Company Quick10K Filing
Quick10K
Top Image Systems
20-F 2017-12-31 Annual: 2017-12-31
20-F 2016-12-31 Annual: 2016-12-31
20-F 2015-12-31 Annual: 2015-12-31
8-K 2019-05-06 Leave Agreement, M&A, Shareholder Rights, Control, Officers, Amend Bylaw, Other Events, Exhibits
8-K 2019-04-22 Exhibits
8-K 2019-04-05 Shareholder Vote, Exhibits
8-K 2019-02-13 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-02-12 Other Events, Exhibits
8-K 2019-02-04 Enter Agreement, Other Events, Exhibits
8-K 2019-02-01
8-K 2019-01-07
FTNT Fortinet 13,294
LOGI Logitech 6,649
FSCT Forescout Technologies 1,591
SSYS Stratasys 1,273
MITK Mitek Systems 383
IMMR Immersion 263
RDCM Radcom 127
ALOT Astronova 113
TACT Transact Technologies 90
LINK Interlink Electronics 24
TISA 2017-12-31
Item 17 ☐ Item 18 ☐
Part I
Item 1. Identity of Directors, Senior Management and Advisors
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information About The Company
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards of Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountants
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Note 1: General
Note 2: Summary of Significant Accounting Policies
Note 3: Other Accounts Receivable and Prepaid Expenses
Note 4: Property and Equipment
Note 5: Intangible Assets
Note 6: Goodwill
Note 7: Accrued Expenses and Other Accounts Payable
Note 8: Commitments and Contingent Liabilities
Note 9: Taxes on Income
Note 10: Long-Term Convertible Note
Note 11: Shareholders' Equity
Note 12: Geographical Information and Major Customers Data
Note 13: Basic and Diluted Net Earnings (Loss) per Share
Note 14: Financial Expense
Note 15: Related Party Transaction
Note 16: Subsequent Events
EX-4.8 exhibit_4-8.htm
EX-4.9 exhibit_4-9.htm
EX-8 exhibit_8.htm
EX-12.1 exhibit_12-1.htm
EX-12.2 exhibit_12-2.htm
EX-13.1 exhibit_13-1.htm
EX-13.2 exhibit_13-2.htm
EX-15.1 exhibit_15-1.htm

Top Image Systems Earnings 2017-12-31

TISA 20F Annual Report

Balance SheetIncome StatementCash Flow

20-F 1 zk1821520.htm 20-F

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 20-F
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2017
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to __________
 
OR
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF   THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report______
 
Commission File Number 001-14552
 




Top Image Systems Ltd.
(Exact name of Registrant as specified in its charter)
 
Not applicable
 
(Translation of Registrant’s Name into English)
 
Israel
(Jurisdiction of incorporation or organization)


 
2 Ben Gurion St, Ramat Gan, 5257334, Israel
(Address of principal executive offices)


Patti Barton
Acting Chief Financial Officer
Top Image Systems Ltd.
2 Ben Gurion St, Ramat Gan, 5257334, Israel
Tel: 972-3-7679100
Fax: 972-3-6486664
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on
which registered
Ordinary Shares, nominal value NIS 0.04 per share
 
The NASDAQ Stock Market LLC

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)


 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
 
18,167,066 Ordinary Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes ☐          No ☒
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ☐          No ☒
 
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒          No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒          No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ☒
International Financial Reporting Standards as issued
Other ☐
 
by the International Accounting Standards Board  ☐
 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ☐          Item 18 ☐
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐          No ☒
 
This Form 20-F including all attachments is being incorporated by reference into the Registration Statement on Form S-8 (file no. 333-125064) and the Registration Statements on Form F-3 (file no. 333-119885, 333-175546, 333-193350 and 333-198136).


TABLE OF CONTENTS
 
          Page
 
PART I

1
1
2
17
34
44
50
52
53
55
75
75
     
PART II  
     
76
76
76
76
77
77
77
77
78
78
78
 
PART III
     
78
78
78
 
- i -
 
Forward-Looking Statements
 
Certain matters discussed in this Annual Report on Form 20-F (“Form 20-F”) are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are statements that are not historical facts and that reflect our expectations, beliefs, projections, future plans and strategies, anticipated events or trends.  For example, statements related to our future financial condition or results of operations, management’s strategies and objectives and expected market growth are forward-looking statements.  Forward-looking statements are often characterized by the use of words such as “believes,” “estimates,” “expects,” “projects,” “may,” “will,” “intends,” “plans,” “predicts,” “anticipates,” or “potential” and similar expressions.  Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results to differ materially from historical results or any future results, performance or achievements expressed, suggested or implied by such forward-looking statements.  Such risks and uncertainties include, but are not limited to:
 
·
fluctuations in the market price of our ordinary shares;
 
·
potential dilution to the holders of our ordinary shares as a result of future issuances of our securities;
 
·
quarterly fluctuations in our results of operations;
 
·
unstable conditions in the global economy and capital markets;
 
·
future acquisitions that could require significant resources or result in unanticipated adverse consequences;
 
·
whether or not we can successful complete acquisitions of other businesses and efficiently integrate them,
 
·
competitive pressures in the data capture and automatic form processing markets;
 
·
the success of our strategic marketing relationships;
 
·
our ability to continue technological innovation and successful commercial introduction of new products;
 
·
the potential for losses;
 
·
our ability to protect intellectual property and other proprietary information;
 
·
the possibility that our ordinary shares could be involuntarily delisted from NASDAQ;
 
·
exposure to currency fluctuations; and
 
·
other risks and uncertainties described in, or incorporated into, this prospectus.
 
The risks included in this section are not exhaustive.  You should carefully consider the section entitled “Risk Factors” in this Form 20-F and other reports we file with or furnish to SEC, which include additional factors that could impact our business and financial performance.  If any of these trends, risks or uncertainties actually occurs or continues, our business, financial condition and results of operations could be materially adversely affected.
 
Forward-looking statements contained in this Form 20-F are based on our current plans, estimates and projections, and, therefore, you should not place undue reliance on them as a prediction of future results. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.
 
- ii -
 
Use of Certain Terms
 
In this report, “we,” “us,” “our,” “TIS” and the “Company” refer to Top Image Systems Ltd. and its consolidated subsidiaries, collectively.   References to “$” and “U.S. dollars” are to the lawful currency of the United States of America.  Certain financial information contained in this Form 20-F is presented in thousands where noted.
 
PART I
 
ITEM 1.          IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
 
Not applicable.
 
ITEM 2.          OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
1

 
ITEM 3.          KEY INFORMATION
 
SELECTED FINANCIAL DATA
 
The following selected consolidated financial data are presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.  All financial statements included in this annual report are presented solely under U.S. GAAP. The selected consolidated financial data should be read in conjunction with and are qualified by reference to Item 5 of this report entitled “Operating and Financial Review and Prospects” and the consolidated financial statements and notes thereto and other financial information included elsewhere in this report.
 
   
2013
   
2014
   
2015
   
2016
   
2017
 
                               
   
U.S. dollars in thousands (except share and per share data)
 
Statement of Operations Data:
                             
License Revenues
   
11,762
     
11,211
     
7,708
     
5,973
     
5,236
 
Services Revenues
   
17,295
     
24,644
     
26,083
     
25,662
     
24,432
 
Total Revenues
   
29,057
     
35,855
     
33,791
     
31,635
     
29,668
 
Cost of License Revenues
   
2,740
     
1,442
     
545
     
701
     
562
 
Cost of Services Revenues
   
9,076
     
12,880
     
15,593
     
16,119
     
16,093
 
Total Cost of revenues
   
11,816
     
14,322
     
16,138
     
16,820
     
16,655
 
Gross profit
   
17,241
     
21,533
     
17,653
     
14,815
     
13,013
 
Research and development, net
   
3,377
     
4,914
     
4,797
     
4,581
     
4,997
 
Selling and marketing
   
9,498
     
12,967
     
10,894
     
7,448
     
6,586
 
General and administrative
   
4,637
     
6,819
     
7,492
     
6,910
     
6,592
 
Acquisition related costs
   
-
     
1,170
     
-
     
-
     
-
 
Restructuring Charges
   
-
     
-
     
-
     
1,142
     
-
 
Amortization of intangible assets
   
-
     
239
     
390
     
502
     
613
 
Operating income (loss)
   
(271
)
   
(4,576
)
   
(5,920
)
   
(5,768
)
   
(5,775
)
Financial expense, net
   
(286
)
   
(352
)
   
(1,145
)
   
(956
)
   
(603
)
Other income, net
   
369
     
7
     
4
     
12
     
7
 
Income (loss) from continuing operations before taxes on income
   
(188
)
   
(4,921
)
   
(7,061
)
   
(6,712
)
   
(6,371
)
Taxes (tax benefit) on income
   
(1
)
   
552
     
1,215
     
(115
)
   
(204
)
Net income (loss)
   
(187
)
   
(5,473
)
   
(8,276
)
   
(6,597
)
   
(6,575
)
Net profit attributable to non- controlling interest
   
-
     
(6
)
   
(19
)
   
(13
)
   
(11
)
Net income (loss) attributable to parent company
   
(187
)
   
(5,479
)
   
(8,295
)
   
(6,610
)
   
(6,586
)
                                         
                                         
Net basic income (loss) per share:
 
(0.02
)
 
(0.34
)
 
(0.46
)
 
(0.37
)
 
(0.37
)
    Net diluted income (loss) per share:
 
(0.02
)
 
(0.34
)
 
(0.46
)
 
(0.37
)
 
(0.37
)
Weighted average number of shares outstanding for basic net income (loss) per share
   
11,718,960
     
16,071,608
     
17,870,588
     
17,925,684
     
18,006,776
 
Weighted average number of shares outstanding for diluted net income (loss) per share
   
11,718,960
     
16,701,608
     
17,870,588
     
17,925,684
     
18,006,776
 
 
As of December 31,
 
   
2013
   
2014
   
2015
   
2016
   
2017
 
Summary of Balance Sheet Data:
                             
Cash and cash equivalents
   
3,203
     
4,386
     
2,404
     
7,636
     
2,231
 
Working capital
   
8,498
     
8,974
     
3,941
     
4,258
     
(914
)
Total assets
   
21,647
     
47,306
     
40,217
     
39,639
     
31,631
 
Long term debt
   
1,956
     
4,355
     
5,220
     
8,368
     
7,763
 
Total liabilities
   
5,933
     
13,469
     
14,225
     
19,646
     
17,463
 
Shareholders’ equity
   
15,714
     
33,837
     
25,992
     
19,993
     
14,168
 
 
2

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

Risks Related to Our Business
 
We have had a history of losses and may incur future losses.
 
Since our inception in March 1991, we have incurred net losses in every year other than in 1995, 1997, 1998, 2006, 2008, 2011 and 2012, and our losses may recur and continue.  As of December 31, 2017, we had an accumulated deficit of approximately $47 million. We plan to maintain the level of our aggregate product development expenses. We cannot assure you that our revenues will grow or that we will achieve consistent profitability in the future. Failure to increase revenues could result in a material adverse effect on our business, prospects, financial results and results of operations.

If we are unable to achieve and maintain a leading position and to build awareness of our brands, we may not be able to compete effectively against competitors with greater name recognition and our sales could be adversely affected.
 
If we are unable to economically achieve and maintain a leading position in data recognition software or to promote and maintain our brands, our business, results of operations and financial condition could suffer.  Development and awareness of our brands will depend largely on our success in increasing our customer base.  In order to attract and retain customers and to promote and maintain our brands in response to competitive pressures, we may be required to increase our marketing budget or increase our sales expenses.   There can be no assurance that our efforts will be sufficient or that we will be successful in attracting and retaining customers or promoting our brands. 
 
Our capital requirements have historically been significant and we may not be able in the future to meet our requirements with our working capital.
 
Historically, our capital requirements have been significant.
 
In May 2018, in order to provide the Company with additional liquidity if needed, we entered into a term sheet (the “Term Sheet”) with Hale Capital Partners which provides for a new senior secured term loan of up to $3 million (the “Senior Loan”) as part of a secured credit facility (the “Credit Facility”) that would include the existing convertible note held by an affiliate of Hale in an amount of $5.6 million.  The Senior Loan would be required to the prepaid on certain events and would be prepayable at the Company’s option at a premium beginning one year following closing.

In December 2016, we borrowed $5 million from HCP-FVE, LLC, an affiliate of Hale Capital Partners in exchange for a convertible promissory note (the “Convertible Note”) which bears interest at the prime rate plus 2.5% (if paid in cash) or 3% (if the interest capitalized) per annum and matures (if not converted prior) in December 2020.  As of March 31, 2018, the principal amount of the Convertible Note is convertible into 3,094,998 of our ordinary shares.  Upon withdrawel from the Credit Facility, the Convertible Note, plus accrued interest, will be exchanged for secured notes that will be junior to the Senior Loan with an interest rate of Prime plus 4.0%.

The Company has not yet determined if it will draw on the Credit Facility.  The issuance of the warrants and the changes to the Convertible Note are conditioned upon the drawing down of the Credit Facility.  If the Company elects not to withdraw funds out of the Credit Facility, it will be obligated to pay to Hale Capital Partners, LP a break up fee of equal to three percent (3%) of the Credit Facility.
 
In December 2017, we secured a $2.5 million line of credit with a U.S. based bank.  The line was secured by the accounts receivables of our U.S. subsidiary and bore interest at 2.5% or 3% (if in stream line mode) per annum and matured in December 2018.  We had borrowings outstanding of $0.8 million against the line of credit at December 31, 2017.  Subsequent to December 31, 2017, the borrowings under the line were repaid and the line was cancelled.

We may require additional financing in the future to fund our operations and capital requirements.  In such event, we cannot assure you that additional financing will be available to us when needed, on commercially reasonable terms, or at all.  We have no expectation that our existing shareholders will provide any portion of our future financing requirements.  Any inability to obtain additional financing when needed would have a material adverse effect on us, requiring us to curtail our expansion efforts.  In addition, our current and possible future indebtedness, subjects us to risks associated with such substantial indebtedness, including the risk that interest rates may fluctuate or that we may have insufficient resources to repay interest and principal on any such indebtedness.  Any additional equity financing may involve substantial dilution of the interests of our then-existing shareholders.
 
 
3

 
 
Volatility in the European Union and questions about its future may negatively affect our European operations.

On June 23, 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union, commonly referred to as “Brexit”. As a result of the referendum, the British government and the European Union have begun negotiating the terms of the United Kingdom’s future relationship with the European Union.  Although it is unknown what those terms will be, it is possible that there will be greater restrictions on imports and exports between the United Kingdom and European Union countries and increased regulatory complexities.  Uncertainties arising from Brexit have resulted in financial volatility in Europe and fluctuations in some of the currencies in which we do business have been attributed to questions about Brexit. In addition, speculation about the future of European Union has led to further uncertainty in the markets.  These developments may have an impact on both our European and worldwide operations and could have a material adverse effect on our business, prospects and financial condition.
 
The European credit markets, which had a negative impact on the European economy in recent years and experienced an increase in availability of funds and lower borrowing costs in 2017, may have adverse impact on our operations.  In 2015, 2016 and 2017 we generated $14.1 million, $10.2 million and $9.5 million respectively, of revenues from our operations in Europe, which represented 42%, 32% and 32% respectively, of our total revenues. We are not certain that we will be able to maintain those levels in light of the ongoing economic uncertainty in Europe. The uncertainty in the Euro Zone may result in additional deterioration of our customers’ and end-users’ credit quality or access to cash, which could lower the realization rate on our accounts receivable.  Economic difficulties in Europe could lead to the lower demand for such products or services, increase our exposure to losses from bad debts or result in our customers or end-users ceasing operations, any of which could materially adversely affect our business, financial condition and results from operations.
  
The market for data capture systems, automatic form processing systems and mobile data captures is highly competitive.
 
The market for data capture systems in general, and for automatic form processing systems in particular, is characterized by intense competition, significant price erosion over the life of the product, and rapidly changing business conditions, customer requirements, and technology.  Our products compete with those developed and marketed by numerous well-established companies, including Kofax, Ephesoft, Esker, Itesoft, Nuance, Mitek Systems, Banctec, EMC (Captiva Software), IBM Datacap, Delux (Wassau) as well as with manual data entry solutions.  Many of our competitors have longer operating histories and greater financial resources than we do.  Furthermore, certain of these competitors are industry leaders with the financial resources necessary to enable them to withstand substantial price competition or downturns in the market for computer software.  The fact that our resources are more limited places us at a significant disadvantage.  This risk is particularly acute during difficult economic times. Further, the emerging market for mobile data capture systems in which we are competing, even at this stage of its development, is characterized by intense competition and rapidly changing business conditions, customer requirements, and technology.  The emerging nature of the market may impose financial risks that competitors with greater financial resources are more equipped to bear.
 

4

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

·
our continuing need to invest in research and development;
 
·
our capital equipment requirements; and
 
·
marketing requirements.

A slowdown could have a material adverse effect on our business, prospects, financial condition and results of operations.
 
The impact of the global economy may have a material adverse effect on our business, results of operations and financial condition.  
 
We sell our products and services in various countries around the world, with a significant concentration in Europe and North America. Consequently, our sales and profitability are dependent on economic conditions globally and in each market we operate in. Changes in consumer and corporate confidence, declines in income and asset values and other adverse factors related to the global economy could result in our customers and the end-users of our products, services and solutions, postponing or reducing spending on our products, services and solutions.  Should those conditions occur, they might adversely affect our business.
 
Changes in the global economy could lead to a reduced availability of credit which could have a negative impact on the financial condition, and in particular on the purchasing ability, of some of our customers and may also result in requests for extended payment terms, credit losses, insolvencies, limited ability to respond to demand or diminished sales channels available to us. Changes in the global economy combined with a tightening in credit markets could also cause financial difficulties for our suppliers and collaborative partners which may result in their failure to perform as planned and, consequently, in delays in the delivery of our products, services and solutions.

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

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

Our industry is marked by rapid technological changes and frequent new or updated product introductions, and if we do not respond to such rapid technological changes, new product introductions and enhancements and evolving industry standards, our products and services could become obsolete.
 
As processing speeds increase, memory capacities expand, software is upgraded, and mobile and onsite infrastructure improve, we need to ensure that our products, capitalize on these developments, and remain compatible with industry standards.  Our ability to compete will depend upon our ability to offer state-of-the-art products generally, and cloud solutions in particular in a timely and cost-effective manner.  Our product decisions must anticipate the changing demand for products. In 2016 we announced the release of our AP for SAP product and in 2017 we announced the release of our AP Cloud product.  We can provide no assurance that these products will be successful or that our efforts to expand our customer base will succeed.  If we are unable to develop, modify and enhance our existing technology to respond to such changing standards and customer demands, our business could be adversely affected.  In addition, the development of new technologies, new product introductions or enhancements by our competitors could adversely affect our sales.
5

We have a history of quarterly fluctuations in our results of operations and expect these fluctuations to continue, this may cause our stock price to decline.
 
We have experienced and expect to experience in the future significant fluctuations in our quarterly results of operations.
 
Our lengthy sales cycle increases our exposure to customer cancellations or delays in orders, which may result in volatile quarterly revenues.  Given the high average selling price of, and the cost and time required to implement our solutions, a customer’s decision to license our products typically involves a significant commitment of resources and is influenced by the customer’s budget cycles and internal approval procedures for information technology purchases.  In addition, selling our solutions requires us to educate potential customers about our solutions’ uses and benefits.  As a result, our solutions have a long sales cycle, which can take 9 to 15 months or more.  Consequently, we have difficulty predicting the quarter in which sales to expected customers may occur and actual sales may not necessarily be in the same calendar quarter or even year in which we expended resources in connection with marketing to the client.  The sale of our solutions is also subject to delays from the lengthy budgeting, approval and competitive evaluation processes of our customers, which typically accompany significant capital expenditures.
 
Other factors that may contribute to fluctuations in our quarterly results of operations include:
 
·
the size and timing of orders;
 
·
customer deferral of orders in anticipation of new products, product upgrades or price enhancements;
 
·
customer deferral of orders due to general economic conditions or a customer’s specific cash flow shortages;
 
·
the high level of competition that we encounter; and
 
·
the timing of our product introductions, upgrades or enhancements or those of our competitors or of providers of complementary products.
 
Fluctuations in our quarterly results could discourage investors and cause the market price of our ordinary shares to decline.

Loss of large customers could adversely affect us.
 
In 2017 one customer accounted for more than 10% of our revenues.  Loss of this customer would have a material adverse effect on the Company. We are actively recruiting additional large customers and partners for our products.  If we become dependent on one or more large customers our, business, prospects, financial conditions and results of operations could be adversely affected by the loss of such customers.
 
Our success depends on our proprietary software technology.
 
Our success depends upon our proprietary software technology.  Although we believe that our technology has been developed independently and does not infringe on the proprietary rights of others, we cannot assure you that the technology does not and will not infringe or that third parties will not assert infringement claims against us in the future.  In the case of infringement, we would, under certain circumstances, be required to modify our products or obtain a license.  We cannot assure you that we would be able to do so either in a timely manner under acceptable terms and conditions or at all, or that we will have the financial or other resources necessary to defend successfully a patent infringement or other proprietary rights infringement action.  Further, even if we were not infringing, intellectual property litigation is expensive and time consuming for management.  Any of the foregoing could have a material adverse effect on us.  Furthermore, if our products or technologies are deemed to infringe upon the rights of others, or if infringement claims are asserted against third parties whom we are obligated to indemnify, we could become liable for damages, which could have a material adverse effect on us.
 
