F-1 1 ff12017_compulabltd.htm REGISTRATION STATEMENT

As filed with the Securities and Exchange Commission on June 13, 2017

 

Registration No. 333-

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

     

Form F-1

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

CompuLab Ltd.

(Exact name of registrant as specified in its charter)

 

State of Israel   3570   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial 
Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

Gideon Yampolsky, Chief Executive Officer

CompuLab Ltd. 

17 HaYetsira Street

Moradot HaCarmel Industrial Park

Yokneam Elite, Israel 2069208 

Tel: +972-4-8290100

 

Zysman, Aharoni, Gayer and

Sullivan & Worcester LLP 

1633 Broadway

New York, NY 10019

Tel: 212.660.5000

(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
  (Name, address, including zip code, and telephone number,
including area code, of agent for service)

 

Copies to:

 

Edwin L. Miller Jr.

Oded Har-Even

Robert V. Condon III

Zysman, Aharoni, Gayer and

Sullivan & Worcester LLP

1633 Broadway

New York, NY 10019

Tel: 212.660.5000

 

Shy S. Baranov

David A. Huberman

Zysman, Aharoni, Gayer & Co.

41-45 Rothschild Blvd.

Beit Zion

Tel-Aviv, Israel 65784

Tel: +972.3.795.5555

 

Barry I. Grossman

Tamar Donikyan

Ellenoff, Grossman &
Schole LLP

1345 Avenue of the Americas

New York, NY 10105

Tel: 212.370.1300 

 

Shachar Hadar

Meitar Liquornik Geva

Leshem Tal

16 Abba Hillel Silver Rd.

Ramat Gan

52506, Israel

Tel: +972.3.610.3100

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date hereof.

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ☐

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

 

Emerging growth company

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. 

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of
Securities to be Registered
  Proposed Maximum
Aggregate Offering
Price(1)
   Amount of
Registration Fee
 
Ordinary Shares, par value NIS 1.00 per share(2)(3)  $23,000,000   $2,665.70 
Representative’s warrants to purchase Ordinary Shares(4)   -    - 
Ordinary Shares underlying representative’s warrants(5)   1,150,000    133.29 
TOTAL  $24,150,000   $2,798.99 

 

 
(1)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended, or the Securities Act.

 

(2) Pursuant to Rule 416, the securities being registered hereunder include such indeterminate number of additional securities as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions.

 

(3) Includes Ordinary Shares which may be issued upon exercise of a 45-day option granted to the underwriters to cover over-allotments, if any.

 

(4) In accordance with Rule 457(g) under the Securities Act, because the shares of the registrant’s Ordinary Shares underlying the representative’s warrants are registered hereby, no separate registration fee is required with respect to the warrants registered hereby.

 

(5) As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, the warrants are exercisable at a per share exercise price equal to 125% of the public offering price, and the proposed maximum aggregate offering price of the Ordinary Shares underlying the representative’s warrants is equal to 125% of 1,150,000 (which is equal to 5% of 23,000,000).

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

 
SUBJECT TO COMPLETION, DATED JUNE 13, 2017
 

 

Ordinary Shares

 

 

 

CompuLab Ltd.

 

We are offering                    of our ordinary shares, par value NIS 1.00, or Ordinary Shares, in a firm commitment underwritten initial public offering. Prior to this offering, there has been no public market for our Ordinary Shares. The estimated initial public offering price is between $      and $      per share.

 

We have applied for the listing of the Ordinary Shares on the NASDAQ Capital Market under the symbol “CPUL.” We make no representation that such application will be approved or that the shares will trade on such market either now or at any time in the future. If the application is not approved, we will not complete this offering.

 

   Per Share   Total 
Initial public offering price                   
Underwriting discounts and commissions (1)      
Proceeds to us (before expenses)      

 

 
(1)

Maxim Group LLC, or Maxim, the representative of the underwriters, will receive compensation in addition to the underwriting discount, as set forth in the section entitled “Underwriting” beginning on page 100 upon the closing of this offering, which consists of warrants entitling Maxim to purchase 5% of the aggregate number of Ordinary Shares issued in this offering, with an exercise price equal to 125% of the price per Ordinary Share sold in this offering. We have also agreed to reimburse the underwriters for certain expenses incurred by them. See “Underwriting” for additional disclosure regarding compensation to the underwriters payable by us.

 

We have granted the underwriters an option, exercisable one or more times in whole or in part, to purchase up to          additional Ordinary Shares from us at the public offering price, less the underwriting discounts and commissions, within 45 days from the date of this prospectus to cover over-allotments, if any. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable will be $    , and the total proceeds to us, before expenses, will be $    .

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and, as such, may elect to comply with certain reduced public company reporting requirements.

 

Our directors, executive officers and principal shareholders collectively beneficially own 189,839 of our Ordinary Shares, or 89.54%, of our total outstanding Ordinary Shares. Our chief executive officer individually beneficially owns 70.75% of our total outstanding Ordinary Shares. Upon consummation of this offering, our directors, executive officers and founders will collectively beneficially own approximately       % of our total outstanding Ordinary Shares. Accordingly, upon consummation of this offering, these shareholders as a group will control the vote on all matters requiring shareholder approval, including the election of directors.

 

Investing in our Ordinary Shares involves a high degree of risk. See “Risk Factors” beginning on page 8 of this prospectus for a discussion of information that should be carefully considered in connection with an investment in our Ordinary Shares.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the Ordinary Shares to purchasers in the offering on or about           , 2017.

 

Sole Book-Running Manager

 

Maxim Group LLC

 

 

 

Prospectus dated     , 2017

 

 

 

 

 

  

The Airtop – our most powerful passively cooled workstation.

 

 

  

TABLE OF CONTENTS

 

    Page
Summary   1
Risk Factors   8
Special Note Regarding Forward-Looking Statements and Market Data   27
Use of Proceeds   28
Dividend Policy   29
Capitalization   30
Dilution   31
Selected Financial Data   32
Management’s Discussion and Analysis of Financial Condition and Results of Operations   35
Business   51
Management   66
Principal Shareholders   85
Description of Share Capital   86
Shares Eligible for Future Sale   92
Taxation   93
Underwriting   100
Expenses Related to the Offering   106
Legal Matters   106
Experts   106
Enforceability of Civil Liabilities   106
Where You Can Find Additional Information   107
Index of Financial Statements   F - 1

 

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. We are offering to sell our Ordinary Shares, and seeking offers to buy our Ordinary Shares, only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus or any such free writing prospectus, regardless of the time of delivery or the time of any sale of our Ordinary Shares.

 

For investors outside the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.

 

In this prospectus, “we,” “us,” “our,” the “Company” and “CompuLab” refer to CompuLab Ltd.

 

“Fit-PC,” “Intense PC,” “Utilite,” “FitLet” and “Airtop” are registered trademarks of CompuLab, and CompuLab’s logo is an unregistered trademark of CompuLab. All other trademarks and trade names appearing in this prospectus are the property of their respective owners.

 

Our reporting currency and functional currency is the U.S. dollar. Unless otherwise expressly stated or the context otherwise requires, references in this prospectus to “dollars” or “$” mean U.S. dollars, and references to “NIS” are to New Israeli Shekels.

 

 i 

 

PROSPECTUS SUMMARY

 

The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all of the information you should consider before buying our Ordinary Shares. Therefore, you should read the entire prospectus carefully, especially the “Risk Factors” section beginning on page 8 and our financial statements and the related notes appearing at the end of this prospectus before deciding to invest in our Ordinary Shares.

 

THE COMPANY

 

Overview

 

We are a global developer and manufacturer of embedded computer systems, fan-less “Mini PCs” and a line of recently developed powerful fan-less computing systems, including workstations, entry-level servers, PCs for industrial and homeland security, or HLS, which are less susceptible to the threat of spyware. Embedded computer systems, or computers-on-modules, also referred to as CoMs, are single circuit boards, with the functionality of a complete computer, that serve as the building blocks and the computing power for thousands of electronic products, including smart electronic devices that have become indispensable in daily life. Our Mini PCs are computers that are used for a variety of daily applications; they are fully integrated, small and low-powered and are cooled by passive cooling technology without any fans enabling us to reduce the size and energy consumption of our computers. We currently market over 25 distinct products, have over 1,500 direct and indirect customers diversified across many industries, over 20 resellers for CoMs products spanning across Europe, Asia Pacific and South America, and over 25 Mini PC resellers in Europe, Asia Pacific, South America, the United States and South Africa.

 

We introduced our first pilot product in our Airtop line of powerful fan-less computers during the first quarter of 2016. We received strong market feedback, and believe that additional specific improvements are required to gain broader market acceptance. Our goal is to implement the required improvements in the next generation of the Airtop line. The new commercial version of the Airtop line (named Airtop 2) is expected to be launched in the third quarter of 2017, and will embed the seventh generation of Intel Core® architecture and a high performance graphics card. The Airtop line of workstations, entry level servers, industrial and HLS PCs are enabled by our proprietary breakthrough passive cooling technology, Air Tubed Natural Air Flow, or AT-NAF. The AT-NAF technology is capable of dissipating large amounts of heat from small enclosures without a cooling fan or any moving parts. The AT-NAF technology is more energy efficient and more reliable since it has no moving parts, and there is no air and dust circulation around the components. We believe that this technology has significant and potentially disruptive market potential.

 

We were established in 1992 in Israel, have been in the CoM business for over 17 years and have over nine years of experience in the relatively new Mini PC market. We have 78 employees in our facility in Yokneam Elite, Israel, of whom approximately 24% are engaged in engineering and technical support, 53% in production and testing, 9% in sales and marketing and the remaining in management, finance, human resources and administration.

 

Our products are divided into three categories:

 

  Computer on modules. Our standardized CoMs cover a broad range of pricing, performance and features. Our CoMs are embedded in products such as medical devices, telecommunication systems, transportation systems, robotics, automotive devices, ATMs, military systems, aerospace and many others. Our CoMs are based on several different processor architectures, including the Intel Core, AMD, TI OMAP/Sitara and Freescale/NXP/Qualcomm.
     
    We recently developed a micro CoM called the Ultra Compact Multi-Layer Module, or the UCMM, which has the highest density feature available today. The UCMM is half the size of the smallest CoM currently available and addresses the mobile device and wearable computing markets. The UCMM is backed by a patent pending technology. The first product based on the UCMM technology, called the UCM-iMX7, was launched in June 2017.

 

  Miniature fan-less PCs. Our Mini PCs are stand-alone fan-less computers that are used in many industrial, personal and commercial applications. We believe that our Mini PCs are the smallest, most energy efficient, passively cooled PCs in the market to date. Our flagship “Intense PC,” “Fit-PC,” and “FitLet” are based on the sixth and seventh generation Intel Core (Skylake and Kaby Lake), AMD Kabini and Freescale processor architectures.
     
  IoT Gate. We recently launched a mini-computer product (gateway) for the Internet of Things, or IoT, market, called the IoT Gate IMX7, or the IoT Gate, which is based on Freescale’s IMX7 architecture. The new product enables the inter-connection of local devices, appliances and sensors to the global internet cloud for data storage and monitoring.

 

  Airtop Line. We have developed an advanced Airtop line of computers which consists of professional workstations, entry level servers, and industrial and HLS PCs. The Airtop line is based on our new proprietary AT-NAF technology that is capable of passively cooling a variety of powerful computing systems without the use of any fans. The Airtop line features a larger, more powerful design than the Mini PC line, and as opposed to the Mini PC line, the Airtop line is able to embed separate high-end graphics processing units, or GPUs, thus significantly broadening our market reach. The Airtop is our most prominent technological innovation.

 

We intend to grow our business principally by promoting the Airtop line, launching a series of products based on our recently introduced AT-NAF technology, by developing new innovative technologies and products such as the UCMM and the IoT Gate, and by continuing to improve the functionality of our other product lines. We believe that the market addressed by the Airtop is approximately twelve times larger than the CoM and Mini PC markets combined, comprising over $30 billion worldwide. In order to exploit this opportunity, we plan to aggressively expand our sales, marketing, research and development and manufacturing resources in support of this product expansion.

 

 1 

  

We develop our software and hardware products in-house with advanced research and development capabilities. Manufacturing, production and testing are also completed in-house, with capabilities that specialize in dense and low-powered, fan-less passive cooling. Our rate of new product introductions has continued to increase in the past few years with the growth of our research and development team, reaching an average of five to seven new products per year in the past three years. We expect 2017 to be a record year in terms of product launches, such as the next generation of the Airtop, IoT Gate, UCMM, Intense-PC 3, or IPC3, and more.

 

Among our prior breakthroughs was the introduction in 2007 of the smallest, most powerful and energy-efficient fan-less Mini PC based on the then latest Intel architecture, as well as the AT-NAF technology during 2016. Our products meet all environmental standards, are lead-free and compliant with the European Union’s Restriction of Hazardous Substances, or RoHS, Directive.

 

We have a strong and diversified customer base consisting of over 1,500 commercial customers across a variety of industries in over 50 countries. Our end customers include small and medium-sized businesses, as well as large blue-chip companies such as Roche, Philips, Tyco, ProData (Brazil), Walmart (through Stratacache) and many others. Many of our customers are returning customers that continue to purchase new products over extended periods of time. We believe that we are one of the top three leading vendors in the Advanced RISC (reduced instruction set computer) Machines, or ARM, CoM market which is based mainly on the widely used ARM architectures of TI and Freescale.

  

Risks Associated with Our Business

 

Our ability to implement our business strategy is subject to numerous risks that you should be aware of before making an investment decision. These risks are described more fully in the section entitled “Risk Factors” immediately following this prospectus summary. These are not the only risks we face. These risks include, among others:

 

  We may not be able to successfully manage our planned growth and expansion;

 

  If we fail to meet growth expectations about our business, our share price may significantly decline in value;

 

  Our quarterly operating results will likely fluctuate in the future, which could cause rapid declines in our share price;

 

  Our cost structure and ability to deliver products to customers in a timely manner may be adversely affected by volatility in the market for core components and materials for our products;

 

  We may lose sales or incur unexpected expenses relating to insufficient, excess or obsolete inventory;

 

  Our dependence on sales to certain customers;

 

  Our dependence on partners and suppliers;

 

  The availability of, and the price of certain components used in our products;

 

  The market in which we operate is highly competitive, and if we do not compete effectively, we may not be able to increase our market penetration, grow our net sales or improve our gross margins;

 

  Our success and growth depend on our ability to continuously develop and successfully market new products and improvements that are up to date with developments in market technologies and demands; if we are unable to do so, demand for our current products may decline and new products we introduce may not be successful;

 

  Protecting our know-how, patents and other intellectual property;

 

 

Adequate financial resources for projected capital expenditures and liquidity;

 

  The average selling prices for our products are subject to decline, which could harm our results of operations; and

 

  If we lose our key executives, or are unable to attract additional key employees, we may not be able to implement our business strategy in a timely manner.

 

 2 

 

Corporate Information

 

We are an Israeli corporation based in Yokneam Elite, Israel, near Haifa, and were incorporated on May 10, 1992. Our principal executive offices are located at 17 HaYetzira St., Yokneam Elite, Israel, and our telephone number is +972-4-8290100. Our website address is www.compulab.co.il, the contents of which are not a part of this prospectus and is included as an inactive textual reference.

 

Implications of being an Emerging Growth Company

 

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not “emerging growth companies” including, but not limited to:

 

  being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

  not being required to comply with the auditor attestation requirements for the assessment of our internal control over financial reporting provided by Section 404 of the Sarbanes-Oxley Act of 2002;

 

  not being required to comply with any requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and our financial statements;

 

  reduced disclosure obligations regarding executive compensation; and

 

  not being required to hold a nonbinding advisory vote on executive compensation or seek shareholder approval of any golden parachute payments not previously approved.

 

We intend to take advantage of these exemptions. We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of this offering.

 

The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. This means that an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are, for the time being, electing to delay such adoption of new or revised accounting standards.

 

If and when we no longer are an emerging growth company, we will still have reduced compliance obligations as a “foreign private issuer,” as described below.

 

Implications of being a Foreign Private Issuer

 

Upon completion of this offering, we will be subject to the information reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, that are applicable to “foreign private issuers,” and under those requirements we will file reports with the U.S. Securities and Exchange Commission, or the SEC. As a foreign private issuer, we will not be subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, we will be subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. For example, although we intend to report our financial results on a quarterly basis, we will not be required to issue quarterly reports, proxy statements that comply with the requirements applicable to U.S. domestic reporting companies, or individual executive compensation information that is as detailed as that required of U.S. domestic reporting companies. We will also have four months after the end of each fiscal year to file our annual reports with the SEC and will not be required to file current reports as frequently or promptly as U.S. domestic reporting companies. Our officers, directors and principal shareholders will be exempt from the requirements to report transactions in our equity securities and from the short-swing profit liability provisions contained in Section 16 of the Exchange Act. As a foreign private issuer, we will also not be subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act. In addition, as a foreign private issuer, we will be permitted, and intend, to follow certain home country corporate governance practices instead of those otherwise required under the NASDAQ Stock Market rules for domestic U.S. issuers (See “Risk Factors — Risks Related to this Offering and the Ownership of Our Ordinary Shares”). These exemptions and leniencies will reduce the frequency and scope of information and protections available to you in comparison to those applicable to U.S. domestic reporting companies. We intend to take advantage of the exemptions available to us as a foreign private issuer during and after the period we qualify as an emerging growth company.

 

 3 

 

THE OFFERING

 

Ordinary Shares offered by us             Ordinary Shares
     

Ordinary Shares to be outstanding after this offering

            Ordinary Shares (or       Ordinary Shares if the over-allotment option is exercised in full)
     
Over-allotment option  

We have granted the underwriters the right to purchase up to            additional Ordinary Shares from us at the public offering price less the underwriting discount within 45 days from the date of this prospectus to cover over-allotments.

     
Representative’s warrants  

We will issue to Maxim, the representative of the underwriters, upon closing of this offering, compensation warrants, or the Representative’s Warrants, entitling Maxim to purchase 5% of the aggregate number of Ordinary Shares issued in this offering, excluding Ordinary Shares issued pursuant to the exercise of the over-allotment option, at an exercise price of           per share. The Representative’s Warrants will have a term of five years and may be exercised commencing 12 months after the date of effectiveness of the Registration Statement on Form F-1 of which this prospectus forms a part. The Representative’s Warrants may be exercised on a cashless basis.

     

Use of proceeds

 

We expect to receive approximately $      million in net proceeds from the sale of      Ordinary Shares offered by us in this offering (approximately $      million if the underwriters exercise their over-allotment option in full), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, assuming the shares are offered at $     per share, the midpoint of the estimated price range set forth on the cover of this prospectus.

 

We expect to use the net proceeds from this offering for the following purposes:

 

●   Approximately $4 million for scaling up marketing and sales of our Airtop line, including brand creation and forming dedicated global marketing and sales activity;

 

●   Approximately $3 million for scaling up our current business in the ARM CoM and Mini PC markets, including the CoM Express and IoT markets;

 

●   Approximately $2 million for leveraging our new proprietary AT-NAF technology to additional application areas and products;

 

●   Approximately $2 million for research and development, or R&D, of new breakthrough technologies to expand our business;

 

●   Approximately $2 million to enhance and increase our sales force and post sales experts in the United States, and to establish on-the-ground presence in Europe;

 

●   Approximately $3 million to ramp up production capabilities and establish a production line in the United States; and

 

●   The remainder for working capital and general corporate purposes.

     
Risk factors  

You should read the “Risk Factors” section starting on page 8 of this prospectus for a discussion of factors to consider carefully before deciding to invest in our Ordinary Shares.

     
Proposed NASDAQ symbol  

We have applied for the listing of our Ordinary Shares on the NASDAQ Capital Market under the symbol “CPUL.”

 

The number of Ordinary Shares to be outstanding after this offering is based on 212,012 Ordinary Shares outstanding as of December 31, 2016. Unless otherwise indicated, all information in this prospectus assumes no exercise of the underwriters’ over-allotment option or the Representative’s Warrants.

 

 4 

 

SUMMARY FINANCIAL DATA

 

The following table summarizes our financial data. We have derived the following statements of operations data and balance sheet data for the years ended December 31, 2016, 2015 and 2014 from our audited financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and related notes included elsewhere in this prospectus. Numbers in the following tables are in U.S. dollars and, except share and per share amounts, in thousands.

 

   Year Ended December 31, 
   2016   2015   2014 
Statements of Operations Data:  (in thousands of U.S. dollars, except share and per share amounts) 
Revenues  $21,957   $27,781   $23,370 
Cost of revenues   14,824    18,705    17,101 
Gross profit   7,133    9,076    6,269 
Operating expenses:               
Research and development, net   2,181    3,054    3,173 
Sales and marketing   1,606    1,777    1,846 
General and administrative   1,369    1,904    1,840 
Other operating expenses   154    349    75 
Other operating income   (184)   (179)   (186)
Total operating expenses   5,126    6,905    6,748 
Operating income (loss)   2,007    2,171    (479)
Financial expenses   529    667    863 
Financial income   (18)   (13)   (835)
Financial expenses in respect of warrants   -    1,597    86 
Income (loss) before taxes on income   1,496    (80)   (593)
Taxes on income   94    40    21 
Net income (loss)  $1,402   $(120)  $(614)
                
Earnings (loss) per Ordinary Share  $6.61   $(0.57)  $(3.07)
Number of Ordinary Shares used in computing net income (loss) per Ordinary Share   212,012    212,012    200,000 

  

 5 

 

  

As of December 31,

 
   2016   2015   2014   2016 
  Actual   As Adjusted (1) 
Balance Sheet Data:        
Total current assets  $10,019   $11,151   $12,590             
Total non-current assets   11,849    12,762    12,967      
Total current liabilities   11,178    14,438    19,353      
Non-current liabilities   1,672    1,793    1,483      
Shareholders’ equity   9,018    7,682    4,721      

  

 

(1) As adjusted data gives retroactive effect to the sale of           Ordinary Shares in this offering at an initial public offering price of $           per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if the sale had occurred on the balance sheet date shown above.

 

  

Year Ended December 31,

 
   2016   2015   2014 
Supplemental Financial Data:            
EBITDA  $3,782   $3,929   $1,147 
Adjusted EBITDA  $4,163   $4,656   $1,460 

 

We believe that EBITDA, or earnings before interest, taxes, depreciation and amortization, and adjusted EBITDA, or Adjusted EBITDA, are important supplemental measures of operating performance because they eliminate items that may have less bearing on our operating performance and highlight trends that may not otherwise be apparent when relying solely on International Financial Reporting Standards, or IFRS, financial measures. EBITDA and Adjusted EBITDA are non-GAAP measures that are not a measure of our financial performance under IFRS and should not be considered an alternative to net income or any other performance measures derived in accordance with IFRS. Accordingly, you should consider EBITDA and Adjusted EBITDA along with other financial performance measures, including net income, and our financial results presented in accordance with IFRS. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under IFRS. Some of these limitations are:

 

  these measures do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

  these measures do not reflect changes in, or cash requirements for, our working capital needs; and

 

  although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and these measures do not reflect any cash requirements for such replacements.

 

We believe that EBITDA and Adjusted EBITDA are useful measures for analyzing the performance of our core business because they facilitate operating performance comparisons from period to period and company to company. This is accomplished by backing out potential differences caused by changes in foreign exchange rates that impact financial assets and liabilities denominated in currencies other than the US dollar (affecting finance expenses, net), tax positions (such as the impact on periods or companies of changes in effective tax rates), the age and book depreciation of fixed assets (affecting relative depreciation expense), the depreciation and amortization of capitalized development expenses (because it is a non-cash expense) and expenses that include non-capitalized expenses of this offering, management fee expenses and R&D expenses for an experimental scientific project.

 

 6 

 

The following table reconciles net income (loss) for the period to EBITDA for the periods presented:

 

   Year Ended December 31, 
   2016   2015   2014 
Reconciliation of Net Income (Loss) to EBITDA:  (in thousands) 
Net income (loss)  $1,402   $(120)  $(614)
Finance expenses, net   511    654    28 
Financial expenses in respect of warrants   -    1,597    86 
Taxes on income   94    40    21 
Depreciation and amortization   1,775    1,758    1,626 
EBITDA  $3,782   $3,929   $1,147 

 

The following table reconciles EBITDA to Adjusted EBITDA for the periods presented:

 

   Year Ended December 31, 
   2016   2015   2014 
Reconciliation of EBITDA to Adjusted EBITDA:  (in thousands) 
EBITDA  $3,782   $3,929   $1,147 
Other operating expenses - issuance expenses   154    349    75 
Management Fees   105    121    133 
Special scientific project expenses   122    257    105 
Adjusted EBITDA  $4,163   $4,656   $1,460 

  

 7 

 

RISK FACTORS

 

An investment in our Ordinary Shares involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information appearing elsewhere in this prospectus, including our financial statements and the notes thereto, before deciding to invest in our Ordinary Shares. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and future growth prospects. In these circumstances, the market price of our Ordinary Shares could decline, and you may lose all or part of your investment.

