TISA Top Image Systems, Ltd. - Ordinary Shares

ITEM 3.                        KEY IN FORMATION

 

SELECTED FINANCIAL DATA

 

The following selected consolidated financial data are presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.  All financial statements included in this annual report are presented solely under U.S. GAAP. The selected consolidated financial data should be read in conjunction with and are qualified by reference to Item 5 of this report entitled “Operating and Financial Review and Prospects” and the consolidated financial statements and notes thereto and other financial information included elsewhere in this report.

 

 

 

  RISK FACTORS

 

An investment in ordinary shares of the company involves a high degree of risk.  You should consider carefully the following risk factors when making an investment decision. If one or more of the following risks, or risks and uncertainties not currently known to us or that we believe are immaterial, occur, such occurrence(s) could have a material adverse effect on our business, financial condition, results of operations and prospects, the value of ordinary shares of the company could decline, and you could lose all or part of your investment in ordinary shares of the company.

Risks Related to Our Business

If we are unable to achieve and maintain a leading position and to build awareness of our brands, we may not be able to compete effectively against competitors with greater name recognition and our sales could be adversely affected.

 

If we are unable to economically achieve and maintain a leading position in data recognition software or to promote and maintain our brands, our business, results of operations and financial condition could suffer.  Development and awareness of our brands will depend largely on our success in increasing our customer base.  In order to attract and retain customers and to promote and maintain our brands in response to competitive pressures, we may be required to increase our marketing budget or increase our sales expenses.   There can be no assurance that our efforts will be sufficient or that we will be successful in attracting and retaining customers or promoting our brands. In 2014 we acquired eGistics, Inc., a provider of cloud-based solutions for the financial sector as part of our efforts to expand our market share and to offer additional products.  We cannot be certain that the acquisition will help us reach that goal. Failure in this regard could harm our business and results of operations.

 

Our capital requirements have historically been significant and we may not be able in the future to meet our requirements with our working capital.

 

Historically, our capital requirements have been significant. We may require additional financing in the future to fund our operations and capital requirements.  In such event, we cannot assure you that additional financing will be available to us when needed, on commercially reasonable terms, or at all.  We have no expectation that our existing shareholders will provide any portion of our future financing requirements.  Any inability to obtain additional financing when needed would have a material adverse effect on us, requiring us to curtail our expansion efforts.  In addition, to the extent that we incur substantial indebtedness, we will be subject to risks associated with such substantial indebtedness, including the risk that interest rates may fluctuate or that we may have insufficient resources to repay interest and principal on any such indebtedness.  Any additional equity financing may involve substantial dilution of the interests of our then-existing shareholders.

 

The impact of a continuing global economic downturn may have a material adverse effect on our business, results of operations and financial condition.  

 

We sell our products and services in various countries around the world, with a significant concentration in Europe and North America. Consequently, our sales and profitability are dependent on economic conditions globally and in each market we operate in. The weakening of consumer and corporate confidence, declining income and asset values in many areas and other adverse factors related to the global economic downturn that has been ongoing to various degrees in various regions since 2008 has resulted in our customers and the end-users of our products, services and solutions, postponing or reducing spending on our products, services and solutions.  Should those conditions persist or worsen, they might adversely affect our business.

 

The global economic downturn has also led to more limited availability of credit which may have a negative impact on the financial condition, and in particular on the purchasing ability, of some of our customers and may also result in requests for extended payment terms, credit losses, insolvencies, limited ability to respond to demand or diminished sales channels available to us. The generally difficult economic conditions combined with tightening credit markets may also cause financial difficulties for our suppliers and collaborative partners which may result in their failure to perform as planned and, consequently, in delays in the delivery of our products, services and solutions.  

 

For example, the European debt crisis, which has had a negative impact on the European economy, may have adverse impact on our operations.  In, 2013, 2014, and 2015, we generated $16.6 million, $19.2 million, and $14.1 million respectively, of revenues from our operations in Europe, which represented 57%, 54%, and 42% respectively, of our total revenues. We are not certain that we will be able to maintain those levels in light of the ongoing economic difficulties in Europe. The tightening of European credit markets and uncertainty in the Euro Zone, may result in additional deterioration of our customers’ and end-users’ credit quality or access to cash, which could lower the realization rate on our accounts receivable.   The economic difficulties in Europe can lead to the lower demand for such products or services, increase our exposure to losses from bad debts or result in our customers or end-users ceasing operations, any of which could materially adversely affect our business, financial condition and results from operations.

 

The difficult global economic conditions may also result in inefficiencies due to our reduced ability to forecast developments in our industry and plan our operations accordingly. Adverse economic conditions affecting us, our current and potential customers, their spending on our products, services and solutions, and our suppliers and collaborative partners may have a material adverse effect on our business, results of operations and financial condition.  

 

Additional acquisitions may lead to increased expenditures and integration costs, and could strain management, financial, and operational resources.

 

In the past, we acquired related complementary businesses in an effort to expand capacity, enter new markets and diversify our sources of revenue.  Those acquisitions strained our management, financial and operational resources.  

Specifically, in 2014 we acquired eGistics, Inc., a provider of cloud based solutions for the financial sector, in connection with our efforts to expand our market share and to offer additional products. We paid $18 million, comprised of $9 million in cash and $9 million in shares. Concluding the transaction required a significant investment of our management time and effort.

Any future acquisition may also generate such strain. In the event we engage in additional acquisitions, they may also result in potentially dilutive issuances of equity securities, incurrence of additional debt, the assumption of known and unknown liabilities, the amortization of expenses related to intangible assets and the impairment of goodwill, all of which could harm our business, financial condition and operating results.

 

We currently have subsidiaries in foreign countries and additional acquisitions in foreign countries, should we choose to pursue them, may pose additional challenges. We could experience inefficiencies in conducting our business as we integrate new operations and manage geographically dispersed operations.  Also, the acquired businesses may not yield the income and levels of activity we expected them to yield, which may result in losses.

 

Additionally, we may not succeed in retaining or hiring qualified management, sales, customer support, and technical personnel to integrate acquired operations, manage future growth effectively, and accomplish our overall objectives.  Competition for qualified personnel is intense.  If we expand too fast, or fail to integrate our recently acquired businesses or other new businesses, or lose key personnel from our recently acquired businesses or other businesses, there could be a material adverse effect on our business, prospects, financial condition and results of operations.

 

The market for data capture systems, automatic form processing systems and mobile data captures is highly competitive.

A slowdown in our customers’ industries could adversely impact the sale of our products and our prospects of achieving or maintaining profitability.

 

A slowdown in the industries to which we sell our products would likely result in significantly reduced product demand, erosion of selling prices and overcapacity.  Such a downturn could materially reduce demand for the products and technology that we offer.  In addition, our ability to reduce expenses in response to any downturn or slowdown in such industries may be limited because of:

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our continuing need to invest in research and development;

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our capital equipment requirements; and

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marketing requirements.

A slowdown could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

Our success depends on our strategic marketing relationships and the marketing and distribution efforts of our distributors and other strategic partners.

 

Our business and prospects depend upon our ability to maintain our existing, and to develop additional, strategic marketing relationships and upon the marketing and distribution efforts of our distributors and other strategic partners.  The loss or diminishment of our relationship with any one of our significant strategic partners could have a material adverse effect on our existing operations and growth prospects.  We normally attempt to recruit distributors with established distribution channels and reputations for marketing and installing document imaging, data capture and workflow systems to market our products. We cannot assure you that we will be able to develop such relationships.

 

Our industry is marked by rapid technological changes and frequent new or updated product introductions, and if we do not respond to such rapid technological changes, new product introductions and enhancements and evolving industry standards, our products and services could become obsolete.

 

We have had a history of losses and may incur future losses.

 

Since our inception in March 1991, we have incurred net losses in every year other than in 1995, 1997, 1998, 2006, 2008, 2011 and 2012, and our losses may recur and continue.  As of December 31, 2015, we had an accumulated deficit of $33,767,000. We plan to maintain the level of our aggregate product development expenses. We cannot assure you that our revenues will grow or that we will achieve consistent profitability in the future. Failure to increase revenues could result in a material adverse effect on our business, prospects, financial results and results of operations.

 

We have a history of quarterly fluctuations in our results of operations and expect these fluctuations to continue, this may cause our stock price to decline.

 

We have experienced and expect to experience in the future significant fluctuations in our quarterly results of operations.

 

Our lengthy sales cycle increases our exposure to customer cancellations or delays in orders, which may result in volatile quarterly revenues.  Given the high average selling price of, and the cost and time required to implement our solutions, a customer’s decision to license our products typically involves a significant commitment of resources and is influenced by the customer’s budget cycles and internal approval procedures for information technology purchases.  In addition, selling our solutions requires us to educate potential customers about our solutions’ uses and benefits.  As a result, our solutions have a long sales cycle, which can take 9 to 15 months or more.  Consequently, we have difficulty predicting the quarter in which sales to expected customers may occur and actual sales may not necessarily be in the same calendar quarter or even year in which we expended resources in connection with marketing to the client.  The sale of our solutions is also subject to delays from the lengthy budgeting, approval and competitive evaluation processes of our customers, which typically accompany significant capital expenditures.

 

Other factors that may contribute to fluctuations in our quarterly results of operations include:

 

·	the size and timing of orders;

 

·	customer deferral of orders in anticipation of new products, product upgrades or price enhancements;

 

·	customer deferral of orders due to general economic conditions or a customer’s specific cash flow shortages;

 

·	the high level of competition that we encounter; and

 

·	the timing of our product introductions, upgrades or enhancements or those of our competitors or of providers of complementary products.

 

Fluctuations in our quarterly results could discourage investors and cause the market price of ordinary shares of the company to decline.

 

Our success depends on our proprietary software technology.

 

Our success depends upon our proprietary software technology.  Although we believe that our technology has been developed independently and does not infringe on the proprietary rights of others, we cannot assure you that the technology does not and will not infringe or that third parties will not assert infringement claims against us in the future. In addition, our recent acquisition of eGistics, Inc. included intellectual property.  We relied on customary representations and warranties of, backed by various indemnities from, the sellers, with respect to eGistics’ ownership of its intellectual property. While we are not aware of any infringement claims regarding such intellectual property, we have no firsthand knowledge with respect thereto, and can provide no assurance that such intellectual property does not infringe.   In the case of infringement, we would, under certain circumstances, be required to modify our products or obtain a license.  We cannot assure you that we would be able to do so either in a timely manner under acceptable terms and conditions or at all, or that we will have the financial or other resources necessary to defend successfully a patent infringement or other proprietary rights infringement action.  Further, even if we were not infringing, intellectual property litigation is expensive and time consuming for management.  Any of the foregoing could have a material adverse effect on us.  Furthermore, if our products or technologies are deemed to infringe upon the rights of others, or if infringement claims are asserted against third parties whom we are obligated to indemnify, we could become liable for damages, which could have a material adverse effect on us.

 

Our products contain third party intellectual property which may expose us to additional risks.

 

We license components of our software systems and technology from third parties in reliance on such parties’ representations as to ownership of the licensed intellectual property.  If our licensors are found not to own or have rights to sublicense such rights to us and we are unable to replace the licensed technology with a comparable substitute, there could be a material adverse effect on our business prospects and financial results.  Even if we were to replace licensed technology with available alternatives, it could take time to identify the best replacement and integrate it into our software.  The delay and uncertainty could negatively impact our financial results. Furthermore, we could be sued for, or found liable for infringement arising from our use of such licensed technology and indemnity obligations, if any, on the part of the providers of such licensed technology might not be sufficient to cover liabilities we incur.

 

Our inability to protect our intellectual property could adversely affect our competitive position and, consequently, our business and operations.

 

Our success depends on our ability to protect our intellectual property. We rely upon trade secret protection, employee and third-party nondisclosure agreements and other intellectual property protection methods to protect our confidential and proprietary information.  Despite these efforts, we cannot be certain that others will not otherwise gain access to our trade secrets or copy and use information that we regard as proprietary without our authorization.  In the past, we have not obtained any patents.  As a result of a change in our intellectual property protection policy, we have begun to file patent applications with regard to relevant technology.  We have applications at this point for patents in the U.S. with regard to mobile capture, full page images and contextual classification.  We may file additional patent applications in the future.  We cannot assure you that:

 

ITEM 4 .                        INFORMATION ABOUT THE COMPANY

 

History and Development

 

Establishment, Legal Name, Office and Trading Markets

 

We were incorporated in March of 1991, are domiciled in Israel and exist as a company with limited share liability subject to Israeli law.  Our legal name is Top Image Systems Ltd. and our registered and principal executive offices are located in Israel at 2 Ben Gurion St, Ramat Gan, 5257334, and our telephone number is + 972-3-767-9100.  Our website is http://www.topimagesystems.com (the information contained in our website is not a part of this annual report and no portion of such information is incorporated herein).

 

 

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Ordinary shares of the company began trading on the NASDAQ in November 1996.  Ordinary shares of the company were previously also traded on the Tel Aviv Stock Exchange (“TASE”).  Effective October 31, 2014, we voluntarily delisted ordinary shares of the company from the TASE.

 

Recent Developments

 

Acquisition of eGistics, Inc.

 

On July 16, 2014, we closed our acquisition of eGistics, Inc., a Delaware corporation (the “Acquisition”). eGistics was a leading provider of private cloud-based document management solutions that enable organizations in the financial industry to optimize the way they store, manage and distribute content, documents and business information. 

 

We paid a total of $18 million in consideration of eGistics, which was comprised of $9 million ($8.3 million after a working capital adjustment) in cash, 2,353,310 of ordinary shares of the company.

Subsequent to the Acquisition we appointed Mr. Donald Dixon to our Board of Directors for a two-year term.  Mr. Dixon shares voting and investment power with respect to the shares received by entities associated with Trident Capital, Inc. which together beneficially own 13.1% of our outstanding ordinary shares as a result of the consideration such entities received in connection with merger.

 

We filed a registration statement on Form F-3 registering the 2,353,310 of ordinary shares of the company for resale by parties which received ordinary shares in connection with the Acquisition.  The resale of one-half of those shares is contractually restricted until July 15, 2016.

On October 21, 2014, we amended eGistics’ certificate of incorporation to rename the entity TIS Americas, Inc.

Underwritten Offering

 

In February 2014, we closed on an underwritten public offering of 3,162,500 of ordinary shares of the company at $4.75 per share for gross proceeds of $15.0 million. The aggregate amount of ordinary shares sold reflects the exercise in full by the underwriters of their option to purchase up to 412,500 additional ordinary shares to cover over-allotments.  We received net proceeds of approximately $13.7 million from the sale of ordinary shares, after deducting the underwriters’ discounts and other estimated offering expenses.

New Management Appointments

In the second quarter of 2015 the Company substantially fortified its management team by hiring several highly experienced and reputed industry leaders to key management positions.  The accomplished industry innovator and former CEO of ReadSoft SAP Solutions Lab Carsten Nelk was recruited to fill the position of Chief Technology Officer. Bob Fresneda, another well-known capture industry executive and proven sales generator, who as SVP, Region Americas & Asia Pacific for ReadSoft AB, acquired by Lexmark in 2014, was responsible for the growth of this region's revenues to over $25 million, assumed the position of President, TIS Americas.  Later in the second quarter the Company appointed Andrew Pery to the position of Chief Marketing Officer. Having served in the past both as Chief Marketing Officer for Hummingbird (now Open Text) and Kofax (now Lexmark), Mr. Pery brings extensive experience as Chief Marketing Officer for leading enterprises focused on document capture and enterprise content management solutions and broad skills in marketing, management, business development and M&A. The impact of the addition of these skilled and experienced executives to the Company’s management team is having a strong impact on the Company’s strategic planning and execution.

 

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Extending our market reach with strategic partnerships

A key dimension of our strategy is to forge partnerships with leading providers of document process automation solutions with global reach and focus on vertical industry solutions delivery expertise.  During fiscal 2015 we have entered into a strategic partnership with Xerox.  The partnership is built upon a track record of success that the two companies have built over the years with a number of successful implementations.

 

Over the years, TIS and Xerox have collaborated on many large-scale document processing projects for customers around the world. Some examples include several projects in France, from contract processing for a leading telecom provider to customer communications/ mailroom processing for a publishing company and for a large bank, along with invoice automation and document processing projects in the retail and energy sectors. Other notable joint projects include mailroom automation for UWV Netherlands, the Dutch social security agency, the Argentinean Census, which managed a staggering 185,000,000 forms in 6 months, invoice processing for a major Czech bank and a recent project for a telecom provider in Brazil enabling mobile customer enrollment at 3000 retail sites. The partnership represents a formalized global strategy. In an analyst report IDC characterized the deal as a “global reseller agreement with Top Image Systems that provides its customers with end-to-end automation solutions for industry-specific, content-driven processes. As part of the agreement, Xerox solidified its relationship with TIS, providing Xerox with full access to TIS Enterprise Capture technologies eFLOW and mobiFLOW, which Xerox will be using as a core platform within its workflow automation solutions. These solutions will support Xerox's large enterprise customers in improving their day-to-day effectiveness and streamlining content-driven tasks, such as onboarding, claims administration, and invoice processing.”

“IDC applauds this global partnership that Xerox and TIS have agreed upon and anticipates that the partnership will serve both companies extremely well. What makes this agreement a win for both parties is that it complements each other with solution, services, and sales force that support and enable strategy execution. For Xerox, this relationship will support expansion of workflow automation solutions for its enterprise-size businesses. For TIS, this relationship will support its strategy of expanding the global reach of its technology and solutions with the support of the Xerox global direct sales force that will act as the prime contractor with responsibility for all aspects of the customer relationship, both presales and post sales. TIS will support Xerox on complex bids as needed and will provide Xerox with: ·       Access to enterprise capture product that can support a variety of content types,         languages, classification techniques,  and integration points ·       Access to mobile scanning platform SDKs and specific mobile capture apps in the         banking vertical ·       A partner that brings high marks from its customers for customer service, willingness         to meet custom requirements, and the ability to work with customers on specific         projects ·       As this agreement is a global extension of a regional relationship, we anticipate that         the logistics around this partnership are already in place and once training of the         Xerox direct global sales team is completed, Xerox will make TIS solutions available         globally. Source: IDC Flash, Ron Glaz, March 2016.

 

 

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Mobile Capture Innovation   TIS is a pioneer in the delivery of innovative mobile capture technology. Our solutions are now deployed within the banking sector by leading financial service providers such as Fiserv and Jack Henry and Associates.   In 2012 TIS released the mobiFLOW mobile imaging platform as a stand-alone SDK that enables our partners to leverage TIS mobile technology to embed mobile applications that span across mobile check deposit, mobile bill payment and mobile enrollment solutions.

TIS signed a contract with Fiserv to supply them with our mobile imaging platform for a range of applications that can be integrated with existing Fiserv solutions deployed today at billers and financial institutions across the U.S. Initially Fiserv developed its Snap-to-Pay mobile bill payment application on the mobiFLOW platform as an add-on functionality for select Fiserv mobile banking and payments solutions that enables end-consumers to pay bills quickly and easily with a snap of their smartphone camera.  The launch of Snap-to-Pay by Fiserv is well-positioned in the market, as Fiserv manages the largest electronic bill payment network in the U.S., facilitating bill payments through thousands of billers and financial institutions for millions of end consumers.   Ginger Schmeltzer, Senior Vice President, Emerging Payments, Fiserv at the time of the agreement commented “Fiserv is committed to offering its customers a robust, dependable mobile imaging platform and applications that will ensure optimal quality, operational efficiency and a positive user experience.  We are confident that this agreement with TIS will continue to position us to meet growing consumer, biller and financial institution demand for these services.” In another publication Ms. Schmeltzer remarked, “The launch of Snap-to-Pay reflects the ongoing evolution of the Fiserv payments vision.  It’s important that we make the end user mobile payment experience easy and friction-free in order to drive adoption... Snap-to-Pay is a timesaver, and that is a valuable convenience for people who want to pay a bill and get on with their day.”

 

Xerox Brazil partnered with TIS to provide a mobiENROLL digital enrollment solution for a leading Brazilian telecom provider which was deployed at 3000 retail stores across Brazil. Top Image Systems was chosen to provide a mobile enrollment app that would efficiently integrate with Xerox’s back office document management solution. “We at Xerox Brazil are extremely enthusiastic about the enormous business potential of this partnership. There are endless opportunities across the Brazilian market to leverage mobile image processing to accelerate and increase the efficiency and accuracy of document-based processes...and to generate substantial new business.” Marcus Vinicius Lopes, Global Document Outsourcing, Xerox Brazil.

 

The mobiFLOW SDK is a multi-purpose mobile capture and processing platform that enables capture of any document of any size using a mobile device.   Our patent-pending APMI (Automatic Perfect Mobile Image) technology and embedded quality verification functionalities ensure that our applications provide the best user experience available.  The “APMI” technology delivers easy-to-use “auto-capture” functionality. APMI guides the user to hover with the smartphone above a document; in the split second that the APMI technology identifies that conditions are sufficient to take the picture (based on lighting, angle, distance, stability and other parameters) it automatically takes the picture. The APMI-based application also helps the user by hinting how the handset should be held (e.g. - closer, turn right, tilt down) in order to improve image quality. Consequently, the user avoids time-consuming repetitive image creation, examination, enhancement and rejection and enables high-quality capture on the first attempt.

 

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Strategic Acquisitions extend market reach to cloud based document process automation

 

With the acquisition of eGistics Inc., a leading U.S.-based provider of cloud solutions for financial service providers and banks, in 2014, TIS added the eGistics cloudDocs® platform to our product offering.   The acquisition enabled the company to extend its footprint into the U.S. banking sector for remittance processing.  The company has relationships with the largest financial service providers such as First Data and with the top banks in the U.S.

 

Bank of the West added the Snap-to-Pay application to their mobile banking program under the name Scan to Pay.   Through extensive testing, Bank of the West found Scan to Pay to be the most accurate service of its kind with almost no image rejections - – ~78% recognition; 77% field level accuracy; 35% perfect reads. Scan to Pay stands out through its use of machine learning to read mobile images of bill stubs, creating a streamlined, easy and efficient process for users. “We wanted to build something that is easy to use that gets it right virtually every time," said Jamie Armistead, executive vice president and head of digital channels at Bank of the West.  Later bank analyses of the product were positive, showing that bill set up with the app takes less than 30 seconds with accuracy rates more than 30% higher than current industry benchmarks. Scan-to-Pay was the first Bill Pay experience for 30% of the users, meaning new business for the bank; new users capture twice more bills than established users as they have many more payees to add; overall mobile bill pay volume grew 14%. The first mobiCHECK implementation at a leading global bank based in the UK with deployment of over 1 million users was deployed by TIS partner Jack Henry & Associates, Inc. “We have been impressed by the technologies underlying the TIS mobile capture solution and believe the combined strength of the TIS solution and our Alogent Mobile Remote Deposit solution will accommodate our international expansion strategy.” Stacey Zengel, GM Imaging Solutions, Jack Henry & Associates, Inc. In 2015 Stacey Zengel was promoted to President of the Jack Henry Banking division.

 

The eGistics acquisition enabled us to expand our solution suite to provide cloud-based document management and archiving applications to the U. S’s top financial institutions and 3rd party processors such as PNC Bank, First Data and FIS.  This highly scalable and highly secure cloud-based solution for the long-term storage and management of remittance (payment) images and data enables remittance corporate customers to correct and make exception decisions on-line to speed up posting.  We provide an agile, highly secure solution for the short- or long-term storage of ACH payment information and attached documents, and streamline dispute research and management. We provide secure, compliant cloud-based document management for banks - a solution that enables a bank to capture, store, protect and manage its own important business documents with over 50 billion documents managed and archived in a highly secure (PCI certified, and AT 101 SOC 2 Type 2, FFIEC and HIPAA compliant) private cloud data center.

FLOW Remit has been deployed by the top five and many other leading U.S. banks and financial institutions. One such customers is global payment processing company First Data Corporation. Operating 8 data centers across the U.S. each collecting millions of images per month, FDC had to aggregate all the images into a single archive and make the images available to users via a variety of front-end systems. FDC needed to replace legacy archive system with image platform to access payment-related data on which could build revenue-generating services, including decisioning.  Upon deploying eFLOW Remit, First Data achieved reduced paper storage and management costs; integrated images from disparate capture sources into a central archive; enhanced risk management; improved customer service; ensured regulatory compliance and centralized administrative control. They also generated revenue from the eFLOW Remit Decisioning Module.

 

In 2015, BNY Mellon, a global leader in investment management and investment services, upgraded its receivables solutions; as part of this upgrade, BNY Mellon initiated deployment of eFLOW Remit to power delivery of enhanced archival, retrieval and reporting services to BNY Mellon’s receivables clients.  "Our receivables services are an important part of our supply chain solutions," said Paul Simons, managing director and head of the Supply Chain Product Management Group for BNY Mellon's Treasury Services business.  “One of the key benefits we can deliver to clients is our ability to consolidate payment flows and remittance information across the full array of payment channels, electronic as well as paper-based. Our collaboration with TIS adds new and exciting dimensions to our ability to provide insights and analytics on receivables quickly, efficiently and on a fully integrated basis.  It's another example of strategic commitment to excellence as a provider of supply chain services."

Looking forward, TIS envisions fully leveraging our advanced cloud and mobile capture technologies to merge the eFLOW and CloudDocs solution sets to create a set of future-forward banking process automation solutions that engage bank customers as fully empowered participants in their banking processes.  Customers and bankers will be able to augment their familiar current bank-based processes with the ability to conveniently capture documents using a mobile or desktop device anytime, anywhere, inside or outside the bank branch and deliver them via a fully-integrated document processing platform without jeopardizing banking systems’ security or compliance, truly transforming digital banking via full customer engagement.

 

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In addition, TIS offers CloudDocs for Healthcare, a highly scalable claims management system that enables users to quickly search millions of documents directly from the CloudDocs user interface. CloudDocs for Healthcare helps health care or health care-related organizations handle an increasing number of documents, forms and records that must be captured, organized, protected and retrieved at a moment's notice.

Rebranded as eFLOW CloudDocs, this cloud-based platform also extends our market reach to support highly scalable and secure cloud based document process automation and archival solutions.  It forms and important foundation for our next generation of cloud based financial process automation solutions   The eFLOW CloudDocs platform automates the capture, management and storage of documents for any business process in a highly secure, highly scalable and compliant environment in the cloud.

eFLOW CloudDocs DM’s multi-tenant, SaaS-based architecture also enables access and retrieval of stored documents from any authorized device, anywhere. The intuitive interface of CloudDocs DM enables users to build the site to reflect their own organizational structure. Documents can be organized by department, function, location, role, or according to other user defined parameters.

The Way Forward:  End-to-end Financial Process Automation (FPA) Solution.

 

TIS has made significant efforts to deliver an end-to-end financial process automation solution that automate processes such as Procure-to-Pay and Order-to-Cash.  Our solutions enable treasury and finance organizations to streamline their labor-intensive and error-prone processes to reduce transaction costs, reduce invoice processing cycle times and thereby empower treasury to take advantage of early payment discounts to realize higher returns on invested capital.  We enable our customers to capture supplier invoices from multiple channels, automate the extraction, validation and matching of invoice metadata and line item information and integrate with back end ERP applications for approval and payment.

CNH America, LLC, a subsidiary of Fiat Industrial S.p.A, manufactures agricultural and construction equipment, employing some 30,000 and operating a network of 11,300 dealers worldwide. At CNH eFLOW processes some 53,000 invoices per month, including 11,000 EDI items, with 70% field recognition before initiation of system tuning.  Over 70% of matching invoices are touched only once in eFLOW and posted directly to SAP and 75% of invoices are posted automatically.  The system executes EDI visualization functionality to identify erroneous EDI items early on.

 

User Advice: Consider AP invoice automation solutions to augment your ERP payable processes when most of your purchasing activities are non-PO-related, are processed outside your ERP system, or if casual users find the user interface of the ERP system too complex. If you have multiple ERP solutions and/or multiple instances of a single ERP, AP invoice automation solutions can be leveraged to provide a common interface to AP to support a single financial management process for AP. Evaluate offerings from your strategic ERP vendor against specialist solutions from APIA, P2P and TEM vendors. Source: Gartner Research “IT Market Clock for Financial Management Applications, 2015”, Published: 30 September 2015, Nigel Rayner, Christopher Iervolino, John E. Van Decker.