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Our products contain third party intellectual property which may expose us to additional risks.
 
We license components of our software systems and technology from third parties in reliance on such parties’ representations as to ownership of the licensed intellectual property.  If our licensors are found not to own or have rights to sublicense such rights to us and we are unable to replace the licensed technology with a comparable substitute, there could be a material adverse effect on our business prospects and financial results.  Even if we were to replace licensed technology with available alternatives, it could take time to identify the best replacement and integrate it into our software.  The delay and uncertainty could negatively impact our financial results. Furthermore, we could be sued for, or found liable for infringement arising from our use of such licensed technology and indemnity obligations, if any, on the part of the providers of such licensed technology might not be sufficient to cover liabilities we incur.
 
We use certain “open source” software tools that may be subject to intellectual property infringement claims, the assertion of which could impair our product development plans, interfere with our ability to support our clients or require us to pay licensing fees.

Certain of our products contain open source code, and we may use more open source code in the future. Open source code is code that is covered by a license agreement that permits the user to liberally copy, modify and distribute the software without cost, provided that users and modifiers abide by certain licensing requirements. The original developers of the open source code provide no warranties on such code. As a result of our use of open source software, we could be subject to suits by parties claiming ownership of what we believe to be open source code, and we may incur expenses in defending claims that we did not abide by the open source code license. If we are not successful in defending against such claims, we may be subject to monetary damages or be required to remove the open source code from our products. Such events could disrupt our operations and the sales of our products, which would negatively impact our revenues and cash flow. We monitor our use of such open source code to avoid subjecting our products to conditions that we do not intend. The use of such open source code, however, may ultimately subject some of our products to unintended conditions so that we are required to take remedial action that may divert resources away from our development efforts.
 
Our inability to protect our intellectual property could adversely affect our competitive position and, consequently, our business and operations.
 
Our success depends on our ability to protect our intellectual property. We rely upon trade secret protection, employee and third-party nondisclosure agreements and other intellectual property protection methods to protect our confidential and proprietary information.  Despite these efforts, we cannot be certain that others will not otherwise gain access to our trade secrets or copy and use information that we regard as proprietary without our authorization.  In the past, we have not obtained any patents.  As a result of a change in our intellectual property protection policy, we have begun to file patent applications with regard to relevant technology.  We have applications at this point for patents in the U.S. with regard to mobile capture, full page images and contextual classification.  We may file additional patent applications in the future.  We cannot assure you that:
 
·
any of our existing patent applications will be accepted;
 
·
we will be successful in generating technology in the future which will be susceptible to applications for patents;
 
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·
any patents which we may obtain will be broad enough to protect our technology, will provide us with competitive advantages or will escape challenge or invalidation by third parties;
 
·
the patents of others will not have an adverse effect on our ability to do business; or
 
·
others will not independently develop similar products, duplicate our products or, if patents are issued to us, design around these patents.
 
Further, the laws of foreign jurisdictions where we sell and seek to sell our products may afford little or no protection of our intellectual property rights.  We cannot assure you that the protection provided to our intellectual property rights by the laws and courts of foreign nations will be substantially similar to the remedies available under U.S. law.
 
Our products may contain defects, damaging our reputation, causing a loss of customers, requiring us to allocate significant time and financial resources to correct, and potentially resulting in liability claims.
 
Our products may contain undetected errors or defects, particularly when first introduced or when new versions or enhancements are released.  In the past, we have discovered minor software bugs in certain products after they were released to the market.  Such errors or defects could require us to divert financial and other resources to correct the problems.
 
In addition, our products are combined with complex products developed by other vendors.  As a result, should problems occur, it may be difficult to identify the source or sources of the problems.  Defects and errors, or end-user perception of defects and errors, found in current versions, new versions or enhancements of these products after commencement of commercial shipments may result in:
 
·
damage to brand reputation;
 
·
loss of customers;
 
·
delay in market acceptance of current and future products;
 
·
diversion of development and engineering resources to correct defects or errors; and
 
·
warranty or product liability claims.
 
Although we have product liability insurance, defects, errors or successful product liability claims against us could have a material adverse effect on our business, prospects and financial results.
 
We engage in international sales, which expose us to a number of foreign political and economic risks.
 
We have significant operations in foreign countries, including research and development, sales and customer support operations.  Currently, in addition to our operations in Israel, we have significant operations in the U.S., Germany, the United Kingdom, Australia and Singapore.  Our international sales and other operations are subject to risks inherent in doing business in foreign countries, including, but not limited to:
 
·
changing domestic and foreign customs and tariffs or other trade barriers;
 
·
potential staffing difficulties and labor disputes;
 
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·
managing and obtaining support and distribution for local operations;
 
·
difficulty in enforcing agreements through the different legal systems of the countries in which we operate;
 
·
customers in the various countries in which we operate may have long payment cycles;
 
·
seasonal reductions in business activity in certain parts of the world;
 
·
restrictions on our ability to repatriate earnings from countries in which we operate;
 
·
credit risk and financial conditions of local customers and distributors;
 
·
potential difficulties in protecting intellectual property;
 
·
potential imposition of restrictions on investments;
 
·
potentially adverse tax consequences;
 
·
foreign currency exchange restrictions and fluctuations;
 
·
natural disasters; and
 
·
local political and social conditions, including the possibility of hyperinflationary conditions, terrorism and political instability in certain countries.
 
In 2015, 2016, and 2017 approximately 42%, 32%, and 32%, respectively, of our revenues were generated from sales made in the European Union. If this trend continues, we may be more particularly exposed to the risk of losing business and revenues as a result of trade restrictions imposed by the European Union as well as ramifications of the debt crisis in certain European countries.  See “Volatility in the European Union and questions about its future may negatively affect our European operations.”.
 
We may not be successful in developing and implementing policies and strategies to address the foregoing risks in a timely and effective manner at each location where we do business.  Consequently, the occurrence of one or more of the foregoing factors could have a material adverse effect on our international operations or upon our financial condition and results of operations.
 
We may be adversely impacted by fluctuations in currency exchange rates.
 
We maintain operations and generate revenues in a number of countries.  The results of operations and the financial position of our local operations are generally reported in the relevant local currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to currency translation risk.  In addition, we are exposed to currency transaction risk because some of our expenses are incurred in a different currency from the currency in which our revenues are received and from which our revenues and expenses are reported.  Our most significant currency exposures are to the Euro, New Israeli Shekel, British Pound, Singapore dollar, Australian dollar, Japanese Yen and Brazilian Real. In periods when the U.S. dollar strengthens against these currencies our revenue may be adversely impacted. In periods when the U.S. dollar weakens against these currencies, our expenses may be adversely affected. Brexit-related has led to currency volatility, particularly with respect to the British Pound and the Euro and could have a negative impact on our results.  Although from time to time we may purchase forward exchange contracts to reduce currency transaction risk, these purchases, if made, will not eliminate translation risk or all currency risk.
 
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 Political, economic and military conditions in Israel may adversely affect our ability to develop, manufacture and market our products.
 
Because our principal offices are located in Israel, political, economic and military conditions in Israel directly affect our operations.  Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors.  A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel.  There has been a marked increase in such hostility and a significant deterioration of Israel’s relationship with the Palestinian Authority since October 2000 and the peace process is currently at a standstill. Since 2011 there has been increasing instability in neighboring Arab countries including Syria, Egypt, Jordan, Tunisia, Libya, Bahrain, and Yemen culminating in the replacement of certain leaders in some of those countries and the control of territories by extremist Islamic groups.  In addition, there is a high level of tension relating to Iran’s nuclear capabilities, Iran’s threats to attack Israel, Iran’s military presence in Syria, and the potential response of Israel and the international community to Iran’s gaining nuclear capabilities. Civil war in Syria has intensified and has become increasingly complex over recent months resulting in volatile developments in the region. Stray rounds from the conflict have landed in Israel from time to time and there have been cross-border skirmishes which increase the risk of escalation.
 
In December 2017 the United States announced a plan to move the United States embassy in Israel from Tel Aviv to Jerusalem drawing criticism from Arab and European leaders and spurring protests in Israel.  Jerusalem is one of the world’s most fiercely contested areas as it is claimed by both Palestinians and Israelis.  The United States moving its embassy may have an impact in efforts to create peace between Israel and Palestinians.

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

Our principal offices are located in Ramat Gan, Israel. A number of groups in several countries have called for consumer boycotts of Israeli products. While many of those boycotts are focused on products originating in the West Bank and Ramat Gan is not in that area, other boycotts do not differentiate between different areas under Israeli control.  Various political events from time to time have led to the revival or intensification of boycott efforts. Existing or future boycott efforts might adversely affect our sales efforts, and could have a material adverse effect on our business, prospects, financial condition and results of operations.  Israel’s ongoing military conflict with Hamas and the resulting invasion of parts of the Gaza Strip was met with new international efforts to boycott Israeli products and services. While it is unclear as whether such efforts will have a material impact on Israeli business, it remains possible that they could discourage current and potential customers from purchasing our products and thereby have a negative impact on our business, prospects and financial condition.
 
Our operations may be disrupted by the obligation of key personnel to perform military service.
 
Generally, all male adult citizens and permanent residents of Israel under the age of 42 (or older, for citizens who hold certain positions in the Israeli armed forces reserves) are obligated, unless exempt, to perform military reserve duty annually and some of our employees in Israel are so obligated.  Moreover, in the event of armed conflict in which Israel is involved or the threat of such conflict, these employees might be called for active military duty for an unlimited period of time. Increased military activity could also result in a reduction of prospective qualified employees available to work for us to expand our business or replace employees on active military duty.
 
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Our operations could be disrupted by the absence for a significant period of key employees as a result of military service.  Any disruption in our operations could adversely affect our ability to develop and market products.
 
We may not be able to expand our personnel or marketing efforts quickly enough to support our growth.
 
Because of our small size and our business strategy to increase our sales we anticipate an increased demand on all of our resources.  To the extent that our efforts to generate new business and increase demand for our products and services are successful, we will need to accurately estimate our need for personnel or marketing and customer support, or we may not be able to support our future growth.  We cannot assure you that we will be able to provide such services on adequate terms and conditions or at all.  Furthermore, in order to remain competitive and keep our products up to date, we need to continue to attract and retain a qualified team of employees.  If we fail to obtain the human resources our business requires, there could be a material adverse effect on our business, prospects, financial conditions and results of operations.

Additional acquisitions may lead to increased expenditures and integration costs, and could strain management, financial, and operational resources.
 
In the past, we acquired related complementary businesses in an effort to expand capacity, enter new markets and diversify our sources of revenue.  Those acquisitions strained our management, financial and operational resources.  
 
Any future acquisition may also generate such strain. In the event we engage in additional acquisitions, they may also result in potentially dilutive issuances of equity securities, incurrence of additional debt, the assumption of known and unknown liabilities, the amortization of expenses related to intangible assets and the impairment of goodwill, all of which could harm our business, financial condition and operating results.
 
We currently have subsidiaries in foreign countries and additional acquisitions in foreign countries, should we choose to pursue them, may pose additional challenges. We could experience inefficiencies in conducting our business as we integrate new operations and manage geographically dispersed operations.  Also, the acquired businesses may not yield the income and levels of activity we expected them to yield, which may result in losses.
 
Additionally, we may not succeed in retaining or hiring qualified management, sales, customer support, and technical personnel to integrate acquired operations, manage future growth effectively, and accomplish our overall objectives.  Competition for qualified personnel is intense.  If we expand too fast, or fail to integrate our recently acquired businesses or other new businesses, or lose key personnel from our recently acquired businesses or other businesses, there could be a material adverse effect on our business, prospects, financial condition and results of operations.
 
Government grants similar to grants we have received for research and development expenditures in the past may not be available to us in the future.  Furthermore, our receipt of such grants limits our ability to develop products and transfer technologies outside of Israel and imposes certain liabilities on us.
 
We have received grants on a number of occasions from the National Technological Innovation Authority (the "NTIA") of the government of Israel NTIA under the Law for the Encouragement of Research, Development and Technological Development in Industry, 1984. (Until the NTIA was created in an amendment to that law in 2015, such grants were made and administered by the Office of the Chief Scientist of the Ministry of the Economy.  We will refer use "NTIA" with regard to all such grants, even if they pre-date the amendment.)  Such grants were given to finance a portion of our research and development expenditures in Israel.  Such grants generally bear royalties on sales of products utilizing technologies developed using such grants or arising out of such technologies up to a maximum of 100% of the amount of the grant, linked to the dollar, plus interest at the LIBOR rate. The grants received during 2012 through 2017 totaled $0.7 million.  During 2016 and 2017 we received grants from the NTIA totaling $0.24 and $0.02 million,  respectively. The Israeli government may decide not to continue the program in the future at its current level or to terminate it altogether or the NTIA may not accede to future grant requests from us.  In addition, if we fail to comply with any of the conditions imposed by the NTIA, including the payment of royalties with respect to grants received, we may be required to refund any payments previously received from the NTIA, together with interest and penalties.  The terms of the NTIA grants limit our ability to transfer technologies outside of Israel without the prior approval of the NTIA, if such technologies were developed using NTIA grants or arose out of such technologies.  The NTIA has the right, but not the obligation, to allow transfer of technology outside of Israel. Even if we receive approval for the transfer of technology outside of Israel, such approval of the NTIA may not be obtained on terms that are acceptable to us, or at all.
 
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If we fail to satisfy the conditions specified under Israeli law, we may be denied benefits to which we are currently entitled or may be entitled to in the future.
 
Our activities in Israel have been granted “Approved Enterprise” (established plan) and "Benefited Enterprise" status under "The Law for the Encouragement of Capital Investments, 1959", or the Investment Law, as amended.  The benefits available to an Approved Enterprise program or a Benefited Enterprise are normally in the form of favorable tax rates and are dependent upon the continuing fulfillment of ongoing conditions stipulated in the certificate of approval or under applicable law.  If we fail to comply with these conditions, in whole or in part, benefits from tax exemptions or reduced tax rates would likely be denied us in the future and we could be required to refund tax benefits already received. There can be no assurance that such benefits will be continued in the future at their current levels or at any level.

For a description of the investment law and its recent material amendments, see “Additional Information-Law for the Encouragement of Capital Investments, 1959.”

The amendment of Israeli tax laws or tax laws of other countries may adversely affect our profitability.

Our tax expenses and the resulting effective tax rate reflected in our financial statements may increase over time as a result of changes in corporate income tax rates, other changes in the tax laws of the countries in which we operate or changes in the mix of countries where we generate profit. These changes could have a material adverse effect on our business, competitiveness and financial results.

The application and/or amendment of Israeli laws or laws of other countries may adversely affect our ability to enforce judgments or other rights.

Because our principal offices are located in Israel, we are subject to Israeli law.  Many of our contracts with third parties are subject to the laws of other jurisdictions.  We cannot assure you that any judgments granted in the U.S. or any jurisdiction other than Israel would be capable of enforcement or execution in Israel.  Nor can we assure you that any of our contracts pursuant to the laws of any foreign country are enforceable by us.  The inability to enforce or execute judgments or other rights and/or the possibility of the laws of various jurisdictions being amended from time to time may have a material adverse effect on our business, prospects, and financial condition.

It may be difficult to enforce a U.S. judgment against us, our officers and directors, assert U.S. securities law claims in Israel or serve process on substantially all of our officers and directors.
 
We are incorporated in Israel. Some of our executive officers and directors are nonresidents of the U.S., and a majority of our assets and the assets of these persons are located outside the U.S. Therefore, it may be difficult to enforce a judgment obtained in the U.S. against us or any such persons or to effect service of process upon these persons in the U.S. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws if they conclude Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court would agree to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact 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 addressing these matters. Additionally, there is doubt as to the enforceability of civil liabilities under the Securities Act and the Exchange Act in original actions instituted in Israel.

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Under current Israeli law, we may not be able to enforce covenants not to compete, and, therefore, we may be unable to prevent competitors from benefiting from the expertise of some of our former employees.

In general, we have entered into non-competition agreements with our employees in Israel. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors for a limited period. Under current law, it is unlikely that we will be unable to enforce these agreements, and it may be difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for us.

Risks Related to Our Ordinary Shares
 
Our Ordinary Shares have been subject to frequent significant price fluctuations.
 
Trading in shares of companies listed on the NASDAQ in general and trading in shares of technology companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to operating performance. These broad market and industry fluctuations may depress our share price, regardless of our actual operating results.
 
In addition, the trading price of our ordinary shares has been highly volatile and could continue to be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including, but not limited to:
 
·
actual or anticipated period-to-period fluctuations in financial results;
 
·
litigation or the threat of litigation;
 
·
failure to achieve, or changes in, financial estimates by securities analysts, if any;
 
·
announcements regarding new or existing products or services or technological innovations by us or our competitors;
 
·
conditions or trends in the software industry;
 
·
additions or departures of key personnel or directors;
 
·
regulatory developments in the U.S. and other countries in which we operate;
 
·
developments or disputes concerning our intellectual property rights;
 
·
general market conditions;
 
·
overall fluctuations in the U.S. and world equity markets; and
 
·
economic and other external factors or disasters or crises.
 
13

 
If we fail to maintain NASDAQ minimum price requirements or other applicable continued listing requirements, our ordinary shares could be delisted.
 
According to NASDAQ listing standards, if the stock price of a listed company falls below $1.00 a share for a period of 30 consecutive business days, such company’s stock may be subject to delisting unless such failure is cured within 180 days from the date on which NASDAQ notifies the listed company of such failure. There were periods in 2009, 2010 and 2017 during which our stock price fell below $1.00 per share.
 
If we fail to maintain the minimum price for our ordinary shares required by NASDAQ or comply with other continued listing requirements of NASDAQ, our ordinary shares could be involuntarily delisted.
 
A large number of our ordinary shares could be sold in the market in the near future, which would cause downward pressure on the market price for our ordinary shares. 
 
As of March 31, 2018, we had approximately 18,251,722 ordinary shares outstanding, of which 14,127,114 were held by shareholders who were not our directors, executive officers and more than 10% shareholders.  A substantial portion of our shares is currently freely trading without restriction under the Securities Act of 1933, as amended, or the Securities Act, having been registered for resale or held by their holders for over one year and are eligible for sale under Rule 144.  As of March 31, 2018, there were outstanding options to purchase an aggregate of approximately 2,612,265 ordinary shares. In addition, there were 407,725 outstanding RSUs.
 
In May 2018, we entered into the Term Sheet.  In connection with the Credit Facility we will issue 10-year warrants to purchase the number of our ordinary shares equal to 40% of the total Credit Facility divided by the market price.  The warrants will have an exercise price equal to the market price of the ordinary shares plus 15%.

In December 2016, we borrowed $5 million in exchange for the Convertible Note, which bears interest at the prime rate plus 2.5% (if paid in cash) or 3% (if the interest capitalized) per annum and matures (if not converted prior) in December 2020.  As of March 31, 2018, the principal amount of the Convertible Note is convertible into 3,094,998 of our ordinary shares.
 
Upon withdrawal from the Credit Facility, the Convertible Note, plus accrued interest, will be exchanged for secured notes that will be junior to the Senior Loan with an interest rate of Prime plus 4.0%.

The Company has not yet determined if it will draw on the Credit Facility.  The issuance of the warrants and the changes to the Convertible Note are conditioned upon the drawing down of the Credit Facility.
 
The issuance of and resale of our ordinary shares that may be issued to HCP FVE on conversion of the Convertible Note or exercise of the Warrants could have a negative impact on the price of our ordinary shares.
 
Future issuances of our ordinary shares could adversely affect the trading price of our ordinary shares and could result in substantial dilution to shareholders.
 
In May 2018, we entered into the Term Sheet.  In connection with the Credit Facility we will issue 10-year warrants to purchase the number of our ordinary shares equal to 40% of the total Credit Facility divided by the market price.  The warrants will have an exercise price equal to the market price of the ordinary shares plus 15%.

In December 2016, we borrowed $5 million in exchange for the Convertible Note, which bears interest at the prime rate plus 2.5% (if paid in cash) or 3% (if the interest capitalized) per annum and matures (if not converted prior) in December 2020.  As of March 31, 2018, the principal amount of the Convertible Note is convertible into 3,094,998 of our ordinary shares.  Upon withdrawal from the Credit Facility, the Convertible Note, plus accrued interest, will be exchanged for secured notes that will be junior to the Senior Loan with an interest rate of Prime plus 4.0%.

The Company has not yet determined if it will draw on the Credit Facility.  The issuance of the warrants and the changes to the Convertible Note are conditioned upon the drawing down of the Credit Facility.
 
In addition, we may need to issue substantial amounts of our ordinary shares in financings or acquisitions in the future.  To the extent that the market price of our ordinary shares declines, we will need to issue an increasing number of ordinary shares per dollar of equity investment.  In order to obtain future financing if required, it is likely that we will issue additional ordinary shares or financial instruments that are exchangeable for or convertible into ordinary shares.  Capital raising activities, if available, and dilution associated with such activities could cause our share price to decline.
 
