial condition.
We have in-balance
sheet financial instruments and off-balance sheet contingent commitments. Our in-balance sheet financial instruments consist of
our assets and liabilities. Our cash is held in bank accounts in U.S. dollars and NIS bearing no interest. As of December 31, 2017,
our trade receivables’ and trade payables’ aging days were 125 and 99 days, respectively. The fair value of our financial
instruments is similar to their book value. Our off-balance sheet contingent commitments consist of: (a) royalty commitments that
are directly related to our future revenues, (b) lease commitments of our premises and vehicles, and (c) directors’ and officers’
indemnities, in excess of the proceeds received from liability insurance which we obtain.
The Company had working
capital of $7,342,000 as of December 31, 2017. It is the Company’s opinion that current working capital is sufficient for
the Company’s ongoing operation. The Company may grow its business through acquisitions of complementary business for both
divisions. In order to finance such acquisitions, the Company might need to significantly increase its debt and raise additional
equity financing.
Cash Flows
Net cash provided by
operating activities was $355,000 in 2017 and $370,000 in 2015
.
Net cash used in operating activities in 2016 was $(361,000),
due to working capital requirements related to the acquisition of the business of iDnext and Next-Line.
Net cash used in investment
activities in year 2017 amounted to $344,000 and includes cost of $138,000 related to offices renovation. Net cash used in investment
activities in year 2016 amounted to $268,000 and included payment of $154,000 for acquisition of the business of iDnext and Next-Line
business. Net cash used in investment activities in year 2015 amounted to $47,000.
Net cash provided by
financing activities in 2017 and 2016 amounted to $236,000 and $496,000, respectively. Net cash used in financing activities in
2015 amounted to $426,000, respectively.
5C.
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Research and Development
|
Since August 2012 and
following a cooperation agreement the Company entered into with an independent software development company for the maintenance,
development and support of our software solutions, the Company has no research and development expenses. The selling and marketing
of the software solutions continues to be performed by our RFID and Mobile Solutions division.
BOS’ vision is
to become a leading Israeli integrator of RFID and Mobile solutions in Israel and a global provider of electronic components with
supply chain added value services.
Committed to this vision,
we anticipate that RFID and Mobile product offerings will increase, mainly through acquisitions of complementary solutions.
5E.
|
Off-Balance Sheet Arrangements
|
Not applicable.
5F.
|
Tabular Disclosure of Contractual Obligations
|
The following table
of our material contractual obligations as of December 31, 2017, summarizes the aggregate effect that these obligations are expected
to have on our cash flow in the periods indicated (in U.S. thousands of dollars with the exception of per share data):
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
Long-term loans
(1)
|
|
$
|
3,028
|
|
|
$
|
505
|
|
|
$
|
1,515
|
|
|
$
|
1,008
|
|
|
|
-
|
|
Accrued severance pay
(2)
|
|
$
|
286
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
286
|
|
Operating lease - cars
(3)
|
|
$
|
576
|
|
|
$
|
284
|
|
|
$
|
292
|
|
|
|
-
|
|
|
|
-
|
|
Purchase obligation for service and inventory
|
|
$
|
4,841
|
|
|
$
|
4,494
|
|
|
$
|
347
|
|
|
|
-
|
|
|
|
-
|
|
Facilities lease
|
|
$
|
491
|
|
|
$
|
172
|
|
|
$
|
259
|
|
|
$
|
60
|
|
|
|
-
|
|
Total
|
|
$
|
9,222
|
|
|
$
|
5,455
|
|
|
$
|
2,413
|
|
|
$
|
1,068
|
|
|
$
|
286
|
|
(1)
|
In October 2017, the Company and its Israeli subsidiaries entered into an agreement with Bank Beinleumi for the provision of credit facilities in order to refinance Company's loans with Bank Beinleumi in a total amount of $3.03 million as of December 31, 2017.
|
(2)
|
The time for payment of the severance cannot be predicted.
|
(3)
|
The Company has pre-paid the last instalment of each of the motor vehicles as a deposit.
|
Item
6:
Directors, Senior Management and Employees
6A.
|
Directors
and Senior Management
|
Set
forth below is information regarding our directors and senior management.
Name
|
|
Age
|
|
Position
|
Mr.
Yosi Lahad (*)
|
|
62
|
|
Chairman
of the Board of Directors
|
Mr.
Yuval Viner
|
|
55
|
|
Co-Chief
Executive Officer and Director
|
Mr.
Avidan Zelicovsky
|
|
48
|
|
President
and Director
|
Mr.
Eyal Cohen
|
|
49
|
|
Co-Chief
Executive Officer and Chief Financial Officer
|
Ms.
Revital Cohen
|
|
41
|
|
Director
|
Mr.
David Golan (*)
|
|
77
|
|
Director
|
Ms.
Odelia Levanon (*)
|
|
55
|
|
Director
|
Mr.
Ziv Dekel
|
|
54
|
|
Director
|
(*)
Member of our audit committee and compensation committee.
Mr.
Yosi Lahad
was appointed as Chairman of the Board in 2015. Mr. Lahad has extensive interdisciplinary practical and academic
knowledge and vast experience in restructuring processes and strategic alliances. Mr. Lahad has led as CEO or Chairman several
technology companies from early stage to growth and led several M&A events in the United States, Israel and China. Mr. Lahad
provides strategic and business development services to global companies in a variety of industries including communications,
IT, energy, water, Homeland security & Robotics. Mr. Lahad serves as an active Board Chairman/member of several companies
such as JPI Group China, a leading strategic planning firm for companies entering the Chinese market,
A
tlasSense,
a provider of innovative analytics of health information over Internet
,
and NextWave Robotics
among others. Previously, Mr. Lahad served as the country Managing Director of Tadiran’s operations in China and as a Division
VP at ELBIT Systems. Mr. Lahad had been a faculty member/Adjunct Professor lecturing on strategy of emerging companies and innovation
at the Interdisciplinary Center (a joint program with Wharton school of business at University of Pennsylvania) and at Tel-Aviv
University from 2005. Mr. Lahad is a frequent guest lecturer in universities and international conferences
on
Innovations in AI, Automation and Intelligent Systems.
Mr. Lahad holds a BSc. in engineering from the Technion, an MSc.
in engineering from the University of Texas (UTA) and an MBA from Tel Aviv University.
Mr.
Yuval Viner
was appointed as the Company acting Chief Executive Officer on October 20, 2009, as Chief Executive Officer on
March 17, 2010 and joined our Board of Directors on June 29, 2015. Since August 15, 2017, Mr. Viner shares the position of Chief
Executive Officer with Mr. Eyal Cohen. From March 2008, following the acquisition of Dimex System’s assets, he served as
the Head of RFID and Mobile Solutions division. Mr. Viner joined Dimex Systems (1988) Ltd. in 1993 and was appointed as Dimex
System’s CEO in 2000. Mr. Viner joined the Company as part of the acquisition of Dimex Systems assets. Mr. Viner is a graduate
of the Practical Engineering Academy of Tel Aviv.
Mr.
Avidan Zelicovsky
was appointed as the Company acting president in October 20, 2009, as president on March 17, 2010 and joined
our Board of Directors on June 29, 2015. From November 2004, following the acquisition of Odem by BOS, Mr. Zelicovsky served as
the Head of Supply Chain Solutions division. Mr. Zelicovsky first joined the Company’s subsidiary Odem in 1996. Mr. Zelicovsky
holds a B.A. in Business Administration from the Tel Aviv College of Management and an LL.M. from the Bar-Ilan University.
Mr.
Eyal Cohen
was appointed as the Company’s Chief Financial Officer in January 2007. In August 15, 2017, Mr. Cohen was
appointed as the Company’s Co-Chief Executive Officer, a position he holds together with Mr. Yuval Viner. From 2004 through
2006, Mr. Cohen served as the Company’s controller, and prior to that held the position of Chief Financial Officer at Cellact
Ltd, a technology company. From 1998 to 2001, Mr. Cohen was the controller of e-SIM Ltd., a technology company traded on NASDAQ
in the past, and in the years 1995-1997 held an audit manager position in technology department of PricewaterhouseCoopers. Mr.
Cohen holds a B.A. in Accounting and Business Administration from the College of Management in Tel-Aviv and is a certified public
accountant in Israel and in the United States, in the state of Maine.
Mr.
David Golan
has served as an External Director of the Company (within the meaning of the Israeli Companies Law) since February
2009 and until December 12, 2017. Thereafter, following the adoption by the Company of an exemption from the requirement to appoint
External Directors, Mr. Golan has been elected to serve on the Company’s Board of Directors as a regular director. He currently
serves as a director in several companies, both public and private. Previously, until 2002, he served as an Executive Director
of a group of companies in the Rad-Bynet group. In the years 1998-2000 he served as President of the Zeevi Investments group.
Between 1997-1998, Mr. Golan served as President of Clal Trading Ltd. and between 1992-1997 he served as Vice President in Clal
Trading Ltd. Between the years 1988-1992 Mr. Golan served as managing director of Gal Industries Ltd. Mr. Golan holds a bachelor’s
degree in Economics and Statistics from the Hebrew University, an MBA from New York University and took part in a senior management
course in IMD Lausaunne.
Ms.
Odelia Levanon
joined our Board of Directors in November 2015. Since November 2017, Ms. Levanon is the CEO of the IUCC - Inter-University
Computation Center. During the years 2014-2017, Ms. Levanon has served as the Chief Information Officer of Irani Group, a leading
Israeli importer and wholesaler of fashion brands. Ms. Levanon has served as the Chief Executive Officer of a venture capital
fund, from 2012 to 2014 and as the Chief Information Officer and head of the technology division of Mega retail from 2000 to 2012.
She also serves as a board member of the Old Jaffa Development Company Ltd. and has previously served as a member of the Board
of You – loyalty club from 2008 to 2012. Since 2016, Ms. Levanon is a lecturer on management in the field of information
systems in the Israel Academic College in Ramat Gan. Ms. Levanon holds an M.Sc. in Computer Sciences and a B.Sc. in Mathematics
and Computer Sciences, both from Tel Aviv University.
Mr.
Ziv Dekel
joined our Board of Directors on June 29, 2015. Mr. Dekel has over 25 years of management and strategic counseling
experience. Since 2010, Mr. Dekel provides strategic advisory services to various business entities. In 1989, Mr. Dekel joined
Shaldor Strategy Counseling as an analyst, and from 2002 through 2010 served as Shaldor's CEO and Managing Partner. Mr. Dekel
holds a BA in Economics and an MBA, both from Tel-Aviv University.
Ms.
Revital Cohen
joined our Board of Directors on December 12, 2017. Since 2011, Ms. Cohen has an expertise in implementation
of ERP system in enterprises and provides consulting to companies in various fields such as business planning, finance, ERP and
human resources. Prior to 2011, Ms. Cohen was a senior consultant with Step Economic Consulting Ltd. Ms. Cohen holds a bachelor’s
degree in Sociology and Education, and master’s degree in Organizational Studies from the Hebrew University in Jerusalem.
Ms. Cohen is a sister-in-law of Mr. Eyal Cohen, the Company’s Co-CEO and CFO.
The
following table presents the total compensation paid to or accrued on behalf of all of our directors and officers as a group for
the year ended December 31, 2017:
|
|
Salaries, Directors' fees, Service fees, Commissions and Bonus
|
|
|
Pension, Retirement and Similar benefits
|
|
All directors and officers as a group (then 10 persons)
|
|
$
|
804,000
|
|
|
$
|
115,000
|
|
Compensation
Requirements under Israeli Law
Compensation
Policy
In
December 2012, an amendment to the Israeli Companies Law, or Amendment 20, became effective, requiring public companies to appoint
a compensation committee. See “Compensation Committee” below for information concerning our Compensation Committee.
Pursuant
to Amendment 20, we were required to adopt a compensation policy regarding the terms of office and employment of office holders,
including compensation, severance and other benefits, exemptions from liability, insurance and indemnification. The Compensation
Policy must be based on the considerations, must include the provisions and needs to reference the matters which are detailed
in the Israeli Companies Law. An “office holder” is defined in the Israeli Companies Law as a general manager, chief
executive officer, chief business manager, deputy general manager, vice general manager, any other person assuming the responsibilities
of any of the foregoing positions without regard to such person’s title, a director and a manager directly subordinate to
the chief executive officer.
As
required by the Israeli Companies Law, our Compensation Policy for Executive Officers and Directors (the “Compensation Policy”)
was approved by our Board of Directors, after considering the recommendations of the Compensation Committee. According to the
Israeli Companies Law, a compensation policy must also be approved by a majority of a company’s shareholders, provided that
(i) such majority includes at least a majority of the shareholders who are not controlling shareholders and who do not have a
personal interest in the matter, who are present and voting, or (ii) the non-controlling shareholders and shareholders who do
not have a personal interest in the matter who were present and voted against the policy hold two percent or less of the voting
power of the company (the “Compensation Majority”). Our amended Compensation Policy was approved by a Compensation
Majority on November 8, 2016.
The
Compensation Policy must be approved by the Board of Directors and the Company’s shareholders every three years. In the
event that the Compensation Policy is not approved by the Company’s shareholders, the Compensation Committee and the Board
of Directors may still approve the policy, if the Compensation Committee and the Board of Directors determine, based on specified
reasons and following further discussion of the matter, that the Compensation Policy is in the best interests of the Company.
Changes
to existing terms of office and employment of office holders (other than directors), only requires the approval of the Compensation
Committee, if the Compensation Committee determines that the revised terms are not substantially different from the existing terms.
Pursuant
to Amendment 20, any arrangement between a company and an office holder (other than a director or the chief executive officer)
as to his or her terms of office and employment must be in line with the company’s compensation policy and requires the
approval of such company’s compensation committee and board of directors. However, under certain circumstances and conditions,
the compensation committee and the board of directors may approve an arrangement that deviates from the company’s compensation
policy, provided that such arrangement is approved by the Compensation Majority of the company’s shareholders. The board
of directors and the compensation committee of a company may, under special circumstances and for specified reasons, approve such
an arrangement even if the shareholders did not approve it, following a re-discussion of the matter in which, among other things,
any shareholders’ objections were examined.
Directors
Pursuant
to Amendment 20, any arrangement between a company and a director as to his or her terms of office and employment must be in compliance
with the Compensation Policy and requires the approval of the Compensation Committee, the board of directors and the shareholders
by a simple majority.
Under
the Israeli Companies Law and regulations promulgated pursuant thereto, the compensation payable to External Directors and independent
directors is subject to certain further limitations.
In
accordance with the approval of our shareholders in December 2017, directors who are not employees or service providers of the
Company (excluding the Active Chairman) are entitled to receive annual compensation of NIS 29,270 (approximately $8,500), paid
on a quarterly basis, and an additional NIS 2,175 (approximately $630) for each board and board committee meeting attended
(or
60% of the attendance fee for a board meeting held via teleconference or 50% of such fee for a meeting held without convening)
.
In
addition, in December 2017 our shareholders approved a grant to each of our directors (excluding the Active Chairman) of options
to purchase 7,500 Ordinary Shares.
The options shall be granted to those directors elected
or re-elected by the shareholders in December 2017, provided that three years have lapsed since the Company's previous grant of
options to such director, and to future directors to be elected for the first time to the Board of Directors. The grant date will
be the date of approval of appointment or reappointment of the director at the shareholders meeting
. The options’
exercise price is calculated as the weighted average of the closing prices of the shares on the Nasdaq Capital Market during the
20 trading days preceding the date of approval of the grant by the Board of Directors.
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The
options will vest and become exercisable annually over a period of three years, in three
equal parts, such that one third of the options shall vest on each of the first, second
and third anniversary of the grant date, provided that the director is still serving
on the Company’s Board of Directors at the applicable vesting date.
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The
maximum option term is five years from the date of grant.
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Payment
of the exercise price must be made in full upon exercise of the options, by cash or check
or cash equivalent, or by the assignment of the proceeds of a sale of some or all of
the Ordinary Shares being acquired upon exercise of options, or by any combination of
the foregoing.
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The
options are exercisable only by the director, and may not be assigned or transferred
except following approval of the Company’s audit committee or compensation committee,
as applicable, by will or by the laws of descent and distribution. The options shall
be exercisable during the term the director holds office (up to five years) or within
60 days following termination of this position, with certain exceptions in the case of
the death or disability.
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The
Compensation of the directors is in compliance with the Company’s Compensation policy approved by the shareholders on November
8, 2016.
Under
recent amendments to Regulation 5D of the Israeli Companies Regulations (Reliefs for Public Companies whose Shares are Listed
on a Stock Exchange Outside of Israel), 5760-2000 (“Relief Regulations”), Israeli companies with securities listed
on certain foreign exchanges, including NASDAQ, such as the Company, that satisfy certain conditions, namely, (i) meeting the
applicable foreign country laws and regulations that apply to companies organized in that country relating to the appointment
of independent directors and composition of audit and compensation committees; and (ii) have no controlling shareholder, are exempt
from the requirement to appoint External Directors and certain other corporate governance requirements that are otherwise dictated
under the Israeli Companies Law. Accordingly, on October 16, 2017, we have chosen to opt out of the requirement to appoint External
Directors under the Relief Regulations and related Israeli Companies Law rules concerning the composition of the audit committee
and compensation committee of the board of directors.
The
Company does not have any contracts with any of its non-employee or non-consultant directors that would provide for benefits upon
termination of service.
Active
Chairman of the Board
In
accordance with the approval of our shareholders in December 2017, the Company’s Active Chairman is entitled to an annual
cash compensation of NIS 110,000 (approximately $31,500) in 2017 and NIS 120,000 (approximately $34,600) in 2018. The Active Chairman
shall not be entitled to any additional compensation for participation in Board meetings (i.e. attendance fees). Additionally,
the shareholders approved the grant to the Company’s Active Chairman of options to purchase 25,500 Ordinary Shares, subject
to the reappointment of Mr. Lahad to the Board of Directors at the shareholders meeting of 2018 (at which time, three years will
have lapsed since the previous grant of options to Mr. Lahad). The option terms of Active Chairman’s grant are as follows:
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The
options’ exercise price is calculated as the weighted average of the closing prices
of the shares on the Nasdaq Capital Market during the 20 trading days preceding the date
of approval of the grant by the Board of Directors.
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●
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The
options will vest and become exercisable annually over a period of three years, in three
equal parts, such that one third of the options shall vest on each of the first, second
and third anniversary of the grant date, provided that the Active Chairman is still serving
on the Company’s Board of Directors at the applicable vesting date.
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The
maximum option term is five years from the date of grant.
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Payment
of the exercise price must be made in full upon exercise of the options, by cash or check
or cash equivalent, or by the assignment of the proceeds of a sale of some or all of
the Ordinary Shares being acquired upon exercise of options, or by any combination of
the foregoing.
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The
options are exercisable only by the Active Chairman, and may not be assigned or transferred
except following approval of the Company’s audit committee or compensation committee,
as applicable, by will or by the laws of descent and distribution. The options shall
be exercisable during the term the Active Chairman holds office (up to five years) or
within 60 days following termination of this position, with certain exceptions in the
case of the death or disability.
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Chief
Executive Officer
Pursuant
to Amendment 20, any arrangement between a company and its chief executive officer, or CEO, as to his or her terms of office and
employment must be in line with the Compensation Policy and requires the approval of the compensation committee, the Board of
Directors and the Company’s shareholders by the Compensation Majority.
Under
certain circumstances and conditions, the Compensation Committee and the Board of Directors may approve an arrangement that deviates
from the Compensation Policy provided it is approved by the shareholders by the Compensation Majority. In addition, under certain
circumstances, a company may be exempt from receiving the shareholders’ approval with respect to the terms of office and
employment of a candidate for chief executive officer if such candidate meets certain independence criteria and the compensation
committee has determined for specified reasons that shareholder approval would prevent the engagement, provided that the terms
are in-line with the Compensation Policy.
Set
forth below is the compensation of our management in the year ended December 31, 2017:
Co-CEO
Mr. Yuval Viner
Monthly
Salary
:
A
gross monthly base salary of NIS 43,692 (approximately $12,600) linked to an increase in the CPI, plus customary benefits, which
include managers’ insurance, education fund, car expenses and long-term disability insurance.
Commencing
January 2018 the salary shall increase to - NIS 44,472 (approximately $12,800).
Bonus
:
A
bonus based on achievements of the Company’s 2017 targets for revenues ($10,000) and Net GAAP profit ($12,000).
In
addition, in special circumstances, the Board may grant the Co-Chief Executive Officer a bonus irrespective of the achievements
of the net profit targets, provided such bonus is capped at a one month salary.
Pursuant
to our Compensation Policy, the total annual bonus for the Co-Chief Executive Officer is capped at five (5) monthly salaries.