 

Risks Related to Our Business and Industry

 

The market in which we operate is highly competitive, and if we do not compete effectively, we may not be able to increase our market penetration, grow our net sales or improve our gross margins.

 

The market for our products is intensely competitive and rapidly changing. Barriers to entry in our market are relatively low and we expect increased challenges from existing as well as new competitors. Some of our principal competitors offer solutions at a lower price, which has resulted in pricing pressures on sales of our solutions. We expect further downward pricing pressure from our competitors and expect that we will have to price some of our products aggressively to increase our market share with respect to those products or geographies, particularly for CoMs based on ARM CPUs’ large sale opportunities and for the Airtop line products. If we are unable to maintain the margins on our products, our operating results could be negatively impacted. In addition, if we do not develop new innovative products, or enhance the reliability, performance, efficiency and other features of our existing products, our customers may turn to our competitors for alternatives. In addition, pricing pressures and increased competition generally may also result in reduced sales, less efficient utilization of our manufacturing operations, lower margins or the failure of our products to achieve or maintain widespread market acceptance, any of which could have a material adverse effect on our business, results of operations and financial condition.

 

Our principal competitors include global computer systems companies such as Intel Corporation, Dell Inc., HP Development Company, L.P., AsusTeK Computer Inc. and Lenovo Group Ltd. as well as companies that specialize in our product area, such as Giga-Byte Technology Co., Ltd., Shuttle Inc., Nexcom International Co., Ltd., Kontron AG, Congatec Holding AG, Seco srl, Advantech Co. Ltd., Variscite Ltd., Toradex AG, Phytech Messtechnik, and American Portwell Technology, Inc.

 

Some of our competitors enjoy substantial competitive advantages, such as:

 

  greater name recognition and deeper market penetration;

 

  longer operating histories;

 

  larger sales and marketing organizations and research and development teams and budgets;

 

  more established relationships with customers, contract manufacturers and suppliers and better channels to reach larger customer bases and larger sales volume allowing for better costs;

 

  larger customer service and support organizations with greater geographic scope;

 

  a broader and more diversified array of products and services;

 

  lower manufacturing costs;

 

  preferred vendor status with our existing and potential customers; and

 

  substantially greater financial, technical, personnel, sales, marketing and other resources.

 

 8 

 

As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Competitors may seek to copy our innovations relating to products which do not have intellectual property protection and use cost advantages from greater size to compete aggressively with us on price. Our competitors may, in the future, as they have in the past, lower their prices in order to increase their market share, therefore adversely affecting the price we may realize from our own customers. Certain suppliers and customers are also current or prospective competitors and as a result, assistance that we provide to them as customers may ultimately result in increased competitive pressure against us. Furthermore, because of these advantages, even if our application optimized products are more effective than the products that our competitors offer, potential customers might accept competitive products in lieu of purchasing our products. The challenges we face from larger competitors will become even greater if consolidation or collaboration between or among our competitors occurs in our industry. For all of these reasons, we may not be able to compete successfully against our current or future competitors, and if we do not compete effectively, our ability to increase our net sales may be impaired.

 

Our success and growth depend on our ability to continuously develop and successfully market new products and improvements; if we are unable to do so, demand for our current products may decline and new products we introduce may not be successful.

 

Average selling prices of some of our products tend to decline as they mature. As a result, we must continually anticipate and respond to changing customer requirements, innovate in our current and emerging product categories, introduce new product lines and products and enhance existing products in order to capture market share, remain competitive and execute our growth strategy.

 

We believe that the success of our products depends to a significant degree on our ability to identify new features or product opportunities, anticipate technological developments and market trends and distinguish our products from those of our competitors. In order to further grow our business, we also will need to quickly develop, manufacture and ship innovative and reliable new products and enhancements to our existing products in a cost-effective and timely manner. This must be achieved in order to take advantage of developments in enabling technologies and the introduction of new computer hardware (such as new generations of microprocessors and more powerful graphics cards), all of which drive demand for our products.

 

If we do not execute on these factors successfully, demand for our current products may decline as new products from competitors are introduced, and any new products that we may introduce may not gain widespread acceptance, adversely affecting our business and operating results. In addition, if we do not continue to distinguish our products through technologically advanced features and designs, as well as continue to build and strengthen our brand recognition and our access to distribution channels, our business could be harmed.

 

We are highly dependent on the success of our customers’ sales to their certain end markets.

 

Our customers in the CoM line are not the end users of our products and solutions, rather our products are integrated into our customers’ products and solutions, which are then sold to the end user. Therefore, our success depends, in large part, on the ability of our customers to market and sell their products that incorporate our products to the end user. If any of our customers’ marketing and sales efforts are unsuccessful, this will adversely affect our sales and/or profitability. If we are unable to collaborate with and secure design wins with successful original equipment manufacturers, or OEMs, we may fail to create significant demand for our products. In addition, if any of our customers choose to focus their efforts on end markets that do not require our products and solutions, we may experience an unexpected decrease in demand for our products. Any of these circumstances may adversely affect our results of operations.

 

Our failure to deliver high quality and updated products could damage our reputation and diminish demand for our products.

 

Since our products in the CoM line are embedded in our customers’ solutions, the performance of our products, and particularly their reliability, is critical to our customers’ business operations. The design of our products is sophisticated and complex, and the process for manufacturing, assembling and testing our solutions is challenging. Occasionally, our design or manufacturing processes may fail to deliver products of the quality that our customers require.

 

New flaws or limitations in our solutions may be detected in the future. Part of our strategy is to bring new products to market quickly, and first-generation products may have a higher likelihood of containing undetected flaws. If our customers discover defects or other performance problems with our products, our customers’ businesses and our reputation may be damaged. Customers may elect to delay or withhold payment for defective or underperforming products, request remedial action, terminate contracts for untimely delivery, or elect not to order additional products, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or subject us to the expense and risk of litigation. We may incur expense in recalling, refurbishing or repairing defective products. If we do not properly address customer concerns about our products, our reputation and relationships with our customers may be harmed.

 

 9 

 

Moreover, if we fail to anticipate our customers’ changing needs or emerging technological trends, our market share and results of operations could materially suffer. In order to avoid this type of result, we must make long-term investments in research and development, develop or obtain relevant know-how and intellectual property before knowing whether our predictions will accurately reflect our customers' demand for our products and solutions. The market's acceptance of our products and solutions could decline and our results could suffer, if we are unable to adapt our products to new technological industry standards and new applications if we fail to anticipate and/or respond to technological advancements in our industry. Additionally, any delay in the development, production, marketing or offering of a new product or application or an enhancement to an existing product or application could result in customer attrition or impede our ability to attract new customers, causing a decline in our revenue or earnings and weakening our competitive position. For all of these reasons, customer dissatisfaction with the quality and diversification of our products could substantially impair our ability to grow our business.

 

We must work closely with our suppliers to make timely new product introductions.

 

We rely on our close working relationships with our suppliers, including Intel Corporation, Texas Instruments Incorporated, Freescale Semiconductor, Ltd. and Advanced Micro Devices, Inc. to anticipate and deliver new products on a timely basis when new generation core components are made available. Intel, Texas Instruments Incorporated, Freescale Semiconductor, Ltd. and Advanced Micro Devices, Inc. are the suppliers of the microprocessors we use in our products. If we are not able to maintain our relationships with our suppliers, negotiate attractive terms with them, or continue to leverage their research and development capabilities to develop new technologies desired by our customers, our ability to quickly offer advanced technology and product innovations to our customers would be impaired. As is customary in our industry, we have no long-term agreements that obligate our suppliers to continue to work with us or to supply us with products, and as such, either party, without cause, upon a granting of relatively short notice period, may terminate these agreements.

 

Historically, there have been instances of fluctuations in the demand for processors, and this has led to shortages in the supply of processors. This occurrence previously caused processor suppliers to allocate available processors more selectively among their customers. In the future, processor suppliers may allocate products to clients in other industries that source larger volumes of their products rather than to companies like us in the embedded computing industry. If there is an interruption in our supply of processors and we are unable to obtain suitable processors at competitive prices, we may experience delays in deliveries to our customers.

 

We rely on our key executives and highly-skilled technical personnel and if we are unable to attract, retain or motivate key personnel or hire qualified personnel, we may not be able to grow or our business may contract, which would have a material adverse effect on our results of operations and financial condition.

 

Our performance is largely dependent on the continued service of our executive management team and other highly-skilled key employees, particularly our electrical engineers, software engineers, mechanical engineers and computer professionals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly-skilled personnel and, if we are unable to hire and train a sufficient number of qualified employees for any reason, we may not be able to implement our current initiatives or grow, or our business may contract and we may lose market share. In addition, our employment arrangements with our executives and employees do not require them to provide services to us for any specific length of time, and they can terminate their employment with us at any time, subject to contractual notice periods, as applicable. The loss of services of any of these executives or of one or more other key members of our team could seriously harm our business. Furthermore, certain of our competitors or other technology businesses may seek to hire our employees. There is no assurance that any equity or other incentives that we grant to our employees will be adequate to attract, retain and motivate employees in the future. Furthermore, we only have non-competition agreements with our Chief Executive and acting Chief Financial Officers. However, the enforceability of any current or future non-competition agreements may be limited under applicable Israeli law, and Israeli courts are often reluctant to enforce such agreements. If we are unable to enforce any of these agreements, competitors that employ our former employees could benefit from the expertise our former employees gained while working for us.

 

 10 

 

Our cost structure and ability to deliver products to customers in a timely manner may be adversely affected by volatility in the market for core components and materials for our products.

 

Prices of materials and core components utilized in the manufacture of our products, such as central processing units, or CPUs, dynamic random-access memory, Flash memory and peripherals, chassis, memory and hard drives represent a significant portion of our cost of sales. Prices of these core components and materials are volatile as new CPUs and components are periodically introduced into the market, and, as a result, it is difficult to predict expense levels and operating results. As is customary in our industry, we generally do not enter into long-term supply contracts for these materials and core components, but instead purchase these materials and components on a purchase order basis. If our business growth renders it necessary or appropriate to transition to longer term contracts with materials and core component suppliers, we may not be able to effectively adjust for price fluctuations, and our costs may increase and our gross margins could correspondingly decrease.

 

Because we often acquire materials and core components on an as needed basis, we may be limited in our ability to effectively and efficiently respond to customer orders because of the then-current availability or the terms and pricing of materials and core components. Our industry has experienced materials shortages and delivery delays in the past, and we may experience shortages or delays of critical materials in the future. From time to time, we have been forced to delay the introduction of certain of our products or the fulfillment of customer orders as a result of shortages of materials and core components. As of December 31, 2016 and 2015, we had $5,100,000 and $6,300,000 of orders waiting to be fulfilled, respectively. If shortages or delays arise, the prices of these materials and core components may increase or the materials and core components may not be available at all. In addition, in the event of shortages, some of our larger competitors may have greater abilities to obtain materials and core components due to their larger purchasing power. We may not be able to secure enough core components or materials at reasonable prices or of acceptable quality to build new products to meet customer demand, which could adversely affect our business and financial results.

 

As we increasingly target larger customers and larger sales opportunities, our customer base may become more concentrated, our cost of sales may increase, our margins may be lower and our sales may be less predictable.

 

As our business continues to grow, we have become increasingly dependent upon larger sales to maintain our rate of growth. In particular, for the year ended December 31, 2016, four customers accounted for approximately 35% of our annual sales. As customers buy our products in greater volumes and their business becomes a larger percentage of our net sales, we may grow increasingly dependent on those customers to maintain our growth. If our largest customers do not purchase our products at the levels, timeframes or geographies that we expect, our ability to maintain or grow our net sales will be adversely affected.

 

Additionally, as we focus increasingly on selling to larger customers and attracting larger orders, we expect greater costs of sales. Our sales cycle may become longer and more expensive because larger customers typically spend more time negotiating contracts than smaller customers. Larger customers often seek to gain greater pricing concessions, as well as greater levels of support in the implementation and use of our products. These factors can result in lower margins for our products.

 

Increased sales to larger companies may also cause fluctuations in results of operations. A larger customer may seek to fulfill all or substantially all of its requirements in a single order, and not make another purchase for a significant period of time. Accordingly, a significant increase in revenue during the period in which we recognize the revenue from the sale may be followed by a period of time during which the customer purchases none or few of our products. A significant decline in net sales in periods following a significant order could adversely affect our revenues and net income. Likewise, large orders are generally subject to intense pricing pressure which can have an adverse impact on our margins and results of operations. As a result, our quarter-to-quarter results of operations may be subject to greater fluctuation and our share price may be adversely affected.

 

We may not be able to successfully manage our planned growth and expansion.

 

Over time, we expect to continue to make investments to pursue new customers and expand our product offerings to grow our business rapidly. We expect that our annual operating expenses will continue to increase as we invest in sales and marketing, research and development, manufacturing and production infrastructure, and strengthen customer service and support resources for our customers. Our failure to expand operational and financial systems timely or efficiently could result in operating inefficiencies, which could increase our costs and expenses more than we had planned and prevent us from successfully executing our business plan. We may not be able to offset the costs of operation expansion by leveraging the economies of scale from our growth in negotiations with our suppliers and contract manufacturers. Additionally, if we increase our operating expenses in anticipation of the growth of our business and this growth does not meet our expectations, our financial results will be negatively impacted.

 

 11 

 

If our business grows, we will have to manage additional product design projects, materials procurement processes, and sales efforts and marketing for an increasing number of products, as well as expand the number and scope of our relationships with suppliers, distributors and end customers. If we fail to manage these additional responsibilities and relationships successfully, we may incur significant costs, which may negatively impact our operating results. Additionally, in our efforts to be first to market with new products with innovative functionality and features, we may devote significant research and development resources to products and product features for which a market does not develop quickly, or at all. If we are not able to predict market trends accurately, we may not benefit from such research and development activities, and our results of operations may suffer.

 

As our future development and commercialization plans and strategies develop, we expect to need additional managerial, operational, sales, marketing, financial and legal personnel. Our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, operational mistakes, loss of business opportunities, loss of employees, and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional new products. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenue could be reduced, and we may not be able to implement our business strategy.

 

All of our assets are subject to security interests under a credit facility, and if we default on our obligations under the credit facility, we may suffer materially adverse consequences, including foreclosure on our assets.

 

As of the date hereof, all of our assets were pledged as collateral under our credit facility with Bank Leumi le Israel, or Bank Leumi. If we default on our obligations under the credit facility, Bank Leumi has the right to foreclose upon and sell, or otherwise transfer the collateral subject to its security interests. If Bank Leumi exercises its right to sell the assets pledged under the credit facility, such sales may be completed at distressed sale prices, thereby diminishing or potentially eliminating the amount of cash available to us after repayment of the amounts outstanding under the credit facility. Such deleveraging of our company could significantly impair our ability to effectively operate our business and may otherwise have a material adverse effect on our financial condition, results of operations and cash flows. Further, in such a circumstance, we could be forced to curtail or cease our business activities. In the past, we have failed to meet certain financial covenants under the credit facility, pertaining to our shareholder’s equity, and Bank Leumi waived its right to call for the immediate repayment of the loan. We cannot be certain that we will continue to meet the financial covenants under this credit facility, and Bank Leumi may not continue to waive its right to call for the immediate repayment of the loan. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financing Arrangements.”

 

Our quarterly operating results will likely fluctuate in the future, which could cause rapid declines in our share price.

 

Even if our business continues to grow as expected over the long term, there likely will be quarterly variations in our financial performance. Historically, our quarterly operating results have been subject to significant fluctuation due to various factors, many of which are beyond our control. We believe that our quarterly operating results will continue to fluctuate. Factors that may affect quarterly operating results in the future include:

 

  unpredictability of the timing and size of customer orders, since most of our customers purchase our products on a purchase order basis rather than pursuant to a long term contract;

 

  fluctuations in availability and costs associated with key components and other materials needed to satisfy customer requirements;

 

  variability of our margins based on the product mix that we sell and the percentage of our sales to higher or lower margin types of customers;

 

  the timing of the introduction of new products by leading microprocessor vendors and other suppliers;

 

  our ability to introduce new and innovative products that appeal to our customers;

 

  our ability to address technology issues as they arise, improve our products’ functionality and expand our product offerings;

 

  changes in our product pricing policies, including those made in response to new product announcements and pricing changes of our competitors;

 

  the mix of whether customer purchases are made directly or through indirect sales channels;

 

  general economic conditions in our geographic markets; and

 

  impact of regulatory changes on our cost of doing business.

 

Accordingly, it is difficult to accurately forecast our growth and results of operations on a quarterly basis. If we fail to meet expectations of investors or analysts, our stock price may fall rapidly and without notice. Furthermore, the fluctuation of quarterly operating results may render less meaningful period-to-period comparisons of our operating results, and you should not rely upon them as an indication of future performance.

 

 12 

 

Our research and development expenditures, as a percentage of our net sales, are relatively high for companies like us, and our earnings will depend upon maintaining revenues and margins that offset these expenditures.

 

Our strategy is to focus on being consistently rapid-to-market with both standardized and customizable products that take advantage of our own internal development and the latest technologies offered by microprocessor manufacturers and other component vendors. Consistent with this strategy, we spend higher amounts, as a percentage of revenues, on research and development costs than many of our competitors. If we cannot sell our products in sufficient volume and with adequate gross margins to compensate for such investment in research and development, our earnings may be materially and adversely affected.

 

Any failure to adequately expand or retain our sales force will impede our growth.

 

We expect that our direct sales force will continue to grow as larger customers increasingly require a direct sales approach. Competition for direct sales personnel with the advanced sales skills and technical knowledge we need is intense. Our ability to grow our revenue in the future will depend, in large part, on our success in recruiting, training, retaining and successfully managing sufficient qualified direct sales personnel. New hires require significant training and may take six months or longer before they reach full productivity. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we do business. If we are unable to hire, develop and retain sufficient numbers of productive sales personnel, sales of our products will suffer.

 

Currency exchange rate fluctuations could result in our products becoming relatively more expensive to our overseas customers or increase our manufacturing costs, each of which could adversely affect our operating results.

 

Our international sales and suppliers in foreign countries make us subject to risks associated with fluctuating currency values and exchange rates. Because sales of our products have been denominated to date primarily in U.S. dollar, increases in the value of the U.S. dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Gains and losses on the conversion to U.S. dollar of accounts receivable, accounts payable and other monetary assets and liabilities arising from international sales or operations may contribute to fluctuations in our results of operations. In addition, as a result of our foreign sales and operations, we have revenues, costs, assets and liabilities that are denominated in foreign currencies. Therefore, decreases in the value of the U.S. dollar could result in significant increases in our manufacturing costs that could have a material adverse effect on our business and results of operations.

 

We may lose sales or incur unexpected expenses relating to insufficient, excess or obsolete inventory.

 

As a result of our strategy to provide greater choice and customization of our products to our customers, we are required to maintain a high level of inventory of components. If we fail to maintain sufficient inventory, we may not be able to meet demand for our products on a timely basis, and our sales may suffer. If we overestimate customer demand for our products, we could experience excess inventory of our products and be unable to sell those products at a reasonable price, or at all. As a result, we may need to record higher inventory reserves. In addition, from time to time we assume greater inventory risk in connection with the purchase or manufacture of more specialized components in connection with higher volume sales opportunities. We expect that we will experience write-downs from time to time in the future related to existing and future commitments. If we are later able to sell inventory with respect to which we have taken a reserve at a profit, it may increase the quarterly variances in our operating results. Additionally, the rapid pace of innovation in our industry could render significant portions of our existing inventory obsolete. Historically, we have written off obsolete inventory. Excess or obsolete inventory levels for these or other reasons could result in unexpected expenses or increases in our reserves against potential future charges which would adversely affect our business and financial results.

 

 13 

 

If we fail to manage the distribution of our products and services properly, our revenue, gross margins and profitability could suffer.

  

We use a variety of distribution methods to sell our products and services, including third-party resellers, sales representatives and distributors and both direct and indirect sales to enterprise accounts and consumers. Successfully managing the interaction of our direct and indirect channel efforts to reach various potential customer segments for our products and services is a complex process. Moreover, since each distribution method has distinct risks and gross margins, our failure to implement the most advantageous balance in the delivery model for our products and services could adversely affect our revenue and gross margins and therefore our profitability. Other distribution risks are described below:

 

  Some of our distributors sell products offered by our competitors and may elect to focus their efforts on these sales. If our competitors offer our distributors more favorable terms or have more products available to meet the needs of their customers, or utilize the leverage of broader product lines sold through the distributors, those distributors may de-emphasize or decline to carry our products.

 

  Our distributors’ order decision-making process is complex and involves several factors, including end customer demand, warehouse allocation and marketing resources, which can make it difficult to accurately predict total sales for the quarter until late in the quarter.

 

  Distributors may increase orders during periods of product shortages or delay orders in anticipation of new products. Distributors also may adjust their orders in response to the supply of our products and the products of our competitors and fluctuations in end-user demand. Our reliance upon indirect distribution methods may reduce visibility to demand and pricing issues, and therefore make forecasting more difficult. Moreover, our use of indirect distribution channels may limit our willingness or ability to adjust prices quickly and otherwise to respond to pricing changes by competitors.

 

  Disruptions in our distribution channels could cause our revenues to decrease or fail to grow as expected.

 

If we are unable to maintain successful relationships with distributors or expand our distribution channels or we experience unexpected changes in payment terms, inventory levels or other practices by our distributors, our business will suffer.

 

If we do not successfully manage the expansion of our international operations, our business could be harmed.

 

Since our inception we have conducted all of our manufacturing operations in Israel. We may decide in the future to diversify the location of our manufacturing operations to locations in the United States and/or Asia. The commencement of new manufacturing operations in new locations, particularly in other jurisdictions, entails additional risks and challenges. If we are unable to successfully ramp up these operations we may incur unanticipated costs, difficulties in making timely delivery of products or suffer other business disruptions which could adversely impact our results of operations.

 

Our suppliers’ failure to improve the functionality and performance of core components for our products may impair or delay our ability to deliver innovative products to our customers.

 

We need our core component suppliers, such as Intel Corporation, Texas Instruments Incorporated, Freescale Semiconductor, Ltd. and Advanced Micro Devices, Inc., to provide us with core components that are innovative, reliable and attractive to our customers. Due to the pace of innovation in our industry, many of our customers may delay or reduce purchase decisions until they believe that they are receiving best-of-breed products that will not be rendered obsolete by an impending technological development. Accordingly, demand for new systems that incorporate new products and features is significantly impacted by our suppliers’ new product introduction schedules and the functionality, performance and reliability of those new products. If our materials and core component suppliers fail to deliver new and improved materials and core components for our products, we may not be able to satisfy customer demand for our products in a timely manner, or at all. If our suppliers’ components do not function properly, we may incur additional costs and our relationships with our customers may be adversely affected.

 

Our customers do not enter into long-term purchase agreements with us and may stop purchasing our products at any time, which makes it difficult for us to accurately forecast product demand and may result in unexpected declines in revenue.

 

We generally do not obtain firm, long-term purchase commitments from our customers, and frequently do not have visibility as to their future demand. Customers also cancel requirements, change engineering or other service requirements, change production quantities, delay production or revise their forecasts for future orders for a number of reasons that are beyond our control. Cancellations, reductions or delays by a significant customer, or by a group of customers, could seriously harm our operating results and negatively affect our working capital levels. Such cancellations, reductions or delays have occurred from time to time and may continue to occur.

 

 14 

 

In addition, we make significant decisions based on our estimates of customers’ requirements, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, working capital management, facility requirements, personnel needs and other resource requirements. The short-term nature of our customers’ commitments and the possibility of rapid changes in demand for our products reduce our ability to accurately estimate the future requirements of those customers. Since many of our operating expenses are fixed, a reduction in customer demand can harm our operating results. Moreover, since our margins vary across customers, a reduction in demand with higher margin customers will have a more significant adverse effect on our operating results.

 

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

 

Upon the listing of securities on NASDAQ, we will become a publicly traded company in the United States. As a public company in the United States, we will incur additional significant accounting, legal and other expenses that we did not incur before the offering. We also anticipate that we will incur costs associated with corporate governance requirements of the SEC and NASDAQ, as well as requirements under Section 404 and other provisions of the Sarbanes-Oxley Act. We expect these rules and regulations to increase our legal and financial compliance costs, introduce new costs such as investor relations, stock exchange listing fees and shareholder reporting, and to make some activities more time consuming and costly. The implementation and testing of such processes and systems may require us to hire outside consultants or employees and incur other significant costs. Any future changes in the laws and regulations affecting public companies in the United States, including Section 404 and other provisions of the Sarbanes-Oxley Act, and the rules and regulations adopted by the SEC and NASDAQ, for so long as they apply to us, will result in increased costs to us as we respond to such changes. These laws, rules and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees, if any, or as executive officers.

 

Our growth into new markets exposes us to risks inherent in international business operations.