The company places strategic focus on the emerging FPA market opportunity within the mid-market segment.  We are developing financial process automation solutions that can be deployed on premises, in hybrid and in cloud environments and which combine cloud capture, workflow and a gateway to multiple back-end enterprise resource planning or ERP platforms.  In particular, the cloud ERP adoption trend is accelerating within the mid-market, with 60% of companies in the $25 million to $1 billion range expected to adopt cloud ERP platforms over the next 3-5 years. We are enhancing and expanding our Financial Process Automation solutions to meet this growing demand and it represents our strategic focus for creating accelerated revenue growth.

 

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TIS’ eFLOW for Accounts Payable solution sets a new standard for financial processing by offering users the option of a traditional on premise deployment, a completely cloud-based deployment, or a hybrid deployment.  Tailored for mid-market companies where the migration of ERP to the cloud can be extremely challenging, the eFLOW AP solution offers a simple and flexible deployment path. eFLOW   provides an end-to-end solution for multichannel invoice capture and workflow that collects invoices of any type, extracts the relevant invoice data and validates it with three-way matching against the ERP, enabling seamless straight through process automation.  Fully integrated with SAP and other ERP systems our solution enables efficient payment, improves Accounts Payable monitoring and cash flow planning.  Maximized straight-through processing and compressed invoice processing cycles, eliminating delays and penalties and achieving discounts, mean significantly reduced invoice processing costs.

Throughout TIS’s history we have deployed complex Accounts Payable automation solutions at leading enterprises worldwide.   Bosch Service Solutions, an international supplier of Shared Services and Business Process Outsourcing and a part of the Bosch Group, one of the world’s leading global supplier of technology and services, has deployed eFLOW to process its over 300,000 invoices per month, arriving in German, English, Chinese (Fapiao invoices) & other languages.  eFLOW processes some 160 distinct company codes, each with specific requirements.   The system automatically recognizes the invoice data with a field recognition rate of over 80%, achieving straight through processing rates of up to 40% and posts the invoices in SAP.

 

The first release of our newest FPA release eFLOW AP, launched in the first quarter of 2016, targets SAP users   The seamless integration of the eFLOW AP automation solution with SAP extends the value of customers’ ERP investments by delivering greater workflow flexibility, streamlined exception resolution and enhanced visibility into AP data, all within SAP. The SAP deployment option offers several important advantages, including:

·

OCR functionality integrated into SAP which is capable of controlling the entire process;

·

ad-hoc real-time analytics to measure and adjust the AP process;

·

a familiar environment; and

·

eliminating data redundancy by using the existing SAP infrastructure to protect these investments.

 

In addition, the solution also leverages the most up-to-date SAP functionality such as FIORI resulting in a simplified user experience that enables users to work within a single consistent environment which distinguishes our solution from many competing alternatives. Our solution enables familiar interfaces for professional SAP users, easy data retrieval and validation from relevant SAP modules, easy use of existing SAP structures for authority checks and approval hierarchies, overall increasing return on investment in the existing SAP implementation.

The Accounts Payable operations of the global power generation provider ENEL involves 17 subsidiaries, 7000 suppliers and agents, creating 7-8 million invoices per year across multiple SAP systems & versions (4.6c, 4.7 e ECC 6.0).  An internal review in 2013 indicated that the project within which eFLOW is implemented achieved ROI of 385% resulting in an NPV of €14m.

 

eFLOW AP includes the following main components:

 

·	eFLOW Extract: Advanced extraction, validation and matching of data from invoices and other payables documents that arrive in any format, from any source, including from mobile devices.

·	eFLOW Control: Streamlined invoice review, automated posting, automated data completion and invoice validation including OCR on the fly capabilities.

·	eFLOW Resolve: Approval and exception resolution through the use of self-learning technology, configurable workflows, mobile review and segregation of duties.

·	eFLOW Portal: Integrated collaboration tool that facilitates purchase order and invoice submission, communication with suppliers, real-time self-service invoice and payment status and dynamic discount offers.

·

eFLOW Archive: Highly secure cloud-based archive that provides instant access to images and related data, workflow logs and robust reporting and analytics from anywhere, at any time.  eFLOW AP leverages the eFLOW CloudDocs archival platform for highest data security, letting users quickly organize documents by category, function, department or responsibility and share and archive invoices, purchase orders and related documents.  The solution also provides real-time reports that identify process bottlenecks and monitor performance, empowering finance departments to continuously improve and streamline accounts payable operations.

 

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Order to Cash

Financial Process Automation (FPA) solutions can automate all stages of the payment cycle.  On the accounts receivables side, TIS accelerates overall accounts receivable processes through expedited capture of AR documents from purchase orders through to remittance advices. In 2015, TIS expanded its activities in this sphere through partnership with a leading financial supply chain management processing provider, cooperating to offer automated remittance advice management solutions.

eFLOW for Sales and Purchase Orders

eFLOW for Sales and Purchase Orders makes sales order processing simple and consistent, streamlining document management workflow processing with sales and purchase order automation. eFLOW automates processing of all types of sales and purchase orders—any structure, any method of delivery.  The arrival of a purchase order—whether by fax, mail or email—prompts eFLOW to automatically capture and extract the relevant data. The solution classifies and verifies the extracted data, then feeds it directly into the ERP system for further action. Error-free PO data is shared across business systems, improving processes and communications.  The solution also contributes to regulatory compliance by facilitating the maintenance of internal controls, transparency and clear accountability.

Initiating downstream processes automatically upon receipt of every purchase or sales order eliminates lag time. Reducing response times and assuring high accuracy of data improves customer service levels, eliminates painful and costly customer complaints and the need for error correction and complaint management, ultimately bringing higher order replacement.

Principal Markets

 

As of December 31, 2015, we operated offices and branches in Israel, the United States, the United Kingdom, Germany, Hong Kong, Singapore, Australia and Japan.  Our U.S. branch is responsible for sales, marketing and support activities in the United States, Canada, and Latin America.  In addition, we believe that significant opportunities exist elsewhere in Europe, in Asia and in Africa.  We have several local sales and technical representatives in multiple countries. These representatives manage our sales, marketing and operational activity in their locations, providing integration and implementation services, as well as marketing support.

 

The following table summarizes total revenues by category of activity and geographic market for each of the last three completed fiscal years:

 

License Revenues by Region (U.S. dollars in thousands)

 

		2013								2014								2015
		$				%				$				%				$				%
Germany			2,616				22	%			2,893				26	%			2,421				31	%
Rest of Europe			1,761				15	%			3,035				27	%			2,127				28	%
Asia Pacific			2,322				20	%			2,745				24	%			1,433				19	%
North and South America			4,254				36	%			2,091				19	%			1,343				17	%
Africa & Middle East			809				7	%			447				4	%			384				5	%
Total			11,762				100	%			11,211				100	%			7,708				100	%

 

 

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Service Revenues by Region (U.S. dollars in thousands)

		2013								2014								2015
		$				%				$				%				$				%
Germany			7,820				45	%			6,186				25	%			4,881				19	%
Rest of Europe			4,370				25	%			7,121				29	%			4,658				18	%
Asia Pacific			3,259				19	%			3,536				14	%			3,837				14	%
North and South America			1,284				8	%			7,435				30	%			12,270				47	%
Africa & Middle East			562				3	%			366				2	%			437				2	%
Total			17,295				100	%			24,644				100	%			26,083				100	%

 

Seasonality

 

Seasonality does not currently affect our business in a material manner because the seasonality of different markets substantially offset each other.

 

Our business significantly depends upon the requirements of large corporations and governmental agencies.  As many of these entities operate according to annual budgets, their tendency is to approve budgets in the beginning of the fiscal year and release the budgets toward the end of the fiscal year. This mode of operation affects our results of operations throughout the year.

 

Marketing Channels

 

TIS continues to expand its credibility, brand recognition and presence worldwide through its channel sales program and investment in technology partnerships.  TIS cooperates with over 70 partners worldwide, including Xerox, PFU (Fujitsu) Imaging Solutions, Tata Consulting Services, Cognizant, Amdocs, Hanse Orga, Kodak and many others. We work with numerous eFLOW® resellers worldwide as well as with leading BPOs in North America and Europe.   We maintain technology partnerships with the world’s leading software vendors and with a broad set of recognition engine providers as well as with BPM and specialty workflow providers.

 

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The data capture market has been most recently characterized by consolidation. Lexmark, after acquiring Brainware and its Perceptive Software solution proceeded to ReadSoft and Kofax.  As a result, we are one of the few remaining independent global software companies in the document automation space.  We believe that we are positioned to benefit from present market dynamics by establishing partnerships with companies seeking to replace their capture and workflow vendor.   These opportunities may increase the length and complexity of our sales cycle.  However, they position us to enter into partnerships potentially leading to a larger pool of sizable deals that enable us to team with companies possessing complementary skills and functionalities.

 

In parallel, TIS is actively strengthening its joint go-to-market strategy with Xerox, Workflow Automation and other strategic partners in order to sell comprehensive end-to-end solutions based on eFLOW Digital Mailroom and/or eFLOW AP. We are also leveraging our eFLOW platform together with partner software and services to better meet customer demand and to expand our sales capacity.

 

Partnerships are also key in the area of mobile imaging, where our strategy is to accelerate our presence primarily through developing partnerships for sales.  TIS has signed agreements with well-known suppliers to the US financial industry such as Jack Henry & Associates and Fiserv, one of the leading global solution providers to banks and other financial institutions.  TIS is developing a broad network of mobile imaging partners to maximize its market access to this large, dynamic and fast growing sector.

 

Competition

 

Competition in the multichannel capture, workflow and delivery market is intensifying.  While there is much consolidation at the high end of the market, overall the market is fragmented and is characterized by numerous local applications, varying requirements, a multitude of specific vertical solutions and various combined software offerings to customers. Competitors usually focus on one or more key business processes and their solutions address differing needs, which vary according to company size, industry, geography and platform. Within the ECM lifecycle, TIS focuses primarily on the imaging and capture phase along with integrated, embedded BPM workflow capabilities. The big three ECM players (IBM, Opentext, and Oracle) primarily focus on the stages that follow capture, meaning BPM, content storage (archiving) and records management.

In contrast to solutions offered by smaller players, we built our eFLOW® platform from the ground up. The platform accordingly covers the entire spectrum of capture and imaging functionality, in contrast with many competitor solutions that focus only on specific areas (such as Accounts Payable). The data capture/imaging market is highly fragmented with more than 50 players and has recently been in a consolidation trend. We compete with Lexmark and its subsidiary Perceptive Software, IBM (which acquired Datacap), Oracle, Banctec, Basware, Hyland (which acquired AnyDoc), eCopy, Global360 (acquired by OpenText), Ikon, Itesoft, Nuance, Parascript, Scansoft, Scan Optics, as well as a variety of manual data entry systems.  Newer entries capturing interest and market share include Esker, Ephesoft, Coupa and Concur in the AP space.

In the United States and Europe, we often compete with multiple industry participation supplying similar solutions. In the Asia Pacific region, we compete mainly with local technology providers and the large global competitors. TIS competes in global and regional tenders as well as in the open market.

In the area of mobile capture and payments, we compete primarily with Mitek Systems, Inc., which was the first to market in the U.S. and has considerable market share.  Lexmark, which acquired Kofax, also offers a mobile capture solution. We view increased competition as a positive development through its effectively educating the market and increasing industry confidence in mobile solutions in general.

In the remittance processing arena, our solutions compete mostly with the solutions of Wausau (recently acquired by Deluxe) as well as with in-house solutions.

 

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Third Party Technology

 

We license various recognition software technologies from third parties in order to utilize them in our products. We currently use technologies developed by several different companies. Depending upon the requirements of each customer, we incorporate one or several of such technologies into a specific product. We are not dependent upon any single source of recognition software technology and the various technologies that we use are, in large part, interchangeable.

 

Intellectual Property Rights

 

Our success depends upon our proprietary software technology. We rely on trade secret protection, employee and third-party nondisclosure agreements and other intellectual property protection methods to protect our confidential and proprietary information. In addition, we are engaged in efforts to protecting our intellectual property through the filing of patent applications. Despite these efforts, we cannot be certain that others will not otherwise gain access to our trade secrets or copy and use information that we regard as proprietary without our authorization. None of our patent applications have yet resulted in a patent and we cannot assure you that we will succeed in obtaining any patents. We can disclose that on March 2, 2016 our application to issue US patent application number 14/078,637 which was filed on 13, November 2013 has been allowed for issuance. Notwithstanding, we cannot assure you that:

 

·

any patents which we may obtain will be broad enough to protect our technology, will provide us with competitive advantages or will escape challenge or invalidation by third parties;

 

·

the patents of others will not have an adverse effect on our ability to do business; or

 

·

others will not independently develop similar products, duplicate our products or, if patents are issued to us, design around these patents.

 

Further, the laws of foreign jurisdictions where we sell and seek to sell our products may afford little or no protection of our intellectual property rights. We cannot assure you that the protection provided to our intellectual property rights by the laws and courts of foreign nations will be substantially similar to the remedies available under U.S. law.

 

We believe that our technology has been developed independently and does not infringe on the proprietary rights of others. However, we cannot assure you that the technology does not and will not infringe or that third parties will not assert infringement claims against us in the future. In the case of infringement, we would, under certain circumstances, be required to modify our products or obtain a license. We cannot assure you that we would be able to do either in a timely manner under acceptable terms and conditions or at all, or that we will have the financial or other resources necessary to defend successfully a patent infringement or other proprietary rights infringement action. Further, even if we were not infringing, intellectual property litigation is expensive and time consuming for management. Failure to do any of the foregoing could have a material adverse effect on us.  Furthermore, if our products or technologies are deemed to infringe upon the rights of others, we could become liable for damages, which could have a material adverse effect on us.

 

In addition, we license components of our software systems and technology from third parties in reliance on such parties’ representations as to ownership of the licensed intellectual property. If our licensors are found not to own or have rights to sublicense such rights to us and we are unable to replace the licensed technology with a comparable substitute, there could be a material adverse effect on our business prospects and financial results. Even if we were to replace licensed technology with available alternatives, it could take time to identify the best replacement and integrate it into our software. The delay and uncertainty could negatively impact our financial results.

 

We believe that product recognition is an important competitive factor in the form processing industry. Accordingly, we promote the eFLOW ® name in connection with our marketing activities. On March 10, 2009, the United States Patent and Trade Office (the “USPTO") registered a trademark for one of our significant solution and module names, namely eFLOW ®, for computer software applications; namely, software applications that processes and integrates data provided from various sources across a single platform, in Class 9 (U.S. CLS. 21, 23, 26, 36 and 38).

 

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Likewise, on May 26, 2009, the USPTO registered our trademark TIS® for use in connection with “Application service provider (ASP) featuring software, technical consultation and technical assistance in the field of computer systems and installation, maintenance, and updating of computer software” in International Class 042 (U.S. CLS. 100 and 101). Similarly, on May 26, 2009, the USPTO registered our trademark TOP IMAGE SYSTEMS® for use in connection with “Technical consultation in the field of computer systems; technical assistance in the nature of technical support services, namely, troubleshooting of computer hardware and software systems; installation, maintenance and updating of computer software”, in International Class 042 (U.S. CLS. 100 and 101).

Warranty and Service

 

We generally negotiate our warranty obligations with respect to our products on a case-by-case basis.  Normally our warranty period is up to three months. We may be exposed to potential product liability claims by our customers and users of our products. Currently, we hold worldwide product liability insurance and professional indemnity policies that provide coverage limited to different amounts up to $9 million. Despite this coverage, a successful claim against us for product liability could have a material adverse effect on our financial condition.  While we have not experienced material warranty liability in the past, we cannot assure you that future warranty expense will not have an adverse effect on us.

 

We have various maintenance and support agreements with many of our customers. These agreements typically provide us with regular payments of fees ranging 15-25% per annum of the applicable license fees. Our technical team also provides support to value-added resellers, distributors and systems integrators to assist in the integration of our products.

 

Governmental Regulation

 

The government of Israel encourages research and development projects through the OCS pursuant to the Law for the Encouragement of Industrial Research and Development, 1984 (the “ Research Law ”). In several times before, we received grants from the government of Israel through the OCS to finance portion of our research and development expenditures in Israel. Such grants bear royalties on sales of products utilizing technologies developed using such grants or arising out of such technologies, up to a maximum of 100% of the amount of participation received, linked to the dollar plus interest at the LIBOR rate for 12 month loans on the first day of trading in the year during which the grant was approved. In addition, if we fail to comply with any of the conditions imposed by the OCS, including the payment of royalties with respect to grants received, we may be required to refund any payments previously received from the OCS, together with interest and penalties. In 2015 we did not receive any grants. By way of comparison, in 2012, 2013 and 2014 together, we received grants totaling $408,000

 

The terms of the OCS grants limit our ability to transfer technologies outside of Israel without the prior approval of the OCS, if such technologies were developed using OCS grants or arose out of such technologies.  The OCS has the right but not the obligation, to allow transfer of technology outside of Israel. Also, even if we receive approval for the transfer of technology outside of Israel, such approval is likely to involve a significant payment to the OCS. We cannot be certain that any approval of the OCS will be obtained on terms that are acceptable to us, or at all.

 

We also benefit from being designated as an “Approved Enterprise” and as Benefited Enterprise under Israel’s Law for the Encouragement of Capital Investments, 1959.  For additional information, see the section below entitled "Additional Information - Law for the Encouragement of Capital Investments, 1959.”

 

Additionally, we may be subject to varied regulation in the markets where we sell our products.  The burden of complying with such regulatory schemes (which may be contradictory) could have a material adverse effect on our ability to diversify or grow our sales.

 

 

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Organizational Structure

 

Top Image Systems Ltd. is the parent company of several companies. It has a number of subsidiaries worldwide, the most significant and operational of which are the following wholly owned subsidiaries:

 

¾

T.I.S America Inc. (incorporated in Delaware);

 

¾

Tis Americas Inc. (incorporated in Delaware) formally named eGistics Inc. (a subsidiary of T.I.S America Inc.)

 

¾

Top Image Systems UK Limited (incorporated in the United Kingdom);

 

¾

Top Image Systems (2007) UK Limited (incorporated in the United Kingdom), formerly known as CPL;

 

¾

TIS Deutschland GmbH (incorporated in Germany);

 

¾

Top Image Systems (Asia Pacific) Pte. Ltd (incorporated in Singapore), formerly known as Asiasoft Global Pte Ltd;

 

¾

TIS Japan Ltd. (incorporated in Japan); and

 

¾

Top Image Systems Pty Ltd. (incorporated in Australia)

 

Top Image Systems (Singapore) Pte. Ltd is a wholly-owned subsidiary of Top Image Systems (Asia Pacific) Pte. Ltd, formerly known as Asiasoft Global Pte. Ltd.

 

Property, Plant and Equipment

 

Our principal executive offices are located in Ramat Gan, Israel and our principal business and service operations are located in Cologne, Germany, Frankfurt, Germany, Plano, TX, USA, New Orleans, LA, USA, Philadelphia, PA, USA, Tokyo, Japan, and Singapore. We also have a regional office in Hong Kong and Australia.

All facilities are leased. The following table sets forth details of the square meters and approximate monthly rental fees in U.S. dollars of our main current leased property, all of which are fully utilized:

Facility		Monthly rent in USD (approximate)				Square meters (approximate)				Expiration date
Ramat Gan, Israel			14,000				670				2017
Cologne, Germany			17,800				740				2021
Tokyo, Japan			3,700				120				2017
Hong Kong			2,000				100				2016
Plano, TX, USA			13,500				1,153				2019
Philadelphia, PA, USA			2,200				18				2016
Singapore			9,500				200				2018
Frankfurt, Germany			5,300				275				2020
New Orleans, LA, USA			9,400				400				2016

 

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ITEM 5 .                        OPERATIN G AND FINANCIAL REVIEW AND PROSPECTS

 

Management’s discussion and analysis of financial condition and results of operations

 

You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes and other financial information contained elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties, including those discussed in "Item 3. Key Information—Risk Factors." See "Forward-looking statements" at the beginning of this annual report.

 

Overview

 

We develop and market intelligent content capture and workflow automation solutions for managing and validating incoming content in any format from any source. Whether originating from electronic, paper, mobile or other sources, our solutions deliver digital content to the people and applications that drive an enterprise by using advanced network, mobile and cloud technologies.  Our software improves business processes by integrating different types of data from multiple sources. Our products integrate information regardless of the source and format of the data, whether structured, as in the case of application forms or surveys, or semi-structured, such as invoices, purchase orders, checks, freight and shipping bills and others or unstructured. Our solutions seamlessly deliver the extracted data to downstream business applications for further processing, performance monitoring, archival and storage such as enterprise content management, enterprise resource planning, or customer relationship management systems. Our solutions minimize the need for manual data entry by automatically reading, identifying, interpreting and processing information, thereby increasing data capture accuracy and straight through processing. Our platform consolidates incoming documents and data from multiple sources for Omni channel processing, replacing traditional means of extracting information from paper-based documents and integrating multiple information sources one platform for optimal processing, monitoring and compliance.   Going forward we are consolidating the capabilities of our eFLOW, mobiFLOW and eFLOW Cloud Docs platforms to create an enhanced multi-functional platform that will drive advanced end-to-end process automation solutions.

 

In 2015, we had a net loss of $8.3 million compared to net loss of $5.5 million in 2014 which is primarily attributable to a decrease in our revenues, and an increase in cost of revenues.

 

Sales Cycle

 

Our sales to end-user customers, value-added resellers, distributors and system integrators are made on open credit terms and we do not hold collateral to secure payment. The terms of the arrangements with these customers, generally, do not provide them with the right to return the purchased products or solutions.  Payment with respect to such sales is generally due within a specified period following receipt of an invoice.  The period varies from customer to customer, but usually we provide credit terms of up to 120 days for end-user customers and up to 180 days for resellers, distributors and system integrators.  In some arrangements, management can offer longer payment terms as mentioned above, evaluating business sense, creditworthiness of the customer and other facts needed to establish such decision.

 

Our sales cycle for eFLOW ® solutions ranges from 9 to 15 months. These sales cycles vary by customer and could extend for longer periods depending on the time required by the customer to evaluate the utility of the applicable product to its operations.  Our operating results could vary between periods as a result of this fluctuation in the length of our sales cycles, the purchasing patterns of potential customers, the timing of introduction of new products and product enhancements introduced by us and our competitors, technological factors, variations in sales by distribution channels, competitive pricing and generally non-recurring product sales.  Consequently, our license revenues may vary significantly by quarter.

 

 

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Geographical Considerations

 

The following table summarizes total revenues by geographic market for each of the last three completed fiscal years.

 

Revenues by Region (U.S. dollars in thousands)

 

		2013								2014								2015
		$				%				$				%				$				%
Germany			10,436				36	%			9,079				25	%			7,302				22	%
Rest of Europe			6,131				21	%			10,156				28	%			6,785				20	%
Asia Pacific			5,581				19	%			6,281				18	%			5,270				16	%
North and South America			5,538				19	%			9,526				27	%			13,613				40	%
Africa & Middle East			1,371				5	%			813				2	%			821				2	%
Total			29,057				100	%			35,855				100	%			33,791				100	%

 

Our acquisition of eGistics Inc., described below, represents part of our ongoing efforts to expand our geographical operations. As a result of the acquisition, we effectively diversified our revenue sources and reduced our dependence on Europe.

 

Acquisitions and Dispositions

 

Acquisition of eGistics, Inc.

 

On July 16, 2014, we closed on our acquisition of eGistics, Inc., a Delaware corporation, pursuant to an Agreement and Plan of Merger (the “Acquisition”). eGistics was a leading provider of private cloud-based document management solutions that enable organizations in the financial industry to optimize the way they store, manage and distribute content, documents and business information. 

 

We paid a total of $18 million in consideration of eGistics, which was comprised of $9 million in cash, subject to a working capital related adjustment, and issued 2,353,310 of ordinary shares of the company valued at $3.8244 per share, or $9 million in the aggregate.  After application of the adjustment, we paid a net cash amount equal to $8.3 million. The price per share of ordinary shares of the company issued in connection with the transaction was calculated pursuant to the terms of the Acquisition.

  

The Acquisition included customary provisions for transactions of this nature, including indemnity obligations concerning certain representations and warranties.  The indemnity obligations are secured by an indemnity insurance policy in favor of our wholly owned US subsidiary, and a portion of the cash consideration we paid into escrow.

 

Subsequent to the Acquisition we appointed Mr. Donald Dixon to our board of directors for a two-year term.  Mr. Dixon shares voting and investment power with respect to the shares received by entities associated with Trident Capital, Inc. which together beneficially own 13.1% of our outstanding ordinary shares as a result of the consideration such entities received in connection with merger.

 

We filed a registration statement on Form F-3 which became effective of October 8, 2014, registering the 2,353,310 of ordinary shares of the company for resale by parties which received ordinary shares in connection with the Acquisition.  The resale of such shares is contractually restricted until July 15, 2015, when 1,176,655 of such shares (allocated pro rata among the selling shareholders) will be released from this restriction, and the remainder will be released from this restriction on July 15, 2016.

On October 21, 2014, we amended eGistics’ certificate of incorporation to rename the entity TIS Americas, Inc.

 

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Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, which could potentially result in materially different results under different 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 and results of operations and are the most critical to aid in fully understanding and evaluating our reported results:

 

1.

Revenue recognition

 

2.

Allowance for doubtful accounts

 

3.

Contingencies and accrued expenses

 

4.

Share-based compensation

 

5.

Income taxes

 

Revenue Recognition

 

The Company reports its revenue in two categories: (i) license, which includes mainly perpetual license; and (ii) services, which includes Software as a Services ("SaaS") revenue, service revenue, including revenue from professional services, training services and post-contract customer support (“PCS”).

 

The Company accounts for the sale of perpetual software in accordance with ASC 985-605, "Software Revenue Recognition ("ASC 985-605")". ASC 985-605 generally requires revenues earned from software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements determined by the vendor's specific objective evidence ("VSOE") of fair value. VSOE is based on the price charged when an element is sold separately or renewed. Revenues are allocated under the "residual method" when VSOE of fair value exists for all undelivered elements and VSOE of fair value does not exist for all of the delivered elements, and when all ASC 985-605 criteria for revenue recognition are met.

 

Revenue from license fees is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.

 

 

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PCS revenue are deferred and recognized on a straight-line basis over the term of the agreement.

 

Arrangements that include professional services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement.

 

For sales not included a perpetual software, the Company recognizes revenues in accordance to Accounting Standards Update ("ASU") No. 2009-13, Topic 605 - Multiple-Deliverable Revenue Arrangements ("ASU 2009-13").  ASU 2009-13 requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price.

 

The selling price for a deliverable is based on its vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The Company then recognizes revenue on each deliverable in accordance with its policies for product and service revenue recognition. TPE of selling price is established by evaluating largely interchangeable competitor products or services in stand-alone sales to similarly situated customers. However, as the Company's products contain a significant element of proprietary technology and its solutions offer substantially different features and functionality, the comparable pricing of products with similar functionality typically cannot be obtained.

 

Additionally, as the Company is unable to reliably determine what competitors’ products' selling prices are on a stand-alone basis, the Company is not typically able to determine TPE. The ESP is established considering multiple factors including, but not limited to, pricing practices in different geographical areas and through different sales channels, gross margin objectives, internal costs, competitors' pricing strategies, and industry technology lifecycles. The selling price of the products and professional services was based on ESP.

 

Deferred revenues represent unearned amounts received for PCS and professional services arrangements that are paid by customers and not yet recognized as revenues.

 

The Company generally does not grant a right of return to its customers.

 

Allowance for doubtful accounts

 

We maintain an allowance for doubtful accounts for estimated losses inherent in our accounts receivables portfolio. In establishing the required allowance, we base our determination, among other factors, on information available about the debtors' financial condition, the volume of their operations and our evaluation of the security received from them. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is determined to be remote.