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Also, in order to compensate our directors, provide incentives to our employees and induce prospective employees and consultants to work for us, from time to time we offer and issue options to purchase ordinary shares and/or rights exchangeable for or convertible into ordinary shares.  The company has also recently adopted an incentive plan by which certain members of management may elect to receive all or part of their annual bonuses earned upon meeting preset professional targets in the form of restricted stock units ("RSUs") rather than cash. Future issuances of shares or RSUs could result in substantial dilution to shareholders.
 
Our ordinary shares may become subject to the SEC’s penny stock rules.
 
Generally, transactions in securities that are traded in the U.S. at a market price per share of less than $5.00, may be subject to the “penny stock” rules promulgated under the Exchange Act.  Under these rules, broker-dealers who recommend such securities to persons other than institutional investors:
 
·
must make a special written suitability determination for the purchaser;
 
·
receive the purchaser’s written agreement to a transaction prior to sale;
 
·
provide the purchaser with risk disclosure documents which identify risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and
 
·
obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.
 
As a result of these requirements, if our ordinary shares become subject to the “penny stock” rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our ordinary shares in the U.S. may be significantly limited.  Some broker-dealers have adopted a policy under which they refuse to allow clients to hold penny stocks in their brokerage accounts, or refuse to open new accounts holding penny stocks. Accordingly, the market price of our ordinary shares may be depressed or limited, and investors may find it more difficult to sell the shares.
 
We have not paid dividends in the past.
 
We have never declared or paid any cash dividends on our ordinary shares.  We have retained any future earnings to finance operations and to expand our business and, therefore, may not pay any cash dividends on ordinary shares in the future.
 
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.

We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our articles of association and by the Israeli Companies Law, 5759-1999, or the Companies Law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, pursuant to the Companies Law each shareholder of an Israeli company has to act in good faith in exercising its rights and fulfilling its obligations toward the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders and class meetings, on amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers, and transactions requiring shareholders’ approval under the Companies Law. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the company, or has other powers toward the company has a duty of fairness toward the company. However, the Companies Law does not define the substance of this duty of fairness, which is determined primarily in case law.
 
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 As a foreign private issuer whose shares are listed on NASDAQ, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.
 
As a foreign private issuer whose shares are listed on NASDAQ, we are permitted to follow certain home country corporate governance practices instead of certain requirements of The NASDAQ Listing Rules.  As a foreign private issuer listed on NASDAQ, we may also follow home country practice with regard to, among other things, composition of the Board of Directors and quorum at shareholders' meetings.  A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer's home country certifying that the issuer's practices are not prohibited by the home country's laws.  In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement.  Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ's corporate governance rules.

Provisions of Israeli law could delay, prevent or make difficult a change of control and therefore depress the price of our shares.

The Companies Law generally provides that a merger be approved by the Board of Directors and by the shareholders of a participating company by the vote of a majority of the shares of each class present and voting on the proposed merger. The Companies Law has specific provisions for determining the majority of the shareholder vote. Upon the request of any creditor of a constituent in the proposed merger, a court may delay or prevent the merger if it concludes that there is a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy its obligations to creditors. In general, a merger may not be completed until the passage of certain statutory time periods. In addition, another procedure for completing an acquisition or merger requires court approval of the terms of the transaction.  In certain circumstances, an acquisition of shares in a public company must be made by means of a tender offer that complies with certain requirements of the Companies Law that differ from those that apply to U.S. corporations. Furthermore, Israeli tax considerations may make potential acquisitions unappealing to us or to some of our shareholders.  Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an Israeli company and a foreign company, less favorably than U.S. tax laws. These provisions of Israeli corporate and tax law may have the effect of delaying, preventing or making more difficult an acquisition of or merger with us, which, if public trading in our ordinary shares resumes, could depress our share price.

We are a foreign private issuer and you will receive less information about us than you would from a domestic U.S. corporation.

As a “foreign private issuer”, we are exempt from rules under the Exchange Act that impose certain disclosure and procedural requirements in connection with proxy solicitations under Section 14 of the Exchange Act. Our directors, executive officers and principal shareholders also are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules thereunder with respect to their purchases and sales of our shares. In addition, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. As a result, you may not be able to obtain the same information relating to us as you would for a domestic U.S. corporation.

Due to an exemption available to us as a foreign private issuer, our interim financial information is not audited or reviewed.

As a “foreign private issuer”, we are exempt from rules under the Exchange Act that require quarterly financial statements since our home jurisdiction does not require such disclosure.  While we provide interim financial information through Forms 6-K in accordance with NASDAQ requirements, such financial information is not audited or subject to the heightened level of review required of domestic issuers. As a result, you may not be able to obtain the same information relating to us as you would for a domestic U.S. corporation.

Our compliance and reporting costs will increase at such time that we are no longer a foreign private issuer.

We are required to annually determine whether we continue to qualify as foreign private issuer. Although our most recent annual determination applicable to the period covered by this report concluded  that we were a foreign private issuer, we believe that prospectively, our status may change. In particular, due to changes in our board of directors and our latest assessment of the percentage of our securities held by U.S. persons, we believe that at the time of our next determination of status, we may not qualify as a foreign private issuer.  If that occurs, we would be subject to the more detailed filing requirements of the United States Securities Exchange Act of 1934 as they apply to domestic U.S. companies.  As a result, we would be required to file current reports on form 8-K, quarterly reports on Form 10-Q, and annual reports on Form 10-K, and be subject to additional accounting and reporting requirements.  We anticipate that the increased compliance will significantly increase our legal and accounting costs and could negatively affect our business, prospects, and financial condition.

 
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Although our internal control over financial reporting was considered effective as of December 31, 2017, there is no assurance that our internal control over financial reporting will continue to be effective in the future, which could result in our financial statements being unreliable, government investigation or loss of investor confidence in our financial reports.
 
                If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting. We may also identify material weaknesses or significant deficiencies in our internal control over financial reporting. In addition, our internal control over financial reporting has not been audited by our independent registered public accounting firm. In the future, if we are unable to assert that our internal controls are effective; our investors could lose confidence in the accuracy and completeness of our financial reports, which in turn could cause our stock price to decline. Failure to maintain effective internal control over financial reporting could also result in investigation or sanctions by regulatory authorities.

ITEM 4.          INFORMATION ABOUT THE COMPANY

HISTORY AND DEVELOPMENT
 
Establishment, Legal Name, Office and Trading Markets
 
We were incorporated in March of 1991, are domiciled in Israel and exist as a company with limited share liability subject to Israeli law.  Our legal name is Top Image Systems Ltd. and our registered and principal executive offices are located in Israel at 2 Ben Gurion St, Ramat Gan, 5257334, and our telephone number is + 972-3-767-9100.  Our website is http://www.topimagesystems.com (the information contained in our website is not a part of this annual report and no portion of such information is incorporated herein).
 
Our ordinary shares began trading on the NASDAQ in November 1996.  Our ordinary shares were previously also traded on the Tel Aviv Stock Exchange (“TASE”).  Effective October 31, 2014, we voluntarily delisted our ordinary shares from the TASE.
 
Recent Developments
 
Credit Facility with Hale Capital Partners
 
In May 2018, in order to provide the Company with additional liquidity if needed, we entered into the Term Sheet with Hale Capital Partners which provides for a new senior secured term loan of up to $3 million as part of the secured Credit Facility that would include the existing Convertible Note held by an affiliate of Hale in an amount of $5.6 million.  The Senior Loan would include monthly repayments of $50,000 in 2019 and $100,000 from January 2020 through maturity (such amount to increase on the happening of certain events), an interest rate of Prime plus 5% payable monthly and a 36-month term.  In connection with the Credit Facility we will issue 10-year warrants to purchase the number of our ordinary shares equal to 40% of the total Credit Facility divided by the market price.  The warrants will have an exercise price equal to the market price of the ordinary shares plus 15%. The Credit Facility will be secured by the Company’s assets and will be guaranteed by each of our subsidiaries, subject to certain limitations.   The Senior Loan would be required to the prepaid on certain events and would be prepayable at the Company’s option at a premium beginning one year following closing.

Upon withdrawal from the Credit Facility, the Convertible Note, plus accrued interest, will be exchanged for secured notes that will be junior to the Senior Loan with an interest rate of Prime plus 4.0% and the convertibility to convertible preferred shares will be cancelled.

The Company has not yet determined if it will draw on the Credit Facility.  The issuance of the warrants and the changes to the Convertible Note are conditioned upon the drawing down of the Credit Facility.  If the Company elects not to withdraw funds out of the Credit Facility, it will be obligated to pay to Hale Capital Partners, LP a break up fee of equal to three percent (3%) of the Credit Facility.
 
Appointment of Don Dixon as Chairman of the Board
 
Effective January 1, 2017 Mr. Don Dixon has assumed the position of Chairman of the Company’s Board of Directors; Mr. Izhak Nakar, Company Founder, stepped down from his position as Active Chairman as of the same day. Mr. Nakar remains a member of the Company’s Board of Directors and is still a significant shareholder of the Company. Until June 30, 2017 Mr. Nakar continued to provide some of the services to the Company in his role as Active Chairman.
 
Mr. Dixon is a Managing Director of Trident Capital, a major shareholder in Top Image Systems, and has extensive experience in transforming and growing shareholder value for the companies under his management. He brings his expertise, experience and global network of business contacts to the Company. In the past, Mr. Dixon has led companies which have become industry leaders, including Qualys, Merchant e-Solutions, Bytemobile, CSG Systems, and eGistics, Inc., which was acquired by the Company in 2014. Over the course of his career, Mr. Dixon has been involved in successful exits from 36 companies. He has been a member of various boards of directors, including Affiliated Computer Systems which was later sold to Xerox.  Mr. Dixon is also Co-Chairman of the Advisory Committee of the Princeton University School of Engineering and Applied Sciences and serves on the Advisory Board of the Harvard Kennedy School Center for Public Leadership.
 
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Appointment of Brendan Reidy to Chief Executive Officer
 
Effective, August 31, 2016 Brendan Reidy assumed the position of Chief Executive Officer of the Company. Mr. Reidy is a seasoned executive with a proven track record of driving rapid growth and increased shareholders’ value within the software as a service (“SaaS”) industry. Mr. Reidy most recently served as President, Chief Operating Officer and Chief Technology Officer of XRS Corporation.  Under Mr. Reidy’s leadership, XRS achieved a nearly twelvefold increase in valuation leading to the sale of XRS at a premium. In parallel, Mr. Reidy served as a member of the board of directors of eGistics for ten years prior to our acquisition of the company. Previously Mr. Reidy was Chairman, President and CEO of Clarus Systems, Inc. In addition, Mr. Reidy also served as a Venture Partner at Trident Capital, and at various times served on the boards of four Trident portfolio companies and held two full-time positions with portfolio companies. He earned an M.B.A. from The Wharton School, University of Pennsylvania, and a B.A. from Stanford University.
 
Consolidation of  Operations
 
During fiscal 2017, TIS announced and implemented additional measures to achieve cost reductions through consolidation and restructuring:
 
Consolidation of sales and marketing functions for the Americas into our US headquarters in Plano, Texas, under the leadership of John McCaffrey, Vice President and General Manager of TIS Americas.  John brings to TIS a wealth of experience and proven track record in building high performance organizations, delivering sustained top-line revenue growth and shareholder value.  He has consistently delivered results in senior leadership roles including as Advisory Consulting / Professional Services, Enterprise Sales, Marketing, Major Account Management and Strategic Partnerships.  John was led the professional service team at Virtustream prior to its $1.2B acquisition by EMC in 2015.  In addition, John served on the leadership team of Clarus Systems (sold to OPNET, now Riverbed) and Adjoined Consulting (sold to Kanbay, now Capgemini).  Mr. McCaffrey started his career in the telecom industry at US WEST (now CenturyLink).  He holds an M.S. from the MIT Sloan School of Management, an M.A. from Boston University and a B.S. in Engineering from Princeton University.  He also serves as a U.S. Air Force veteran, having attained the rank of Captain.
 
Integration of the global Engineering teams under Arvind Sharma, Senior Vice President of Engineering. Arvind brings over 25 years of experience in the software industry, developing products in various fields such as mobile technologies, cloud solutions, and cybersecurity. He has led cross-functional teams to success by implementing new processes, innovative automation techniques and Agile/SCRUM methodologies. With in-depth knowledge of cyber security, Arvind’s expertise includes compliance, regulations, data breaches and protection strategies. Arvind’s past experience includes working at companies such as AT&T Bell Labs, Motorola and Yahoo!, as well as multiple startups in the San Francisco Bay Area. More recently, he led the engineering efforts for a cybersecurity firm and has managed global teams in the US, China, Canada, Mexico, India and Spain. Arvind brings to TIS his passion for building high-caliber engineering teams that develop platforms in Public/Private Cloud, SaaS Products, Big Data, Web APIs, Mobile and Web Applications. Arvind holds a degree in Physics and Computer Science from University of Bombay, India.
 
Appointment of Patti Barton as Acting Chief Financial Officer. Having joined Top Image Systems in 2015, Ms. Barton previously served as the Company’s Vice President - Global Finance in our US headquarters. Ms. Barton has more than 30 years of experience with leading finance organizations at companies such as Pulte Homes, Fannie Mae and Inland Investments.  She is a seasoned finance executive with broad experience in strategic management and finance, as well as in SEC reporting and risk management. Ms. Barton previously served eight years with KPMG and is a licensed CPA.  Ms. Barton earned a B.B.A. from the University of Texas at Arlington College of Business.
 
                Yossi Dagan, Chief Financial Officer, Kristian Niklasson, Chief Services Officer and Michael Schrader, President made decisions to pursue other opportunities.  Brendan Reidy assumed responsibilities for EMEA Operations and Professional Services.  With the continuity of Brendan Reidy and Patti Barton, as well as the addition of Arvind Sharma and John McCaffrey, we experienced little operational impact during the transition of our management team.

 
Credit Facility with a U.S. Based Bank
 
                In December 2017, we secured a $2.5 million line of credit with a U.S. based bank.  The line is secured by the accounts receivables of our U.S. subsidiary and bears interest at 2.5% or 3% (if in stream line mode) per annum and matures in December 2018.  We had borrowings outstanding of 0.8 against the line of credit at December 31, 2017.  Subsequent to December 31, 2017, the borrowings under the line were repaid and the line was cancelled
 
 
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Sale of Convertible Note to HPE-FVE, LLC
 
 In December 2016, we borrowed $5 million from HCP-FVE, LLC, an affiliate of Hale Capital Partners in exchange for the Convertible Note which bears interest at the prime rate plus 2.5% (if paid in cash) or 3% (if the interest capitalized) per annum and matures (if not converted prior) in December 2020.  As of March 31, 2018, the principal amount of the Convertible Note is convertible into 3,094,998 of our ordinary shares.  The transaction contemplates revising our Articles of Association to create a new class of Company preferred stock.  Our stockholders approved the revised Articles of Association during the annual shareholders meeting in October 2017. As of May 15, 2018, the Convertible Note has not been converted into preferred shares. If issued, the preferred shares will also be convertible into our ordinary shares at the same conversion price

Upon withdrawal from the Credit Facility, the Convertible Note, plus accrued interest, will be exchanged for secured notes that will be junior to the Senior Loan with an interest rate of Prime plus 4.0% and the convertibility to convertible preferred shares will be cancelled.
 
The Convertible Note and preferred stock have certain approval rights and provide HCP FVE with the right to appoint a member to our Board of Directors. The approval rights remain in effect for as long as HCP FVE holds at least 35% of the original aggregate principle amount of the Convertible Note or its preferred stock equivalent, as the case may be.  Such rights restrict the Company’s ability to take certain actions, including, but not limited to: (i) liquidating or dissolving the Company or any subsidiary; (ii) issuing certain securities of the Company senior to those issued to HCP FVE or at a lower price than paid by HCP FVE; (iii) incurring certain indebtedness (including any that is convertible into capital stock of the Company); (iv) paying dividends or other distributions or redeeming any ordinary shares or other equity interests or any securities convertible into our ordinary shares; (v) increasing the number of shares available under our stock option plan, amending such plan, or adopting a new equity incentive plan; (vi) approving any cash incentive or retention plan for its officers and/or directors (unless required to be approved, and actually approved, by the Company’s shareholders); (vii) incurring any lien on any of the Company’s or any of its subsidiaries’ respective properties or assets; or (viii) making any significant change in the nature of the Company’s business.

We are entitled to force the conversion of the Convertible Note or preferred stock, as the case may be, if the ordinary shares trade at 250% of the conversion price for at least 45 consecutive trading days. HCP FVE will have the right to demand that the Convertible Note or the preferred stock, as the case may be, be redeemed after December 5, 2020. The proceeds from the sale will be used by the Company for general working capital purposes, including accelerating the company’s ongoing migration of its innovative financial process automation solutions to a cloud-based platform.
 
Upon withdrawal from the Credit Facility, the Convertible Note, plus accrued interest, will be exchanged for secured notes that will be junior to the Senior Loan with an interest rate of Prime plus 4.0% and the convertibility to convertible preferred shares will be cancelled.
 
HCP FVE is a private growth equity fund focused on partnering with talented management teams to achieve remarkable corporate transformations that benefit all stakeholders including employees, customers, and our investors. Hale is represented on the Top Image Systems Board.
 
BUSINESS ENVIRONMENT

While the overall business climate continues to improve with forecasted 2018 GDP growth of 4.0% there are signs of increased volatility driven by anticipated inflationary pressures given increased input costs and wage pressures.

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In order to realize continuous efficiency gains and achieve business agility in an intensely competitive global economic climate businesses are planning to significantly accelerate spending on digital transformation (DX).
 
Worldwide spending on DX technologies (hardware, software, and services) is expected to be nearly $1.3 trillion in 2018, an increase of 16.8% over the $1.1 trillion spent in 2017. A new update to the Worldwide Semiannual Digital Transformation Spending Guide from International Data Corporation (IDC) forecasts DX spending to maintain a strong pace of growth over the 2016-2021 forecast period with a compound annual growth rate (CAGR) of 17.9%. By 2021, DX spending is expected nearly double to more than $2.1 trillion.

Customer retention and customer loyalty are the primary drivers for accelerated investments in process management. Businesses seek solutions that help them flourish in the digital economy by accelerating customer onboarding, reducing customers’ transaction costs, ensuring customer satisfaction and gaining better insight into customer behavior and sentiments to anticipate their future needs.

The introduction of advanced robotics automation technologies, big data analytics, and cloud deployment options are ushering in a new era of enterprise transformation. These technologies empower midsize companies to automate labor intensive and error prone business processes to mitigate risk, reduce transaction costs, and improve customer engagement and service levels.
 
AI has massive potential to enhance decision making, reinvent business models and ecosystems, and remake the customer experience. Many organizations have already taken notice of this, with a recent Gartner survey indicating that 59% of organizations are gathering information to build an AI strategy, while the rest are piloting or adopting AI programs.
“Worldwide spending on digital transformation technologies is expected to be nearly $1.3 trillion in 2018, an increase of 16.8% over the $1.1 trillion spent in 2017. A new update to the Worldwide Semiannual Digital Transformation Spending Guide from International Data Corporation (IDC) forecasts  spending to maintain a strong pace of growth over the 2016-2021 forecast period with a compound annual growth rate (CAGR) of 17.9%. In 2021, Digital Transformation  spending will nearly double to more than $2.1 trillion.
 
AI has become a major battleground for software and service vendors, with AI expected to be incorporated into every application, app and service, at least on some level. Gartner highlights augmented analytics, which uses machine learning to automate data preparation, insight discovery and insight sharing as an area of growing strategic importance. Organizations should explore intelligent apps that augment human activity, and identify use cases across advanced analytics, intelligent processes and new user experiences

Digital business moments, which are a combination of business events that reflect the discovery of notable states or state changes, will drive digital business. While a simple example would be the signal that a purchase order has been completed, as the “Internet of Things” and other technologies emerge, complex events can be detected more quickly and analyzed in greater detail. Gartner suggests that enterprises should embrace “event thinking,” given that by 2020, event-sourced, real-time situational awareness will be a required characteristic for 80% of digital business solutions, and 80% of new business ecosystems will require support for event processing.
 
There have been significant advancements in machine learning technologies, commonly referred to as robotics process automation, designed to lower the costs of labor-intensive and error-prone business processes. These advancements make it easier to proactively comply with data security and privacy requirements.
 
With the proliferation of incoming information from multiple channels, it is imperative for organizations to invest in capabilities to capture information at the source, digitize it as soon as it enters the organization and transform that information into actionable business processes. This includes using intelligent classification tools to ensure that personally identifiable information is protected and managed. Notably, we believe that only a minority of organizations employ effective meta-data and classification of their data.

Recent developments have heightened both public focus and the commercial need for solutions with respect to the processing of personally identifiable information.  In addition, on May 25, 2018, the General Data Protection Regulation will come into effect in the European Union and will introduce new privacy and compliance requirements concerning the collection of data and could potentially subject violators to heavy fines.  The new rules regulate data concerning European persons even if it is collected and stored outside the European Union, and have further increased global attention to collection, protection, and storage procedures.
 