The Board of Directors may reduce any bonus payable to the Co-Chief Executive Officer by up to 20%, at its discretion.
Options
:
On
December 12, 2017, the Company’s shareholders approved a grant of options to purchase 20,000 of the Company’s Ordinary
Shares, on the following terms:
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Exercise
price: the weighted average closing price of the Ordinary Shares on the NASDAQ during the 20 trading days preceding the date
of the approval of the proposed grant by the shareholders of the Company, amounting to $2.131.
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Vesting
schedule: the options will vest and become exercisable over a period of three years, in three equal parts, such that one third
of the options shall vest on each of the first, second and third anniversary of the date of approval of the grant by the shareholders
of the Company, provided that the Co-Chief Executive Officer is still holding office with the Company at the applicable vesting
date.
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The
options shall expire on the fifth anniversary of the date of approval by the Company’s shareholders of their grant.
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Co-CEO
and CFO, Mr. Eyal Cohen
:
Monthly
Salary
:
A
gross monthly base salary of NIS 41,387 (approximately $11,900) linked to an increase in the CPI, plus customary benefits, which
include managers’ insurance, education fund, car expenses and long-term disability insurance.
Commencing
January 2018 the salary shall increase to NIS 44,472 (approximately $12,800).
Bonus
:
A
bonus based on achievements of the Company’s 2017 targets for revenues ($10,000) and Net GAAP profit ($12,000).
In
addition, in special circumstances, the Board may grant the Co-Chief Executive Officer (and Chief Financial Officer) a bonus irrespective
of the achievements of the net profit targets, provided such bonus is capped at a one month salary.
As
provided in our Compensation Policy, the total annual bonus for the Co-Chief Executive Officer and Chief Financial Officer is
capped at five (5) monthly salaries. The Board of Directors may reduce any bonus payable to the Co-Chief Executive Officer and
Chief Financial Officer by up to 20%, at its discretion.
Options
:
On
December 12, 2017, the Company’s shareholders approved the grant of options to purchase 20,000 of the Company’s Ordinary
Shares, on the following terms:
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Exercise
price: the weighted average closing price of the Ordinary Shares on the NASDAQ during the 20 trading days preceding the date
of the approval of the proposed grant by the shareholders of the Company, amounting to $2.131.
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Vesting
schedule: the options will vest and become exercisable over a period of three years, in three equal parts, such that one third
of the options shall vest on each of the first, second and third anniversary of the date of approval of the grant by the shareholders
of the Company, provided that the Co-Chief Executive Officer and Chief Financial Officer is still holding office with the
Company at the applicable vesting date.
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The
options shall expire on the fifth anniversary of the date of approval by the Company’s shareholders of their grant.
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Company’s
President
Pursuant
to Amendment 20, any arrangement between a company and its President, as to his or her terms of office and employment must be
in line with the Compensation Policy and requires the approval of the Compensation Committee, the Board of Directors and the Company’s
shareholders by the Compensation Majority.
Monthly
Salary
:
A
gross monthly base salary of NIS 44,472 (approximately $12,800) linked to the CPI, plus customary benefits, which include managers’
insurance, education fund, car expenses and long-term disability insurance.
Bonus
:
A
bonus based on achievements of the Company’s 2017 targets for revenues ($10,000) and Net GAAP profit ($12,000).
Options
:
On
December 12, 2017, the Company’s shareholders approved a grant of options to purchase 20,000 of the Company’s Ordinary
Shares, on the following terms:
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Exercise
price: the weighted average closing price of the Ordinary Shares on the NASDAQ during the 20 trading days preceding the date
of the approval of the proposed grant by the shareholders of the Company, amounting to $2.131.
|
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●
|
Vesting
schedule: the options will vest and become exercisable over a period of three years, in three equal parts, such that one third
of the options shall vest on each of the first, second and third anniversary of the date of approval of the grant by the Company’s
shareholders.
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The
options shall expire on the fifth anniversary of the date of approval by the Company’s shareholders of their grant.
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For
additional information on the compensation of our directors and management see our proxy statement filed with the SEC under Form
6-K on October 25, 2017.
Directors:
Our
Board of Directors is currently comprised of seven directors. The directors are elected by a simple majority at the annual shareholders’
meeting, to serve until the next annual meeting of our shareholders and until their respective successors are elected and qualified.
Our Articles of Association provide that the number of directors in the Company shall be determined from time to time by the annual
general meeting of shareholders, provided that it shall not be less than four nor more than eleven. Our Articles of Association
provide that the directors may appoint additional directors (whether to fill a vacancy or to expand the Board of Directors) so
long as the number of directors so appointed does not exceed the number of directors authorized by shareholders at the annual
general meeting, and such appointees shall serve until the next annual general meeting.
NASDAQ
Marketplace Rules require that the board of directors of a NASDAQ-listed company have a majority of independent directors, within
the meaning of NASDAQ rules. Our Board of Directors has determined that Messrs. Lahad, Golan, Dekel, and Ms. Levanon, who constitute
a majority of the Board of Directors, are independent directors under the applicable Nasdaq Stock Market requirements.
Our
Articles of Association provide that a director may appoint, by written notice to the Company, any individual to serve as an alternate
director, for up to a maximum period of one month, if the alternate director does not already serve as a member of the Board of
Directors. An alternate director shall have all of the rights and obligations of the director who appointed him or her and shall
be subject to all of the provisions of the Articles of Association and the Israeli Companies Law. Unless the time period or scope
of any such appointment is limited by the appointing director, such appointment is effective for all purposes for a period of
one month, but in any event will expire upon the expiration of the appointing director’s term, removal of the alternate
director at an annual general meeting, the bankruptcy of the alternate director, the conviction of the alternate director for
an offense in accordance with the Israeli Companies Law, the legal incapacitation of the alternate director, the removal of the
alternate director by court order or the resignation of the alternate director. Currently, no alternate directors have been appointed.
A director may appoint an alternate director to serve in his place as a member of a committee of the Board of Directors, even
if the alternate director currently serves as a director, as long as he does not already serve as a member of that committee.
Officers
serve at the discretion of the Board or until their successors are appointed.
According
to the provisions of our Articles of Association and the Israeli Companies Law, the Board of Directors convenes in accordance
with the Company’s requirements, and at least once every three months. Usually, our Board of Directors convenes more often.
Furthermore, our Articles of Association provide that the Board of Directors may also pass resolutions without actually convening,
provided that all the directors entitled to participate in the discussion and vote on a matter that is brought for resolution
agree not to convene for discussion of the matter. Resolutions passed without convening a meeting, shall be passed by an ordinary
majority (just as in the case of convened meetings) and shall have the same effect as resolutions passed at a duly convened meeting.
In
accordance with the requirements of the Nasdaq Stock Market, nominees for directors are recommended for election by a majority
of the independent directors.
External
Directors:
Under
the Israeli Companies Law, public companies are required to elect two External Directors who must meet specified standards of
independence. External directors may not have during the two years preceding their appointment, directly or indirectly through
a relative, partner, employer or controlled entity, any affiliation with (i) the company, (ii) those of its shareholders who are
controlling shareholders at the time of appointment and/or their relatives, or (iii) any entity controlled by the company or by
its controlling shareholders. Under recent amendments to Relief Regulations, Israeli companies with securities listed on certain
foreign exchanges, including NASDAQ, such as the Company, that satisfy certain conditions, namely, (i) meeting the applicable
foreign country laws and regulations that apply to companies organized in that country relating to the appointment of independent
directors and composition of audit and compensation committees; and (ii) have no controlling shareholder, are exempt from the
requirement to appoint External Directors and certain other corporate governance requirements that are otherwise dictated under
the Israeli Companies Law. Accordingly, on October 16, 2017, we have chosen to opt out of the requirement to appoint External
Directors under the Relief Regulations and related Israeli Companies Law rules concerning the composition of the audit committee
and compensation committee of the board of directors.
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’s fiduciary duties consist of a duty of care and a duty of loyalty. 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 business feasibility
of a given action brought for his or her approval or performed by him or her by virtue of his or her position; and (ii) all other
information of importance pertaining to the foregoing actions. The duty of loyalty requires that an office holder act in good
faith and for the benefit of the company, including (i) avoiding any conflict of interest between the office holder’s position
in the company and any other position he or she holds or his or her personal affairs; (ii) avoiding any competition with the company’s
business, (iii) refraining from 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 by virtue of his or her 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 at 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 his or her possession, in connection with any existing or proposed transaction relating to the company. In
addition, if the transaction is an extraordinary transaction, namely, (i) a transaction other than in the ordinary course of business;
(ii) a transaction that is not on market terms; or (ii) a transaction 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 (“relatives”),
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.
Under
the Israeli Companies Law, all arrangements as to compensation of office holders who are not directors require approval by the
board of directors, and exculpation, insurance and indemnification of, or an undertaking to, indemnify an office holder who is
not a director requires both board of directors and compensation committee approval. The compensation of office holders who are
directors must be approved by our Compensation Committee, Board of Directors and shareholders, in that order.
Some
other 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 beneficial for the company’s 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 be required.
Generally, in all matters in which a director has a personal interest he or she shall not be permitted to vote on the matter or
be present in the meeting in which the matter is considered, except in case of a transaction that is not extraordinary or for
the purpose of presenting the proposed transaction, if the chairman of the audit committee or board of directors (as applicable)
determines it necessary. Should a majority of the audit committee or of the board of directors have a personal interest in the
matter, then: (a) all of the directors are permitted to vote on the matter and attend the meeting at which the matter is considered;
and (b) the matter requires approval of the shareholders at a general meeting.
Audit
Committee:
Under
the Israeli Companies Law, the board of directors of any public company must appoint an audit committee. Our audit committee currently
consists of David Golan, Odelia Levanon and Yosi Lahad. The chairperson of the audit committee is David Golan.
Under
the Nasdaq Rules we are required to maintain an audit committee consisting of at least three independent directors, all of whom
are financially literate and one of whom has accounting or related financial management expertise.
The
Company has determined that all the members of its audit committee meet the applicable Nasdaq Capital Market and SEC independence
standards.
Mr.
David Golan is an audit committee financial expert as defined by the SEC rules and has the requisite financial sophistication
as defined by the Nasdaq Rules.
Our
audit committee oversees (in addition to the Board of Directors) the accounting and financial reporting processes of the Company
and audits of our financial statements, including the integrity of our financial statements, compliance with legal and regulatory
requirements, our independent auditors’ qualifications, independence, compensation and performance, and the performance
of our internal audit function. Our audit committee is also required to (i) find deficiencies in the business management of the
Company and propose to our Board of Directors ways to correct such deficiencies; (ii) determine whether certain related party
actions and transactions are “material” or “extraordinary” in connection with their approval procedures;
(iii) approve related-party transactions as required by Israeli law; and (iv) establish whistle blower procedures (including in
respect of the protections afforded to whistle blowers). Additional duties of our audit committee are (i) to establish procedures
to be followed in respect of non-extraordinary related party transactions with a controlling shareholder which may include, where
applicable, the establishment of a competitive process for such transaction, under the supervision of the audit committee, or
whomever it designates for this purpose, in accordance with criteria determined by the audit committee, (ii) to establish procedures
for approving certain related party transactions with a controlling shareholder, which having been determined by the audit committee
not to be extraordinary transactions, were also determined by the audit committee not to be negligible transactions; and (iii)
such other duties as may be directed by our Board of Directors. The audit committee may consult from time to time with our independent
auditors and internal auditor with respect to matters involving financial reporting and internal accounting controls.
The
Company has adopted an audit committee charter which sets forth the responsibilities of the committee. A copy of this charter
is available upon written request to the Company at its address in Israel.
Under
the Sarbanes-Oxley Act of 2002, the audit committee is responsible for the appointment, compensation, retention and oversight
of the work of the Company’s external auditors. However, under Israeli law, the appointment of external auditors requires
the approval of the shareholders of the Company. Accordingly, the appointment of the external auditors is approved and recommended
to the shareholders by the audit committee and ratified by the shareholders. Furthermore, pursuant to the Company’s Articles
of Association, the Board of Directors is the organ that has the authority to determine the compensation of the external auditors;
however, the Board of Directors delegated its authority to the audit committee, so that a second discussion by the Board of Directors
shall not be necessary.
Compensation
Committee
:
Our
Board of Directors has established a compensation committee, which offers recommendations to the Board of Directors regarding
equity compensations issues (with the Board of Directors also approving compensation of our executive officers). The compensation
committee also makes recommendations to our Board of Directors in connection with the terms of employment of our chief executive
officer and all other executive officers.
Under
the Israeli Companies Law, a company’s compensation committee is responsible for: (i) making recommendations to the board
of directors with respect to the approval of the compensation policy applicable to the company’s office holders and any
extensions thereto; (ii) providing the board of directors with recommendations with respect to any amendments or updates to the
Compensation Policy and periodically reviewing the implementation thereof; (iii) reviewing and approving arrangements with respect
to the terms of office and employment of office holders; and (iv) determining whether or not to exempt a transaction with a candidate
for chief executive officer from shareholder approval.
Under
the Nasdaq Rules, we are required to maintain a compensation committee consisting of at least two independent directors. Our compensation
committee currently consists of David Golan, Yosi Lahad and Odelia Levanon. The chairperson of the compensation committee is David
Golan.
Internal
Auditor
Under
the Israeli Companies Law, the board of directors of a public company must appoint an internal auditor based on the recommendation
of the audit committee. The role of the internal auditor is, among other things, to examine whether a company’s actions
comply with applicable law and orderly business procedure. Under the Israeli Companies Law, the internal auditor may not be an
interested party or an office holder or a relative of an interested party or of an office holder, nor may the internal auditor
be the company’s independent auditor or its representative. An “interested party” is defined in the Israeli
Companies Law as: (i) a holder of 5% or more of the issued share capital or voting power in a company, (ii) any person or entity
who has the right to designate one or more directors or to designate the chief executive officer of the company, or (iii) any
person who serves as a director or as a chief executive officer of the company.
BDO
Consulting Group, BDO Ziv Haft's consulting arm, serves as our internal auditor.
Duties
of Shareholders
Under
the Israeli Companies Law, a shareholder has a duty to refrain from abusing its power in the company and to act in good faith
and in an acceptable manner in exercising its rights and performing its obligations to the company and other shareholders, including,
among other things, voting at general meetings of shareholders on the following matters:
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an
amendment to the articles of association;
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an
increase in the company’s authorized share capital;
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the
approval of related party transactions and acts of office holders that require shareholder approval.
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A
shareholder also has a general duty to refrain from discriminating against other shareholders.
The
remedies generally available upon a breach of contract will also apply to a breach of the above mentioned duties, and in the event
of discrimination against other shareholders, additional remedies are available to the injured shareholder.
In
addition, any controlling shareholder, any shareholder that knows that its vote can determine the outcome of a shareholder vote
and any shareholder that, under a company’s articles of association, has the power to appoint or prevent the appointment
of an office holder, or has another power with respect to a company, have a duty to act with fairness towards the company. The
Israeli Companies Law does not describe the substance of this duty, 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 to act with fairness, taking the shareholder’s
position in the company into account.
Israeli
Securities Authority Administrative Enforcement:
Under
the Israeli Securities Law, the Israeli Securities Authority, or the ISA, may take certain administrative enforcement actions
against a company or a person, including a director, officer or shareholder of a company, if performing certain transgressions
designated in the Securities Law.
The
ISA is also authorized to impose fines on any person or company breaching certain provisions designated under the Israeli Companies
Law.
As
of February 28, 2018, we had 78 employees, all of whom are located in Israel. Of these 78 employees: 10 employees are in general
and administrative positions, 16 employees are in marketing and sales, 15 employees are employed as technicians and 37 employees
are in operating activities. In addition, the Company employs temporary employees who provide inventory counting services, in
a number which fluctuates according to the particular projects, and customarily increases towards year end. We believe that our
relations with our employees are satisfactory. We have not experienced a collective labor dispute or a strike.
Israeli
labor laws are applicable to all of our employees in Israel.
We
and our employees are not parties to any collective bargaining agreements and our employees are not represented by any labor union.
However, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel)
and the Coordination Bureau of Economic Organizations (including the Manufacturers’ Association of Israel) are applicable
to all Israeli employees by order of the Israeli Ministry of Labor and Welfare. These provisions principally concern the length
of the work day and the work week, minimum wages for workers, contributions to pension funds, insurance for work-related accidents,
procedures for dismissing employees, determination of severance pay and other conditions of employment. These provisions are modified
from time to time.
Israeli
labor laws subject employers to increased liability, including monetary sanctions and criminal liability, in cases of violations
of certain labor laws and certain violations by contractors providing maintenance, security and cleaning services.
Our
Israeli employees are covered by pension insurance policies according to law requirement. Israeli employees and employers are
required to pay predetermined sums to the Israeli National Insurance Institute which amounts also include, since January 1, 1995,
payments for national health insurance.
As
of February 28, 2018, shares and options held by our officers and directors, then consisting of 8 persons, are as follows:
Name
|
|
Position
|
|
Shares
|
|
|
Options and
Warrants
|
|
Mr. Yosi Lahad
|
|
Chairman of the Board of Directors
|
|
|
-
|
|
|
|
17,375
|
|
Ms. Odelia Levanon
|
|
Director
|
|
|
349
|
|
|
|
5,000
|
|
Mr. Avidan Zelicovsky
|
|
President and Director
|
|
|
-
|
|
|
|
90,000
|
|
Mr. Yuval Viner
|
|
Co-Chief Executive Officer
|
|
|
5,127
|
|
|
|
93,750
|
|
Mr. Eyal Cohen
|
|
Co-Chief Executive Officer and Chief Financial Officer
|
|
|
33,338
|
|
|
|
68,334
|
|
Mr. Ziv Dekel
|
|
Director
|
|
|
|
|
|
|
5,000
|
|
Mr. David Golan
|
|
Director
|
|
|
-
|
|
|
|
7,500
|
|
Ms. Revital Cohen
|
|
Director
|
|
|
55,100
|
|
|
|
7,500
|
|
Share
Option Plans
The
purpose of Share Option Plans is to enable us to attract and retain qualified persons as employees, officers, directors, consultants
and advisors and to motivate such persons by providing them with an equity participation in the Company.
The
Share Option Plans are administered by the Board of Directors, which has broad discretion, subject to certain limitations, to
determine the persons entitled to receive options.
Ordinary
Shares
2003
Plan
In
May 2003 the Company’s shareholders approved the adoption of the 2003 Israeli Stock Option Plan or the Plan. In December
2017, the shareholders approved an increase of the pool of shares reserved for issuances under the Plan, to 500,000 Ordinary Shares.
In December 2012, the Company’s shareholders approved a 10 year extension to the Plan, according to which the Board of Directors
may grant options under the Plan through May 31, 2023.
Under
the Plan, the terms and conditions under which options are granted and the number of shares subject thereto shall be determined
by the Board of Directors. The Board of Directors also has discretion to determine the nature of the consideration to be paid
upon the exercise of an option under the Plan. Such consideration generally may consist of cash, or, at the discretion of the
Board of Directors, cash and a recourse promissory note.
The
Ordinary Shares acquired upon exercise of an option are subject to certain restrictions on transfer, sale or hypothecation. Options
are exercisable and restrictions on disposition of shares lapse pursuant to the terms of the individual agreements under which
such options were granted or shares issued.
The
Company has elected to designate the Plan under the “capital gains” track of Section 102 of Israeli Income Tax Ordinance
5721-1961 (the “Tax Ordinance”), designed to afford qualified optionees certain tax benefits under the Tax Ordinance
(a “Section 102 Plan”). Pursuant to the election made by the Company, capital gains derived by optionees arising from
the sale of shares pursuant to the exercise of options granted to them under the Plan, will be subject to a flat capital gains
tax rate of 25% (instead of the gains being taxed as salary income at the employee’s marginal tax rate). However, as a result
of this election, the Company is not allowed to claim the amounts credited to such employees as a benefit when the related capital
gains tax is payable by them, as an expense for tax purposes. The Company may change its election from time to time, as permitted
by the Tax Ordinance. There are various conditions that must be met in order to qualify for these benefits, including the registration
of the options in the name of a trustee (the “Trustee”) for each of the employees who is granted options. Each option,
and any Ordinary Shares acquired upon the exercise of the option, must be held by the Trustee for a period commencing on the date
of grant and ending no earlier than 24 months from the date of grant.