 

Contingencies and Other Accrued Expenses

 

We are, from time to time, involved in claims, lawsuits, government investigations, and other proceedings arising from the ordinary course of our business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. Such legal proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and cash flows. If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material.

 

Share-based compensation

 

We have selected the Monte-Carlo option-pricing model to determine the fair value of our awards on the date of grant. Determining the fair value of equity-based awards on the grant date requires the exercise of judgment, including the amount of equity-based awards that are expected to be forfeited. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

 

 

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Although management believes that their estimates and judgments about equity-based compensation expense are reasonable, actual results could differ.

 

Income taxes

 

We account for income taxes in accordance with ASC 740, "Income Taxes". This Statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax 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. We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

 

We account for uncertain tax positions in accordance with the provisions of ASC No. 740 "Income Taxes". This accounting guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements, under which a Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Accordingly, we report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

 

Recently Enacted Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, an updated standard on revenue recognition. ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and US GAAP. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. ASU 2014-09 was initially effective for annual and interim reporting periods beginning after December 15, 2016 and may be adopted either on a full retrospective or modified retrospective approach. On July 9, 2015, the FASB approved a one-year deferral of the effective date of the ASU. The revised effective date is for annual reporting periods beginning after December 15, 2017 and interim periods therein, with an early adoption permitted as of the original effective date. The Company is still evaluating the impact of implementation of this standard on its consolidated financial statements.

 

In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU 2015-17) “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”.  ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet statement of financial position. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods therein and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. The Company has not yet adopted ASU 2015-17 and does not expect the adoption of this guidance to have a material impact on its consolidated financial position or results of operations.

 

In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), whereby, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee ‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and 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. 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 must be applied. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Companies may not apply a full retrospective transition approach. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early application is permitted. The Company is evaluating the potential impact of this pronouncement.

 

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Results of Operations

 

The following table sets forth the percentage relationships of certain items from our consolidated statements of operations, as a percentage of revenues for the periods indicated:

 

		Year ended December 31,
		2013				2014				2015
		%				%				%
License revenues			40.5				31.3				22.8
Service revenues			59.5				68.7				77.2
Total revenues			100.0				100.0				100.0
Cost of License revenues			9.4				4.0				1.6
Cost of Service revenues			31.2				35.9				46.1
Total Cost of revenues			40.6				39.9				47.7
Gross profit			59.4				60.1				52.2
Operating costs and expenses:
Research and development, net			11.6				13.7				14.2
Selling and marketing			32.7				36.2				32.2
General and administrative			16.0				19.0				22.2
Acquisition related costs			-				3.3				-
Amortization of intangible assets			-				0.7				1.2
Total operating costs and expenses			60.3				72.9				69.8
Operating loss			(0.9	)			(12.8	)			(17.5	)
Financial expenses, net			(1.0	)			(0.9	)			(3.4	)
Other income, net			1.3				0.0				0.0
Loss from continuing operations before taxes on income			(0.3	)			(13.7	)			(20.9	)
Taxes on income (income tax benefits)			0.0				(1.5	)			(3.6	)
Net loss			(0.6	)			(15.2	)			(24.5	)
Attributable to:
Non- controlling interest			-				0.0				0.0
Company's shareholders			(0.6	)			(15.2	)			(24.5	)

 

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Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

 

Revenues .  Total revenues for the year ended December 31, 2015 amounted to $33.8 million compared to $35.9 million for the year ended December 31, 2014, a decrease of 5.8%. The decrease in revenues was driven by a decrease in license revenues of $6.5 million, or 37.4%, from $17.3 million in 2014 to $10.8 million in 2015. Service revenues increased by $4.4 million, or 23.7%, $23.0 million in the year ended December 31, 2015, compared to $18.6 million in the year ended December 31, 2014. The increase in service revenues was due to including a full year of revenues of eGistics, Inc. which we acquired in the third quarter of 2014. The decrease in license revenues was mostly a result of slower sales cycles, and fewer eFlow license sales.

 

Cost of Revenues .  Cost of Revenues increased by 12.7%, $16.1 million in 2015 compared to $14.3 million in 2014. Cost of revenues from licenses decreased by 22.3% from $1.9 million in 2014 to $1.5 million in 2015. The decrease is a result of fewer license sales. Cost of revenues from services increased by 18.1%, from $12.4 million in 2014 to $14.7 million in 2015 as a result of including a full year of cost of revenues of eGistics, Inc. which we acquired in the third quarter of 2014. In addition, the increase in services revenues resulted in the use of more contractors and third party providers, and higher travel costs.

 

Gross margin decreased by 7.8% from 60.0% gross margin in 2014 to 52.2% gross margin in 2015. The decrease is because the revenues decreased and the cost of revenues include fixed costs.

 

Research and Development, net .  Research and Development expenses decreased by 2.4%, $4.8 million in 2015 compared to $4.9 million in 2014. This decrease is a result of lower use of contractors, and additional decrease in travel and transportation expenses.

 

Selling and Marketing . Selling and Marketing expenses amounted to $10.9 million in the year ended December 31, 2015 and $13.0 million in the year ended December 31, 2014. This 19.0% decrease is the result of lower commission payments to our sales team, due to lower sales levels.

 

General and Administrative .  General and Administrative expenses in the year ended December 31, 2015 amounted $7.5 million, compared to $6.8 million for the year ended December 31, 2014. This increase of 9.9% is mainly result of from including the General and Administrative expenses derived from eGistics for a full year, and an additional increase in bad debts provision in 2015.

 

 

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Financial expenses, net .  Our net financial expenses for the year ended December 31, 2015 increased to $1.1 million from $0.4 million for the year ended December 31, 2014.  The increase of 225% is derived mostly from exchange rate differences in Europe.

 

Tax on income. In 2015, we recorded a net tax expense in the amount of $1.2 million, which mostly results from increasing our valuation allowance on the deferred tax assets, since we assessed that the deferred tax assets will not be realized, in the foreseeable future.

 

  Net (loss) income .  As a result of an increase in our costs, primarily after giving effect to bad debt provision and recording a full valuation allowance in respect to deferred tax assets, and to including a full year of costs of eGistics, Inc. which we acquired in the third quarter of 2014, and in addition a decrease in revenues as described above, we incurred a net loss of $8.3 million in 2015, compared to net loss in the amount of $5.5 million in 2014.

 

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

 

Revenues .  Total revenues for the year ended December 31, 2014 amounted to $35.6 million compared to $29.1 million for the year ended December 31, 2013, an increase of 23.4%. The increase in revenues was driven by an increase in license revenues of $4.8 million, or 38.0%, from $12.5 million in 2013 to $17.3 million in 2014. Service revenues increased by $2.0 million, or 12.4%, from $16.6 million in the year ended December 31, 2013 to $18.6 million in the year ended December 31, 2014. The increase in service revenues was due to the increase in our maintenance stream as well as higher levels of professional services provided by our larger services team. The increase in license revenues was mostly a result of a first-time consolidation of the eGistics acquisition.

 

Cost of Revenues .  Cost of Revenues increased by 21.2%, from $11.8 million in 2013 to $14.3 million in 2014.  Cost of revenues from licenses decreased by 30.2% from $2.7 million in 2013 to $1.9 million in 2014. The decrease is a result of our decreased use of third party licenses and subcontractors in connection with customizing our solutions for specific customers. Cost of revenues from services increased by 36.7%, from $9.1 million in 2013 to $12.4 million in 2014 as a result of increase in our headcount as well as increase in usage of third party service providers.

 

Gross margin increased by 0.6% from 59.4% gross margin in 2013 to 60.0% gross margin in 2014.

 

Research and Development, net .  Research and Development expenses increased by 45.5%, from $3.4 million in 2013 to $4.9 million in 2014. This increase is a result of our continued investment in product development as well as from the integration of the R&D costs of the eGistics acquisition.

 

Selling and Marketing . Selling and Marketing expenses amounted to $9.5 million in the year ended December 31, 2013 and $13.0 million in the year ended December 31, 2014. This 36.5% increase is the result of the company’s increased investment in promoting its products in new markets in North America and Australia as well as the addition of the costs of eGistics.

 

General and Administrative .  General and Administrative expenses in the year ended December 31, 2013 amounted $4.6 million, compared to $6.8 million for the year ended December 31, 2014. This increase of 47% is mainly result of the costs associated after the acquisition of eGistics, the cost of legal fees in the connection with the settlement of IP litigation with Mitek as well as the General and Administrative expenses derived from the acquisition of eGistics.

 

Financial expenses, net .  Our net financial expenses for the year ended December 31, 2014 increased to $0.4 million from $0.3 million for the year ended December 31, 2013.

 

Tax on income. In 2014, we recorded a net tax expense in the amount of $0.6 million. This tax expense is mostly a result of current tax expenses in Germany.

 

 

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Net (loss) income.   As a result of greater increase in cost than the increase in revenues as described above and a one-time acquisition related cost on the amount of $1.2 million, we incurred a net loss of $5.5 million in 2014, compared to net loss in the amount of $0.2 million in 2013.

 

Impact of Currency Fluctuation

 

We maintain operations and generate revenues in a number of countries.  The results of operations and the financial position of some of our local operations are generally reported in the relevant local currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to currency translation risk.  In addition, we are exposed to currency transaction risk because some of our expenses are incurred in a different currency from the currency in which our revenues are received and from which our revenues and expenses are reported.  Our most significant currency exposures are to the Euro, New Israeli Shekel, British Pound, Singapore dollar, Australian dollar, Japanese Yen and Brazilian Real. In periods when the U.S. dollar strengthens against these currencies our revenue may be decrease when expressed in US dollars. In periods when the U.S. dollar weakens against these currencies, our revenues may increase when expressed in US dollars.

 

Political and Economic Conditions in Israel Affecting our Business

 

Because our principal offices are located in Israel, political, economic and military conditions in Israel directly affect our operations.  Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors.  A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel.  There has been a marked increase in such hostility and a significant deterioration of Israel’s relationship with the Palestinian Authority since October 2000 and the peace process is currently at a standstill.  Since 2011, there have been high levels of instability in neighboring Arab countries including Egypt, Jordan, Tunisia, Libya, Bahrain, Yemen and Syria culminating in the replacement of certain leaders in some of those countries.  In addition, there is a high level of tension relating to Iran’s nuclear capabilities, Iran’s threats to attack Israel, and the potential response of Israel and the international community to Iran’s gaining nuclear capabilities. Differences between the President of the United States and the Israeli government have grown larger during the past year, adding to regional uncertainty. Civil war in Syria has intensified and has become increasingly complex over recent months and has continued into 2016. Stray ammunition from the conflict landing in Israel from time to time and there have been several cross-border skirmishes which increase the risk of escalation.  Religious fundamentalist organizations such as ISIS and Al Qaeda have played an increasingly prominent role in regional unrest generally and in the Syrian conflict in particular.  In addition, in July 2014, local hostilities intensified as Hamas launched over 3,000 rockets and launched attacks on Israelis from the Gaza Strip into Israel, reaching cities throughout the country, including the greater Tel Aviv area in which our corporate headquarters are located.  The Israel Defense Forces responded with attacks at Hamas targets in the Gaza strip and a military effort which included an invasion of parts of the Gaza Strip.  While hostilities have diminished in intensity, as of the date hereof, no permanent ceasefire agreement has been reached and it is unclear whether hostilities will continue and, if so, for how long.

Continuing or escalating instabilities and hostilities in the region or curtailment of trade between Israel and its present trading partners as a result or in response to such instabilities may have an adverse effect on our business conditions, including our ability to develop, manufacture and market our products.

   

Some of our employees in Israel are obligated to perform military reserve duty annually.  Moreover, in the event of armed conflict in which Israel is involved or the threat of such conflict, our employees might be called for active military duty for an unlimited period of time. Increased military activity could also result in a reduction of prospective qualified employees available to work for us to expand our business or replace employees on active military duty.  Our operations could be disrupted by the absence for a significant period of our executive officers or key employees as a result of military service.  Any disruption in our operations could adversely affect our ability to develop and market products.

 

 

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Economic Conditions

 

The Israeli government’s monetary policy contributed to relative price stability in recent years. Economic growth has continued in recent years, though at varying rates.  We cannot assure you that the Israeli government will be successful in its attempts to keep prices stable or that economic growth will continue.  Price volatility or a decrease in growth rates may have a material adverse effect on our business.

 

Trade Relations

 

Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation.  Israel is also a member of the World Trade Organization (WTO) that includes the General Agreement on Trade in Services (GATS) and the Agreement on Basic Telecommunications Services. Israel is a signatory to the WTO Information Technology Agreement requiring participants to eliminate duties on information technology products covered by the agreement.  In addition, Israel has been granted preferences under the Generalized System of Preferences by the United States, Australia, Canada and Japan.  These preferences allow Israel to export products covered by such programs either duty-free or at reduced tariffs. Israel is also a member in the Organization for Economic Cooperation and Development (OECD). Israel and the European Economic Community, now known as the European Union, signed a Free Trade Agreement in 1975.  That agreement provides benefits with regard to Israeli exports to most European countries and, in parallel, obligates Israel to abolish its tariffs on imports of industrial goods (as opposed to agricultural goods) originating from the EU countries over a number of years.  In 1985, Israel and the United States entered into an agreement to establish a free trade area.  The free trade area has eliminated all tariffs on industrial goods and some non-tariff barriers on most trade between the two countries.  On January 1, 1993, an agreement between Israel and the EFTA (European Free Trade Association), which currently includes Austria, Norway, Finland, Sweden, Switzerland, Iceland and Liechtenstein, established a free trade zone between Israel and the EFTA countries. Free trade treaties exist with a number of other countries (Turkey, Mexico, Canada and MERCOSUR) and are being negotiated with others. We cannot assure you that our ability to conduct trade in the international market will be unhindered by political developments in our region.

 

Liquidity and Capital Resources

 

As of December 31, 2015, we had $2.4 million in cash, cash equivalents, compared to $4.4 million as of December 31, 2014.

 

Our capital resources are derived from our operating activities as well as from our financing activities. In 2015, we used $1.0 million of cash in operating activity compared to $4.9 million used in operating activities in 2014. The decrease in cash used by operating activities in 2015 compared to 2014 was mainly attributed to a decrease in trade receivables, due to faster collection processes.

 

We believe that our current cash, cash equivalents and cash deposits and our forecasted positive cash flows for future periods, will be sufficient to meet our on-going operations for the year ending December 31, 2016.

 

Net cash used by investing activities for the year ended December 31, 2015 was $1.1 million compared to $7.8 million in 2014. In 2014, net cash used in investing activities consisted primarily of cash paid for the acquisition of eGistics.

 

For the years ended December 31, 2015 and 2014, our aggregate capital expenditures were $0.9 million and $0.2 million, respectively. These expenditures were principally for the purchases of computer hardware and software.

 

Net cash provided by financing activities was $0.3 million in 2015 compared to $14.1 million in 2014. The cash provided by financing activities is mostly attributable to proceeds from issuance of ordinary shares.

 

 

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Public Sale of Securities

 

In February 2014, we closed on an underwritten public offering of 3,162,500 of ordinary shares of the company at $4.75 per share for gross proceeds of $15.0 million. The aggregate amount of ordinary shares sold reflects the exercise in full by the underwriters of their option to purchase up to 412,500 additional ordinary shares to cover over-allotments.  We received net proceeds of approximately $13.7 million from the sale of ordinary shares, after deducting the underwriters’ discounts and other estimated offering expenses. The net proceeds from the offering will be used for general corporate purposes, including potential acquisitions.  Canaccord Genuity Inc. acted as the sole book-running manager for the offering, and Roth Capital Partners and The Benchmark Company, LLC acted as co-managers.

 

Research and Development, Patents and Licenses

 

In order to accommodate the rapidly changing needs of our markets, we place considerable emphasis on research and development projects designed to improve our existing product lines and to develop new product lines to meet the changing needs of our market. We invested in research and development with expenses level of $4,797,000 in 2015, compared to $4,914,000 in 2014, and to $3,377,000 in 2013. As of December 31, 2015, 41 of our employees were engaged primarily in research and development activities. We expect that we will continue to commit substantial resources to research and development in the future. For further details about our product see “Business Overview - Products and Solutions”.

 

Off-Balance Sheet Arrangements

 

We are not a party to any material off-balance sheet arrangements.

 

Tabular disclosure of contractual obligations.

 

The following is a summary of our significant contractual obligations as of December 31, 2015:

 

		Payment due by period ($ thousands)
Contractual Obligation*		Total				Less Than 1 Year				1-3 Years				3-5 Years				More than 5 Years
Operating and Capital Lease Obligation			4,151				1,602				1,687				700				162
Accrued severance pay**			1,533				-				-				-				1,533

 

*Our contractual obligations and commitments at December 31, 2015 principally include obligations associated with our operating and capital lease obligations and contractual and legal obligations related to employees and officers’ severance expense.  Such obligations are detailed in Note 8 to the consolidated financial statements for the year ended December 31, 2015 as well as the section entitled “Compensation” herein. We expect to finance these contractual commitments from cash on hand and cash generated from operations.

 

** Severance pay related to accrued obligations to employees as required under applicable labor law. These obligations are payable only upon termination, retirement or death of the respective employee.

 

Starting from October 2015, the Company had a line of credit with an Israeli bank ("the bank") for total borrowing of up to $ 500, based on several conditions and financial covenants. The line of credit bears interest rate of Libor + 4%.

 

 

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During the year ended December 31, 2015, from time to time the Company used this line of credit and recorded interest expenses in the amount of $ 3.

 

Subsequent to year end, on March 6, 2016, the Company replaced the current line with a new line of credit with the same bank. According to the agreement, the Company is provided with the aggregate principal amount of account receivables ("AR") loan and AR credit line which will not exceed the lower of $3,000 and the sum of 70% of the aggregate value of eligible AR. The line of credit bears interest rate of Libor + 4.2%. In the framework of the agreement, we undertook certain financial covenants, which mainly effected by cash, AR and EBITDA.

ITEM 6 .                        DIRECT ORS, SENIOR MANAGEMENT AND EMPLOYEES

 

Directors and Senior Management

 

The following table sets forth the identity of our directors, and senior management as of March 22, 2016.  The mailing address for each of the individuals below is c/o TIS at our address set forth herein.

 

Name	Age	Title
Izhak Nakar	65	Active Chairman of the Board
Michael Schrader	40	Chief Executive Officer
Yossi Dagan	40	Chief Financial Officer
Robert Fresneda	52	President, TIS Americas
Ido Schechter	55	Director
Asael (Asi) Karfiol	50	External Director
Osnat Segev-Harel	54	External Director
Donald R. Dixon	68	Director

 

Izhak Nakar founded the Company in 1991, and served as our Chairman of the Board and CEO from inception until 2001.  In 2001 – 2009, Mr. Nakar served as a Director.  Since 2009, Mr. Nakar has served as the Active Chairman of the Board. Mr. Nakar as Serial Entrepreneur founded NIR4YOU Technology Capital, a privately held investment company specializing in early stage investments in high–tech companies. NIR4YOU Capital has 15 companies on its portfolio including:    ForesCout, e-mobilis, TopGuard, Matearis, Video Codes, SundaySky, Expression Ltd, Secur DI, MomSense, Orcam, Outernets Inc etc. Three of the 15 companies were sold to large enterprises, including SAP and Microsoft.  Mr. Nakar served in the Israeli Air Force from 1970 to 1987, where he led various large-scale, highly technical development projects, including leading a development team that worked in cooperation with the U.S. Air Force. He received his B.Sc. in Computer Science from Bar Ilan University in 1982, and an MBA from Bar Ilan University in 1984. Mr. Nakar is a recipient of the “Israel Defense Award,” bestowed annually by the President of Israel, for the development of high-tech systems in the field of intelligence for the Israeli Defense Forces. He also received the “Man of the Year Award” in Business and Management (‘95-’96) in recognition of his business accomplishments and contributions to the growth and development of Israeli high-tech companies. In addition, in 2004, Mr. Nakar was elected as a member of the Board of Israel-Japan chamber of Commerce.

 

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Michael Schrader   Promoted to CEO in 2014, from 2004 Mr. Schrader served as the manager of TIS’s German operations, where he successfully organized a skilled sales team able to respond to the demands of a highly competitive market and an engineering team able to develop superior standardized applications. Upon joining TIS in 1999, Mr. Schrader rapidly progressed within the company, serving as a software engineer, a technical team leader, an international strategic project manager and as the director of engineering for Europe, then as General Manager for EMEA, Senior VP of Global Solutions and most recently CTO/COO. Prior to TIS, Mr. Schrader held the position of software engineer at Siemens and owned a Document Management consulting and development business. Mr. Schrader holds a degree in Business Engineering / Administration from the Bochum University of Applied Sciences and is an Associate Engineer of Siemens Technical College in Erlangen.

 

Yossi Dagan   has served as Chief Financial Officer since August, 2015.  Mr. Dagan brings over 13 years of experience working with publicly traded and private technology companies. Having last served as VP Finance of Kenshoo, a SAAS company managing online advertising, he previously managed the finance department as a Corporate Controller of Imperva Inc. (IMPV), leading the company to a successful IPO on the NYSE. Mr. Dagan is a CPA and holds a B.A. in Business and Accounting from the College of Management in Israel.

 

Robert Fresneda   was appointed President of TIS Americas in June 2015 to substantially expand geographical business operations. Prior to joining TIS, Fresneda served as SVP, Region Americas & Asia Pacific for ReadSoft AB, where he drove growth in revenues to US$25 million; after the acquisition of ReadSoft by Lexmark in 2014, Fresneda took responsibility for Worldwide Channel Sales. Under Fresneda’s leadership as President and CEO of ReadSoft North America, it became the largest subsidiary of the global enterprise, leading in total profits and personnel, revenue and profit growth. He holds degrees in Marketing, Accounting and Business Administration from the Southeastern Louisiana University.

 

Ido Schechter served as our CEO from January 2002 through December 2013, and has been a director since December 2004.  From January 2001 until he became CEO, Dr. Schechter was Vice President of TIS’ ASP 2 , our initiative to offer data collection services via the Internet, using the eFLOW® platform solution.  Prior to that Dr. Schechter was TIS’s Vice President of Sales from August 1996.  From January 1995 until August 1996, Dr. Schechter served as General Manager of Super Image, a former affiliate of ours, which operated a form processing service bureau.  From August 1993 to December 1994, Dr. Schechter oversaw the start-up of automatic form processing services at Israel Credit Cards, Ltd.  From 1991 to 1993, Dr. Schechter was a research scientist at the Horticultural Research Institute of Ontario, Canada.  Dr. Schechter is the recipient of eight Honors and Scholarships, has published or presented more than twenty-five articles and is a Captain in the Israeli Air Force.  Dr. Schechter received his Ph.D.  and M.Sc. in Plant Physiology from the University of Guelph in Ontario, Canada and his B.Sc.  from the Hebrew University in Israel.

 

Asael Karfiol was elected to serve as an external director for a third three-year term in October 2013. Mr. Karfiol has been active in the field of venture capital and investment banking for more than 15 years in which he incorporates his financial education and expertise together with his technological and marketing education and expertise. Mr. Karfiol is a Partner and an Executive Director in Mooreland Partners, a global technology focused investment banking firm based in Greenwich Connecticut, with offices in New York, Silicon Valley and London . Prior to that, Mr. Karfiol served as General Partner at Hyperion Israel Venture Partners for seven years. From 1995 through 2001, Mr. Karfiol served as Vice President at Ascend Venture Capital, an Israeli venture capital fund and at ITI – Integrated Technologies of Israel, an American-Israeli investment company. Prior to that, Mr. Karfiol served as Marketing Manager for the Keter Plastic Group and as General Manager of a strategic international marketing consulting firm for leading Israeli corporations . Mr. Karfiol holds a B.Sc. (summa cum laud e) in Electrical Engineering and an MBA (magna cum laude) from Tel Aviv University.

 

Osnat Segev-Harel was elected to serve as an external director in December, 2011 and was re-elected for a three-year term in December, 2014.   Ms. Segev-Harel has extensive experience of over 15 years in business development for high-tech companies. Ms. Segev-Harel is   currently serves as a go to market consultant for early stage high tech companies.  Until December 2013 Ms. Segev-Harel served as CMO and VP of business development for Sapiens International Corporation N.V. From 2005 through 2009 Ms. Segev-Harel served as a director of sales strategy and planning and as director of business development in NICE Actimize Inc. in New York, in which she has acquired a deep knowledge of the global banking industry in general and in North America in particular from 1995 through 2005 she served as business development executive in IBM, Israel, including as an account manager in IBM’s Banking Division.  Prior to that, between 1988 and 1994 Ms. Segev-Harel was a User Interface project leader in Digital Equipment Corporations, Israel.   Ms. Segev-Harel holds a Practical Engineering degree from the Hadassah College in Jerusalem, a B.Sc. in Futurism from the State University of New York and an MBA from Derby University majoring in Strategy. Ms. Segev-Harel has completed a Directors Certification Program at Bar Ilan University. Ms. Segev-Harel possesses professional competence as required by the Companies Law and regulations deriving thereof. 

 

 

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Donald R. Dixon was elected to serve as a director in July, 2014. Mr. Dixon is also a Managing Director of Trident Capital and co-founded the firm in 1993. Currently, Mr. Dixon serves also as a director of 2Checkout, Advanced Payment Solutions, Amprius, Iron Net Cybersecurity, Odyssey Logistics, Qualys (QLYS)and Tiandi Energy. Mr. Dixon is also on the investment committee of Mustang Ventures, an affiliated China fund of Trident Capital Fund VI. In the past, Mr. Dixon has served as a director of a number of other corporations, many of which were acquired, including eGistics, Inc. which we acquired in July 2014. In addition to his board work for Trident, Mr. Dixon is Co-Chairman of the Advisory Committee of the Princeton University School of Engineering and Applied Sciences. Mr. Dixon also serves on the Advisory Board of the Harvard Kennedy School Center for Public Leadership. From 1988 to 1993, Mr. Dixon was Co-President of Partech International, a private equity fund associated with Banque Paribas. Prior to Partech, he was a Managing Director of Alex. Brown & Sons. Earlier in his career, Mr. Dixon was a Vice President of Morgan Stanley & Co. and a Senior Account Officer at Citibank, N.A. Raised in New Jersey, Mr. Dixon earned his B.S.E. from Princeton University and his M.B.A. from Stanford Graduate School of Business.

 

The foregoing information is based upon data provided to us by the relevant director or senior management member.

 

The Company is not aware of any familial relationships between any of the persons named above.

 

Compensation

 

The aggregate direct remuneration paid or payable to all persons who served in the capacity of executive officer during 2015 was approximately $819,000, including approximately $36,000, which was set aside for pension and retirement benefits and including amounts expended by us for automobiles made available to our executive officers.

 

The total amount paid or payable to our directors, including external directors, for 2015 was $114,000. As of April 1 , 2016, options to purchase 737,500 of ordinary shares of the company were held by certain executive officers and directors (consisting of 6 persons). Options with respect to 620,834 of such shares are currently exercisable or will become exercisable within 60 days of April 1 , 2016. See “Share Ownership.”)

 

The compensation of the directors for 2015 (approved by our compensation committee and by our Board of Directors was as follows: Each of Mr. Don Dixon, Mr. Asael Karfiol, Ms. Osnat Segev-Harel and Dr. Ido Schechter received compensation for his or her service, in the amount of NIS 49,875 (approximately $12,800) per year and an amount of NIS 3,330 (approximately $850) for each meeting of the Board of Directors or any committee in which they participate.

 

·

During 2015, each of Mr. Don Dixon, Mr. Asael Karfiol and Ms. Osnat Segev-Harel and Dr. Ido Schechter was awarded options to acquire 25,000 Ordinary Shares of the Company. Half of the options vested on December 31, 2015 and the remainder will vest on December 31, 2016 (with acceleration in the event of an earlier change of control). The exercise price per share of the options is $3.30 per share.