Accordingly, we believe there exists significant growth opportunity in solutions which reduce error-prone and labor-intensive tasks associated with the capture, extraction and classification of large volumes of information and accelerate the process of compliance with data classification, retention and compliance policies and regulations.

 

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Reduced Transaction Costs
 
Organizations continue to face significant headwinds caused by sluggish global GDP growth and rising geo-political risks.  Given such a climate of uncertainty, finding the right balance between growth and profitability is a daunting task. The Hackett Group Report found that, “due to the continuing economic uncertainty, budgets in the coming year will be strained, making it imperative to fund innovation and transformation through cost reductions made elsewhere.” (Source:Key Issues 2016: Business Services Must Improve Agility to Balance Cost, Innovation, and Transformation”, The Hackett Group, 2016 by Erik Dorr and Sean Kracklauer)
 
In particular, corporate finance processes tend to be inefficient and remain, to a large extent, paper- intensive.  For example, research shows that the accounts payable function remains a predominantly paper-intensive function. According to Ardent Partners, the average cost per invoice is $15.96, while straight-through processing can reduce the average cost per invoice to $2.94. (Source: “ePayables 2015: Higher Ground”, Ardent Partners, 2015, Andrew Bartolini and Christopher Dwyer) A recent PWC report found that, “although finance will always require significant investment, the fact that top quartile costs are 40% lower than average performers indicates that some organizations have been able to better manage finance costs through a variety of methods, including automation, shared services and more efficient use of capacity.” (Source: “Breaking Away: How leading finance functions are redefining excellence”, PWC, 2016)

        In today’s economic climate, senior corporate executives increasingly stress the need for efficient and timely allocation of capital. In fact, this has become a front-running strategy for achieving competitive advantages and maximizing shareholder value.  In particular, automation of financial processes empowers organizations to have:
 
·
Better cash flow visibility;
 
·
Improved spend management;
 
·
Fewer exceptions;
 
·
Greater accuracy; and
 
·
Faster reconciliation.

Automating invoice processing empowers AP staff to provide real-time insight into key payment metrics such as Days Payables Outstanding, as well as useful analysis of supplier performance, including supplier discounts that can result in higher return on invested capital.
 
Prudent spend management translates into lower cost of goods negotiated with preferred suppliers in accordance with clear and transparent payment terms. This results in higher volume of straight-through processing for purchase order-based invoices. Less manual intervention means AP staff can focus more of their time on complex tasks such as exceptions management.
   
        Equally troubling for corporate executives are the missed opportunities when errors are encountered on incoming invoices. Surprisingly, 68% of businesses have reported that 1% of total invoice volumes contain errors. While 1% may not appear to be material, these errors result in significant cost inefficiencies, late payment penalties, missed early payment discounts and, in some cases, increase the risk of making duplicate payments.
 
A Forbes article on the increased preoccupation of the C-suite with efficient capital allocation during difficult times put aptly: “Cash is King!” We’ve all heard this maxim, but today it rings truer than ever before. “A healthy profit may look nice on your financial statements, but if capital expenditures or receivable collections are draining your cash, you won’t be in business for long.” (Source: “The '8 Great' Challenges Every Business Faces,” Forbes, Cheryl Conner, March 4, 2013) This explains why AP automation can and does make a tangible contribution to help businesses optimize working capital and support efficient capital allocation.

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Improved customer engagement and service levels.

Whatever the nature of a business’s customers– whether consumers, businesses, citizens, clients or service partners – and no matter how they choose to communicate and interact – whether via paper, email, web, social, mobile - organizations have to make a choice. Specifically, they need to determine whether they run their business at the speed of paper, or at the speed of digital.

If the answer is digital – as it should be - then two things are required. First, the organization must eliminate paper from its processes and convert information into a digital format as soon as it comes within reach.  Second, no matter via which channel or medium they are transmitted, an organization’s processes, responses and the resulting customer engagement must be fast, transparent and channel agnostic.

Thus, we see the increasing importance of transforming all inbound content, documentation and forms data to a unified digital format as early as possible in any process, including via mobile capture, customer response management and digital mailroom solutions. All downstream processes can then be managed in an agile, responsive and compliant way, at maximum productivity.

Once our world is truly digital, we will have a much greater ability to react and respond to market discontinuities, new customer expectations, disruptive events, legislative changes and new innovations. Content analytics, trend projections, automated compliance and intelligent workflows simply cannot be implemented around paper. Digital on-boarding speeds up and strengthens relationships with new customers. Automatic processing of onboarded data accelerates engagement and increases customer retention. Prompt and personalized responses delight customers. And open access to digital customer data fuels the insights that fully digital businesses will use to anticipate customer needs and grow top-line revenues. Such businesses will thrive in the digital economy.

PRODUCT OVERVIEW

Our Mission

We aim to drive digital business transformation and improve customer experiences.  Our business is to empower our customers to thrive and compete in the digital economy by digitizing and automating error-prone and labor-intensive document-centric business processes.

Organizations deploying our solutions are creating new customer experiences where the customer journey begins, progresses, and ends in a completely digital environment.  This journey begins by transforming all inbound content, documentation, and forms data to a unified digital format at the moment the content enters the organization.
 
Our solutions offer advanced capture and workflow technology, superior recognition rates, innovative mobile and cloud offerings, and integration with virtually any business system along with significant improvement of straight-through processing rates.

        Our market-leading eFLOW business process automation platform, which has evolved and improved over the past twenty years, is the foundation of our business process automation solutions.  We empower our customers and partners to build their digital business through four principles:
 
·
Onboard inbound information. As business content enters the organization from various channels, we automatically capture and organize all data, making it understandable and digitally actionable.
 
·
Accelerate customer engagement. By automating labor-intensive, error-prone business processes, we reduce transaction costs and free customer-facing staff to focus on higher value exceptions.
 
·
Improve service levels and delight customers. We enable proactive customer response management processes based on classifying and routing inbound information to the right department for resolution, ensuring accurate personalized responses that improve service quality and build customer satisfaction.
 
·
Increase business agility. With better insight into customer sentiments and buying trends, we enable businesses to generate repeat business, foster customer loyalty, and create higher customer lifetime value.

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We have established a strong footprint within three market segments, as follows:

·
The Banking Sector represents 37 % of our total revenue globally. Our banking focus spans across the following functionalities:

o
Receivables Automation: Featuring state-of-the-art cybersecurity, via our cloud-based remittance portals and document repository we provide secure distributed access to remittance data and related documents. For over 18 years we have worked with the largest financial service providers such as First Data delivering to them and to the leading financial institutions who are their customers secure cloud-based data and document management. As of the end of 2016 our remittance solution has processed over $360 billion in remittance transactions.

o
Digital Mailroom for Banking: Our customers rely on eFLOW to automate their document-centric processes, including account opening, lockbox, loan origination and many more.  The solution enables banks to accelerate various procedures and workflows, from change of address to account initiation, while ensuring administration of regulatory rules such as KYC (Know Your Customer) and Four-Eyes.  Check verification and clearing, lockbox management, fraud detection and signature verification, credit card verification and many other document- based processes are digitized and automated to significantly improve accuracy, efficiency and customer satisfaction.

o
Signature Verification: Our solutions provide automated verification for signatures on any type of document, including checks, with a high degree of accuracy. Our specialized tool verifies signatures by comparing them to existing samples and identifies anomalies that may suggest forgery. Human operators are alerted when the software flags signatures as potentially fraudulent. Verification results are provided through a graphical user interface, enabling the operator to see problem areas clearly and quickly.

·
Content Process Automation represents 42% of our total revenue.   Through a global network of channel partners, solution providers and system integrators our solutions focus on:

o
Forms Processing: We have implemented multiple high-volume, large scale forms processing deployments over the years, including over 30 population census processing projects for Germany, India, Brazil, Italy, Kenya, Spain, South Africa, Ireland and many other countries around the world.   Recently we were selected together with a strategic partner to carry out large-scale census projects for two additional national census projects.  Top Image Systems has been recognized as an approved vendor for the UNPFA (United Nations Population Fund Agency), the organization responsible for the execution of censuses worldwide.

o
Digital Mailroom: These solutions manage all content from multiple channels entering an organization, whether handwritten or printed, regardless of its form or origin. The data is captured, classified and delivered to persons and systems across the organization, offering powerful sorting, routing, prioritization and automatic response capabilities to ensure that all mission-critical input immediately reaches the right destination, while in parallel all routine data is handled efficiently with minimal human intervention.   We have provided digital mailroom solutions to global insurance providers such as the Generali Group, Allianz, Aegon and Barmer GEK, to leading financial institutions such as Standard Chartered and Citibank, as well as to commercial enterprises across a variety of industry sectors.

o
Customer Response Management: These solutions provide automated responses to inquiries generated from all inbound customer communications which are digitized classified and prioritized generating actionable data that triggers a variety of workflow tasks including automated response to inquiries.

(Source: Harvey Spencer Associates, c. 2016)

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·
Financial Process Automation Solutions represents 21% of our total revenue.  Our accounts payable automation solution employs invoice capture and workflow automation to streamline and improve invoice management from the moment invoices enter the organization.  Based on two decades of company experience deploying successful invoicing projects globally, our solutions reliably and efficiently integrate with businesses’ core financial systems and can flexibly adapt to their IT environments.

o
Accounts Payable Automation: The cloud mid-market is underserved and represents sustainable growth opportunities (30% 5 Year CAGR, 2013-18: Goldman Sachs). Building on our experience digitizing over 280 million invoices annually for our customers around the world; our go-to-market strategy seeks to extend our market reach to the under-served mid-market segment for accounts payable automation, with particular focus on the cloud opportunity.

o
The Procure to Pay Market is growing in double digits from $ 4.4 billion in 2013 to 6.8 billion in 2016.   (Source: Forrester, 2016)

o
Only 40% of mid-market companies with annual revenues in the $20 million to $1 billion range have implemented fully automated accounts payable solutions.

o
AP Automation is still at an early stage of development with considerable room for growth, particularly within the mid-market segment.

(Source: Institute of Finance & Management, 2015)

Our Go-To-Market Strategy

Our strategy is to build on and extend our core document capture and process automation platform by delivering repeatable end-to-end business process automation solutions offering flexible deployment options on premise, cloud and mobile.

This strategy is designed to maximize profitability from our installed base of core document capture implementations, while transforming our business to focus on higher velocity process automation solutions, with particular initial emphasis on accounts payable automation.

Specifically, our investments focus on creating sustainable customer and shareholder value by:

1.
Making our core eFLOW capture and process automation platform easier to adapt, implement and support;
 
2.
Accelerating revenue growth from higher value process automation applications, with initial focus on accounts payable automation; and
 
3.
Better enable our partners to implement solutions based on our product portfolio.
 
1.
Making our core eFLOW capture and process automation platform easier to adapt, implement and support:
 
Our eFLOW technology comprises mechanisms and engines that leverage the latest advancements in machine learning capabilities to improve automation and continuously achieve very high recognition rates for even very complex documents, and supports all major European languages, as well as Chinese and Japanese.
 
We aim to constantly improve the technology, its algorithms, and its architecture, in order to maintain eFLOW’s industry-leading capabilities for superior intelligent capture and recognition of complex documents.
 
Infrastructure and User Experience:
 
We have revamped the architecture of eFLOW by means of a new cloud and web-enabled architecture which supports full and easy scalability. For companies operating in a decentralized environment, eFLOW brings new potential for high performance document capture across the business, while ensuring data security for processes at every stage. Great consideration has gone into the selection of the eFLOW technology infrastructure, which is based on up-to-date technologies such as HTML5, WCF (Windows Communication Foundation), .NET, and many others. eFLOW utilizes single sign on and on-line license activation for easier installation and deployment. We expect to continue to invest in the system's infrastructure and user interfaces with the aim to simplify and enhance the user experience.
 
24

Performance and Throughput:
 
Servers can be seamlessly interchanged with minimal or no interruption. eFLOW’s architecture uses load-balancing to ensure optimal performance of all stations at all times, deciding automatically which server will handle requests and when. In circumstances of unusually heavy loads of documents to be processed, additional servers can be added to reinforce the system’s capacity to support additional users and documents, ensuring optimal performance and throughput.
 
Deployment Flexibility:
 
Today, global operations and workforces can be found in multiple locations – in the office, on the road and increasingly in home offices. Standardization across all users is key to ensure process efficiency; eFLOW aligns the user experience by providing standard client/server and browser-based web client interfaces. Powered by HTML5, our flexible web interfaces leave zero footprint, zero deployment and are device-independent. eFLOW’s Web Front Office functionality allows users to split, merge, delete, sort, classify and capture documents using only a web client. The VALIDATE module includes WEB VALIDATE, a rich and accessible interface that allows an unlimited number of operators to check flagged items using only Internet-based browsers, anywhere, anytime. Enterprises can operate with maximum flexibility and efficiency by distributing their validation workload across as many stations as they choose, requiring zero footprint, no installation procedures and only minimum hardware to activate them. All of these developments work together to ensure and enhance deployment flexibility.
 
Performance Monitoring:
 
Increasingly business decisions are improved through analysis of data. With eFLOW, managers can apply service levels that measure the processing activities against expected results. The system gives straightforward insight into common inquiries, such as the volume of documents the current staff can process in a given time period, or how many hours it takes three data operators to process 10,000 documents. We aim to empower users to fully leverage the knowledge and data within eFLOW to continuously monitor and improve their operations.
 
Mobile Capture Platform:
 
The mobiFLOW SDK is a multi-purpose mobile capture and processing platform that enables capture of any document of any size using a mobile device.   Our patent-pending APMI (Automatic Perfect Mobile Image) technology and embedded quality verification functionalities ensure that our applications provide the best user experience available.  The “APMI” technology delivers easy-to-use “auto-capture” functionality. APMI guides the user to hover with the smartphone above a document; in the split second that the APMI technology identifies that conditions are sufficient to take the picture (based on lighting, angle, distance, stability and other parameters) it automatically takes the picture. The APMI-based application also helps the user by hinting how the handset should be held (e.g. - closer, turn right, tilt down) in order to improve image quality. Consequently, the user avoids time-consuming repetitive image creation, examination, enhancement and rejection. A high-quality image of the document is captured on the first attempt. mobiFLOW integrates seamlessly with the eFLOW capture platform to allow users to enjoy uniform access to multi-channel capture and processing.
 
In sum, Top Image Systems is dedicated to maintaining and enhancing our eFLOW, mobiFLOW and eFLOW CloudDocs capture and process automation platforms, reinforcing our core capture technologies with new technologies such as machine learning and extended mobile and cloud capabilities to better serve and expand our global install base.
 
25

In parallel, in response to market trends, we see growing demand for end-to-end capture and process automation solutions; to meet this demand going forward, we are also leveraging our eFLOW platform within prepackaged solutions and service applications.  Initially we are focusing on developing and bringing to market an end-to-end cloud-based financial process automation solution that combines our capture capabilities with specific process functionalities to optimize accounts payable automation. Going forward, we foresee expanding this solution suite to offer additional prepackaged solutions for other specific market segments. These solutions will augment and strengthen the market presence and viability of the eFLOW platform.
 
2.
Accelerating revenue growth from higher value process automation applications, with initial focus on delivering an end-to-end accounts payable application:
 
Launched in Q2 2016, our next-generation solution for AP automation inside of SAP combines the best of traditional automation solutions together with the flexibility and ease-of-use that agile companies want and need. Now, SAP organizations of any size can have it all when it comes to AP automation.  Offering seamless integration with SAP, SAP HANA-certification and an integrated user experience for Accounts Payable Professionals working within their familiar SAP application environment, the new solution delivers:
 
·
Powerful data extraction and validation
 
·
Workflow
 
·
Mobile capabilities
 
·
Flexible deployment options
 
·
SAP integration

With seamless SAP integration, our AP automation solution provides users with 360-degree visibility into invoices and related data, arming organizations with the real-time reporting and analytics required to improve operational performance, optimize cash flow, and ensure compliance, control, and security.   Our best-in-class data extraction technology makes it easier and faster to get invoice information into SAP, reducing manual data entry and associated errors. The technology is self-learning, continually improving recognition rates and accuracy over time for invoices received via any delivery channel: paper, fax, email, web, mobile, EDI, or XML.
 
When discrepancies arise in captured data, users can quickly complete missing or incorrect fields by pointing and clicking on the required data fields appearing on the invoice images displayed within SAP. The marked values are automatically transferred into corresponding fields on the data entry screen inside SAP. The end-to-end SAP Accounts Payable solution process flow is illustrated below:
 
 
26

 
Our AP automation solution incorporates user-configurable business rules to automatically match the header and line-item data captured from invoices with critical information stored in SAP, such as the invoice date, vendor, quantity, and amount. Automatically validating this information increases the rate of invoices posted straight-through, without human operator intervention, and dramatically accelerates invoice approval cycles providing superior straight through processing of vendor invoices.
 
Going forward, we plan to launch the beta version of our cloud AP solution designed for the mid-market segment.  As part of this initiative, we are planning to cloud-enable our on-premise AP solution delivering:
Throughout 2016 several early adopters deployed our new AP Automation solution, including:
·
An engineering and construction company operating 9 sites across Switzerland;
·
A win with an European aerospace component manufacturing company;
·
A win at a mid-sized European medical device manufacturer operating 10 subsidiaries;
·
A win at a U.S.-based technology supplier processing invoices across global shared service centers;
·
An upsell to an existing customer in the European power generation sector
·
A substantial contract with an existing customer in the energy sector to deploy eFLOW AP for SAP in North, Central and South America to provide visibility into and analysis of AP processes inside their familiar SAP interface.
 
·
Cloud vendor invoice capture leveraging the power, scalability and throughput of our eFLOW Extract component;
 
·
Straight-through processing of vendor invoices in the cloud; and
 
·
Cloud-based invoice archival of vendor invoices and related documentation such as Purchase Orders and contracts, which leverages our expertise and capabilities developed within our private cloud-based remittance processing solution for the banking sector.
 
Since the launch of our end-to-end Accounts Payable application for SAP we have developed a robust opportunity pipeline and secured a number of initial deployments with successful rollouts.
 
27

 
3.
Better enable our partners to implement solutions based on our product portfolio
 
A key dimension of our strategy is to forge and nurture partnerships with leading technology providers, as well as with providers of document process automation solutions with global reach and focus on vertical industry solutions delivery expertise.
 
Our channel strategy encompasses:
 
·
Technology partnerships such as SAP and Microsoft,
 
·
Strategic Partners that embed our core eFLOW platform such as Xerox and FiServ; and
 
·
Value added solution providers that deliver line of business solutions based on our core eFLOW platform.
 
Our network of channel partners is illustrated below:
 
We actively pursue new partnerships to expand our reach while nurturing our existing partnerships around the world, involving cooperation with business process outsourcing providers as well as with a variety of document services providers.  Within this framework, we partner with numerous financial services providers, some of whom resell our remittance processing services and others who develop and market mobile imaging applications using our mobiFLOW SDK. During 2017we worked closely with partners such as Fiserv as well as with TCS (Tata Consultancy Services) to support joint customers and expand joint business.
 
During fiscal 2016, we entered into a strategic partnership with Xerox. The partnership is built upon the two companies’ track records of success over the years through a number of successful joint implementations.
 
Over the years, TIS and Xerox have collaborated on many large-scale document processing projects for customers around the world. Some examples include several projects in France, from contract processing for a leading telecom provider to customer communications / mailroom processing for a publishing company and for a large bank, along with invoice automation and document processing projects in the retail and energy sectors. Some other notable joint projects include mailroom automation for UWV Netherlands, the Dutch social security agency, the Argentinian Census which processed 185,000,000 forms in 6 months, invoice processing for a major Czech bank and a recent project for a telecom provider in Brazil enabling mobile customer enrollment at 3,000 retail sites.
 
The partnership was agreed upon and became formalized global strategy as independently validated by IDC: “On February 26, 2016, Xerox announced a global reseller agreement with Top Image Systems that provides its customers with end-to-end automation solutions for industry-specific, content-driven processes. As part of the agreement, Xerox solidified its relationship with TIS, providing Xerox with full access to TIS Enterprise Capture technologies eFLOW and mobiFLOW, which Xerox will be using as a core platform within its workflow automation solutions. These solutions will support Xerox's large enterprise customers in improving their day-to-day effectiveness and streamlining content-driven tasks, such as onboarding, claims administration, and invoice processing.” (Source: “IDC Flash, Xerox Further Expands Workflow Automation Suite with the Support of Top Image Systems”, Ron Glaz, 2016)
 
In 2016, following the signature on the global contract, we have worked together with Xerox to identify and pursue joint opportunities globally. TIS participated as a Platinum Partner at the Xerox Sales Kickoff in Canada, at the European-wide LEO Kickoff as well as at sales kickoffs in Belgium and the U.S. Both companies are investing in programmatic initiatives including marketing and sales campaigns, ramp up of sales and pre-sales training and training of Xerox and Fuji-Xerox technical teams. TIS training programs have been executed at Xerox sites around the globe, including in North, Central and South America.  In the IDC Worldwide Document Workflow Services Marketscape published in September 2016, which named Xerox as one of the leading vendors, the report cites Top Image Systems as Xerox’s key partner for enterprise capture, one of only three partners mentioned in the report. While the sales cycle remains long, the pipeline arising from our joint activities has increased during the year.  The companies have won two large-scale government projects in the Americas and in Asia Pacific as well as a first joint win for a large retail company in North America.
 