As
of February 28, 2018, we had 314,125 options outstanding under the Plan (of which 196,197 are exercisable) with the following
exercise prices as set forth below:
Exercise Price
Per Share $
|
|
|
Number of Options
Outstanding
|
|
$
|
2.126
|
|
|
|
30,000
|
|
$
|
2.131
|
|
|
|
75,000
|
|
$
|
2.237
|
|
|
|
26,625
|
|
$
|
2.96
|
|
|
|
73,000
|
|
$
|
3.875
|
|
|
|
375
|
|
$
|
3.877
|
|
|
|
90,000
|
|
$
|
4.02
|
|
|
|
5,000
|
|
$
|
6.67
|
|
|
|
10,375
|
|
$
|
33.60
|
|
|
|
3,750
|
|
|
Total
|
|
|
|
314,125
|
|
Item
7:
Major Shareholders and Related Party Transactions
We
are not directly or indirectly owned or controlled by another corporation or by any foreign government.
As
of February 28, 2018, to the best of the Company’s knowledge there are no beneficial owners of more than five percent (5%)
of the Company’s outstanding Ordinary Shares.
The
changes in holdings (excluding warrants) of the major shareholders over the last three years are detailed, to the best of our
knowledge or based on the respective shareholder’s public filings, in the table below:
Holdings as of:
|
|
December 31, 2015
|
|
|
December 31, 2016
|
|
|
December 31, 2017
|
|
|
February 28, 2018
|
|
Novel Infrastructures Ltd.
|
|
|
128,147
|
|
|
|
128,147
|
|
|
|
128,147
|
|
|
|
128,147
|
|
D. D. Goldstein Properties and Investments Ltd.
(1)
|
|
|
127,200
|
|
|
|
127,200
|
|
|
|
127,200
|
|
|
|
127,200
|
|
Bellite Pty Limited
|
|
|
116,286
|
|
|
|
116,286
|
|
|
|
116,286
|
|
|
|
116,286
|
|
iDnext Ltd.
(2)
|
|
|
-
|
|
|
|
162,734
|
|
|
|
162,734
|
|
|
|
162,734
|
|
(1)
|
According
to a 13D report from November 17, 2014.
|
(2)
|
Includes
50,072 shares held by iDnext's wholly owned subsidiary Next-Line Ltd. Mr. Moti Harel may be deemed to have sole voting and
dispositive power with respect to the shares held by iDnext Ltd. and its subsidiary Next-Line Ltd. See also Item 7B. “Related
Party Transactions”.
|
As
of February 28, 2018, there were 48 record holders of Ordinary Shares, of which 6 were registered with addresses in the United
States, representing approximately 87.9% of the outstanding Ordinary Shares. However, the number of record holders in the United
States is not representative of the number of beneficial holders, nor is it representative of where such beneficial holders are
resident since many of the Ordinary Shares are held of record by brokers and other nominees.
7B.
|
Related
Party Transactions
|
Services
Agreement with Cukierman & Co. Investment House
In
2003, the Company’s Audit Committee and Board of Directors approved the engagement of Cukierman & Co. Investment House
Ltd. (“Cukierman & Co.”), to provide non-exclusive investment-banking services and business development services
to the Company, effective April 15, 2003 (the “Services Agreement”). Cukierman & Co. is a company indirectly controlled
by Mr. Edouard Cukierman. Since June 26, 2003 and until January 8, 2015, Mr. Cukierman served as the Chairman of the Company’s
Board of Directors and was also a co-manager of the Catalyst Fund, a shareholder of the Company.
For
its services, Cukierman & Co. was paid a monthly sum of $10,000 plus VAT (except from February 9, 2009 until December 31,
2010, during which period Cukierman & Co. agreed to temporarily reduce such fee to $8,500), in addition to a success fee of
4%-6% for a consummated private placements. The Services Agreement, as supplemented, provides for success fees in connection with
securing M&A transactions of 3.5% of the proceeds exchanged in such a transaction and also for a success fee of 6% of the
revenues actually received by the Company in respect of a sale of the Company's products to a new customer which was introduced
by Cukierman & Co. According to its terms, the Company may terminate the Services Agreement at any time, with one-month’s
prior written notice.
Pursuant
to an amendment to the Services Agreement, as of July 1, 2012, the private placement portion of Cukierman & Co’s services
was discontinued, and the monthly payment was reduced to approximately $6,350 plus VAT, reflecting payment for the business development
and mergers and acquisitions services only. In addition, the payment was to be made only once a year at the end of each calendar
year by way of issuance of the Company’s Ordinary Shares (and not in cash), using the price per share stipulated in the
revised Services Agreement.
On
July 15, 2013, an additional amendment to the Service Agreement was signed by which all payments to Cukierman & Co. were to
be made on a quarterly basis.
In
2015 the Company issued to Cukierman & Co. 4,065 Ordinary Shares as per the revised Services Agreement. In February 2015,
the Company terminated the Services Agreement.
For
further payments which the Company paid and accrued pursuant to the Services Agreement in 2015, see Note 19a to the Consolidated
Financial Statements for the year ended December 31, 2017.
Management
Services Agreement with iDnext Ltd.
On
January 1, 2016 the Company, through its wholly owned subsidiary BOS-Dimex, consummated the acquisition of the business operations
of iDnext Ltd. and its subsidiary Next-Line.
Pursuant
to a Management Services Agreement entered into as part of the acquisition agreement, iDnext was entitled to a monthly fee of
NIS 33,000 (approximately $9,500) plus VAT through December 31, 2017. iDnext is controlled by Mr. Moti Harel, who was a member
of the Company’s Board of Directors until December 12, 2017.
For
further payments which the Company paid and accrued pursuant to the Management Services Agreement in 2017, see Note 19C to the
Consolidated Financial Statements for the year ended December 31, 2017.
The
Management Services Agreement expired on December 31, 2017, and the parties are negotiating a new agreement.
Intercompany
Payments
During
the years 2016 and 2017 the Company charged each of its subsidiaries, Odem and Dimex $256,000 and $350,000 respectively for their
share of corporate overhead.
Since
January 2014, the Company has raised $4.53 million, all of which were contributed to its subsidiaries and used for working capital,
bank loans repayments and for an acquisition. In certain cases, the Company pays by shares for acquisitions made by a subsidiary
(for example, the iDnext acquisition).
Indemnity
Undertakings by the Company to its Directors and Officers
On
February 18, 2003, the Company’s shareholders approved indemnity undertakings to its directors and officers (including future
directors and officers as may be appointed from time to time), in excess of any insurance proceeds, not to exceed, in the aggregate
over the years, a total amount of $2,500,000. On May 18, 2006, at the recommendation of the audit committee and the Board of Directors,
the shareholders approved amendments to the indemnity undertakings, in light of changes to the Israeli Companies Law. On December
20, 2011, following an amendment to the Israeli Securities Law and a corresponding amendment to the Israeli Companies Law, which
had authorized the Israeli Securities Authority to impose administrative sanctions against companies and their office holders
for certain violations of the Israeli Securities Law or the Israeli Companies Law, the Company’s shareholders approved a
modified form of such indemnification agreement to ensure that the Company’s directors were afforded protection to the fullest
extent permitted by law, which form was approved and ratified by the Company’s shareholders on October 22, 2015. In addition,
under the new indemnification agreements, the Company exempts and releases each director from any and all liability to the Company
related to any breach by each director of his duty of care to the Company, to the maximum extent permitted by law.
7C.
|
Interests
of Experts and Counsel
|
Not
applicable.
Item
8:
Financial Information
8A.
|
Consolidated
Statements and Other Financial Information
|
Consolidated
Financial Statements
See
“Item 18. Financial Statements.”
Sales
Outside of Israel
The
total amount of revenues of the Company and its subsidiaries from sales out of Israel has been as follows:
Year
|
|
Export revenues
|
|
|
% of all revenues
|
|
2017
|
|
$
|
7,062,000
|
|
|
|
25
|
%
|
2016
|
|
$
|
6,808,000
|
|
|
|
25
|
%
|
2015
|
|
$
|
6,555,000
|
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
Legal
Proceedings
As
of the date of this report we are not aware of any pending of threatened legal actions in which the Company is involved.
On
April 9, 2017 D.D. Goldstein Properties and Investments Ltd., a shareholder of the Company (the “Plaintiff”) filed
a claim against the Company's Chairman Yosi Lahad, the Company's Co-CEO, Yuval Viner, the Company's Co-CEO and CFO, Eyal Cohen
and Ms. Gabriela Jacobs, an (indirect) shareholder of the Company.
The
Plaintiff claims that the defendants, acting in bad faith, breached their duties of loyalty and care and several laws, by inducing
the Plaintiff to purchase shares of the Company. The Plaintiff claims that he was led to believe that the defendants were going
to facilitate his gaining control of the Company. The claim is for a total amount of NIS 2,600,000 (approximately $750,000).
While
the Company is not a named defendant in the proceedings, itis a party to indemnification agreements with the Defendants, pursuant
to which it pays the legal fees involved in their defense, and may be required to indemnify the Defendants in the event a ruling
is handed against them. The Company expects such payments, if any, to be covered under its Directors and Officers insurance policy
(subject to a deductible).
Dividend
Policy
The
Company does not currently have a dividend policy. The declaration and payment of any cash dividends in the future will be determined
by the Board of Directors in light of the conditions existing at that time. This will include our earnings and financial condition.
We may only pay cash dividends in any fiscal year, out of “profits”, as defined under Israeli law. Any cash dividend
in the future out of an approved enterprise will be subject to an additional tax. Currently we have no profits from an approved
enterprise; hence no provision has been made for tax on future dividends.
Not
applicable.
Item
9:
The Offer and Listing
9A.
|
Offer
and Listing Details
|
Commencing
April 1996, our Ordinary Shares were traded, and our warrants, until they expired on April 2, 2000, were traded in the over-the-counter
market in the United States, and quoted on what is now called the NASDAQ Capital Market under the symbol “BOSC” and
“BOSCW,” respectively. In September 2000, our Ordinary Shares started to be traded on what is now called the NASDAQ
Global Market. In January 2002, our shares also began trading on the TASE, under the symbol “BOSC”, pursuant to the
dual-listing regulations of the Israeli Securities Authority. On May 12, 2009, we delisted our Ordinary Shares from trade on the
TASE. The delisting of the Ordinary Shares from the TASE did not affect the continued listing of the Ordinary Shares on the NASDAQ
Global Market under the symbol BOSC. After the delisting of the Company’s Ordinary Shares from the TASE, we are no longer
subject to reporting requirements in Israel. On October 16, 2009, the Company’s Ordinary Shares were transferred to the
NASDAQ Capital Market and are traded on such market under the symbol “BOSC”.
Prices
set forth below are high and low reported closing prices for our Ordinary Shares as reported by NASDAQ for the periods indicated.
All share prices have been retroactively adjusted to reflect the 1:4 reverse stock split effected on December 14, 2012.
Period
|
|
|
|
High ($)
|
|
|
Low ($)
|
|
|
|
|
|
|
|
|
|
|
Annual Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
Annual
|
|
|
8.40
|
|
|
|
2.63
|
|
2014
|
|
Annual
|
|
|
7.88
|
|
|
|
3.88
|
|
2015
|
|
Annual
|
|
|
3.47
|
|
|
|
1.81
|
|
2016
|
|
Annual
|
|
|
4.07
|
|
|
|
1.64
|
|
2017
|
|
Annual
|
|
|
2.46
|
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Information (2016)
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2.03
|
|
|
|
1.64
|
|
|
|
Second Quarter
|
|
|
4.07
|
|
|
|
1.93
|
|
|
|
Third Quarter
|
|
|
3.7
|
|
|
|
2.14
|
|
|
|
Fourth Quarter
|
|
|
2.45
|
|
|
|
1.95
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Information (2017)
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2.46
|
|
|
|
2.09
|
|
|
|
Second Quarter
|
|
|
2.24
|
|
|
|
1.74
|
|
|
|
Third Quarter
|
|
|
2.08
|
|
|
|
1.67
|
|
|
|
Fourth Quarter
|
|
|
2.43
|
|
|
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly Information (2018)
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
2.3
|
|
|
|
2.14
|
|
|
|
February
|
|
|
2.23
|
|
|
|
1.94
|
|
|
|
March (through March 15)
|
|
|
2.08
|
|
|
|
1.93
|
|
Not
applicable.
Our
securities are traded on the NASDAQ Capital Market under the symbol “BOSC”.
Not
applicable.
Not
applicable.
Not
applicable.
Item
10:
Additional Information
Not
applicable.
10B.
|
Memorandum and Articles of Association
|
The
Company’s registration number at the Israeli Registrar of Companies is 52-0042565.
In
March 2002 the Company adopted new articles of association (“Articles of Association”), in view of the Israeli Companies
Law. Since then, certain articles of the Articles of Association have been amended.
Set
forth below is a summary of certain provisions of our Memorandum of Association (“Memorandum”) and Articles of Association.
This summary is not complete and should be read together with our Memorandum and Articles of Association, incorporated by reference
hereto.
1.
|
Objects of the Company:
|
The
Company’s Memorandum (Article 2(p)) and Articles of Association (Article 2) provide that the Company may engage in any legal
business.
2.
|
Provisions related to the directors of the Company:
|
The
Board of Directors may issue shares and other securities, which are convertible or exercisable into shares, up to the limit of
the Company’s authorized share capital.
(a)
|
Approval of Certain Transactions under the Israeli Companies
Law:
|
We
are subject to the provisions of the Israeli Companies Law, which became effective on February 1, 2000, as amended. See Item 6C
“Board Practices” above.
(b)
Borrowing powers exercisable by the Board of Directors are not specifically outlined in the Company’s Articles of Association,
however, according to Article 15: “Any power of the Company which has not been vested in another organ pursuant to the Israeli
Companies Law or the articles may be exercised by the Board of Directors”.
(c)
The Company’s Articles of Association do not contain provisions regarding the retirement of directors under an age limit
requirement, nor do they contain a provision requiring a director to hold any Company shares in order to qualify as a Director.
3.
With regard to the rights, preferences and restrictions attaching to the Ordinary Shares, the Company’s Articles of Association
provide the following:
(a)
|
Dividends, Rights to Share in the Company’s Profits
and Rights to Share in any Surplus upon Liquidation
|
All
holders of paid-up Ordinary Shares of the Company have an equal right to participate in the distribution of (i) dividends, whether
by cash or by bonus shares; (ii) Company assets; and (iii) the Company’s surplus assets upon winding up, all pro rata to
the nominal value of the shares held by them (Articles 4.2.2, 4.2.3 and 7.3).
The
Board of Directors is the organ authorized to decide upon the distribution of dividends and bonus shares (Article 26.1). The shareholders
who are entitled to a dividend are the current shareholders as of the date of the resolution for the dividend or on a later date
if another date is specified in the resolution on the dividend’s distribution. If the Board of Directors does not otherwise
determine, any dividend may be paid by way of a cheque or payment order that shall be sent by mail to the registered address of
the shareholder or person entitled thereto, or in the case of registered joint shareholders to the shareholder whose name appears
first in the shareholders’ register in relation to the joint shareholding. Every such cheque shall be drawn up to the order
of the person to whom it is being sent. The receipt of a person who on the date of the dividend’s declaration is listed
in the shareholders’ register as the holder of any share or, in the case of joint shareholders, of one of the joint shareholders
shall serve as confirmation of all the payments made in connection with such share. For the purpose of implementing any resolution
pursuant to the provisions of this paragraph, the Board of Directors may settle, as it deems fit, any difficulty arising in relation
to the distribution of the dividend and/or bonus shares, including determine the value for the purpose of the said distribution
of certain assets and resolve that payments in cash shall be made to members in reliance upon the value thus determined, determine
regulations in relation to fractions of shares or in relation to non-payment of amounts less than NIS 200.
All
holders of paid-up Ordinary Shares of the Company have an equal right to participate in and vote at the Company’s general
meetings, whether ordinary or special, and each of the shares in the Company shall entitle its holder, present at the meeting
and participating in the vote, himself, by proxy or through a voting instrument, to one vote (Article 4.2.1). Such voting rights
may be affected in the future by the grant of any special voting rights to the holders of a class of shares with preferential
rights. Shareholders may vote either in person or through a proxy or voting instrument, unless the Board of Directors prohibits
voting through a voting instrument on a certain matter and stated so in the notice of the meeting (Articles 14.1 and 14.6). A
resolution at the general meeting shall be passed by an ordinary majority unless another majority is specified in the Israeli
Companies Law or the Company’s Articles of Association (Article 14.3). For applicable provisions of the Israel Companies
Law, see Item 6C “Board Practices”.
(c)
|
Election of Directors
|
The
Company’s directors are elected by the shareholders at a shareholders’ meeting. The Ordinary Shares do not have cumulative
voting rights with respect to the election of directors. The holders of Ordinary Shares, conferring more than 50% of the voting
power present by person or by proxy at the shareholders’ meeting, have the power to elect the directors. The directors elected
shall hold office until the next annual meeting, or sooner if they cease to hold office pursuant to the provisions of the Company’s
Articles of Association. In addition, the Board of Directors may appoint a director (to fill a vacancy or otherwise) between shareholder
meetings, and such appointment shall be valid until the next annual meeting or until such appointee ceases to hold office pursuant
to the provisions of the Company’s Articles of Association. Directors of the Company stand for reelection at every annual
meeting (Article 16.2) and not at staggered intervals.
The
Company may, subject to any applicable law, issue redeemable securities on such terms as determined by the Board of Directors,
provided that the general meeting of shareholders approves the Board of Director’s recommendation and the terms determined
(Article 27).
(e)
|
Capital Calls by the Company
|
The
Board of Directors may only make calls for payment upon shareholders in respect of monies not yet paid for shares held by them
(Article 7.2).
No
provision in the Company’s Articles of Association discriminates against an existing or prospective holder of securities,
as a result of such shareholder owning a substantial amount of shares.
4.
|
Modification of Rights of Holders of Stock:
|
The
general meeting of shareholders may resolve to create new shares of an existing class or of a new class with special rights and/or
restrictions (Article 9.1).
So
long as not otherwise provided in the shares’ issue terms and subject to the provisions of any law, the rights attached
to a particular class of shares may be altered, after a resolution is passed by the Company and with the approval of a resolution
passed at a general meeting of the holders of the shares of such class or the written agreement of all the class holders. The
provisions of the Company’s Articles of Association regarding general meetings shall apply, mutatis mutandis, to a general
meeting of the holders of a particular class of shares (Article 10.1). The rights vested in the holders of shares of a particular
class that were issued with special rights shall not be deemed to have been altered by the creation or issue of further shares
ranking equally with them, unless otherwise provided in such shares’ issue terms (Article 10.2).
The
above mentioned conditions are not more onerous than is required by law.
5.
|
Annual General Meetings and Extraordinary General
Meetings:
|
General
meetings shall be convened at least once a year at such place and time as determined by the Board of Directors but no later than
15 months from the last annual general meeting. Such general meetings shall be called “annual meetings”. The Company’s
other meetings shall be called “special meetings” (Article 12.1). The annual meeting’s agenda shall include
a discussion of the Board of Directors’ reports and the financial statements as required by law. The annual meeting shall
appoint an auditor, appoint the directors and discuss all the other matters which must be discussed at the Company’s annual
general meeting, pursuant to Company’s Articles or the Companies Law, as well as any other matter determined by the Board
of Directors (Article 12.2).
The
Board of Directors may convene a special meeting pursuant to its resolution and it must convene a general meeting if it receives
a written requisition from any one of the following (hereinafter referred to as “requisition”) (i) two directors or
one quarter of the directors holding office; and/or (ii) one or more shareholders holding at least 5% of the issued capital and
at least 1% of the voting rights in the Company; and/or (iii) one or more shareholders holding at least 5% of the voting rights
in the Company (Article 12.3). A requisition must detail the objects for which the meeting must be convened and shall be signed
by the persons requisitioning it and sent to the Company’s registered office. The requisition may be made up of a number
of documents in an identical form of wording, each of which shall be signed by one or more of the persons requisitioning the meeting
(Article 12.4). When the Board of Directors is required to convene a special meeting, it shall do so within 21 days of the requisition
being submitted to it, for a date that shall be specified in the invitation and subject to the law (Article 12.5).
One
or more shareholders, holding at least 1% of the voting rights in the Company are entitled to request the Board of Directors to
include a certain matter in the agenda of an upcoming general meeting, provided that such matter is appropriate for discussion
at general meetings.
Notice
to the Company’s shareholders regarding the convening of a general meeting shall be sent to all the shareholders listed
in the Company’s shareholders’ register at least 21 days prior to the meeting and shall be published in other ways
insofar as required by the law. The notice shall include the agenda, proposed resolutions and arrangements with regard to a written
vote. The accidental omission to give notice of a meeting to any member, or the non-receipt of notice sent to such member, shall
not invalidate the proceedings at such meeting (Article 12.6).
The
shareholders entitled to participate in and vote at the general meeting are the shareholders on the date specified by the Board
of Directors in the resolution to convene the meeting, and subject to the law (Article 14.1).