 

·

During 2015, Mr. Izhak Nakar was awarded options to acquire 100,000 Ordinary Shares of the Company. Half of the options vested on December 31, 2015 and the remainder will vest on December 31, 2016 (with acceleration in the event of an earlier change of control). The exercise price per share of the options is $3.30 per share.

 

For further details about Mr. Nakar’s compensation see “ Related Party Transactions ”.

 

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Committees of the Board

 

Audit Committee

 

Our audit committee is comprised of Donald Dixon and the external directors Asael Karfiol and Osnat Segev-Harel.  The Companies Law requires that public companies appoint an audit committee.  The responsibilities of the audit committee include: identifying defects or irregularities in the management of the company’s business, deciding  if certain actions are material in the context of conflicts of interest or extraordinary in the context of  transactions with related parties and approving conflicts of interest and related party transactions, determining whether certain transactions with controlling shareholders require a competitive process or the way non-insignificant transactions are to be approved, reviewing and suggesting changes to the internal auditor work plan, examining our internal auditing arrangements and the functioning of the internal auditor and  determining  arrangements as to treatment of complaints by our employees regarding defects in the management of the company’s business and the protections to be given to such employees.  In addition, as described under Item 16, the audit committee is responsible for the approval of all audit and non-audit services provided to the Company by Ernst and Young and for overseeing the qualifications, independence, appointment, compensation and performance of the Company’s independent auditors. The audit committee operates under a charter adopted by our Board of Directors and which is on display on our website at http://www.topimagesystems.com . An audit committee must consist of at least three directors, including all of the external directors of the Company and, its chairman is required to be an external director. Asael Karfiol is the chairman of our audit committee. Furthermore, as required by NASDAQ rules all the members of our audit committee are independent, see “Directors, Senior Management and Employees- Independent Directors”.

 

Compensation Committee

 

Our compensation committee is comprised of Donald Dixon and the external directors, Asael Karfiol and Osnat Segev-Harel. Public companies are required to appoint a compensation committee comprised of at least three directors, including all of the external directors. The external directors must also constitute a majority of the members. All other members of the committee, who are not external directors, must be directors who receive compensation that is in compliance with the Compensation Regulations. In addition, the chairperson of the compensation committee must be an external director. That position is currently held by Osnat Segev-Harel. The Companies Law further stipulates that directors who are not qualified to serve on the audit committee may not serve on the compensation committee. An audit committee that meets all the qualifications for a compensation committee may also serve as a company's compensation committee.  Generally, any person who is not qualified to be a member of the compensation committee may not attend the compensation committee’s meetings. Our compensation committee meets those standards.

 

The responsibilities of the compensation committee under the Companies Law include: making recommendations to the Board of Directors with respect to our Compensation Policy and its extensions for additional periods, periodically reviewing the implementation of the Compensation Policy and providing the Board of Directors with recommendations with respect to any amendments or updates of it, approving transactions  arrangements with respect to the Terms of Office and Employment of office holders exempting a transaction with a candidate for chief executive officer from shareholder approval. The compensation committee also oversees the administration of the Company’s various compensation plans and arrangements, in particular, the incentive compensation, deferred compensation and equity based plans of the Company (and to the extent appropriate, the subsidiaries of the Company) and assists the Board in fulfilling its responsibilities relating to the compensation of directors, the chief executive officer and other office holders of the Company.

 

Independent and External Directors

 

The rules of the NASDAQ Stock Market require that a majority of our directors be “independent” as defined in Rule 5605(a)(2) thereof.  The Board of Directors has determined that Donald Dixon, Osnat Segev-Harel and Asael Karfiol are each independent director for purposes of the NASDAQ rules.

 

 

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Israeli law requires that a public company have at least two external directors. The two external directors of the Company are Osnat Segev-Harel and Asael Karfiol.  The Companies Law requires as a general principle that at least one statutory external director have financial and accounting expertise, and that the other statutory external director have professional competence, as determined by the Board of Directors. The Companies Law also requires a company's Board of Directors to determine the minimal number of members of the board of directors to possess financial and accounting expertise, based, among other things, on the type of company, its size, the volume and complexity of its activities and the number of directors.  Our Board of Directors decided that the minimal number of directors to possess financial and accounting expertise on the Company's Board shall be two. Under the Companies Regulations (Qualifications of Director Having Financial and Accounting Expertise and of Director Having Professional Competence) – 2005, a director having financial and accounting expertise is a person who, due to his or her education, experience and talents is highly skilled in respect of, and understands, business and accounting matters and financial reports, in a manner that enables him or her to deeply understand the company’s financial statements and to rise issues in respect of the manner in which the financial data is presented. The Board of Directors has determined that Asael Karfiol and Osnat Segev-Harel both possess financial and accounting expertise as required by the above mentioned regulations. Under the regulations, a director having professional competence is a person who has an academic degree in either economics, business administration, accounting, law or public administration or an academic degree in an area relevant to the company’s business, or has at least five years’ experience in a senior position in the business management of a corporation with a substantial scope of business, in a senior position in the public service or in the field of the company’s business. The Board of Directors has determined that Osnat Segev-Harel possesses professional competence as required by the above mentioned regulations.

 

NASDAQ rule 5605(c)(3) provides that an audit committee must have at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. The Board of Directors has determined that Asael Karfiol meets those requirements.

 

Employees

 

The following table presents the number of our employees categorized by geographic location:

 

Location		No. of Employees as of December 31,
		2013				2014				2015
Israel			37				43				43
Germany and rest of Europe			77				78				76
Japan			7				7				7
USA & Latin America			14				66				65
United Kingdom			11				11				13
Singapore and Hong Kong			23				23				29
Australia			-				5				7
Total			169				233				240

The following table presents the number of our employees categorized by activity:

		No. of Employees as of December 31,
		2013				2014				2015
Professional services			79				106				119
Research and development			28				44				41
Sales and marketing			41				53				49
Operations and administrations			21				30				31
Total			169				233				240

 

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We have never experienced any strikes or work stoppages. Substantially all of our employees have employment agreements and none are represented by a labor union.

We are subject to labor laws and regulations in Israel and in other countries where our employees are located.  Although our Israeli employees are not parties to any collective bargaining agreement, we are subject to certain provisions of collective bargaining agreements that are applicable to our Israeli employees by virtue of expansion orders of the Israeli Ministry of Industry, Commerce and Labor.   Israeli labor laws and the laws of other countries where our employees are located may differ materially from U.S. labor laws and, in some cases, impose material obligations on us (such as requirements to pay overtime, minimum wages, procedures for dismissal, severance pay or obligatory pensions and mandatory cost of living increases).

 

Share Ownership

 

Board of Directors, Senior Management and Certain Employees

 

Izhak Nakar, the chairman of our Board of Directors beneficially owned 1,864,409 ordinary shares representing approximately 10.3% of the Company’s issued and outstanding share capital, as of April 1, 2016. Ido Schechter, our former Chief Executive Officer and member of the board, beneficially owned 347,575 ordinary shares representing approximately 1.9% of the Company’s issued and outstanding share capital, as of April 1, 2016. All other directors and executive officers each beneficially owned less than 1% of the Company’s shares. The following table sets forth information regarding options held by our directors and officers currently exercisable or exercisable within 60 days as of April 1, 2016.  Ordinary shares subject to these options are deemed to be outstanding for the purpose of computing the ownership percentage of the person holding these options, but are not deemed to be outstanding for the purpose of computing the ownership percentage of any other person.

 

Name		Ordinary Shares Underlying Options		Expiration Dates		Exercise Prices ($/share)
Izhak Nakar		242,500		2019 – 2025		$1.30 - $3.86
Ido Schechter		142,500		2021 – 2025		$2.11 - $3.86
Michael Schrader		123,334		2022 – 2025		$3.30- $4.45
Don Dixon		12,500		2025		$3.30
All other directors and officers as a group		100,000		2021 – 2025		$2.11 - $3.86

 

None of the ordinary shares beneficially owned by any of the directors or executive officers of the Company has any voting rights which are different than the voting rights held by all other holders of ordinary shares.

 

Stock Options

 

In order to attract, retain and motivate employees (including officers) who perform services for or on our behalf, we maintain three Employee Share Option Plans, one established in 1996 (“ESOP 1996”), the second in 2000 (“ESOP 2000”) and the third in 2003 (“ESOP 2003”).  Upon adoption of ESOP 2003, all shares previously available for grant under ESOP 1996 and ESOP 2000 that were not the subject of outstanding options were transferred to ESOP 2003 and are subject to the terms of ESOP 2003. Further, all options under such old plans that expire prior to their exercise according to the conditions detailed therein will be transferred into the new plan. On August 29, 2013, our Board of Directors, based on the recommendation of our compensation committee of the same day, resolved to amend and restate ESOP 2003 ("Amended ESOP 2003"). Those decisions were approved by the shareholders on October 15, 2013. While Amended ESOP 2003 retains most of the terms and conditions of the ESOP 2003, it incorporates changes, inter alia, with regard to conformance with provisions of relevant tax law, the treatment of options in the context of a merger or acquisition of the Company and with the default vesting terms of options awarded Amended ESOP 2003. Amended ESOP 2003 is valid until August 28, 2023.  We filed the necessary documents with the Israeli tax authorities for the approval of Amended ESOP 2003 and on April 29, 2014 it was approved. Such approval provides the grantees eligibility for certain benefits under Section 102 of the Israeli Income Tax Ordinance (New Version) 1961. As of April 1, 2016, options to purchase an aggregate of 1,826,443 ordinary shares were outstanding.  The outstanding options are exercisable at exercise prices between $1.30 and $6.04.  In addition to shares reserved in the event of the exercise of the outstanding options, 200,494 shares are reserved in the event of the issue of additional options.

 

 

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Major Shareholders

 

The following table sets forth certain information regarding the beneficial ownership of our outstanding ordinary shares as of April 1, 2016, for each person whom we know (based on filings with the SEC) beneficially owns five percent or more of the outstanding ordinary shares.

 

Beneficial ownership of shares is determined under SEC, and generally includes any shares over which a person exercises sole or shared voting or investment power. The number of shares indicated as “Beneficially Owned” in the following table includes the number of shares underlying options or warrants that are currently exercisable or may be exercised in 60 days.  Ordinary shares subject to these options are deemed to be outstanding for the purpose of computing the ownership percentage of the person holding these options, but are not deemed to be outstanding for the purpose of computing the ownership percentage of any other person. Applicable percentages are based on 17,919,126 ordinary shares outstanding as of April 1, 2016.

 

Name		Number of Shares Beneficially Owned				Percentage of Shares
Izhak Nakar (1)			1,864,409				10.3	%
Entities Associated with Trident Capital, Inc. (2			2,346,707				13.1	%

 

(1)

Mr. Nakar’s beneficially owned shares includes 1,562,735 ordinary shares held by Nir 4 You Technologies Ltd.

 

(2)

The information is based upon the recent Schedule 13G filed with the SEC by Trident Capital   Management V LLC on February 17, 2015. Consists of (i) 2,102,267 held of record by Trident Capital Fund-V, L.P., a Delaware limited partnership, (ii) 60,846  held of record by Trident Capital Fund-V Principals Fund, L.P., a Delaware limited partnership, (iii) 12,218 held of record by Trident Capital Fund-V Affiliates Fund, L.P., a Delaware limited partnership, (iv) 11,659 held of record by Trident Capital Fund-V Affiliates Fund (Q), L.P., a Delaware limited partnership, and (v)  159,717 held of record by Trident Capital Parallel Fund-V, C.V., a partnership organized under the laws of the Netherland. Trident Capital Management-V, L.L.C, a Delaware limited liability company (“TCM-V”), is the sole general partner of Trident Capital Fund-V, L.P., Trident Capital Fund-V Affiliates Fund, L.P., Trident Capital Fund-V Affiliates Fund (Q), L.P. and Trident Capital Fund V Principals Fund, L.P. TCM-V is the sole investment general partner of Trident Capital Parallel Fund-V, C.V. The members of TCM-V are Donald R. Dixon, Peter T. Meekin, John H. Moragne and Robert C. McCormack (collectively, the “Managers”), together in the case of certain such individuals with their respective family planning vehicles as reported as of July 31, 2014. The Managers of TCM-V share voting and investment power with respect to the shares held by each fund.

 

 

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Significant Changes in Percentage Ownership

 

In February 2014, we closed on an underwritten public offering of 3,162,500 of ordinary shares of the company at $4.75 per share for gross proceeds of $15.0 million. The aggregate amount of ordinary shares sold reflects the exercise in full by the underwriters of their option to purchase up to 412,500 additional ordinary shares to cover over-allotments.  We received net proceeds of approximately $13.7 million from the sale of ordinary shares, after deducting the underwriters’ discounts and other offering expenses. The net proceeds from the offering have been and will be used for general corporate purposes, including acquisitions.  Canaccord Genuity Inc. acted as the sole book-running manager for the offering, and Roth Capital Partners and The Benchmark Company, LLC acted as co-managers.

 

As of April 1, 2016, 17,919,126 ordinary shares of Company were issued and outstanding.  The Company believes that, as of April 1, 2016, there were 77 shareholders of record of the Ordinary Shares in the United States, who, collectively held as of that date a total of 15,964,254 ordinary shares, or 89.1% of the Company’s total outstanding ordinary shares.

 

Related Party Transactions

 

Our agreement with Mr. Izhak Nakar provides that in consideration for his services to the Company worldwide, Mr. Nakar is entitled to compensation in the amount of $28,125 plus VAT per month. During 2015, we paid Mr. Nakar $322,922 in cash compensation.

 

In addition, Mr. Nakar was awarded options to purchase 100,000 ordinary shares of the Company, vesting in two equal parts such that 50% vested on December 31, 2015 and the remainder will vest on December 31, 2016. The exercise price per share of the Options is $3.30. Pursuant to our agreements with Mr. Nakar, Mr. Nakar was entitled to receive a payment equal to 4.25% of our EBITDA for the year ended December 31, 2015, if we met certain revenue and EBIDTA targets set by the Board. During the course of 2015, he waived the entitlement for 2015.

 

The terms of Mr. Nakar's compensation for 2015 other than the options were approved in accordance with Israeli law as it existed prior to 2012 (see "Approval of Terms of Office and Employment"). Under the transitional provisions of an amendment passed in 2012, the approval remains effective. The options grant was approved by the compensation committee and then the Board of Directors on May 21, 2015, reaffirmed on October 29, 2015, and then by the Shareholders at the Company’s annual general meeting on December 28, 2015.

 

Our agreement with Mr. Schrader, the Chief Executive Officer of the Company, provides for a base salary of $252,000 (denominated in EURO) per year and for an automobile allowance, pension, retirement, severance, vacation or similar benefits.  During 2015 Mr. Schrader was paid $265,000. In addition, Mr. Schrader was awarded options to purchase 25,000 ordinary shares of the Company, vesting in three equal parts such that one third vested on December 31, 2015, one third will vest on December 31, 2016 and the remainder will vest of December 31, 2017. The exercise price per share of the Options is $3.40. Lastly, Mr. Schrader will be entitled to a cash bonus in the amount of $1,500,000 in the event of a merger or acquisition of the Company that reflects a valuation of the Company of more than $90,000,000. Mr. Schrader would have been entitled to receive an amount equal 4.25% of the Company’s EBITDA for the year ended December 31, 2015, had we met certain revenue and EBIDTA targets set by the Board of Directors. We did not meet those targets and, therefore, Mr. Schrader was not entitled to, and did not receive, such bonus for 2015.

 

The conditions of Mr. Schrader's employment were approved by the compensation committee and then the Board of Directors on May 21, 2015, reaffirmed on October 29, 2015, and then by the shareholders on December 28, 2015.

 

During 2015, Mr. Fresneda, President of TIS Americas, was paid $160,000, for a base salary, an automobile allowance, pension, retirement, severance, vacation or similar benefits.  Mr. Fresneda will be entitled to a cash bonus in the amount of $1,300,000 in the event of a merger or acquisition of the Company that reflects a valuation of the Company of more than $90,000,000. Mr. Fresneda would have been entitled to receive an amount equal 0.7% of the Company’s EBITDA for the year ended December 31, 2015, had we met certain revenue and EBIDTA targets set by the Board of Directors. We did not meet those targets and, therefore, Mr. Fresneda was not entitled to, and did not receive, such bonus for 2015.

 

 

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From time to time, as new members join our Board of Directors, they become parties to our letter of indemnification to be given to our directors and officers. The letter was approved by our shareholders at a shareholders meeting held on November 15, 2005 and amended at a shareholders meeting held on December 22, 2011. The aggregate indemnification amount that the Company will pay to all its officers and directors pursuant to these letters of indemnification shall not exceed $20,000,000.

ITEM 8.                        FINAN CIAL INFORMATION

 

Consolidated statements and other financial information

 

Consolidated Financial Statements

 

See Item 18.

 

Other Financial Information

 

The amount of export revenues constitutes a significant portion of our total revenues.  The following is a table giving details of our export revenues, as well as the breakdown of revenues between licenses and services.

 

		2013				2014				2015
		$ Thousands
Export Revenues
Export Revenues			28,928				35,216				33,063
Total Revenues			29,057				35,855				33,791
Percentage of Total Revenues			99.6	%			98.2	%			97.8	%
Breakdown of Revenues
License Revenues			40	%			31	%			23	%
Service Revenues			60	%			69	%			77	%

 

Legal Proceedings

 

During 2015, two of the Company's customers in Europe filed lawsuits due to certain commercial disputes with claims for payment of 100 EUR and 85 EUR respectively. The company denies all claims and is vigorously defending the suits, but is unable to predict the outcome at this stage.

 

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Dividend Policy

 

To date, we have not paid any dividends on ordinary shares of the company.  The payment of dividends in the future, if any, is within the discretion of the Board of Directors and will depend upon our earnings, our capital requirements and financial condition and other relevant factors.  We might not declare or pay any dividends in the future.

 

We have the status of an “Approved Enterprise” and "Benefited Enterprise" under the Law for the Encouragement of Capital Investments, 1959, and as amended, under which we may take advantage of certain tax exemptions. If we distribute a cash dividend from income which derived from the Approved and Benefited Enterprise during the tax exemption period, we would have to pay corporate tax at a rate of up to 25% (depended on the foreign investments with the Company) on the amount equal to the amount distributed and on the amount of corporate tax which would have been due in the absence of the tax exemption, in addition to withholding tax on such dividends paid. For further description of the conditions limiting our ability to declare and pay dividends see “Israeli Taxation, Foreign Exchange Regulation and Investment Programs".

 

The distribution of dividends may also be limited by the Companies Law, which permits the distribution of dividends only out of retained earnings or earnings derived over the two most recent fiscal years, whichever is higher, provided that there is no reasonable concern that payment of a dividend will prevent a company from satisfying its existing and foreseeable obligations as they become due. Our articles of association provide that dividends will be paid at the discretion of, and upon resolution by, our Board of Directors however, the Board of Directors at its discretion, may transfer the decision in this matter to the general meeting.

 

  Significant Changes .

 

None.

ITEM 9.                        LISTIN G

 

   Offer and Listing Details.

 

Since November 1996, ordinary shares of the company have been quoted on the NASDAQ.    Since April 29, 1999, the symbol for the ordinary shares has been “TISA.”

 

The following table sets forth, for the periods indicated, the high and low closing prices of ordinary shares of the company, as reported on the NASDAQ.

 

 

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Stock price history

 

The annual high and low market prices (in USD) for the ordinary shares for the five most recent full financial years are set forth below:

 

Year Ended			Price
December 31, 2015	Hi		$	4.32
	Lo			2.83
December 31, 2014	Hi			5.88
	Lo			3.29
December 31, 2013	Hi			6.04
	Lo			2.66
December 31, 2012	Hi			5.45
	Lo			2.19
December 31, 2011	Hi			2.91
	Lo		$	1.11

 

The high and low market prices for the ordinary shares for each full financial quarter over the two most recent full financial years and any subsequent period are set forth below:

 

Quarter Ended			Price
December 31, 2015	Hi		$	3.79
	Lo			2.83
September 30, 2015	Hi			4.32
	Lo			3.33
June 30, 2015	Hi			4.00
	Lo			3.15
March 31, 2015	Hi			3.66
	Lo			2.85
December 31, 2014	Hi			4.14
	Lo			3.29
September 30, 2014	Hi			4.57
	Lo			3.87
June 30, 2014	Hi			4.40
	Lo			3.59
March 31, 2014	Hi			5.88
	Lo		$	4.06

 

 

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For the most recent six months, the high and low market prices of the ordinary shares for each month are set forth below:

 

Month Ended			Price
February 29, 2016	Hi		$	2.28
	Lo			1.90
January 31, 2016	Hi			2.98
	Lo			2.17
December 31, 2015	Hi			3.39
	Lo			2.83
November 30, 2015	Hi			3.78
	Lo			3.30
October 31, 2015	Hi			3.79
	Lo			3.33
September 30, 2015	Hi			3.81
	Lo		$	3.33

 

Markets

 

Ordinary shares of the company were dual-listed on the TASE on December 3, 2006, in addition to being listed on the NASDAQ.  Effective October 31, 2014, we voluntarily delisted from TASE.

ITEM 10.                     ADDITIONAL INFORMATION

 

Memorandum and Articles of Association

 

General

 

TIS is registered with the Israeli Registrar of Companies.  The registration number issued to TIS by the Registrar of Companies is 52-004294-6.  The objectives for which we were founded are set out in Section 2 of the Memorandum of Association as follows: “The Company is permitted to deal with any activity that is meant to advance the interests of the Company and to act in any field which the Company’s management believes is beneficial to the Company.” At our December 22, 2011 shareholders meeting, we adopted new Articles of Association to accommodate changes that had been made in the Companies Law and in the Israeli Securities Law 1968-5728.

 

Directors and other Office Holders

 

General

 

A director’s ability to vote on a proposal, arrangement or contract in which the director is materially interested is codified, along with the fiduciary duties of all “office holders,” in the Companies Law.  Under the Israeli Companies Law, the term “office holders,” is defined to mean, a director, chief executive officer, chief business manager, deputy chief executive officer, vice chief executive officer, any person filling any of those roles in a company even if his title is different and any other manager directly subordinate to the chief executive officer.  An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty.  The duty of care includes avoiding negligent acts and acting skillfully as a reasonable office holder would act.  The duty of loyalty includes avoiding any conflict of interest between the office holder’s position in the company and his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others, and revealing to the company any information or documents relating to the company’s affairs which the office holder has received due to his position as an office holder of the company.

 

The Israeli Companies Law requires that an office holder promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company.

 

 

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In the case of a transaction in which an office holder has a personal interest, that is not an extraordinary transaction, as defined under Israeli law, and after the office holder complies with the above disclosure requirement, only board approval is required.  Members of the board having a personal interest should not be present at the vote or exercise their vote unless a majority of the board has a personal interest. The transaction must not be aversed to the company’s interest. If such transaction is an extraordinary transaction or if we intend to provide an undertaking to indemnify, exempt or insure an office holder, with regard to their duties,  or if we are making an arrangement as to conditions of employment of an office holder, then, in addition to any approval required by the Board of Directors or by any other organ of the company according to its Articles of Association, it also must be approved by the audit committee or compensation committee (depending on the nature of the transaction) prior to the approval by the Board of Directors, and, under specified circumstances, by a meeting of the shareholders.  In certain cases, the approval by the shareholders requires special majorities.  An office holder who has a personal interest in the approval of a transaction brought before the Board of Directors, the compensation committee or the audit committee may not be present at this meeting or vote on this matter unless most of the members have a personal interest in approving the transaction or the occurrence of specific circumstances defined in the law.

 

Arrangements regarding the compensation of our directors (whether in their capacity as directors or regarding the provision of other services) require audit committee or compensation committee (depending on the matter), Board of Directors and shareholder approval.

 

External Directors

 

Under the Israeli Companies Law, public companies are required to appoint two external directors. Any committee having the power to act on behalf of a company’s board (as opposed to an advisory committee) must have at least one external director as a member.  All of the external directors must be members of the Audit Committee and the compensation committee, the chairman of the Audit Committee and the compensation committee must be an external director.  An external director must be an individual resident of Israel, though the majority of companies whose business is conducted abroad may appoint foreign residents, provided that certain other criteria are met.  However, companies such as ours whose shares have been offered to the public outside of Israel may appoint external directors who are not residents of Israel.  A person may not be appointed as an External Director if:

 

·

Such person or his or her relative, partner, employer or any person to which they are directly or indirectly subordinate, or any entity under that person’s control, has or had, on or within the two years preceding the date of such appointment as an external director, any affiliation with the Company, with a Controlling shareholder at the date of such appointment or their relative,  or with an entity controlling, controlled by or under common control with the Company or, in a company that has no Controlling shareholder, an affiliation to a person who at the date of such appointment acts as the company’s chairman of the board, CEO, a principal shareholder or the most senior officer in the financial field. The term "affiliation" includes an employment relationship, a regular business or professional relationship, control, and service as an office holder other than service as a director appointed as an external director in a company offering shares to the public for the first time;

 

·

Such person's position or business activities create or may create a conflict of interests or interfere with such person's ability to serve in the capacity of an external director;

 

·

Such person acts as a director of another company in which one of the external directors’ acts as a director in the Company;

 

·

Such person is an employee of the securities authority or of the Tel Aviv Stock Exchange; or

 

·

Such person or their relative, partner, employer or any person to which he or she is directly or indirectly subordinate, or any entity under that person’s control, has a professional or business relationship with a person to whom affiliation is prohibited, even if such relationship is not maintained regularly, aside for negligible relationships.

 

 

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Under the Companies Law and regulations promulgated under it, a person is qualified to serve as an external director only if he or she possesses accounting and financial expertise or professional competence. At least one of the external directors must have accounting and financial expertise.

 

A controlling shareholder means a shareholder who has the ability to direct the company's actions other than by virtue of being a director or an officer.  A shareholder who holds more than 50% of the voting power in the company's general meeting of shareholders or any equivalent governing body or has the right to elect directors or to appoint the company's CEO is presumed to be a controlling shareholder.

 

No person may serve as an external director if the person’s position or other business creates, or may create, a conflict of interest with the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director.  A director of one company may not be appointed as an external director in another, if at the same time, a director of the other company serves as an external director of the first.  Other limitations exist with regard to various types of memberships and positions, whose holders may not serve as external directors.  If, at the time external directors are to be appointed, all current members of the Board of Directors are of the same gender, then at least one external director must be of the other gender.

 

The election of the external director requires a simple majority of the total number of votes cast at the meeting, whether such votes are cast in person or by proxy, provided that either:

	—	such majority includes at least the majority of the votes of non-controlling shareholders who are present in person or by proxy, where abstentions are not counted as votes; or
	—	the total number of shares held by non-controlling shareholders who voted against the election of the external Director does not exceed two percent of the aggregate voting rights in the company.

 

The initial term of an external director under the law is three years. The initial term is extendable for an additional two three-year terms under any of the following conditions: a) a shareholder holding at least 1% of the voting rights at the shareholders meeting nominates the external director for an additional term,  the majority provisions mentioned above are met and the external director is not at the time of the appointment a related or competing shareholder or related to such a shareholder and had no connection to such a shareholder during the two preceding years, b) the Board of Directors nominates the external director and the majority provisions mentioned above are met or c) the external director nominates himself and the majority provisions mentioned above are met and the external director is not at the time of the appointment a related or competing shareholder or related to such a shareholder and had no connection to such a shareholder during the two preceding years. In a company like ours whose shares are traded on specified exchanges outside of Israel, if  the compensation committee and the Board of Directors determine that, in light of the expertise and special contribution of the external director to the work of the Board of Directors and its committees, the appointment for an additional period is for the benefit of the company and if the shareholders meeting is be apprised of the grounds for that decision and the period during which the external director has already served, there is no limit as to the number of terms for which the external directors may be elected. External directors may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to the company.

 

An external director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly in connection with service provided as an external director or for any other service. Any external director who receives compensation in violation of such rules may not serve as an external director.  A  company, a controlling shareholder and any other entity controlled by the controlling shareholder may not grant to such external director, its spouse or child, any benefits, directly or indirectly and the external director, its spouse or child may not be appointed to serve in any position, may not be employed by and may not, directly or indirectly render any professional services to the company such controlling shareholder or any other entity controlled by the controlling shareholder, during the first two years following such external director termination of services, and with respect to a relative who is not the external director’s spouse or child during the first year following such termination.