28

Principal Markets
 
As of December 31, 2017, we operated offices and branches in Israel, the United States, the United Kingdom, Germany, Hong Kong, Singapore, Australia and Japan.  Our U.S. branch is responsible for sales, marketing and support activities in the United States, Canada, and Latin America.  In addition, we believe that significant opportunities exist in other countries of Western and Eastern Europe, Asia and Africa.  We have several local sales and technical representatives in multiple countries, these representatives manage our sales, marketing and operational activity in their locations, providing integration and implementation services, as well as marketing support.
 
The following table summarizes total revenues by category of activity and geographic market for each of the last three completed fiscal years:
 
License
Revenues by Region
(U.S. dollars in thousands)
                                   
   
2015
   
2016
   
2017
 
   
$
   
%
   
$
   
%
   
$
   
%
 
Germany
   
2,421
     
31
%
   
1,099
     
18
%
   
1,058
     
20
%
Rest of Europe
   
2,127
     
28
%
   
922
     
16
%
   
842
     
16
%
Asia Pacific
   
1,433
     
19
%
   
1,736
     
29
%
   
2,689
     
52
%
North and South America
   
1,343
     
17
%
   
1,961
     
33
%
   
375
     
7
%
Africa & Middle East
   
384
     
5
%
   
255
     
4
%
   
231
     
5
%
                                                 
Total
   
7,708
     
100
%
   
5,973
     
100
%
   
5,195
     
100
%
 
Service Revenues by Region
(U.S. dollars in thousands)
   
2015
   
2016
   
2017
 
   
$
   
%
   
$
   
%
   
$
   
%
 
Germany
   
4,881
     
19
%
   
4,164
     
16
%
   
3,957
     
16
%
Rest of Europe
   
4,658
     
18
%
   
4,016
     
16
%
   
3,666
     
15
%
Asia Pacific
   
3,837
     
14
%
   
4,191
     
16
%
   
3,733
     
15
%
North and South America
   
12,270
     
47
%
   
12,847
     
50
%
   
12,816
     
53
%
Africa & Middle East
   
437
     
2
%
   
444
     
2
%
   
296
     
1
%
                                                 
Total
   
26,083
     
100
%
   
25,662
     
100
%
   
24,468
     
100
%

29

 
Seasonality
 
Seasonality does not currently affect our business in a material manner because the seasonality of different markets substantially offset each other.
 
Our business significantly depends upon the requirements of large corporations and governmental agencies.  As many of these entities operate according to annual budgets, their tendency is to approve budgets in the beginning of the fiscal year and release the budgets toward the end of the fiscal year. This mode of operation affects our results of operations throughout the year.
 
Marketing Channels
 
TIS continues to expand its credibility, brand recognition and presence worldwide through its channel sales program and investment in technology partnerships.  TIS cooperates with over 70 partners worldwide, including Xerox, PFU (Fujitsu) Imaging Solutions, Tata Consulting Services, Cognizant, Amdocs, Hanse Orga, and Kodak. We work with numerous eFLOW® resellers worldwide as well as with leading BPOs in North America and Europe.   We maintain technology partnerships with the world’s leading software vendors and with a broad set of recognition engine providers as well as with BPM and specialty workflow providers.

The data capture market has recently experienced consolidation activity. Lexmark acquired Brainware and included it in Lexmark’s Perceptive Software and then also acquired ReadSoft and Kofax. In April of 2016 Lexmark was acquired by a Chinese consortium. Then in May 2017 Thoma Bravo, a leading private equity firm, purchased Lexmark’s Enterprise Software business, which included Kofax, Readsoft and Perceptive Software, and has consolidated the group under the Kofax brand. These events have created some new opportunities for TIS. As one of the few independent global software companies in the document automation space, a company offering a rich portfolio of advanced mobile and cloud-based intelligent processing solutions, TIS is positioned to benefit from present market dynamics by establishing partnerships with companies seeking to replace their capture and workflow vendor.  For example, we now have an enhanced opportunity to pursue business relationships with companies in competition with Kofax.
 
We are constantly monitoring the effect of consolidation and other changes in the marketplace and their impact on our business. While customer transactions via partners tend to take more time to finalize and to be more complex, partnerships are the entry point to a greater pool of larger transactions.  Approaching transactions in cooperation with partners offering skills and functionalities complementary to ours often improves our chances of winning contracts.
 
In parallel, TIS is actively strengthening its joint go-to-market strategy with Xerox Workflow Automation and other strategic partners in order to sell comprehensive end-to-end solutions leveraging the eFLOW platform – together with partner software and services – to better meet customer demand and to expand our sales capacity.
 
Partnerships are also key in the area of mobile imaging, a line of business where our strategy is to accelerate our presence primarily through developing partnerships for sales.  TIS has signed agreements with well-known suppliers to the US financial industry such as with a division of Jack Henry & Associates that is now Alogent, and Fiserv, one of the leading global solution providers to banks and other financial institutions.  TIS is developing a broad network of mobile imaging partners to maximize its market access to this large, dynamic and fast growing sector.

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

30

In contrast to solutions offered by smaller market players, the eFLOW® platform was built from the ground up and covers the entire spectrum of capture and imaging solutions. This stands in contrast with applications which focus only on specific areas such as Accounts Payable. The data capture/imaging market is highly fragmented with more than 50 players and, as described above, is trending toward consolidation. We compete with Kofax, Open Text, IBM (which acquired Datacap), EMC Captiva (acquired by Dell), Oracle, Banctec, Basware, Hyland (who acquired AnyDoc), eCopy, Global360 (acquired by OpenText), Ikon, Itesoft, Nuance, Parascript, Scansoft, Scan Optics, as well as a variety of manual data entry systems.  Newer participants capturing interest and market share include Esker, Ephesoft, Coupa and Concur in the AP space.

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

In the area of mobile capture and payments, we compete primarily with Mitek Systems, Inc., the first company to market in the mobile capture space, and which is currently mostly active in the US. While the market for mobile capture solutions is still relatively young, we believe it is very large, growing larger, and rapidly changing. We welcome competitive activity which we believe serves primarily to educate the market and increase prospects’ confidence.

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

Third Party Technology
 
We license various recognition software technologies from third parties in order to incorporate them in our products. We currently use technologies developed by several different companies. Depending upon the requirements of each customer, we incorporate one or several of such technologies into a specific product. We are not dependent upon any single source of recognition software technology and the various technologies that we use are, in large part, interchangeable.
 
Intellectual Property Rights
 
Our success depends upon our proprietary software technology. We rely on trade secret protection, employee and third-party nondisclosure agreements and other intellectual property protection methods to protect our confidential and proprietary information. In addition, we are engaged in efforts to protecting our intellectual property through the filing of patent applications. Despite these efforts, we cannot be certain that others will not otherwise gain access to our trade secrets or copy and use information that we regard as proprietary without our authorization. None of our patent applications have yet been productive of a patent and we cannot assure you that we will file for or obtain any patents. In addition, we cannot assure you that:
 
·
any patents which we may obtain will be broad enough to protect our technology, will provide us with competitive advantages or will escape challenge or invalidation by third parties;
 
·
the patents of others will not have an adverse effect on our ability to do business; or
 
·
others will not independently develop similar products, duplicate our products or, if patents are issued to us, design around these patents.
 
Further, the laws of foreign jurisdictions where we sell and seek to sell our products may afford little or no protection of our intellectual property rights. We cannot assure you that the protection provided to our intellectual property rights by the laws and courts of foreign nations will be substantially similar to the remedies available under U.S. law.
 
31

We believe that our technology has been developed independently and does not infringe on the proprietary rights of others. However, we cannot assure you that the technology does not and will not infringe or that third parties will not assert infringement claims against us in the future. In the case of infringement, we would, under certain circumstances, be required to modify our products or obtain a license. We cannot assure you that we would be able to do either in a timely manner under acceptable terms and conditions or at all, or that we will have the financial or other resources necessary to defend successfully a patent infringement or other proprietary rights infringement action. Further, even if we were not infringing, intellectual property litigation is expensive and time consuming for management. Failure to do any of the foregoing could have a material adverse effect on us.  Furthermore, if our products or technologies are deemed to infringe upon the rights of others, we could become liable for damages, which could have a material adverse effect on us.
 
In addition, we license components of our software systems and technology from third parties in reliance on such parties’ representations as to ownership of the licensed intellectual property. If our licensors are found not to own or have rights to sublicense such rights to us and we are unable to replace the licensed technology with a comparable substitute, there could be a material adverse effect on our business prospects and financial results. Even if we were to replace licensed technology with available alternatives, it could take time to identify the best replacement and to fully integrate it into our software. The delay and uncertainty could negatively impact our financial results.
 
We believe that product recognition is an important competitive factor in the form processing industry. Accordingly, we promote the eFLOW® name in connection with our marketing activities. On March 10, 2009, the United States Patent and Trade Office (the "USPTO") registered a trademark for one of our significant solution and module names, namely eFLOW®, for computer software applications; namely, software applications that process and integrate data provided from various sources across a single platform, in Class 9 (U.S. CLS. 21, 23, 26, 36 and 38).

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

Warranty and Service
 
We generally negotiate our warranty obligations with respect to our products on a case-by-case basis.  Normally our warranty period is up to three months. We may be exposed to potential product liability claims by our customers and users of our products. Currently, we hold worldwide product liability insurance and professional indemnity policies that provide coverage limited to different amounts up to $9 million. Despite this coverage, a successful claim against us for product liability could have a material adverse effect on our financial condition.  While we have not experienced material warranty liability in the past, we cannot assure you that future warranty expense will not have an adverse effect on us.
 
We have various maintenance and support agreements with many of our customers. These agreements typically provide us with regular payments of fees ranging 15-25% per annum of the applicable license fees. Our technical team also provides support to value-added resellers, distributors and systems integrators to assist in the integration of our products.
 
32

Governmental Regulation
 
NTIA is the Israel Innovation Authority previously known as the Office of the Chief Scientist of Israel’s Ministry of Economy. Its mission is to assist the advancement of Israel's knowledge-based science and technology industries in order to encourage innovation and entrepreneurship while stimulating economic growth. The government of Israel encourages research and development projects through the NTIA under the Law for the Encouragement of Research, Development and Technological Development in Industry, 1984. We have received grants from the NTIA to finance a portion of our research and development expenditures in Israel.  Such grants generally bear royalties on sales of products utilizing technologies developed using such grants or arising out of such technologies up to a maximum of 100% of the amount of the grant, linked to the dollar, plus interest at the LIBOR rate. The grants received during 2012, 2013, 2014, 2015, 2016 and 2017 totaled $0.7. During 2017 we received grants from the NTIA totaling$.2. The Israeli government may decide not to continue the program in the future at its current level or to terminate it altogether or the NTIA may not accede to future grant requests from us.  In addition, if we fail to comply with any of the conditions imposed by the NTIA, including the payment of royalties with respect to grants received, we may be required to refund any payments previously received from the NTIA, together with interest and penalties.  The terms of the NTIA grants limit our ability to transfer technologies outside of Israel without the prior approval of the NTIA, if such technologies were developed using NTIA grants or arose out of such technologies.  The NTIA has the right, but not the obligation, to allow transfer of technology outside of Israel. Even if we receive approval for the transfer of technology outside of Israel, such approval of the NTIA may not be obtained on terms that are acceptable to us, or at all.
 
We also benefit from being designated as an “Approved Enterprise” and as Benefited Enterprise under Israel’s Law for the Encouragement of Capital Investments, 1959.  For additional information, see the section below entitled "Additional Information - Law for the Encouragement of Capital Investments, 1959.”
 
Additionally, we may be subject to varied regulation in the markets where we sell our products.  The burden of complying with such regulatory schemes (which may be contradictory) could have a material adverse effect on our ability to diversify or grow our sales.
 
Recent developments have heightened both public focus and the commercial need for solutions with respect to the processing of personally identifiable information.  In addition, on May 25, 2018, the General Data Protection Regulation will come into effect in the European Union and will introduce new privacy and compliance requirements concerning the collection of data and could potentially subject violators to heavy fines.  The new rules regulate data concerning European persons even if it is collected and stored outside the European Union, and have further increased global attention to collection, protection, and storage procedures.  As Top Image Systems operates in the EU as well as provides goods and services to EU residents compliance with GDPR is required.  Pursuant to Article 3 of GDPR, Top Image Systems is deemed to be an “establishment of a processor” and therefore falls within the scope of GDPR.    Accordingly, the company is updating its privacy notice and policies to ensure compliance with enhanced privacy rights.
 
Organizational Structure
 
Top Image Systems Ltd. has a number of subsidiaries worldwide, the most significant and operational of which are the following wholly owned subsidiaries:
 
¾
T.I.S America Inc. (incorporated in Delaware);
 
¾
Tis Americas Inc. (incorporated in Delaware) formerly named eGistics Inc. (a subsidiary of T.I.S America Inc.)
 
¾
Top Image Systems UK Limited (incorporated in the United Kingdom);
 
¾
Top Image Systems (2007) UK Limited (incorporated in the United Kingdom), formerly known as CPL;
 
¾
TIS Deutschland GmbH (incorporated in Germany);
 
¾
Top Image Systems (Asia Pacific) Pte. Ltd (incorporated in Singapore), formerly known as Asiasoft Global Pte Ltd;
 
¾
TIS Japan Ltd. (incorporated in Japan); and
 
¾ Top Image Systems Pty Ltd. (incorporated in Australia)- 51% of its shares are owned by Top Image Systems Ltd.
 
Top Image Systems (Singapore) Pte. Ltd is a wholly-owned subsidiary of Top Image Systems (Asia Pacific) Pte. Ltd, formerly known as Asiasoft Global Pte. Ltd.
 
Property, Plant and Equipment
 
Our principal executive offices are located in Ramat Gan, Israel and our principal business and service operations are located in Cologne, Germany; Frankfurt, Germany; Plano, TX, USA; Tokyo, Japan; and Singapore. We also have regional offices in Hong Kong and Australia.

33

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

Facility
 
Monthly rent
in USD
(approximate)
   
Square meters
(approximate)
   
Expiration
date
 
Ramat Gan, Israel
   
13,700
     
670
     
Month to Month
 
Cologne, Germany
   
17,200
     
740
     
2021
 
Tokyo, Japan
   
3,800
     
120
     
2019
 
Hong Kong
   
2,000
     
100
     
2019
 
Plano, TX, USA
   
13,200
     
1,153
     
2019
 
Singapore
   
10,100
     
200
     
2019
 
Frankfurt, Germany
   
5,100
     
275
     
2020
 
 
ITEM 5.          OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
Management’s discussion and analysis of financial condition and results of operations
 
You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes and other financial information contained elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties, including those discussed in "Item 3. Key Information—Risk Factors." See "Forward-looking statements" at the beginning of this annual report.
 
Overview
 
We develop and market automated data capture solutions for managing and validating content gathered from customers, trading partners and employees. Whether originating from electronic, paper, mobile or other sources, our solutions deliver digital content to the applications that drive an enterprise by using advanced technologies including wireless communications, servers, form processing and information recognition systems.  Our software improves business processes by integrating different types of data from multiple sources. Our products integrate information regardless of the source and format of the data, whether structured, as in the case of application forms or surveys, or semi-structured, such as invoices, purchase orders, checks, freight and shipping bills and others. Our solutions seamlessly deliver the extracted data to applications such as document and content management, enterprise resource planning, or customer relationship management. Our solutions minimize the need for manual data entry by automatically reading, identifying, interpreting and processing information, thereby increasing data capture accuracy and the rate of information processing. The platform solution we offer replaces traditional means of extracting information from paper-based documents and integrates multiple information sources into a single enterprise-level solution that increases speed and efficiency.
 
We develop and market our software solutions to wide range of customers, based on one end-to-end solution that automatically classifies, recognizes and understands data processed into the organization systems. We process, validate and integrate the data into ERP, CRM and workflow systems, while our solution, eFLOW® Unified Content Platform, performs business-critical key data capture, lying within incoming documents (paper forms, eForms, fax, image files, microfiche and electronic).
 
Sales Cycle
 
Our sales to end-user customers, value-added resellers, distributors and system integrators, all of which we consider to be our end-users, are made on open credit terms and we do not hold collateral to secure payment. The terms of the arrangements with these customers, generally, do not provide them with the right to return the purchased products or solutions.  Payment with respect to such sales is generally due within a specified period following receipt of an invoice.  The period varies from customer to customer, but usually we provide credit terms of up to 120 days for end-user customers and up to 180 days for resellers, distributors and system integrators.  In some arrangements, management can offer longer payment terms as mentioned above, evaluating business sense, creditworthiness of the customer and other facts needed to establish such decision.
 
34

Our sales cycle for eFLOW® solutions ranges from 9 to 15 months. These sales cycles vary by customer and could extend for longer periods depending on the time required by the customer to evaluate the utility of the applicable product to its operations.  Our operating results could vary between periods as a result of this fluctuation in the length of our sales cycles, the purchasing patterns of potential customers, the timing of introduction of new products and product enhancements introduced by us and our competitors, technological factors, variations in sales by distribution channels, competitive pricing and generally non-recurring product sales.  Consequently, our product revenues may vary significantly by quarter.
 
Geographical Considerations
 
The following table summarizes total revenues by geographic market for each of the last three completed fiscal years.
 
Revenues by Region
(U.S. dollars in thousands)
                                   
   
2015
   
2016
   
2017
 
   
$
   
%
   
$
   
%
   
$
   
%
 
Germany
   
7,302
     
22
%
   
5,263
     
17
%
   
5,015
     
17
%
Rest of Europe
   
6,785
     
20
%
   
4,938
     
16
%
   
4,507
     
15
%
Asia Pacific
   
5,270
     
16
%
   
5,927
     
18
%
   
6,422
     
22
%
North and South America
   
13,613
     
40
%
   
14,808
     
47
%
   
13,191
     
44
%
Africa & Middle East
   
821
     
2
%
   
699
     
2
%
   
528
     
2
%
Total
   
33,791
     
100
%
   
31,635
     
100
%
   
29,663
     
100
%
 
Critical Accounting Policies and Estimates
 
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements in conformity with generally accepted accounting principles in the United States requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, which could potentially result in materially different results under different assumptions and conditions. These are our management’s best estimates based on experience and historical data; however, actual results could differ materially from these estimates. Our significant accounting principles are presented within Note 2 to our consolidated financial statements attached to this annual report. While all the accounting policies impact the financial statements, certain policies may be viewed to be critical. Management believes that the following policies are those that are most important to the portrayal of our financial condition and results of operations and are the most critical to aid in fully understanding and evaluating our reported results:
 
·
Revenue recognition
 
·
Allowance for doubtful accounts
 
·
Contingencies and accrued expenses
 
·
Share-based compensation
 
·
Income taxes
 
35

 
Revenue Recognition
 
We report our revenue in two categories: license revenue and services revenue. License revenue includes perpetual or term licenses.  Service revenue includes cloud services, professional services and post-contract customer support (“PCS”).  Our arrangements for license our cloud offerings often contain multiple other elements, including professional services and PCS.
 
We recognize revenue in accordance with ASC 985-605, "Software Revenue Recognition ("ASC 985-605"), which generally requires revenues earned from software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements.  Software revenue recognition requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor's specific objective evidence ("VSOE") of fair value exists for those elements.   Revenues are allocated using the residual method when a license arrangement includes multiple elements.
 
Revenue from license fees is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.   PCS revenue is deferred and recognized on a straight-line basis over the term of the agreement.  Arrangements that include professional services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement.
 
For sales that do not included a perpetual software, we recognize revenues in accordance to Accounting Standards Update ("ASU") No. 2009-13, Topic 605 - Multiple-Deliverable Revenue Arrangements ("ASU 2009-13").  ASU 2009-13 requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price.
 
The selling price for a deliverable is based on its vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The Company then recognizes revenue on each deliverable in accordance with its policies for product and service revenue recognition. TPE of selling price is established by evaluating largely interchangeable competitor products or services in stand-alone sales to similarly situated customers. However, as our products contain a significant element of proprietary technology and its solutions offer substantially different features and functionality, the comparable pricing of products with similar functionality typically cannot be obtained.
 
Deferred revenues represent amounts received by customers and not yet recognized.  We generally do not grant a right of return to our customers.
 
Allowance for doubtful accounts
 
We maintain an allowance for doubtful accounts for estimated losses inherent in our accounts receivables portfolio. In establishing the required allowance, we base our determination, among other factors, on information available about the debtors' financial condition, the volume of their operations and our evaluation of the security received from them. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is determined to be remote.
 
Contingencies and Other Accrued Expenses
 
We are, from time to time, involved in claims, lawsuits, government investigations, and other proceedings arising from the ordinary course of our business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. Such legal proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and cash flows. If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material.
 
36

Share-based compensation
 
We have selected the Monte-Carlo option-pricing model to determine the fair value of our awards on the date of grant. Determining the fair value of equity-based awards on the grant date requires the exercise of judgment, including the amount of equity-based awards that are expected to be forfeited. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.
 