 

We intend to expand our international sales efforts, especially into Asia, and are expanding our business operations in Europe and North America. Our international expansion efforts may not be successful. Our international operations expose us to risks and challenges, such as:

 

  our ability to establish local manufacturing, support and service functions, and to form channel relationships with resellers in these markets;

 

  localization of our systems and components, including translation into foreign languages and the associated expenses;

 

  limited visibility into sales of our products by our distributors;

 

  laws favoring local competitors; and

 

  difficulties in staffing and managing foreign operations.

 

These factors could limit our future international sales or otherwise adversely impact our operations or our results of operations.

 

As our business grows, we expect that we may be exposed to greater customer credit risks.

 

Historically, we have offered very limited credit terms to our customers. As our customer base expands, as our orders increase in size, we expect to offer increased credit terms and flexible payment programs to our customers. Doing so may subject us to increased credit risk, higher accounts receivable with longer days outstanding, and increases in charges or reserves, which could have a material adverse effect on our business, results of operations and financial condition.

 

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The average selling prices for our products are subject to decline, which could harm our results of operations.

 

Average selling prices of computing products typically are higher at the time of introduction of new products, which utilize the latest technology and tend to decrease over time as such products become commoditized and are ultimately replaced by even newer generation products. We cannot predict the timing or amount of any decline in the average selling prices of our products that we may experience in the future. In some instances, our agreements with our distributors limit our ability to reduce prices unless we make such price reductions available to them, or price protect their inventory. If we are unable to decrease per unit manufacturing costs faster than the rate at which average selling prices continue to decline, our business, financial condition and results of operations will be harmed.

 

Our direct sales efforts may harm our relationships with our distributors and OEMs.

 

We expect our direct sales force to continue to grow as our business grows. As our direct sales force becomes larger, our direct sales efforts may lead to conflicts with our distributors and OEMs, who may view our direct sales efforts as undermining their efforts to sell our products. If a distributor or OEM deems our direct sales efforts to be inappropriate, the distributor or OEM may not effectively market our products, may emphasize alternative products from competitors, or may seek to terminate our business relationship. Our failure to implement an effective direct sales strategy that maintains and expands our relationships with our distributors and OEMs could lead to a decline in sales and adversely affect our results of operations.

 

We are subject to risks by doing business outside of Israel that could impair our ability to grow our revenue.

 

In the fiscal years ended December 31, 2016, 2015 and 2014, approximately 93.8%, 95.7% and 95.2%, respectively, of our revenue was comprised of sales made outside of Israel. Our operations may be materially and adversely affected by many risks related to doing business outside of Israel, including:

 

  increases in duty rates, exchange or price controls;

 

  governmental currency controls;

 

  import restrictions;

 

  political, social and economic changes and disruptions;

 

  in certain jurisdictions, reduced protection for our intellectual property rights; and

 

  difficulty in enforcing contracts or legal rights under foreign legal systems.

         

The occurrence of any one these risks could impair our ability to grow our revenue.

 

Backlog at the end of a quarter is not an adequate predictor of sales in the following quarter.

 

Our net sales are difficult to forecast because we do not have sufficient backlog of unfulfilled orders to meet our quarterly net sales targets at the beginning of a quarter. Rather, part of our net sales in any quarter depends upon customer orders that we receive and fulfill in that quarter from our finished goods inventory. We also cannot predict the volume of orders that our distributors will receive in any given quarter. Because our expense levels are based in part on our expectations as to future net sales and to a large extent are fixed in the short term, we might be unable to adjust spending in time to compensate for any shortfall in net sales. Accordingly, any significant shortfall of revenues in relation to our expectations would harm our operating results.

 

Failure to comply with other laws and governmental regulations could harm our business.

 

Our business is subject to regulation by various governmental agencies. Such regulation includes those relating to consumer protection, import/export, product safety, disposal of hazardous materials, labor and employment, and tax and other regulations by a variety of regulatory authorities in each of the areas in which we conduct business. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, fines, damages, civil and criminal penalties, or injunctions.

 

We must comply with environmental laws and regulations, which can be expensive, and may affect our business and operating results.

 

We are subject to general environmental local laws and regulations. If we were to violate or become liable under environmental laws in the future as a result of our inability to obtain permits, human error, accident, equipment failure or other causes, we could be subject to fines, costs, or civil or criminal sanctions, face third party property damage or personal injury claims or be required to incur substantial investigation or remediation costs, which could be material, or experience disruptions in our operations, any of which could have a material adverse effect on our business. In addition, environmental laws could become more stringent over time imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business.

 

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We expect that our operations will be affected by other new environmental laws and regulations on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs, and could require that we change the design and/or manufacturing of our products, any of which could have a material adverse effect on our business.

 

Insurance policies may not cover all operating risks and a casualty loss beyond the limits of any reasonable insurance coverage.

 

We presently have no product liability insurance. Our business is subject to all of the operating hazards and risks normally incidental to handling, storing, and transporting the products we sell. Our insurance coverage, if obtained in the future, may not be adequate to protect us from all liabilities and expenses that may arise from claims for personal injury or death or property damage arising in the ordinary course of business.

 

We rely on third party manufacturers and suppliers for certain components of our products.

 

We rely on third party manufacturers and suppliers for certain components of our finished products. If we were to lose any of our current suppliers, the process of identifying and qualifying a new supplier that will meet our quality and delivery requirements may require a significant investment of time and resources, adversely affecting our ability to satisfy customer purchase orders and delaying our ability to rapidly introduce new products to market. Similarly, if any of our suppliers were to cancel or materially change contracts or otherwise reduce their commitments to us or if they fail to meet the quality or delivery requirements needed to satisfy customer demand for our products, whether due to shortages or other reasons, our reputation and relationships with customers could be damaged. We could lose orders, be unable to develop or sell some products cost-effectively or on a timely basis, if at all, and have significantly decreased revenues, margins and earnings, which would have a material adverse effect on our business.

 

Risks Related to Our Intellectual Property

 

If we are unable to obtain and maintain effective patent rights for our products, we may not be able to compete effectively in our markets. If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us.

 

We rely upon a combination of patents, trade secret protection, and confidentiality agreements to protect the intellectual property related to our technologies and products. Our success depends in large part on our ability to obtain and maintain patent and other intellectual property protection in the United States and in other countries with respect to our proprietary technology and new products.

 

We have sought to protect our proprietary position by filing patent applications in the United States and in other countries, with respect to our novel technologies and products, which are important to our business. Patent prosecution is expensive and time consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection.

  

We have a limited portfolio of one issued U.S. patent and two U.S. patent applications. With respect to our issued U.S. patent and one of our patent applications, both of which are related to different elements of our new Airtop line, we have also filed applications with the Patent Cooperation Treaty of the World Intellectual Property Organization, or PCT. The additional patent application is related to our new micro CoM, the UCMM. We cannot offer any assurances about which, if any, additional patents will be issued, the breadth of any such patents or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties. Any successful opposition to these patents or any other patents owned by or licensed to us after patent issuance could deprive us of rights necessary for the successful commercialization of any new products that we may develop. We do not have any patents or patent applications relating to our technology that is outside of our Airtop line and the UCMM. This lack of patent protection may enable our competitors, subject to lead time, to develop and sell competing products.

 

Further, there is no assurance that all potentially relevant prior art relating to our patent applications has been found, which can invalidate a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue, and even if such patents cover our products, third parties may challenge their validity, enforceability, or scope, which may result in such patents being narrowed, found unenforceable or invalidated. Furthermore, even if they are unchallenged, our patent applications and any future patents may not adequately protect our intellectual property, provide exclusivity for our new products, or prevent others from designing around our claims. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.

 

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If we cannot obtain and maintain effective patent rights for our new products, we may not be able to compete effectively, and our business and results of operations would be harmed.

 

If we are unable to maintain effective proprietary rights for our products, we may not be able to compete effectively in our markets.

 

In addition to the protection afforded by any patents that may be granted, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or that we elect not to patent, processes for which patents are difficult to enforce and any other elements of our product candidate discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific advisors, and contractors. We also seek to preserve the integrity and confidentiality of our data, trade secrets and intellectual property by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets and intellectual property may otherwise become known or be independently discovered by competitors.

 

Although we expect all of our employees and consultants to assign their inventions to us, and all of our employees, consultants, advisors, and any third parties who have access to our proprietary know-how, information, or technology to enter into confidentiality agreements, we cannot provide any assurances that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Misappropriation or unauthorized disclosure of our trade secrets and intellectual property could impair our competitive position and may have a material adverse effect on our business. Additionally, if the steps taken to maintain our trade secrets and intellectual property are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret.

 

Intellectual property rights of third parties could adversely affect our ability to commercialize our products, and we might be required to litigate or obtain licenses from third parties in order to develop or market our product candidates. Such litigation or licenses could be costly or not available on commercially reasonable terms.

 

It is inherently difficult to conclusively assess our freedom to operate without infringing on third party rights. Our competitive position may suffer if existing patents or patents resulting from patent applications issued to third parties or other third party intellectual property rights cover our products or elements thereof, or our manufacturing or uses relevant to our development plans. In such cases, we may not be in a position to develop or commercialize products or our product candidates unless we successfully pursue litigation to nullify or invalidate the third party intellectual property right concerned, or enter into a license agreement with the intellectual property right holder, if available on commercially reasonable terms. There may also be pending patent applications that if they result in issued patents, could be alleged to be infringed by our new products. If such an infringement claim should be brought and be successful, we may be required to pay substantial damages, be forced to abandon our new products or seek a license from any patent holders. No assurances can be given that a license will be available on commercially reasonable terms, if at all.

 

It is also possible that we have failed to identify relevant third party patents or applications. For example, U.S. applications filed before November 29, 2000 and certain U.S. applications filed after that date that will not be filed outside the U.S. remain confidential until patents issue. Patent applications in the U.S. and elsewhere are published approximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority date. Therefore, patent applications covering our new products or platform technology could have been filed by others without our knowledge. Additionally, pending patent applications which have been published can, subject to certain limitations, be later amended in a manner that could cover our platform technologies, our new products or the use of our new products. Third party intellectual property right holders may also actively bring infringement claims against us. We cannot guarantee that we will be able to successfully settle or otherwise resolve such infringement claims. If we are unable to successfully settle future claims on terms acceptable to us, we may be required to engage in or continue costly, unpredictable and time-consuming litigation and may be prevented from or experience substantial delays in pursuing the development of and/or marketing our new products. If we fail in any such dispute, in addition to being forced to pay damages, we may be temporarily or permanently prohibited from commercializing our new products that are held to be infringing. We might, if possible, also be forced to redesign our new products so that we no longer infringe the third party intellectual property rights. Any of these events, even if we were ultimately to prevail, could require us to divert substantial financial and management resources that we would otherwise be able to devote to our business.

 

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Third-party claims of intellectual property infringement may prevent or delay our development and commercialization efforts.

 

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing new products. As the CoMs, Mini PCs and Workstations industries expand and more patents are issued, the risk increases that our products may be subject to claims of infringement of the patent rights of third parties.

 

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, designs, methods of manufacture, or methods for treatment related to the use or manufacture of our products. There may be currently pending patent applications that may later result in issued patents that our products may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents.

 

If any third-party patents were held by a court of competent jurisdiction to cover aspects of our formulations, processes for designs, or methods of use, the holders of any such patents may be able to block our ability to develop and commercialize the applicable product candidate unless we obtain a license or until such patent expires or is finally determined to be invalid or unenforceable. In either case, such a license may not be available on commercially reasonable terms or at all.

 

Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our products. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure.

 

Patent policy and rule changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any issued patents.

 

Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of any patents that may issue from our patent applications, or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. We therefore cannot be certain that we or our licensors were the first to make the invention claimed in our owned and licensed patent or pending applications, or that we or our licensor were the first to file for patent protection of such inventions. Assuming the other requirements for patentability are met, in the United States prior to March 15, 2013, the first to make the claimed invention is entitled to the patent, while outside the United States, the first to file a patent application is entitled to the patent. After March 15, 2013, under the Leahy-Smith America Invents Act, or the Leahy-Smith Act, enacted on September 16, 2011, the United States has moved to a first to file system. The Leahy-Smith Act also includes a number of significant changes that affect the way patent applications will be prosecuted and may also affect patent litigation. The effects of these changes are currently unclear as the United States Patent and Trademark Office, or the USPTO, must still implement various regulations, the courts have yet to address many of these provisions and the applicability of the act and new regulations on specific patents discussed herein have not been determined and would need to be reviewed. In general, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any issued patents, all of which could have a material adverse effect on our business and financial condition.

 

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We may be involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming, and unsuccessful.

 

Competitors may infringe our intellectual property or that of our licensors that we may acquire in the future. If we or a future licensing partner were to initiate legal proceedings against a third party to enforce a patent covering one of our new products, the defendant could counterclaim that the patent covering our product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Under the Leahy-Smith Act, the validity of U.S. patents may also be challenged in post-grant proceedings before the USPTO. The outcome following legal assertions of invalidity and unenforceability is unpredictable.

 

Interference proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to determine the priority of inventions with respect to our patent or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees.

 

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our Ordinary Shares.

 

Changes in U.S. and international patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

 

Our success is also dependent on intellectual property. Obtaining and enforcing patents involves both technological and legal complexity. Therefore, obtaining and enforcing these patents is costly, time consuming, and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain patents or to enforce patents that we might obtain in the future.

 

We may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

 

We employ individuals who were previously employed at our competitors or potential competitors. Although we try to ensure that our employees, consultants, and independent contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants, or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of our employees’ former employers or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

 

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We may be subject to claims challenging the inventorship of our intellectual property.

 

We may be subject to claims that former employees, collaborators or other third parties have an interest in or right to compensation with respect to our current patent and patent applications, future patents or other intellectual property as an inventor or co-inventor. For example, we may have inventorship disputes arise from conflicting obligations of consultants or others who are involved in developing our products. Litigation may be necessary to defend against these and other claims challenging inventorship or claiming the right to compensation. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Also, while the employment agreements of our management and those involved with the creation of our intellectual property contain provisions for the assignment of inventions, we cannot be sure that we will not face claims demanding remuneration in consideration for assigned inventions. To the extent that our employees have not effectively waived the right to compensation with respect to inventions that they helped create, they may be able to assert claims for compensation with respect to our future revenue. As a result, we may receive less revenue from future products if such claims are successful which in turn could impact our future profitability.

 

We may not be able to protect our intellectual property rights throughout the world.

 

Filing, prosecuting, and defending patents on products in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States.

 

Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and may also export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products. Future patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

 

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, which could make it difficult for us to stop the marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our future patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

 

Risks Related to this Offering and Ownership of Our Ordinary Shares

 

Sales of a substantial number of our Ordinary Shares in the public market by our existing shareholders could cause our share price to fall.

 

Sales of a substantial number of our Ordinary Shares in the public market, or the perception that these sales might occur, could depress the market price of our Ordinary Shares and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our Ordinary Shares. All of the Ordinary Shares owned by our existing shareholders are subject to lock-up agreements with the underwriters of this offering that restrict the shareholders’ ability to transfer our Ordinary Shares for at least six months from the date of the closing of the offering of the Ordinary Shares. Substantially all of our outstanding Ordinary Shares will become eligible for unrestricted sale upon expiration of the lock-up period, as described in the section of this prospectus entitled “Shares Eligible for Future Sale.” In addition, Ordinary Shares issued or issuable upon exercise of options and warrants vested as of the expiration of the lock-up period will be eligible for sale at that time. Sales of Ordinary Shares by these shareholders could have a material adverse effect on the trading price of our Ordinary Shares.

 

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If you purchase our Ordinary Shares in this offering, you will incur immediate and substantial dilution in the book value of your shares.

 

The initial public offering price is substantially higher than the net tangible book value per share of our Ordinary Shares. Investors purchasing Ordinary Shares in this offering will pay a price per share that substantially exceeds the net tangible book value of our Ordinary Shares. As a result, investors purchasing Ordinary Shares in this offering will incur immediate dilution of $     per share, based on the initial public offering price of $     per share (the midpoint of the price range set forth on the cover page of this prospectus) and our net tangible book value as of December 31, 2016. As a result of this dilution, investors purchasing shares in this offering may receive significantly less than the purchase price paid in this offering in the event of liquidation. For more information, please refer to the section of this prospectus entitled “Dilution.”

 

Our principal shareholders, chief executive officer and directors currently own over 89% of our outstanding Ordinary Shares and will own approximately        % of our Ordinary Shares upon the closing of this offering. They will therefore be able to exert significant control over matters submitted to our shareholders for approval.

 

After this offering, our chief executive officer and directors, and shareholders who own more than 5% of our outstanding Ordinary Shares before this offering will, in the aggregate, beneficially own approximately ____% of our Ordinary Shares (assuming no exercise of the underwriters’ over-allotment option). This significant concentration of share ownership may adversely affect the trading price for our Ordinary Shares because investors often perceive disadvantages in owning shares in companies with controlling shareholders. As a result, these shareholders, if they acted together, could significantly influence or even unilaterally approve matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of these shareholders may not always coincide with our interests or the interests of other shareholders.

 

As an “emerging growth company” under the JOBS Act, we are allowed to postpone the date by which we must comply with some of the laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC, which could undermine investor confidence in our company and adversely affect the market price of our Ordinary Shares.

 

For so long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain exemptions from various requirements that are applicable to public companies that are not “emerging growth companies” including:

 

  being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

  not being required to comply with the auditor attestation requirements for the assessment of our internal control over financial reporting provided by Section 404 of the Sarbanes-Oxley Act of 2002;

 

  not being required to comply with any requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and our financial statements;

 

  reduced disclosure obligations regarding executive compensation; and

 

  not being required to hold a nonbinding advisory vote on executive compensation or seek shareholder approval of any golden parachute payments not previously approved.

 

We intend to take advantage of these exemptions until we are no longer an “emerging growth company.” We will remain an emerging growth company until the earlier of: (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the prior June 30, and (2) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.

 

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We cannot predict if investors will find our Ordinary Shares less attractive because we may rely on these exemptions. If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary Shares, and our share price may be more volatile and may decline.

 

As a “foreign private issuer,” we are permitted, and intend, to follow certain home country corporate governance practices instead of otherwise applicable SEC and NASDAQ requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.

 

Upon completion of this offering, we will be subject to the information reporting requirements of the Exchange Act that are applicable to “foreign private issuers,” and under those requirements we will file reports with the SEC. As a “foreign private issuer”, and even if we should cease to be an emerging growth company, we will not be subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, we will be subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. For example, although we intend to report our financial results on a quarterly basis, we will not be required to issue quarterly reports, proxy statements that comply with the requirements applicable to U.S. domestic reporting companies, or individual executive compensation information that is as detailed as that required of U.S. domestic reporting companies. Although a recent amendment to the Israeli Companies Law 5759-1999, or the Israeli Companies Law, will require us to disclose the annual compensation of our five most highly compensated senior officers on an individual basis, this disclosure will not be as extensive as that required of a U.S. domestic issuer. We will also have four months after the end of each fiscal year to file our annual reports with the SEC and will not be required to file current reports as frequently or promptly as U.S. domestic reporting companies. Our officers, directors and principal shareholders will be exempt from the requirements to report transactions in our equity securities and from the short-swing profit liability provisions contained in Section 16 of the Exchange Act. As a “foreign private issuer”, we will also not be subject to the requirements of Regulation FD, promulgated under the Exchange Act. In addition, as a “foreign private issuer”, we will be permitted, and intend, to follow certain home country corporate governance practices instead of those otherwise required under the NASDAQ Stock Market rules for domestic U.S. issuers.

 

We intend to follow home country practice in Israel with regard to, among other things, director nomination procedures and approval of compensation for officers. In addition, we may follow our home country law instead of the NASDAQ Stock Market rules that require shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the Company, certain transactions other than a public offering involving issuances of a 20% or greater interest in the Company, and certain acquisitions of the stock or assets of another company, amending our compensation policy from time to time, and the approval of certain interested-parties transactions.

 

These exemptions and leniencies will reduce the frequency and scope of information and protections to which you are entitled as an investor. We intend to take advantage of the exemptions available to us as a "foreign private issuer" during and after the period we qualify as an “emerging growth company”.

 

We may be subject to securities litigation, which is expensive and could divert management attention.

 

In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could seriously hurt our business. Any adverse determination in litigation could also subject us to significant liabilities.

 

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they adversely change their recommendations or publish negative reports regarding our business or our shares, our share price and trading volume could decline.

 

The trading market for our Ordinary Shares will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. We do not have any control over these analysts and we cannot provide any assurance that analysts will cover us or provide favorable coverage. If any of the analysts who may cover us adversely change their recommendation regarding our shares, or provide more favorable relative recommendations about our competitors, our share price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.

 

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Risks Related to Israeli Law and Our Operations in Israel

 

Our operations are subject to currency and interest rate fluctuations.

 

We incur expenses in U.S. dollars, and NIS, but our functional currency is the U.S. dollar. As a result, we are affected by foreign currency exchange fluctuations through both translation risk and transaction risk. As a result, we are exposed to the risk that the NIS may appreciate relative to the dollar, or, if the NIS instead devalues relative to the dollar, that the inflation rate in Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag behind inflation in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar-denominated results of operations would be adversely affected.

 

Provisions of Israeli law and our amended and restated articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.

 

As a company incorporated under the law of the State of Israel, we are subject to Israeli corporate law. Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date on which a merger proposal is filed by each merging company with the Israel Registrar of Companies and at least 30 days have passed from the date on which the shareholders of both merging companies have approved the merger. In addition, a majority of each class of securities of the target company must approve a merger. Moreover, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital and a majority of the offerees that do not have a personal interest in the tender offer approves the tender offer, unless, following consummation of the tender offer, the acquirer would hold at least 98% of the company’s outstanding shares. Furthermore, the shareholders may, at any time within six months following the completion of the tender offer, claim that the consideration for the acquisition of the shares does not reflect their fair market value, and petition an Israeli court to alter the consideration for the acquisition accordingly, other than those who indicated their acceptance of the tender offer in case the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights, and the acquirer or the company published all required information with respect to the tender offer prior to the tender offer’s response date. See “Description of Share Capital —Acquisitions under Israeli Law” for additional information.

 

Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. See “Taxation — Israeli Tax Considerations” for additional information.

 

Our amended and restated articles of association that will be in effect immediately prior to the consummation of this offering will also contain provisions that could delay or prevent changes in control or changes in our management without the consent of our board of directors. These provisions will include the following:

 

  no cumulative voting in the election of directors, which limits the ability of minority shareholders to elect director candidates; and

 

  the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents minor shareholders from being able to fill vacancies on our board of directors.

 

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It may be difficult to enforce a judgment of a United States court against us and our officers and directors and the Israeli experts named in this prospectus in Israel or the United States, to assert United States securities laws claims in Israel or to serve process on our officers and directors and these experts.

 

We were incorporated in Israel and our corporate headquarters are located in Israel. All of our executive officers and directors reside outside of the United States, and all of our assets and most of the assets of these persons are located outside of the United States. Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not necessarily be enforced by an Israeli court. It also may be difficult to affect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel. Additionally, it may be difficult for an investor, or any other person or entity, to initiate an action with respect to United States securities laws in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of United States securities laws reasoning that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not United States law is applicable to the claim. If United States law is found to be applicable, the content of applicable United States law must be proven as a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded by either a United States or foreign court. See “Enforceability of Civil Liabilities” for additional information on your ability to enforce a civil claim against us and our executive officers or directors named in this prospectus.

 

Your rights and responsibilities as a shareholder will be governed by Israeli law, which differs in some material respects from the rights and responsibilities of shareholders of U.S. companies.

 

The rights and responsibilities of the holders of our Ordinary Shares are governed by our amended and restated articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in typical U.S.-based corporations. In particular, a shareholder of an Israeli company has certain duties to act in good faith and fairness toward the company and other shareholders and to refrain from abusing its power in the company. See “Management—Approval of Related Party Transactions under Israeli Law—Shareholder Duties” for additional information. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations on holders of our Ordinary Shares that are not typically imposed on shareholders of U.S. corporations.

 

Our headquarters and other significant operations are located in Israel, and, therefore, our results may be adversely affected by political, economic and military instability in Israel.

 

Our executive offices and our corporate headquarters are located in Moradot HaCarmel Industrial Park, Yokneam Elite, Israel. In addition, all of our officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring Arab countries, the Hamas militant group and the Hezbollah. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations. Since October 2000, there have been increasing occurrences of terrorist violence. In 2006, a conflict between Israel and the Hezbollah in Lebanon resulted in thousands of rockets being fired from Lebanon into Israel. In 2008, Israel engaged in an armed conflict with Hamas in the Gaza Strip, which involved missile strikes against Israel and negatively affected business conditions in Israel. In 2012 and 2014, Israel experienced a similar armed conflict, resulting in hundreds of rockets being fired from the Gaza Strip. Ongoing and revived hostilities or other Israeli political or economic factors, such as, an interruption of operations at the Tel Aviv airport, could prevent or delay shipments of our components or products. If continued or resumed, these hostilities may negatively affect business conditions in Israel in general and our business in particular. In the event that hostilities disrupt the ongoing operation of our facilities or the airports and seaports on which we depend to import and export our supplies and product candidates, our operations may be materially adversely affected. 