 

 

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Alternate Directors

 

Under the Israeli Companies Law, the Articles of Association of a company may entitle a director to appoint another person to serve as an alternate director.  Our Articles entitle our directors by written notice to us to make such an appointment and to cancel any such appointment.  Our Articles also provide that any person may act as an alternate director.  The Israeli Companies Law now prohibits incumbent directors from acting as alternate directors and a single person from acting as an alternate director for more than one incumbent director.

 

The term of appointment of an alternate director may be for one meeting of the Board of Directors or for a specified period or until notice is given of the cancellation of the appointment.  To our knowledge, no director currently intends to appoint any other person as an alternate director, except if the director is unable to attend a meeting of the Board of Directors.

 

Internal Auditor and Certified Public Accountant

 

Under the Israeli Companies Law, the Board of Directors must appoint an internal auditor, nominated by the Audit Committee.  The role of the internal auditor is to examine, among other matters, whether the company’s actions comply with the law and orderly business procedure.  Under the Israeli Companies Law, the internal auditor may be an employee of the company but not an office holder (as defined above), nor an affiliate, nor a relative of an office holder or affiliate, and he or she may not be the company’s independent accountant or its representative.  In addition, the internal auditor may not be a person who holds 5% or more of the company’s outstanding share capital or voting rights, or a person who has the right to appoint one or more directors or the general manager.  The Company’s internal auditor is Mr. Doron Cohen of Fahn Kanne Control Management Ltd., a member firm of Grant Thornton International.

 

In addition, under the Israeli Companies Law, all companies must appoint a certified public accountant to audit the company’s financial statements and to report to the chairman of the Board of Directors any material improprieties that it may discover with respect to the accounting control of the company.  In our last shareholders meeting, December 28, 2015 we appointed Kost Forrer Gabbay and Kasierer, a member firm of Ernst & Young Global and certified public accountants in Israel, as our certified public accountant for auditing services, effective until the next shareholders meeting.

 

Indemnification of Directors and Officers

 

At a shareholders meeting held on December 22, 2011, following the amendment of the law in 2011, the shareholders approved the adoption of a new Articles of Association, which include, inter alia, an expansion of the insurance and indemnification given to office holders to the maximum extent permitted by law and in addition, the Shareholders approved the amendment of the indemnification letter currently in place with regard to the Company’s directors and office holders. See “Major Shareholders and Related Party Transactions - Related Party Transactions.”

 

Under the Israeli Companies Law, a company may indemnify an office holder against any monetary liability incurred in his or her capacity as an office holder whether imposed on him or her or incurred by him or her in favor of another person pursuant to a judgment, a settlement or an arbitrator’s award approved by court. A company also can indemnify an office holder against reasonable litigation expenses including attorneys’ fees, incurred, whether or not paid by him or her in his or her capacity as an office holder, in proceedings instituted against him or her by the company, on its behalf or by a third-party, in connection with criminal proceedings in which the office holder was acquitted, or as a result of a conviction for a crime that does not require proof of criminal intent, or in which an indictment was not brought against the office holder.

 

In addition, a company may indemnify an office holder against reasonable legal fees, including attorney’s fees, incurred, whether or not paid by him, by him or her in consequence of an investigation or proceeding instituted against him or her by an authority that is authorized to conduct such investigation or proceeding, and that was resolved without an indictment against him or her and without imposing on him or her financial obligation as an alternative of a criminal proceeding, or that was resolved without filing an indictment against him or her but with the imposition on him or her of a financial obligation as an alternative to a criminal proceeding in respect of an offense that does not require the proof of criminal intent.

 

 

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A company may indemnify an office holder in respect of these liabilities either in advance of an event or following an event. If a company undertakes to indemnify an office holder in advance of an event, the indemnification, other than litigation expenses, must be limited to foreseeable events in light of the company’s actual activities when the company undertook such indemnification, and reasonable amounts or standards, as determined by the Board of Directors.

 

A company may obtain insurance for an office holder against liabilities incurred in his or her capacity as an office holder. These liabilities include a breach of duty of care to the company or a third-party, including a breach arising out of negligent conduct of the office holder, a breach of duty of loyalty and any monetary liability imposed on the office holder in favor of a third-party. A company may also exculpate an office holder from a breach of duty of care in advance of that breach. Our Articles provide for exculpation both in advance or retroactively, to the extent permitted under Israeli law. A company may not exculpate an office holder from a breach of duty of loyalty towards the company, from a breach of duty of care concerning dividend distribution or a purchase of the company’s shares by the company or other entities controlled by the company or from procedures according to chapters H3, H4 or I1 of the Israeli Securities Law 1968-5728.

 

Under the Israeli Companies Law, a company may indemnify or insure an office holder against a breach of duty of loyalty only to the extent that the office holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company. In addition, a company may not indemnify, insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly (excluding mere negligence), or committed with the intent to derive an unlawful personal gain, or against a fine or forfeit levied against the office holder in connection with a criminal offense. In addition, a Company may indemnify any person as permitted in Section 56H(b)(1) of the Israeli Securities Law.

 

Currently, we hold an insurance policy for our office holders that provides coverage limited to $20,000,000 in aggregate for the policy period ending on March 31, 2017.

 

Approval of Terms of Office and Employment

 

Any arrangement between a public company and an office holder of the company as to such office holder’s terms of office and employment, including exemption and release of the office holder from liability for breach of his or her duty of care to the company, an undertaking to indemnify the office holder, post factum indemnification or insurance; any grant, payment, remuneration, compensation, or other benefit provided in connection with termination of service; and any benefit, other payment or undertaking to provide any payment as aforesaid (“ Terms of Office and Employment ”) generally require the approval of the company’s compensation committee and the Board of Directors and, with respect to directors and the chief executive officer, also the company’s shareholders (sometimes with special majorities). Notwithstanding the above, the amendment of existing Terms of Office and Employment of office holders (other than directors), requires the approval of the compensation committee only, if the committee determines that the amendment is not material in relation to its existing terms.

 

In addition, the Terms of Office and Employment of office holders must be in accordance with the terms of a compensation policy adopted by the Company (a “ Compensation Policy ”). Under the Companies Law, the Compensation Policy must be based on those considerations, must include those provisions and needs to reference those matters detailed in the Companies Law. A Compensation Policy must be approved by the compensation committee, the Board of Directors and the shareholders (with a special majority), though the compensation committee and the Board of Directors may approve a Compensation Policy despite the shareholders’ non-approval. On August 29, 2013, our compensation committee, followed by our board of directors, adopted a Compensation Policy and the Compensation Policy was approved (with the required special majority) by our shareholders on October 15, 2013. On November 18, 2014, our compensation committee, followed by our Board of Directors, adopted an amended Compensation Policy and the amended Compensation Policy was approved (with the required special majority) by our shareholders on December 31, 2014. (We note that on May 21, 2016 our compensation committee and our board of directors approved and amended the Compensation Policy and reaffirmed that approval on October 29, 2015, but our shareholders did not approve the amended Compensation Policy and, therefore, the Compensation Policy approved on December 31, 2014 remains in effect.)  A Compensation Policy generally must be brought for approval again in accordance with the procedures of the Companies Law once every three years.

 

 

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When the requirement to adopt a Compensation Policy was enacted in 2012, the validity of Terms of Office and Employment approved prior to the effective date of the amendment in accordance with the requirements of the Companies Law as at the time of approval was not affected. All current relevant Terms of Office and Employment that pre-date the adoption of the Compensation Policy and have not been changed since were approved by all required bodies of the Company.

 

Directors

 

Any arrangement between a company and a director as to his or her Terms of Office and Employment that is not consistent with the Compensation Regulations (as defined below) must be in line with the Compensation Policy and requires the approval of the compensation committee, the Board of Directors and the shareholders (in certain cases by a special majority). The compensation committee approved the terms of the directors' compensation where required for 2015 on May 21, 2015Both approvals were reaffirmed on October 29, 2015 and approved by the shareholders on December 28, 2015.

 

External directors may receive compensation solely as provided for in certain regulations promulgated pursuant to the Companies Law governing the terms of compensation payable to external directors (the “ Compensation Regulations ”).

 

Chief Executive Officer

 

Any arrangement between a company and its chief executive officer 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 a special majority. However, if certain conditions are met, the compensation committee and the Board of Directors may vary from the Compensation Policy with approval of the shareholders.

 

The compensation committee approved the terms of the CEO's compensation for 2015 on May 21, 2015 and the Board of Directors approved such terms on the same day. Those approvals were reaffirmed on October 29, 2015 and the shareholders approved the terms on December 28, 2015.

 

Other Office Holders

 

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 Compensation Policy and requires the approval of the compensation committee and the Board of Directors. However, if certain conditions are met, the compensation committee and the Board of Directors may vary from the Compensation Policy.

 

Rights, Preferences, Restrictions of Shares

 

Our authorized share capital consists of a single class of equity, ordinary shares of the company. Subject to Israeli law, dividends may be declared by a company’s Board of Directors, unless authority is provided in the company’s articles of association to transfer such powers to the company’s shareholders, who may then declare dividends following a recommendation by the directors. Our articles of association grant the board the power to transfer the final decision regarding dividends to the shareholders. In such event, the shareholders may only declare a dividend in an amount that is equal or less than that recommended by the directors or not to declare a dividend at all, despite a directors’ recommendation, but may not declare dividend in an amount which is in excess of the amount recommended by the directors.  The directors may invest or use otherwise for our benefit, any dividends that are not demanded within one year of their being declared.  The directors shall pay such un-demanded dividends upon receipt of a valid demand; however, the company is not liable to pay any interest on such un-demanded dividends.

 

Each shareholder is entitled to one vote for each ordinary share held. Except for the external directors, each director is elected to serve until the next annual general meeting of shareholders and until his or her successor has been elected.  Our Articles do not grant shareholders any rights to share in our profits other than through dividends.  In the event that we go into liquidation, any surplus is distributed to the shareholders in proportion to the amount paid by each on account of the nominal value of the shares paid.  No account is taken of any premiums paid in excess of the nominal value.

 

 

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We may issue and redeem redeemable shares and redeemable warrants. There are no sinking fund provisions recorded in our Articles.  The directors may only make calls upon shareholders in respect of sums unpaid on their shares.  Our Articles contain no provisions which discriminate against any existing or future shareholder as a result of said shareholder holding a substantial number of shares.

 

According to our Articles, any resolution on the change of the Company’s share capital by way of the creation of new shares, or cancellation of unissued registered shares, with preferred or qualified rights is deemed a change of our Articles of Association and as such requires the vote of a majority of 75% of the shareholders participating in the general meeting. If at any time our share capital is divided into different classes of shares, we may change the rights of shareholders by way of a resolution of the general meeting, subject to the consent of the shareholders of the class whose rights are being impaired by the proposed change.

 

Meetings of Shareholders

 

An annual general meeting must be held once in each year and not later than fifteen months after the preceding annual general meeting.  All shareholders are entitled to attend and vote or vote by proxy at annual general meetings.  Notice of annual general meetings may be sent by us by personal delivery, post, facsimile or telex to shareholders at the address recorded in our records. Any notice sent by post to a shareholder’s address that is situated outside of Israel must be sent by airmail. Any general meeting that is not an annual general meeting is called an extraordinary general meeting.  All shareholders are entitled to attend and vote or vote by proxy at extraordinary general meetings.

 

Our Board of Directors may convene an extraordinary general meeting when and as it sees fit.  In addition, the Board must, according to statute, convene an extraordinary general meeting if it receives a demand to do so from either (i) at least two directors, (ii) at least one quarter of the directors of the Board or (iii) one or more shareholders who hold (A) an aggregate of at least five percent of our issued share capital and one percent of all voting rights, or (B) at least five percent of all voting rights.  Any demand by a person or persons, as described in (i), (ii) and/or (iii) of this paragraph, who wish to demand that an extraordinary general meeting be convened must be made in writing and sent to our registered office.  The demand must detail the objects of the meeting and must be signed by all those making the demand.

 

Notice of an annual general meeting and of an extraordinary general meeting must be sent in advance to all shareholders recorded in our register of shareholders in accordance with the dates required according to the applicable law.  Such notice must include the place, date and hour of the meeting, the agenda for the meeting, the proposed resolutions and instructions for proxy voting.

 

The determining date as to share ownership for purposes of attending and voting at a general meeting is as set forth in the decision to convene a general meeting but not earlier than 21 days before the scheduled general meeting date and not later than 4 days prior to such scheduled meeting date;  Notwithstanding the foregoing, Israeli companies such as ours whose shares have been listed for trade on a recognized foreign stock exchange, which issue proxy statements to their shareholders in conformity with the law of the country where such foreign exchange is located, are entitled to vary such determining date to not earlier than 40 days before the scheduled general meeting date and not later than 4 days prior to such scheduled meeting date, and are entitled to certain allowances as to issuing proxy statements to shareholders outside Israel.

 

Limitations of Shareholders

 

No limitations exist or are imposed by Israeli law or our constituent documents with regard to the right to own our shares, including any limitations upon the rights of non-resident or foreign shareholders to hold or exercise voting rights.

 

 

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Limitations on Change of Control

 

There are no provisions in our Articles or other constituent documents other than as required by law that would have an effect of delaying, deferring or preventing a change in control of us.

 

Provisions Relating to Major Shareholders

 

We are required by law to maintain a separate register of shareholders that hold 5%, or more of either our issued shares or voting rights.

 

The Israeli Companies Law applies the same disclosure requirements to a controlling shareholder of a public company, which includes a shareholder that holds 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company, as it does to “office holders” in the context of a related party transaction.  For the purposes of this definition, the law deems two or more shareholders who hold voting rights in the company and each of which has a personal interest in the approval of a transaction being brought to the company for approval, as jointly holding such shares.  See the section entitled “Directors-General” in this report.  Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and agreements relating to employment and compensation terms of a controlling shareholder, require the approval of the audit committee or the compensation committee (depends on the nature of the transactions), the Board of Directors and the shareholders of the company.

 

The shareholder approval must either include majority of the shares held by disinterested shareholders who are present, in person or by proxy, at the meeting, or, alternatively, the total shareholdings of the disinterested shareholders who vote against the transaction must not represent more than 2% of the voting rights in the company.  In addition, a private placement of securities that grants 25% or more of the actual voting rights in the company prior to such private placement that its proceeds are not in cash or in registered securities or that is not in “market terms”, that will increase the relative holdings of a shareholder that holds 5% or more of the company’s outstanding share capital, assuming the exercise of all of the securities convertible into shares held by that person, or that will cause any person to become, as a result of the issuance, a holder of more than 5% of the company’s outstanding share capital, requires approval by the Board of Directors and then the shareholder of the company.

 

Under the Israeli Companies Law, a shareholder has a duty to act in good faith towards the company and the other shareholders and to refrain from abusing his power in the company, including, among other things, voting in the general meeting of shareholders on the following matters:

 

·

any amendment to the Articles of Association;

 

·

an increase of the company’s authorized share capital;

 

·

a merger; or

 

·

approval of interested party transactions that require shareholder approval.

 

In addition, any controlling shareholder who can determine the outcome of a shareholder vote and any shareholder who, under a company’s Articles of Association, can appoint or prevent the appointment of an office holder, is under a duty to act with fairness towards the company.  The Israeli Companies Law does not describe the substance of this duty.

 

The Companies Law, provides that in the event that a controlling shareholder breaches his duty of fairness then such breach shall be considered as a breach of contract, mutatis mutandis, while taking into account the special position of such controlling shareholder within the company.

 

 

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Material Contracts

 

Other than as described below, neither we nor any of our subsidiaries has entered into any material contracts, other than contracts entered into in the ordinary course of business, during the two years immediately preceding publication of this document:

 

On July 16, 2014, we closed our acquisition of eGistics, Inc., a Delaware corporation, pursuant to an Agreement and Plan of Merger (the “Acquisition”). eGistics was a leading provider of private cloud-based document management solutions that enable organizations in the financial industry to optimize the way they store, manage and distribute content, documents and business information. 

 

We paid a total of $18 million in consideration of eGistics, which was comprised of $9 million in cash, subject to a working capital related adjustment, and issued 2,353,310 of ordinary shares of the company valued at $3.8244 per share, or $9 million in the aggregate.  After application of the adjustment, we paid a net cash amount equal to $8.3 million. The price per share of ordinary shares of the company issued in connection with the transaction was calculated pursuant to the terms of the Acquisition.

 

The Acquisition included customary provisions for transactions of this nature, including indemnity obligations concerning certain representations and warranties.  The indemnity obligations are secured by an indemnity insurance policy in favor of our wholly owned US subsidiary, and a portion of the cash consideration we paid into escrow.

 

Subsequent to the Acquisition we appointed Mr. Donald Dixon to our Board of Directors for a two-year term.  Mr. Dixon shares voting and investment power with respect to the shares received by entities associated with Trident Capital, Inc. which together beneficially own 13.2% of our outstanding ordinary shares as a result of the consideration such entities received in connection with merger.

 

Israeli Taxation, Foreign Exchange Regulation and Investment Programs

The following is a summary of the principal Israeli tax laws applicable to us, the Israeli Government programs from which we benefit, and Israeli foreign exchange regulations. This section also contains a discussion of material Israeli tax consequences to our shareholders who are not residents or citizens of Israel. This summary does not discuss all aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances, or to some types of investors subject to special treatment under Israeli law. Examples of investors subject to special treatment under Israeli law include residents of Israel, traders in securities, or persons who own, directly or indirectly, 10% or more of our outstanding voting capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on new tax legislation that has not been subject to judicial or administrative interpretation. The discussion should not be construed as legal or professional tax advice and does not cover all possible tax consequences.

 

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 you that the tax authorities or the courts will accept the views expressed in this section.

 

         General corporate tax structure in Israel

 

Generally, Israeli companies are subject to “Corporate Tax” on their taxable income at the rate of 26.5% for the 2015 tax year. On January 5, 2016 the Israeli parliament approved the reduction of the corporate tax rate by 1.5%, from 26.5% to 25%, starting from January 1, 2016. Israeli companies are generally subject to Capital Gains Tax at the corporate tax rate.

 

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However, as discussed below, the rate is effectively reduced for income derived from our Approved Enterprise and Benefited Enterprise plans.

As of December 31, 2015, we had business loss carry forwards for tax purposes in the amount of $11,314,000. The amount of our carry forward business losses will be offset against relevant taxable future income for an indefinite period.

 

As of December 31, 2015 the foreign subsidiaries had operating loss carry forwards for tax purposes in the amount of $30,427,000. A portion of such losses expires over a period from 2022 through 2035, and some of them can be carried forward indefinitely.

 

        Law for the Encouragement of Capital Investments, 1959

The Law for the Encouragement of Capital Investments, 5719-1959 (the “ Investments Law ”), provides certain incentives for capital investments in a production facility (or other eligible assets).  Generally, an investment program that is implemented in accordance with the provisions of the Investments Law, referred to as an “Approved Enterprise”, is entitled to benefits.  These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the location of the facility in which the investment is made or the election of the grantee.         

 

Our facilities in Israel have been granted Approved Enterprise status under the Investments Law.  The Investments Law provides that an approved enterprise is eligible for tax benefits on taxable income derived from its approved enterprise programs.  The tax benefits under the Investments Law also apply to income generated by a company from the grant of a usage right with respect to know-how developed by the approved enterprise, income generated from royalties, and income derived from a service which is auxiliary to such usage right or royalties, provided that such income is generated within the approved enterprise’s ordinary course of business. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted average of the applicable rates. In addition, the tax benefits available to an approved enterprise are contingent upon the fulfillment of conditions stipulated in the Investments Law and regulations and the criteria set forth in the specific certificate of approval, as described above.  In the event that a company does not meet these conditions, it would be required to refund the amount of tax benefits, plus a consumer price index linkage adjustment and interest.

 

The Investments Law also provides that an approved enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved enterprise program.

 

        Since we have not yet generated taxable income, the period of benefits to which we are entitled as an Approved Enterprise has not yet begun.

 

        The Investments Law has been amended several times over the last years, with the two most significant changes effective as of April 1, 2005 (the “ 2005 Amendment ”), and as of January 1, 2011 (the “ 2011 Amendment ”).  Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the amended Investments Law.  Similarly, the 2011 Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of the Investments Law prior to the 2011 Amendment, yet companies entitled to benefits under the Investments Law as in effect up to January 1, 2011 may choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead to forego such benefits and elect the benefits of the 2011 Amendment. The following discussion is a summary of the Investments Law prior to its amendments as well as the relevant changes contained in the subsequent legislation.

 

Tax benefits for Approved Enterprises approved before April 1, 2005

 

Under the Investments Law prior to its 2005 amendment, a company that wished to receive benefits had to receive an approval from the Investment Center of the Israeli Ministry of Industry, Trade and Labor, which we refer to as the Investment Center.  Each certificate of approval for an Approved Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset.

 

 

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An Approved Enterprise may elect to forego any entitlement to the grants otherwise available under the Investments Law and, instead, participate in an alternative benefits program. Under the alternative benefits track, a company’s undistributed income derived from an Approved Enterprise will be exempt from corporate tax for a period of between two and ten years from the first year of taxable income, depending upon the geographic location within Israel of the Approved Enterprise.  The benefits commence on the date in which that taxable income is first earned. Upon expiration of the exemption period, the Approved Enterprise is eligible for the reduced tax rates otherwise applicable under the Investment Law for any remainder of the otherwise applicable benefits period. Since we have not yet generated taxable income, the period of benefits to which we are entitled as an Approved Enterprise has not yet begun.

 

A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors’ Company, or FIC.  A FIC eligible for benefits is essentially a company with a level of foreign investment, as defined in the Investments Law, of more than 25%.  A FIC that has an Approved Enterprise program will be eligible for an extension of the period during which it is entitled to tax benefits under its Approved Enterprise status (so that the benefit periods may be up to ten years) and for further tax benefits if the level of foreign investment exceeds 49%.

 

A company that has elected to participate in the alternative benefits program and that subsequently pays a dividend out of the income derived from the portion of its facilities that have been granted Approved Enterprise status during the tax exemption period will be required to recapture the deferred corporate tax applicable to the amount distributed (grossed up to reflect such tax) at the rate that would have been applicable had such income not been tax-exempted under the alternative route.  This rate generally ranges from 10% to 25%, depending on the extent to which non-Israeli shareholders hold such company’s shares. Such company may also be required to record a deferred tax liability with respect to such tax-exempt income prior to its distribution.

 

In addition, dividends paid out of income generated by an Approved Enterprise (or out of dividends received from a company whose income is generated by an Approved Enterprise) are generally subject to withholding tax at the rate of 15%, or at the lower rate provided under an applicable tax treaty.  The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter.  After this period, the withholding tax is applied at a rate of up to 30%, or at the lower rate under an applicable tax treaty.  In the case of a FIC, the 12-year limitation on reduced withholding tax on dividends does not apply.

 

The Investments Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program.  This benefit is an incentive granted by the Israeli government regardless of whether the alternative benefits program is elected.

 

The benefits available to an Approved Enterprise are subject to the fulfillment of conditions stipulated in the Investments Law and its regulations and the criteria in the specific certificate of approval with respect thereto, as described above.  If a company does not meet these conditions, it may be required to refund the amount of tax benefits, together with consumer price index linkage adjustment and interest.

 

The 2005 Amendment

 

        On April 1, 2005, an amendment to the Investments Law came into effect. The 2005 amendment revised the criteria for investments qualified to receive tax benefits. An eligible investment program under the amendment will qualify for benefits as a Benefited Enterprise (rather than the previous terminology of Approved Enterprise). Among other things, the amendment provides tax benefits to both local and foreign investors and simplifies the approval process. The period of tax benefits for a new Benefited Enterprise commences in the “Year of Commencement.” This year is the later of (1) the year in which taxable income is first generated by a company, or (2) a year selected by the company for commencement, on the condition that the company meets certain provisions provided by the Investments Law (Year of Election). The amendment does not apply to investment programs approved prior to December 31, 2004. The new tax regime applies to new investment programs only. Pursuant to the 2005 Amendment, the Investment Center will continue to grant Approved Enterprise status to qualifying investments.  However, the 2005 Amendment limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise, such as provisions generally requiring that at least 25% of the Approved Enterprise’s income be derived from export to specific markets with a population of at least 14 million.

 

 

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The 2005 Amendment provides that the approval of the Investment Center is required only for Approved Enterprises that receive cash grants. As a result, a company is no longer required to obtain the advance approval of the Investment Center in order to receive tax benefits.  Rather, a company may claim the tax benefits offered by the Investments Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment.  A company that has a Benefited Enterprise may, at its discretion, approach the Israeli Tax Authority for a pre-ruling confirming that it is in compliance with the provisions of the Investments Law. Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities) that derive more than 25% of their business income from export to specific markets with a population of at least 12 million.  In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which meets all the conditions that are set out in the amendment for tax benefits and which exceeds a minimum amount specified in the Investments Law.  Such investment entitles a company to a Benefited Enterprise status with respect to the investment, and may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Benefited Enterprise.  Where a company requests to have the tax benefits apply to an expansion of existing facilities, only the expansion will be considered to be a Benefited Enterprise, and the company’s effective tax rate will be the weighted average of the applicable rates.  In such case, the minimum investment required in order to qualify as a Benefited Enterprise must exceed a certain percentage of the value of the company’s production assets before the expansion.

 

The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Benefited Enterprise are determined, among other things, by the geographic location of the Benefited Enterprise.  Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to ten years, depending on the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefit period, depending on the level of foreign investment in the company in each year, as explained above.

 

The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the year of commencement, or 12 years from the first day of the Year of Election.

 

If a company distributes dividends from tax-exempt income, the company will be taxed on the otherwise exempt income at the same reduced corporate tax rate that would have applied to that income. Distribution of dividends derived from income that was taxed at reduced rates, but not tax-exempt, does not result in additional tax consequences to the company. Shareholders who receive dividends derived from Approved Enterprise or Benefited Enterprise income are generally taxed at a rate of 15%, which is withheld and paid by the company paying the dividend, if the dividend is distributed during the benefits period or within the following 12 years (the limitation does not apply to a Foreign Investors Company, which is a company that more than 25% of its shares owned by non-Israeli residents).

 

        The tax benefits available under Approved Enterprise or Benefited Enterprise relate only to taxable income attributable to the specific Approved Enterprise or Benefited Enterprise, and our effective tax rate will be the result of a weighted combination of the applicable rates.

 

Percent of Foreign Ownership		Rate of Reduced Tax		Reduced Tax Period		Tax Exemption Period
0-25%		25%		5 years		2 years
25-49%		25%		8 years		2 years
49-74%		20%		8 years		2 years
74-90%		15%		8 years		2 years
90-100%		10%		8 years		2 years

 

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The Company received approvals for an establishment program and three expansions during the years 1990, 1991, 1999 and 2000.

 

        We believe that our Approved Enterprise and Benefited Enterprise programs currently operate in compliance with all applicable conditions and criteria, but we cannot assure you that they will continue to do so. If we do not fulfill these conditions, in whole or in part, the benefits can be cancelled and we may be required to refund the amount of the benefits, linked to the Israeli consumer price index plus interest.

 

The Company elected 2009 as a year of election under the Amendment.

 

To date, the Company has not utilized the benefits of the Investments Law, as amended subsequent to April 1, 2005, because of utilizing carry forward losses from previous years for tax purposes.

 

The 2005 amendment to the Investments Law treats the repurchase of shares out of Benefited Enterprise tax exempt income as deemed dividend.        

 

        As a result of the 2005 amendment, tax-exempt income attributed to Benefited Enterprise will subject us to taxes also upon complete liquidation.