Although management believes that their estimates and judgments about equity-based compensation expense are reasonable, actual results could differ.
 
Income taxes
 
We account for income taxes in accordance with ASC 740, "Income Taxes". This Statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
 
We account for uncertain tax positions in accordance with the provisions of ASC No. 740 "Income Taxes". This accounting guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements, under which a Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Accordingly, we report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
 
Recently Enacted Accounting Pronouncements
 
               In May 2016, the FASB issued ASU 2016-11, “Revenue Recognition: Customer Payments and Incentives”, which clarifies the guidance in recognizing costs for consideration given by a vendor to a customer as a component of cost of sales. This ASU is effective for annual and interim periods beginning after December 15, 2017. We expect to adopt the standard under the modified retrospective method. However, we are continuing to evaluate the impact of the standard, and its adoption method is subject to change. We are in the process of analyzing our contracts to quantify the impact that the adoption of the standard will have on revenue.
 
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation”, which effects all entities that issue share-based payment awards to their employees. The amendments in this ASU cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. This ASU was effective for annual and interim periods beginning after December 15, 2016. The Company has determined that adoption of this method had no material impact on the financial statements.
 
In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), which requires lessees to record a right-of-use asset and a lease liability on their balance sheets.

Topic 842 supersedes the previous leases standard, ASC 840, "Leases". The guidance is effective for the interim and annual periods beginning on or after December 15, 2018, and early adoption is permitted. The Company has elected not to early adopt this standard.  The Company expects that most of its operating lease commitments will be subject to Topic 842 and will be recognized as right-of-use assets and lease liabilities upon adoption with no material impact on its results of operations or cash flows.
 
 
37

 
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016 and December 2016 within ASU 2015-04, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively, (collectively referred to as Topic 606). These updates supersede the revenue recognition requirements in ASC Topic 605, "Revenue Recognition" and nearly all other existing revenue recognition guidance under U.S. GAAP. The core principal of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services and permits the use of the retrospective or cumulative effect transition method. Topic 606 identifies five steps to be followed to achieve its core principal, which include (i) identifying contract(s) with customers, (ii) identifying performance obligations in the contract(s), (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract(s) and (v) recognizing revenue when (or as) the entity satisfies a performance obligation.
 
We anticipate that we will adopt Topic 606 using the cumulative effect approach when this guidance becomes effective for us, starting in the first quarter of 2018. The Company has determined that implementation of the standard will have not have material impact on its financial statements.
 
38


Results of Operations
 
The following table sets forth the percentage relationships of certain items from our consolidated statements of operations, as a percentage of revenues for the periods indicated:
 
   
Year ended December 31,
 
   
2015
   
2016
   
2017
 
   
%
   
%
   
%
 
                   
License revenues
   
22.8
     
18.9
     
17.6
 
Service revenues
   
77.2
     
81.1
     
82.4
 
Total revenues
   
100.0
     
100.0
     
100.0
 
                         
Cost of License revenues
   
1.6
     
2.2
     
1.9
 
Cost of service revenues
   
46.1
     
51.0
     
54.2
 
Total Cost of revenues
   
47.7
     
53.2
     
56.1
 
 
                       
Gross profit
   
52.2
     
46.8
     
43.9
 
Operating costs and expenses:
                       
Research and development, net
   
14.2
     
14.5
     
16.8
 
Selling and marketing
   
32.2
     
23.5
     
20.3
 
General and administrative
   
22.2
     
21.8
     
22.2
 
Acquisition related costs
   
-
     
-
     
-
 
Amortization of intangible assets
   
1.2
     
1.6
     
2.1
 
Restructuring Charges
   
-
     
3.6
     
1.9
 
 
                       
Total operating costs and expenses
   
69.8
     
65.0
     
63.3
 
 
                       
Operating loss
   
(17.5
)
   
(18.2
)
   
(19.5
)
Financial expenses, net
   
(3.4
)
   
(3.0
)
   
(2.0
)
Other income, net
   
0.0
     
0.0
     
0.0
 
 
                       
Loss from continuing operations before taxes on income
   
(20.9
)
   
(21.2
)
   
(21.5
)
Taxes on income (income tax benefits)
   
(3.6
)
   
0.4
     
(0.7
)
 
                       
Net loss
   
(24.5
)
   
(20.9
)
   
(22.2
)
Attributable to:
                       
 Non- controlling interest
   
0.0
     
0.0
     
0.0
 
                         
 Company's shareholders
   
(24.5
)
   
(20.9
)
   
(22.2
)

39

 
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
 
Revenues.  Total revenues for the year ended December 31, 2017 amounted to $29.7 million compared to $31.6 million for the year ended December 31, 2016, a decrease of 6.2%. The decrease in revenues was driven by a decrease in product revenues of  $.8 million, or  13%, from $6.0 million in 2016 to $5.2 million in 2017. Service revenues decreased by  $1.3 million, or 5.0%, from $25.7 million in the year ended December 31, 2016 to $24.4 million in the year ended December 31, 2017. The decrease in product revenues was mostly a result of longer sales cycles, and fewer eFlow license sales.
 
Cost of Revenues.  Cost of Revenues decreased by 1%, from $16.8 million in 2016 to $16.7 million in 2017. The decrease of  $.1 million is attributed mainly to reduction in personnel.
 
Gross margin decreased by 2.9% from 46.8% gross margin in 2016 to 43.9% gross margin in 2017, as a result of lower revenues in 2017. Most of our expenses are fixed, which causes a decrease in gross margin when revenues decline.
 
Research and Development, net.  Research and Development expenses increased by 9%, from $4.6 million in 2016 to $5.0 million in 2017. This increase is primarily a result of an increase in development resources during the year and the addition of a Senior VP of Engineering.
 
Selling and Marketing. Selling and Marketing expenses amounted to $7.5 million in the year ended December 31, 2016 and $6 million in the year ended December 31, 2017. This  20% decrease is primarily a result of a restructuring process we initiated, where the number of sales employees was reduced and thus the decrease in payroll and commissions.
 
General and Administrative.  General and Administrative expenses in the year ended December 31, 2017 was $6.6 million, compared to $6.9 million for the year ended December 31, 2016. This decrease of  4.3% is mainly a result of restructuring process we initiated, where the number of employees was reduced and thus the decrease in payroll
 
Financial expenses, net.  Our net financial expenses for the year ended December 31, 2017 decreased to $.6 million from $1 million for the year ended December 31, 2016.
 
Tax on income. In 2017, we recorded a net tax expense in the amount of $0.2 million.
 
Net (loss) income.  As a result of a decrease in our costs, in addition to a decrease in revenues as described above, we incurred a net loss of $6.6 million in 2017, compared to net loss in the amount of $6.6 million in 2016.
 
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
 
Revenues.  Total revenues for the year ended December 31, 2016 amounted to $31.6 million compared to $33.8 million for the year ended December 31, 2015, a decrease of 6.3%. The decrease in revenues was driven by a decrease in product revenues of $1.7 million, or 22.5%, from $7.7 million in 2015 to $6.0 million in 2016. Service revenues decreased by $0.4 million, or 1.6%, from $26.1 million in the year ended December 31, 2015 to $25.7 million in the year ended December 31, 2016. The decrease in product revenues was mostly a result of slower sales cycles, and fewer eFlow license sales.
 
Cost of Revenues.  Cost of Revenues increased by 4.2%, from $16.1 million in 2015 to $16.8 million in 2016. The increase of $0.7 million is attributed mainly to additional hardware costs related to some of our revenues.
 
Gross margin decreased by 5.4% from 52.2% gross margin in 2015 to 46.8% gross margin in 2016, as a result of lower revenues in 2016. Most of our expenses are fixed, while there was a decrease in revenues, which caused the decrease in gross margin.
 
40

Research and Development, net.  Research and Development expenses decreased by 4.5%, from $4.8 million in 2015 to $4.6 million in 2016. This decrease is primarily a result of lower use of contractors in 2016 and lower travel costs.
 
Selling and Marketing. Selling and Marketing expenses amounted to $10.9 million in the year ended December 31, 2015 and $7.5 million in the year ended December 31, 2016. This 31.6% decrease is primarily a result of a restructuring process we initiated, where the number of sales employees was reduced and thus the decrease in payroll and commissions.
 
General and Administrative.  General and Administrative expenses in the year ended December 31, 2015 amounted $7.5 million, compared to $6.9 million for the year ended December 31, 2016. This decrease of 7.8% is mainly a result of restructuring process we initiated, where the number of sales employees was reduced and thus the decrease in payroll
 
Restructuring charges.  During 2016 the company has executed a restructuring process. The total expenses related to this process in 2016 were $1.1 million.
 
Financial expenses, net.  Our net financial expenses for the year ended December 31, 2016 decreased to $1.0 million from $1.1 million for the year ended December 31, 2015
 
Tax on income. In 2016, we recorded a net tax income in the amount of $0.1 million. This tax income is mostly a result of current tax expenses in Germany.
 
Net (loss) income.  As a result of a decrease in our costs, primarily after a restructuring process held in 2016, in addition to a decrease in revenues as described above, we incurred a net loss of $6.6 million in 2016, compared to net loss in the amount of $8.3 million in 2015.
 
Impact of Currency Fluctuation
 
We maintain operations and generate revenues in a number of countries.  The results of operations and the financial position of some of our local operations are generally reported in the relevant local currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to currency translation risk.  In addition, we are exposed to currency transaction risk because some of our expenses are incurred in a different currency from the currency in which our revenues are received and from which our revenues and expenses are reported.  Our most significant currency exposures are to the Euro, New Israeli Shekel, British Pound, Singapore dollar, Australian dollar, Japanese Yen and Brazilian Real. In periods when the U.S. dollar strengthens against these currencies our revenue may be decrease when expressed in US dollars. In periods when the U.S. dollar weakens against these currencies, our expenses may increase when expressed in US dollars.
 
Political and Economic Conditions in Israel Affecting our Business
 
Because our principal offices are located in Israel, political, economic and military conditions in Israel directly affect our operations.  Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors.  A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel.  There has been a marked increase in such hostility and a significant deterioration of Israel’s relationship with the Palestinian Authority since October 2000 and the peace process is currently at a standstill. Since 2011 there has been increasing instability in neighboring Arab countries including Syria, Egypt, Jordan, Tunisia, Libya, Bahrain, and Yemen culminating in the replacement of certain leaders in some of those countries and the control of territories by extremist Islamic groups.  In addition, there is a high level of tension relating to Iran’s nuclear capabilities, Iran’s threats to attack Israel, Iran’s military presence in Syria, and the potential response of Israel and the international community to Iran’s gaining nuclear capabilities. Civil war in Syria has intensified and has become increasingly complex over recent months resulting in volatile developments in the region. Stray rounds from the conflict have landed in Israel from time to time and there have been cross-border skirmishes which increase the risk of escalation. 
41


In December 2017 the United States announced a plan to move the United States embassy in Israel from Tel Aviv to Jerusalem drawing criticism from Arab and European leaders and spurring protests in Israel.   Jerusalem is one of the world’s most fiercely contested areas as it is claimed by both Palestinians and Israelis.  The United States’ moving its embassy may have an impact on efforts to create peace between Israel, Palestinians and Israel’s Arab neighbors.

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

Generally, all male adult citizens and permanent residents of Israel under the age of 42 (or older, for citizens who hold certain positions in the Israeli armed forces reserves) are obligated, unless exempt, to perform military reserve duty annually and some of our employees in Israel are so obligated.  Moreover, in the event of armed conflict in which Israel is involved or the threat of such conflict, these employees might be called for active military duty for an unlimited period of time. Increased military activity could also result in a reduction of prospective qualified employees available to work for us to expand our business or replace employees on active military duty.

Economic Conditions
 
The Israeli government’s monetary policy contributed to relative price stability in recent years. Economic growth has continued in recent years, though at varying rates.  We cannot assure you that the Israeli government will be successful in its attempts to keep prices stable or that economic growth will continue.  Price volatility or a decrease in growth rates may have a material adverse effect on our business.
 
Trade Relations
 
Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation.  Israel is also a member of the World Trade Organization and is a signatory of the Global Agreement on Trade in Services and the Agreement on Basic Telecommunications Services.  In addition, Israel has been granted preferences under the Generalized System of Preferences by ,Canada and has other trade preferences from the United States, Australia and other countries.  These preferences allow Israel to export the products covered by such programs either duty-free or at reduced tariffs. Israel is also a member in the Organization of Economically Developed Countries. Israel and the European Economic Community, now known as the European Union, signed a Free Trade Agreement in 1975.  This agreement confers advantages on Israeli exports to most European countries and obligates Israel to lower its tariffs on imports from these countries over a number of years.  In 1985, Israel and the United States entered into an agreement to establish a free trade area.  The free trade area has eliminated all tariff and some non-tariff barriers on most trade between the two countries.  On January 1, 1993, an agreement between Israel and the EFTA (European Free Trade Association), which includes Austria, Norway, Finland, Sweden, Switzerland, Iceland and Liechtenstein, established a free trade zone between Israel and the EFTA nations. Free trade treaties exist with a number of other countries and are being negotiated with others. We cannot assure you that our ability to conduct trade in the international market will be unhindered by political developments in our region.
 
42

Liquidity and Capital Resources
 
As of December 31, 2017, we had $2.2 million in cash, cash equivalents, compared to $7.6 million as of December 31, 2016.
 
Our capital resources are derived from our operating activities as well as from our financing activities. In 2017, we used $2.6 million of cash in operating activity compared to $2.0 million in 2016. The increase in cash used by operating activities in 2017 compared to 2016 was mainly attributed an increase in accrued expenses, in addition to a decrease in trade receivables.
 
We believe that our current cash, cash equivalents and cash deposits, our forecasted positive cash flows for future periods, and potential borrowings under the Senior Loan will be sufficient to meet our on-going operations for the next twelve months.
 
Net cash used by investing activities for the year ended December 31, 2017 was $.6 million compared to $.1 million in 2016. In 2017, net cash used in investing activities consisted primarily of cash paid for purchase of property and equipment.
 
For the years ended December 31, 2017 and 2016, our aggregate capital expenditures were $0.6 million and $0.2 million, respectively. These expenditures were principally for the purchases of computer hardware and software.
 
Net cash provided used by financing activities was $2.2 million in 2017 compared to $7.4 million in 2016. The cash provided by financing activities was mostly attributable to an investment we received from HCP FVE in 2016 and from a short term bank loan.
 
In December 2017, we secured a $2.5 million line of credit with a U.S. based bank.  The line is secured by the accounts receivables of our U.S.subsidiary and bears interest at 2.5% or 3% (if in stream line mode) per annum and matures in December 2018.  We had borrowings outstanding of $0.8  million against the line of credit at December 31, 2017. Subsequent to December 31, 2017, the borrowings under the line were repaid and the line was cancelled.
 
In May 2018, in order to provide the Company with additional liquidity if needed, we entered into the Term Sheet with Hale Capital Partners which provides for a Senior Loan in an amount of up to $3 million as part of the secured Credit Facility that would include the existing Convertible Note held by an affiliate of Hale in an amount of $5.6 million.  The Senior Loan would include monthly repayments of $50,000 in 2019 and $100,000 from January 2020 through maturity (such amount to increase on the happening of certain events), an interest rate of Prime plus 5% payable monthly and a 36-month term.  The Credit Facility will be secured by the Company’s assets and will be guaranteed by each of our subsidiaries, subject to certain limitations.  The Senior Loan would be required to the prepaid on certain events and would be prepayable at the Company’s option at a premium beginning one year following closing.

In December 2016, we borrowed $5 million from HCP-FVE, LLC, an affiliate of Hale Capital Partners in exchange for the Convertible Note which bears interest at the prime rate plus 2.5% (if paid in cash) or 3% (if the interest capitalized) per annum and matures (if not converted prior) in December 2020.  Upon withdrawal from the Credit Facility, the Convertible Note, plus accrued interest, will be exchanged for secured notes that will be junior to the Senior Loan with an interest rate of Prime plus 4.0%.

The Company has not yet determined if it will draw on the Credit Facility.  The issuance of the warrants and the changes to the Convertible Note are conditioned upon the drawing down of the Credit Facility.  If the Company elects not to withdraw funds out of the Credit Facility, it will be obligated to pay to Hale Capital Partners, LP a break up fee of equal to three percent (3%) of the Credit Facility.
 
Research and Development, Patents and Licenses
 
In order to accommodate the rapidly changing needs of our markets, we place considerable emphasis on research and development projects designed to improve our existing product lines and to develop new product lines to meet the changing needs of our market.  In 2017, as part of our efforts to strengthen our position, we continued investing in research and development with expenses level of $5.0 million, compared to $4.6 million in 2016, and to $4.8 million in 2015. As of December 31, 2017, 34 of our employees were engaged primarily in research and development activities. We expect that we will continue to commit substantial resources to research and development in the future. For further details about our product see “Business Overview - Products and Solutions”.
 
Off-Balance Sheet Arrangements
 
We are not a party to any material off-balance sheet arrangements.
 
Tabular disclosure of contractual obligations.
 
The following is a summary of our significant contractual obligations as of  December 31, 2017:
 
   
Payment due by period ($ thousands)
 
Contractual Obligation*
 
Total
   
Less Than 1
Year
   
1-3 Years
   
3-5 Years
   
More than
5 Years
 
Operating and Capital Lease Obligation
   
2,569
     
1,183
     
1,386
     
-
     
-
 
Accrued severance pay**
   
b721
     
-
     
-
     
-
     
721
 
 
*Our contractual obligations and commitments at December 31, 2017 principally include obligations associated with our operating and capital lease obligations and contractual and legal obligations related to employees and officers’ severance expense.  Such obligations are detailed in Note 8 to the consolidated financial statements for the year ended December 31, 2017 as well as the section entitled “Compensation” herein. We expect to finance these contractual commitments from cash on hand and cash generated from operations.
 
**Severance pay related to accrued obligations to employees as required under applicable labor law. These obligations are payable only upon termination, retirement or death of the respective employee.
 
43


ITEM 6.          DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
Directors and Senior Management
 
The following table sets forth the identity of our directors, and senior management as of March 31, 2018.  The mailing address for each of the individuals below is c/o TIS at our address set forth herein.
 
Name
 
Age
 
Title
Donald R. Dixon
 
70
 
Chairman of the Board
Brendan Reidy
 
64
 
Chief Executive Officer
Patti Barton
 
57
 
Acting Chief Financial Officer
Martin Hale
 
46
 
Director
Izhak Nakar
 
67
 
Director
Ido Schechter
 
57
 
Director
Osnat Segev-Harel
 
56
 
Director
 
Donald R. Dixon was appointed Chairman of the Board beginning in January 2017. He was first elected to serve as a director in July, 2014. Mr. Dixon is also a Managing Director of Trident Capital and co-founded the firm in 1993. Currently, Mr. Dixon serves also as a director of 2Checkout,  Advanced Payment Solutions, Amprius, Odyssey Logistics, Qualys (QLYS), SivaPower and Tiandi Energy. Mr. Dixon is also on the investment committee of Mustang Ventures, an affiliated China fund of Trident Capital Fund VI. In the past, Mr. Dixon has served as a director of a number of other corporations, many of which were acquired, including eGistics, Inc. which we acquired in July 2014. In addition to his board work for Trident, Mr. Dixon is Co-Chairman of the Advisory Committee of the Princeton University School of Engineering and Applied Sciences. Mr. Dixon also serves on the Advisory Board of the Harvard Kennedy School Center for Public Leadership. From 1988 to 1993, Mr. Dixon was Co-President of Partech International, a private equity fund associated with Banque Paribas. Prior to Partech, he was a Managing Director of Alex. Brown & Sons. Earlier in his career, Mr. Dixon was a Vice President of Morgan Stanley & Co. and a Senior Account Officer at Citibank, N.A. Raised in New Jersey, Mr. Dixon earned his B.S.E. from Princeton University and his M.B.A. from Stanford Graduate School of Business.
 
Brendan Reidy August 31, 2016 Brendan Reidy assumed the position of Chief Executive Officer of the Company in August , 2016. Mr. Reidy is a seasoned executive with a proven track record of driving rapid growth and increased shareholders’ value within the software as a service (“SaaS”) industry. Mr. Reidy most recently served as President, Chief Operating Officer and Chief Technology Officer of XRS Corporation.  Under Mr. Reidy’s leadership, XRS achieved a nearly twelvefold increase in valuation leading to the sale of XRS at a premium. In parallel, Mr. Reidy served as a member of the board of directors of eGistics for ten years prior to our acquisition of the company. Previously Mr. Reidy was Chairman, President and CEO of Clarus Systems, Inc. In addition, Mr. Reidy also served as a Venture Partner at Trident Capital, and at various times served on the boards of four Trident portfolio companies and held two full-time positions with portfolio companies. He earned an M.B.A. from The Wharton School, University of Pennsylvania, and a B.A. from Stanford University.
 