 

In addition, since 2010 political uprisings and conflicts in various countries in the Middle East, including Egypt and Syria, are affecting the political stability of those countries. It is not clear how this instability will develop and how it will affect the political and security situation in the Middle East. This instability has raised concerns regarding security in the region and the potential for armed conflict. Any potential future conflict could also include missile strikes against parts of Israel, including our offices and facilities. Such instability may lead to deterioration in the political and trade relationships that exist between the State of Israel and certain other countries. Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions, could harm our results of operations and could make it more difficult for us to raise capital. Parties with whom we do business may sometimes decline to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners face to face. Several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continues or increases. Similarly, Israeli companies are limited in conducting business with entities from countries that are considered to be in a state of war with Israel, including Iran, Lebanon and Syria. In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.

 

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While we do not currently have commercial insurance, commercial insurance that we may obtain in the future may not cover losses that may occur as a result of an event associated with the security situation in the Middle East or for any resulting disruption in our operations. Although the Israeli government has in the past covered the reinstatement value of certain damages that were caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained or, if maintained, will be sufficient to compensate us fully for damages incurred and the government may cease providing such coverage or the coverage might not suffice to cover potential damages. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect business conditions generally and could harm our results of operations.

 

Further, in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results, financial conditions or the expansion of our business.

 

Our operations may be disrupted as a result of the obligation of management or key personnel to perform military service.

 

Our employees and consultants in Israel, including members of our senior management, may be obligated to perform one month, and in some cases longer periods, of military reserve duty until they reach the age of 40 (or older, for citizens who hold certain positions in the Israeli armed forces reserves) and, in the event of a military conflict or emergency circumstances, may be called to immediate and unlimited active duty. In the event of severe unrest or other conflict, individuals could be required to serve in the military for extended periods of time. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be similar large-scale military reserve duty call-ups in the future. Our operations could be disrupted by the absence of a significant number of our officers, directors, employees and consultants related to military service. Such disruption could materially adversely affect our business and operations.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA

 

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements that are based on our management’s current beliefs, projections and assumptions and on information currently available to our management. All statements other than statements of historical fact contained in this prospectus, including statements regarding our future or expected results of operations and financial condition, business strategies, plans, competitive position, industry and market environment and potential growth opportunities, are forward-looking statements. Forward-looking statements can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts, “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms.

 

Forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors, including those described in “Risk Factors” and elsewhere in this prospectus that may cause actual results, performance, conditions or achievements to be materially different from results, performance, conditions or achievements expressed or implied by the forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this prospectus. Except as may be required by law, we do not intend to update these forward-looking statements.

 

This prospectus also contains estimates, projections and other information concerning our industry, markets and products, including estimated historical and projected market size and growth rates, that are based on data and projections by market research firms and trade associations, and information we obtained from websites and magazines relating to electronics, as well as estimates and forecasts prepared by our management. This information involves a number of assumptions, estimates, uncertainties and limitations. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause actual industry, market or other conditions to differ materially from those reflected in these estimates, projections and other information. In particular, data regarding the amount of historical and projected revenues in the global embedded computer and Mini PC markets are subject to a high degree of uncertainty and these estimates, beliefs and projections may prove to have been incorrect. The inaccuracy of any of this data or these beliefs may have a material adverse effect on our business, financial condition and results of operations and the market price of our Ordinary Shares.

 

 27 

 

USE OF PROCEEDS

 

We estimate that the net proceeds we receive from the sale of Ordinary Shares in this offering will be approximately $         million (or approximately $       million if the underwriters exercise their over-allotment option in full), assuming an initial public offering price of $       per share, the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price per share would increase (decrease) the estimated net proceeds to us by approximately $      million (or by approximately $     million if the underwriters exercise such option in full), assuming that the number of Ordinary Shares sold by us, as set forth on the cover page of this preliminary prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Each         share increase (decrease) in the number of Ordinary Shares sold by us in this offering would increase (decrease) the net proceeds to us from this offering by approximately $      million, assuming an initial public offering price per share equal to the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

We expect to use the net proceeds from this offering for the following purposes:

 

  Approximately $4 million for scaling up marketing and sales of our Airtop line, including brand creation and forming dedicated global marketing and sales activity;

 

  Approximately $3 million for scaling up our current business in the ARM CoM and Mini PC markets, including the CoM Express and IoT markets;

 

  Approximately $2 million for leveraging our new proprietary AT-NAF technology to additional application areas and products;

 

  Approximately $2 million for R&D of new breakthrough technologies to expand our business;

 

  Approximately $2 million to enhance and increase our sales force and post sales experts in the United States, and to establish on the ground presence in Europe;

 

  Approximately $3 million to ramp up production capabilities and establish a production line in the United States; and

 

  The remainder for working capital and general corporate purposes.

 

Changing circumstances may cause us to consume capital significantly faster than we currently anticipate. The amounts and timing of our actual expenditures will depend upon numerous factors, including the progress of our development efforts, the pace of our efforts in regards to manufacturing and commercialization and the overall economic environment. Therefore, our management will retain broad discretion over the use of the proceeds from this offering. We may ultimately use the proceeds for different purposes than what we currently intend. Pending any ultimate use of any portion of the proceeds from this offering, if the anticipated proceeds will not be sufficient to fund all the proposed purposes, our management will determine the order of priority for using the proceeds, as well as the amount and sources of other funds needed.

 

Pending our use of the net proceeds from this offering, we may invest the net proceeds in a variety of capital preservation investments, including short-term, investment grade, interest bearing instruments and U.S. government securities.

 

We have no current understandings, commitments or agreements with respect to any material acquisition in any technologies, products or companies.

 

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DIVIDEND POLICY

 

We have declared and paid cash dividends on our Ordinary Shares in the past. We do not anticipate paying dividends in the near future. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

The Israeli Companies Law imposes further restrictions on our ability to declare and pay dividends. See “Description of Share Capital—Dividend and Liquidation Rights” for additional information.

 

Payment of dividends may be subject to Israeli withholding taxes. See “Taxation—Israeli Tax Considerations” for additional information.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2016:

 

  on an actual basis;

 

 

on an as adjusted basis to give effect to the sale of        Ordinary Shares in this offering at the initial public offering price of $      per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, at the closing of the offering, as if the sale of the shares in each case had occurred on December 31, 2016.

 

You should read this table in conjunction with the sections titled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus. Information in the table below is in thousands, except for share and per share amounts.

 

   As of December 31, 2016 
   Actual   As Adjusted 
   (In thousands, 
except share data)
 
Cash  $618   $                
Total Debt  $6,290   $     
Ordinary Shares of NIS 1.00 par value; 400,000 shares authorized and 212,012 shares outstanding actual;        shares authorized and     shares outstanding as adjusted   67      
Additional paid-in capital  $2,788   $      
Reserve from transaction with controlling shareholder   98      
Treasury shares   (10,091)     
Shareholder's withdrawals   (514)     
Retained earnings  $16,670   $      
Total shareholders’ equity  $9,018   $      
Total Capitalization  $15,308   $     

 

The outstanding share information above assumes no exercise of the underwriters’ over-allotment option and the Representative’s Warrants.

 

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DILUTION

 

If you invest in our Ordinary Shares, you will experience immediate and substantial dilution to the extent of the difference between the initial public offering price of our Ordinary Shares and the as adjusted net tangible book value per share of our Ordinary Shares immediately after the offering.

 

Our historical net tangible book value per share is determined by dividing our total tangible assets, less total liabilities, by the actual number of outstanding Ordinary Shares. The historical net tangible book value of our Ordinary Shares as of December 31, 2016 was $6.22 million, or $29.35 per share.

 

The as adjusted net tangible book value of our ordinary shares as of December 31, 2016, was $     , or $     per share. The as adjusted net tangible book value gives effect to the sale of          Ordinary Shares in this offering at the initial public offering price of $      per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The difference between the initial public offering price and the as adjusted net tangible book value per share represents an immediate dilution of $      per share to new investors purchasing Ordinary Shares in this offering.

 

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share      $ 
Pro forma net tangible book value per share before this offering, as of December 31, 2016  $29.35     
Increase in pro forma net tangible book value per share attributable to new investors in this offering        
Pro forma net tangible book value per share after offering        
Dilution in pro forma tangible book value per share to new investors      $ 

 

If the underwriters’ over-allotment option to purchase additional shares from us is exercised in full, and based on the initial public offering price of $     per share, the as adjusted net tangible book value (deficit) per share after this offering would be approximately $     per share, and the dilution to new investors purchasing shares in this offering would be approximately $     per share.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $       per ordinary share would increase (decrease) our as adjusted net tangible book value per share by $        and the dilution per ordinary share to new investors by $        , assuming that the number of Ordinary Shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and estimated offering expenses payable by us.

 

An increase of 100,000 Ordinary Shares in the number of Ordinary Shares offered by us, would increase our as adjusted net tangible book value after this offering by approximately $      and would decrease the dilution per Ordinary Shares to new investors by $    , assuming no changes in the assumed initial public offering price of $      per Ordinary Shares and after deducting estimated underwriting discounts and estimated offering expenses payable by us.  Conversely, a decrease of 100,000 Ordinary Shares in the number of Ordinary Shares offered by us would decrease our as adjusted net tangible book value after this offering by approximately $      and the as adjusted net tangible book value per Ordinary Shares after this offering by $     per Ordinary Shares and would increase the dilution in net tangible book value per Ordinary Shares to new investors by $      , after deducting estimated underwriting discounts and estimated offering expenses payable by us.  The information discussed above is illustrative only and will adjust based on the actual public offering price and other terms of the offering determined at pricing.

 

The table below summarizes as of December 31, 2016, on the as adjusted basis described above, the number of Ordinary Shares we issued and sold, the total consideration we received and the average price per share (1) paid by our existing shareholders and (2) to be paid by new investors purchasing our ordinary shares in this offering at the initial public offering price of $     per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

   Shares Purchased   Total Consideration   Average Price 
   Number   Percent   Amount   Percent   Per Share 
Existing shareholders       %  $    %  $ 
New investors                              
Total               100%  $    100%  $    

 

The number of Ordinary Shares to be outstanding after this offering is based on 212,012 Ordinary Shares outstanding as of December 31, 2016, and assumes no exercise of the underwriters’ over-allotment option or the Representative’s Warrants.

 

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SELECTED FINANCIAL DATA

 

The following table summarizes our financial data. We have derived the following statements of operations data and balance sheet data for the years ended December 31, 2016, 2015 and 2014 from our audited financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and related notes included elsewhere in this prospectus. Numbers in the following tables are in U.S. dollars and, except share and per share amounts, in thousands.

 

   Year Ended December 31, 
   2016   2015   2014 
Statements of Operations Data:  (in thousands of U.S. dollars, except share and per share amounts) 
Revenues  $21,957   $27,781   $23,370 
Cost of revenues   14,824    18,705    17,101 
Gross profit   7,133    9,076    6,269 
Operating expenses:               
Research and development, net   2,181    3,054    3,173 
Sales and marketing   1,606    1,777    1,846 
General and administrative   1,369    1,904    1,840 
Other operating expenses   154    349    75 
Other operating income   (184)   (179)   (186)
Total operating expenses   5,126    6,905    6,748 
Operating income (loss)   2,007    2,171    (479)
Financial expenses   529    667    863 
Financial income   (18)   (13)   (835)
Financial expenses in respect of warrants   -    1,597    86 
Income (loss) before taxes on income   1,496    (80)   (593)
Taxes on income   94    40    21 
Net income (loss)  $1,402   $(120)  $(614)
                
Earnings (loss) per Ordinary Share  $6.61   $(0.57)  $(3.07)
Number of Ordinary Shares used in computing net income (loss) per Ordinary Share   212,012    212,012    200,000 

 

   As of December 31, 
   2016   2015   2014   2016 
  Actual   As Adjusted (1) 
Balance Sheet Data:        
Total current assets  $10,019   $11,151   $12,590           
Total non-current assets   11,849    12,762    12,967      
Total current liabilities   11,178    14,438    19,353      
Non-current liabilities   1,672    1,793    1,483      
Shareholders’ equity   9,018    7,682    4,721      

 

(1) As adjusted data gives retroactive effect to the sale of           Ordinary Shares in this offering at an initial public offering price of $           per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if the sale had occurred on the balance sheet date shown above.

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   Year Ended December 31, 
   2016   2015   2014 
Supplemental Financial Data:            
EBITDA  $3,782   $3,929   $1,147 
Adjusted EBITDA  $4,163   $4,656   $1,460 

 

We believe that EBITDA and Adjusted EBITDA, are important supplemental measures of operating performance because they eliminate items that may have less bearing on our operating performance and highlight trends that may not otherwise be apparent when relying solely on IFRS, financial measures. EBITDA and Adjusted EBITDA are non-GAAP measures that are not a measure of our financial performance under IFRS and should not be considered an alternative to net income or any other performance measures derived in accordance with IFRS. Accordingly, you should consider EBITDA and Adjusted EBITDA along with other financial performance measures, including net income, and our financial results presented in accordance with IFRS. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under IFRS. Some of these limitations are:

 

  these measures do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

  these measures do not reflect changes in, or cash requirements for, our working capital needs; and

 

  although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and these measures do not reflect any cash requirements for such replacements.

 

We believe that EBITDA and Adjusted EBITDA are useful measures for analyzing the performance of our core business because they facilitate operating performance comparisons from period to period and company to company. This is accomplished by backing out potential differences caused by changes in foreign exchange rates that impact financial assets and liabilities denominated in currencies other than the US dollar (affecting finance expenses, net), tax positions (such as the impact on periods or companies of changes in effective tax rates), the age and book depreciation of fixed assets (affecting relative depreciation expense), the depreciation and amortization of capitalized development expenses (because it is a non-cash expense) and expenses that include non-capitalized expenses of this offering, management fee expenses and R&D expenses for an experimental scientific project.

  

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The following table reconciles net income (loss) for the period to EBITDA for the periods presented:

 

   Year Ended December 31, 
    2016    2015    2014 
Reconciliation of Net Income (Loss) to EBITDA:  (in thousands) 
Net income (loss)  $1,402   $(120)  $(614)
Finance expenses, net   511    654    28 
Financial expenses in respect of warrants   -    1,597    86 
Taxes on income   94    40    21 
Depreciation and amortization   1,775    1,758    1,626 
EBITDA  $3,782   $3,929   $1,147 

  

The following table reconciles EBITDA to Adjusted EBITDA for the periods presented:

 

   Year Ended December 31,  
   2016   2015   2014 
Reconciliation of EBITDA to Adjusted EBITDA:  (in thousands)
EBITDA  $3,782   $3,929   $1,147 
Other operating expenses - issuance expenses   154    349    75 
Management Fees   105    121    133 
Special scientific project expenses   122    257    105 
Adjusted EBITDA  $4,163   $4,656   $1,460 

 

 34 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of the prospectus contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

 

Introduction

 

We are a global developer and manufacturer of CoMs, computer systems, fan-less “Mini PCs” and a line of recently developed powerful fan-less computing systems, such as workstations, entry-level servers, and industrial and HLS PCs which are less susceptible to the threat of spyware. CoMs are single circuit boards, with the functionality of a complete computer, that serve as building blocks and the computing power for thousands of electronic products, including smart electronic devices that have become indispensable in daily life. Our Mini PCs are computers that are used for a variety of daily applications; they are fully integrated, small and low-powered and are cooled by passive cooling technology without any fans that enables us to reduce the size and energy consumption of our computers. We currently market over 25 distinct products, have over 1,500 direct and indirect customers, diversified across many industries, and have over 20 resellers for CoMs products spanning across Europe, Asia Pacific and South America, and over 25 Mini PC resellers in Europe, Asia Pacific, South America, the United States and South Africa.

 

A history of our product development, manufacturing capabilities and sales and marketing efforts is summarized as follows:

 

  In 2005 we implemented a new assembly line and all assembling was moved in-house. Over the past 10 years, we increased the capacity of the assembly lines by ten times and upgraded the lines with new state-of-the-art assembling and automated optical inspection machines;

 

 

In 2008 we introduced the fit-PC, a fully integrated ultra-small and ultra-low-power PC computer for industrial and commercial applications;

 

  In 2009 we launched an online support system to improve communication between customers and our technical support team;

 

 

In September 2011 we relocated to a new company-owned facility in Yokneam Elite, Israel. The facility integrates all of our activities under the same roof, including management, sales, R&D, tech support and manufacturing, and was designed to support our continued growth;

 

 

In 2013 we collaborated with Linux Mint by introducing MintBox 2 - a miniature fan-less PC based on an Intel Core i5 Processor running Linux Mint 15 “Olivia”;

 

  During 2015 we introduced four new CoM Express products; and

 

  In the first quarter of 2016, we introduced the first product from our Airtop line based on our proprietary AT-NAF technology.

 

Our end customers include small and medium-sized businesses as well as large blue-chip companies and many others. Over 50% of our customers are returning customers, placing orders more than once. On average, each of our returning customers has placed more than 10 orders with us.

 

We were established in 1992, have been in the CoM business for over 17 years and have over nine years of experience in the relatively new Mini PC market.

 

As of December 31, 2016, we had 78 employees in our owned facility in Yokneam Elite, Israel, of whom approximately 24% are engaged in engineering and technical support, 53% in production and testing, 9% in sales and marketing and the remaining are management, finance, human resources, administration and general employees.

 

We report our results in U.S. dollars, which we consider our functional currency.

 

 35 

 

Key Factors Impacting our Business

  

AT-NAF Technology

 

During 2014-2015, due to a strategic decision, we focused on materializing our new AT-NAF Technology over our existing product lines. As a result of our efforts to launch the Airtop line, our revenues pertaining to our other product lines declined by 21% for the year ended December 31, 2016, as compared to fiscal 2015. The AT-NAF technology that we have developed addresses potential markets which are significantly larger than the current markets of our CoM and Mini PC product lines. The AT-NAF technology has the potential to increase our revenues and gross margin in the future; however we face challenges, such as reducing the development cost of the AT-NAF technology so that we are able to compete with the alternatives available today in the market. Other challenges include learning the trends in a market that is relatively new to us, increasing market awareness and acceptance for our technology and successfully competing with familiar brands and market leaders. The Airtop line started generating revenues during 2016 and we anticipate an increase in the Airtop line revenues after the expected launch of the next generation of the Airtop in third quarter 2017. We do not anticipate any further decrease in revenues for our other product lines or any additional out of the ordinary expenses as a result of our efforts related to the rollout of the Airtop line.

 

Success of Design Wins

 

We closely monitor design wins by customer, region and end market. We consider design wins to be critical to our future success in the CoM line, although the revenue generated by each design win can vary significantly. Our long-term sales expectations are based on forecasts from customers and internal estimates of customer demand, factoring in both the expected time to market of the end customer products that are incorporating our solutions and associated revenue potential.

 

During the years 2010-2012 we had relatively few design wins in the CoM line, with an annual average of 163 design wins (compared to an annual average of 290 design wins during 2013-2016). The relatively low number of design wins during 2010- 2012 affected our CoMs sales during 2016 and 2015 because of the time lag between a design win and a sale, which is typically within three to five years.

 

Our Ability to Develop New Products and Standards that Address Constantly Evolving Application and Market Requirements

 

The technology included in all of our products is dependent on processor technology that is available to us through our processor partners, including AMD, Freescale and Intel. While there are a limited number of high performance processor vendors, our success in capturing market opportunities is, in part, dependent on the processor platforms we select for our solutions, as we have early access to strategic technology roadmaps from those processor partners. Due to the fact that the markets in which we and our customers operate are characterized by rapid technological advances, our ability to compete successfully depends upon our ability to deliver a continual and timely flow of competitive products, services and technologies to the marketplace. We believe our current and potential future customers evaluate their product selection criteria based on a number of factors, including form factor size, processing power and security requirements. Our goal is to recognize industry trends and invest in R&D to create new products and drive standards that address evolving application and market requirements.

 

Sales Volume and End-Market Demand of our Customers' Products

 

A typical design win can generate a wide range of sales volumes for our CoM products, depending on the end market demand for our customers' products. This can depend on several factors, including reputation of the end customer, market penetration, product capabilities and size of the end market that the product addresses. In the vast majority of cases, we may offer lower prices which may be offset by lower purchase and manufacturing costs related to higher volumes. In general, our customers with greater market penetration and better branding tend to develop products that generate larger volumes over their product life cycles.

 

 36 

 

 

Key Measures of Our Business

 

The following discussion describes the components of our income statement and certain key factors affecting our results of operations.

 

Revenue  

 

Substantially all of our revenue is derived from sales of products in our CoM and Mini PC segments. We design, integrate and market differentiated products that we sell to customers through our direct sales organization, our network of independent sales representatives and our distributors.

 

We report our financial results in U.S. dollars. However, some of our revenue is denominated in EURO and NIS. 91%, 93% and 90% of our revenues in 2016, 2015 and 2014, respectively, were denominated in U.S. dollars, with the balance denominated in EURO or NIS.

 

Cost of Goods Sold

 

Our total cost of goods sold consists of the costs associated with the procurement of our products, mainly materials and components as well as labor, depreciation and amortization expenses (including amortization of previously capitalized development projects) and other manufacturing costs.

 

Gross Profit and Gross Margin

 

Our gross profit consists of the difference between our revenue and our cost of goods sold. Gross margin is gross profit shown as a percentage of revenue. Our gross margin may fluctuate from period to period, primarily as a result of changes in product pricing, costs and product mix.

 

Research and Development (R&D) Expenses

 

Our research and development expenditures (before capitalization) accounted for 13.6%, 15.4% and 17.5% of total revenues, or $2,978,000, $4,290,000, and $4,101,000 for our last three fiscal years ended December 31, 2016, 2015 and 2014, respectively.

 

Our research and development department consists of 19 experienced engineers who possess know-how and specialize in developing technologies and products in our fields of operation.

 

Our R&D expenses consist of the costs incurred to maintain and expand our technical position by continually enhancing our products and solutions (both in the CoM segment and the Mini PC segment) as well as the development of new products such as the Airtop line of powerful fan-less computers. These costs include personnel expenses, depreciation and amortization, fees for third-party R&D services, materials and components and other expenses. R&D expenses include all research costs and non-revenue generating development costs which do not meet the criteria for capitalization (see below), such as maintenance and improvement of existing products. Regular amortization and impairment write-offs of revenue generating capitalized development costs are included in cost of goods sold. We expect that our R&D expenses will grow with our revenue, but we do not believe that our R&D expenses are likely to increase as a percentage of revenue.

 

We incur R&D costs in relation to internal R&D projects. Product development costs under IFRS are generally required to be capitalized if the product being developed is technically and commercially viable, the costs of the development can be measured reliably, there are probable future economic benefits from the development and we have sufficient intent and resources to complete the development and use or sell the resulting asset. Other development expenditures that do not meet these criteria are recognized as an incurred expense. Likewise, we expense research costs as incurred.

 

 37 

 

Selling and Marketing Expenses

 

Our selling and marketing expenses consist mainly of expenses for our internal and external sales forces, marketing and advertising expenses, internal cost allocations, travel and other expenses. Other expenses include commissions to third party agents, packing, shipping and delivery, as well as fees for third-party services. As a result of this offering and the anticipated expansion of our international sales efforts of the CoM, Mini-PC and Airtop products, especially in Asia, and expanding our business operations in Europe and North America, we believe that our total expenses are likely to increase during the next two years.

 

General and Administrative Expenses

 

Our general and administrative expenses mainly consist of personnel expenses for our administrative staff, building and maintenance expenses as well as other expenses. The other expenses include items such as legal, consulting and audit fees, general maintenance expenses, fees for third-party services, depreciation and amortization, travel expenses as well as insurance premiums. As a public company, we expect to deploy further additional resources into our general and administrative areas to comply with the increased capital markets financial reporting and regulatory requirements.

 

Other Categories of Expenses Affecting Results

 

Material Costs

 

The majority of our cost of goods sold consists of the materials and components as well as other manufacturing costs of our high-performance products and solutions. We source these materials and components from our suppliers in Israel. In the past, we have been able to optimize our procurement costs by leveraging our growing scale to create operational efficiencies. As a result of this offering and the expected future growth of our business, we anticipate being able to further optimize our supply chain and the corresponding procurement costs accordingly and achieve additional economies of scale.

 

Personnel Expenses

 

Our personnel expenses consist of wages and salaries, including related benefits, such as social security costs, pension and severance pay and cash-based incentive compensation. Personnel expenses are included in cost of goods sold, R&D, selling and marketing and general and administrative expenses. As part of our business strategy and a result of this offering, we anticipate hiring additional sales personnel in order to support international sales efforts as well as production and R&D personnel to support growing sales and R&D activities during 2017 and 2018, which will result in increased personnel expenses. However, we anticipate that our personnel expenses will grow at a slower rate than our revenue.