No
discussions may be commenced at the general meeting unless a quorum is present at the time of the discussion’s commencement.
A quorum is the presence of at least two shareholders holding at least 33⅓% of the voting rights (including presence through
a proxy or a voting instrument), within half an hour of the time fixed for the meeting’s commencement (Article 13.1). If
no quorum is present at a general meeting within half an hour of the time fixed for the commencement thereof, the meeting shall
be adjourned for one week, to the same day, time and place, or to a later time if stated in the invitation to the meeting or in
the notice of the meeting (Article 13.2). The quorum for the commencement of the adjourned meeting shall be any number of participants.
6.
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Limitations on the rights to own securities:
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There
are no limitations on the rights to own the Company’s securities, including the rights of non-residents or foreign shareholders
to do so.
Under
the Israeli Companies Law, a merger is generally required to be approved by the shareholders and Board of Directors of each of
the merging companies. Shareholder approval is not required if the company that will not survive is controlled by the surviving
company. Additionally, the law provides some exceptions to the shareholder approval requirement in the surviving company. If the
share capital of the company that will not be the surviving company is divided into different classes of shares, the separate
approval of each class is also required, unless determined otherwise by the court. A majority of votes approving the merger shall
suffice, unless the company (like ours) was incorporated in Israel prior to the enactment of Israeli Companies Law, in which case
a majority of 75% of the voting power is needed in order to approve the merger. Additionally, unless the court determines otherwise,
a merger will not be approved if it is objected to by a majority of the shareholders present at the meeting, after excluding the
shares held by the other party to the merger, by any person who holds 25% or more of the other party to the merger and by the
relatives of and corporations controlled by these persons. Upon the request of a creditor of either party to the proposed merger,
the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger,
the surviving company will be unable to satisfy the obligations of any of the parties of the merger. Also, a merger can be completed
only after all approvals have been submitted to the Israeli Registrar of Companies and provided that 30 days have elapsed since
shareholder approval was received and 50 days have elapsed from the time that a proposal for approval of the merger was filed
with the Registrar by each merging company.
The
Israeli Companies Law also 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 holder of 25% or more of the voting power at general meetings.
This rule does not apply if there is already another holder of 25% or more of the voting power at general meetings. 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 become a holder of more than 45% of the voting power of the company. This
rule does not apply if someone else already holds 45% of the voting power of the company. An acquisition from a 25% or 45% holder,
which turns the purchaser into a 25% or 45% holder respectively, does not require a tender offer. An exception to the tender offer
requirement may also apply when the additional voting power is obtained by means of a private placement approved by the general
meeting of shareholders.
Under
the Israeli Companies Law, a person may not acquire shares in a public company if, after the acquisition, he will hold more than
90% of the shares or more than 90% of any class of shares of that company, unless a tender offer is made to purchase all of the
shares or all of the shares of the particular class. The Israeli Companies Law also provides that as long as a shareholder in
a public company holds more than 90% of the company’s shares or of a class of shares, that shareholder shall be precluded
from purchasing any additional shares. If such tender offer is accepted and less than 5% of the shares of the company are not
tendered, and a majority of the offeree shareholders not having a personal interest accepted the offer, all of the shares will
transfer to the ownership of the acquirer. Similarly, all of the shares will transfer to the ownership of the acquirer in the
event that less than 2% of the shares of the company are not tendered. The 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, the acquirer
may stipulate in the tender offer that any shareholder tendering his shares will not be entitled to appraisal rights. If ownership
in all of the shares is not transferred to the acquirer as described above, then the acquirer may not acquire shares in the tender
offer that will cause his shareholding to exceed 90% of the outstanding shares.
8.
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Disclosing Share Ownership:
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The
Company has no bylaw provisions governing the ownership threshold, above which shareholder ownership must be disclosed.
All
material contracts have been described in detail throughout this form, wherever applicable.
There
are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our Ordinary
Shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank
of Israel regarding certain transactions. However, legislation remains in effect pursuant to which currency controls can be imposed
by administrative action at any time.
The
following is a summary of the material Israeli tax consequences, Israeli foreign exchange regulations and certain Israeli government
programs affecting the Company.
To
the extent that the discussion is based on new tax or other legislation that has not been subject to judicial or administrative
interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax or other authorities
in question. The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive
of all possible tax considerations.
Israeli
Tax Considerations
The
following is a general discussion only and is not exhaustive of all possible tax considerations. It is not intended, and should
not be construed, as legal or professional tax advice and should not be relied upon for tax planning purposes. In addition, this
discussion does not address all of the tax consequences that may be relevant to purchasers of our ordinary shares in light of
their particular circumstances, or certain types of purchasers of our ordinary shares subject to special tax treatment. Examples
of this kind of investor include residents of Israel and traders in securities who are subject to special tax regimes not covered
in this discussion. Each individual/entity should consult its own tax or legal advisor as to the Israeli tax consequences of the
purchase, ownership and disposition of our ordinary shares.
To
the extent that part of the discussion is based on new tax legislation, which has not been subject to judicial or administrative
interpretation, we cannot assure that the tax authorities or the courts will accept the views expressed in this section.
The
following summary describes 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 holders of our ordinary shares.
Special
Provisions Relating to Tax Reporting in United States Dollars
The
Company and its subsidiaries, respectively, have elected to measure their taxable income and file their tax return in United States
Dollars, under the Israeli Income Tax Regulations (Principles Regarding the Management of Books of Account of Foreign Invested
Companies and Certain Partnerships and the Determination of Their Taxable Income), 1986.
Capital
Gains Tax on Sales of Our Ordinary Shares
Israeli
law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax
purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by both residents and non-residents
of Israel, unless a specific exemption is available or a tax treaty between Israel and the shareholder’s country of residence
provides otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of
the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable
to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the
date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus.
As
of January 1, 2012, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market
or not, is 25% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such
shares, in which case the gain is generally taxed at a rate of 30%. Additionally, if such shareholder is considered a “substantial
shareholder” at any time during the 12-month period preceding such sale, i.e., such shareholder holds directly or indirectly,
including with others, at least 10% of any means of control in a company, the tax rate is 30%. Israeli companies are subject to
the corporate tax rate on capital gains derived from the sale of shares (24% in 2017 and 23% in 2018). However, the foregoing
tax rates do not apply to: (i) dealers in securities; and (ii) shareholders who acquired their shares prior to an initial public
offering (that may be subject to a different tax arrangement).
The
tax basis of shares acquired prior to January 1, 2003 is determined in accordance with the average closing share price in the
three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted
cost of the shares as the tax basis if it is higher than such average price.
In
addition, as of January 1, 2013, shareholders that are individuals who have taxable income that exceeds NIS 800,000 in a tax year
(linked to the Israeli consumer price index (or CPI) each year - NIS 803,520 in 2016), will be subject to an additional tax, referred
to as High Income Tax, at the rate of 2% on their taxable income for such tax year which is in excess of such amount. Commencing
January 1, 2017, the High Income Tax rate has increased to 3% and its threshold has been lowered to NIS 640,000 (linked to the
CPI) (NIS 640,000 in 2017 and NIS 641,880 in 2018). For this purpose taxable income will include,
inter alia
, taxable capital
gains from the sale of our shares and taxable income from dividend distributions.
Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly
traded on a recognized stock exchange or regulated market outside of Israel, provided that such capital gains are not derived
from a permanent establishment in Israel, the shareholders are not subject to the Israeli Income Tax Law – Inflationary
Adjustments, 1985, and the shareholders did not acquire their shares prior to an initial public offering. However, non-Israeli
corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of more than 25% in such
non-Israeli corporation, or (ii) are the beneficiaries or are entitled to 25% or more of the revenues or profits of such non-Israeli
corporation, whether directly or indirectly.
Pursuant
to the treaty between the government of the United States and the government of Israel with respect to taxes on income, as amended
(the “U.S.-Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a person who (i) holds
the ordinary shares as a capital asset, (ii) qualifies as a resident of the United States within the meaning of the U.S.-Israel
Tax Treaty, and (iii) is entitled to claim the benefits afforded to such person by the U.S.-Israel Tax Treaty, generally, will
not be subject to the Israeli capital gains tax. Such exemption will not apply if (i) such U.S. resident holds, directly or indirectly,
shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange or disposition,
subject to certain conditions, or (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent
establishment in Israel. In such case, the sale, exchange or disposition of ordinary shares would be subject to Israeli tax, to
the extent applicable; however, under the U.S.-Israel Tax Treaty, such U.S. resident 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 the limitations
in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.
In
some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration
may be subject to the withholding of Israeli tax at the source.
Taxation
of Dividends paid to Non-Resident Holders of Shares
Non-residents
of Israel are subject to income tax on income accrued or derived from sources in Israel. Such sources of income include passive
income such as dividends. On distributions of dividends other than bonus shares, or stock dividends, income tax is applicable
at the rate of 25%, or 30% for a shareholder that is considered a “substantial shareholder” at any time during the
12-month period preceding such distribution, unless a different withholding tax rate is provided in a treaty between Israel and
the shareholder’s country of residence.
In
principle, non-Israeli residents (whether individuals or corporations) are generally subject to Israeli withholding tax on the
receipt of dividends paid for publicly traded shares at the rate of 25% and at the rate of 30% on dividends paid to substantial
shareholders. However, so long as the shares are registered with a Nominee Company, as defined in the Encouragement of Capital
Investments Law, 1959 (the “Investments Law”), which is a company incorporated to be a holder of record and
distribution agent of publicly traded company, the shares are generally subject to Israeli withholding tax at a rate of 25%, unless
a different rate is provided under an applicable tax treaty (provided that a certificate from the Israel Tax Authority allowing
for a reduced withholding tax rate is obtained in advance).
Under
the U.S.-Israel Tax Treaty, the maximum withholding tax on dividends paid to a holder of ordinary shares that is a Treaty U.S.
Resident is generally 25%. However, pursuant to the Investments Law, dividends distributed by an Israeli company and derived from
income eligible for benefits under the Investments Law will generally be subject to a reduced dividend withholding tax rate, subject
to the conditions specified in the U.S.-Israel Tax Treaty. The U.S.-Israel Tax Treaty further provides that a 15% or a 12.5% Israeli
dividend withholding tax will apply to dividends paid to a U.S. corporation owning 10% or more of an Israeli company’s voting
shares during, in general, the current and preceding tax year of the Israeli company. The 15% rate applies to dividends distributed
from income derived from an Approved Enterprise or, presumably, from a Privileged Enterprise (as defined in the Investments Law),
in each case within the applicable period or, presumably, from a Preferred Enterprise, and the lower 12.5% rate applies to dividends
distributed from income derived from other sources. However, these provisions do not apply if the company has certain amounts
of passive income.
General
Corporate Tax Structure in Israel
The
Israeli corporate tax rate was 26.5%, 25% and 24% in 2015, 2016 and 2017, respectively. Effective January 1, 2018 and thereafter,
the corporate tax rate in Israel will be 23%.
Foreign
Exchange Regulations
Under
the Foreign Exchange Regulations an Israeli company may calculate its tax liability in U.S. Dollars under certain conditions.
The tax liable income, as calculated in U.S. Dollars is translated into NIS according to the exchange rate as of December 31
st
of each year.
Israeli
Transfer Pricing Regulations
Section
85A of the Tax Ordinance and the transfer pricing regulations require that all cross-border transactions carried out between related
parties be conducted on an arm’s length basis and be taxed accordingly.
UNITED
STATES FEDERAL INCOME TAX CONSIDERATIONS
Subject
to the limitations described herein, this discussion summarizes certain material U.S. federal income tax consequences of the purchase,
ownership and disposition of our Ordinary Shares to a U.S. holder. A U.S. holder is a beneficial owner of our Ordinary Shares
who is:
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an
individual who is a citizen or resident of the United States for U.S. federal income tax purposes;
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a
corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized under the
laws of the United States or any political subdivision thereof or the District of Columbia;
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an
estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or
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a
trust: (i) if a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons have
the authority to control all of its substantial decisions; or (ii) that is in existence on August 20, 1996 and that has in
effect a valid election under applicable U.S. Treasury Regulations to be treated as a U.S. person.
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A
non-U.S. holder is a beneficial owner of our Ordinary Shares that is not a U.S. holder. Unless otherwise specifically indicated,
this discussion does not consider the U.S. federal income tax consequences to a person that is a non-U.S. holder of our Ordinary
Shares and considers only U.S. holders that will own the Ordinary Shares as capital assets (generally for investment).
If
a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds our Ordinary Shares, the
tax treatment of the partnership and a partner in such partnership will generally depend on the status of the partner and the
activities of the partnership. Such a partner or partnership should consult its tax advisor as to its tax consequences.
This
discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), current and
proposed Treasury Regulations promulgated under the Code and administrative and judicial interpretations of the Code, all as currently
in effect and all of which are subject to differing interpretations or to change, possibly with retroactive effect. Notably, in
December 2017, the U.S. Congress approved, and the U.S. President signed into law, the “Tax Cuts and Jobs Act” (the
“TCJA”), which alters significantly the U.S. Federal income tax system. Although this discussion takes into account
provisions enacted under the TCJA, given the complexity of this new law, U.S. holders should consult their own tax advisors regarding
its potential impact on the U.S. federal income tax consequences to them in light of their particular circumstances. This discussion
does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. holder based on the U.S.
holder’s particular circumstances (including the potential application of the alternative minimum tax). In particular, this
discussion does not address the U.S. federal income tax consequences to U.S. holders who are a bank, broker-dealers or who own,
directly, indirectly or constructively, 10% or more (by voting power) of our company, real estate investment trusts, regulated
investment companies, grantor trusts, S corporations, U.S. holders holding the Ordinary Shares as part of a hedging, straddle
or conversion transaction, U.S. holders whose functional currency is not the U.S. dollar, U.S. holders who have elected to-market
accounting, insurance companies, tax-exempt organizations, financial institutions, persons that receive Ordinary Shares as compensation
for the performance of services, certain former citizens or former long-term residents of the United States and persons subject
to the alternative minimum tax, who may be subject to special rules not discussed below. Additionally, this discussion does not
address the possible application of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S. tax laws.
This
summary of material United States Federal income tax considerations is for general information only and is not tax advice. Each
holder of our Ordinary Shares is advised to consult with its tax advisor with respect to the specific U.S. federal, state, local
and foreign income tax consequences to which it is subject with respect to purchasing, holding or disposing of our Ordinary Shares.
U.S.
Holders of Ordinary Shares
Taxation
of distributions on Ordinary Shares
Subject
the discussion below under “Tax consequences if we are a passive foreign investment company,” a distribution paid
by us with respect to our Ordinary Shares, including the amount of any non-U.S. taxes withheld, to a U.S. holder will be treated
as dividend income to the extent that the distribution does not exceed our current and accumulated earnings and profits, as determined
for U.S. federal income tax purposes. Dividends that are received with respect to Ordinary Shares by U.S. holders that are individuals,
estates or trusts generally will be taxed at preferential tax rates, provided that such dividends meet the requirements of “qualified
dividend income.” For this purpose, qualified dividend income generally includes dividends paid by a non-U.S. corporation
if certain holding period and other requirements are met and either (i) the stock of the non-U.S. corporation with respect to
which the dividends are paid is “readily tradable” on an established securities market in the U.S. (e.g., the NASDAQ
Global Market); or (ii) the non-U.S. corporation is eligible for benefits of a comprehensive income tax treaty with the U.S. which
includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. The United
States Internal Revenue Service (“IRS”) has determined that the U.S.-Israel income tax treaty is satisfactory for
this purpose. Dividends that fail to meet such requirements, and dividends received by corporate U.S. holders, are taxed at ordinary
income rates. No dividend received by a U.S. holder will be a qualified dividend (i) if the U.S. holder held the ordinary share
with respect to which the dividend was paid for less than 61 days during the 121-day period beginning on the date that is 60 days
before the ex-dividend date with respect to such dividend, excluding for this purpose, under the rules of Section 246(c) of the
Code, any period during which the U.S. holder has an option to sell, is under a contractual obligation to sell, has made and not
closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished
its risk of loss by holding other positions with respect to, such ordinary share (or substantially identical securities); or (ii)
to the extent that the U.S. holder is under an obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in property substantially similar or related to the ordinary share with respect to which the dividend is
paid. If we were to be considered a “passive foreign investment company” or PFIC (as such term is defined in the Code)
for any taxable year, dividends paid on our Ordinary Shares in such year or in the following taxable year would not be qualified
dividends. See discussion below regarding our PFIC status at “Tax Consequences If We Are A Passive Foreign Investment Company.”
In addition, a non-corporate U.S. holder will be able to take a qualified dividend into account in determining its deductible
investment interest (which is generally limited to its net investment income) only if it elects to do so. In such case the dividend
will be taxed at ordinary income rates.
The
amount of any distribution which exceeds the amount treated as a dividend will be treated first as a non-taxable return of capital,
reducing the U.S. holder’s tax basis in its Ordinary Shares to the extent thereof, and then as capital gain from the deemed
disposition of the Ordinary Shares (subject to the PFIC rules discussed below). Such distributions (treated as capital gain) would
not give rise to income from sources outside the United States. Corporate holders will not be allowed a deduction for dividends
received in respect of the Ordinary Shares.
There
is no assurance that dividends received by a U.S. holder from the Company will be eligible for the preferential tax rates mentioned
above. Dividends that are not eligible for the preferential tax rates will be taxed at ordinary income rates.
Dividends
paid by us in NIS will be included in the gross income of U.S. holders at the U.S. dollar amount of the dividend (including any
non-U.S. taxes withheld therefrom), based upon the exchange rate in effect on the date the distribution is included in income,
regardless of whether the NIS is converted into U.S. dollars. If the NIS is not converted into U.S. dollars on the date of receipt,
U.S. holders will have a tax basis in the NIS for U.S. federal income tax purposes equal to that dollar value. Any subsequent
gain or loss in respect of the NIS arising from exchange rate fluctuations on a subsequent conversion or any other disposition
of the NIS will be treated as ordinary income or loss, and generally will be income or loss from sources within the United States
for U.S. foreign tax credit purposes. In addition, proposed Treasury regulations (which taxpayers may rely upon pending publication
of final regulations) issued on December 18, 2017 provide that certain taxpayers may elect to “mark to market” gain
or loss resulting from exchange rate fluctuations with respect to such NIS. The proposed regulations are complex. U.S. holders
should consult their own tax advisors regarding the applicability of such proposed regulations to their particular circumstances.
Subject
to the limitations set forth in the Code and the Treasury Regulations thereunder, U.S. holders may elect to claim a foreign tax
credit against their U.S. federal income tax liability for non-U.S. income taxes withheld from dividends received in respect of
the Ordinary Shares. The conditions and limitations on claiming a foreign tax credit include, among others, computation rules
under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income taxes
otherwise payable with respect to each such class of income. In this regard, dividends paid by us generally will be foreign source
“passive income” for U.S. foreign tax credit purposes. U.S. holders that do not elect to claim a foreign tax credit
may instead claim a deduction for the non-U.S. income tax withheld if they itemize their deductions. The rules relating to foreign
tax credits are complex, additional limitations on the credit apply to individuals receiving dividends eligible for preferential
tax rates on dividends described above (and may also be impacted by the tax treaty between the United States and Israel), and
you should consult your tax advisor to determine whether and to what extent you would be entitled to this credit. A U.S. holder
will be denied a foreign tax credit for non-U.S. income taxes withheld from a dividend received on the Ordinary Shares (i) if
the U.S. holder has not held the Ordinary Shares for at least 16 days of the 31-day period beginning on the date which is 15 days
before the ex-dividend date with respect to such dividend; or (ii) to the extent the U.S. holder is under an obligation to make
related payments with respect to positions in substantially similar or related property. Any days during which a U.S. holder has
substantially diminished its risk of loss on the Ordinary Shares are not counted toward meeting the required 16-day holding period.
Taxation
of the disposition of Ordinary Shares
Subject
to the discussion below under “Tax consequences if we are a passive foreign investment company,” upon the sale, exchange
or other disposition of our Ordinary Shares (other than in certain non-recognition transactions), a U.S. holder will recognize
capital gain or loss in an amount equal to the difference between the amount realized on the disposition and the U.S. holder’s
tax basis in the Ordinary Shares. The gain or loss recognized on the disposition of the Ordinary Shares will be considered a long-term
capital gain or loss if the U.S. holder had held the Ordinary Shares for more than one year at the time of the disposition and
otherwise will generally be short-term capital gain or loss. The deductibility of capital losses is subject to limitations. Long-term
capital gains of certain non-corporate shareholders are generally taxed at preferential rates. Gain or loss recognized by a U.S.
holder on a sale, exchange or other disposition of Ordinary Shares generally will be treated as U.S. source income or loss for
U.S. foreign tax credit purposes.