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Patti Barton was appointed Acting Chief Financial Officer in 2017.  Patti has been with Top Image Systems since 2015, having previously served as Vice President – Global Finance based in our US Headquarters.  Patti has extensive experience in leading organizations to improved financial strength and increased shareholder value.   Patti seasoned accounting executive with broad experience in financial leadership.  Before joining Top Image Systems, Ms. Barton served in financial leadership roles Pulte Homes, Fannie Mae and Inland Investments. Ms. Barton began her career with eight years with KMPG and is a licensed CPA.  Ms. Barton earned a B.B.A. from the University of Texas at Arlington College of Business.
 
Martin Hale founded Hale Capital Partners in 2007. Prior to that, Mr. Hale was a founding member of Pequot Ventures (now known as FirstMark Capital) where he served as a member of the General Partner. From 2002 to 2007, Mr. Hale was a Managing Director and a Member of the Operating & Investment Committees helping to lead 7 funds with approximately $2.2 billion under management. Prior investments included Cobalt Networks (IPO, sold to Sun Microsystems for $2 billion), Flarion Technologies (sold to Qualcomm for $850 million), Celiant Corporation (sold to Andrew Corp. for more than $500 million) and Analex Corporation (sold to QinetiQ for $188 million). Prior to Pequot Ventures Mr. Hale was an Associate at Geocapital Partners and an Analyst at Broadview International. He received his B.A. cum laude from Yale University.
 
Izhak Nakar founded the Company in 1991, and served as our Chairman of the Board and CEO from inception until 2001.  In 2001 – 2009, Mr. Nakar served as a Director.  From 2009 to December 31, 2016, Mr. Nakar has served as the Active Chairman of the Board. On December 31, 2016, Mr. Nakar ceased being the Active Chairman of the Board, but continues as a Director, Until June 30, 2017, he will continue supplying certain services to the Company that he supplied as Active Chairman. Mr. Nakar has co-founded several technology companies including us and TopGuard (acquired by Elron Software NASDAQ:ELRN), e-Mobilis, Momsense and has founded Anir Vision and NIR 4 YOU Technology.  Mr. Nakar served in the Israeli Air Force from 1970 to 1987, where he led various large-scale, highly technical development projects, including leading a development team that worked in cooperation with the U.S. Air Force. He received his B.Sc. in Computer Science from Bar Ilan University in 1982, and an MBA from Bar Ilan University in 1984. Mr. Nakar is a recipient of the “Israel Defense Award,” bestowed annually by the President of Israel, for the development of high-tech systems in the field of intelligence for the Israeli Defense Forces. He also received the “Man of the Year Award” in Business and Management (‘95-’96) in recognition of his business accomplishments and contributions to the growth and development of Israeli high-tech companies. In addition, in 2004, Mr. Nakar was elected as a member of the Board of Israel-Japan chamber of Commerce.
 
Ido Schechter served as our CEO from January 2002 through December 2013, and has been a director since December 2004.  From January 2001 until he became CEO, Dr. Schechter was Vice President of TIS’ ASP2, our initiative to offer data collection services via the Internet, using the eFLOW® platform solution.  Prior to that Dr. Schechter was TIS’s Vice President of Sales from August 1996.  From January 1995 until August 1996, Dr. Schechter served as General Manager of Super Image, a former affiliate of ours, which operated a form processing service bureau.  From August 1993 to December 1994, Dr. Schechter oversaw the start-up of automatic form processing services at Israel Credit Cards, Ltd.  From 1991 to 1993, Dr. Schechter was a research scientist at the Horticultural Research Institute of Ontario, Canada.  Dr. Schechter is the recipient of eight Honors and Scholarships, has published or presented more than twenty-five articles and is a Captain in the Israeli Air Force.  Dr. Schechter received his Ph.D.  and M.Sc. in Plant Physiology from the University of Guelph in Ontario, Canada and his B.Sc.  from the Hebrew University in Israel.
 
Osnat Segev-Harel was elected to serve as an external director in December, 2011 and was re-elected for a three-year term in December, 2014. Since November 10, 2016, she serves as a director. Ms. Segev-Harel has extensive experience of over 15 years in business development for high-tech companies. Ms. Segev-Harel is currently serves as a go to market consultant for early stage high tech companies.  Until December 2013 Ms. Segev-Harel served as CMO and VP of business development for Sapiens International Corporation N.V. From 2005 through 2009 Ms. Segev-Harel served as a director of sales strategy and planning and as director of business development in NICE Actimize Inc. in New York, in which she has acquired a deep knowledge of the global banking industry in general and in North America in particular From 1995 through 2005 she served as business development executive in IBM, Israel, including as an account manager in IBM’s Banking Division.  Prior to that, between 1988 and 1994 Ms. Segev-Harel was a User Interface project leader in Digital Equipment Corporations, Israel.  Ms. Segev-Harel holds a Practical Engineering degree from the Hadassah College in Jerusalem, a B.Sc. in Futurism from the State University of New York and an MBA from Derby University majoring in Strategy. Ms. Segev-Harel has completed a Directors Certification Program at Bar Ilan University. Ms. Segev-Harel possesses professional competence as required by the Companies Law and regulations deriving thereof. 
 
45

The foregoing information is based upon data provided to us by the relevant director or senior management member.
 
The Company is not aware of any familial relationships between any of the persons named above.
 
Compensation
 
The aggregate direct remuneration paid or payable to all persons who served in the capacity of executive officer during 2017 was approximately $959,000, including approximately $137,000, which was set aside for pension and retirement benefits and including amounts expended by us for automobiles made available to our executive officers.
 
Our agreement with Mr. Reidy, the Chief Executive Officer of the Company, provides for a base salary of $0.3 million per year and for, pension, vacation or similar benefits.  During 2017 Mr. Reidy was paid $0.3 million.
 
Mr. Reidy is entitled to receive a bonus amount of $0.2 million per annum, based on achievement of performance goals set by the Board of Directors.  During 2017 no bonus payments were made.
 
In 2016, Mr. Reidy was awarded options to purchase 563,654 ordinary shares of the Company and additional 563,654 RSUs. The exercise price per share of the options is $1.66. One third of the options and RSUs vested on August 23, 2017, and the remaining half will vest in equal monthly amounts, over a period of the following 24 months.
 
The total amount paid or payable to our directors, for 2017 was $0.2 million. As of March 31, 2018, options to purchase 1,694,963 of our ordinary shares were held by certain executive officers and directors (consisting of 12persons). Options with respect to  885,637of such shares are currently exercisable or will become exercisable within 60 days of March 31, 2018. (See “Share Ownership.”)
 
The compensation of our directors for 2017 (approved by our Compensation Committee and by our Board of Directors was as follows: Each of Mr. Don Dixon, Mr. Izhak Nakar, Mr. Martin Hale, Ms. Osnat Segev-Harel and Dr. Ido Schechter received compensation for his or her service, in the amount of NIS 49,875 (approximately $13,000) per year and an amount of NIS 3,330 (approximately $870) for each meeting of the Board of Directors or any committee in which they participate.
 
·
In 2016, the Company reduced the exercise price on certain options in order to maintain incentive.
 
For further details about Mr. Nakar’s compensation see “Related Party Transactions”.

Committees of the Board
 
Audit Committee
 
Our audit committee is comprised of Donald Dixon, Martin Hale and Osnat Segev-Harel. The Companies Law requires that public companies appoint an audit committee.  The responsibilities of the audit committee include: identifying defects or irregularities in the management of the company’s business, deciding  if certain actions are material in the context of conflicts of interest or extraordinary in the context of  transactions with related parties and approving conflicts of interest and related party transactions, determining whether certain transactions with controlling shareholders require a competitive process or the process for approval of non-insignificant transactions, reviewing and suggesting changes to the internal auditor work plan, examining our internal auditing arrangements and the functioning of the internal auditor and  determining  arrangements as to treatment of complaints by our employees regarding defects in the management of the company’s business and the protections to be given to such employees.  In addition, as described under Item 16, the audit committee is responsible for the approval of all audit and non-audit services provided to the Company by Ernst and Young and for overseeing the qualifications, independence, appointment, compensation and performance of the Company’s independent auditors. The audit committee operates under a charter adopted by our Board of Directors and which is on display on our website at http://www.topimagesystems.com. Donald Dixon is the chairman of our audit committee. Furthermore, as required by NASDAQ rules all the members of our audit committee are independent, see “Directors, Senior Management and Employees- Independent Directors”.
 
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NASDAQ rule 5605(c)(3) provides that an audit committee must have at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. The Board of Directors has determined that Osnat Segev-Harel meets those requirements.
 
Compensation Committee
 
Our compensation committee is comprised of Donald Dixon, Martin Hale and Osnat Segev-Harel. Osnat Segev-Harel is the chairperson. The Companies Law requires public companies to appoint a compensation committee. The responsibilities of the compensation committee under the Companies Law include: making recommendations to the Board of Directors with respect to our Compensation Policy and its extensions for additional periods, periodically reviewing the implementation of the Compensation Policy and providing the Board of Directors with recommendations with respect to any amendments or updates of it, approving transactions and  arrangements with respect to the Terms of Office and Employment of office holders exempting a transaction with a candidate for chief executive officer from shareholder approval. The compensation committee also oversees the administration of the Company’s various compensation plans and arrangements, in particular, the incentive compensation, deferred compensation and equity based plans of the Company (and to the extent appropriate, the subsidiaries of the Company) and assists the Board in fulfilling its responsibilities relating to the compensation of directors, the chief executive officer and other office holders of the Company. Furthermore, as required by NASDAQ rules all the members of our compensation committee are independent, see “Directors, Senior Management and Employees- Independent Directors”.
 
Independent Directors
 
As a foreign private issuer, the Company follows the rules of the State of Israel in connection with the nomination of directors and the composition of its audit committee and compensation committee. Those rules are described under the rubrics "Audit Committee" (page 50), "Compensation Committee" and "Independent Directors" (page 51) and "External Directors" (page 60) in the Company's Form 20-F filed on April 15, 2016 (available for viewing at https://www.sec.gov/Archives/edgar/data/1021991/000117891315001250/zk1516580.htm).

On April 17, 2016, Israel adopted Regulation 5D of the Companies Regulations (Relief for Companies with Shares Registered for Trading Outside of Israel), 5760-2000 (the "Relief Regulations").  That regulation provided that, if shares of a company are registered for trading on a stock exchange listed in Regulation 5A(3) of the Relief Regulations (NASDAQ is so listed), the Company has no controlling shareholder as defined in the Companies Law, the Company fulfills the laws that apply to companies registered in the country of the stock exchange, with regard to the appointment of independent directors and the composition of audit committees and compensation committees, the company may elect not to be bound by the provisions of the Companies Law that require the appointment of external directors and their service on its audit and compensation committees. Even if a company so elects, it may not have a board of directors composed only of the members of one sex. A company that so elects is entitled to stipulate that the persons serving as external directors as of the time of the election may continue to serve as (non-external) directors until the earlier of (i) the end of the period for which each was elected or (ii) the second annual general meeting following the date of this resolution.

47

On November 10, 2016, the Company's Board of Directors determined that the Company met the requirements under regulation 5D of the Relief Regulations and elected not to be bound by the provisions of the Companies Law that require the appointment of external directors and their service on its audit and compensation committees. The Company further resolved that its external directors who were serving as of November 10, 2016 (Osnat Segev-Harel and Asael Karfiol) would continue to serve as directors until the earlier of (i) the end of the period for which each was elected or (ii) the second annual general meeting following the date of this resolution.  Asael Karfiol has since ceased to be a director.

There are no requirements under Israeli law or regulations for the formation of a nomination committee nor regarding the general procedure for nominating directors for their terms in publicly traded companies.
 
Employees
 
The following table presents the number of our employees categorized by geographic location:
 
Location
 
No. of Employees as of December 31,
 
   
2015
   
2016
   
2017
 
Israel
   
43
     
37
     
26
 
Germany and rest of Europe
   
76
     
64
     
60
 
Japan
   
7
     
7
     
7
 
USA & Latin America
   
65
     
61
     
58
 
United Kingdom
   
13
     
12
     
9
 
Singapore and Hong Kong
   
29
     
25
     
19
 
Australia
   
7
     
7
     
6
 
Total
   
240
     
213
     
185
 
 
The following table presents the number of our employees categorized by activity:

   
No. of Employees as of December 31,
 
   
2015
   
2016
   
2017
 
Professional services
   
119
     
106
     
104
 
Research and development
   
41
     
37
     
34
 
Sales and marketing
   
49
     
37
     
27
 
Operations and administrations
   
31
     
33
     
20
 
Total
   
240
     
213
     
185
 
 
We have never experienced any strikes or work stoppages. Substantially all of our employees have employment agreements and none are represented by a labor union.

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

48

 
Share Ownership
 
Board of Directors, Senior Management and Certain Employees
 
Izhak Nakar, who served as the Active Chairman of our Board of Directors through December 2016 and who continues to serve as a director, beneficially owned 1,911,659 ordinary shares representing approximately 10.5% of the Company’s issued and outstanding share capital, as of March 31, 2018. Ido Schechter, our former Chief Executive Officer and member of the board, beneficially owned 205,075 ordinary shares representing approximately 1.1% of the Company’s issued and outstanding share capital, as of March 31, 2018. All other directors and executive officers each beneficially owned 1.6 % of the Company’s shares. The following table sets forth information regarding options held by our directors and officers currently exercisable or exercisable within 60 days as of March 31, 2018.  Ordinary shares subject to these options are deemed to be outstanding for the purpose of computing the ownership percentage set forth above of the person holding these options, but are not deemed to be outstanding for the purpose of computing the ownership percentage of any other person.
 
 
Name
 
Ordinary Shares
Underlying Options and RSU’s
 
 
Expiration Dates
 
 
Exercise Prices ($/share)
Options
           
Izhak Nakar
 
305,000
 
2019 – 2027
 
$1.29 - $3.86
Ido Schechter
 
180,000
 
2021 – 2027
 
$1.29 - $3.86
Brendan Reidy
 
563,654
 
2026
 
$1.66
Don Dixon
 
50,000
 
2025-2027
 
$1.29 - $3.30
Patti Barton
 
29,833
 
2025-2026
 
1.26-3.42
All other directors and officers as a group
 
126,335
 
2021 – 2025
 
$2.11 - $6.04
RSU’s
           
Brendan Reidy
 
30,336
 
2026
 
-
 
None of the ordinary shares beneficially owned by any of the directors or executive officers of the Company has any voting rights which are different than the voting rights held by all other holders of ordinary shares.
 
Stock Options
 
In order to attract, retain and motivate employees (including officers) who perform services for or on our  behalf, we maintain three Employee Share Option Plans, one established in 1996 (“ESOP 1996”), the second in 2000 (“ESOP 2000”) and the third in 2003 (“ESOP 2003”).  Upon adoption of ESOP 2003, all shares previously available for grant under ESOP 1996 and ESOP 2000 that were not the subject of outstanding options were transferred to ESOP 2003 and are subject to the terms of ESOP 2003. Further, all options under such old plans that expire prior to their exercise according to the conditions detailed therein will be transferred into the new plan. On August 29, 2013, our Board of Directors, based on the recommendation of our compensation committee of the same day, resolved to amend and restate ESOP 2003 ("Amended ESOP 2003"). Those decisions were approved by the shareholders on October 15, 2013. On December 23, 2016, the shareholders approved the 2016 Israeli Incentive Plan (the "2016 Plan"), which will govern options awarded after such date.  While the 2016 Plan retains most of the terms and conditions of the Amended ESOP 2003, it incorporates changes, inter alia, with regard to ability to issue RSUs.  We filed the necessary documents with the Israeli tax authorities for the approval of the 2016 Plan on January 4, 2017 and the Company is entitled to award options under it 30 days after the filing. As a result, Israeli grantees are eligible for certain benefits under Section 102 of the Israeli Income Tax Ordinance (New Version) 1961. On June 15, 2016, upon recommendation of the Compensation Committee, the Board approved a voluntary repricing plan by which option holders could elect to exchange their current options for new options at a ratio of 1:2 (1 new option for every 2 options currently held by the option holder). The exercise price for the new options was set at $2.11 All other terms of the options remained unchanged. Implementation of the repricing plan with regard to the options held by directors and the CEO were approved by the shareholders on December 23, 2016.  In October 2017 the stockholders approved a US sub-plan to the Company's 2016 Israeli Incentive Plan. As of March 31, 2018, options to purchase an aggregate of 3,119,293 ordinary shares were outstanding.  The outstanding options are exercisable at exercise prices between $1.30 and $6.04. In addition, 407,725 RSUs were outstanding as of March 31, 2018.
 
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Further, upon the recommendation of the Compensation Committee, the Board decided on June 15, 2016 to allow executives eligible for performance-based bonuses to elect to receive bonuses in whole or in part as restricted share units ("RSUs") instead of awarding full cash bonuses. The RSUs are to be issued at par value to members of the executive management who are subject to the compensation policy, who have met certain targets set by the Board. Each grant of RSUs will vest in two equal parts, subject to the continued employment of the grantee. As of March 31, 2018, a total of 407,725 RSUs had been issued to several officers and were outstanding.
 
On August 3, 2016, the board of directors approved the repricing of all unvested options as of that date, to an exercise price of $ 2.11. The number of options and the vesting terms for the repriced options remained unchanged. Total of 401,414 unvested options were repriced during 2016 based on this plan.
 
In addition to shares reserved in the event of the exercise of the outstanding options, 1,722,279 shares are reserved in the event of the issue of additional options or RSUs.
 
ITEM 7.          MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
Major Shareholders
 
The following table sets forth certain information regarding the beneficial ownership of our outstanding ordinary shares as of March 31, 2018, for each person whom we know (based on filings with the SEC) beneficially owns five percent or more of the outstanding ordinary shares.
 
Beneficial ownership of shares is determined under SEC, and generally includes any shares over which a person exercises sole or shared voting or investment power. The number of shares indicated as “Beneficially Owned” in the following table includes the number of shares underlying options or warrants that are currently exercisable or may be exercised in 60 days.  Ordinary shares subject to these options are deemed to be outstanding for the purpose of computing the ownership percentage of the person holding these options, but are not deemed to be outstanding for the purpose of computing the ownership percentage of any other person. Applicable percentages are based on 18,251,722 ordinary shares outstanding as of March 31, 2018.
 
Name
 
Number of Shares
Beneficially Owned
   
Percentage of Shares
 
Izhak Nakar (1)
   
1,911,659
     
10.5
%
Entities Associated with Trident Capital, Inc. (2)
   
2,346,707
     
13.0
%
                 
 
(1)
Mr. Nakar’s beneficially owned shares includes 1,562,735 ordinary shares held by Nir 4 You Technologies Ltd., which is owned by Mr. Nakar.
 
(2) The information is based upon the recent Schedule 13G filed with the SEC by Trident Capital Management V LLC on February 17, 2015. Consists of (i) 2,102,267 held of record by Trident Capital Fund-V, L.P., a Delaware limited partnership, (ii) 60,846  held of record by Trident Capital Fund-V Principals Fund, L.P., a Delaware limited partnership, (iii) 12,218 held of record by Trident Capital Fund-V Affiliates Fund, L.P., a Delaware limited partnership, (iv) 11,659 held of record by Trident Capital Fund-V Affiliates Fund (Q), L.P., a Delaware limited partnership, and (v)  159,717 held of record by Trident Capital Parallel Fund-V, C.V., a partnership organized under the laws of the Netherland. Trident Capital Management-V, L.L.C, a Delaware limited liability company (“TCM-V”), is the sole general partner of Trident Capital Fund-V, L.P., Trident Capital Fund-V Affiliates Fund, L.P., Trident Capital Fund-V Affiliates Fund (Q), L.P. and Trident Capital Fund V Principals Fund, L.P. TCM-V is the sole investment general partner of Trident Capital Parallel Fund-V, C.V. The members of TCM-V are Donald R. Dixon, Peter T. Meekin, John H. Moragne and Robert C. McCormack (collectively, the “Managers”), together in the case of certain such individuals with their respective family planning vehicles as reported as of July 31, 2014. The Managers of TCM-V share voting and investment power with respect to the shares held by each fund.
 
50

 
Significant Changes in Percentage Ownership
 
In February 2014, we closed on an underwritten public offering of 3,162,500 of our ordinary shares at $4.75 per share for gross proceeds of $15.0 million. The aggregate amount of ordinary shares sold reflects the exercise in full by the underwriters of their option to purchase up to 412,500 additional ordinary shares to cover over-allotments.  We received net proceeds of approximately $13.7 million from the sale of ordinary shares, after deducting the underwriters’ discounts and other offering expenses. The net proceeds from the offering have been and will be used for general corporate purposes, including acquisitions.  Canaccord Genuity Inc. acted as the sole book-running manager for the offering, and Roth Capital Partners and The Benchmark Company, LLC acted as co-managers.
 
As of March 31, 2018, 18,251,722 ordinary shares of Company were issued and outstanding.  The Company believes that, as of March 31, 2018, there were 21 shareholders of record of the Ordinary Shares in the United States, who, collectively held as of that date a total of 16,416,923 ordinary shares, or 89.9% of the Company’s total outstanding ordinary shares.
 
Related Party Transactions
 
In May 2018, we entered into the Term Sheet with Hale Capital Partners.  Hale Capital Partners is an affiliate of Martin Hale.

In December 2016, we borrowed $5 million from HCP-FVE, LLC.  HCP-FVE is an affiliate of Martin Hale.
 