 

Depreciation and Amortization Expenses

 

Depreciation and amortization expenses are included in our cost of goods sold, R&D, selling and marketing and general and administrative expenses. Our depreciation expenses are primarily related to the building owned by us, equipment we use in the development and production of our products, and motor vehicles. Because we have capitalized some of our R&D expenses, our amortization expenses are primarily related to the amortization of previously capitalized costs for internal product development projects.

 

Cost reduction plan and efficiency measures

 

In the beginning of 2016, as a result of the decrease in orders during the fourth quarter of 2015, as well as in January and February 2016, and due to anticipated decrease in revenues resulting therefrom, management implemented a cost reduction plan. The cost reduction plan consisted of a 20% cut in head count, temporary salary reduction, temporary cancellation of certain employee benefits and cancelation or delaying certain R&D projects, as well as reduction of management fees. Management estimates that the net annual savings resulting from the above measures was approximately $1.7 million. As the orders we received grew during 2016, certain elements of the cost reduction plan were cancelled. See also “Business —Cost Reduction Plan.”

 

 38 

 

Our Key Metrics

 

Design Wins

 

Design wins enable our management to manage our business and estimate future trends in revenue from our CoM line. A design win is an evaluation kit bought by a potential customer for the purpose of evaluating and testing the suitability of our CoM product to the customer’s future product. Customers that purchase an evaluation kit get access to our technical and support team. Design wins are expected to result in significant orders within three to five years.

 

Design wins for our last three fiscal years ended December 31, 2016, 2015 and 2014, amounted to 285, 271, and 330, respectively.

 

Orders

 

Management keeps track of orders received from customers from all product lines, in aggregate, on a weekly basis. This enables us to estimate our future revenue stream from these orders for the upcoming month, quarter and year. Orders, once entered into our Enterprise Resource Planning, or ERP, management information system, are considered to be firm, with more than 99% resulting in sales within 12 to 16 weeks.

 

Number of products ordered

 

We keep records of the number of products ordered in each of our product lines and review these records at least once a year. This enables us to monitor, on a high-level basis, market trends with respect to each of our product lines, including average product price, bestselling products and products that are close to “end of life.” Furthermore, as all of our products are manufactured in our own facility, the record of number of products ordered also enables us to monitor the capacity, efficiency and functionality of our two surface mount technology, or SMT, lines.

 

The table below illustrates the approximate number of products ordered in each of our CoM and Mini PC lines during 2014 - 2016:

 

   For the year ended December 31, 
   2016   2015   2014 
   No. of Units Ordered 
Product line            
CoM   70,020    76,440    107,030 
Mini PC   22,100    35,720    33,090 
Total   92,120    112,160    140,120 

 

 39 

 

Financial Overview

 

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

Results of Operations

 

   Year ended
December 31,
 
   2016   2015 
   (in thousands) 
Revenues  $21,957   $27,781 
Cost of revenues   14,824    18,705 
Gross profit   7,133    9,076 
Research and development expenses   2,181    3,054 
Selling and marketing expenses   1,606    1,777 
General and administrative expenses   1,369    1,904 
Other operating expenses (income)   (30)   170 
Operating income   2,007    2,171 
Financial expenses, net   511    654 
Financial expenses in respect of warrants   -    1,597 
Taxes on income   94    40 
Net income for the period  $1,402   $(120)

 

Revenue  

 

Our revenue decreased by 21%, from $27.8 million in 2015 to $22 million in 2016. The break down by segments is as follows:

 

   Year ended
December 31,
     
   2016   2015   % change 
   (in thousands)     
Mini PC  $12,932   $16,448    (21.4)%
CoM   9,025    11,333    (20.4)%
   $21,957   $27,781    (21.0)%

 

The decrease in our revenue was primarily due to the following: (i) we undertook a strategic decision during 2014 and 2015 to focus on materializing our new AT-NAF technology through our first product in the Airtop line, which was launched during the first quarter of 2016. Our intense efforts across all departments related to the Airtop line had an adverse impact on the sales of our other product lines, the Mini PC and the CoM, during 2016. A significant amount of time was diverted from the Mini PC and the CoM lines to the development of the AT-NAF technology and to learning and assessing the new potential market of the Airtop line and the complex technology challenges related to the AT-NAF technology, and as a result, our R&D team and management were busy, leaving less time for new development, marketing and support of our Mini PC and CoM lines; (ii) we had relatively low design wins in the CoM line during the years 2010 - 2012 with an annual average of 163 design wins (compared to an annual average of 291 design wins during 2013 - 2015), which affected our CoMs sales during 2016 and 2015, as the finalization of a design win generally takes three to five years; and (iii) we believe that during 2014 and 2015 some of our returning customers purchased large quantities as part of their strategy to meet anticipated sales demand in advance. Usually, the small and medium orders from our customers are more or less stable across the year; however large orders of $500,000 and above, have no time pattern and we cannot anticipate when we can expect to receive a large order. During 2014 and 2015 we received a relatively large number of large orders from our customers as compared to 2016. We cannot anticipate when or whether these customers will place large orders again.

 

We believe that focusing on developing the AT-NAF technology during 2014-2015 contributed approximately 70% to the impact on our 2016 revenues, the low number of design wins during 2010-2012 contributed approximately 15% and the remaining 15% is attributed to the lack of large orders.

 

 40 

Cost of Revenues and Gross Profit

 

   Year ended
December 31,
     
   2016      2015   % change 
   (in thousands)     
Cost of materials and components  $10,623   $14,140    (24.9)%
Salary and related expenses   1,274    2,152    (40.8)%
Depreciation, amortization and other manufacturing expenses   1,931    2,058    (6.2)%
Change in inventories   996    355    - 
Cost of revenues  $14,824   $18,705    (20.7)%
   ​​  ​    ​​  ​    ​  ​ 
Gross profit  $7,133   $9,076    (21.4)%
Gross margin   32.5%   32.7%   (0.6)%

 

Cost of revenues decreased by 20.7% from $18.7 million in 2015 to $14.8 million in 2016, primarily due to the decrease in revenue. Gross profit decreased from $9.1 million in 2015 to $7.1 million in 2016, and our gross profit margin slightly decreased from 32.7% to 32.5% over the same period. The cost reduction plan implemented in 2016 supported gross margin despite the reduction in volume of sales.

 

In 2015 and 2016, $14.1 million and $10.6 million, respectively, of our cost of revenues resulted from cost of materials and components, a decrease of 24.9%. The decrease in the cost of materials and components is primarily due to the reduction in revenue. Salary and related expenses decreased by 40.8%, from $2.2 million in 2015 to $1.3 million in 2016. The decrease in salary and related expenses was primarily due to our cost reduction plan and to a lesser extent to the reduction in production volume. Depreciation, amortization and other manufacturing costs decreased by 6.2% from $2.1 million in 2015 to $1.9 million in 2016.

 

Gross Profit Segment Information

 

The breakdown of gross profit by segments is as follows:

 

   Year ended
December 31,
     
   2016   2015   % change 
   (in thousands)     
CoM gross profit  $2,895   $3,861    (25.0)%
CoM gross margin   32.1%   34.1%   (5.9)%
Mini PC gross profit  $4,238   $5,215    (18.7)%
Mini PC gross margin   32.8%   31.7%   3.5%

 

CoM segment gross profit decreased by 25% from $3.9 million in 2015 to $2.9 million in 2016. The decrease was primarily due to the reduction in the segment revenues. Despite the decrease in the segment revenues, the segment gross margin did not change materially, as the decrease in segment revenue was offset primarily due to the cost reduction plan that we implemented during 2016, which included salary reductions and cut offs in the production department.

 

Mini PC segment gross profit decreased by 18.7% from $5.2 million in 2015 to $4.2 million in 2016. The decrease was primarily attributed to the reduction in the segment revenues.

 

Research and Development (R&D) Expenses

 

   Year ended
December 31,
     
   2016   2015   % change 
   (in thousands)     
R&D expenses  $2,181   $3,054    (28.6)%

 

R&D expenses decreased by 28.6% from $3.1 million in 2015 to $2.2 million in 2016. The decrease in R&D expenses was primarily due to our cost reduction plan, as well as cancellation or delay in certain R&D projects which, according to management's assessment, will not have a material effect on the Company’s mid to long-term road map. The effect of the cost reduction plan was primarily due to reduction in salary and related expenses which amounted to $2.5 million in 2016, compared to $3.4 million in the same period of 2015. In 2015 and 2016, we capitalized $1.2 million and $0.8 of our own work as intangible assets, respectively.

 

Selling and Marketing Expenses

 

   Year ended
December 31,
     
   2016   2015   % change 
   (in thousands)     
Selling and marketing expenses  $1,606   $1,777    (9.6)%

 

Selling and marketing expenses decreased by 9.6% from $1.8 million in 2015 to $1.6 million in 2016. The overall decrease of our selling and marketing expenses was primarily due to the decline in revenues in 2016 and the related decrease in salary and related expenses, from $734,000 in 2015 to $526,000 in 2016. In 2016 commission expenses increased to $492,000 from $374,000 in 2015. The increase in commission expenses during 2016 resulted from higher sales of products which are subject to higher sales commission, as compared with the same period in 2015. Shipping expenses, as well as marketing and advertising expenses totaled $501,000 in 2016, compared to $568,000 in 2015.

 41 

 

General and Administrative Expenses

 

   Year ended
December 31,
     
   2016   2015   % change 
   (in thousands)     
General and administrative expenses  $1,369   $1,904    (28.1)%
                

       

Our general and administrative expenses decreased by 28.1% from $1.9 million in 2015 to $1.4 million in 2016. The decrease in our general and administrative expenses was primarily due to the cost reduction plan. The majority of the decline resulted from a reduction in salary and related expenses which were down 29.3%, from $1,032,000 in 2015 to $730,000 in 2016.

 

Other operating expenses (income)

 

   Year ended
December 31,
     
   2016   2015   % change 
   (in thousands)     
Issuance expenses  $154   $349    (55.9)%
Other operating income   (184)   (179)   2.8%
Other operating expenses (income)  $(30)  $170    -%

 

Our other operating expenses turned from $170,000 expense in 2015 to $30,000 income in 2016. The change in our other operating expenses was primarily due to a decrease in issuance expenses which decreased by 55.9%, from $349,000 in 2015 to $154,000 in 2016. Issuance expenses are mainly derived from legal and accounting expenses related to the proposed public offering of our securities. Other operating income is comprised mainly of rent income from our investment property, less related depreciation, which totaled $170,000 and $169,000 in 2016 and 2015, respectively.

 

Financial expenses, net

 

   Year ended
December 31,
     
   2016   2015   % change 
   (in thousands)     
Finance expenses  $529   $667    (20.7)%
Finance income   (18)   (13)     
Financial expenses in respect of the Warrants   -    1,597      
Financial expenses, net  $511   $2,251    (77.3)%

 

Our financial expenses, net decreased by 77.3% from $2.25 million in 2015 to $0.5 in 2016. The decrease in our financial expenses, net was primarily due to financial expenses in the amount of $1.6 million in respect of warrants that were issued to shareholders on December 29, 2012, that were measured at fair value, in 2015 and were exercised on December 22, 2015. For details, see Note 22 to our audited financial statements included elsewhere in this prospectus. Finance expenses decreased by 20.7% from $667,000 to $529,000 mainly due to a decrease in interest paid to banks of $309,000 in 2016 compared to $396,000 in 2015.

 

 42 

 

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

 

   Year ended
December 31,
 
   2015   2014 
   (in thousands) 
Revenues  $27,781   $23,370 
Cost of revenues   18,705    17,101 
Gross profit   9,076    6,269 
Research and development expenses   3,054    3,173 
Selling and marketing expenses   1,777    1,846 
General and administrative expenses   1,904    1,840 
Other operating expenses (income)   170    (111)
Operating income (loss)   2,171    (479)
Financial expense, net   654    28 
Financial expenses in respect of warrants   1,597    86 
Taxes on income   40    21 
Net loss for the period  $(120)  $(614)

 

Revenue

 

Our revenue increased by 18.9% from $23.4 million 2014 to $27.8 million 2015. The breakdown by segment is as follows:

 

   Year Ended
December 31,
     
   2015   2014   % change 
   (in thousands)     
Mini PC  $16,448   $12,441    32.2%
CoM   11,333    10,929    3.7%
   $27,781   $23,370    18.9%

 

The increase in sales of Mini PCs was primarily due to certain large orders received during 2014 and the first half of 2015 that were delivered in 2015.

 

Cost of Revenues and Gross Profit

 

   Year ended December 31, 
   2015   2014   % change 
    (in thousands) 
Cost of materials and components  $14,140   $14,158    (0.1)%
Salary and related expenses   2,152    1,986    8.4%
Depreciation, amortization and other manufacturing expenses   2,058    1,932    6.5%
Change in inventories   355    (975)   - 
Cost of revenues  $18,705   $17,101    9.4%
   ​​  ​    ​  ​    ​  ​ 
Gross profit  $9,076   $6.269    44.8%
Gross margin   32.7%   26.8%   22.0%

 

 43 

Cost of revenues increased by 9.4% from $17.1 million in 2014 to $18.7 million in the same period of 2015. Gross profit increased from $6.3 million in 2014 to $9.1 in 2015, and our gross profit margin increased from 26.8% in 2014 to 32.7% in 2015. The increase in gross margin was primarily due to increased sales of higher margin products.

 

In 2015 and 2014, $14.1 million and $14.2 million, respectively, of our cost of revenues resulted from cost of materials and components. Salary and related expenses increased by 8.4%, from $2 million in 2014 to $2.2 million in 2015. Depreciation, amortization and other manufacturing costs increased by 6.5% from $1.9 million in 2014 to $2.1 million in 2015.

 

Gross Profit Segment Information

 

The breakdown of gross profit by segments is as follows:

 

   Year ended
December 31,
     
   2015   2014   % change 
   (in thousands)     
CoM gross profit  $3,861   $3,073    25.6%
CoM gross margin   34.1%   28.1%   21.3%
Mini PC gross profit  $5,215   $3,196    63.2%
Mini PC gross margin   31.7%   25.7%   23.3%

 

CoM segment gross profit increased by 25.6% from $3.1 million in 2014 to $3.9 million in 2015. The increase is primarily due to the increase in the segment gross margin which grew from 28.1% in 2014 to 34.1% in 2015. This growth is attributed to better pricing of the segment products during 2015 and better utilization of the production workforce and production facilities we had in 2015.

 

Mini PC segment gross profit increased by 63.2% from $3.2 million in 2014 to $5.2 million in 2015. The increase is primarily due to the increase in the segment revenues and due to the increase in the segment gross margin which grew from 25.7% in 2014 to 31.7% in 2015. This growth is attributed to better pricing of the segment products during 2015 and better utilization of the production workforce and production facilities we had in 2015.

 

Research and Development (R&D) Expenses

 

   Year ended
December 31,
     
   2015   2014   % change 
   (in thousands)     
R&D expenses  $3,054   $3,173    (3.8)%

 

R&D expenses decreased by 3.8% from $3.2 million in 2014 to $3.1 million in 2015. The decrease was primarily due to increased capitalized expenses attributed to intangible assets. These expenses were $1.2 million in 2015, an increase of 33.1% from $0.9 million in 2014. Salary and related expenses increased by 6.7% in 2015 to $3.4 million from $3.2 million in 2014. Our material and components expenses in 2015 and 2014 were $0.5 million, while other R&D costs were $0.3 million and $0.4 million in 2015 and 2014, respectively.

 

Selling and Marketing Expenses

 

   Year ended
December 31,
     
   2015   2014   % change 
   (in thousands)     
Selling and marketing expenses  $1,777   $1,846    (3.7)%

 

Selling and marketing expenses decreased by 3.7% from $1.8 million in 2014 to $1.7 million 2015. The decrease of our selling and marketing expenses was primarily due to an 18.3% decrease in commission expenses, from $458,000 in 2014 to $374,000 in 2015 and a decrease of 23.7% in marketing and advertising expenses, from $287,000 in 2014 to $219,000 in 2015. These decreases were offset by an 8.7% increase both in salary and related expenses and in marketing and advertising expenses which were $734,000 and $349,000 in 2015 compared to $675,000 and $321,000 in 2014.

 

General and Administrative Expenses

 

  

Year ended

December 31,

     
   2015   2014   % change 
   (in thousands)     
General and administrative expenses  $1,904   $1,840    3.5%

 

Our general and administrative expenses increased by 3.5% from $1.8 million in 2014 to $1.9 million in 2015. The increase in general and administrative expenses was primarily due to certain non-significant items which totaled $0.2 million in 2015, compared to $0.1 million in 2014. The largest line item, salary and related expenses, was flat, $1 million in both 2014 and 2015.

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Other operating expenses (income)

 

  

Year ended

December 31,

     
   2015   2014   % change 
   (in thousands)     
Issuance expenses  $349   $75    365%
Other operating income   (179)   (186)   3.8%
Other operating expenses (income)  $170   $(111)     

 

Our other operating expenses increased from an $111,000 income in 2014 to a $170,000 expense in 2015. The increase in our other operating expenses was primarily due to an increase in issuance expenses which were $349,000 in 2015 and $75,000 in 2014, since the public issuance process of our securities started at the end of 2014. Other operating income is comprised mainly of rent income from our investment property, less related depreciation, which totaled to $169,000 and $180,000 in 2014 and 2015, respectively.

 

Financial expenses, net

 

   Year ended
December 31,
     
   2015   2014   % change 
   (in thousands)     
Finance expenses  $667   $863    (22.7)%
Finance income   (13)   (835)     
Financial expenses in respect of the Warrants   1,597    86      
Financial expenses, net  $2,251   $114      

 

Our financial expenses, net increased from $114,000 in 2014 to $2.25 million in 2015. The increase in our financial expenses, net was primarily due to financial expenses in the amount of $1.6 million during 2015, in respect of warrants that were issued to shareholders on December 29, 2012, that are measured at fair value, and were exercised on December 22, 2015. For details, see Note 22 to our audited financial statements included elsewhere in this prospectus. Finance expenses decreased by 22.7% from $863,000 in 2014 to $667,000 in 2015 due to a decrease in interest and commissions to banks from $611,000 in 2014 to $494,000 in 2015 and a decrease in expenses due to financial derivatives in 2014 of $180,000, offset by exchange rate differences of $87,000 in 2015. Finance income in 2014 is mainly comprised of $ 785,000 due to exchange rate differences.

 

Liquidity and Capital Resources

 

As of December 31, 2016, we had cash and cash equivalents of $0.6 million. We have access to bank credit facilities in Israel with an aggregate availability of approximately $3.9 million. We have financed our activities to date primarily through our cash flow from operations and withdrawing from our bank credit facilities.

 

We believe that our existing cash and cash equivalents, anticipated cash flow from operations and available credit facilities will be sufficient to meet our working capital and operating expenses for at least the next twelve months.

 

Cash Flows

 

   Year ended December 31, 
   2016   2015   2014 
   (in thousands) 
Net cash flows from operating activities  $3,025    3,825   $3,693 
Net cash flows used in investing activities   (975)   (1,558)   (1,075)
Net cash flow from (used) in financing activities   (1,964)   (2,883)   (1,707)
Net change in cash and cash equivalents  $86    (616)  $911 
Cash and cash equivalents at the end of the period  $618    532   $1,148 

 

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Net Cash Flows from Operating Activities

 

In 2016, our net cash flows from operating activities of $3 million primarily reflected our net income of $1.4 million, increased by our non-cash depreciation and amortization expenses of $1.8 million and finance expenses, net of $0.5 million, offset by non-cash decrease in employee benefit liabilities of $0.3 million. Additional significant operating cash flows resulted from a decrease in our inventories of $2 million and a decrease of our other accounts receivables of $0.7 million. This was offset primarily by increased trade receivables of $1.3 million and a decrease of our trade payables and other accounts payables of $2 million.

 

In 2015, our net cash flow from operating activities of $3.8 million primarily reflected our net loss of $120,000, increased primarily by our non-cash depreciation and amortization expenses of $1.8 million, by finance expenses, net of $0.7 million, and non-cash finance expenses in respect of warrants of $1.6 million. Additional operating cash flows resulted primarily from a decrease in our trade receivables of $0.8 million, a decrease in inventories of $0.25 million and an increase in provisions of $0.2 million. This was partially offset by an increase in our other accounts receivables of $0.3 million, a decrease in our trade payables of $0.95 and a decrease in our other account payables of $0.3 million.

 

Our net cash inflow from operating activities in 2014 of $3.7 million reflected our net loss of $0.6 million increased primarily by our non-cash depreciation and amortization expenses of $1.6 million. Further cash flows from operations resulted primarily due to an increase in our trade payables of $2.2 million, an increase in our other accounts payable of $1.4 million offset by an increase of $1.4 million in inventories.

 

Net Cash Flows used in Investing Activities

 

In 2016, our net cash flows used in investing activities of $0.9 million consisted primarily of $0.8 million of capitalized product development costs. In addition, we invested $0.3 million in property, plant and equipment, which was mostly for motor vehicles and computers. Sales of equipment and motor vehicles contributed $0.1 million.

 

In 2015, our net cash flows used in investing activities of $1.6 million consisted primarily of $1.2 million of capitalized product development costs. In addition, we invested $0.4 million in property, plant and equipment, which was mostly for lab equipment, leasehold improvements and motor vehicles. Sales of equipment and motor vehicles contributed $0.1 million.

 

Our net cash flows used in investment activities in 2014 of $1.1 million primarily consisted of $0.9 million of capitalized product development costs and $0.2 million in property, plant and equipment.

 

Net Cash Flow from (used) in Financing Activities

 

In 2016, we had a net cash flow used in financing activities of $2 million resulted primarily from repayment of short term bank credit, net of $0.2 million, a repayment of long term loans of $1.1 million and payment of interest of $0.5 million.

 

In 2015, we had a net cash flow used in financing activities of $2.9 million resulted primarily from repayment of short term bank credit, net of $1.1 million, a repayment of long term loans of $1.1 million and payment of interest of $0.4 million.

 

In 2014, we had a net cash flow used in financing activities of $1.7 million resulted primarily from repayment of short term bank credit, net of $6.1 million, a repayment of long term loans of $0.4 million and payment of interest of $0.6 million. This was offset by a receipt of long term loans of $5.6 million.

 

 46 

 

Financing Arrangements

 

As of December 31, 2016, short term bank credit amounted to $3.3 million, long term loans amounted to $3 million and we had undrawn credit facilities with an aggregate availability of $0.65 million at Bank Leumi. The credit facilities were initiated in the beginning of 2013, in order to fund a $10 million buyout of a former controlling shareholder. All of the credit facilities are interest-bearing. The interest rate for usage of our credit facilities is a maximum fixed interest rate of 3.75%. With respect to these credit facilities we collateralized our building in a first right mortgage and registered a fixed lien on our goodwill, unpaid capital and our other assets, for details see Note 21(c) to our audited financial statements included elsewhere in this prospectus. An additional guarantee was granted by our Chief Executive Officer (and until July 2014 also other shareholders). See “Certain Relationships and Related Party Transactions”.

 

As of December 31, 2016, the Company had not complied with all of the financial covenants required by Bank Leumi pursuant to certain credit facilities. See Note 12(3)(b) to our audited financial statements included elsewhere in this prospectus for details regarding our financial covenants. Accordingly, we reclassified long-term bank loans and presented them as of the reporting date in current liabilities.

 

Following the aforementioned, on January 24, 2017, we reached an agreement with Bank Leumi to revise the covenants as follows:

 

  (1) Our Tangible Capital, defined as shareholder's equity offset by (i) intangible assets, (ii) loans given to shareholders, subsidiaries or related parties and (iii) deferred expenses, will not be less than 23% of our total assets, based on our quarterly financial statements.

 

  (2) Our Tangible Capital will be equal to or exceeds $5.3 million, based on our quarterly financial statements.

 

The revised covenants will be reviewed on the basis of our quarterly financial information and annual financial statements which will be provided to Bank Leumi 45 days from the end of each quarter, and by April 30 after each year end, respectively. Accordingly, the revised covenants will be applied with respect to our annual financial statements for the year ended December 31, 2016, and onwards.

 

Similarly, as of December 31, 2014 and 2015, we had not complied with all of our financial covenants required by Bank Leumi pursuant to certain credit facilities. Accordingly, we reclassified long term bank loans and presented them as of the reporting date in current liabilities. Subsequent to December 31, 2015, Bank Leumi sent us notice for breaching the covenants but did not call for repayment of the loans. Instead, Bank Leumi provided us with a waiver to the above mentioned breach as of December 31, 2015.

 

Contractual Obligations

 

We currently do not have any contractual obligations other than the financing arrangements described above.

 

Seasonality

 

Revenue and operating results are not susceptible to fluctuation due to seasonality. However, we may encounter fluctuations in revenues from quarter to quarter due to large orders from customers that are not subject to a specific schedule or a seasonality pattern.

 

Off-Balance Sheet Arrangements

 

We currently do not have any off-balance sheet arrangements.

 

Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to market risk from fluctuations in interest rates and foreign currency exchange rates which may adversely affect our results of operations and financial condition. The market risk is understood as the risk that the fair value or the future cash flow of a financial instrument fluctuates due to changes in the market prices. Market risks include interest rate risk and foreign exchange risk.