 

Reform of the Investments Law – “2011 Amendment”

 

The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such term is defined in the Investments Law) effective as of January 1, 2011 and onward.  A Preferred Company is defined as either (i) a company incorporated in Israel and not fully owned by a governmental entity or (ii) a limited partnership (a) that was registered under the Israeli Partnerships Ordinance and (b) all limited partners of which are companies incorporated in Israel, but not all of them are governmental entities, which, in the case of the company and companies referenced in clauses (i) and (ii)(b), have, among other things, Preferred Enterprise status and are controlled and managed from Israel. According to the 2011 amendment, the benefit tracks in the Investment Law were modified and a flat tax rate would apply to the Company’s entire preferred income. We will be able to choose to apply the amendment (the waiver is non-recourse) and from then the uniform corporate tax rate will be 9% in development Zone A and 16% elsewhere in Israel.

 

A dividend distributed from income which is attributed to a Preferred Enterprise/Special Preferred Enterprise will be subject to withholding tax at source at the following rates: (i) Israeli resident corporation – 0%, (ii) Israeli resident individual –20% (iii) non-Israeli resident - 20% subject to a reduced tax rate under the provisions of an applicable double tax treaty.

 

We may choose not to apply the 2011 amendment, in which case the Company will remain subject to the Investments Law as in effect prior to the 2011 amendment until the expiration of the Company’s current investment programs. We are examining the possible effect of the amendment on the financial statements, if at all.

 

         Law for the Encouragement of Industry (Taxes), 1969

We believe that we currently qualify as an Industrial Company within the meaning of the Law for the Encouragement of Industry (Taxes), 1969 (the “Industrial Encouragement Law”). Under the Industry Encouragement Law, an “Industrial Company” is defined as a company resident in Israel, at least 90% of the income of which, in any tax year, exclusive of income from government loans, capital gains, interest and dividends, is derived from an “Industrial Enterprise” owned by it.  An “Industrial Enterprise” is defined as an enterprise, located in Israel, owned by an Industrial Company, whose major activity in a given tax year is industrial production activity.

 

 

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        The following are the principal corporate tax benefits that are available to an Industrial Company:

 

§

Amortization of the cost of purchased know-how patents used for the development or promotion of the Industrial Enterprise over an eight-year period commencing on the year in which such rights were first exercised for tax purposes.

 

§

Accelerated depreciation rates on equipment and buildings.

 

§

Under specified conditions, an election to file consolidated tax returns with related Israeli Industrial Companies.

 

§

Expenses related to a public offering are deductible in equal amounts over three years commencing on the year of offering.

        Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We cannot assure you that we qualify or will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.

 

Tax Benefits for Research and Development

 

Israeli tax law allows, under specified conditions, a tax deduction for research and development expenditures, including capital expenditures, for the year in which they are incurred.  Such expenditures must relate to scientific research and development projects, and must be approved by the relevant Israeli government ministry, determined by the field of research.  Furthermore, the research and development must be for the promotion of the company’s business and carried out by or on behalf of the company seeking such tax deduction.  However, the amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects.  Expenditures not so approved by the relevant Israeli government ministry, but otherwise qualifying for deduction, are deductible over a three-year period.

 

Taxation of our Shareholders

The following is a short summary of the material provisions of the tax environment to which shareholders may be subject. This summary is based on the current provisions of tax law. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts.

 

The summary does not address all of the tax consequences that may be relevant to all purchasers of our common shares in light of each purchaser’s particular circumstances and specific tax treatment. For example, the summary below does not address the tax treatment of residents of Israel and traders in securities who are subject to specific tax regimes. As individual circumstances may differ, holders of our common shares should consult their own tax adviser as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of common shares. The following is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Each individual should consult his or her own tax or legal adviser.

 

Taxation of Israeli Shareholders on Capital Gains from Sale of Shares

 

Israeli law generally imposes a capital gains tax on the sale of capital assets located in Israel, including shares in Israeli resident companies, unless a specific exemption is available or unless a treaty between Israel and the country of the non-resident provides otherwise. The Ordinance distinguishes between the “Real Capital Gain” and the “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 (CPI) or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale.  The Real Capital Gain is the excess of the total capital gain over the Inflationary Surplus.

 

 

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An individual is subject to a 25% tax rate on real capital gains derived from the sale of shares. Additionally, if such shareholder is considered a “substantial shareholder” (generally a shareholder who holds directly or indirectly 10% or more of the right to profits, right to nominate a director or voting rights) of the company issuing the shares, the tax rate is 30%. Individual shareholders dealing with securities in Israel are taxed at their marginal tax rates applicable to business income.

 

Prior to January 1, 2012, the capital gain tax rate applicable to individuals was 20% (or 25% if the selling individual shareholder was a Substantial Shareholder at any time during the 12-month period preceding the sale).  With respect to assets (not shares that are listed on a stock exchange) purchased on or after January 1, 2003, the portion of the gain generated from the date of acquisition until December 31, 2011 will be subject to the previous capital gains tax rates (20% or 25%) and the portion of the gain generated from January 1, 2012 until the date of sale will be subject to the new tax rates (25% or 30%).

 

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 CPI each year, which equated to NIS 810,720 in the 2015 tax year), 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 threshold. For this purpose, taxable income will include taxable capital gains from the sale of our shares and taxable income from dividend distributions.

 

The determination of whether the individual is a substantial shareholder will be made on the date that the securities are sold. In addition, the individual will be deemed to be a substantial shareholder if at any time during the 12 months preceding this date he had been a substantial shareholder.

 

Israeli Resident Corporations. Under present Israeli tax legislation, the tax rate applicable to Real Capital Gain derived by Israeli resident corporations from the sale of shares of an Israeli company is the general corporate tax rate.

 

Taxation of Israeli Shareholders on Receipt of Dividends

 

Israeli Resident Individuals. Israeli residents who are individuals are generally subject to Israeli income tax for dividends paid on our common shares (other than bonus shares or share dividends) at 25%, or 30% if the recipient of such dividend is a Substantial Shareholder at the time of distribution or at any time during the preceding 12-month period.    However, dividends distributed from taxable income accrued during the period of benefit of an Approved Enterprise, Benefited Enterprise or Preferred Enterprise are subject to withholding tax at the rate of 15%, if the dividend is distributed during the tax benefit period under the Investments Law or within 12 years after that period.  An average rate will be set in case the dividend is distributed from mixed types of income (regular and approved/ benefited/ preferred income).

 

Israeli Resident Corporations. Israeli resident corporations are generally exempt from Israeli corporate tax for dividends paid on our common shares.

 

Taxation of Non-Israeli Shareholders on Capital Gain from Sale of shares

 

Non-Residents of Israel. Israeli capital gain tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or rights to shares in an Israeli resident company; or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the seller’s country of residence provides otherwise.  As mentioned above, Real Capital Gain derived by a company is generally subject to tax at the corporate tax rate of 26.5% or, if derived by an individual, at the rate of 25% or 30%, if generated from an asset purchased on or after January 1, 2003.  Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income.

 

 

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Non-residents of Israel, including corporations, will generally be exempt from any capital gains tax from the sale of shares traded on a recognized stock exchange outside of Israel (including NASDAQ), provided that such shareholders did not acquire their shares prior to an initial public offering and that the gains are not derived through a permanent establishment that the non-resident maintains in Israel. However, non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. In any case, these tax rates are subject to the provisions of any applicable tax treaty. On January 2009, an amendment to the Israeli tax regime became effective all the non-residents of Israel will generally be exempt from any capital gains tax from the sales of shares traded on a recognized stock exchange outside of Israel.

 

In addition, pursuant to the Convention Between the U.S. Government and the Government of Israel with Respect to Taxes on Income, as amended (the “United States-Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a person who qualifies as a resident of the United States within the meaning of the United States-Israel Tax Treaty and who is entitled to claim the benefits afforded to such person by the United States-Israel Tax Treaty (a “United States Treaty Resident”) generally will not be subject to the Israeli capital gains tax unless such United States Treaty 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. However, under the United States-Israel Tax Treaty, such United States Treaty 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 United States-Israel Tax Treaty does not relate to U.S. state or local taxes.

 

Taxation of Non-Israeli Shareholders on Receipt of Dividends

 

Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. These sources of income include passive income, including dividends, royalties and interest. On the distribution of dividends by a publicly traded company, income tax is withheld at source, at the rate of 25% for dividends paid to an individual or foreign corporation, and 15% for dividends generated by an Approved Enterprise, unless in each case a different rate is provided in a treaty between Israel and shareholder’s country of residence. Under the U.S.-Israel tax treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a U.S. resident will be 25%. However, the maximum tax rate on dividends not generated by an Approved Enterprise paid to a U.S. corporation holding at least 10% of our voting power is 12.5%.

 

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.

 

A non-resident of Israel who receives dividends from which tax was withheld is generally exempt from the duty to file returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer, and the taxpayer has no other taxable sources of income in Israel.

 

Foreign Exchange Regulations

An Israeli company calculates its tax liability in US dollars according to certain orders. The tax liability, as calculated in US dollars is translated into NIS according to the exchange rate as of December 31st of each year.

 

        Dividends, if any, paid to the holders of ordinary shares of the company, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of ordinary shares of the company to an Israeli resident, may be paid in non-Israeli currency. If these amounts are paid in Israeli currency, they may be converted into freely repatriable U.S. dollars at the rate of exchange prevailing at the time of conversion. In addition, the statutory framework for the potential imposition of exchange controls has not been eliminated, and may be restored at any time by administrative action.

 

 

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U.S. FEDERAL INCOME TAX CONSIDERATIONS

THE DISCUSSION BELOW IS BASED UPON THE SECTIONS OF THE INTERNAL REVENUE CODE, TREASURY REGULATIONS, PUBLISHED INTERNAL REVENUE SERVICE RULINGS, PUBLISHED ADMINISTRATIVE POSITIONS OF THE INTERNAL REVENUE SERVICE AND COURT DECISIONS THAT ARE CURRENTLY APPLICABLE, ANY OR ALL OF WHICH COULD BE MATERIALLY AND ADVERSELY CHANGED AT ANY TIME, POSSIBLY ON A RETROACTIVE BASIS.  THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY HOLDER OR PROSPECTIVE HOLDER OF ORDINARY SHARES AND NO OPINION OR REPRESENTATION WITH RESPECT TO THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO ANY SUCH HOLDER OR PROSPECTIVE HOLDER IS MADE. ACCORDINGLY, HOLDERS AND PROSPECTIVE HOLDERS OF ORDINARY SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS ABOUT THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF ORDINARY SHARES.

The following is a discussion of material United States Federal income tax consequences generally applicable to U.S. Holders (as defined below) who acquire ordinary shares of the company and hold them as capital assets. This discussion does not address all potentially relevant United States Federal income tax matters, and it does not address consequences peculiar to persons subject to special provisions of United States Federal income tax law, such as, for example, tax-exempt organizations, qualified retirement plans, persons subject to alternative minimum tax, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers and shareholders who acquired their shares through the exercise of employee share options or otherwise as compensation. In addition, this discussion only applies to common shares held by U.S. Holders as capital assets within the meaning of Section 1221 of the Internal Revenue Code, and does not cover any state, local or foreign tax consequences.

   

As used herein, the term “U.S. Holder” means a person, with the exception of those subject to special provisions of Federal income tax law, that holds our common shares that is (i) an individual who is a citizen or resident of the United States, (ii) a corporation organized under the laws of the United States, (iii) an estate, the income of which is subject to United States Federal income tax without regard to its source and (iv) a trust if (A) a United States court is able to exercise primary supervision over administration of the trust and one or more United States persons have authority to control all substantial decisions of the trust or (B) the trust has in effect a valid election under applicable United States Treasury Regulations to be treated as a U.S. person.

 

If a partnership or an entity treated as a partnership for United States Federal income tax purposes holds common shares, the United States Federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Partnerships or a partner in a partnership holding common shares should consult their own tax advisor regarding the consequences of the ownership and disposition of common shares by the partnership.

The term "Non-U.S. Holder" means a beneficial owner of an ordinary share who is not a U.S. Holder. The tax consequences to a Non-U.S. Holder may differ substantially from the tax consequences to a U.S. Holder. Certain aspects of U.S. federal income tax relevant to a Non-U.S. Holder also are discussed below.

 

Taxation of ordinary shares

 

Taxation of Dividends Paid On Ordinary Shares

 

Subject to the discussion under “Tax Consequences if the Company is a Passive Foreign Investment Company” below, a U.S. Holder generally will be required to include in gross income as ordinary income the amount of any distribution paid on ordinary shares, including any Israeli taxes withheld from the amount paid, to the extent the distribution is paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes.  In general, distributions in excess of such earnings and profits will be applied against and will reduce (but not below zero) the U.S. Holder’s tax basis in the ordinary shares and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of ordinary shares.

 

 

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A non-corporate U.S. Holder that meets certain eligibility requirements may qualify for a 20% or lower rate of U.S. federal income taxation on dividends paid if the Company is a “qualified foreign corporation” for U.S. federal income tax purposes, although the actual rates may be higher due to the phase out of certain tax deductions, exemptions and credits.

 

The Company generally will be treated as a “qualified foreign corporation” if (i) the Company is eligible for benefits under the income tax treaty between the United States and Israel (the “Treaty”) which contains an exchange of information program, or (ii) the ordinary shares are readily tradable on an established securities market in the United States.  Because the Treaty has been identified by the U.S. Treasury as a qualifying treaty and the Company should be eligible for benefits under the Treaty, the Company should currently be treated as a qualified foreign corporation.  However, no assurance can be given that a change in circumstances will not affect the Company’s treatment as a qualified foreign corporation for U.S. federal income tax purposes in any taxable year.  In addition, a non-corporate U.S. Holder will generally not be eligible for the reduced rate (a) if such U.S. Holder has not held the ordinary shares for at least 61 days of the 121-day period beginning on the date which is 60 days before the ex-dividend rate, (b) to the extent the U.S. Holder is under an obligation to make related payments on substantially similar or related property, or (c) with respect to any portion of a dividend that the U.S. Holder elects to treat as investment income under Section 163(d)(4)(B) of the Code.  Any days during which the U.S. Holder has diminished its risk of loss with respect to the ordinary shares (for example, by holding an option to sell the ordinary shares), are not counted towards meeting the 61-day holding period.  Non-corporate U.S. Holders should consult their own tax advisors concerning whether dividends received by them qualify for the reduced rate of tax.

 

U.S. Holders will generally include in their gross income any dividend paid in NIS, including the amount of any Israeli taxes withheld, in an amount equal to the U.S. dollar value of the NIS received, calculated by reference to the exchange rate in effect on the date the dividends are received, regardless of whether the dividend payments are actually converted into U.S. dollars.  U.S. Holders will have a tax basis in any NIS distributed by the Company equal to the U.S. dollar value of the NIS on the date of receipt.  Generally, any gain or loss resulting from exchange rate fluctuations during the period from the date the U.S. Holder includes the dividend payment in income to the date the payment is converted into U.S. dollars will be treated as ordinary income or loss and will be U.S. source income or loss for U.S. foreign tax credit purposes.

 

U.S. Holders may have the option of claiming the amount of any Israeli income taxes withheld at source either (1) as a deduction from gross income but only for a year in which the U.S. Holder elects to do so with respect to all foreign income taxes, or (2) subject to the foreign tax credit limitation, as a dollar-for-dollar credit against the U.S. Holder’s U.S federal income tax liability.  Individuals who do not claim itemized deductions, but instead utilize the standard deduction, may not claim a deduction for the amount of the Israeli income taxes withheld, but such amount may be claimed as a credit against the individual’s U.S. federal income tax liability.  The amount of foreign income taxes which may be claimed as a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each U.S. Holder, and may further be impacted by the provisions of the Treaty.  The total amount of allowable foreign tax credits in any year cannot exceed regular U.S. tax liability for the year attributable to foreign source taxable income.  A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on the ordinary shares to the extent such 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 or to the extent such U.S. Holder is under an obligation to make related payments with respect to 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 16-day holding period required by the statute.  In addition, distributions of current or accumulated earnings and profits will be foreign source passive income for U.S. foreign tax credit purposes and will not qualify for the dividends received deduction available to certain corporations.

 

 

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Taxation of the Disposition of Ordinary Shares

 

Upon the sale, exchange or other disposition of ordinary shares, subject to the discussion under “Tax Consequences if the Company is a Passive Foreign Investment Company” below a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s adjusted basis in the ordinary shares, which is usually the cost of such shares, and the amount realized on the disposition.  Capital gain from the sale, exchange or other disposition of ordinary shares held for more than one year is long-term capital gain.  Long-term capital gain of a non-corporate U.S. Holder is eligible to be taxed at reduced rates. However, given the uncertain economic conditions in the United States and the size of the federal deficit, tax rates are subject to change and U.S. Holders should consult their tax advisors. Gains and losses recognized by a U.S. Holder on a sale, exchange or other disposition of ordinary shares will be treated as U.S source income or loss for U.S foreign tax credit purposes. The deductibility of capital losses is subject to limitations.

 

Tax Consequences if the Company is a Passive Foreign Investment Company

 

The Company will be a passive foreign investment company, or PFIC, if 75% or more of its gross income in a taxable year, including the pro rata share of the gross income of any company, U.S. or foreign, in which it is considered to own 25% or more of the shares by value, is passive income. Alternatively, the Company will be considered to be a PFIC if at least 50% of its assets in a taxable year, determined quarterly and averaged over the year including the pro rata share of the assets of any company in which it is considered to own 25% or more of the shares by value, are held for the production of, or produce, passive income.  Passive income includes amounts derived by reason of the temporary investment of funds raised in the Company’s public offerings.

 

 If the Company is a PFIC, and a U.S. Holder does not make one of the elections described below with respect to such shares, the U.S. Holder would be subject to special rules with respect to (1) any excess distribution ( i.e. , the portion of any distributions received by the U.S. Holder on the ordinary shares in a taxable year in excess of 125% of the average annual distributions received by the U.S. Holder in the three preceding taxable years, or, if shorter, the U.S. Holder's holding period for the ordinary shares), and (2) any gain realized on the sale, exchange or other disposition of the ordinary shares. Under these special rules:

 

	·	the excess distribution or gain would be allocated ratably to each day over the U.S. Holders' aggregate holding period for the ordinary shares
	·	the amount allocated to the current taxable year and any taxable year before the Company became a PFIC would be taxed as ordinary income; and

·

the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year.

 

In addition, if a U.S.  Holder who is an individual, dies while owning ordinary shares, such holder's successor generally would not receive a step-up in tax basis with respect to such ordinary shares.

 

The special PFIC rules described above will not apply to a U.S. Holder if the U.S. Holder makes a timely and effective election to treat the Company as a “qualified electing fund” (“QEF”), which election generally must be made in the first year in the U.S. Holder’s holding period for the ordinary shares in which the Company was a PFIC, and if the Company complies with certain reporting requirements.  Instead, a U.S. Holder that makes a QEF election is required for each taxable year to include in its income a pro rata share of (1) the “ordinary earnings” of the Company, which will be taxed as ordinary income and (2) the “net capital gain” of the Company, which will be taxed as long-term capital gain to such U.S. Holder.  A U.S. Holder that makes a QEF election will be subject to U.S. federal income tax on such amounts for each taxable year in which the Company is a PFIC, regardless of whether such amounts are actually distributed to such U.S. Holder by the Company.  However, a U.S. Holder that makes a QEF election may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on such amounts, subject to an interest charge.

 

A U.S. Holder that makes a QEF election with respect to the Company generally (1) may receive a tax-free distribution from the Company to the extent that such distribution represents “earnings and profits” of the Company that were previously included in income by the U.S. Holder because of such QEF election and (2) will adjust such U.S. Holder’s tax basis in its ordinary shares to reflect the amount included in income (resulting in an increase in basis) or allowed as a tax-free distribution (resulting in a decrease in basis) because of the QEF election.  In addition, a U.S. Holder that makes a QEF election generally will recognize capital gain or loss on the sale or other taxable disposition of Company ordinary shares.

 

 

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The Company has agreed to supply U.S. Holders with the information needed to report income and gain pursuant to a QEF election in the event that the Company is classified as PFIC.  The QEF election is made on a U.S. Holder-by-U.S. Holder basis and can be revoked only with the consent of the IRS.  A U.S. Holder generally makes a QEF election by attaching a completed IRS Form 8621, including the PFIC annual information statement, to a timely filed United States federal income tax return (the QEF election must be made on or before the U.S. holder's tax return due date, as extended, for the first taxable year to which the election will apply). Even if a QEF election is not made, a U.S. Holder in a PFIC generally must file a completed IRS Form 8621 every year.

 

As an alternative to making a QEF election, a U.S. Holder of PFIC stock which is publicly traded may, in certain circumstances, elect to mark the stock to market annually (a “mark-to-market election”), recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the U.S. holder’s fair market value of the PFIC stock and its adjusted basis in the PFIC stock.  Losses would be 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.  This election is available provided that the Company ordinary shares constitute “marketable stock,” which includes stock of a PFIC that is “regularly traded” on a “qualified exchange or other market,” as specifically defined in the Code.  If a U.S. Holder makes a mark-to-market election with respect to ordinary shares for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) the ordinary shares and for which the Company is determined to be a PFIC, such U.S. Holder generally will not be subject to the PFIC rules described above with respect to its ordinary shares.  A mark-to-market election applies to the tax year for which the election is made and to each subsequent year, unless the ordinary shares cease to be marketable, or the IRS consents to revocation of the election.

 

The Company believes that it was not a PFIC in 2015.  However, the tests for determining PFIC status are applied annually, and it is difficult to make accurate predictions of future income and assets which are relevant to this determination.  Accordingly, we cannot be certain whether we will be treated as a PFIC for any taxable year.  Absent one of the elections described above, U.S. Holders who hold ordinary shares during a period when the Company is a PFIC will be subject to the foregoing rules, regardless of whether the Company ceases to be a PFIC in one or more subsequent years.  U.S. Holders are urged to consult their tax advisors about the PFIC rules, including the consequences to them of making a mark-to-market or QEF election with respect to the Company’s ordinary shares, in the event that the Company qualifies as a PFIC.

 

Legislation regarding Medicare Tax

For taxable years beginning after December 31, 2012, a U.S. Holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8% tax on the lesser of (1) the U.S. Holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. Holder’s modified adjusted gross income for the taxable year over a certain threshold (which, in the case of individuals, will be between $125,000 and $250,000 depending on the individual’s circumstances).  A U.S. Holder’s “net investment income” will generally include its dividend income and its net gains from the disposition of shares, unless such dividends or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities).  If you are a U.S. Holder that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in the shares.

Tax Consequences for Non-U.S. Holders of Ordinary Shares

 

Except as described in the section entitled “Information Reporting and Back-up Withholding”, a Non-U.S. Holder of ordinary shares generally will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, ordinary shares, unless:

 

·

such 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 a treaty with the United States, such item is attributable to a permanent establishment or, in the case of an individual, a fixed place of business, in the United States;

 

 

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·

the Non-U.S. Holder is an individual who holds the ordinary shares as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met; or

 

·

the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S. tax law applicable to U.S. expatriates.

 

Information Reporting and Back-up Withholding

 

In general, U.S. Holders may be subject to certain information reporting requirements under the Code relating to their purchase and/or ownership of stock of a foreign corporation such as the Company.  Failure to comply with these information reporting requirements may result in substantial penalties.

For example, certain individuals who are U.S. Holders are required to file Form 8938 to report the ownership of specified foreign financial assets for tax years beginning after March 18, 2010 if the total value of those assets exceeds an applicable threshold amount (subject to certain exceptions).  For these purposes, a specified foreign financial asset includes not only a financial account (as defined by the Code and applicable Treasury Regulations ) maintained by a foreign financial institution, but also 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, provided that the asset is not held in an account maintained by a U.S. financial institution. The minimum applicable threshold amount is generally $50,000 in the aggregate, but this threshold amount varies depending on whether the individual lives in the U.S., is married, files a joint income tax return with his or her spouse, etc.  Certain domestic entities that are U.S. Holders may also be required to file Form 8938 in the near future.  U.S. Holders are urged to consult with their tax advisors regarding their reporting obligations, including the requirement to file IRS Form 8938.

Information reporting requirements will generally apply to payments with respect to ordinary shares paid to a U.S. Holder other than certain exempt recipients (such as corporations). Backup withholding will apply to such payments if such U.S. Holder fails to provide a taxpayer identification number or certification of other exempt status or fails to comply with the applicable requirements of the backup withholding rules. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such U.S. Holder's United States Federal income tax liability provided the required information is furnished by such U.S. Holder to the Internal Revenue Service. A U.S. Holder who does not provide a correct taxpayer identification number may be subject to penalties imposed by the Internal Revenue Service.

Unless otherwise provided by the IRS, if the Company is a PFIC, a U.S. Holder is generally required to file an informational return annually to report its ownership interest in the PFIC.

 

Non-U.S. Holders generally are not subject to information reporting or back-up withholding with respect to dividends paid on, or upon the disposition of, ordinary shares, provided that such non-US Holder certifies to its foreign status, or otherwise establishes an exemption.

 

Available Information

 

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill the obligations with respect to such requirements by filing reports with the SEC. You may read and copy any document we file with the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Certain of our SEC filings are also available to the public at the SEC’s website at http://www.sec.gov .  Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. In addition, all corporate documents filed with the SEC must be available to the public by law and are available for review at our headquarters, 2 Ben Gurion St, Ramat Gan, 5257334, Israel.

 

 

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As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing 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 periodic reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act.  However, we generally publicly announce our quarterly and year-end results periodically, and furnish certain periodic information with the SEC under cover of Form 6-K.

ITEM 11 .                        QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 not purchased options or entered into swaps or forward or futures contracts and do not use derivative financial instruments for speculative trading purposes.

 

We maintain operations and generate revenues in a number of countries.  The results of operations and the financial position of our local operations are generally reported in the relevant local currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to currency translation risk.

 

In addition, we maintain operations and generate revenues in a number of countries.  The results of operations and the financial position of our local operations are generally reported in the relevant local currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to currency translation risk.  In addition, we are exposed to currency transaction risk because some of our expenses are incurred in a different currency from the currency in which our revenues are received and from which our revenues and expenses are reported.  Our most significant currency exposures are to the Euro, New Israeli Shekel, British Pound, Singapore dollar, Australian dollar. Japanese Yen and Brazilian Real. In periods when the U.S. dollar strengthens against these currencies our revenue may be adversely impacted. In periods when the U.S. dollar weakens against these currencies, our expenses may be adversely affected.

ITEM 12.                        DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

Not applicable.

 

 

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PART II

 

ITEM 13.                        DEFAULTS, DIVIDEND ARREARAGES AN D DELINQUENCIES

 

None.

 

ITEM 14.                      MATERIAL MODIFICATIONS TO TH E RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

None.

 

ITEM 15.                        CONTROLS AND PROCEDURES

 

 (a)           Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of December 31, 2015.  Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of such date were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b)           Report of Management on Internal Control Over Financial Reporting.

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management assessed the effectiveness of internal control over financial reporting as of December 31, 2015 based on the criteria in “Internal Control- Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

Based on that assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2015 under those criteria.

 

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, and can only provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

(c)           Not applicable

 

(d)           There has been no change in our internal control over financial reporting that occurred during the fiscal year ended December 31, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 16A.                     AUDIT COM MITTEE FINANCIAL EXPERT

 

The Board of Directors has determined that Asael Karfiol, a member of our audit committee, is an audit committee financial expert and is independent pursuant to the rules of the NASDAQ Stock Market. Asael Karfiol is an independent director as defined by the NASDAQ listing standards.

 

 

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ITEM 16B.                     CODE OF E THICS

 

We have in place a Code of Business Conduct and Ethics that applies to all directors, officers and employees.  This code, as applied to our principal financial officers (i.e. our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions), is our “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. This code is also our “code of conduct” within the meaning of NASDAQ Rule 5610.  The full text of the Code of Business Conduct and Ethics is available at our Internet website at http://www.topimagesystems.com .

 

  PRINC IPAL ACCOUNTANT FEES AND SERVICES

 

Audit Fees

 

In 2015 and 2014, we engaged the services of Kost Forer Gabbay and Kasierer, an independent registered accounting firm (a member of Ernst & Young Global) (“EY”), to audit our financial statements.  The aggregate fees billed by EY for professional services rendered for the audit of our annual financial statements included in this Annual Report and other services in connection with statutory and regulatory filings or engagements for the fiscal year ended December 31, 2015 and 2014 were $246,276 and $375,500, respectively.