A
U.S. holder that uses the cash method of accounting calculates the U.S. dollar value of the proceeds received on the sale as of
the date that the sale settles. However, a U.S. holder that uses the accrual method of accounting is required to calculate the
value of the proceeds of the sale as of the trade date and may therefore realize foreign currency gain or loss. A U.S. holder
may avoid realizing a foreign currency gain or loss by electing to use the settlement date to determine the proceeds of sale for
purposes of calculating the foreign currency gain or loss. In addition, a U.S. holder that receives foreign currency upon disposition
of Ordinary Shares and converts the foreign currency into U.S. dollars after the settlement date or trade date (whichever date
the U.S. holder is required to use to calculate the value of the proceeds of sale) will have foreign exchange gain or loss based
on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S.
source ordinary income of loss.
Net
Investment Income Tax
Non-corporate
U.S. holders may be subject to an additional 3.8% surtax on all or a portion of their “net investment income”, which
may include dividends on, or capital gains recognized from, the disposition of, our Ordinary Shares. In each case, the 3.8% surtax
applies only to the extent the U.S. holder’s total adjusted income exceeds certain thresholds. U.S. holders are urged to
consult their own tax advisors regarding the implications of the additional Net Investment Income tax on their investment in our
Ordinary Shares.
Tax
consequences if we are a passive foreign investment company
For
U.S. federal income tax purposes, we will be considered a passive foreign investment company, or PFIC, if either (i) 75% or more
of our gross income in a taxable year is passive income; or (ii) 50% or more of the value (determined on the basis of a quarterly
average) of our assets in a taxable year produce or are held for the production of passive income. If we own (directly or indirectly)
at least 25% by value of the stock of another corporation, we will be treated for purposes of the foregoing tests as owning our
proportionate share of that other corporation’s assets and as directly earning our proportionate share of that other corporation’s
income. If we are a PFIC, a U.S. holder must determine under which of three alternative taxing regimes it wishes to be taxed:
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The
“QEF” regime applies if the U.S. holder elects to treat us as a “qualified electing fund” (“QEF”)
for the first taxable year in which the U.S. holder owns our Ordinary Shares or in which we are a PFIC, whichever is later,
and if we comply with certain reporting requirements. A U.S. holder may not make a QEF election with respect to warrants.
If the QEF regime applies, then, for each taxable year that we are a PFIC, such U.S. holder will include in its gross income
a proportionate share of our ordinary earnings (which is taxed as ordinary income) and net capital gain (which is taxed as
long-term capital gain), subject to a separate election to defer payment of taxes, which deferral is subject to an interest
charge. These amounts would be included in income by an electing U.S. holder, whether or not such amounts are actually distributed
to the U.S. holder. A U.S. holder’s basis in our Ordinary Shares for which a QEF election has been made would be increased
to reflect the amount of any taxed but undistributed income. Generally, a QEF election allows an electing U.S. holder to treat
any gain realized on the disposition of his Ordinary Shares as capital gain.
|
If
a QEF election is made after the first taxable year in which a U.S. holder holds our Ordinary Shares and we are a PFIC, then special
rules would apply.
Once
made, the QEF election applies to all subsequent taxable years of the U.S. holder in which it holds our Ordinary Shares and for
which we are a PFIC and can be revoked only with the consent of the IRS.
|
●
|
The
“mark-to-market” regime, may be elected so long as our Ordinary Shares are “marketable stock” (e.g.,
“regulatory traded” on the NASDAQ Global Market). Under current law, a mark-to-market election cannot be made
with respect to warrants. Pursuant to this regime, in any taxable year that we are a PFIC, an electing U.S. holder’s
Ordinary Shares are marked-to-market each taxable year and the U.S. holder recognizes as ordinary income or loss an amount
equal to the difference as of the close of the taxable year between the fair market value of our Ordinary Shares and the U.S.
holder’s adjusted tax basis in our Ordinary Shares. Losses are allowed only to the extent of net mark-to-market gain
previously included by the U.S. holder under the election for prior taxable years. An electing U.S. holder’s adjusted
basis in our Ordinary Shares is increased by income recognized under the mark-to-market election and decreased by the deductions
allowed under the election.
|
Under
the mark-to-market election, in a taxable year in which we are a PFIC, any gain on the sale of our Ordinary Shares is treated
as ordinary income, and any loss on the sale of our Ordinary Shares, to the extent the amount of loss does not exceed the net
mark-to-market gain previously included, is treated as ordinary loss. The mark-to-market election applies to the taxable year
for which the election is made and all later taxable years, unless the Ordinary Shares cease to be marketable stock or the IRS
consents to the revocation of the election.
If
the mark-to-market election is made after the first taxable year in which a U.S. holder holds our Ordinary Shares and we are a
PFIC, then special rules would apply.
|
●
|
A
U.S. holder making neither the QEF election nor the mark-to-market election is subject to the “excess distribution”
regime. Under this regime, “excess distributions” are subject to special tax rules. An excess distribution includes
(i) a distribution with respect to our Ordinary Shares that is greater than 125% of the average distributions received by
the U.S. holder from us over the shorter of either the preceding three taxable years or such U.S. holder’s holding period
for our Ordinary Shares prior to the distribution year; and (ii) gain from the disposition of our Ordinary Shares.
|
Excess
distributions must be allocated ratably to each day that a U.S. holder has held our Ordinary Shares. A U.S. holder must include
amounts allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a PFIC, in
its gross income as ordinary income for that year. All amounts allocated to other taxable years of the U.S. holder would be taxed
at the highest tax rate for each such year applicable to ordinary income and the U.S. holder also would be liable for interest
on the deferred tax liability for each such year calculated as if such liability had been due with respect to each such year.
The portions of gains and distributions that are not characterized as “excess distributions” are subject to tax in
the current taxable year as ordinary income under the normal tax rules of the Code.
A
U.S. person who inherits shares in a foreign corporation that was a PFIC in the hands of the decedent, is generally denied the
otherwise available step-up in the tax basis of such shares to fair market value at the date of death. Instead, such U.S. holder’s
basis would generally be equal to the lesser of the decedent’s basis or the fair market value of the Ordinary Shares on
the date of death. Furthermore, if we are a PFIC, each U.S. holder will generally be required to file an annual report with the
IRS.
Based
on an analysis of our assets and income, we believe that we were not a PFIC for our taxable year ended December 31, 2017. We currently
expect that we will not be a PFIC in 2018. However, PFIC status is determined as of the end of the taxable year and is dependent
on a number of factors, including the relative value of our passive assets and our non-passive assets, our market capitalization
and the amount and type of our gross income. There can be no assurance that we will not become a PFIC for the current taxable
year ending December 31, 2018 or in a future taxable year.
If
we were a PFIC, a U.S. holder could make certain elections that may alleviate certain tax consequences referred to above, and
one of these elections may be made retroactively if certain conditions are satisfied. It is expected that the conditions necessary
for making certain of such elections will apply in the case of our Ordinary Shares. Neither the Company nor its advisors have
the duty to or will undertake to inform U.S. holders of changes in circumstances that would cause the Company to become a PFIC.
The Company does not currently intend to take the action necessary for a U.S. holder to make a “qualified electing fund”
election in the event the Company is determined to be a PFIC.
If
we are determined to be a PFIC, the general tax treatment for U.S. holders described in this section would apply to indirect distributions
and gains deemed to be realized by U.S. holders in respect of any of our subsidiaries that also may be determined to be PFICs.
If
a U.S. holder owns ordinary shares during any year in which we are a PFIC and the U.S. holder recognized gain on a disposition
of our ordinary shares or receives distributions with respect to our ordinary shares, the U.S. holder generally will be required
to file an IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund)
with respect to the Company, generally with the U.S. holder’s federal income tax return for that year. If our Company were
a PFIC for a given taxable year, then you should consult your tax advisor concerning your annual filing requirements.
The
U.S. federal income tax rules relating to PFICs are complex. U.S. holders are urged to consult their own tax advisors with respect
to the acquisition, ownership and disposition of our Ordinary Shares, the consequences to them of an investment in a PFIC, any
elections available with respect to our Ordinary Shares and the IRS information reporting obligations with respect to the acquisition,
ownership and disposition of our Ordinary Shares.
Tax
return disclosure and backup withholding
A
U.S. holder generally is subject to information reporting and may be subject to backup withholding at a rate of 24% with respect
to dividend payments made with respect to, and proceeds from the disposition of, the Ordinary Shares. Backup withholding will
not apply with respect to payments made to exempt recipients, including corporations, or if a U.S. holder provides a correct taxpayer
identification number, certifies that such holder is not subject to backup withholding or otherwise establishes an exemption.
Backup withholding is not an additional tax. It may be claimed as a credit against the U.S. federal income tax liability of a
U.S. holder or the U.S. holder may be eligible for a refund of any excess amounts withheld under the backup withholding rules,
provided, in either case, that the required information is furnished to the Internal Revenue Service.
The
Foreign Account Tax Compliance Act (“FATCA”) generally subjects U.S. individuals that hold certain specified foreign
financial assets (which include stock of a non-U.S. corporation) to U.S. return disclosure obligations (and related penalties
for failure to disclose). The definition of specified foreign financial assets includes not only financial accounts maintained
in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security
issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other
than a U.S. person and any interest in a foreign entity. Such U.S. individuals are required to file IRS Form 8938 with their U.S.
Federal income tax returns, unless an exception applies. Generally, U.S. holders may be subject to these reporting requirements
unless their Ordinary Shares are held in an account at a domestic financial institution or certain other exceptions apply. Penalties
for failure to file certain of these information returns may be substantial. In addition, in the event a 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 holder for the related tax year may not close until three years after the date that the required return information
is filed. Holders should consult their own tax advisors regarding the filing of an IRS Form 8938.
Non-U.S.
Holders of Ordinary Shares
Except
as provided below, a non-U.S. holder of Ordinary Shares will not be subject to U.S. federal income or withholding tax on the receipt
of dividends on, and the proceeds from the disposition of, an Ordinary Share, unless that item is effectively connected with the
conduct by the non-U.S. holder of a trade or business in the United States and, in the case of a resident of a country which has
an income tax treaty with the United States, that item is attributable to a permanent establishment in the United States or, in
the case of an individual, a fixed place of business in the United States. In addition, gain recognized by an individual non-U.S.
holder on the disposition of the Ordinary Shares will be subject to tax in the United States, if such non-U.S. holder is present
in the United States for 183 days or more during the taxable year of the sale and other conditions are met.
Non-U.S.
holders are generally not subject to information reporting or backup withholding with respect to the payment of dividends on,
or proceeds from the disposition of, Ordinary Shares, provided that the non-U.S. holder provides its taxpayer identification number,
certifies to its foreign status or otherwise establishes an exemption.
A
non-U.S. holder will be required to provide a certificate of non-U.S. status on an appropriate IRS Form W-8.
10F.
|
Dividends and Paying Agents
|
Not
applicable.
10G.
|
Statement by Experts
|
Not
applicable.
10H.
|
Documents on Display
|
The
documents concerning the Company that are referred to in the form may be inspected at the Company’s office in Israel.
10I.
|
Subsidiary Information
|
For
information relating to the Company’s subsidiaries, see “Item 4C. Organizational Structure” as well as the Company’s
Consolidated Financial Statements (Items 8 and 18 of this form).
Item
11:
Quantitative and Qualitative Disclosure about Market Risk
Market
risk represents the risk of changes in the value of our financial instruments caused by fluctuations in interest rates, foreign
exchange rates and equity prices. We do not engage in trading market-risk instruments or purchase hedging or “other than
trading” instruments that are likely to expose us to market risk, whether interest rate, commodity price or equity price
risk. We have purchased forward contracts but do not use derivative financial instruments for speculative trading purposes.
Foreign
Currency Exchange Rate Risk
We
are exposed to currency transaction risks because some of our expenses are incurred in a different currency from the currency
in which our revenues are received. Our most significant currency exposures are to the NIS. In periods when the U.S. dollar is
significantly devaluated against the NIS, our reported results of operations may be adversely affected. The Company enters into
foreign currency contracts, with financial institutions to reduce the risk of exchange rate fluctuations. Such contracts are not
designated as hedging instruments. From time to time, the Company recognizes derivative instruments as either assets or liabilities
on the balance sheet at fair value.
“Derivatives
and Hedging” (“ASC 815”), as amended, requires the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value through income (loss). If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value
of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately recognized
in earnings.
The
Company entered into forward contracts to hedge against the risk of changes in future cash flow from payments of payroll and related
expenses denominated in Israeli Shekels. These contracts are designated as cash flows hedges, as defined by ASC 815, and are considered
highly effective as hedges of these expenses. As of December 31, 2017 and 2016, and during the periods then ended, the impact
on the Company’s financial statements of these forward contracts amounted to an income of $148,000 and expenses of $1,000,
respectively.
In
addition, the Company's entered into forward contracts in order to hedge the exposure to variability in expected future cash flows
resulting from changes in related foreign currency exchange rates. These contracts did not meet the requirement for hedge accounting.
The amount recorded as financial loss related to these contracts in 2017, 2016 and 2015 was $(160,000), $(6,000) and
$
(45,000),
respectively.
Although
from time to time we enter into foreign currency contracts to reduce currency transaction risk, these transactions will not eliminate
translation risk or all currency risk. For information concerning risk factors related to Foreign Currency Exchange see “Item
3D - Risk Factors.”
Credit
Risk Management
The
Company sells its products and purchases products from vendors on credit terms.
The
trade receivables of the Company are derived from sales to customers located primarily in Israel, India and the Far East. The
Company generally does not require collateral, however certain of the Company’s customers outside of Israel are insured
against customer nonpayment through the Israeli Credit Insurance Company Ltd. and, in certain circumstances, the Company may require
letters of credit, advanced payments, or other collateral.
Provisions
are made for doubtful debts on a specific basis and, in management’s opinion, appropriately reflect the loss inherent in
collection of the debts. Management bases this provision on its assessment of the risk of the debt.
The
table below presents the account receivables balance by geographical market as of December 31, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Israel and others
|
|
$
|
7,333,000
|
|
|
$
|
6,474,000
|
|
India
|
|
$
|
2,190,000
|
|
|
$
|
1,258,000
|
|
Far East
|
|
$
|
138,000
|
|
|
$
|
96,000
|
|
Americas
|
|
$
|
104,000
|
|
|
$
|
77,000
|
|
Europe
|
|
$
|
439,000
|
|
|
$
|
23,000
|
|
|
|
$
|
9,804,000
|
|
|
$
|
7,928,000
|
|
Interest
Rate Risk
The
Company's exposure to market risk for changes in interest rates is due to loans that carry variable interest.
A
material change in the interest rate payable on our loans may have a material adverse effect on the Company’s financial
results and cash flow. In the event that interest rates associated with the Company’s variable rate borrowings were to increase
100 basis points, the after tax impact on future cash flows would be a decrease of $30,000.
Bank
Risk
The
Company manages its loans in Bank Beinleumi, which provides credit to the Company’s Israeli subsidiaries. In case of the
termination or expiration of our credit lines, deterioration in our relations with our bank or adverse changes in the financial
position of the bank, our liquidity could be materially adversely affected.
Item
12:
Description of Securities Other than Equity Securities
Not
applicable.
The accompanying notes are an integral
part of the consolidated financial statements.
CONSOLIDATED
BALANCE SHEETS
U.S. dollars in thousands, except share
and per share data
|
|
December 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term loans
|
|
$
|
505
|
|
|
$
|
400
|
|
Trade payables
|
|
|
5,951
|
|
|
|
4,601
|
|
Employees and payroll accruals
|
|
|
822
|
|
|
|
677
|
|
Deferred revenues
|
|
|
798
|
|
|
|
680
|
|
Accrued expenses and other liabilities
|
|
|
304
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
8,380
|
|
|
|
6,617
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Long-term loans, net of current maturities
|
|
|
2,523
|
|
|
|
2,734
|
|
Accrued severance pay
|
|
|
286
|
|
|
|
194
|
|
Deferred gain
|
|
|
-
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
2,809
|
|
|
|
2,943
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Share capital:
|
|
|
|
|
|
|
|
|
Ordinary Shares of NIS 80.00 nominal value: Authorized; 4,000,000 shares at December 31, 2017 and 2016; Issued and outstanding: 3,356,689 and 2,935,286 shares at December 31, 2017 and 2016, respectively
|
|
|
70,855
|
|
|
|
61,488
|
|
Additional paid-in capital
|
|
|
9,415
|
|
|
|
17,976
|
|
Accumulated other comprehensive loss
|
|
|
(220
|
)
|
|
|
(275
|
)
|
Accumulated deficit
|
|
|
(69,832
|
)
|
|
|
(70,605
|
)
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
|
|
10,218
|
|
|
|
8,584
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
21,407
|
|
|
$
|
18,144
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
March 29 , 2018
|
|
|
|
|
|
|
Date of approval of the
|
|
|
|
|
|
|
financial statements
|
|
|
|
|
|
|
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
U.S. dollars in thousands
|
|
Year
ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
28,932
|
|
|
$
|
27,427
|
|
|
$
|
25,599
|
|
Cost of revenues
|
|
|
22,587
|
|
|
|
22,112
|
|
|
|
20,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,345
|
|
|
|
5,315
|
|
|
|
5,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
3,389
|
|
|
|
3,111
|
|
|
|
2,768
|
|
General and administrative
|
|
|
1,870
|
|
|
|
1,498
|
|
|
|
1,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating costs and expenses
|
|
|
5,259
|
|
|
|
4,609
|
|
|
|
4,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,086
|
|
|
|
706
|
|
|
|
688
|
|
Financial expenses, net
|
|
|
(297
|
)
|
|
|
(339
|
)
|
|
|
(376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
|
789
|
|
|
|
367
|
|
|
|
312
|
|
Taxes on income (tax benefit)
|
|
|
16
|
|
|
|
7
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
773
|
|
|
$
|
360
|
|
|
$
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net Income per share
|
|
$
|
0.24
|
|
|
$
|
0.14
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (in thousands) used in calculation of earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,171
|
|
|
|
2,587
|
|
|
|
1,970
|
|
Diluted
|
|
|
3,171
|
|
|
|
2,593
|
|
|
|
1,970
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
U.S. dollars in thousands
|
|
Year
ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
773
|
|
|
$
|
360
|
|
|
$
|
334
|
|
Cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains and losses
|
|
|
(93
|
)
|
|
|
(15
|
)
|
|
|
108
|
|
Gain (loss) in respect of derivative instruments designated for cash flow hedge, net of taxes
|
|
|
148
|
|
|
|
(1
|
)
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gain (loss)
|
|
|
55
|
|
|
|
(16
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
828
|
|
|
$
|
344
|
|
|
$
|
318
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
STATEMENTS
OF CHANGES IN SHAREHOLDERS’ EQUITY
U.S. dollars in thousands, except share
data
|
|
Ordinary Shares
|
|
|
Share capital and additional paid-in capital
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
Accumulated deficit
|
|
|
Total shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2015
|
|
|
1,802,692
|
|
|
$
|
76,839
|
|
|
$
|
(243
|
)
|
|
$
|
(71,299
|
)
|
|
$
|
5,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Ordinary Shares
|
|
|
385,511
|
|
|
|
760
|
|
|
|
-
|
|
|
|
-
|
|
|
|
760
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
(16
|
)
|
Share-based compensation expense
|
|
|
4,065
|
|
|
|
130
|
|
|
|
-
|
|
|
|
-
|
|
|
|
130
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
334
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
2,192,268
|
|
|
$
|
77,729
|
|
|
$
|
(259
|
)
|
|
$
|
(70,965
|
)
|
|
$
|
6,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Ordinary Shares
|
|
|
570,284
|
|
|
|
1,283
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,283
|
|
Exercise of options
|
|
|
10,000
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
Issuance of ordinary shares related to acquisition
|
|
|
162,734
|
|
|
|
298
|
|
|
|
-
|
|
|
|
-
|
|
|
|
298
|
|
Other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
(16
|
)
|
Share-based compensation expense
|
|
|
-
|
|
|
|
124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
124
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
360
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
2,935,286
|
|
|
$
|
79,464
|
|
|
$
|
(275
|
)
|
|
$
|
(70,605
|
)
|
|
$
|
8,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Ordinary Shares
|
|
|
421,403
|
|
|
|
746
|
|
|
|
-
|
|
|
|
-
|
|
|
|
746
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
|
|
55
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
60
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
773
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
3,356,689
|
|
|
$
|
80,270
|
|
|
$
|
(220
|
)
|
|
$
|
(69,832
|
)
|
|
$
|
10,218
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
|
|
Year
ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
773
|
|
|
$
|
360
|
|
|
$
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
245
|
|
|
|
248
|
|
|
|
205
|
|
Gain from sale and disposal of property and equipment
|
|
|
(10
|
)
|
|
|
(14
|
)
|
|
|
-
|
|
Currency fluctuation of deposits and loans
|
|
|
242
|
|
|
|
70
|
|
|
|
(16
|
)
|
Severance pay, net
|
|
|
92
|
|
|
|
39
|
|
|
|
29
|
|
Share-based compensation expense
|
|
|
60
|
|
|
|
124
|
|
|
|
130
|
|
Issuance of shares to service provider
|
|
|
-
|
|
|
|
23
|
|
|
|
-
|
|
Change in fair value of contingent consideration related to acquisition
|
|
|
-
|
|
|
|
(178
|
)
|
|
|
-
|
|
Increase in trade receivables, net
|
|
|
(1,876
|
)
|
|
|
(857
|
)
|
|
|
(927
|
)
|
Decrease (Increase) in inventories in other accounts receivable and other assets
|
|
|
58
|
|
|
|
(274
|
)
|
|
|
(235
|
)
|
Decrease (Increase) in inventories
|
|
|
(926
|
)
|
|
|
189
|
|
|
|
340
|
|
Increase (decrease) in trade payables
|
|
|
1,350
|
|
|
|
(70
|
)
|
|
|
203
|
|
Increase (decrease) in employees and payroll accruals, deferred revenues, accrued expenses and other liabilities
|
|
|
347
|
|
|
|
(21
|
)
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
355
|
|
|
|
(361
|
)
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(368
|
)
|
|
|
(139
|
)
|
|
|
(66
|
)
|
Proceeds from sale of property and equipment
|
|
|
53
|
|
|
|
15
|
|
|
|
-
|
|
Change in long-term bank deposits
|
|
|
(29
|
)
|
|
|
10
|
|
|
|
275
|
|
Acquisition of business
|
|
|
-
|
|
|
|
(154
|
)
|
|
|
-
|
|
Change in loan granted related to acquisition of business
|
|
|
-
|
|
|
|
-
|
|
|
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(344
|
)
|
|
|
(268
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of shares, net
|
|
|
606
|
|
|
|
1,260
|
|
|
|
760
|
|
Proceeds from exercise of options
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
Repayment of deferred consideration related to the Dimex acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
(59
|
)
|
Proceeds from long term loan
|
|
|
2,976
|
|
|
|
3,680
|
|
|
|
-
|
|
Repayment of long-term loans
|
|
|
(3,346
|
)
|
|
|
-
|
|
|
|
-
|
|
Repayment of short and long-term loans
|
|
|
-
|
|
|
|
(4,474
|
)
|
|
|
(1,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
236
|
|
|
|
496
|
|
|
|
(426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
247
|
|
|
|
(133
|
)
|
|
|
(103
|
)
|
Cash and cash equivalents at the beginning of the year
|
|
|
1,286
|
|
|
|
1,419
|
|
|
|
1,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
$
|
1,533
|
|
|
$
|
1,286
|
|
|
$
|
1,419
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
|
|
Year
ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Net cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
161
|
|
|
$
|
190
|
|
|
$
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
7
|
|
|
$
|
12
|
|
|
$
|
13
|
|
|
(a)
|
Acquisition of iDnext Ltd. And Next-Line Ltd.:
|
|
Fair value of net tangible assets acquired at acquisition date
|
|
$
|
-
|
|
|
$
|
80
|
|
|
$
|
-
|
|
|
Fair value of net intangible assets acquired at acquisition date
|
|
$
|
-
|
|
|
$
|
806
|
|
|
$
|
-
|
|
|
Less- amount acquired by converting loan into shares
|
|
$
|
-
|
|
|
$
|
(256
|
)
|
|
$
|
-
|
|
|
Less-Contingent consideration on account of acquisition
|
|
$
|
-
|
|
|
$
|
(178
|
)
|
|
$
|
-
|
|
|
Less- amount acquired by issuance of shares
|
|
$
|
-
|
|
|
$
|
(298
|
)
|
|
$
|
-
|
|
|
Net cash used to pay for Acquisition of iDnext Ltd. and Next-Line Ltd.