 

Interest Rate Risk

 

The interest rate risk includes the influence of positive and negative changes to interest rates on our profit, equity, or cash flow in the current or any future reporting period. Interest rate risks from financial instruments arise in connection with financial liabilities. The current interest-bearing liabilities on our statement of financial position are our bank short term credit and loans.

 

Foreign Exchange Risk

 

Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities. The foreign exchange risk can be split into two types: translation risk and transaction risk.

 

We operate in a global environment and are exposed to foreign exchange risk resulting from the exposure to different currencies, mainly the NIS and the EURO. The change in the rate of exchange of such non-dollar currencies exposes us to an increase or decrease of our financial instruments denominated in these currencies, resulting in finance income or loss.

 

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Credit Risk

 

The credit risk, also known as risk of default, is the risk that a business partner will not fulfill its obligations in the framework of a financial instrument or customer contract and that this will lead to a financial loss.

 

We regularly monitor the credit provided to our customers and their general financial position, and when necessary, require collateral as security for the credit line granted to such customers.

 

JOBS Act

 

On April 5, 2012, the U.S. Congress enacted the JOBS Act. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This means that an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards. As a result, our financial statements may not be comparable to companies that comply with the public company effective date.

 

Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on other exemptions, including without limitation, the exemptions from the requirements to: (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 and (ii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). These exemptions will apply for a period of five years following the completion of our initial public offering or until we are no longer an “emerging growth company.”

 

Significant Accounting Policies and Critical Judgments, Estimates and Assumptions

 

We describe our significant accounting policies more fully in Note 2 to our audited financial statements for the year ended December 31, 2016. We believe that the accounting policies below are critical in order to fully understand and evaluate our financial condition and results of operations.

 

The preparation of financial statements in conformity with IFRS, requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

 

A summary of significant accounting policies is provided below.

 

The preparation of our financial statements requires our management to make judgments, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and the accompanying disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities for future periods. On an ongoing basis, we evaluate our estimates, assumptions and judgments.

 

We based our assumptions and estimates on parameters available when our financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond our control. Such changes are reflected in the assumptions when they occur.

 

For more details refer to Notes 2 and 3 to our audited financial statements for the year ended December 31, 2016 included elsewhere in this prospectus.

 

Capitalized Development Costs

 

We recognize costs for internally generated intangible assets in our statement of comprehensive income, with the exception of development costs which we capitalize. However, we only capitalize development costs of a single project as an intangible asset if the following criteria pursuant to IAS 38 have been met:

 

  completing the intangible asset is technically feasible;

 

 48 

 

  the management intends to complete and sell or use the product;

 

  it is probable that the product will generate future economic benefits;

 

  adequate resources are available so that the development can be completed; and

 

  the expenditure during development can be reliably measured.

 

The previously mentioned criteria are assessed and analyzed on a project by project basis, reviewed and approved by us. Once the project is approved in accordance with the criteria in IAS 38, costs are capitalized. Those costs directly attributable to the development project include personnel costs for members of staff involved in the development process. Other development expenditures that do not meet these criteria are recognized as an expense as incurred.

 

Capitalized development costs are amortized on a straight-line basis over the period of the expected future benefit (between three to seven years). Amortization of the asset begins when development is complete and the asset is available for use, which is normally the release of the developed product to mass production. The amortization expense is included in cost of goods sold.

 

For additional information regarding of our capitalized development costs, see Note 2(j) to our audited financial statements included elsewhere in this prospectus.

 

Inventories  

 

We hold a stock of our key products, raw materials and supplies to reduce delivery lead times, so we can react to short-term fluctuations in customer demand and fluctuations in the availability of raw materials and supplies.

 

At each balance sheet date, we review the recoverability of the inventories based on our assumptions on future achievable sales prices and necessary costs of goods sold.

 

Impairment of Tangible and Intangible Assets

 

At each balance sheet date, we have to estimate whether there exists evidence that the carrying amount of fixed assets or intangible assets could be impaired. In this case, as well as annually, the recoverable amount of the asset in question has to be estimated. The discounted future cash flows of the asset affected are estimated in order to calculate the value in use. The estimation of the discounted future cash flows is based on essential assumptions such as future sales prices and sales volumes, as well as costs and the interest rates used for discounting. In the event that our assumptions are not appropriate at a future point in time, we might face future impairment losses.

 

Any impairment write-offs are charged to depreciation and amortization expense of the respective function. Impairment write-offs related to capitalized development costs of revenue generating projects are charged to cost of goods.

 

For additional information regarding of the impairment of our tangible and intangible assets, see Note 2(k) to our audited financial statements included elsewhere in this prospectus.

 

Functional Currency

 

In accordance with IFRS, we have to determine our functional currency by evaluating the primary economic environment in which we operate.

 

This determination was made based on the fact that sales prices for goods are denominated in U.S. dollars, consistent with industry practice and that the portion of U.S. dollar denominated revenue ranges between 90% and 93%.

 

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Cash based incentive plan

 

Employees (including senior executives) of the Company receive part of their remuneration in the form of Incentive Plan Transactions, or IPT, whereby these employees render services in consideration for credit units which can only be settled in cash (cash-settled transactions). In measuring this liability, we make assumption of the period in which each employee is expected to redeem the incentive, the expected orders in the year preceding to the settlement and the discount rate for computing the present value of the expected payments under the IPT. These factors may vary from one period to another, causing material changes to the assumed liability, which are reflected in the income statement as well.

 

For additional information regarding the framework of the incentive plan transactions see Note 2(r) to our audited financial statements included elsewhere in this prospectus.

 

Income Taxes

 

Deferred tax assets are recognized for unused tax losses and other temporary differences to the extent that it is probable that taxable profit will be available against which the losses and the temporary differences can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likelihood, timing and the level of future taxable profits together with future tax planning strategies.

 

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BUSINESS

 

Overview

 

We are a global developer and manufacturer of embedded computer systems, fan-less “Mini PCs” and a line of recently developed powerful fan-less computing systems, including workstations, entry-level servers, PCs for industrial and homeland security, or HLS, which are less susceptible to the threat of spyware. Embedded computer systems, or computers-on-modules, also referred to as CoMs, are single circuit boards, with the functionality of a complete computer, that serve as the building blocks and the computing power for thousands of electronic products, including smart electronic devices that have become indispensable in daily life. Our Mini PCs are computers that are used for a variety of daily applications; they are fully integrated, small and low-powered and are cooled by passive cooling technology without any fans enabling us to reduce the size and energy consumption of our computers. We currently market over 25 distinct products, have over 1,500 direct and indirect customers diversified across many industries, over 20 resellers for CoMs products spanning across Europe, Asia Pacific and South America and over 25 Mini PC resellers in Europe, Asia Pacific, South America, the United States and South Africa.

 

We introduced our first pilot product in our Airtop line of powerful fan-less computers during the first quarter of 2016. We received strong market feedback, and believe that additional specific improvements are required to gain broader market acceptance. Our goal is to implement the required improvements in the next generation of the Airtop line. The new commercial version of the Airtop line (named Airtop 2) is expected to be launched in the third quarter of 2017, and will embed the seventh generation of Intel Core® architecture and a high performance graphics card. The Airtop line of workstations, entry level servers, industrial and HLS PCs are enabled by our proprietary breakthrough passive cooling technology, AT-NAF. The AT-NAF technology is capable of dissipating large amounts of heat from small enclosures without a cooling fan or any moving parts. The AT-NAF technology is more energy efficient and more reliable since it has no moving parts, and there is no air and dust circulation around the components. We believe that this technology has significant and potentially disruptive market potential.

 

We were established in 1992 in Israel, have been in the CoM business for over 17 years and have over nine years of experience in the relatively new Mini PC market. We have 78 employees in our facility in Yokneam Elite, Israel, of whom approximately 24% are engaged in engineering and technical support, 53% in production and testing, 9% in sales and marketing and the remaining in management, finance, human resources and administration.

 

Our products are divided into three categories:

 

  Computer on modules, or “CoMs”. Our standardized CoMs cover a broad range of pricing, performance and features. Our CoMs are embedded in products such as medical devices, telecommunication systems, transportation systems, robotics, automotive devices, ATMs, military systems, aerospace and many others. Our CoMs are based on several different processor architectures, including the Intel Core, AMD, TI OMAP/Sitara and Freescale/NXP/Qualcomm.

 

We recently developed a micro CoM called the Ultra Compact Multi-Layer Module, or UCMM, which has the highest density feature available today. The UCMM is half the size of the smallest CoM currently available and addresses the mobile device and wearable computing markets. The UCMM is backed by a patent pending technology. The first product based on the UCMM technology, called the UCM-iMX7, was launched in June 2017.

 

  Miniature fan-less PCs. Our Mini PCs are stand-alone fan-less computers that are used in many industrial, personal and commercial applications. We believe that our Mini PCs are the smallest, most energy efficient, passively cooled PCs in the market to date. Our flagship “Intense PC,” “Fit-PC,” and “FitLet” are based on the sixth and seventh generation Intel Core (Skylake and Kaby Lake), AMD Kabini and Freescale processor architectures.
     
  IoT Gate. We recently launched a mini-computer product (gateway) for the IoT market called the IoT Gate IMX7, which is based on Freescale’s IMX7 architecture. The new product enables the inter-connection of local devices, appliances and sensors to the global internet cloud for data storage and monitoring. 

 

  Airtop Line. We have developed an advanced Airtop line of computers which consists of professional workstations, entry level servers, and industrial and HLS PCs. The Airtop line is based on our new proprietary AT-NAF technology that is capable of passively cooling a variety of powerful computing systems without the use of any fans. The Airtop line features a larger, more powerful design than the Mini PC line, and as opposed to the Mini PC line, the Airtop line is able to embed separate high-end graphics processing units, or GPUs, thus significantly broadening our market reach. The Airtop is our most prominent technological innovation.

 

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The following are examples of the uses of our products in common applications:

 

CoMs   Mini PCs   Airtop
         

●   Recorder of the capsule endoscopy in the first generation of Given Imaging products

 

●   Studio and audio equipment for Comrex

 

●   Measurement equipment and shaft alignment for Fixturlaser

 

●   Smart home application for Stanley Security

 

●   Retail digital signage for IPM France

 

●   Industrial coffee equipment for De John Duke

 

●   Management PC for blood and tissue analysis machines for Roche

 

●    Point of sales for the Israeli national lottery

 

●    Controller PC for C&C metal works for Extrol

 

●    Controller for surveillance cameras

 

●    Consumer PC

 

●    Multi Media Centers

 

●    Personal file server

 

●    Controller and screen sharing for remote services

 

●   Workstation for control room for security agencies

 

●   Real time video analysis and 3D modelling for Playsight

 

●   Music recording and production for studios

 

●   Data processing in contaminated air environments for Valmet

 

●   VOIP for PennyMac

 

●   Air traffic control for Nav-Canada

 

●   Workstation for individuals

 

We intend to grow our business principally by promoting the Airtop line, launching a series of products based on our recently introduced AT-NAF technology, by developing new innovative technologies and products such as the UCMM and the IoT Gate, and by continuing to improve the functionality of our other product lines. We believe that the market addressed by the Airtop is approximately twelve times larger than the CoM and Mini PC markets combined, comprising over $30 billion worldwide. In order to exploit this opportunity, we plan to aggressively expand our sales, marketing, research and development and manufacturing resources in support of this product expansion.

 

We develop our software and hardware products in-house with advanced research and development capabilities. Manufacturing, production and testing are also completed in-house, with capabilities that specialize in dense and low-powered, fan-less passive cooling. Our rate of new product introductions has continued to increase in the past few years with the growth of our research and development team, reaching an average of five to seven new products per year in the past three years. We expect 2017 to be a record year in terms of product launches, such as the next generation of the Airtop, IoT Gate, UCMM, IPC3, and more. Among our prior breakthroughs was the introduction in 2007 of the smallest, most powerful and energy-efficient fan-less Mini PC based on the then latest Intel architecture, as well as the AT-NAF technology during 2016. Our products meet all environmental standards and are lead-free and compliant with the European Union’s RoHS Directive.

 

We have almost 20 years of experience in the embedded computing industry, and are known for our technological and engineering expertise. We have made a number of “first to market” innovations, including being the first to:

 

  integrate the high capacity NAND flash on-board across all of our products in 2000;

 

  offer a complete networking solution on a CoM in 2000;

 

  offer full Linux support for ARM based CoMs in 2003;

 

  have on-board WiFi in CoM in 2006;

 

  market with a fan-less Mini PC based on Intel architecture in 2008; and

 

  introduce a fan-less computer that is able to dissipate 200W in a small enclosure in 2016.

 

Historically our policy was not to file patent applications on our inventions. In 2014, however, we began to build our intellectual property portfolio, which now includes one issued U.S. patent and two U.S. patent applications. Our issued U.S. patent and one of our patent applications are related to different elements of our new Airtop line and describe a device which is able to passively cool powerful CPUs and graphics cards using a layered heat pipe structure without the use of fans. We have also filed related applications with the PCT. Our additional pending patent application is related to the UCMM, which describes a technology for reducing the footprint of a CoM by folding a printed circuit board, or PCB, in half. We plan to file additional patent applications on future R&D achievements.

 

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We have a strong and diversified customer base consisting of over 1,500 commercial customers across a variety of industries in over 50 countries. Our end customers include small and medium-sized businesses, as well as large blue-chip companies such as Roche, Philips, Tyco, ProData (Brazil), Walmart (through Stratacache) and many others. Many of our customers are returning customers that continue to purchase new products over extended periods of time. We believe that we are one of the top three leading vendors in the ARM CoM market which is based mainly on the widely used ARM architectures of TI and Freescale.

 

Industry Overview

 

CoMs

 

The embedded computing market is still relatively young. In 2002, the total CoM market was only $44 million, increasing to an estimated $800M in 2014. Market research suggests that the strongest demand will come mostly from stand-alone devices, particularly in the medical, industrial automation and control, and gaming machines segments. The CoM market is resilient in short term economy slowdowns because most embedded products are a necessity, and most companies are reluctant to abandon these projects due to the loss of “time-to-market.”

 

Currently, OEMs of any product or device that requires computing capabilities are the main source of customer demand for CoMs, directly and through sales channels. As the outsourcing of electronics trend continues, OEMs continue to seek ways to decrease working capital, save costs or upgrade existing products. The EU and the Americas account for approximately 80% of worldwide demand for CoMs, but regional demand is predicted to shift slightly as Asia Pacific countries progressively adopt and use this technology.

 

Another trend is that the number of processor cores for CoMs will continue to increase as the importance of optimal performance density remains the primary objective for many embedded hardware designers. In addition to the increase in absolute computational power, more challenges are being placed on industrial and commercial application designers to reduce power consumption and overall size, which renders obsolete traditional single core approaches.

 

According to VDC Research, the use of embedded computing modules in new OEM products is increasing. Because of advances in processor capability, CoMs now offer OEMs as much computing power as previous generations of larger and higher priced embedded boards and system products. We believe further market shifts between product types may also be driven by OEMs that need to upgrade their existing product lines.

 

Steady growth has also been fueled by the rise of the ARM sector of general purpose central processors. ARM chips are the principal competitor to Intel x86 chips.

 

Management believes that CoMs based on ARM architecture currently offer a better value proposition than the x86. ARM has more features and gives better performance for a lower price and size and power consumption. In contrast, x86 processors are designated for “heavyweight” applications requiring high processing performance. ARM on the other hand is designated for simple “lightweight” applications. Most of new embedded applications fall into the “lightweight” category and therefore tend to use an ARM-based solution.

 

There is a large installed base of x86 embedded applications, including investments in customized software. The transition to ARM is complex. As a result, x86 CoMs still constitute a major part of the market. New applications, however, are gradually shifting to ARM, and we believe this tendency will accelerate with time.

 

The CoMs market based on ARM chips is highly fragmented with many relatively small manufacturers. Unlike our company, we believe most of these CoMs manufacturers do not have a scalable operation, sales and support structure and do not own a manufacturing facility.

 

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CoM Express. The CoM Express standard was first released in 2005 by the PCI Industrial Computer Manufacturers Group (PICMG) and it sought to provide standardized module interfaces for several different target applications. It did so by defining five different module types each implementing different pinout configurations and feature sets on one or two 220-pin connectors. In that way, CoM Express is a set of multiple standards. It also defined two module sizes (later expanded to four) to allow additional flexibility to better serve the end application while maintaining compatibility within each module. Recently, we decided to penetrate the “CoM Express” market and now offer six distinctive products. Our CoM Express Computer-on-Modules are fully-featured single board computers designed for integration into custom applications through miniature high-density connectors. Our modules are supported with ready-to-run packages for Linux and MS Windows. As a new market for our company, management believes that the CoM express segment has a potential for growth.

 

There are a number of trends in the embedded computing solutions market, as follows.

 

Increased Outsourcing

 

As end users continue to demand greater performance and discover additional uses, computing technology is becoming more complex, evolving more rapidly and requiring more specialized engineering talent and knowledge. As a result, it is difficult for OEMs and original design manufacturers, or ODMs, to keep up with advancements and to design their own embedded systems in a cost-effective and timely manner. By utilizing a third-party embedded provider like us that delivers a complete solution that integrates the desired processor, electrical interfaces and software, an OEM or ODM can dramatically reduce its development expenses and time to market as well as mitigate the burden of hiring and retaining engineering experts capable of leveraging the latest processor technology. Leading embedded computing solutions address specific design and application requirements, allowing customers to focus on their core competencies, such as product definition and branding. As a result, embedded computing companies like us are increasingly essential to OEMs and ODMs as they attempt to meet their customers' time-to-market and performance demands. According to VDC Research and our view of the market, we believe that 20% to 25% of the global embedded systems and boards market is outsourced.

 

More specifically, OEMs and ODMs are increasingly outsourcing all or some of their product development to embedded computing solutions companies in part because these companies have:

 

  specialization and expertise required for the integration of complex processors and other semiconductor content;

 

  access to third-party engineering talent that can assist in architectural and other design improvements;

 

  faster design and integration periods driven by shorter time-to-market and development cycles;

 

  reduced in-house engineering resources as OEMs and ODMs implement restructuring and cost-cutting measures; and

 

  protection against supply shortages of silicon, embedded systems or components.

 

Growth of Internet of Things/Industry 4.0

 

IoT is a market development that connects everyday devices to the internet by integrating computing intelligence into each device and pairing it with communication functionality. These connected devices, or endpoints, are typically physical objects which contain electronics, sensors, connectivity and software features that monitor the device and provide specific information to other devices or to “hub” data centers. These hubs contain embedded computers which collect and analyze the data being provided by the endpoints. The various emerging IoT applications are expected to drive significant growth within the embedded computing solutions market over the next several years. According to a forecast analysis titled, “Internet of Things, Endpoints and Associated Services, Worldwide, 2014 Update” published in December 2014, Gartner Inc. forecasted endpoints to grow at a 30% compound annual growth rate, or CAGR, from 2014 to 2020 and reach an installed base of 25 billion units and a total market size of $263 billion.

 

The smart factory trend, also known as Industry 4.0, is a trend within the broader IoT market development which is expected to revolutionize the manufacturing infrastructure on a large scale and lead to increased demand for connectivity and computerization, particularly in manufacturing applications. Similar to recent trends in the consumer market, where mobile phones and other devices have integrated smart technology, the industrial sector is becoming more digital and connected due to benefits such as increased efficiency and new capabilities. In an April 2015 report titled Industry 4.0, The Boston Consulting Group estimated that in the German manufacturing sector, Industry 4.0 will boost productivity by €90 to €150 billion over the next five to ten years, revenue by €30 billion per year and employment by 6% over the next ten years. In order to achieve these gains, German manufacturers will need to invest €250 billion (1% to 1.5% of manufacturers' revenues) over the next ten years. We believe this trend will further contribute to the growth of the embedded computing market.

 

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Mini PCs

 

The Mini PC market developed more recently than the CoMs market. In 2007, we were the first to market a small, powerful and efficient passively cooled PC, based on Intel’s Atom processor. The introduction of the Intel Atom advanced the Mini PC market by providing acceptable performance at low-power industrial levels. We believe the Mini PC market has high growth potential in industrial applications because a small fan-less PC performs better than a traditional PC because it is more reliable, more efficient, smaller and more durable, as well as requiring no maintenance. The Mini PC market is hard to measure because there is no common and practical definition differentiating Mini PCs from regular PCs; our management, however, estimates that the current Mini PC market size is approximately $1.5 billion, and our market share is approximately 1%. In the past three years, due to the high growth of the Mini PC market, global chip makers and hardware manufacturers, such as Intel, Asus and Gigabyte, entered the market with Mini PCs that use fans to cool the CPUs. We believe the introduction of new Mini PCs from such global players may accelerate the worldwide adoption of Mini PCs. We estimate that the Mini PC market will grow at a yearly rate of over 40% in the next few years.

 

Small form factor PCs, like the MAC Mini and Intel NUC, have been sold for several years; these computers, however, have suffered from marginal thermal design and low durability. They are usually not considered suitable for industrial applications or suitable to function in rugged environments because they use fans to cool the CPUs and are therefore less reliable. Their internal components are exposed to dust and humidity which is accelerated by the internal fan.

 

Airtop

 

We have developed the AT-NAF technology that makes possible the introduction of fan-less computing systems with significantly higher computational power. Our first passively cooled product of the Airtop line was introduced to the market in the second quarter of 2016. The Airtop line is based on a series of powerful CPUs and graphics cards. This increased functionality creates new opportunities for us in several large markets, including professional PCs, workstations, entry level servers, industrial and HLS PCs. The next generation of the Airtop, which will embed the most recent CPUs (Intel 7th Generation) and powerful graphic cards is expected to be introduced in the second or third quarter of 2017.

 

According to John Peddie Research in the third quarter of 2016, the market for workstations remains active. In the third quarter of 2016, the market for workstations managed to maintain most of its previous and substantial gains, while generating its highest quarterly volume on record. Worldwide, the industry shipped over 1.1 million workstations in the third quarter of 2016, representing a 9.3% gain over the same quarter a year ago, along with a 3.4% quarterly gain over its all-time high in the previous quarter. We believe that this market momentum will continue.

 

Our Airtop line also addresses the entry level server market. These servers are primarily designed to fulfill the requirements of small and medium size enterprises, data centers and work groups. These servers are designed to run applications over an extended period of time with minimal human supervision and are usually priced from $2,000 to $25,000. They include file servers, print servers, web servers and email servers, among others. The Airtop line is designed to be the only computer required in the small office, home office, and small-to-medium business environments. According to the International Data Corporation, the total server market in 2015 reached $55 billion.

 

The global low-end server market is projected to reach 12 million units by 2020. The growth is driven by growing demand for low-cost and energy-efficient servers primarily in developing countries in regions such as Asia-Pacific and Latin America. In a February 2015 report, Global Industry Analysts predicted that Asia-Pacific will represent the largest as well as the fastest growing market worldwide with a projected CAGR of 7.9%.

 

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Our Airtop line is also suitable for industrial purposes and can operate in harsh and contaminated environments. In addition, the Airtop can be used for a variety of purposes by security agencies.

 

IoT Gate IMX7

 

Based on Freescale IMX7 architecture and after research we conducted to learn what the IoT market needs, we launched an affordable gateway for the IoT market in the first quarter of 2017. The new product will enable the connectivity of local electronic devices, appliances and sensors to the global internet cloud for data storage and monitoring. Currently, we are developing an additional product to serve as a gateway which shall be a high-end version of the first gateway and is expected to be launched later on in 2017.

 

Strategy

 

We intend to grow our business principally by: (i) promoting the Airtop line, (ii) launching a series of products based on our recently introduced breakthrough AT-NAF technology, (iii) developing new technologies for heat dissipation, (iv) continuing to improve the functionality of all of our other product lines, and (v) expanding our R&D efforts into new business areas. Our growth strategy includes the following:

 

  Aggressively exploit our new Airtop technology. We believe that our new Airtop line has significant and potentially disruptive market potential. We plan to aggressively expand our sales, marketing, research and development and manufacturing resources in support of this product launch and expansion. We intend to create a dedicated global marketing and sales team for the Airtop, to increase the number of sales channels and distributors worldwide, to participate in trade shows and to advertise digitally.

 

  Continue to expand our high quality and diverse customer base and maintain customer loyalty. With over 1,500 direct and indirect customers, diversified across many industries, we are not dependent on any single customer or industry sector. We enjoy a high rate of customer loyalty with many returning customers.

 

  Continue to market all-in-one solutions with configure-to-order capabilities. We believe that our CoMs provide economical solution for companies requiring customized units. Most off-the-shelf computer boards have limited configurations, and full customization is expensive and requires a large quantity order. Our CoMs provide a solution to both cost and customization with all of our products covering a wide variety of applications.

 

 

Maintain strong distribution channels. We have strong resellers worldwide with over 20 resellers for CoMs products spanning across Europe, Asia Pacific and South America, and over 25 Mini PC resellers in Europe, Asia Pacific, South America, the United States and South Africa.