 

Tax Fees

 

For the fiscal years ended December 31, 2015 and 2014 the aggregate fees billed for tax compliance, tax advice and tax planning by EY were $25,000 and $78,500, respectively.

 

Other services

 

For the fiscal years ended December 31, 2015 and 2014 the aggregate fees billed for non-audit services, were $26,946 and $75,500, respectively.

 

Before EY is engaged by our subsidiaries or us to render any auditing or permitted non-audit related service, the engagement must be:

 

·

approved by our audit committee; or

 

·

entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee’s responsibilities to management.

 

The audit committee has considered the nature and amount of the fees billed by EY, and believes that the provision of the services for activities unrelated to the audit is compatible with maintaining Ernst & Young’s independence.

 

ITEM 16C.                     EXEMPTI ONS FROM THE LISTING STANDARDS OF AUDIT COMMITTEES

 

Not applicable.

 

ITEM 16D.                    PURCHA SES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

Not applicable.

 

 

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ITEM 16E.                     CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANTS

 

Not applicable.

 

ITEM 16F.                      CORPORATE GOVERNANCE

 

Not applicable.

 

ITEM 16G.                      CORPORATE GOVERNANCE

 

Not applicable .

 

ITEM 16H.                     MINE SAFETY DISCLOSURE

 

Not applicable.

PART III

 

ITEM 17.                        FINANCIAL STATEMENTS

 

The Company has elected to provide Financial Statements pursuant to Item 18.

 

ITEM 18.                        FINANCIAL STATEMENTS

 

See pages F-1 through F-39.

 

 

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ITEM 19.                        EXHIBITS

 

Number		Description
1.1		Amended and restated Articles of Association of the Company dated October 27, 2003 and amended December 22, 2011(incorporated by reference to exhibit 99.1 to the Company’s 6-K Form filed on November 16, 2011).
1.2		Memorandum of Association of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form F-1 (registration number 333-05718).
2.1		Form of Ordinary Shares Purchase Warrant of the Company (incorporated by reference to Exhibit 99.3 to the Company’s Form 6-K filed on June 14, 2011).
4.1		Employee Agreement between the Company and Izhak Nakar (incorporated by reference to Exhibit 4.1 to the Company’s Form 20-F for the year ended December 31, 2012).
4.2		Top Image Systems Ltd.  2003 Amended Option Plan (2013) (incorporated by reference to Exhibit 99.4 to the Company’s Form 6-K filed on September 3, 2013).
4. 3		Form of Director and Officer Indemnification Agreement   (incorporated by reference to Exhibit 4.12 to the Company ' s annual report on Form 20-F for the year ended December 31, 2006 ).
4.4		Securities Purchase Agreement, dated June 6, 2011, among the Company and the purchasers identified on the signature pages thereto (incorporated by reference to Exhibit 99.1 to the Company’s Form 6-K filed on June 14, 2011).
4.5		Registration Rights Agreement, dated June 13, 2011, among the Company and the purchasers identified on the signature pages thereto (incorporated by reference to Exhibit 99.2 to the Company’s Form 6-K filed on June 14, 2011).
4.6		Underwriting Agreement, dated January 31, 2014, by and between the Registrant and Canaccord Genuity Inc., as representative for several underwriters (incorporated by reference to Exhibit 1.1 to Company’s Form 6-K filed on January 31, 2014)
8		List of Subsidiaries .
12.1		Certification of the principal executive officer pursuant to 15 U.S.C.  Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2		Certification of the Chief Financial Officer pursuant to 15 U.S.C.  Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1		Certification of the principal executive officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15.1		Consent of Kost Forer Gabbay & Kasierer– member of Ernst & Young Global.
15.2		Audit Committee Charter (incorporated by reference to exhibit 14.3 to Company’s annual report on Form 20-F for the year ended December 31, 2003).
101		Attached as Exhibit 101 to this report are the following Interactive Data Files formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2012 and December 31, 2011; (ii) Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010; (iii) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2012, 2011 and 2010;  (iv) Consolidated Statement of Cash Flows for the years ended December 31, 2012, 2011 and 2010; and (v) Notes to the Consolidated Financial Statements. Users of this data are advised pursuant to Rule 401 of Regulation S-T that the information contained in the XBRL documents is unaudited and these are not the official publicly filed financial statements of the Company.

 

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

 

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SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

	TOP IMAGE SYSTEMS LTD.
	By:	/s/ Michael Schrader
		Michael Schrader Chief Executive Officer

 

Date: April 26, 2016

 

 

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TOP IMAGE SYSTEMS LTD

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2015

U.S. DOLLARS IN THOUSANDS

 

INDEX

 

	Page
Report of Independent Registered Public Accounting Firm	F - 2
Consolidated Balance Sheets	F - 3 – F - 4
Consolidated Statements of operations	F - 5
Consolidated Statements of Comprehensive loss	F - 6
Statements of Changes in Shareholders' Equity	F - 7
Consolidated Statements of Cash Flows	F - 8 - F - 9
Notes to Consolidated Financial Statements	F - 10 - F - 39

 

 

 

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Kost Forer Gabbay & Kasierer 3 Aminadav St. Tel-Aviv 6706703, Israel

Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com

 

REPORT OF IND EPEN DENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

TOP IMAGE SYSTEMS LTD.

We have audited the accompanying consolidated balance sheets of Top Image Systems Ltd. (the "Company"), as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2015 and 2014, and the related consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

 

Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
April 26, 2016	A Member of Ernst & Young Global

 

F - 2

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TOP IMAGE SYSTEMS LTD.

 

CONSOLIDATED BALANCE SHEETS

---

U.S. dollars in thousands

 

		December 31,
		2014				2015
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	4,386			$	2,404
Restricted cash			132				262
Trade receivables (net of allowance for doubtful accounts of $ 357 and $ 1,594 at December 31, 2014 and 2015, respectively)			12,034				9,348
Deferred tax assets			749				-
Other accounts receivable and prepaid expenses			787				932
Total current assets			18,088				12,946
LONG-TERM ASSETS:
Severance pay fund			1,235				1,327
Restricted cash			366				147
Non-current deferred tax assets			522				-
Long-term deposits and long-term assets			245				204
Property and equipment, net			1,180				1,444
Intangible assets, net			6,293				5,058
Goodwill			19,377				19,091
Total long-term assets			29,218				27,271
Total assets		$	47,306			$	40,217

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

 

 

F - 3

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TOP IMAGE SYSTEMS LTD.

CONSOLIDATED BALANCE SHEETS

---

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

 

		December 31,
		2014				2015
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term Bank Loans		$	-			$	77
Trade payables			1,593				1,541
Deferred revenues			3,573				2,966
Deferred tax liability			133				-
Accrued expenses and other accounts payable			3,815				4,421
Total current liabilities			9,114				9,005
LONG-TERM LIABILITIES:
Accrued severance pay			1,378				1,533
Non-current deferred revenues			2,212				3,280
Deferred tax liability			318				-
Other long-term liabilities			447				407
Total long-term liabilities			4,355				5,220
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Share capital -
Ordinary shares of NIS 0.04 par value -
Authorized: 125,000,000 shares at December 31, 2014 and 2015; Issued and outstanding: 17,823,959 and 17,919,126 shares at December 31, 2014 and 2015, respectively			198				199
Additional paid-in capital			61,559				62,556
Accumulated other comprehensive loss			(2,454	)			(3,021	)
Accumulated deficit			(25,472	)			(33,767	)
Total parent shareholders' equity			33,831				25,967
Non-controlling interest			6				25
Total shareholders' equity			33,837				25,992
Total liabilities and shareholders' equity		$	47,306			$	40,217

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

 

April 26, 2016
Date of approval of the		Yossi Dagan		Michael Schrader
financial statements		Chief Financial Officer		Chief Executive Officer

 

 

F - 4

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TOP IMAGE SYSTEMS LTD.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

---

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

		Year ended December 31,
		2013				2014				2015
Revenues:
License		$	11,762			$	11,211			$	7,708
Services			17,295				24,644				26,083
Total revenues			29,057				35,855				33,791
Cost of revenues:
License			2,740				1,442				545
Services			9,076				12,880				15,593
Total cost of revenues			11,816				14,322				16,138
Gross profit			17,241				21,533				17,653
Operating expenses:
Research and development, net			3,377				4,914				4,797
Selling and marketing			9,498				12,967				10,894
General and administrative			4,637				6,819				7,492
Acquisition related costs			-				1,170				-
Amortization of intangible assets			-				239				390
Total operating expenses			17,512				26,109				23,573
Operating loss			(271	)			(4,576	)			(5,920	)
Financial expenses, net			286				352				1,145
Other income, net			369				7				4
Loss before taxes on income			(188	)			(4,921	)			(7,061	)
Taxes on income (expenses)			1				(552	)			(1,215	)
Net Loss		$	(187	)		$	(5,473	)		$	(8,276	)
Attributes to:
The Company's shareholders		$	(187	)		$	(5,479	)		$	(8,295	)
Non-controlling interests			-				6				19
		$	(187	)		$	(5,473	)		$	(8,276	)
Net loss per Ordinary share attributable to the Company's shareholders:
Basic		$	(0.02	)		$	(0.34	)		$	(0.46	)
Diluted		$	(0.02	)		$	(0.34	)		$	(0.46	)

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

 

F - 5

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TOP IMAGE SYSTEMS LTD.

 

STATEMENTS OF COMPREHENSIVE LOSS

---

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

 

		Year ended December 31,
		2013				2014				2015
Net Loss		$	(187	)		$	(5,473	)		$	(8,276	)
Foreign currency translation adjustments			(10	)			(914	)			(567	)
Comprehensive Loss		$	(197	)		$	(6,387	)		$	(8,843	)
Attributed to:
Company’s Shareholders		$	(197	)		$	(6,387	)		$	(8,843	)
Non-controlling interests			-				6				19
Comprehensive Loss		$	(197	)		$	(6,381	)		$	(8,824	)

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

 

 

F - 6

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TOP IMAGE SYSTEMS LTD.

 

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

---

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

														Accumulated
										Additional				other												Non
		Ordinary shares								paid-in				comprehensive				Accumulated								controlling
		Number				Amount				capital				loss				deficit				Total				Interest				Total Equity
Balance at January 1, 2013			11,641,758			$	129			$	36,033			$	(1,530	)		$	(19,806	)		$	14,826			$	-			$	14,826
Exercise of stock options			446,291				4				725				-				-				729				-				729
Other comprehensive loss			-				-				-				(10	)			-				(10	)			-				(10	)
Share-based compensation expenses			-				-				356				-				-				356				-				356
Net loss			-				-				-				-				(187	)			(187	)			-				(187	)
Balance at December 31, 2013			12,088,049				133				37,114				(1,540	)			(19,993	)			15,714				-				15,714
Exercise of warrants and stock options			220,100				2				376				-				-				378				-				378
Issuance of Ordinary shares, net *)			3,162,500				36				13,660				-				-				13,696				-				13,696
Issuance of Ordinary shares in conjunction of business acquisition			2,353,310				27				9,739				-				-				9,766				-				9,766
Other comprehensive loss			-				-				-				(914	)			-				(914	)			-				(914	)
Share-based compensation expenses			-				-				670				-				-				670				-				670
Net loss			-				-				-				-				(5,479	)			(5,479	)			6				(5,473	)
Balance at December 31, 2014			17,823,959				198				61,559				(2,454	)			(25,472	)			33,831				6				33,837
Exercise of warrants and stock options			95,167				1				189				-				-				190				-				190
Other comprehensive loss			-				-				-				(567	)			-				(567	)			-				(567	)
Share-based compensation expenses			-				-				808				-				-				808				-				808
Net loss			-				-				-				-				(8,295	)			(8,295	)			19				(8,276	)
Balance at December 31, 2015			17,919,126			$	199			$	62,556			$	(3,021	)		$	(33,767	)		$	25,967			$	25			$	25,992

*)           Net of issuance expenses in the amount of $ 350.

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

 

 

F - 7

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TOP IMAGE SYSTEMS LTD.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

---

U.S. dollars in thousands

 

		Year ended December 31,
		2013				2014				2015
Cash flows from operating activities:
Net Loss		$	(187	)		$	(5,473	)		$	(8,276	)
Adjustments to reconcile net loss to net cash provided by in operating activities:
Share-based compensation expenses			356				670				808
Depreciation and amortization			198				1,041				1,876
Accrued severance pay, net			(50	)			(38	)			63
Decrease in long term assets			-				131				61
Decrease (increase) in deferred tax assets, net			(205	)			56				820
Decrease (increase) in trade receivables, net			1,457				(4,427	)			2,015
Increase (decrease) long term liabilities			-				155				(40	)
Decrease (increase) in other accounts receivable and prepaid expenses			(111	)			201				(184	)
Increase (decrease) in trade payables			(325	)			855				41
Increase (decrease) in deferred revenues			770				134				655
Increase (decrease) in accrued expenses and other accounts payable			(1,440	)			1,810				1,121
Net cash provided by (used in) operating activities			463				(4,885	)			(1,040	)
Cash flows from investing activities:
Decrease (increase) in restricted deposits			(92	)			180				48
Decrease (increase) in long term deposits			(49	)			(74	)			(23	)
Purchase of property and equipment			(76	)			(171	)			(905	)
Business acquired			-				(7,806	)			(216	)
Net cash used in investing activities			(217	)			(7,871	)			(1,096	)

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

 

 

F - 8

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TOP IMAGE SYSTEMS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

---

U.S. dollars in thousands

 

		Year ended December 31,
		2013				2014				2015
Cash flows from financing activities:
Proceeds from exercise of Warrants and stock options			729				378				190
Proceeds from Issuance of Ordinary shares, net of issuance expenses			-				13,696				-
Increase in short term bank borrowings			-				-				77
Payment of accrued issuance expenses			(4	)			-				-
Net cash provided by financing activities			725				14,074				267
Effect of exchange rate on cash and cash equivalent balances			9				(135	)			(113	)
Increase (decrease) in cash and cash equivalents			980				1,183				(1,982	)
Cash and cash equivalents at the beginning of the year			2,223				3,203				4,386
Cash and cash equivalents at the end of the year		$	3,203			$	4,386			$	2,404
Supplemental disclosure of cash flows activities:
Cash paid during the year for:
Taxes		$	143			$	67			$	14
Interest		$	29			$	35			$	107
Supplemental disclosure of Non- cash flow information:
Account payables with respect to business acquisition*)		$	-			$	(216	)		$	-
Payment in shares for business acquisition *)		$	-			$	(9,766	)		$	-

*)           See Note 1d.

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

 

 

F - 9

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 1:

GENERAL

a.

Business and organization:

Top Image Systems Ltd. and its subsidiaries (collectively the "Company" or "TIS") are engaged in the development and marketing of a variety of information recognition systems and technologies and automated document capture solutions for the efficient flow of information within and between organizations. The Company's software minimizes the need for manual data entry by automatically capturing, reading, understanding, identifying, processing, classifying and routing the information contained in documents, increasing data capture accuracy and the rate of information processing.

The Company operates in one reportable segment and its revenues are mainly derived from two sources: (i) license revenue and (ii) services revenue which include Software as a Services (“SaaS”), professional services, maintenance and technical support.

As for information regarding the major customers of the Company see Note 11c.

The Company's shares are traded on The NASDAQ Stock Market LLC in the United States.

b.

The Company's main marketing and sales activities are conducted through its wholly owned subsidiaries in the United States, the United Kingdom, Germany, Hong Kong, Japan and Singapore.  On June 30, 2014 the Company, established a new subsidiary in Australia, Top Image Systems Pty Ltd. (or "TIS Australia"), together with one of its partners.

c.

In February 2014, the Company closed an underwritten public offering whereby 3,162,500 ordinary shares were sold by the Company to the public. The aggregate net proceeds received by the Company from the offering were approximately $13,696. The aggregate amount of Ordinary shares sold reflects the exercise in full by the underwriters of their option to purchase up to 412,500 additional Ordinary shares to cover over-allotments.

d.

On July 16, 2014 the Company signed an Agreement and Plan of Merger (the “Agreement”) to acquire all the outstanding shares of eGistics, Inc. ("eGistics"), a provider of private cloud-based document management solutions in the USA, for a total consideration of $ 17,788.

 

The transaction was effected by paying of $8,022 in cash, net of working capital related adjustment, as disclosed in the Agreement, and through the issuing of a total 2,353,310 of the Company’s Ordinary shares based on the fair value of share on the closing date.

The Company acquired eGistics in order to extend its business in the cloud-based document management.

 

 

F - 10

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 1:

GENERAL (Cont.)

The acquisition was accounted for under the purchase method of accounting, in accordance with Accounting Standard Codification ("ASC") 805 "Business Combinations" ("ASC 805"), and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed of the eGistics. The excess of the purchase price over the net tangible and identifiable intangible assets was assigned to goodwill. The operation results of eGistics have been included in the consolidated financial statements since the acquisition date of July 16, 2014.

 

Net assets		$	2,515
Liabilities assumed			(4,694	)
Customer relations			3,997
Technology			3,005
Goodwill			13,518
Deferred tax liability			(553	)
Total purchase price		$	17,788

In performing the purchase price allocation, the Company considered, among other factors, the intention for future use of acquired assets, analysis of historical financial performance and estimates of future performance of the Company's products. The company's management has determent the fair value of the intangible assets with the assistance of independent valuation firm using the income approach.

The following table sets forth the components of intangible assets associated with the acquisition :

 

		Amount				Amortization period (in years)		Amortization method
Customer relations		$	3,997			8.5		Acceleration
Technology			3,005			3.2		Straight line
		$	7,002

See Note 5c for expected amortization expenses.

Goodwill of $ 13,518 represents the excess of the purchase price over the fair market value of the net tangible and intangible assets acquired. Goodwill will not be amortized and is tested for impairment at least annually.

Acquisition costs in the amount of $1,170 consisted mainly of legal, tax and accounting fees and other external costs directly related to the acquisition and were included in operating expenses, as acquisition related costs.

 

F - 11

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 2:

SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP"), applied on a consistent basis, as follows:

a.

Use of estimates:

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 Company's management believes that the estimates, judgment and assumptions used are reasonable based upon information available at the time they are made. As applicable to these consolidated financial statements, the most significant estimated and assumptions are employed in estimates used in determining values of stock-based compensation costs, financial instruments with no observable market quotes, as well as in estimates used in applying the revenue recognition policy , allowance for doubtful accounts, income taxes and valuation allowance   and contingent liabilities . Actual results could differ from those estimates.

b.

Principles of consolidation:

The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions including profit from intercompany sales not yet realized outside the Company, have been eliminated upon consolidation.

 

F - 12

---

 

TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 2:

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

c.

Financial statements in United States dollars:

A substantial portion of the Company's costs is incurred in U.S. dollars ("dollars"). Some of the revenues of the Company are generated in dollars. The majority of the Company's financing is in dollars. The Company's management believes that the dollar is the currency of the primary economic environment in which the Company and certain of its subsidiaries operate. Thus, the functional and reporting currency of the Company and certain of its subsidiaries is dollar.

Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with ASC 830, "Foreign Currency Matters". All transaction gains and losses of the remeasurement of monetary balance sheet items are reflected in the consolidated statement of comprehensive income (loss) as financial income or expenses, as appropriate.

For those subsidiaries whose functional currency has been determined to be their local currency, assets and liabilities are translated at year-end exchange rates and statement of income (loss) items are translated at average exchange rates prevailing during the year. Related translation adjustments are recorded as a separate component of accumulated other comprehensive loss in changes in shareholders' equity.

d.

Cash equivalents:

Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less, at the date acquired.

e.

Restricted cash:

Restricted cash is primarily invested in short term and long term deposits. For more information, refer to Note 8c.

f.

Long – term deposits and long-term assets:

Consist mainly of long-term prepaid expenses for motor vehicle and office leasing.

g.

Property and equipment, net:

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the assets at the following annual rates :

 

		Years
Computers and peripheral equipment		3
Office furniture and equipment		5 - 16 (mainly 16 years)
Leasehold improvements		Over the shorter of the lease term or useful economic life

 

F - 13

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

NOTE 2:

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

h.

Impairment of long-lived assets:

The Company's long-lived assets are reviewed for impairment in accordance with ASC 360 "Property, Plant and Equipment, whenever events or changes in circumstances indicate that the carrying amount of an asset 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 asset (asset group). If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The loss is allocated to the long-lived assets of the Company on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the Company will not reduce the carrying amount of that asset below its fair value whenever that fair value is determinable. During the years 2013, 2014 and 2015, no impairment losses had been identified for intangible assets and property and equipment.

i.

Goodwill:

Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Under ASC 350, "Intangible - Goodwill and Other," goodwill is not amortized, but rather is subject to an annual impairment test.

ASC 350 requires goodwill to be tested for impairment at the reporting unit level at least annually or between annual tests in certain circumstances, and written down when impaired. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value.

ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment test is performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test.

The Company operates in one operation-based segment and in one reporting unit. The Company performed a qualitative assessment during the fourth quarter of 2015 and concluded that the qualitative assessment did not result in a more likely than not indication of impairment, and therefore no further impairment testing was required.

During the years 2013, 2014 and 2015, no impairment charge was recognized.

 

F - 14

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

NOTE 2:

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

j.

Intangible assets:

Intangible assets are comprised of acquired technology and customer relations. Definite-lived intangible assets are amortized over their estimated useful life. Acquired technology is amortized on a straight line basis over a period of 3.2 years. Customer relations are amortized using accelerated amortization method over a period of 8.5 years.

k.

Revenue recognition:

The Company reports its revenue in two categories: (i) license, which includes mainly perpetual license; and (ii) services, which includes SaaS revenue, service revenue, including revenue from professional services, training services and post-contract customer support (“PCS”).

The Company accounts for the sale of perpetual software in accordance with ASC 985-605, "Software Revenue Recognition ("ASC 985-605")". ASC 985-605 generally requires revenues earned from software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements determined by the vendor's specific objective evidence ("VSOE") of fair value. VSOE is based on the price charged when an element is sold separately or renewed. Revenues are allocated under the "residual method" when VSOE of fair value exists for all undelivered elements and VSOE of fair value does not exist for all of the delivered elements, and when all ASC 985-605 criteria for revenue recognition are met.

Revenue from license fees is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.

 

F - 15

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 2:

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

PCS revenue are deferred and recognized on a straight-line basis over the term of the agreement.

Arrangements that include professional services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement.

For sales not included a perpetual software, the Company recognizes revenues in accordance to Accounting Standards Update ("ASU") No. 2009-13, Topic 605 - Multiple-Deliverable Revenue Arrangements ("ASU 2009-13").  ASU 2009-13 requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price.

The selling price for a deliverable is based on its vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The Company then recognizes revenue on each deliverable in accordance with its policies for product and service revenue recognition. TPE of selling price is established by evaluating largely interchangeable competitor products or services in stand-alone sales to similarly situated customers. However, as the Company's products contain a significant element of proprietary technology and its solutions offer substantially different features and functionality, the comparable pricing of products with similar functionality typically cannot be obtained.

Additionally, as the Company is unable to reliably determine what competitors’ products' selling prices are on a stand-alone basis, the Company is not typically able to determine TPE. The ESP is established considering multiple factors including, but not limited to, pricing practices in different geographical areas and through different sales channels, gross margin objectives, internal costs, competitors' pricing strategies, and industry technology lifecycles. The selling price of the products and professional services was based on ESP.

Deferred revenues represent unearned amounts received for PCS and professional services arrangements that are paid by customers and not yet recognized as revenues.

The Company generally does not grant a right of return to its customers.

l.

Cost of Revenue

 

Our total cost of revenue is comprised of the following:

 

1.

Cost of License Revenue—Cost of license revenue is comprised primarily of third-party license and hardware costs.

 

2.

Cost of Services Revenue—Cost of services revenue is primarily comprised of personnel costs of our technical implementation, support and training teams. Cost of services revenue also includes contractors and facilities costs.

 

m.

Research and development costs:

Research and development costs are charged to the statement of income (loss) as incurred. ASC 985-20 requires capitalization of certain software development costs subsequent to the establishment of technological feasibility.

Based on the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the products are ready for general releases were insignificant. Therefore, all research and development costs have been expensed.

 

F - 16

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 2:

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

n.

Royalty and non-royalty bearing grants:

Royalty-bearing grants from the Government of Israel for funding approved research and development projects are recognized at the time the Company is entitled to such grants, on the basis of the costs incurred and included as a reduction in research and development costs.

Grants are only recognized once there is reasonable assurance that the Company will comply with conditions attached to the grant and the grant will be received. Such grants are recorded as a reduction on related research and development costs since, when received, those are not probable to be repaid.

o.

Accounting for share-based compensation:

At December 31, 2015, the Company has one share-based employee compensation plan, which is described extensively in Note 10.

The Company accounts for share-based compensation in accordance with ASC 718, "Stock Compensation" ("ASC 718").  ASC 718 requires companies to estimate the fair value of share-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 statement of Comprehensive income (loss).

The Company recognizes compensation expenses for the value of its awards, which have graded vesting based on the straight-line method over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures.

The Company estimates the fair value of stock options granted using the Monte-Carlo simulation option-pricing model. The Monte-Carlo Simulation for option pricing requires a number of assumptions, of which the most significant are the suboptimal exercise factor and expected stock price volatility. The suboptimal exercise factor is estimated using historical option exercise information. The suboptimal exercise factor is the ratio by which the stock price must increase over the exercise price before employees are expected to exercise their stock options. The expected life of employee options is a derived output of this assumption from the Monte-Carlo Simulation.

Expected volatility is based upon actual historical stock price movements over the most recent periods. Expected volatility is calculated as of the grant dates for different periods, since the Monte-Carlo Simulation is used for different expected volatilities for different periods.

The Company has historically not paid dividends. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term and calculated for different periods that are in line with the expected volatility periods.

 

 

F - 17

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TOP IMAGE SYSTEMS LTD.

 

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 of the Company's stock options granted to employees and directors was estimated using the following assumptions:

 

		Year ended December 31,
		2013			2014			2015
Dividend yield		0%			0%			0%
Expected volatility		40%-77%			40%-80%			36%-69%
Risk-free interest rate		0.13%-3.04%			0.12%-2.63%			0.26%-2.30%
Contractual term of up to		10 years			10 years			10 years
Suboptimal exercise multiple- employees		1.09			-			2.50
Suboptimal exercise multiple- management		2.36-2.39			2.62-2.66			2.50-2.60

 

The Company applies ASC 718 and ASC 505-50, "Equity-Based Payments to Non-Employees" with respect to options and warrants issued to non-employees. Accordingly, the Company uses Geometric Brownian Motion Model valuation in a Monte Carlo Simulations measure the fair value of the options and warrants at the measurement date as defined in ASC 505-50.

p.

Basic and diluted net earnings (loss) per share:

Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period.

Diluted net loss per share is computed by giving effect to all potential shares of common stock, including stock options, convertible preferred stock warrants stock, to the extent dilutive.

Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive.

q.

Income taxes:

The Company accounts for income taxes in accordance with Accounting Standards Codification No. 740, using the liability method whereby deferred tax assets and liability account balances are determined based on the differences between financial reporting and the tax basis for assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to the amounts that are more likely-than-not to be realized.

 

ASC 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax position taken or expected to

 

F - 18

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 2:

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company accrues interest and penalties related to unrecognized tax benefits in its taxes on income.

r.

Concentrations of credit risk:

Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents, restricted cash and trade receivables.

The Company's cash, cash equivalents and restricted deposits are invested primarily in deposits with major banks worldwide; however, such cash and cash equivalents in the US may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company's investments are institutions with high credit standing, and accordingly, low credit risk exists with respect to these investments.

Trade receivables of the Company are derived from sales to customers located primarily in the U.S., Europe, Japan, and the Far East. The Company performs ongoing credit evaluations of its customers. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection.

s.