|
|
$
|
-
|
|
|
$
|
154
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
a.
|
B.O.S. Better Online Solutions Ltd. (“BOS” or the “Company”) is an Israeli
corporation.
|
The
Company’s shares are listed on NASDAQ under the ticker BOSC.
|
b.
|
The Company has two operating segments: the RFID and Mobile Solutions segment, and the Supply Chain
Solutions segment (see Note 18).
|
The Company’s
wholly-owned subsidiaries include:
|
1.
|
BOS-Dimex Ltd., (“BOS-Dimex”), an Israeli company
that provides comprehensive turn-key solutions for Automatic Identification and Data Collection (AIDC), combining a mobile infrastructure
with software application of manufacturers that we represent. In addition, following the acquisition in January 2016 by BOS-Dimex
of the business operations of iDnext Ltd. and its subsidiary Next-Line Ltd., BOS-Dimex also offers on-site inventory count services
in the fields of apparel, food, convenience and pharma, asset tagging and counting services for corporate and governmental entities.
BOS-Dimex comprises the RFID and Mobile Solutions segment.
|
|
2.
|
BOS-Odem Ltd. (“BOS-Odem”), an Israeli company, is a distributor of electronic components
to customers in the defense high technology industry and a supply chain service provider for aviation customers that seek a comprehensive
solution to their components-supply needs. BOS-Odem is part of the Supply Chain Solutions segment; and
|
|
3.
|
Ruby-Tech Inc., a New York corporation, a wholly-owned subsidiary of BOS-Odem and a part of the
Supply Chain Solutions segment.
|
|
c.
|
In October 2017, the Company and its Israeli subsidiaries entered into an agreement with an Israeli
Bank for the provision of credit facilities in order to refinance the Company’s long term loans. Refer to Note 13 for further information.
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES
|
The consolidated
financial statements are prepared in accordance with the United States generally accepted accounting principles (“U.S. GAAP”).
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. The most significant assumptions are used in determining values of goodwill
and identifiable intangible assets, revenues and the net realizable value of inventory. Actual results could differ from those
estimates.
|
b.
|
Financial statements in U.S. dollars:
|
A substantial
portion of the Company’s revenues is denominated in U.S. dollars (“dollars”). The Company’s management believes that
the dollar is the primary currency of the economic environment in which the Company operates. Thus, the functional and reporting
Currency of the Company is the dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are re
-
measured
into dollars in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
830,
Foreign Currency Matters
. All transactions gains and losses from the measurement of monetary balance sheet items are
reflected in the statement of operations as financial income or expenses as appropriate.
B.O.S. BETTER ONLINE SOLUTIONS 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.)
|
|
c.
|
Principles of consolidation:
|
The consolidated
financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and balances, including
profits from intercompany sales not yet realized outside the Company, have been eliminated upon consolidation.
Cash equivalents
are short-term highly liquid investments with original maturities of less than three months from date of purchase.
|
e.
|
Restricted bank deposits:
|
Restricted
bank deposits are deposits related to forward contracts with banks. Restricted deposits are presented at their cost.
The inventory
is valued at the lower of cost or net realizable value. Cost is determined using the moving average cost method. In 2017 and 2016,
inventory write-offs amounted to $75 and $92, respectively.
Inventory
write-offs and write-downs are provided to cover risks arising from slow-moving items or technological obsolescence.
|
g.
|
Property and equipment, net:
|
Property and equipment
are stated at cost, net of accumulated depreciation. Depreciation is calculated by using the straight-line method over the estimated
useful lives of the assets, at the following annual rates:
|
|
|
%
|
|
|
|
|
|
|
|
|
|
Computers and software
|
|
20 - 33
|
|
(Mainly 33)
|
|
Office furniture and equipment
|
|
6 - 15
|
|
(Mainly 6)
|
|
Leasehold improvements
|
|
Over the shorter of the period
of the lease or the life of the assets
|
|
|
|
Motor vehicles
|
|
15
|
|
|
The
consolidated financial statements include the operations of an acquired business from the date of the acquisition’s consummation.
Acquired businesses are accounted for using the acquisition method of accounting in accordance with ASC No. 805, “Business
Combinations”, which requires, among other things, that most assets acquired and liabilities assumed be recognized at their
estimated fair values as of the acquisition date. Transaction costs are expensed as incurred. Any excess of the consideration transferred
over the assigned values of the net assets acquired is recorded as goodwill. Contingent consideration incurred in a business combination
is included as part of the acquisition price and recorded at a probability weighted assessment of its fair value as of the acquisition
date. The fair value of the contingent consideration is re-measured at each reporting period, with any adjustments in fair value
recognized in earnings.
B.O.S. BETTER ONLINE SOLUTIONS 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.)
|
|
i.
|
Impairment of long-lived assets and intangible assets subject to amortization:
|
The Company’s
long-lived assets are reviewed for impairment in accordance with ASC 360-10,
Accounting for the Impairment or Disposal of Long-Lived
Asset
, whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset (or asset
group) to the future undiscounted cash flows expected to be generated by the assets (or asset group). If such assets are considered
to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds their
fair value.
Recoverability of intangible
assets is measured by a comparison of the carrying amount of the asset to the undiscounted future cash flows expected to be generated
by the asset. If intangible assets are considered to be impaired, the amount of any impairment is measured as the difference between
the carrying value and the fair value of the impaired assets.
Intangible assets with finite lives are amortized
using the straight-line basis over their useful lives, to reflect the pattern in which the economic benefits of the intangible
assets are consumed or otherwise used up. As of December 31, 2017 the remaining intangible assets were comprised of software and
costumer relationship (see Note 8).
For each of the three years
ended on December 31, 2017, 2016 and 2015, no impairment losses were identified.
Goodwill
represents excess of the costs over the net assets of businesses acquired. Under ASC 350,
Intangibles - Goodwill and Other
(“ASC 350”), goodwill is not amortized but instead is tested for impairment at least annually or between annual tests
in certain circumstances, and written-down when impaired.
The Company
performs its annual impairment analysis of goodwill as of December 31 of each year, or more often if indicators of impairment are
present. The provisions of ASC 350 require that a two-step impairment test be performed on goodwill at the level of the reporting
units. In the first step, or “Step 1”, the Company compares the fair value of each reporting unit to its carrying value.
If the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired, and the Company is not required
to perform further testing. If the carrying value of the net assets exceeds the fair value, then the Company must perform the second
step, or “Step 2”, of the impairment test in order to determine the implied fair value of goodwill. To determine the
fair value used in Step 1, the Company uses discounted cash flows. If and when the Company is required to perform a Step 2 analysis,
determining the fair value of its net assets and its off-balance sheet intangibles would require it to make judgments that involve
the use of significant estimates and assumptions.
The Company
operates in two operating-based segments: RFID and Mobile Solutions and Supply Chain Solutions. The Company’s goodwill is related
to the RFID and Mobile Solutions segment, which represents a reporting unit as a whole.
The Company determined the
fair value of such reporting unit using the Income Approach, which utilizes a discounted cash flow model, as it believes that
this approach best approximates the reporting unit’s fair value at this time. The impairment test was based on a
valuation performed by management with the assistance of a third party appraiser. Judgments and assumptions related to
revenue, operating income, future short-term and long-term growth rates, weighted average cost of capital, interest,
capital expenditures, cash flows, and market conditions are inherent in developing the discounted cash flow model. The
material assumptions used for the Income Approach for 2017 were five years of projected net cash flows, WACC of 15% and a
long-term growth rate of 2%. The Company considered historical rates and current market conditions when determining the
discount and growth rates to use in its analyses. If these estimates or their related assumptions change in the future, the
Company may be required to record impairment charges for its goodwill.
B.O.S. BETTER ONLINE SOLUTIONS 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 aggregate fair value of
the RFID and Mobile Solutions segment depends on various factors, some of which are qualitative and involve management judgment,
including stable backlog coverage and experience in meeting operating cash flow targets.
During years
2017, 2016 and 2015 no impairment losses have been identified.
The Company’s
liability for severance pay for its Israeli employees is calculated pursuant to the Israeli Severance Pay Law - 1963 (the “Israeli
Severance Pay Law”), based on the most recent salary of the employees multiplied by the number of years of employment as of
the balance sheet date. Employees employed for a period of more than one year are entitled to one month’s salary for each year
of employment or a portion thereof. The Company’s liability for its Israeli employees is mostly covered by insurance or pension
policies designed solely for distributing severance pay.
Most of the
Company’s employees are subject to Section 14 of the Israeli Severance Pay Law. The Company’s contributions towards severance pay,
for Israeli employees subject to this section, have replaced its severance obligation. Upon contribution of the full amount of
the employee’s monthly salary for each year of service, no additional calculations are conducted between the parties regarding
the matter of severance pay and no additional payments are required to be made by the Company to the employee in respect of severance
pay. Further, the related obligation and amounts deposited on behalf of the employee for such obligation are not stated on the
balance sheet, as the Company is legally released from the obligation to employees once the deposit amounts have been paid.
Severance
expenses for years 2017, 2016 and 2015 amounted to $451, $ 240 and $ 202, respectively.
The Company
derives its revenues mainly from the sale of products and supporting services.
In accordance
with ASC Topic 605 “Revenue Recognition”, the Company recognizes revenues from sale of products when the following
fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been
rendered; (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting receivable is reasonably
assured.
Revenues
from service contracts are recognized ratably over the service period.
The Company
applies the provisions of ASC Topic 605-25, “Revenue Recognition - Multiple-Element Arrangements”, as amended. ASC Topic
605-25 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products and services.
For such arrangements, each element of the contract is accounted for as a separate unit when it provides the customer value on
a stand-alone basis.
the Company
follows the guidance in ASC 605-35, “Revenue Recognition - Construction-Type and Production-Type Contracts” (“ASC
605-35”), with respect to revenues from customized software solutions, whereby the Company applies the completed contract
method, since the Company is unable to obtain reasonable dependable estimates of the total effort required for completion . Under
the completed contract method, all revenue and related costs of revenue are deferred
and recognized upon completion. Provisions for estimated losses on contracts in process are recognized in the period such losses
are determined.
B.O.S. BETTER ONLINE SOLUTIONS 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.)
|
Deferred
revenues include unearned amounts received from customers (mostly for service contracts, software projects and advances from customers)
but not yet recognized as revenues. Deferred revenues from service contracts are recognized over the period of the contract
and advances are recognized once the delivery of the products is done.
The Company
and its subsidiaries account for income taxes in accordance with ASC 740,
Income Taxes
(“ASC 740”). ASC 740 prescribes
the use of the liability method whereby deferred tax assets and liability account balances are determined based on the differences
between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance,
if necessary, to reduce deferred tax assets to the amounts that are more likely than not to be realized. Interest expense and potential
penalties related to income taxes are included in the tax expense line of the Company’s Consolidated Statements of Operations.
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 for recognition by determining if the weight of available evidence indicates it is more
likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes,
if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon
ultimate settlement.
|
n.
|
Concentrations of credit risk and allowance for doubtful accounts:
|
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents,
bank deposits, trade receivables, other accounts receivable and foreign currency derivative contracts.
The trade
receivables of the Company are derived from sales to customers located primarily in Israel, the Far East, Europe and America. The
Company generally does not require collateral; however a significant part of the Company’s customers outside of Israel are insured
against customer nonpayment, through the Israeli Credit Insurance Company Ltd. In certain circumstances, the Company may require
letters of credit, other collateral, additional guarantees or advanced payments. An allowance for doubtful accounts is determined
with respect to specific debts that are doubtful of collection. The expenses (income) related to the allowance for doubtful accounts
for the years ended December 31, 2017, 2016 and 2015, is $27, $10 and $(85), respectively.
The
Company and its subsidiaries are involved in certain legal proceedings that arise from time to time in the ordinary course of their
business and in connection with certain agreements with third parties. Except for income tax contingencies, the Company records
accruals for contingencies to the extent that the management concludes that the occurrence is probable and that the related liabilities
are estimable. Legal expenses associated with contingencies are expensed as incurred.
|
p.
|
Derivative financial instruments:
|
ASC 815 requires the presentation
of all derivatives as either assets or liabilities on the balance sheet and the measurement of those instruments at fair value.
B.O.S. BETTER ONLINE SOLUTIONS 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.)
|
For derivative instruments that
are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component
of other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods during which the
hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change
in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.
See Note 11 for disclosure of the derivative financial instruments in accordance with such pronouncements.
For
other derivatives which do not qualify for hedge accounting, or which have not been designated as hedging instruments, are recognized
in the balance sheet at their fair value, with changes in the fair value carried to the statements of income as incurred in financing
income (expenses), net.
|
q.
|
Basic and diluted net income per share:
|
Basic
net income per share is calculated based on the weighted average number of Ordinary Shares outstanding during each year.
Diluted net income per share is calculated based on the weighted average number of Ordinary Shares outstanding during each
year, plus the potential dilution to Ordinary Shares considered outstanding during the year, in accordance with ASC 260,
Earning
per Share
.
The total
number of Ordinary Shares related to outstanding options and warrants that was excluded from the calculations of diluted net earnings
per share, since they would have an anti-dilutive effect, was 314,125, 283,670 and 404,894 for the years ended December 31, 2017,
2016, and December 31, 2015, respectively.
|
r.
|
Accounting for share-based compensation:
|
The Company
accounts for equity-based compensation in accordance with ASC 718,
Stock Compensation
(“ASC 718”), which requires
the recognition of compensation expenses based on estimated fair values for all equity-based awards made to employees and directors.
ASC 718 requires
companies to estimate the fair value of equity-based payment awards on the date of grant using an option pricing model. The value
of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods
in the Company’s consolidated statements 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, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based
on actual historical pre-vesting forfeitures. The Company considers many factors when estimating forfeitures, including employee
class and historical experience.
The Company
estimates the fair value of stock options granted using the Black-Scholes option pricing model. The option-pricing model requires
a number of assumptions, of which the most significant are expected stock price volatility and the expected option term. Expected
volatility was calculated based upon actual historical stock price movements over the most recent periods ending on the date of
grant, equal to the expected option terms. The expected option term represents the period that the Company’s stock options are
expected to be outstanding and was determined based on the simplified method permitted by the SEC’s Staff Accounting Bulletin
(“SAB”) No.107 and extended by SAB 110 as the average of the vesting period and the contractual term. The Company currently
uses the simplified method as adequate historical experience is not available to provide a reasonable estimate.
B.O.S. BETTER ONLINE SOLUTIONS 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 is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. The Company has historically
not paid dividends and has no foreseeable plans to pay dividends.
The fair
value for options granted in years 2017, 2016 and 2015 was estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
|
|
|
Year ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest
|
|
|
2.05
|
%
|
|
|
1.09
|
%
|
|
|
1.13
|
%
|
|
Dividend yields
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Volatility
|
|
|
57
|
%
|
|
|
85
|
%
|
|
|
76
|
%
|
|
Expected option term
|
|
|
3.5 years
|
|
|
|
3.5 years
|
|
|
|
3.8 years
|
|
|
Forfeiture rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The Company
applies ASC 505-50, Equity-Based Payments to Non-Employees (“ASC 505”) with respect to options and warrants issued to
non-employees, which requires the use of option valuation models to measure the fair value of the options and warrants at the measurement
date.
|
s.
|
Fair value of measurements:
|
The Company
measures fair value and discloses fair value measurements for financial and non-financial assets and liabilities.
The Company
also measures certain non-financial assets, consisting mainly of goodwill and intangible assets at fair value on a nonrecurring
basis. These assets are adjusted to fair value when they are considered to be impaired (see Note 8). As of
December 31, 2017 the Company measured the fair value of goodwill with a total carrying amount of US$ 4.7 million that
is allocated to one reporting unit. The evaluation provided that there is no need to recognize impairment. The fair value measurement
of the non-financial assets is classified as level 3.
The Company
applies ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), pursuant to which fair value is defined as the
price that would be received in consideration for the sale of an asset or paid for the transfer of a liability (i.e., the “exit
price”) in an orderly transaction between market participants at the measurement date.
In
determining fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring
that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in
pricing the asset or liability developed based on market data obtained from sources independent of the Company.
Unobservable
inputs are inputs that the Company assumes market participants would use in pricing the asset or liability developed based on the
best information available under the circumstances.
In accordance
with ASC 820, derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market
observable data of similar instruments.
The Company’s
financial liabilities and assets measured at fair value on a recurring basis, consisted of derivatives (foreign currency forward
contracts and hedging contracts) which were classified within Level 2 and amounted to $ 30 and $ 32 liability as of December
31, 2017 and 2016, respectively.