 

  Exploit potential consolidation opportunities. Following this offering, we believe that we will be in a position to consider increasing our market share through consolidation opportunities and acquisitions in both the ARM and x86 markets.

 

  CoM Express. Recently, we decided to penetrate the “CoM Express” market. CoM Express is a distinct market, presently served by several mid-sized manufacturers, such as Kontron, Advantech, Congatec and others. We estimate the market size to be $700 million. CoM Express products are based exclusively on X86 processor architecture and are used for high-end complex applications. The number of manufacturers in this segment is relatively small and margins relatively high because the development of new CoM Express products requires effort significantly larger than ARM-based CoMs, and is a barrier to entry for small companies. We believe that we are well positioned to penetrate this market due to our current technologies and our continued investment in the Mini-PC line.

 

  IoT segment. We intend to keep developing products for the IoT market.

 

  Maintain and improve our advanced on-line technical support system that is capable of servicing hundreds of projects simultaneously.

 

  Maintain and expand our highly efficient manufacturing operations. We will consider expanding our manufacturing to sites in places such as the United States and/or Asia.

 

  Continue to identify new potential breakthrough technologies and conduct research and development in scientific and technological fields which can expand and leverage our business in the future.

 

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Products

 

Our products consist of three main product lines:

 

Computers on Modules (CoMs)

 

Our CoMs are based on several different processor architectures. Currently, we develop CoMs based on both Intel and ARM CPUs that have recently been upgraded to the advanced Intel Core, AMD, TI Sitara and Freescale IMX architectures. We have a wide range of products with varied specifications. Products are designed to be adaptable to cover a wide field of applications. For the years ended December 31, 2016, 2015 and 2014, CoMs represented approximately 41%, 41% and 47% of our sales, respectively. We estimate that recent decline of CoM sales volume is temporary and CoM sales are expected to increase again in the foreseeable future.

 

CoMs are highly complex with hundreds of separate components, as illustrated by the following diagram of our typical CoM.

  

 

 

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The table below outlines our five leading CoMs and the UCMM first product and their main features and characteristics:

 

Name Description/Specifications   Example of Use

UCM-iMX7

 

30 x 27 x 8 mm

UCM-iMX7 is based on the Freescale i.MX7 application processor featuring a dual core ARM Cortex-A7 CPU at up to 1GHz.

 

The processor is supplemented with up-to 2GB DDR3 and up-to 64GB eMMC flash. In addition, the UCM-iMX7 features extensive connectivity with a wide range of industry standard interfaces – GbE, PCIe, USB and CAN bus. UCM-iMX7 is ready-to-run SW support for Linux and Yocto Project operating systems.

New product

CM-FX6

 

CM-FX6 is based on the Freescale i.MX6 application processor featuring a highly scalable single/dual/quad core Cortex-A9 CPU at up to 1.2GHz coupled with powerful graphics and video processing units.

The processor is supplemented with up-to 4GB DDR3 and 32GB of on-board SSD. In addition, the CM-FX6 features extensive connectivity with a wide range of industry standard interfaces – GbE, PCIe, SATA, USB, RS232 and CAN bus. CM-FX6 is ready-to-run SW support for Linux and Android operating systems.

Transportation security equipment

CM-X300

 

The CM-X300 has all the components required to run operating systems such as Linux and Windows CE. 

The feature set of the CM-X300 module combines a 32-bit CPU, DDR, Flash Disk and vital computing peripherals. The CM-X300 provides a general purpose local bus, 100Mbit Ethernet, serial ports, I/O lines and other functions.

Cooking equipment

 

Coffee machines

 

Gaming equipment

 

Medical instruments

CM-iAM

 

The CM-iAM packs Intel Atom processor technologies into compact, lightweight PC-on-module. Its on-board resources suffice to smoothly run operating systems such as Linux, Windows XP and Windows 7, on credit-card sized board capable running on small battery. 

The feature set of the CM-iAM comprises a 32-bit X86-compatible CPU, DDR2, Flash Disk and vital computing peripherals. The CM-iAM provides a variety of display interfaces, PCIexpress bus, two 1000Mbit Ethernet ports, serial port, general purpose I/O lines and many other functions.

Telecommunication equipment

 

Machine control devices

CM-iGLX

 

The CM-iGLX on-board resources suffice to run operating systems such as Linux and Windows XP/CE, while it is just as small as a credit card. 

The feature set of the CM-iGLX combines a 32-bit X86-compatible CPU, DDR, Flash Disk and vital computing peripherals. The CM-iGLX provides a 32-bit PCI bus, 100Mbit Ethernet, serial ports, general purpose I/O lines and many other functions. 

The user interface is supported by an enhanced graphics controller, touchscreen, and an integrated WLAN (WiFi) interface implements 802.11g industry standard wireless connectivity.

Communication equipment

 

Ruggedized security equipment

CM-iTC

 

The CM-iTC packs Intel Atom processor technology into lightweight PC-on-module. Its on-board resources suffice to run operating systems such as Linux, and Windows Embedded.

The feature set of the CM-iTC comprises an Intel Atom E620/E680 CPU, DDR2, micro SD based internal storage and vital computing peripherals. The CM-iTC provides a variety of display interfaces, two SATA interfaces, PCIexpress buses, two 1000Mbit Ethernet ports, serial ports, USB host and slave ports, CAN with IEEE1588 support ,SPI, two I2C, general purpose I/O lines and many other essential functions.

Telecommunication equipment  Industrial automation

CM-T3730

 

The CM-T3730 packs an ARM module featuring high performance in a low-power envelope and enables advanced video and graphics multimedia applications. An Ideal choice for mobile and battery powered systems.

CM-T3730 is based on TI's 1GHz DaVinci DM3730 processor which combines two CPU cores in single package - an advanced Cortex-A8 ARM CPU and TMS32064x DSP for dedicated video processing. TI's new 45nm processors combined with low voltage Mobile DDR enable very low power consumption in regular operation and in standby.CM-T3730 I/O provides a general purpose local bus, 100Mbit Ethernet, serial ports, GPIOs and other essential functions, while integrated WiFi & Bluetooth interfaces implement industry standard wireless connectivity. The standardized CAMI ("CompuLab's Aggregated Module Interface") connectors of the CM-T3730 module allow interchangeability with other computer-on-module's available from CompuLab, enabling the flexibility required in a dynamic market where application requirements can change rapidly.

Agriculture control terminal

 

Medical devices human machine interface (HMI)

 

Testing equipment

 

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Mini PCs

 

In 2007 we were the first to introduce to the market the smallest, most powerful and energy efficient fan-less PC, which was based on Intel’s Atom processor. The introduction of the Intel Atom advanced the Mini PC market by providing exceptional performance levels at low-power industrial levels. Since then, we have introduced several Mini PC product families with dozens of different specifications. Our Mini PCs use a variety of CPUs, from the powerful Intel Core i7 to the efficient and low power consumption AMD Kabini.

 

The Mini PC products that we offer use updated components such as CPUs and are specially designed by our research and development team to be premium products. Our Mini PCs are widely recognized as ultra-small and energy efficient. For the years ended December 31, 2016, 2015 and 2014 Mini PCs represented approximately 59%, 59%, and 53% of our sales, respectively.

 

Our Mini PCs are suitable for many applications, such as signage, point of sale terminals, surveillance, clean room computing, production floors and many others. The following chart presents the different lines of Mini PC families we offer.

 

 

  

The table below outlines our top selling Mini PCs in 2016 and new products and their main features and characteristics:

 

(CPU – Central Processing Unit, GPU – Graphics Processing Unit, RAM – Random Access Memory, HDD – Hard Disk Drive, BT – Bluetooth, FACE Modules Expansion – enabling to choose different types of connectivity in the front of the product)

 

Name Main Specifications   Example of Use

IOT-GATE-iMX7

 

 





CPU - NXP i.MX 7Dual ARM Cortex-A7 CPU @1GHz

RAM - Up to 2GB DDR3

Storage - eMMC flash, up to 32GB

Power Consumption - 2-5W

Wireless - WiFi 802.11ac + BT 4.1

Connectivity - HDMI, Gbit Ethernet x3, USB2.0 x4, miniPCIe + uSIM socket 

New product

Intense-PC3 (IPC3)

 

 







CPU - Intel 7th Gen. Core CPU @3.5GHz

GPU - Intel HD Graphics GPU

RAM - Up to 32GB DDR3

Storage - 3 internal disks (2.5″, M.2 and mSATA)

Power Consumption - 6-24W

Wireless - WiFi 802.11ac + BT 4.0

Connectivity - HDMI 1.4 + DisplayPort 1.2, Gbit Ethernet x2, USB3.0 x4 + USB2.0 x2, miniPCIe + uSIM socket 

FACE Modules Expansion

New product

Intense-PC2 (IPC2)

 

● 








CPU - Intel 4th Gen. Core CPU @3.3GHz

GPU - Intel HD Graphics GPU

RAM - Up to 16GB DDR3

Storage -500GB HDD + mSATA x2

Power Consumption - 6-24W

Wireless - WiFi 802.11ac + BT 4.0

Connectivity -2x HDMI 1.4a + DisplayPort 1.2, Gbit Ethernet x2, USB3.0 x4 + USB2.0 x2, miniPCIe + uSIM socket 

FACE Modules Expansion

 

Medical instruments for Roche

 

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Name Main Specifications   Example of Use

Fitlet

 

  








CPU - AMD A4-6400T SoC @1.0GHz

GPU - AMD Radeon R3 Graphics

RAM - Up to 8GB DDR3

Storage - mSATA and eSATA

Power Consumption – 4.5 – 10.5W

Wireless - WiFi 802.11ac + BT 4.0

Connectivity - 2x HDMI 1.4a up to 1920 x 1200, USB3.0 x2 + USB2.0 x4, Up-to 4x GbE, miniPCIe expansion

FACET card interface

 

Inside store audio management for Walmart

Bus mounted ticketing machines for Focus

Telemetric

Firewalls

Fit-PC4

 









 

CPU - AMD G-Series Jaguar @2.0GHz 

GPU - Radeon HD 8400E GPU

RAM - Up to 16GB DDR3

Storage -500GB HDD + mSATA

Power Consumption - 5-25W 

Wireless - WiFi 802.11ac + BT 4.0

Connectivity -2x HDMI 1.4a up to 1920 x 1200, Gbit Ethernet x2, miniPCIe x2

FACE Modules Expansion

 

Point of sale computers

Intense-PC

 









 

CPU - Intel 3rd Gen. Core CPU @1.7GHz

GPU - Intel HD Graphics GPU

RAM - Up to 16GB DDR3

Storage -500GB HDD + eSATA x2

Power Consumption - 9-26W

Wireless - WiFi 802.11b/g/n + BT 3.0

Connectivity - HDMI + DisplayPort, 2560x1600, 1000Mb Ethernet x2, USB3.0 x2 + USB2.0 x6

FACE Modules Expansion 

 

Medical instruments for Roche

Gaming computers for the Israeli lottery

Fit-PC3

 








CPU - AMD G-Series @1.65GHz

GPU - Radeon HD 6320 GPU

RAM - Up to 8GB DDR3

Storage - 250GB HDD + eSATA x2

Power Consumption - 7-15W

Wireless - WiFi 802.11b/g/n + BT 3.0

Connectivity - HDMI + DisplayPort, 2560x1600 1000Mb Ethernet,USB3.0 x2 + USB2.0 x6

FACE Modules Expansion

 

Surveillance

Production floor computers for Honda

Fit-PC2i

 






CPU - Atom Z530 @1.6GHz

RAM -2GB DDR2

Storage - 4GB flash disk / 160GB HDD

Power Consumption - 6W

Wireless - WiFi 802.11g

Connectivity - DVI display interface, 1920x1080, 1000Mb Ethernet x2, USB x4, RS232 x1 

 

Digital signage

Personal use

Machinery

Production Floor Computers

Utilite

 

 







CPU - Freescale i.MX6 @1.2GHz

GPU -

RAM - Up to 4GB DDR3

Storage - Up to 512GB SSD

Power Consumption - 3-8W

Wireless - WiFi 802.11b/g/n + BT 3.0

Connectivity - HDMI + DVI-D, 1920x1200, 1000Mb Ethernet x2, USB2.0 x4, RS232 x2

 

Kiosk Applications

Networking Computers

“Internet of Things” Applications

 

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Airtop

 

During the first quarter of 2016, we introduced our state-of-the-art Airtop line of computers that is suitable for entry level servers, professional workstations, and industrial and HLS PCs. The next generation, which will embed the seventh generation of Intel architecture and high performance graphic card, is expected to be launched during the third quarter of 2017. The Airtop line is based on our patent-pending potentially disruptive AT-NAF technology that is capable of passively cooling a variety of powerful computing systems without the use of any fans.

 

The Airtop line is significantly more powerful than existing Mini PCs, including others that we and our competitors offer. The absence of moving parts dramatically enhances reliability and longevity. The Airtop line’s competitive advantages include our breakthrough cooling technology, enhanced user experience and reduced cost of ownership, as detailed in the following table:

 

 

 

Design Philosophy

 

We recognized early that use of high quality hardware is not sufficient to satisfy market demand. Customers typically lack the expertise to customize an operating system for their own devices. As a result, all of our products are offered with several operating systems adapted to the hardware. Two-thirds of our research and development employees are software engineers, resulting in a deep understanding of system software requirements which in turn leads to important design decisions that add significant value to customers. One of the key factors in choosing a new architecture is whether the chip vendor has a solid Linux support roadmap for the architecture. We were the first company to integrate high capacity NAND flash on-board memory across our product line allowing full support of Linux advanced graphic libraries. We were also the first to offer full Linux support for ARM-based CoMs with our CM-X255 product, and all of our new CoMs are supported in the Linux kernel mainline, which is the core software that operates Linux. Our CM-X270 was also the first to have on-board Wi-Fi. Our technological prowess is also evident in our design aspects, often incorporating special features such as WLAN, GSM modems and 3D accelerators. Our configure-to-order method allows customers to add extra features as needed within a wide feature set supported by board design. All boards that we make are designed for wide temperature ranges and their designs have the highest density of features in the industry.

 

Product Life Cycle - CoMs

 

Prior to sale, we require commercial users for CoMs to purchase an evaluation kit for the specified embedded product, which includes technical support, LCD panel compatibility verification, display driver adaptation service and a 45-day trial period. After the 45-day trial, the customer can return the kit for a refund if it finds the product unsuitable.  Evaluation kits are offered only for users who are developing commercial applications. We do not sell CoMs to individuals, students, research institutions or to companies developing an application with an estimated annual procurement less than 100 units.

 

The typical life cycle of a CoM is divided into four stages:

 

The introduction phase lasts approximately six months. Usually during this period any outstanding technical issues with the product are resolved, and the related software support packages are released and stabilized.

 

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In the active marketing phase, which is usually the first two to three years following introduction, the product features and software packages are stable and are maintained and enhanced with additional functions. Our products in this phase are the most suitable for new customers’ designs.

 

During the next “mature” phase, approximately the fourth and fifth years after introduction, products are available, shipped in volume, and benefit from stable and feature-rich software packages developed earlier. At this stage, we no longer recommend these product versions for new customers’ designs since new and more advanced products are available at the same price or less, and technical support is gradually reduced.

 

Lastly, the end-of-life phase is approximately five to ten years after introduction. Our products are not discontinued arbitrarily, and the product life cycle is extended if significant demand exists and components are available. When the end-of-life process begins, we deliver a last-time buy notification to all users at least three months prior to discontinuation of the applicable Company product. Sometimes certain features may be discontinued earlier than the product itself - for example, if a specific component is no longer available. In most such cases, we offer a component stocking service which enables the customer to continue ordering the product including the required feature.

 

When we introduce a new CoM, most evaluation kits are sold in the first two years. Sales then tend to peak in the fourth or fifth year and subsequently decline slightly in the following years.

 

Marketing and Distribution

 

Our marketing strategy for CoMs and Mini PCs differ by target audience, market and product specifications. In general, customers focus on Total Cost of Ownership (TCO), functionality, reliability, energy consumption and form factor/size.

 

Our target customers for our CoMs consist of electronics engineers and chief technology officers (CTOs) who see the product as a necessity since they do not have the know-how, time and capabilities to develop CoMs in house and they usually conduct market research before committing to a certain product. Our marketing strategy ensures that it is visible in market research by potential customers by conducting search engine optimization for selected keywords and submits news to professional web publications on a regular basis. Through our sales efforts, we provide reference guides with product technical specifications in addition to software packages that are readily available. To provide the best customer experience, our staff is available to answer pre-sale questions, and evaluation kits are offered risk-free with support by our research and development team. Lastly, we enhance our competitiveness through our configure-to-order product pricing on volume orders and powerful support systems developed in-house.

 

Our marketing strategy for our Mini PCs products is focused mainly on our long term relationship and reputation with thought leaders and bloggers, combined with exposure due to high and increased market demand. We have a dedicated website for our Mini PCs which receives 40,000 to 50,000 hits per month. Units are handed out for promotional purposes, mainly to technology reviewers and at technology events, such as Microsoft TechEd. Resellers are also encouraged to make their own promotional websites. The message communicated through all Mini PCs promotional channels is the same - our fan-less Mini PCs are market leaders in size, power consumption and robustness. Volume purchases are discounted, promoting larger size purchases.

 

Sales of our products are divided relatively evenly between direct and indirect sales channels, while CompuLab encourages direct sales in order to improve margins.

 

Our new Airtop line addresses a much larger market than our current markets. For the Airtop, we intend to adopt a more active marketing approach, including hiring additional sales and marketing personnel, seeking new and large distributors that specialize in distributing powerful computing systems and increasing our presence in North America and Europe, including by means of expanding our physical presence.

 

Direct Sales

 

Distribution of our products is carried out through direct sales from our Israeli office and indirectly through resellers around the world, including a dedicated office in Florida controlled by our Chief Executive Officer.

 

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The direct sales process is fairly simple and automated. It starts either through a customer placing an email request through contacts listed on our website or placing an order online. Once the request is placed, it is sorted and forwarded to the relevant sales personnel based on the product type and geographic region. The request is then registered in our database system, which then sends a quote, request for payment and activates shipping if the product is in stock. If the product is not in stock or requires modifications, a request is forwarded to the manufacturing department. The database system then generates a confirmation of delivery time and follows up until the order is shipped and the payment is received in full. Also throughout the direct sales process, if there is a specific technical question, the engineering department contacts the customer. Direct sales by our sales team is efficient, and can deal successfully with hundreds of orders at the same time with relatively low manpower.

 

Indirect Sales

 

The second sales channel for our products is through our global resellers. To date none of our resellers has exclusivity. To avoid overlaps with our other resellers or with our direct sales channel, our company policy is that each customer that orders our products through one of our resellers for the first time is registered on the name of such reseller. There are more than 20 resellers for CoM products, located in Europe, Asia Pacific and South America. In North America, CompuLab Embedded Systems, Inc., or Compulab Embedded Systems, a company owned by our Chief Executive Officer, operates a dedicated office in Florida. Some of the European resellers base their entire embedded operation around our products (e.g., RISC in Switzerland). The main requirement for CoM resellers is to bring design-wins, technical skills from the sales team as well as strong familiarity with our products. Successful resellers are often value-added resellers that offer complementary design services or products. Nonetheless, resellers are not required to provide technical support, because we use an advanced online technical support system designed in-house, allowing customers to address technical questions directly to our engineers. Based on the increasing market coverage of Mini PCs internationally, there are currently more than 25 resellers listed on the Fit-PC website. Several customers re-brand the Mini PCs as their own product, such as Portwell's WEBS-1010 product and Extra Computer's Pokini products. Additionally, there are industry specific resellers that target the Mini PCs for specific applications, such as signage, surveillance, voice over internet protocol, or VOIP, and education in third world countries.

 

Competition

 

CoM Market

 

The CoMs market is fragmented but with one competitor that is significantly larger than the others, which is the German company, Kontron. Kontron is the largest embedded vendor and dominant player in the global CoM market and continues to grow in part via acquisitions. Additional competitors in the CoM market are Congatec, Seco, Advantech and Portwell. We believe Kontron holds more than a 10% market share, and is one of the top three leading vendors in the ARM CoMs market. Additional competitors in the ARM CoM market are Phytech, Variscite, and Toradex. Other small competitors hold approximately a combined 2% - 3% market share.

 

Mini PC Market

 

The market for our Mini PCs has high growth potential in the industrial space due to the advantages of a small fan-less PC over a traditional PC because of our reliability, durability and minimal maintenance requirements. Our management estimates the current Mini PC market size to be approximately $1.5 billion, with our market share being approximately 1% with significant growth potential.

 

In the past three years, global companies, such as Intel, Asus and Gigabyte, introduced their own line of Mini PCs, creating market awareness of the Mini PC segment. Additional competitors in the Mini PC market are HP, Dell, Lenovo, Nexcom, Asus and Shuttle.

 

Many PC customers do not engage directly with the Company. For example, NASA, Google and Cisco order through PayPal or Amazon, and therefore our ability to profile the total market and applications is limited.

 

Airtop

 

We believe that the Airtop market is 15 times larger than the CoM and Mini PC markets combined. We also believe that the Airtop line of products address a market of over $30 billion worldwide. The market for products like Airtop is dominated by global companies such as HP, Dell, Lenovo and Apple regarding workstations and servers, none of which currently markets a fan-less product. We believe that the Company's new passive cooling technology differentiates the Airtop line from the current products available in the market by size, reliability and absence of noise.

 

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Customers

 

CoMs

 

Our range of high-quality products has allowed us to establish strong relationships with a global base of blue chip customers. We maintain relationships with our customers by providing them with high quality products and an outstanding level of support. We also customize our products to fit our client’s needs, with more than 80% of the customers providing recurring business.

 

Within the CoM segment, we have over 1,500 customers. Approximately one-third of new potential customers that continue beyond the initial development stage generate sales for us of more than $10,000 each. There is no typical CoM customer, though most are system integrators that have electronic design capability either in-house or through a third party. CoM customers span all industries and types of companies and sizes. End customers include small to large blue-chip companies such as Sierra Nevada, Medtronic, Tyco, Philips and many others.

 

Mini PCs

 

Mini PCs are used in the industrial, IT and consumer markets. Mini PCs can and are used in many different types of applications, such as signage, VOIP, kiosks, ATMs, education, advertising and healthcare. The number of industries and functionalities for which the Mini PC products can be used is broad, and as the market for Mini PCs continues to grow and diversify its usage, we are well positioned to take advantage of that growth. Many PC customers do not engage directly with us. For example, NASA, Google and Cisco order through PayPal or Amazon, and therefore the ability to profile the total market and applications is limited.

 

Similar to the CoM line of products, the Mini PC line end customers have included small to large blue-chip companies such as Roche, McDonalds (through Stratacache), Tyco and many others.

 

Intellectual Property

 

Our intellectual property portfolio includes one issued U.S. patent and two U.S. patent applications. Our issued U.S. patent and one of our patent applications are related to different elements of our new Airtop line and describe a device which is able to passively cool powerful CPUs and graphics cards using a layered heat pipe structure without the use of fans. We have also filed related applications with the PCT. Our additional pending patent application is related to the UCMM, which describes a technology for reducing the footprint of a CoM by folding a PCB in half. We plan to file additional patent applications on future R&D achievements.

 

Research and Development

 

Our research and development expenditures (before capitalization) accounted for 13.6%, 15.4% and 17.5% of total revenues for the years ended December 31, 2016, 2015 and 2014, respectively.

 

Our research and development department consists of 17 experienced engineers who possess know how and specialize in developing technologies and products in our fields of operation.

 

In addition to research and development activities directly related to our main product lines, our plans to allocate a portion of our research and development budget to research and development in new technology fields in order to expand and leverage our business.

 

As part of our strategy to lead technological breakthroughs in passive cooling computing, we conduct an advanced research in the Ionic Wind, or IOW, field. The IOW technology is aimed to enable us to build even more powerful and small computing systems without any moving parts. The success of IOW research could also lead to implementation of products and applications in additional technological areas.

 

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Production and Manufacturing

 

We keep full control of the value chain, from research and development, through self-manufacturing and global sales, outperforming the industry in both efficiency and profitability. We purchase the raw materials required for the production of our products, including components of our products, from third party suppliers. We have not entered into any exclusive agreements with any such supplier. See “Risk Factors — Risks Related to Our Business and Industry — We must work closely with our suppliers to make timely new product introductions”.

 

Our current production rate is approximately 100,000 computer boards and systems per year, with over 15,000 units per month during peak periods. Production yield success has been 98% on our first pass and 99.5% on our second pass. Current existing capacity is over 200,000 units per year, and is easily expandable by outsourcing manufacturing tasks to our approved contractors. Our strategy for the past few years has been to expand production capabilities to support growth. This was implemented by upgrading the SMT lines with the leading SMT machines available in the market, that run several times faster than the ones we previously had, thus increasing our production capabilities by three times. In addition, we decided to keep production in house in order to closely monitor and maintain quality.