Severance pay:

The Company's liability for severance pay is calculated pursuant to Israel's 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 are entitled to one month's salary for each year of employment or a portion thereof. The Company's liability for all of its employees in Israel is fully provided by monthly deposits with insurance policies and by an accrual. The value of these policies is recorded as an asset in the Company's balance sheet.

The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel's Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes immaterial profits.

The Company has also defined contribution plans to some of its employees pursuant to section 14 to the Severance Pay Law under which the Company pays fixed contributions and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient amounts to pay all employee benefits relating to employee service in the current and prior periods.

Severance expenses for the years ended December 31, 2013, 2014 and 2015 amounted to approximately $ 218, $ 370 and $ 295, respectively.

 

F - 19

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

NOTE 2:

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

t.

Fair value of financial instruments:

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

 

A three tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

Level 1:

Observable inputs that reflect quoted prices (unadjusted) for identical assets or     liabilities in active markets.

Level 2:

Observable inputs that reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3:

Unobservable inputs reflecting our own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The carrying amounts of cash and cash equivalents, trade receivables, short-term deposits and trade payables approximate their fair value due to the short-term maturity of such instruments.

u.

Comprehensive loss:

The Company accounts for comprehensive loss in accordance with ASC No. 220, "Comprehensive Income". Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders. The Company determined that its items of comprehensive loss relate to foreign currency translation adjustments.

 

 

F - 20

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

NOTE 2:

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

v.

Contingent liabilities

 

The Company accounts for its contingent liabilities in accordance with ASC 450 definition. A provision is recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

 

With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. As of December 31, 2015, the Company is not a party to any ligation that could have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.

w.

Allowance for doubtful accounts:

The Company maintains an allowance for doubtful accounts for estimated losses inherent in its trade receivable portfolio. In establishing the required allowance, management bases its determination, among other factors, on information available about the debtors' financial situation, the volume of their operations and evaluation of the security received from them. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

x.

Recently Issued Accounting Pronouncements:

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, an updated standard on revenue recognition. ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and US GAAP. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. ASU 2014-09 was initially effective for annual and interim reporting periods beginning after December 15, 2016 and may be adopted either on a full retrospective or modified retrospective approach. On July 9, 2015, the FASB approved a one-year deferral of the effective date of the ASU. The revised effective date is for annual reporting periods beginning after December 15, 2017 and interim periods therein, with an early adoption permitted as of the original effective date. The Company is still evaluating the impact of implementation of this standard on its consolidated financial statements.

 

F - 21

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 2:

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU 2015-17) “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”.  ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet statement of financial position. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods therein and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. The Company has not yet adopted ASU 2015-17 and does not expect the adoption of this guidance to have a material impact on its consolidated financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), whereby, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee ‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and 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. 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 must be applied. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Companies may not apply a full retrospective transition approach. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early application is permitted. The Company is evaluating the potential impact of this pronouncement.

y.

Reclassification:

Certain amounts in prior year's financial statements have been reclassified to conform to the current year's presentation.

 

NOTE 3:

OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

		December 31,
		2014				2015
Government authorities		$	79			$	32
Prepaid expenses			604				707
Rent and motor leasing deposits			61				30
Others			43				163
		$	787			$	932

 

F - 22

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 4:

PROPERTY AND EQUIPMENT

		December 31,
		2014				2015
Cost:
Computers and peripheral equipment		$	6,576			$	7,291
Office furniture and equipment			781				917
Leasehold improvements			87				109
			7,444				8,317
Accumulated depreciation:
Computers and peripheral equipment			5,565				6,055
Office furniture and equipment			627				740
Leasehold improvement			72				78
			6,264				6,873
Depreciated cost		$	1,180			$	1,444

Depreciation expenses amounted to $ 198, $ 277 and $ 641 for the years ended December 31, 2013, 2014 and 2015, respectively.

As to charges, see Note   8b.

 

F - 23

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

NOTE 5:

INTANGIBLE ASSETS

Intangible assets arose from the acquisition of the business from eGistics in July 2014 (see Note 1d).

a.

Identifiable intangible assets:

 

		December 31,
		2014				2015
Original amount:
Customer relations		$	3,997			$	3,997
Technology			3,005				3,005
			7,002				7,002
Accumulated amortization:
Customer relations			239				535
Technology			470				1,409
			709				1,944
		$	6,293			$	5,058

 

b.

Amortization expenses amounted to $ 709 and $ 1,235 for the years ended December 31, 2014 and 2015, respectively.

c.

Estimated amortization expenses of intangible assets for the year ended:

December 31,		Other intangible assets
2016		$	1,435
2017			1,270
2018			649
2019			615
2020			466
2021 and thereafter			623
		$	5,058

 

F - 24

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

NOTE 6:

GOODWILL

The changes in the carrying amount of goodwill for the year ended December 31, 2015 are as follows:

Balance as of January 1, 2014		$	6,168
Acquired during the year (see Note 1d)			13,518
Foreign currency translation adjustments			(309	)
Balance as of December 31, 2014			19,377
Foreign currency translation adjustments			(286	)
Balance as of December 31, 2015		$	19,091

 

NOTE 7:

ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE

		December 31,
		2014				2015
Employees and payroll accruals		$	357			$	285
Government authorities			542				801
Accrued vacation pay			128				211
Accrued expenses			2,152				1,569
Factoring advance payments			180				615
Capital leases – current portion			252				440
Other			204				500
		$	3,815			$	4,421

 

NOTE 8:

COMMITMENTS AND CONTINGENT LIABILITIES

a.

Commitments:

1.

With respect to the participation of the Israeli Government in software research and development costs, the Company is committed to pay to the Government royalties at the rate of 3%-3.5% of revenues from sale of its iCMR software, up to a maximum of 100% of the amount of participation received, linked to the dollar, plus interest at the LIBOR rate.

The Company's total outstanding obligation in respect of royalty-bearing Government participation received or accrued, net of royalties paid or accrued, amounted to $408 as of December 31, 2015.

 

 

F - 25

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 8:

COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

2.

The Company has entered into non-cancelable operating lease agreements for the lease of motor vehicles, facilities rental and certain equipment. The leasing deposits are recorded as part of other account receivables.

The Company's facilities are leased under non-cancelable operating lease agreements, which expire on various dates, the latest of which is in 2016.

As of December 31, 2015, the Company is required to make the following minimum lease payments under operating leases for its motor vehicles, rental facilities and certain equipment:

2016		$	1,602
2017			1,115
2018			572
2019			442
2020			258
2021			162
Total		$	4,151

Rental expenses for motor vehicles, facility rental and certain equipment expenses amounted to $ 1,323, $ 1,279 and $ 1,194 for the years ended December 31, 2013, 2014 and 2015, respectively.

3.

Starting from October 2015, the Company had a line of credit with an Israeli bank ("the bank") for total borrowing of up to $ 500, based on several conditions and financial covenants. The line of credit bears interest rate of Libor + 4%.

During the year ended December 31, 2015, from time to time the Company used this line of credit and recorded interest expenses in the amount of $ 3.

Subsequent to year end, on March 6, 2016, the Company replaced the current line with a new line of credit with the same bank. According to the agreement, the Company is provided with the aggregate principal amount of account receivables ("AR") loan and AR credit line which will not exceed the lower of $3,000 and the sum of 70% of the aggregate value of eligible AR, as defined in the agreement.   The line of credit bears interest rate of Libor + 4.2%. In the framework of the agreement, the Company undertook certain financial covenants, which mainly effected by cash, AR and EBITDA.

b.

Charges:

1.

To secure compliance with the conditions related to the Company's "Approved Enterprise" status, the Company registered a floating charge on equipment and other assets. The charge is unlimited in amount and it may not be further pledged or transferred without the prior consent of the beneficiaries.

2.

To secure revolving credit facilities and guarantees from a bank, the Company recorded a floating charge on its plant, assets and rights and fixed charges on its unpaid share capital and its goodwill in favor of this bank (see also note 8a).

 

 

F - 26

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 8:

COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

c.

Guarantees:

1.

The Company has secured some of its lease agreements by a bank guarantee in the amount of $ 119.

2.

The Company provided certain customers and vendors with a $ 290 bank guarantee.

d.

Legal proceedings:

During 2015, two of the Company's customers in Europe filed lawsuits due to certain commercial disputes, with claims for payment of $92 and $79 respectively. The company denies all claims and is vigorously defending the suits, but is unable to predict the outcome at this stage.

 

NOTE 9:

TAXES ON INCOME

a.

Israeli income taxes:

1.

Measurement of taxable income:

The Company has elected to measure its taxable income and file its tax return 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. Accordingly, results for tax purposes are measured in terms of earnings in dollars.

 

F - 27

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 9:

TAXES ON INCOME (Cont.)

2.

The Law for the Encouragement of Capital Investments, 1959 ("the Investment Law"):

In 1990, the production facilities of the Company were granted the status of an "Approved Enterprise" under the Investment Law. In 1991, 1999, 2000, expansion programs were granted the status of "Approved Enterprise" (established plan). According to the provisions of the Law, the Company has elected the alternative package of benefits - and has waived Government grants in return for tax benefits.

According to the provisions of the Investment Law, the Company's income is tax-exempt for a period of two years commencing with the year it first earns taxable income, and subject to corporate taxes at the reduced rate of 10% to 25%, for an additional period of five to eight years depending upon the level of foreign ownership of the Company.

On April 1, 2005, an amendment to the Investment Law came into effect ("the Amendment") and has significantly changed the provisions of the Investment Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a "Benefited Enterprise", such as provisions generally requiring that at least 25% of the "Benefited Enterprise's" income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits.

However, the Amendment provides that terms and benefits included in any letter of approval already granted will remain subject to the provisions of the Investment Law as they were on the date of such approval. Therefore, investment programs that obtained approval for Approved Enterprise status prior to enactment of the Amendment will continue to be subject to the old provisions of the Investment Law.

The period of tax benefits for a new Benefited Enterprise commences in the "Year of Commencement," which is the later of: (1) the year in which taxable income is first generated by the Company, or (2) the year of election.

The entitlement to the above benefits is contingent upon the fulfillment of the conditions stipulated in the Amendment and regulations published there under. In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest and linked to changes in the Israeli CPI. As of December 31, 2015, the Company believes that it is meeting the aforementioned conditions.

 

F - 28

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 9:

TAXES ON INCOME (Cont.)

The Company elected 2009 as a year of election under the Amendment. The Amendment entitles the Company to a corporate tax exemption for a period of two years and to a reduced corporate tax rate of 10% - 25% (based on the percentage of foreign ownership) for an additional period up to eight years from the first year it has taxable income.

If the Company pays a dividend out of income derived from the Approved and Benefited Enterprise during the tax exemption period, it will be subject to corporate tax in respect of the gross amount distributed, including any taxes thereon, at the rate which would have been applicable had it not enjoyed the alternative benefits, generally 10% - 25%, depending on the percentage of the Company's Ordinary shares held by foreign shareholders.

As of December 31, 2015, the accumulated deficit of the Company does not include tax-exempt profits earned by the Company's "Approved Enterprise" and "Benefited Enterprise".

Income from sources other than the Approved and Benefited Enterprises during the benefit period will be subject to tax at the regular corporate tax rate.

In January 2011, the Israeli Parliament (the Knesset) passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), 2011, which prescribes, among others, for amendment of the Investment Law. The amendment became effective as of January 1, 2011. According to the amendment, the benefit tracks in the Investment Law were cancelled and a flat tax rate would apply to the Company's entire preferred income. The Company will be able to opt to apply the amendment (the waiver is non-recourse) and from then the uniform corporate tax rate will be 7 % in areas in Israel designated as development zone A and 12.5% elsewhere in Israel during 2013, 9% in development zone A and 16% elsewhere in Israel, respectively, in 2014 .

A dividend distributed from income which is attributed to a Preferred Enterprise/Special Preferred Enterprise will be subject to withholding tax at source at the following rates: (i) Israeli resident corporation – 0%, (ii) Israeli resident individual – 15% in 2013 and 20% as of 2014 (iii) non-Israeli resident - 15% in 2013 and 20% as of 2014 subject to a reduced tax rate under the provisions of an applicable double tax treaty.

The Company may choose not to apply the above amendment, in which case the Company will remain subject to the Investment Law as in effect prior to the 2011 amendment until the expiration of the Company's current investment programs. The Company is examining the possible effect of the amendment on the financial statements, if at all.

 

 

F - 29

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

NOTE 9:

TAXES ON INCOME (Cont.)

3.

Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969:

Under the Industry Encouragement Law, an “Industrial Company” is defined as a company resident in Israel, at least 90% of the income of which, in any tax year, exclusive of income from government loans, capital gains, interest and dividends, is derived from an “Industrial Enterprise” owned by it.  An “Industrial Enterprise” is defined as an enterprise, located in Israel, owned by an Industrial Company, whose major activity in a given tax year is industrial production activity. The Company believes it meets all the criteria to be classified as an "industrial company", as defined by the Industry Encouragement Law and, as such, is entitled to certain tax benefits, mainly accelerated depreciation of machinery and equipment, as prescribed by regulations published under the Inflationary Adjustments Law, the right to claim public issuance expenses and amortization of patents and other intangible property rights as a deduction for tax purposes.

4.

Corporate tax rates:

Taxable income of Israeli companies is subject to tax at the rate of 26.5% in the years ended December 31, 2014 and 2015. The tax rate in 2013 was 25%.

On January 4, 2016, the Knesset approved the second and third readings of the amendment to the Income Tax Ordinance (Num 217), lowering the Israeli corporate tax rate from 26.5% to 25%.

5.

According to section 145 of the Israeli Tax Ordinance the Company's tax assessments till and include the year 2011 are considered as final assessments.

b.

Carryforward losses:

As of December 31, 2015, Top Image Systems Ltd. has accumulated carryforward losses and capital losses in the amount of $ 11,314 and $ 1,892, respectively. The losses can be carryforward against relevant taxable income for an indefinite period. As of December 31, 2015, the Company fully depreciated its deferred tax assets for its carry forward net operating losses in Israel.

As of December 31, 2015, the subsidiaries had operating losses carryforwards for tax purposes in the amount of $ 30,427.

As of December 31, 2015, the U.S. subsidiaries had U.S. Federal and State net operating losses carryforwards of approximately $ 25,151, which can be carried forward and offset against taxable income for 7 to 20 years. Utilization of U.S. net operating losses may be subject to substantial annual limitations due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state law provisions. As a result, the Company's management believes that annual limitations may result in the expiration of net operating losses before utilization.

Operating losses carryforwards of its subsidiaries in Singapore, Japan and UK in the total amount of $ 2,511, $ 2,126 and $ 639, respectively, as of December 31, 2015, can be carried forward indefinitely since the Company does not expect to utilize them in the near future.

 

F - 30

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 9:

TAXES ON INCOME (Cont.)

c.

Non-Israeli subsidiaries:

Non-Israeli subsidiaries are taxed according to the tax laws in their respective domiciles of residence. The Company has not made any provisions relating to undistributed earnings of the Company's foreign subsidiaries since the Company has no current plans to distribute such earnings. If earnings are distributed to Israel in the form of dividends or otherwise, the Company may be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.

d.

Income (loss) before taxes on income is comprised as follows:

		Year ended December 31,
		2013				2014				2015
Domestic		$	(829	)		$	(6,343	)		$	(5,453	)
Foreign			641				1,422				(1,608	)
		$	(188	)		$	(4,921	)		$	(7,061	)

e.

Taxes on income are comprised as follows:

		Year ended December 31,
		2013				2014				2015
Current taxes		$	(204	)		$	(496	)		$	(194	)
Deferred taxes			205				(56	)			(1,021	)
		$	1			$	(552	)		$	(1,215	)
Domestic		$	205			$	(166	)		$	(1,268	)
Foreign			(204	)			(386	)			53
		$	1			$	(552	)		$	(1,215	)

f.

Deferred taxes:

Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:

 

 

F - 31

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

NOTE 9:

TAXES ON INCOME (Cont.)

		December 31,
		2014				2015
Carryforward losses		$	10,627			$	12,899
Research and development expenses			780				712
Accrued severance pay			17				52
Accrued vacation pay			30				33
Deferred tax assets before valuation allowance			11,454				13,696
Deferred tax liability:
Intangible assets			(2,391	)			(1,922	)
Deferred revenues			(66	)			(46	)
Deferred tax liabilities before valuation allowance			(2,457	)			(1,968	)
Net deferred tax assets before valuation allowance			8,997				11,728
Valuation allowance			(8,177	)			(11,728	)
Net deferred tax assets		$	820			$	-

 

Company's deferred tax assets and deferred tax liabilities as of December 31, 2014 and 2015:

 

		December 31,
		2014				2015
Domestic:
Current deferred tax asset, net		$	746			$	-
Non-current deferred tax asset, net			522				-
			1,268				-
Current deferred tax liability, net			(130	)			-
Non-current deferred tax liability, net			(318	)			-
			(448	)			-
		$	820			$	-

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and net operating losses are utilized.

 

F - 32

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 9:

TAXES ON INCOME (Cont.)

During the year ended December 31, 2015, the Company recorded a full valuation allowance on its deferred tax assets, since it assessed that the deferred tax assets will not be realized during that period.

Based on a consideration of these factors, the Company has established a valuation allowance of $ 8,177 and $ 11,728 at December 31, 2014 and 2015, respectively.

The Company does not have a provision for Israeli income taxes on the undistributed earnings of its international subsidiaries since the Company intends to indefinitely reinvest these earnings outside Israel.

g.

Reconciliation of the theoretical tax expenses:

The main reconciling item between the statutory tax rate of the Company and the effective tax rate is the recognition of valuation allowances in respect of deferred taxes relating to accumulated net operating losses carried forward among the various subsidiaries worldwide due to the uncertainty of the realization of such deferred taxes, the effect of the "Approved Enterprise" and undetectable expenses related to option expenses and other equity benefits.

 

F - 33

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

NOTE 9:

TAXES ON INCOME (Cont.)

 

h.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits in the years ended December 31, 2014 and December 31, 2015 are as follows:

Gross unrecognized tax benefits as of January 1, 2014		$	204
Interest accrued			9
Gross unrecognized tax benefits as of December 31, 2014			213
Deduction of unrecognized tax benefits			(213	)
Gross unrecognized tax benefits as of December 31, 2015		$	-

There was $ 0 of unrecognized income tax benefits that, if recognized, would impact the effective tax rate in the period in which each of the benefits is recognized

NOTE 10:

SHAREHOLDERS' EQUITY

a.

Dividends:

Dividends may be paid by the Company only out of the Israeli company's earnings and other surpluses in Israeli currency as defined in the Companies Law as of the end of the most recent fiscal year or as accrued over a period of the last two years whichever is higher. Such dividends will be declared and paid in New Israeli Shekels. No dividends were declared in the periods presented.

b.

Employee Stock Option Plan (2003):

The Employee Stock Option Plan (2003) ("the ESOP 2003") is designed to benefit from, and is made pursuant to, the provisions of Section 102 of the Israeli Income Tax Ordinance.

In May 2004, December 2006 and October 2013, the Board of Directors and the shareholders of the Company approved the additional pool of options to purchase additional 650,000, 700,000 and 1,100,000 Ordinary shares, respectively, pursuant to the ESOP 2003.

As of December 31, 2015, 1,855,809 options are outstanding.

As of December 31, 2015, an aggregate amount of 171,128 options is still available for future grant under of the above mentioned plan.

 

F - 34

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

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

 

NOTE 10:

SHAREHOLDERS' EQUITY (Cont.)

c.

Options to employees, management and directors:

 

1.

On July 13, 2014, the board of directors approved the grant of options to purchase 100,000 Ordinary shares to a member of the management, at an exercise price of $ 3.95 with a vesting term of three years.

2.

On September 18, 2014, the board of directors approved the grant of options to purchase 52,500 Ordinary shares to several employees, at an exercise price of $ 4.15 with a vesting term of three years.

3.

On January 1, 2015, the shareholders of the Company approved the grant of options to purchase 10,000 Ordinary shares to a member of the board, at an exercise price of $ 3.42 with vesting term of two years.

 

4.

On June 1, 2015, the board of directors approved the grant of options to purchase 516,549 Ordinary shares to several officers and employees, at an exercise price of $ 3.42. One third will be exercisable in one year, one third will be exercisable in two years, and one third will be exercisable in three years.

5.

On August 10, 2015, the board of directors approved the grant of options to purchase 35,000 Ordinary shares to an officers and several employees, at an exercise price of $ 3.45. One third will be exercisable in one year, one third will be exercisable in two years, and one third will be exercisable in three years.

6.

On December 28, 2015, the shareholders of the Company approved the grant of options to purchase 200,000 Ordinary shares to members of the board, at an exercise price of $ 3.30.  One half was exercisable on December 31, 2015, and one half will be exercisable on December 31, 2016.

7.

On December 28, 2015, the shareholders of the Company approved the grant of options to purchase 50,000 Ordinary shares to an officer, at an exercise price of $ 3.30.  One half will be exercisable on May 21, 2015, and one half will be exercisable on May 21, 2016.

8.

On December 28, 2015, the shareholders of the Company approved the grant of options to purchase 25,000 Ordinary shares to an officer, at an exercise price of $ 3.40.  One third will be exercisable on December 31, 2015, one third will be exercisable on December 31, 2016, and one third will be exercisable on December 31, 2017.

 

The following is a summary of the Company's stock options granted among the various plans:

 

		Year ended   December 31, 2015
		Number of options				Weighted average exercise price				Weighted average remaining contractual life (years)				Aggregate intrinsic value
Outstanding at the beginning of the year			1,294,810			$	3.60				7.57
Granted			836,549				3.38				-
Exercised			(39,422	)			2.01				-
Forfeited			(236,128	)			4.07				-
Outstanding at the end of the year			1,855,809			$	3.48				7.72			$	555
Exercisable at the end of the year			1,103,932			$	3.27				6.86			$	555
Vested and expected to vest at end of year			1,815,258			$	3.46				7.72			$	544

 

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

NOTE 10:

SHAREHOLDERS' EQUITY (Cont.)

The aggregate intrinsic value in the table above represents the total intrinsic value that would have been received by the option holders had all option holders exercised their options on the last date of the exercise period. Total intrinsic value of options exercised for the year ended December 31, 2015 was $ 555. As of December 31, 2015 there was $ 1,456 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2003 Stock Plan. This cost is expected to be recognized over a period of approximately 2.75 years.

The weighted average grant date fair values of options granted during 2014 and 2015 were $ 1.85 and $ 1.67, respectively.

The options outstanding as of December 31, 2015, have been separated into ranges of exercise price as follows:

				Options				Weighted								Options				Weighted average
				Outstanding				average				Weighted				exercisable				exercise
Range of				as of				remaining				average				as of				price of
exercise				December 31,				contractual				exercise				December 31,				options
price				2015				life (years)				price				2015				exercisable
$	1.30				74,322				3.23				1.30				74,322				1.30
$	2.11 - $ 2.25				502,671				5.99				2.18				502,671				2.18
$	3.30 - $ 6.04				1,278,816				8.66				4.09				526,939				4.58
					1,855,809				7.72				3.48				1,103,932				3.27

 

c.

Warrants:

As part of a private placement transaction in 2011, the Company granted its Investors and its agents, for no additional consideration, warrants to purchase 441,750 of the Company's Ordinary shares of NIS 0.04 par value each. The warrants are exercisable on or after six months from June 13, 2011 for a period of five years thereafter, at an exercise price of $2.20 per share.

As of December 31, 2015 297,150 warrants have been exercised, and 144,600 warrants are outstanding for future exercise.

e.

In February 2014, the Company issued 3,162,500 Ordinary shares in conjunction to its public offering (for more details see Note 1c)

f.

On July 16, 2014 the company issued 2,353,310 Ordinary shares in conjunction of the acquisition of eGistics (for more details see Note 1d).

 

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 10:

SHAREHOLDERS' EQUITY (Cont.)

g.

During the years ended December 31, 2013, 2014 and 2015, the Company recognized share-based compensation expense related to employee options in the amount of $ 356, $670 and $ 808, respectively, as follows:

		Year ended December 31,
		2013				2014				2015
Cost of revenues		$	64			$	162			$	150
Research and development, net			23				71				90
Selling and marketing			57				183				198
General and administrative			212				254				370
Total share-based compensation expense		$	356			$	670			$	808

 

NOTE 11:

GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS DATA

a.

Business segment, geographical areas and foreign operations:

The Company applies ASC 280, "Segment Reporting". The Company manages its business on the basis of one reportable segment (see Note 1 for a brief description of the Company's business). Total revenues are attributed to geographic areas based on the location of the customers.

b.

Geographical information :

1.

Revenues:

 

		Year ended December 31,
		2013				2014				2015
License Revenues
Far East		$	2,322			$	2,745			$	1,433
Germany			2,616				2,893				2,421
Rest of Europe			1,761				3,035				2,127
North and South America			4,254				2,091				1,343
Africa and Middle East			809				447				384
			11,762				11,211				7,708
Service Revenues
Far East			3,259				3,536				3,837
Germany			7,820				6,186				4,881
Rest of Europe			4,370				7,121				4,658
North and South America			1,284				7,435				12,270
Africa and Middle East			562				366				437
			17,295				24,644				26,083
Total revenues		$	29,057			$	35,855			$	33,791

 

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 11:

GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS DATA   (Cont.)

2.

The following is a summary of long-lived assets within geographic areas based on the assets' locations:

		Year ended December 31,
		2014				2015
Israel		$	127			$	113
USA			974				1,239
Other			79				92
Total Long-lived assets:		$	1,180			$	1,444

c.

Major customers’ data:

In 2014 and 2015 the Company had no customer who accounted for more than 10% of the total revenues. During 2013 one customer accounted for 10.2% of the total revenues.

NOTE 12:

BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net earnings (loss) per share:

		Year ended December 31,
		2013				2014				2015
Net loss used for the computation of diluted net loss per share		$	(187	)		$	(5,479	)		$	(8,295	)
Weighted average Ordinary shares outstanding			11,718,960				16,071,608				17,870,588
Effect of dilutive securities:
Employees stock options			*) -				*) -				*) -
Warrants			*) -				*) -				*) -
			-				-				-
Diluted weighted average Ordinary shares outstanding			11,718,960				16,071,608				17,870,588
Basic loss per Ordinary share		$	(0.02	)		$	(0.34	)		$	(0.46	)
Diluted loss per Ordinary share		$	(0.02	)		$	(0.34	)		$	(0.46	)

*)     Anti-dilutive.

 

 

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TOP IMAGE SYSTEMS LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

NOTE 13:

FINANCIAL EXPENSE

		Year ended December 31,
		2013				2014				2015
Interest expenses		$	29			$	35			$	107
Fair value adjustments for deferred revenues			-				55				109
Exchange rate loss			86				169				828
Bank charges			171				93				101
		$	286			$	352			$	1,145

NOTE 14:

RELATED PARTY TRANSACTION

According to the Company's agreement with the chairman of the board, in consideration for his services to the Company worldwide, the chairman of the board will be entitled to compensation in the amount of US $ 28.1 plus VAT per month ("the consulting fees"). In addition, as approved annually by the Company's general meeting of the shareholders, the chairman is entitled to a bonus of 4.25% of the Company's adjusted EBITDA, under certain conditions with regard to revenue and EBITDA, as defined in the minutes of the Company's board of Directors.

During 2014 the chairman of the board was entitled to a bonus at the rate of 0.25% of the total amount raised by the Company on the underwritten public offering (see Note 10f).

During 2013, 2014, 2015 the chairman of the board has been entitled to compensation, including the bonus, on the amount of $ 324, $ 369 and $ 323, respectively for his consulting fees.

NOTE 15:

SUBSEQUENT EVENT (UNAUDITED)

On March 8, 2016, the Company announced that it initiated global restructuring actions, in order to decrease its cost levels in the comings years. The company plans to terminate the contracts of 33 employees and contractors, with estimated cost saving of $ 2,187.

In addition, the company plans to cut costs by merging geographical regions and decreasing various other expenses. Total saving in 2016 is estimated to $ 4,328. The restructuring cost in 2016 will result in $1,174 that will be incurred in the first quarter of 2016.

 

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