B.O.S. BETTER ONLINE SOLUTIONS 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
fair value hierarchy is broken down into three levels based on the inputs as follows:
|
Level 1 -
|
Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date.
|
|
|
|
|
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 carrying
amounts of cash and cash equivalents, restricted cash, restricted bank deposits, other accounts receivable, trade payables, and
other accounts payable and accrued expenses approximate their fair values due to the short-term maturities of such instruments.
|
t.
|
New and recent accounting pronouncements:
|
Accounting
Standards Update 2015-11, “Simplifying the Measurement of Inventory”
Effective
January 1, 2017, the Company adopted ASU No. 2015-11, simplifying the Measurement of Inventory (Topic 330) (“ASU 2015- 11”).
ASU 2015-11
outlines that inventory within the scope of its guidance be measured at the lower of cost and net realizable value. Inventory
measured using last-in, first-out (LIFO) and the retail inventory method (RIM) are not impacted by the new guidance. Prior
to the
issuance
of ASU 2015-11, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling
of net realizable value and floor of net realizable value less a normal profit margin).
The adoption
of ASU 2015-11 did not have a significant effect on the consolidated financial statements.
Accounting
Standards Update 2016-09 “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”
Effective
January 2017, the Company adopted Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based
payments and affect all organizations that issue share-based payment awards to their employees.
Several aspects
of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification
of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments also simplify
two areas specific to private companies.
The adoption
of this ASU did not have a significant impact on the consolidated financial statements.
Accounting
Standards Update 2014-09, “Revenue from Contracts with Customers”
In May 2014,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, Revenue from Contracts
with Customers (Topic 606) (“ASU 2014-09”).
B.O.S. BETTER ONLINE SOLUTIONS 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.)
|
ASU 2014-09
outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most
current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose
sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount,
timing and uncertainty of revenue and cash flows arising from contracts with customers.
An
entity should apply the amendments in ASU 2014-09 using one of the following two methods: 1. Retrospectively to each
prior reporting period presented with a possibility to elect certain practical expedients, or, 2. Retrospectively with the
cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects
the latter transition method, it also should provide certain additional disclosures.
During 2016,
the FASB issued several Accounting Standards Updates (“ASUs”) that focus on certain implementation issues of the new
revenue recognition guidance including Narrow-Scope Improvements, Practical Expedients and technical corrections.
In accordance
with an amendment to ASU 2014-09, introduced by Accounting Standard 2015-14, “Revenue from contracts with Customers –
Deferral of the Effective Date”, for a public entity, the amendments in ASU 2014-09 are effective for annual reporting periods
beginning after December 15, 2017, including interim periods within that reporting period (the first quarter of fiscal year 2018
for the Company). Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016,
including interim reporting periods within that reporting period.
The Company
intends to adopt ASU 2014-09 as of January 1, 2018.
The Company
evaluated the impact of ASU 2014-09 on its revenue streams and selling contracts, if any, and on its financial reporting and disclosures
and on the business processes, controls and systems.
Based on
such evaluation, management believes that the adoption of ASU 2014-09 will not have a significant impact on its consolidated financial
statements.
Accounting
Standards Update 2016-02, “Leases (Topic 842): Section A – Leases: Amendments to the FASB Accounting Standards Codification;
Section B – Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification; Section C
– Background Information and Basis for Conclusions”
In February,
2016, the FASB issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).
Under the
new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the
commencement date: 1. A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured
on a discounted basis; and, 2. A right-of-use asset, which is an asset that represents the lessee’s right to use, or control
the use of, a specified asset for the lease term.
Under the
new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor
accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified
the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.
Lessees will no longer be provided with a source of off-balance sheet financing.
B.O.S. BETTER ONLINE SOLUTIONS 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.)
|
Public business
entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years (i.e., January 1, 2019, for a calendar year Company). Early application is permitted for all public business
entities upon issuance.
Lessees (for
capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired
before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.
The Company
is in the process of assessing the impact, if any, of ASU 2016-02 on its consolidated financial statements.
Accounting
Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments”
In June 2016,
the FASB issued ASC Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments.”
ASC Update
2016-13 revised the criteria for the measurement, recognition, and reporting of credit losses on financial instruments to be recognized
when expected. This update is effective for fiscal years beginning after December 15, 2019, including the interim periods within
those years, with early adoption permitted for fiscal years beginning after December 15, 2018, including interim periods within
those years.
The Company
is in the process of evaluating the effect that ASU 2016-13 will have on the results of operations and financial statements, if
any.
Accounting
Standards Update 2017-04 “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”
In January
2017, the FASB issued ASC Update 2017-4, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment.”
To simplify
the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim,
goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge
should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from
any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment
loss, if applicable.
The amendments
also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment
and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform
the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
The amendments
should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon
transition.
B.O.S. BETTER ONLINE SOLUTIONS 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.)
|
A public
business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments for its annual or any
interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
Early adoption
is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
The Company
is evaluating the impact of ASU 2017-4 on its goodwill impairment valuation.
Accounting
Standards Update 2017-12 “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”
In August
2017, the FASB issued ASC Update 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging
Activities. (ASU 2017-12)”
ASU 2017-12,
amends the hedge accounting recognition and presentation requirements in ASC 815 in order to (1) improve the transparency
and understandability of information conveyed to financial statement users about an entity’s risk management activities
by better aligning the entity’s financial reporting for hedging relationships with those risk management activities
and (2) reduce the complexity of and simplify the application of hedge accounting by preparers.
ASU
2017-12 eliminates the concept of separately recognizing periodic hedge ineffectiveness for cash flow and net investment
hedges. Accordingly, the impact of both the effective and ineffective components of a hedging relationship will be recognized
in the same financial reporting period and in the same income statement line item. Also, the guidance in ASU 2017-12 includes
certain targeted improvements to existing guidance on quantitative and qualitative assessments of initial and ongoing hedge
effectiveness.
The transition
guidance in ASU 2017-12 requires an entity to apply the amendments using a modified retrospective approach to hedging relationships
that exist as of the date of adoption by recording a cumulative-effect adjustment to the opening balance of retained earnings as
of the most recent period presented. Entities must apply the new and modified disclosure requirements prospectively from the date
of adoption.
For public
business entities, the guidance in ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 and for interim
periods within those fiscal years. For all other entities, the guidance is effective for fiscal years beginning after December
15, 2019 and for interim periods within fiscal years beginning after December 15, 2020. Early application of the guidance is permitted,
including in an interim reporting period. If adopting the guidance in an interim reporting period, an entity must reflect the effect
of the adoption as of the beginning of the fiscal year that includes the interim reporting period in which the guidance is adopted.
The Company
is evaluating the impact of the amendments on its consolidated financial statements.
|
NOTE 3:-
|
ACQUISITION OF BUSINESS
|
On January 1, 2016, the Company,
through its wholly owned subsidiary BOS-Dimex, consummated the acquisition of the business operations of iDnext Ltd. (“iDnext”)
and its subsidiary Next-Line Ltd. (“Next-Line”), for a total consideration of $886. The consideration was comprised of
a loan conversion in the amount of $256, initially advanced as a loan to iDnext and Next-Line in December 2015 and applied towards
the consideration upon closing of the acquisition, a cash payment of $154 and the issuance of 162,734 Ordinary Shares of the Company
for a value of $298. Additionally, BOS-Dimex has recorded a liability in the amount of $178, reflecting its commitment to make
additional payments contingent on the annual operational profit of the acquired business in the calendar years 2016 and 2017.
As of December 31, 2016, this liability was written off in a whole due to insufficient operating profit of the acquired business
in the years ended December 31, 2016 and 2017.
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 3:-
|
ACQUISITION OF BUSINESS (Cont.)
|
iDnext, incorporated in 1997,
is a private Israeli company that specializes in Automatic Identification and Data Capture (“AIDC”) through barcode and
RFID technology, mainly for libraries.
Next-Line, incorporated in 2008,
specializes in providing on-site inventory count services mainly to leading retail chains in Israel in the fields of apparel, food,
convenience and pharma. Next-Line also provides asset tagging and counting services for corporate and governmental entities. With
its experienced team and proprietary software, Next-Line is able to quickly and accurately count inventory with minimum shutdown
time.
Goodwill generated from the
business acquisition is primarily attributable to expected synergies.
The Company
did not present proforma information since it’s immaterial.
The acquired business operations
are included in the RFID and Mobile Solutions segment.
The purchase price allocation
of the acquired business is as follows:
|
|
|
January 01,
|
|
|
Allocation:
|
|
2016
|
|
|
Tangible assets:
|
|
|
|
|
Fixed assets
|
|
$
|
80
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
Software
|
|
|
111
|
|
|
Customer relationships
|
|
|
141
|
|
|
Goodwill
|
|
|
554
|
|
|
|
|
$
|
886
|
|
Intangible
assets are amortized based on the straight-line method for their remaining useful life.
|
NOTE 4:-
|
OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
|
|
December 31
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Government authorities
|
|
$
|
71
|
|
|
$
|
145
|
|
|
Advances to suppliers
|
|
|
193
|
|
|
|
328
|
|
|
Prepaid expenses
|
|
|
578
|
|
|
|
436
|
|
|
Accrued income
|
|
|
29
|
|
|
|
26
|
|
|
Other
|
|
|
27
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
898
|
|
|
$
|
992
|
|
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
|
|
December 31
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
135
|
|
|
$
|
131
|
|
|
Finished goods
|
|
|
3,105
|
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,240
|
|
|
$
|
2,314
|
|
|
NOTE 6:-
|
LONG TERM ASSETS
|
|
|
|
December 31
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses related to SEDA (see Note 15a2)
|
|
$
|
140
|
|
|
$
|
-
|
|
|
Other
|
|
|
80
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
220
|
|
|
$
|
43
|
|
|
NOTE 7:-
|
PROPERTY AND EQUIPMENT, NET
|
|
|
|
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computers and software
|
|
$
|
1,173
|
|
|
$
|
1,046
|
|
|
Office furniture and equipment
|
|
|
721
|
|
|
|
693
|
|
|
Leasehold improvements
|
|
|
519
|
|
|
|
381
|
|
|
Motor Vehicles
|
|
|
299
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,712
|
|
|
$
|
2,460
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computers and software
|
|
$
|
989
|
|
|
$
|
900
|
|
|
Office furniture and equipment
|
|
|
536
|
|
|
|
492
|
|
|
Leasehold improvements
|
|
|
307
|
|
|
|
280
|
|
|
Motor Vehicles
|
|
|
229
|
|
|
|
274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,061
|
|
|
$
|
1,946
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
651
|
|
|
$
|
514
|
|
Depreciation expenses amounted
to $188, $184 and $ 142 for the years ended on December 31, 2017, 2016 and 2015, respectively.
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 8:-
|
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
|
|
Balance as of December 31, 2015
|
|
$
|
4,122
|
|
|
|
|
|
|
|
|
Acquisition of business during the year 2016
|
|
$
|
554
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017 and 2016
|
|
$
|
4,676
|
|
|
b.
|
Other Intangible Assets:
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
Weighted average amortization period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
Brand name
|
|
|
670
|
|
|
|
670
|
|
|
|
4.1
|
|
|
Customer list
|
|
|
2,450
|
|
|
|
2,450
|
|
|
|
2.5
|
|
|
Software (1)
|
|
|
111
|
|
|
|
111
|
|
|
|
3
|
|
|
Customer relationship (1)
|
|
|
141
|
|
|
|
141
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,372
|
|
|
|
3,372
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand name
|
|
|
670
|
|
|
|
670
|
|
|
|
|
|
|
Customer list
|
|
|
2,450
|
|
|
|
2,450
|
|
|
|
|
|
|
Software
|
|
|
74
|
|
|
|
37
|
|
|
|
|
|
|
Customer relationship
|
|
|
40
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,234
|
|
|
|
3,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
138
|
|
|
$
|
195
|
|
|
|
|
|
Intangible
assets are amortized based on the straight-line method for their remaining useful life.
Amortization
expenses amounted to $57, $ 64 and $ 63 for the years ended December 31, 2017, 2016 and 2015, respectively.
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 9:-
|
CURRENT MATURITIES OF LONG TERM LOANS
|
|
|
|
Loan
|
|
Weighted
interest
rate as of December 31,
2017
|
|
|
December 31
|
|
|
Short term loans
|
|
currency
|
|
%
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities
|
|
NIS
|
|
|
3.35
|
|
|
|
505
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
505
|
|
|
|
400
|
|
As
of December 31, 2017, the Company’s subsidiary Bos Odem has an unutilized short term credit line in the amount of $317, bearing
an annual interest of 3.1%.
|
NOTE 10:-
|
ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
|
December 31
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Derivatives (See Note 11)
|
|
$
|
30
|
|
|
$
|
32
|
|
|
Professional services
|
|
|
149
|
|
|
|
118
|
|
|
Tax accruals
|
|
|
69
|
|
|
|
58
|
|
|
Other
|
|
|
56
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
304
|
|
|
$
|
259
|
|
|
NOTE 11:-
|
DERIVATIVES INSTRUMENTS
|
The Company
uses derivative instruments primarily to manage exposure to foreign currency exchange rates. The Company’s primary objective
in holding derivatives is to reduce the volatility of earnings and cash flows due to changes in foreign currency exchange rates
related to forecasted monthly payroll payments of employees which are paid in NIS.
Losses
(gains) on designated derivatives reclassified from OCI into Consolidated Statement of Operations for the years ended:
|
|
|
Line Item in Statement of Operations
|
|
Year ended December 31,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
|
Cost of revenues
|
|
$
|
(63
|
)
|
|
$
|
-
|
|
|
$
|
32
|
|
|
Foreign currency derivatives
|
|
Sales and marketing
|
|
$
|
(61
|
)
|
|
$
|
1
|
|
|
$
|
60
|
|
|
Foreign currency derivatives
|
|
General and administrative
|
|
$
|
(24
|
)
|
|
$
|
-
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses (income)
|
|
|
|
$
|
(148
|
)
|
|
$
|
1
|
|
|
$
|
124
|
|
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 12:-
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The following
table presents liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016:
|
|
|
December 31, 2017
|
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
30
|
|
|
|
-
|
|
|
$
|
30
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30
|
|
|
|
-
|
|
|
$
|
30
|
|
|
|
-
|
|
|
|
|
December 31, 2016
|
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
32
|
|
|
|
-
|
|
|
$
|
32
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32
|
|
|
|
-
|
|
|
$
|
32
|
|
|
|
-
|
|
|
NOTE 13:-
|
LONG-TERM LOANS, NET OF CURRENT MATURITIES
|
Classified
by linkage terms and interest rates, the total amount of the loans is as follows:
|
Loan currency
|
|
Weighted interest
rate as of December 31,
2017
|
|
|
December 31,
|
|
|
|
|
%
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NIS
|
|
|
3.35
|
|
|
$
|
3,028
|
|
|
$
|
3,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less - current maturities
|
|
|
|
|
|
|
505
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,523
|
|
|
$
|
2,734
|
|
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 13:-
|
LONG-TERM LOANS, NET OF CURRENT MATURITIES (Cont.)
|
In
October 2017, the Company and its Israeli subsidiaries entered into an agreement with Bank Beinleumi for the provision of
credit facilities, which were used to pay Bank Leumi loans amounting to $2,976. The balance of long term loans as of December
31, 2017 amounted to $3,028. The agreement includes covenants to maintain certain financial ratios related to
shareholders’ equity, EBITDA and operating results. The Bank Beinleumi credit facilities are secured by a first ranking
fixed charge on any unpaid share capital of the Company, the goodwill of the Company, and any insurance entitlements in the
Company’s assets pledged thereunder, and a floating charges on all of the assets of the Company and our Israeli
subsidiaries, owned now or in the future. As of December 31, 2017, the Company met the covenants set forth in the agreement.
The loans will be paid in monthly equal installments for a period of 6 years.
The total
amount to be paid by the Company is as follows:
|
Payment schedule
|
|
December 31,
2017
|
|
|
|
|
|
|
|
2018
|
|
$
|
505
|
|
|
2019
|
|
|
505
|
|
|
2020
|
|
|
505
|
|
|
2021
|
|
|
505
|
|
|
2022
|
|
|
505
|
|
|
2023
|
|
|
503
|
|
|
Total
|
|
$
|
3,028
|
|
|
NOTE 14:-
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
Under the
Company’s research and development agreements with the Office of the Chief Scientist (“OCS”) and pursuant to applicable
laws, the Company is required to pay royalties at the rate of 3.5% of sales of products developed with funds provided by the OCS,
up to an amount equal to 100% of the research and development grants (dollar-linked) received from the OCS. The obligation
to pay these royalties is contingent upon actual sales of the products. Royalties payable with respect to grants received under
programs approved by the OCS after January 1, 1999, are subject to interest on the U.S. dollar-linked value of the total grants
received at the annual rate of LIBOR applicable to dollar deposits at the time the grants are received. No grants were received
during the years 2017, 2016 and 2015.
As of December
31, 2017, the Company has an outstanding contingent obligation to pay royalties to the OCS, including interest, in the amount of
approximately $ 3,763, with respect to the grants. During years 2017, 2016 and 2015, the developed software for which the
grant was received is no longer being sold and is not expected to be sold in the future, accordingly no royalty expenses were recorded
during the respective years, and the Company anticipates that no royalties will be paid in the future.
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 14:-
|
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|
|
2.
|
The facilities of the Company are rented under operating lease agreements that expire on various
dates ending in 2019, some with options until the year 2025. Minimum future rental payments are:
|
|
2018
|
|
$
|
172
|
|
|
2019
|
|
|
86
|
|
|
2020
|
|
|
86
|
|
|
2021
|
|
|
87
|
|
|
2022
|
|
|
60
|
|
|
|
|
$
|
491
|
|
The Company’s
motor vehicles are leased under various operating lease agreements. The lease agreements for the motor vehicles expire on various
dates ending in 2021. Minimum future lease payments are:
|
2018
|
|
$
|
284
|
|
|
2019
|
|
|
197
|
|
|
2020
|
|
|
94
|
|
|
2021
|
|
|
1
|
|
|
|
|
$
|
576
|
|
The Company
has pre-paid the last instalments in the amount of $84 for each of the motor vehicles as a deposit. These amounts are classified
in the long term assets.
Lease expenses
for the facilities occupied by the Company and the Company’s motor vehicles in years 2017, 2016 and 2015 amounted to $642, $ 643
and $ 365, respectively.
The Company
is not a party to any legal proceedings.
On April
9, 2017 D.D. Goldstein Properties and Investments Ltd., a shareholder of the Company (the “Plaintiff”) filed a claim
against the Company’s Chairman Yosi Lahad, the Company’s Co-CEO, Yuval Viner, the Company’s Co-CEO and CFO, Eyal Cohen and Ms.
Gabriela Jacobs, an (indirect) shareholder of the Company.
The Plaintiff
claims that the defendants, acting in bad faith, breached their duties of loyalty and care and several laws, by inducing the Plaintiff
to purchase shares of the Company. The Plaintiff claims that he was led to believe that the defendants shall facilitate his becoming
a controlling shareholder of the Company. The claim is for a total amount of NIS 2,600,000 (approximately $750,000).
While the
Company is not a named defendant in these proceedings, the Company is party to indemnification agreements with the members of its
management, pursuant to which it pays the legal fees involved in the defense against the claim, and may be required to provide
indemnification in the event a ruling is handed against them. The Company expects such payments, if any, to be covered under its
Directors and Officers insurance policy (subject to a deductible).
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 15:-
|
SHAREHOLDERS’ EQUITY
|
|
1.
|
Issuance of Ordinary Shares to directors and service provides:
|
During the year ended December
31, 2015, the Company issued 4,065 Ordinary Shares to Cukierman & Co., in consideration for non-exclusive investment-banking
services and business development services to the Company (see Note 19a).
During the year ended December
31, 2016, the Company issued 4,882 Ordinary Shares to a service provider, in consideration for his services in the business acquisition
of iDnext (see Note 3).
|
2.
|
Issuance of Ordinary Shares in connection with Standby Equity Distribution Agreement:
|
On each of
February 3, 2014, February 17, 2015 and May 8, 2017 the Company entered into a Standby Equity Distribution Agreement (“SEDA”),
with YA Global Master SPV Ltd. (“YA Global”) and for the 2017 SEDA with YA II PN Ltd. (together with YA Global, “YA”), for the sale of up to $2,000, $ 1,300 and $2,000, respectively, of its Ordinary Shares to YA. The Company may affect the
sale, at its sole discretion, during a three-year period for the 2014 SEDA, a forty-month period for the 2015 SEDA and a four-year
period for the 2017 SEDA, beginning on the date on which the Securities and Exchange Commission first declares effective a registration
statement registering the resale of the Company’s Ordinary Shares by YA.