 

Our production line is based on the latest model of SMT assembling machines and is fully synchronized with other parts of our operations through a proprietary ERP management information system integrating purchasing, inventory, sales, marketing, finance and human resources activities. The system has been developed in-house and refined and adjusted over time. It supports all aspects of our operations in one unified data system, including item pricing, initial order processing, purchasing, stock management, assembly kit preparation, SMT assembling and automated testing. Large scale configure-to-order manufacturing is possible due to our ERP system.

 

Employees

 

We currently employ 78 employees at our Israeli headquarters, of whom approximately 24% are engaged in engineering and technical support, 53% in production and testing, 9% in sales and marketing and the remaining are management, finance, human resources, administration and general employees.

 

Cost Reduction Plan

 

In the beginning of 2016, as a result of the decrease in orders during the fourth quarter of 2015, as well as in January and February of 2016 and due to the anticipated decrease in revenues resulting therefrom, management implemented the cost reduction plan which consisted of the following key steps:

 

·20% cut in head count across all departments including production, R&D and sales;
   
·temporary reduction in senior management’s salaries and management fees;
   
·cancelation or delay of certain R&D projects which were in preliminary stages; and
   
·cutting certain expenses such as employees’ benefits, general and administrative expenses and payments to service provider.

 

Management estimates that the net annual savings resulting from the above measures was approximately $1.7 million. As orders grew during 2016, certain elements of the cost reduction plan were cancelled, such as the reduction in salaries and management fees and certain employee’s benefits. The material remaining element of the cost reduction plan that is still in effect to date is the cut in head count which was adjusted due to the decrease in our revenues. In addition, there are other remaining non material elements of the cost reduction plan, such as reduction in certain employees’ benefits that are insignificant and we expect these elements of the cost reduction plan to terminate once our revenue increases. We also expect an increase in our head count once our revenue increases and in order to meet our human resources requirements. The termination of the material elements of the plan is subject to increase in our revenues, therefore we expect that such termination shall have no material effect on our operating income.

 

Facilities

 

Our headquarters is in a 59,000 sq. feet facility, which we own, in Yokneam Elite, Israel. One third of the building is rented out by us to a third party pursuant to a lease agreement that extends through December 31, 2017. We also cover the lease expenses of a small sales office in Florida that is used by CompuLab Embedded Systems, a company owned by our Chief Executive Officer, which acts as a U.S. distribution branch of our products. See “Certain Relationships and Related Party Transactions” elsewhere in this prospectus.

 

Litigation

 

We are not currently involved in any material litigation.

 

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MANAGEMENT

 

Executive Officers and Directors

 

The following table sets forth information regarding our executive officers, senior management and directors:

 

Name   Age   Position
Gideon Yampolsky   55   Chairman of the Board of Directors and Chief Executive Officer
Yuval Yanai   64   Director and acting Chief Financial Officer
Dimitry Katkov   41   Vice President, Research and Development
Irad Stavi   46   Vice President of Enclosed Products and Chief Product Officer
Igor Veisbein   37   Vice President of Embedded Products
Ravit Sheinfeld   46   Production Department Manager
Chen Katz   45   Director
Yanir Farber   55   Director

 

We intend to add one or more additional members to our board of directors prior and subject to the closing of this offering. These directors will be “independent directors” and nominees for the purposes of election as “external directors” as contemplated by the NASDAQ Stock Market rules and Israeli law. We will also establish an audit committee and a compensation committee.

 

Gideon Yampolsky co-founded CompuLab and managed it as co-Chief Executive Officer for 18 years, ending in 2010, while serving as a director for twenty years, ending in 2012. From 2010 to 2013, he was engaged in a private project in the field of energy storage for electrical cars. In the beginning of 2013, Mr. Yampolsky returned as our Chief Executive Officer and Chairman of the Board of Directors. Mr. Yampolsky formerly worked for a period of eight years at Intel’s research and development department. Mr. Yampolsky holds a B.Sc. in Electrical Engineering from the Technion - Israel Institute of Technology.

 

Yuval Yanai joined CompuLab during 2014 as a director and acting Chief Financial Officer. Mr. Yanai has held various positions in Israeli high technology companies since 1985. From September 2005 through March 2014, he served as Senior Vice President and chief financial officer of Given Imaging, Ltd., a medical imaging company (NASDAQ: GIVN). From October 2000 through August 2005, Mr. Yanai served as Senior Vice President and Chief Financial Officer of Koor Industries Ltd., one of Israel’s largest holding companies. Mr. Yanai holds a B.Sc. in Accounting and Economics from the Tel-Aviv University. Mr. Yanai is currently the principal of his own company, Yuval Yanai Consulting & Management Ltd., and also currently sits on the board of Check-Cap Ltd. (NASDAQ: CHEK), Mazor Robotics Ltd (TASE/NASDAQ: MZOR), Medical Compression Systems (D.B.N.) Ltd. (TASE: MDCL), Clal Biotechnology Industries Ltd. (TASE: CBI), Standard & Poor’s Maalot Ltd, Endobetix Ltd., Efranat Ltd., Haddasah Medical Organization and the Israeli Fund for UNICEF.

 

Dimitry Katkov joined CompuLab in 1999 as a computer engineer and has been our Vice President of Research and Development since 2005. Mr. Katkov holds a B.Sc. in Electrical Engineering from the Technion - Israel Institute of Technology.

 

Irad Stavi joined CompuLab in 2004 as Vice President of Sales, and has been our Vice President of Enclosed Products since 2013, after serving for four years as Vice President of Business Development. Mr. Stavi formerly worked as a software engineer with Infineon. Mr. Stavi holds a B.Sc. in Computer Engineering from the Technion - Israel Institute of Technology.

 

Igor Veisbein joined CompuLab in 2006 as computer engineer and has been our Vice President of Embedded Products since the January 2013, after serving for three years as a senior project manager. Mr. Veisbein formerly worked as electronics engineer at Valligent. Mr. Veisbein holds a B.Sc. in Electrical Engineering from the Technion - Israel Institute of Technology.

 

Ravit Sheinfeld joined CompuLab in 2002 as Production Department Manager. Ms. Sheinfeld holds a B.Sc. in Industrial Management from Beer-Sheva University and an M.A. in Industrial Management from the Technion - Israel Institute of Technology.

 

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Chen Katz has been a director of CompuLab since the beginning of 2013. Since 2002, Mr. Katz has been the Chief Executive Officer of TechnoPlus Ventures Ltd., or TechnoPlus, an Israeli investment firm and one of our principal shareholders. Mr. Katz is a member of the Israeli bar. Mr. Katz holds a European Master in Law and Economics (EMLE) from the Complutense University of Madrid and an LL.B. from the University of Haifa. Mr. Katz currently sits on the board of D-Led Illumination Technologies Ltd., Nicast Ltd., and RapiDx Ltd.

 

Yanir Farber has been a director of CompuLab since the beginning of 2013. Mr. Farber has served as a director of EFG Investments Ltd. since 2006 and as the executive chairman of TechnoPlus since 2009, and sits on the board of D-Led Illumination Technologies Ltd. since January 2010. Mr. Farber holds a B.Sc. in Industrial Engineering & Management from Tel Aviv University.

 

Arrangements Concerning Election of Directors; Family Relationships

 

We currently have four directors. All of our directors were appointed pursuant to our amended and restated articles of association. Our amended and restated articles of association will be replaced upon the closing of this offering. There are no direct family relationships among our executive officers and directors. However, Ravit Sheinfeld is married to the brother in law of our Chief Executive Officer.

 

Pursuant to our amended and restated articles of association in effect prior to this offering, certain of our shareholders had rights to appoint members of our board of directors. These provisions will no longer be applicable upon the consummation of this offering.

 

Compensation

 

The following table presents in the aggregate all compensation we paid to all of our directors and senior management as a group for the year ended December 31, 2016. The table does not include any amounts we paid to reimburse any of such persons for costs incurred in providing us with services during this period.

 

All amounts reported in the tables below reflect the cost to the Company for the year ended December 31, 2016. Amounts paid in NIS are translated into U.S. dollars at the rate of NIS 3.8406 = U.S.$1.00, based on the average representative rate of exchange between the NIS and the U.S. dollar as reported by the Bank of Israel in the year ended December 31, 2016.

 

  

Salary/ Fee
and Related

Benefits

 
All directors and senior management as a group, consisting of 8 persons  $894,000(1)(2)

 

 

(1)Includes approximately $63,000 of fees paid in 2016 to TechnoPlus, which has two director appointment rights, and has appointed Chen Katz and Yanir Farber to the board of directors.
  
(2)

Includes approximately $178,000 paid to our Chief Executive Officer.

 

For so long as we qualify as a foreign private issuer, we will not be required to comply with the proxy rules applicable to U.S. domestic companies regarding disclosure of the compensation of certain executive officers on an individual basis. Pursuant to the Israeli Companies Law, we will be required, after we become a public company, to disclose the annual compensation of our five most highly compensated officers on an individual basis. This disclosure will not be as extensive as that required of a U.S. domestic issuer. We intend to commence providing such disclosure, at the latest, in the annual proxy statement for our 2017 annual meeting of shareholders, which will be filed under cover of a Form 6-K.

 

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Employment and Service Agreements with Executive Officers

 

We have entered into written employment agreements and/or service agreements with each of our executive officers. These agreements contain provisions standard for a company in our industry regarding confidentiality of information and assignment of inventions. These agreements are terminable by either party upon prior written notice ranging from 30 to 60 days. We only have non-competition agreements with our Chief Executive Officer and acting Chief Financial Officer. However, the enforceability of non-competition agreements may be limited under applicable Israeli law. We intend to enter into agreements with each executive officer and director pursuant to which we will indemnify each of them up to a certain amount and to the extent that these liabilities are not covered by directors and officers insurance.

 

Upon the successful completion of this offering, our Chief Executive Officer will be entitled to a special one-time bonus in the amount of $210,000, and our acting Chief Financial Officer will be entitled to a special one-time bonus in an amount equal to one-third of one percent of the net proceeds received by us in this offering, but which may not be lower than $60,000 and may not exceed $90,000. In addition, we have issued benefit units to each of our executive officers other than our chief executive and acting chief financial officers. The benefit units are issued at management's or the board's discretion similar to cash bonuses, and as an incentive to the recipients. The benefit units become exercisable into cash over a five year period, and their monetary value is based upon our annual sale orders. For the year ended December 31, 2016, we paid an aggregate of approximately $25,000 to one of our executive officers upon the exercise of his benefit units. As of January 1, 2017, our executive officers held in the aggregate approximately 20,825 benefit units with an aggregate value of approximately $4,400.

 

In the future we intend to grant options to purchase of our Ordinary Shares to our officers and certain directors. Such options agreements may contain acceleration provisions upon certain merger, acquisition or change of control transactions. If the relationship between us and an executive officer or director is terminated, except for cause, options that are vested will generally remain exercisable for 90 days after such termination.

 

We describe our option plan under “Management—2015 Incentive Option Plan.” See also Note 16(b) to the audited financial statements for the fiscal year ended December 31, 2016.

 

Directors’ Service Contracts

 

Other than with respect to our directors that are also executive officers (including our Chairman), we do not have written agreements with any director providing for benefits upon the termination of his employment with our company.

 

Corporate Governance Practices

 

As an Israeli company issuing shares to the public, we are subject to various corporate governance requirements under Israeli law relating to such matters as the election of external directors, the appointment of the audit committee, the compensation committee and an internal auditor. These requirements are in addition to the corporate governance requirements imposed by the NASDAQ Stock Market rules and other applicable provisions of U.S. securities laws as applicable to foreign private issuers to which we will become subject upon consummation of this offering and the listing of our Ordinary Shares on the NASDAQ Capital Market. Under the NASDAQ Stock Market rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of the comparable requirements of the NASDAQ Stock Market rules, except for certain matters, including (among others) the composition and responsibilities of the audit committee and the independence of its members within the meaning of the rules and regulations of the SEC. For further information, see “Risk Factors” and “Management—NASDAQ Listing Rules and Home Country Practices.”

 

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Board Practices

 

Board of Directors

 

Under the Israeli Companies Law, the responsibility for setting up our policy and oversight over our business is vested in our board of directors. Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders or to management. Our executive officers are responsible for our day-to-day management and have individual responsibilities established by our board of directors. Our chief executive officer is appointed by, and serves at the discretion of, our board of directors, subject to the employment agreement that we have entered into with him. All other executive officers are appointed by our chief executive officer, and are subject to the terms of any applicable employment agreements that we may enter into with them.

 

Under our amended and restated articles of association, which will be effective immediately prior and subject to the consummation of this offering, our board of directors must consist of at least five and not more than eleven directors, as may be fixed from time to time by our board of directors, including at least two external directors if required to be appointed under the Israeli Companies Law. Accordingly, at any time, the minimum number of directors (other than the external directors) may not fall below three. Our board of directors will consist of             directors immediately prior to the consummation of this offering, which will include          new directors and two nominees as external directors whose service as directors will commence immediately prior to the consummation of this offering and, in the case of the external directors, their appointment as external directors shall be subject to ratification at a meeting of our shareholders to be held no later than three months following the completion of this offering. We have only one class of directors.

 

Other than external directors, for whom special election requirements apply under the Israeli Companies Law as detailed below, our directors are each elected at an annual general meeting of our shareholders and serve until the next annual general meeting. Directors (other than external directors) shall nevertheless be removed prior to the end of their term by the majority of our shareholders at a general meeting of our shareholders or upon the occurrence of certain events, all in accordance with the Israeli Companies Law and our amended and restated articles of association.

 

In addition, our amended and restated articles of association allow our board of directors to appoint directors (who satisfy the eligibility requirements under the Israeli Companies Law), other than external directors, to fill vacancies on our board of directors, for a term of office equal to the remaining period of the term of office of the director(s) whose office(s) have been vacated. External directors are elected for an initial term of three years and may be elected for additional three-year terms under the circumstances described below. External directors may be removed from office only under the limited circumstances set forth in the Israeli Companies Law. See “External Directors.”

 

Under the Israeli Companies Law, nominations for directors may be made by any shareholder holding at least one percent of our outstanding voting power. However, any such shareholder may make such a nomination only if a written notice of such shareholder’s intent to make such nomination has been given to our board of directors. Any such notice must include certain information which is required under the Israeli Companies Law and our amended and restated articles of associations, to provide to our shareholders, the consent of the proposed director nominee(s) to serve as our director(s) if elected and a declaration signed by the nominee(s) declaring that there is no limitation under the Israeli Companies Law preventing their election and that all of the information that is required under the Israeli Companies Law to be provided to us in connection with such election has been provided.

 

Under the Israeli Companies Law, our board of directors must determine the minimum number of directors who are required to have accounting and financial expertise. In determining the number of directors required to have such expertise, our board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that our company requires          director(s) with such expertise. A director with accounting and financial expertise is a director who, due to his or her education, experience and skills, possesses an expertise in, and an understanding of, financial and accounting matters and financial statements, such that he or she is able to understand the financial statements of the company and initiate a discussion about the presentation of financial data.

 

External Directors

 

Under the Israeli Companies Law, the boards of directors of companies, whose shares are publicly traded, including companies with shares listed on the NASDAQ Capital Market, are required to include at least two members elected to serve as external directors.              and           have agreed to serve as our external directors following the consummation of this offering, subject to ratification at a meeting of our shareholders to be held no later than three months following the completion of this offering.

 

The definitions of an external director under the Israeli Companies Law and an independent director under the NASDAQ Stock Market rules are similar to such an extent that it would be generally expected that our two external directors will also comply with the independence requirement under the NASDAQ Stock Market rules.

 

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The Israeli Companies Law provides that external directors must be elected by a majority vote of the shares present and voting at a shareholders meeting, provided that either:

 

the majority voted in favor of election includes a majority of the shares held by non-controlling shareholders who do not have a personal interest in the election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) that are voted at the meeting, excluding for such purpose any abstentions, which we refer to as a disinterested majority; or

 

the total number of shares held by non-controlling disinterested shareholders (as described in the previous bullet-point) that voted against the election of the director does not exceed 2% of the aggregate voting rights in a company.

 

The term “controlling shareholder” as used in the Israeli Companies Law for purposes of all matters related to external directors and for certain other purposes (such as the requirements related to appointment to the audit committee or compensation committee, as described below), means as a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in a company or has the right to appoint the majority of the directors of the company or its general manager (chief executive officer).

 

The Israeli Companies Law provides for an initial three-year term for an external director. Thereafter, an external director may be reelected by shareholders to serve in that capacity for additional three-year terms, provided that the external director continues to meet the independence standards and is reelected per the requirements of the Israeli Companies Law. However, after nine years of service, an external director may be reelected only if both our audit committee and board of directors confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period is beneficial to the company.

 

External Directors may be removed from office only under limited circumstances, including ceasing to meet the statutory qualifications for appointment or violating their duty of loyalty to the company and only by a special meeting of shareholders that approves such dismissal by the same shareholder vote percentage required for the election of external directors, or by a court. If an external directorship becomes vacant and there are less than two external directors on the board of directors at the time, then the board of directors is required under the Israeli Companies Law to call a shareholders’ meeting as soon as possible to appoint a replacement external director.

 

Each committee of the board of directors that is authorized to exercise the powers of the board of directors must include at least one external director, except that the audit committee and compensation committee must each include all external directors then serving on the board of directors. Payment of external directors is governed by applicable regulations promulgated under the Israeli Companies Law and is determined prior to such external director's appointment and may not be changed during his or her term subject to certain exceptions.

 

The Israeli Companies Law provides that a person is not qualified to be appointed as an external director if (i) the person is a relative of a controlling shareholder of the company, or (ii) if that person or his or her relative, partner, employer, another person to whom he or she was directly or indirectly subordinate, or any entity under the person’s control, has or had, during the two years preceding the date of appointment as an external director: (a) any affiliation or other disqualifying relationship with the company, with any person or entity controlling the company or a relative of such person, or with any entity controlled by or under common control with the company; or (b) in the case of a company with no shareholder holding 25% or more of its voting rights, had at the date of appointment as an external director, any affiliation or other disqualifying relationship with a person then serving as chairman of the board or chief executive officer, a holder of 5% or more of the issued share capital or voting power in the company or the most senior financial officer.

 

The term “relative” is defined in the Israeli Companies Law as a spouse, sibling, parent, grandparent or descendant; spouse’s sibling, parent or descendant; and the spouse of each of the foregoing persons.

 

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Under the Israeli Companies Law, the term “affiliation” and the similar types of disqualifying relationships, as used above, include (subject to certain exceptions):

 

an employment relationship;

 

a business or professional relationship even if not maintained on a regular basis (excluding insignificant relationships);

 

control; and

 

service as an office holder, excluding service as a director in a private company prior to the initial public offering of its shares if such director was appointed as a director of the private company in order to serve as an external director following the initial public offering.

 

The term “office holder” is defined in the Israeli Companies Law as a general manager, chief business manager, deputy general manager, vice general manager, any other person assuming the responsibilities of any of these positions regardless of that person’s title, a director and any other manager directly subordinate to the general manager.

 

In addition, no person may serve as an external director if that person’s position or professional or other activities create, or may create, a conflict of interest with that person’s responsibilities as a director or otherwise interfere with that person’s ability to serve as an external director or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange. A person may furthermore not continue to serve as an external director if he or she received direct or indirect compensation from the company including amounts paid pursuant to indemnification or exculpation contracts or commitments and insurance coverage for his or her service as an external director, other than as permitted by the Israeli Companies Law and the regulations promulgated thereunder.

 

If at the time at which an external director is appointed all members of the board of directors, who are not controlling shareholders or relatives thereof, are of the same gender, the external director must be of the other gender. A director of one company may not be appointed as an external director of another company if a director of the other company is acting as an external director of the first company at such time.

 

According to the Israeli Companies Law, a person may be appointed as an external director only if he or she has professional qualifications —defined as an academic degree in certain fields or at least five years of experience in certain senior positions—or if he or she has accounting and financial expertise. In addition, at least one of the external directors must have accounting and financial expertise, unless another independent director, who meets the standards of the NASDAQ Stock Market rules for membership on the audit committee, has accounting and financial expertise. Our board of directors has determined that has accounting and financial expertise and possesses professional qualifications as required under the Israeli Companies Law.

 

Under the regulations pursuant to the Israeli Companies Law, certain exemptions and reliefs with respect to external directors and independent directors are granted to companies whose securities are traded outside of Israel. For example, we will not be required to have external directors if: (i) the company does not have a controlling shareholder (as such term is defined in the Israeli Companies Law); (ii) a majority of the directors serving on the board of directors are “independent,” as defined under NASDAQ Rule 5605(a)(2); (iii) the company follows NASDAQ Rule 5605(e)(1), which requires that the nomination of directors be made, or recommended to the board of directors, by a nominating committee of the board of directors consisting solely of independent directors, or by a majority of independent directors; and (iv) the company follows NASDAQ Rule 5605 with respect to its audit committee and compensation committee. We may use these exemptions and reliefs after this offering.

 

Leadership Structure of the Board

 

In accordance with the Israeli Companies Law and our amended and restated articles of association, our board of directors is required to appoint one of its members to serve as chairman of the board of directors. Our board of directors has appointed Mr. Gideon Yampolsky to serve as chairman of the board of directors.

 

Role of Board in Risk Oversight Process

 

Risk assessment and oversight are an integral part of our governance and management processes. Our board of directors encourages management to promote a culture that incorporates risk management into our corporate strategy and day-to-day business operations. Management discusses strategic and operational risks at regular management meetings, and conducts specific strategic planning and review sessions during the year that include a focused discussion and analysis of the risks facing us. Throughout the year, senior management reviews these risks with the board of directors at regular board meetings as part of management presentations that focus on particular business functions, operations or strategies and presents the steps taken by management to mitigate or eliminate such risks.

 

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Board Committees

 

Audit Committee

 

Under the Israeli Companies Law, the board of directors of a public company must appoint an audit committee. The audit committee must be comprised of at least three directors, including all of the external directors, one of whom must serve as chairman of the committee. The audit committee may not include the chairman of the board, any director employed by or otherwise providing services on a regular basis to the company, to a controlling shareholder or to any entity controlled by a controlling shareholder, or any director who derives most of his or her income from a controlling shareholder or a relative thereof.

 

In addition, under the Israeli Companies Law, a majority the members of the audit committee of a publicly-traded company must be unaffiliated directors. In general, an “unaffiliated director” under the Israeli Companies Law is defined as either (i) an external director, or (ii) an individual who has not served as a director of the company for a period exceeding nine consecutive years and who meets the qualifications for being appointed as an external director, except that he or she need not meet the requirement for accounting and financial expertise or professional qualifications.

 

Audit Committee Charter

 

Following the consummation of this initial public offering, our board of directors intends to appoint an audit committee and adopt an audit committee charter that will set forth the responsibilities of the Audit Committee consistent with the rules of the SEC and the NASDAQ Stock Market rules, as well as subjecting the audit committee charter to the requirements under the Israeli Companies Law, as described below.

 

Under the Israeli Companies Law, our Audit Committee is responsible for

 

determining whether there are deficiencies in the business management practices of our company, and making recommendations to the board of directors to improve such practices;

 

determining whether to approve certain related party transactions (including transactions in which an office holder has a personal interest and whether such transaction is extraordinary or material under the Israeli Companies Law) (see “Management—Approval of Related Party Transactions under Israeli law”);

 

examining our internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to dispose of its responsibilities;

 

examining the scope of our auditor’s work and compensation and submitting a recommendation with respect thereto to our board of directors or shareholders, depending on which of them is considering the appointment of our auditor;

 

establishing procedures for the handling of employees’ complaints as to the management of our business and the protection to be provided to such employees;

 

determining whether certain acts of an office holder not in accordance with his or her fiduciary duty owed to the company are extraordinary or material and to approve such acts and certain related party transactions (including transactions in which an office holder has a personal interest) and whether such transaction is extraordinary or material under the Israeli Companies Law (see “Management —Approval of Related Party Transactions under Israeli Law”);

 

deciding whether to approve and to establish the approval process (including by tender or other competitive proceedings) for certain transactions with a controlling shareholder or in which a controlling shareholder has a personal interest; and

 

determining the process of approving of transactions that are not negligible, including determining the types of transactions that will be subject to the approval of the audit committee.

 

Our Audit Committee may not conduct any discussions or approve any actions requiring its approval (see “Management—Approval of Related Party Transactions under Israeli law”), unless at the time of the approval a majority of the committee’s members are present, which majority consists of unaffiliated directors including at least one external director. 

 

Under the regulations promulgated under the Israeli Companies Law, certain exemptions and reliefs with respect to the audit committee are granted to companies whose securities are traded outside of Israel. We may use these exemptions and reliefs after the listing of our Ordinary Shares on the NASDAQ Capital Market.

 

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NASDAQ Stock Market Requirements for Audit Committee

 

Under the NASDAQ Stock Market rules, we are required to maintain an audit committee consisting of at least three members, all of whom are independent and are financially literate and one of whom has accounting or related financial management expertise.

 

The members of our Audit Committee, which will be formed following the consummation of this offering, will be           and           .

 

Compensation Committee

 

We intend to rely upon the exemption available to foreign private issuers