For each Ordinary Share purchased
under the SEDA, YA will pay 95% for 2014 SEDA and 93% for 2015 and 2017 SEDA, of the lowest daily VWAP (as defined below) of the
Ordinary Shares during the five consecutive trading days (or, for the 2015 and 2017 SEDA, commencing June 2016, three consecutive
trading days), following the date of an advance notice from the Company (provided such VWAP is greater than or equal to 90% of
the last closing price of the Ordinary shares at the time of delivery of the advance notice). Notwithstanding the forgoing, the
notice shall not exceed $500 for the 2014, 2015 and 2017 SEDA. “VWAP” is defined as of any date, to be such date’s daily
dollar volume-weighted average price of the Ordinary Shares as reported by Bloomberg, LP. The Company may terminate
the SEDA at any time upon prior notice to YA, as long as there are no advance notices outstanding and the company has paid to YA
all amounts then due.
In connection with the 2014,
2015 and 2017 SEDA, the Company issued Ordinary shares to YA as a commitment fee of 13,711, 28,930 and 67,307, respectively.
As of December 31, 2017 the
Company presented an amount of $140 as prepaid expenses in connection with the 2017 SEDA.
During
the year 2015, the Company issued to YA 111,951 Ordinary Shares, for a total amount of $187,
net of $ 13 issuance expenses
.
During
the year 2016, the Company issued to YA 565,402 Ordinary Shares, for a total amount of $1,260,
net of $ 24 issuance
expenses
.
During
the year 2017, the Company issued to YA 354,096 Ordinary Shares, for a total amount of $606,
net of $ 22 issuance
expenses
.
|
3.
|
On June 10, 2015, the Company entered into a Share Purchase Agreement with certain investors,
including YA Global, members of management, and certain business partners of the Company, under which the Company issued
244,630 Ordinary Shares and raised an aggregate amount of $573, net of $16 issuance expenses, at a price per
share of $2.406.
|
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 15:-
|
SHAREHOLDERS’ EQUITY (Cont.)
|
|
4.
|
On January 8, 2015, the Company’s Board of Directors approved an increase of 1,500,000 Ordinary
Shares in the Company’s authorized share capital, from 2,500,000 authorized shares to 4,000,000 authorized shares.
|
|
5.
|
On January 1, 2016 the Company issued 162,734 Ordinary Shares as part of the consideration for
the iDnext business acquisition, representing a value of $298 (see Note 3).
|
The term
of Company’s Israeli Stock Option Plan (the “Plan”) is until May 31, 2023. On November 2016 and on December 2017, the
Company’s shareholders approved an increase in the number of options for Ordinary Shares available for issuance under the Plan
by 125,000 and 100,000, respectively, resulting in 500,000 options for Ordinary Shares available for issuance under the Plan. Any
option which is canceled or forfeited before expiration will become available for future grants.
As of December
31, 2017 there are 117,183 options available for future grants under the Plan. Each option granted under the Plan expires between
4-10 years from the date of the grant. The options vest gradually over a period of up to four years.
A summary
of the Company’s employee and director stock option activity and related information for the year ended December 31, 2017, is as
follows:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
Number of options
|
|
|
Weighted-
average exercise price
|
|
|
Number of options
|
|
|
Weighted average exercise price
|
|
|
Number of options
|
|
|
Weighted-
average exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - beginning of year
|
|
|
252,670
|
|
|
$
|
6.21
|
|
|
|
238,894
|
|
|
$
|
6.65
|
|
|
|
136,256
|
|
|
$
|
9.62
|
|
|
Changes during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
75,000
|
|
|
$
|
2.13
|
|
|
|
30,000
|
|
|
$
|
2.13
|
|
|
|
109,625
|
|
|
$
|
2.78
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
(10,000
|
)
|
|
$
|
2.96
|
|
|
|
-
|
|
|
$
|
-
|
|
|
Forfeited
|
|
|
(13,545
|
)
|
|
$
|
49.09
|
|
|
|
(6,224
|
)
|
|
$
|
8.56
|
|
|
|
(6,987
|
)
|
|
$
|
12.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - year end
|
|
|
314,125
|
|
|
$
|
3.39
|
|
|
|
252,670
|
|
|
$
|
6.21
|
|
|
|
238,894
|
|
|
$
|
6.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
192,584
|
|
|
$
|
4.10
|
|
|
|
154,333
|
|
|
$
|
8.44
|
|
|
|
88,766
|
|
|
$
|
12.47
|
|
|
Exercisable at year end
|
|
|
182,584
|
|
|
$
|
4.17
|
|
|
|
144,333
|
|
|
$
|
8.82
|
|
|
|
88,766
|
|
|
$
|
12.47
|
|
During the
years 2017, 2016, and 2015, stock-based compensation expense related to employees and directors stock options amounted to $60,
$124 and $119, respectively, and is included in general and administrative expenses within the statement of operations.
The weighted-average
grant-date fair value of options granted during the years ended December 31, 2017, 2016 and 2015 was $2.16, $2.08 and $2.43,
respectively. The weighted-average grant-date fair value of unvested options as of December 31, 2017 was $2.22. The aggregate
intrinsic value of the outstanding options in each of the years ended December 31, 2017, 2016 and 2015 is $0. The aggregate intrinsic
value represents the total intrinsic value (the difference between the fair market value of the Company’s Ordinary Shares on December
31 of the respective year and the exercise price, multiplied by the number of in-the-money options) that would have been received
by the option holders had all option holders exercised their options on such date.
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 15:-
|
SHAREHOLDERS’ EQUITY (Cont.)
|
No options
were exercised during the years ended on December 31, 2017 and December 31, 2015. During the year ended December 31, 2016, 10,000
options were exercised. As of December 31, 2017 and 2016, there were a total of $ 107 and $ 98, respectively, of unrecognized
compensation cost related to non-vested share-based compensation arrangements granted under the Company’s Plan. That cost is expected
to be recognized through 2020.
No cash was
received from the exercise of options in the year ended December 31, 2017.
During the
year ended December 31, 2016, the Company received $29.6 from the exercise of options.
Options granted
to employees and directors that are outstanding as of December 31, 2017 broken into exercise prices, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
Options
|
|
|
Weighted
|
|
|
Options
|
|
|
Remaining
|
|
|
|
|
|
outstanding
|
|
|
average
|
|
|
exercisable
|
|
|
Contractual
|
|
|
|
|
|
as of
|
|
|
remaining
|
|
|
as of
|
|
|
life of options
|
|
|
Exercise
|
|
|
December 31,
|
|
|
contractual
|
|
|
December 31,
|
|
|
exercisable
|
|
|
Price
|
|
|
2017
|
|
|
life (years)
|
|
|
2017
|
|
|
(years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.126
|
|
|
|
30,000
|
|
|
|
3.86
|
|
|
|
10,002
|
|
|
|
3.86
|
|
|
|
2.131
|
|
|
|
75,000
|
|
|
|
4.93
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.237
|
|
|
|
26,625
|
|
|
|
2.81
|
|
|
|
17,749
|
|
|
|
-
|
|
|
|
2.96
|
|
|
|
73,000
|
|
|
|
2.38
|
|
|
|
45,333
|
|
|
|
3.38
|
|
|
|
3.88
|
|
|
|
375
|
|
|
|
1.88
|
|
|
|
375
|
|
|
|
1.88
|
|
|
|
3.88
|
|
|
|
90,000
|
|
|
|
0.85
|
|
|
|
90,000
|
|
|
|
0.85
|
|
|
|
4.02
|
|
|
|
5,000
|
|
|
|
1.54
|
|
|
|
5,000
|
|
|
|
1.54
|
|
|
|
6.67
|
|
|
|
10,000
|
|
|
|
1.28
|
|
|
|
10,000
|
|
|
|
1.28
|
|
|
|
6.67
|
|
|
|
375
|
|
|
|
1.28
|
|
|
|
375
|
|
|
|
1.28
|
|
|
|
33.60
|
|
|
|
3,750
|
|
|
|
0.23
|
|
|
|
3,750
|
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total
|
|
|
|
314,125
|
|
|
|
2.65
|
|
|
|
182,584
|
|
|
|
1.63
|
|
|
NOTE 16:-
|
TAXES ON INCOME
|
|
a.
|
Corporate tax rates in Israel
|
Taxable income of Israeli companies
is generally subject to corporate tax at the rate of 26.5% for the 2015 tax year, 25% for the 2016 tax year and 24% for the 2017
tax year. On December 30, 2016, as part of the Economic Efficiency Law (Legislative Amendments for Accomplishment of Budgetary
Targets for Budget Years 2017-2018), 5777-2016, the corporate tax rate was reduced to 24% for the 2017 tax year and to 23% in 2018
tax year and thereafter.
The Company
and its Israeli subsidiaries have accumulated losses for Israeli income tax purposes as of December 31, 2017, in the amount of
approximately $32,500. These losses may be carried forward and offset against taxable income in the future for an indefinite
period. In addition, the Company and its Israeli subsidiaries have accumulated capital loses in the amount of approximately $23,600.
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 16:-
|
TAXES ON INCOME (Cont.)
|
|
c.
|
Deferred income taxes:
|
Deferred
income taxes reflect the net tax effect 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 liabilities
and assets are as follows:
|
|
|
December 31
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forward (1)
|
|
$
|
7,482
|
|
|
$
|
7,623
|
|
|
Net capital loss carry forward (1)
|
|
$
|
5,899
|
|
|
$
|
5,899
|
|
|
Allowances and provisions
|
|
|
131
|
|
|
|
110
|
|
|
Intangible assets, net
|
|
|
(246
|
)
|
|
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,266
|
|
|
|
13,513
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance (2)
|
|
$
|
(13,266
|
)
|
|
$
|
(13,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax Liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(2)
|
In years 2017 and 2016, the Company has provided valuation allowances on deferred tax assets that
results from tax loss carry forward and other reserves and allowances due to its history of operating and capital losses and current
uncertainty about the ability to realize these deferred tax assets in the future. Net change in valuation allowance during 2017
was due to a decrease of net operating loss carry forward.
|
|
d.
|
Taxes on income (tax benefit) are comprised as follows:
|
|
|
|
Year ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
16
|
|
|
$
|
7
|
|
|
$
|
7
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16
|
|
|
$
|
7
|
|
|
$
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
9
|
|
|
$
|
-
|
|
|
$
|
(27
|
)
|
|
Foreign
|
|
|
7
|
|
|
|
7
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16
|
|
|
$
|
7
|
|
|
$
|
(22
|
)
|
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 16:-
|
TAXES ON INCOME (Cont.)
|
|
e.
|
Income before taxes on income is comprised as follows:
|
|
|
|
Year ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
750
|
|
|
$
|
366
|
|
|
$
|
285
|
|
|
Foreign
|
|
|
39
|
|
|
|
1
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
789
|
|
|
$
|
367
|
|
|
$
|
312
|
|
|
f.
|
Reconciliation of the theoretical tax expense to the actual tax expense:
|
The main
reconciling items between the statutory tax rate of the Company and the effective tax rate are the non-recognition of tax benefits
from accumulated net operating losses carry forward among the Company and various subsidiaries due to uncertainty of the realization
of such tax benefits.
BOS-Odem,
BOS-Dimex and BOS has final assessments through 2013.
Tax assessments
for Ruby-Tech Inc., a U.S. subsidiary, through 2012 have all been assessed as final.
|
h.
|
In accordance with the Company’s accounting policy, interest expense and potential penalties related
to income taxes are included in the tax expense line of the Company’s Consolidated Statements of Operations.
|
The Company
and its subsidiaries file income tax returns in Israel and in the United States. BOS, BOS-Dimex and BOS-Odem may be subject to
auditing by the Israel tax authorities for fiscal years 2014 and thereafter. Ruby-Tech Inc., a U.S. subsidiary, may be subject
to auditing by the U.S. Internal Revenue Service for fiscal years 2013 and thereafter.
The Company
believes that it has adequately provided for any reasonably foreseeable outcome related to tax audits and settlement. The final
tax outcome of the Company’s tax audits could be different from that which is reflected in the Company’s income tax provisions
and accruals. Such differences could have a material effect on the Company’s income tax provision and net loss in the period in
which such determination is made.
|
i.
|
Uncertain tax positions:
|
As of December
31, 2017 and 2016, the total balance of uncertain tax positions is $60 and $ 58, respectively.
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 17:-
|
SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS
|
|
a.
|
Financial expenses, net:
|
|
|
|
Year
ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income:
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
Change in fair value of forward contracts which are not designated as hedging
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
-
|
|
|
|
1
|
|
|
Financial expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In respect of interest related to bank loans and bank fees
|
|
|
(259
|
)
|
|
|
(307
|
)
|
|
|
(311
|
)
|
|
Change in fair value of forward contracts which are not designated as hedging
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
(24
|
)
|
|
Other (mainly foreign currency transaction losses)
|
|
|
(51
|
)
|
|
|
(27
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(310
|
)
|
|
|
(339
|
)
|
|
|
(377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(297
|
)
|
|
$
|
(339
|
)
|
|
$
|
(376
|
)
|
The
following table sets forth the computation of basic and diluted net income per share:
|
b.
|
Net earnings per share:
|
|
|
|
|
|
Year
ended December 31,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
$
|
773
|
|
|
$
|
360
|
|
|
$
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to Ordinary shareholders
|
|
$
|
773
|
|
|
$
|
360
|
|
|
$
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.
|
|
Denominator (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average Ordinary shares outstanding (in thousands)
|
|
|
3,171
|
|
|
|
2,587
|
|
|
|
1,970
|
|
|
|
|
Diluted weighted average Ordinary shares outstanding (in thousands)
|
|
|
3,171
|
|
|
|
2,593
|
|
|
|
1,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income per share
|
|
$
|
0.24
|
|
|
$
|
0.14
|
|
|
$
|
0.17
|
|
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 18:-
|
SEGMENTS AND GEOGRAPHICAL INFORMATION
|
The Company manages its business
in two reportable segments, consisting of the RFID and Mobile Solutions segment and the Supply Chain Solutions segment.
The Company’s management makes
financial decisions and allocates resources, based on the information it receives from its internal management system. The Company
allocates resources and assesses performance for each operating segment using information about revenues and gross profit. The
Company applies ASC 280,
Segment Reporting
.
|
a.
|
Revenues, gross profit and assets for the operating segments for the years 2017, 2016 and 2015
were as follows:
|
|
|
|
RFID and Mobile Solutions(BOS-Dimex)
|
|
|
Supply
Chain Solutions (BOS-Odem)
|
|
|
Intercompany
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
13,666
|
|
|
$
|
15,495
|
|
|
$
|
(229
|
)
|
|
$
|
28,932
|
|
|
Gross profit
|
|
$
|
3,623
|
|
|
$
|
2,722
|
|
|
$
|
-
|
|
|
$
|
6,345
|
|
|
Assets related to segment
|
|
$
|
5,456
|
|
|
$
|
229
|
|
|
$
|
-
|
|
|
$
|
5,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
12,197
|
|
|
$
|
15,291
|
|
|
$
|
(61
|
)
|
|
$
|
27,427
|
|
|
Gross profit
|
|
$
|
2,888
|
|
|
$
|
2,427
|
|
|
$
|
-
|
|
|
$
|
5,315
|
|
|
Assets related to segment
|
|
$
|
5,308
|
|
|
$
|
120
|
|
|
$
|
-
|
|
|
$
|
5,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,270
|
|
|
$
|
16,336
|
|
|
$
|
(7
|
)
|
|
$
|
25,599
|
|
|
Gross profit
|
|
$
|
2,608
|
|
|
$
|
2,529
|
|
|
$
|
-
|
|
|
$
|
5,137
|
|
|
Assets related to segment
|
|
$
|
4,753
|
|
|
$
|
159
|
|
|
$
|
-
|
|
|
$
|
4,912
|
|
|
b.
|
The following presents total revenues for the years 2017, 2016 and 2015 based on the location of
customers and long- lived assets based on major geographic areas in which the Company operates:
|
|
|
|
Year ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
Total
|
|
|
Long-lived
|
|
|
Total
|
|
|
Long-lived
|
|
|
Total
|
|
|
Long-lived
|
|
|
|
|
revenues
|
|
|
assets *
|
|
|
revenues
|
|
|
assets *
|
|
|
revenues
|
|
|
assets *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
21,870
|
|
|
$
|
651
|
|
|
$
|
20,619
|
|
|
$
|
514
|
|
|
$
|
19,044
|
|
|
$
|
480
|
|
|
India
|
|
|
4,497
|
|
|
|
-
|
|
|
|
3,119
|
|
|
|
-
|
|
|
|
3,140
|
|
|
|
-
|
|
|
Far East
|
|
|
1,416
|
|
|
|
-
|
|
|
|
2,964
|
|
|
|
-
|
|
|
|
1,390
|
|
|
|
-
|
|
|
America
|
|
|
918
|
|
|
|
-
|
|
|
|
411
|
|
|
|
-
|
|
|
|
855
|
|
|
|
-
|
|
|
Europe
|
|
|
231
|
|
|
|
-
|
|
|
|
314
|
|
|
|
-
|
|
|
|
1,170
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,932
|
|
|
$
|
651
|
|
|
$
|
27,427
|
|
|
$
|
514
|
|
|
$
|
25,599
|
|
|
$
|
480
|
|
|
(*)
|
Long-lived assets are comprised of property and equipment (intangible assets and goodwill are not
included).
|
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 18:-
|
SEGMENTS AND GEOGRAPHICAL INFORMATION (Cont.)
|
|
c.
|
Major customer data as a percentage of total revenues:
|
|
|
|
Year ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A (Supply Chain Segment)
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
%
|
|
NOTE 19:-
|
RELATED PARTIES
|
|
a.
|
Service Agreement with Cukierman & Co.:
|
In 2003,
the Company’s Audit Committee and Board of Directors approved the engagement of Cukierman & Co. Investment House Ltd. (“Cukierman
& Co.”), to provide non-exclusive investment-banking services and business development services to the Company.
On July 15,
2013, an additional amendment to the Service Agreement was signed by which all payments to Cukierman & Co. will be made on
a quarterly basis.
In February
2015, the Company terminated the Service agreement.
Expenses
the Company recorded according to the Service Agreement with Cukierman & Co. are:
|
|
|
Year
ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Success fee related to private placement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Retainer fee
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
During the
years 2017, 2016 and 2015, the Company issued 0, 0 and 4,065 Ordinary Shares to Cukierman & Co. as per the Service Agreement
as revised, respectively.
|
b.
|
Agreements with THCAP:
|
On December
13, 2012 the Company’s shareholders approved that Telegraph Hill Capital Fund I, LLC will be paid a monthly retainer for business
development services in the amount of $3.7 per month to be paid in the Company’s Ordinary Shares once a year, using a price per
share as stipulated in the revised agreement. In addition, the Company’s shareholders approved that those payments to THCAP on
behalf of Mr. Gutierrez Roy’s services as a Director be made in the Company’s Ordinary Shares, on a quarterly basis.
On August
21, 2014, the Company’s Board of Directors terminated the Advisory Agreement with THCAP.
On October
22, 2015, the Company’s Board of Directors approved the payment of THCAP’s director’s fees in cash.
On December
31, 2017, 2016 and 2015 the Company did not issued to THCAP any Ordinary shares for the retainer for business development services
and as director’s fees.
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share
and per share data
|
NOTE 19:-
|
RELATED PARTIES (Cont.)
|
Mr. Luis
Gutierrez Roy, managing partner of THCAP, has left the Company’s Board of Directors on July 15, 2015.
Expenses
incurred according to the agreements with THCAP are as follows:
|
|
|
Year
ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retainer fees
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Director’s fee
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6
|
|
|
c.
|
Agreements with iDnext:
|
On January
01, 2016 the Company, through its wholly owned subsidiary BOS-Dimex, consummated the acquisition of the business operations of
iDnext Ltd. (“iDnext”) and its subsidiary Next-Line Ltd. (“Next-Line”) (see Note 3).
Pursuant
to a Management Services Agreement entered into as part of the acquisition agreement, iDnext is to be paid a monthly fee
of 33 Thousand NIS (approximately $8.5) through December 31, 2017. iDnext is controlled by Mr. Moti Harel, who was a member
of the Company’s Board of Directors until December 12, 2017. The Management Services Agreement expired on December 31,
2017 and the parties are negotiating a new agreement.
Expenses
incurred according to the agreement with iDnext are as follows:
|
|
|
Year
ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly fees
|
|
$
|
125
|
|
|
$
|
104
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
125
|
|
|
$
|
104
|
|
|
$
|
-
|
|
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