The Company has not yet determined if it will draw on the Credit Facility.  If the Company draws on the Credit Facility, there will be changes made to the Convertible Note.  If the Company elects not to withdraw funds out of the Credit Facility, it will be obligated to pay to Hale Capital Partners, LP a break up fee of equal to three percent (3%) of the Credit Facility.
 
Our agreement with Mr. Izhak Nakar provided that in consideration for his services to the Company worldwide, Mr. Nakar was entitled to compensation in the amount of $28.1 thousand plus VAT per month. This amount was reduced to $24.8 thousand plus VAT per month during the months of April to December 2016.
 
During 2017 and 2016, we paid Mr. Nakar $197 thousand and $359 thousand in cash compensation.  That agreement ceased on June 30, 2017.
 
In addition, during 2015, Mr. Nakar was awarded options to purchase 100,000 ordinary shares of the Company, vesting in two equal parts such that 50% vested on December 31, 2015 and the remainder vested on December 31, 2016. The exercise price per share of the Options was $3.30. 50,000 options related to this grant were repriced during a repricing process in 2016, the repriced share price was $2.11. Pursuant to our agreements with Mr. Nakar, Mr. Nakar was entitled to receive a payment equal to 4.25% of our EBITDA for the year ended December 31, 2016, if we met certain revenue and EBIDTA targets set by the Board.
 
The terms of Mr. Nakar's compensation for 2016 other than the options and conditional bonus were approved in accordance with Israeli law as it existed prior to the 2012 Amendment (see "Approval of Terms of Office and Employment"). Under the transitional provisions of that amendment, the approval remains effective. The conditional bonus was approved by the Compensation Committee and then the Board of Directors on May 17, 2016 and then by the Shareholders at the Company’s annual general meeting on December 23, 2016.  No payments have bene made related to the conditional bonus.
 
From time to time, as new members join our Board of Directors, they become parties to our letter of indemnification to be given to our directors and officers. The letter was approved by our shareholders at a shareholders meeting held on November 15, 2005 and amended at a shareholders meeting held on December 22, 2011. The aggregate indemnification amount that the Company will pay to all its officers and directors pursuant to these letters of indemnification shall not exceed $20,000,000.
 
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ITEM 8.          FINANCIAL INFORMATION
 
Consolidated statements and other financial information
 
Consolidated Financial Statements
 
See Item 18.
 
Other Financial Information
 
The amount of export revenues constitutes a significant portion of our total revenues.  The following is a table giving details of our export revenues, as well as the breakdown of revenues between products and services.
 
   
2015
   
2016
   
2017
 
   
$ Thousands
 
Export Revenues
                 
Export Revenues
   
33,063
     
30,993
     
29,135
 
Total Revenues
   
33,791
     
31,635
     
29,663
 
Percentage of Total Revenues
   
97.8
%
   
98.0
%
   
98.2
%
                         
Breakdown of Revenues
                       
License Revenues
   
23
%
   
19
%
   
18
%
Service Revenues
   
77
%
   
81
%
   
82
%
 
Legal Proceedings

During 2016, a third party that the Company works with sued the Company for alleged comments that they believe the Company made that could lead to a breach of contract. The Company has filed a counter-suit.  In March 2018 the parties settled all claims in exchange for a payment of approximately $389 thousand, which was accrued in the Company’s financial statements as of December 31, 2017.  Subsequent to December 31, 2017 we paid the third party $384 thousand in relation to the settlement of all claims.  This amount was accrued in the financial statements as of December 31, 2017.
In August 2017, one of the Company’s customers claimed for damages for non-contractual fulfilment. The Company and i's attorneys cannot yet assess the possible outcome.

In October 2017 a former executive raised claims regarding his termination from employment.  In December 2017 the parties settled all claims in exchange for a payments totaling approximately $569 thousand to be throughout 2018, which was accrued in the Company’s financial statements as of December 31, 2017.

In December 2017, one of the Company’s customers claimed for damages, for non-contractual fulfilment. The Company and its attorneys cannot yet assess the possible outcome.

Subsequent to December 31, 2017, in March 2018, one of the Company’s customers claimed for alleged breach of maintenance contact by the Company. The Company and its attorneys cannot yet assess the possible outcome.
 
Dividend Policy
 
To date, we have not paid any dividends on our ordinary shares.  The payment of dividends in the future, if any, is within the discretion of the Board of Directors and will depend upon our earnings, our capital requirements and financial condition and other relevant factors.  We may not declare or pay any dividends on ordinary shares in the future.
 
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The Company has issued the Convertible Note to HCP FVE. The Convertible Note is to be converted to Series A Preferred Shares if and when shareholder approval for articles authorizing such shares is obtained. The preferred shares, if issued, will be entitled in certain circumstances to receive dividends at the prime rate plus 2.5% - 3%.  Upon withdrawal from the Credit Facility, the Convertible Note, plus accrued interest, will be exchanged for secured notes that will be junior to the Senior Loan with an interest rate of Prime plus 4.0% and the convertibility to convertible preferred shares will be cancelled.
 
We have the status of an “Approved Enterprise” and "Benefited Enterprise" under the Law for the Encouragement of Capital Investments, 1959, and as amended, under which we may take advantage of certain tax exemptions. If we distribute a cash dividend from income which derived from the Approved and Benefited Enterprise during the tax exemption period, we would have to pay corporate tax at a rate of up to 25% (depending on the foreign investments in the Company) on the amount equal to the amount distributed and on the amount of corporate tax which would have been due in the absence of the tax exemption, in addition to withholding tax on such dividends paid. For further description of the conditions limiting our ability to declare and pay dividends see “Israeli Taxation, Foreign Exchange Regulation and Investment Programs".
 
The distribution of dividends may also be limited by the Companies Law, which permits the distribution of dividends only out of retained earnings or earnings derived over the two most recent fiscal years, whichever is higher, provided that there is no reasonable concern that payment of a dividend will prevent a company from satisfying its existing and foreseeable obligations as they become due. Our articles of association provide that dividends will be paid at the discretion of, and upon resolution by, our Board of Directors however, the Board of Directors at its discretion, may transfer the decision in this matter to the general meeting.
 
  Significant Changes.
 
None.
 
ITEM 9.          LISTING
 
Offer and Listing Details.
 
Since November 1996, our ordinary shares have been quoted on the NASDAQ.  Since April 29, 1999, the symbol for the ordinary shares has been “TISA.”
 
The following table sets forth, for the periods indicated, the high and low closing prices of our ordinary shares, as reported on the NASDAQ.
 
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Stock price history
 
The annual high and low market prices (in USD) for the ordinary shares for the five most recent full financial years are set forth below:
 
Year Ended
   
Price
 
December 31, 2017
Hi
 
$
1.63
 
 
Lo
   
.98
 
           
December 31, 2016
Hi
   
2.98
 
 
Lo
   
1.22
 
           
December 31, 2015
Hi
   
4.32
 
 
Lo
   
2.83
 
           
December 31, 2014
Hi
   
5.88
 
 
Lo
   
3.29
 
           
December 31, 2013
Hi
   
6.04
 
 
Lo
   
2.66
 
 
The high and low market prices for the ordinary shares for each full financial quarter over the two most recent full financial years and any subsequent period are set forth below:
 
Quarter Ended
   
Price
 
     
December 31, 2017
Hi
 
$
1.63
 
 
Lo
   
.98
 
           
September 30, 2017
Hi
   
1.36
 
 
Lo
   
1.11
 
           
June 30, 2017
Hi
   
1.42
 
 
Lo
   
1.17
 
           
March 31, 2017
Hi
   
1.59
 
 
Lo
   
1.22
 
           
December 31, 2016
Hi
 
$
2.33
 
 
Lo
   
1.22
 
           
September 30, 2016
Hi
   
2.39
 
 
Lo
   
1.76
 
           
June 30, 2016
Hi
   
2.44
 
 
Lo
   
1.42
 
           
March 31, 2016
Hi
   
2.98
 
 
Lo
   
1.52
 
 
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For the most recent six months, the high and low market prices of the ordinary shares for each month are set forth below:
 
Month Ended
   
Price
 
         
March 31, 2018
Hi
 
$
1.06
 
 
Lo
   
.96
 
           
February 28, 2018
Hi
   
1.12
 
 
Lo
   
.99
 
           
January 31, 2018
Hi
   
1.17
 
 
Lo
   
1.07
 
           
December 31, 2017
Hi
   
1.28
 
 
Lo
   
.98
 
           
November 30, 2017
Hi
   
1.28
 
 
Lo
   
1.03
 
           
October 31, 2017
Hi
   
1.63
 
 
Lo
   
1.25
 
 
Markets
 
Our ordinary shares were dual-listed on the TASE on December 3, 2006, in addition to being listed on the NASDAQ.  Effective October 31, 2014, we voluntarily delisted from TASE.
 
ITEM 10.       ADDITIONAL INFORMATION
 
Memorandum and Articles of Association
 
General
 
TIS is registered with the Israel Registrar of Companies.  The registration number issued to TIS by the Registrar of Companies is 52-004294-6.  The objectives for which we were founded are set out in Section 2 of the Memorandum of Association as follows: “The Company is permitted to deal with any activity that is meant to advance the interests of the Company and to act in any field which the Company’s management believes is beneficial to the Company.” At our December 22, 2011 shareholders meeting, we adopted a new set of Articles of Association to accommodate changes that had been made in the Companies Law and in the Israel Securities Law, 1968-5728 (the Securities Law). At our October 19, 2017 shareholders meeting, the shareholders approved an amended and restated Articles of Association which provide for among other things, (i) HCP FVE’s right to appoint a member of the Board of Directors and (ii) the creation of a class of preferred stock into which HCP FVE’s Convertible Notes will be convertible.
 
 
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Directors and other Office Holders
 
General
 
A director’s ability to vote on a proposal, arrangement or contract in which the director is materially interested is codified, along with the fiduciary duties of all “office holders,” in the Companies Law.  Under the Companies Law, the term “office holders,” is defined to mean, a director, chief executive officer, chief business manager, deputy chief executive officer, vice chief executive officer, any person filling any of those roles in a company even if his title is different and any other manager directly subordinate to the chief executive officer.  An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty.  The duty of care includes avoiding negligent acts and acting skillfully as a reasonable office holder would act.  The duty of loyalty includes avoiding any conflict of interest between the office holder’s position in the company and his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others, and revealing to the company any information or documents relating to the company’s affairs which the office holder has received due to his position as an office holder of the company.
 
The Israeli Companies Law requires that an office holder promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company.
 
In the case of a transaction in which an office holder (other than a director or the CEO) has a personal interest, that is not an extraordinary transaction, as defined under Israeli law, and after the office holder complies with the above disclosure requirement, only board approval is required.  Members of the board having a personal interest should not be present at the vote or exercise their vote unless a majority of the board has a personal interest. The transaction must not be adverse to the company’s interest. If such transaction is an extraordinary transaction or if we intend to provide an undertaking to indemnify, exempt or insure an office holder, with regard to their duties, then, in addition to any approval required by the Board of Directors or by any other organ of the company according to its Articles of Association, it also must be approved by the audit committee or compensation committee (depending on the nature of the transaction) prior to the approval by the Board of Directors, and, under specified circumstances, by a meeting of the shareholders.  .
 
Arrangements regarding the compensation of our directors (whether regarding in their capacity as directors or regarding the provision of other services) or of our CEO require compensation committee, Board of Directors and shareholder approval, in some cases with special majorities.
 
Alternate Directors
 
Under the Companies Law, the Articles of Association of a company may entitle a director to appoint another person to serve as an alternate director.  Our Articles entitle our directors by written notice to us to make such an appointment and to cancel any such appointment.  Our Articles also provide that any person may act as an alternate director.  The Companies Law prohibits incumbent directors from acting as alternate directors and a single person from acting as an alternate director for more than one incumbent director.
 
The term of appointment of an alternate director may be for one meeting of the Board of Directors or for a specified period or until notice is given of the cancellation of the appointment.  To our knowledge, no director currently intends to appoint any other person as an alternate director, except if the director is unable to attend a meeting of the Board of Directors.
 
Internal Auditor and Certified Public Accountant
 
Under the Companies Law, the Board of Directors must appoint an internal auditor, nominated by the Audit Committee.  The role of the internal auditor is to examine, among other matters, whether the company’s actions comply with the law and orderly business procedure.  Under the Companies Law, the internal auditor may be an employee of the company but not an office holder (as defined above), nor an affiliate, nor a relative of an office holder or affiliate, and he or she may not be the company’s independent accountant or its representative.  In addition, the internal auditor may not be a person who holds 5% or more of the company’s outstanding share capital or voting rights, or a person who has the right to appoint one or more directors or the general manager.  The Company’s internal auditor is Mr. Doron Cohen of Fahn Kanne Control Management Ltd., a member firm of Grant Thornton International.
 
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In addition, under the Companies Law, all companies must appoint a certified public accountant to audit the company’s financial statements and to report to the chairman of the Board of Directors any material improprieties that it may discover with respect to the accounting control of the company.  In our last shareholders meeting, held on October 19, 2017, we appointed Kost Forrer Gabbay and Kasierer, a member firm of Ernst & Young Global and certified public accountants in Israel, as our certified public accountant for auditing services, effective until the next shareholders meeting.
 
Indemnification of Directors and Officers
 
At a shareholders meeting held on December 22, 2011, following the amendment of the law in 2011, the shareholders approved the adoption of a new Articles of Association, which include, inter alia, an expansion of the insurance and indemnification given to office holders to the maximum extent permitted by law and in addition, the Shareholders approved the amendment of the indemnification letter currently in place with regard to the Company’s directors and office holders. See “Major Shareholders and Related Party Transactions - Related Party Transactions.”
 
Under the Companies Law, a company may indemnify an office holder against any monetary liability incurred in his or her capacity as an office holder whether imposed on him or her or incurred by him or her in favor of another person pursuant to a judgment, a settlement or an arbitrator’s award approved by court. A company also can indemnify an office holder against reasonable litigation expenses including attorneys’ fees, incurred, whether or not paid by him or her in his or her capacity as an office holder, in proceedings instituted against him or her by the company, on its behalf or by a third-party, in connection with criminal proceedings in which the office holder was acquitted, or as a result of a conviction for a crime that does not require proof of criminal intent, or in which an indictment was not brought against the office holder.
 
 In addition, a company may indemnify an office holder against reasonable legal fees, including attorney’s fees, incurred, whether or not paid by him or her in consequence of an investigation or proceeding instituted against him or her by an authority that is authorized to conduct such investigation or proceeding, and that was resolved without an indictment against him or her and without imposing on him or her financial obligation as an alternative of a criminal proceeding, or that was resolved without filing an indictment against him or her but with the imposition on him or her of a financial obligation as an alternative to a criminal proceeding in respect of an offense that does not require the proof of criminal intent.
 
A company may indemnify an office holder in respect of these liabilities either in advance of an event or following an event. If a company undertakes to indemnify an office holder in advance of an event, the indemnification, other than litigation expenses, must be limited to foreseeable events in light of the company’s actual activities when the company undertook such indemnification, and reasonable amounts or standards, as determined by the Board of Directors.
 
A company may obtain insurance for an office holder against liabilities incurred in his or her capacity as an office holder. These liabilities include a breach of duty of care to the company or a third-party, including a breach arising out of negligent conduct of the office holder, a breach of duty of loyalty and any monetary liability imposed on the office holder in favor of a third-party. A company may also exculpate an office holder from a breach of duty of care in advance of that breach. Our Articles provide for exculpation both in advance or retroactively, to the extent permitted under Israeli law. A company may not exculpate an office holder from a breach of duty of loyalty towards the company, from a breach of duty of care concerning dividend distribution or a purchase of the company’s shares by the company or other entities controlled by the company or from procedures according to chapters H3, H4 or I1 of the Securities Law .
 
Under the Companies Law, a company may indemnify or insure an office holder against a breach of duty of loyalty only to the extent that the office holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company. In addition, a company may not indemnify, insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly (excluding mere negligence), or committed with the intent to derive an unlawful personal gain, or against a fine or forfeit levied against the office holder in connection with a criminal offense. In addition a company may indemnify any person as permitted in Section 56H(b)(1) of the Securities Law.
 
57

At the shareholders meeting held on October 19, 2017, the shareholders approved entering into an indemnification agreement between the Company and each of the Company’s current and future directors and CEOs in the form of indemnification agreement approved at such meeting. Currently, we hold an insurance policy for our office holders that provides coverage limited to $20,000,000 in aggregate for the policy period ending on April 30, 2019.
 
Approval of Terms of Office and Employment
 
Any arrangement between a public company and an office holder of the company as to such office holder’s terms of office and employment, including exemption and release of the office holder from liability for breach of his or her duty of care to the company, an undertaking to indemnify the office holder, post factum indemnification or insurance; any grant, payment, remuneration, compensation, or other benefit provided in connection with termination of service; and any benefit, other payment or undertaking to provide any payment as aforesaid (“Terms of Office and Employment”), now generally require the approval of the company’s compensation committee and the Board of Directors and, with respect to directors and the chief executive officer, also the company’s shareholders, sometimes with special majorities. Notwithstanding the above, the amendment of existing Terms of Office and Employment of office holders (other than directors and the CEO), requires the approval of the compensation committee only, if the committee determines that the amendment is not material in relation to its existing terms.
 
In addition, the Terms of Office and Employment of office holders must be in accordance with the terms of a compensation policy adopted by the Company (a “Compensation Policy”). Under the Companies Law, the Compensation Policy must be based on those considerations, must include those provisions and needs to reference those matters detailed in the Companies Law.. A Compensation Policy generally must be brought for approval again in accordance with the procedures of the Companies Law once every three years. On May 21, 2015 the Company's Board of Directors, based on the recommendation of its Compensation Committee of the same day, resolved to approve an amendment and restatement of the compensation policy in the form presented to the shareholders at the annual meeting held on December 28, 2015 (the "Compensation Policy").  The Board of Directors reaffirmed that approval on October 29, 2015. The shareholders did not approve the Compensation Policy with the requisite special majority. On November 10, 2016, in accordance with their powers under the Companies Law, the Compensation Committee and the Board of Directors decided to approve the Compensation Policy even though it had not been approved by the Shareholders.
 
Directors
 
Any arrangement between a company and a director as to his or her Terms of Office and Employment must be in line with the Compensation Policy and requires the approval of the compensation committee, the Board of Directors and the shareholders by a simple majority. On October 19, 2017, the shareholders approved option grants to each of the Company’s directors along with an additional grant to Ms. Osnat Segev-Harel following the recommendation of the Compensation Committee and the Board of Directors on April 25, 2017 as Ms. Segev-Harel was unable to benefit from the Company’s 2016 repricing plan of the options held by directors and the CEO (see “Share Ownership – Stock Options”) since she served as an external director at that time.
 
Chief Executive Officer
 
Any arrangement between a company and its chief executive officer as to his or her Terms of Office and Employment must be in line with the Compensation Policy and requires the approval of the Compensation Committee, the Board of Directors and the company’s shareholders by simple majority. The compensation committee approved the terms of the CEO's compensation as delineated in an offer letter previously signed with him on November 10, 2016  (effective retroactive as of August 23, 2016) and the Board of Directors approved those terms on the same day. The shareholders approved the terms on December 23, 2016.
 
Other Office Holders
 
Any arrangement between a company and an office holder (other than a director or the chief executive officer) as to his or her Terms of Office and Employment must be in line with the Compensation Policy and requires the approval of the Compensation Committee and the Board of Directors.
 
Rights, Preferences, Restrictions of Shares
 
Articles of Association
 
The following is a summary of the material provisions of our Amended and Restated Articles of Association approved by our shareholders on October 19, 2017 and related provisions of Israeli corporate law. For the complete text of our Amended and Restated Articles of Association, see “Item 19 – Exhibits.”
 
Description of shares

Our authorized share capital consists of NIS 5,000,000 divided into the following two classes of shares: (i) 115,000,000 ordinary shares, NIS 0.04 nominal value (“ordinary shares”); and (ii) 10,000,000 Series A Preferred Shares, NIS 0.04 nominal value (“preferred shares”).

58

 
Description of Ordinary Shares
 
All of the issued and outstanding ordinary shares are validly issued, fully paid, and non-assessable. The ordinary shares do not have pre-emptive rights. Our articles of association and Israeli law do not restrict in any way the ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries that are in a state of war with Israel.
 
Subject to Israeli law, dividends may be declared by a company’s Board of Directors, unless authority is provided in the company’s articles of association to transfer such powers to the company’s shareholders, who may then declare dividends following a recommendation by the directors. Our articles of association grant the board the power to transfer the final decision regarding dividends to the shareholders. In such event, the shareholders may only declare a dividend in an amount that is equal or less than that recommended by the directors or not to declare a dividend at all, despite a directors’ recommendation, but may not declare dividend in an amount which is in excess of the amount recommended by the directors.  The directors may invest or use otherwise for the company's benefit, any dividends that are not demanded within one year of their being declared.  The directors shall pay such un-demanded dividends upon receipt of a valid demand; however the company is not liable to pay any interest on such un-demanded dividends.  So long as any preferred shares are outstanding, the Company shall not pay or declare any dividend, or make any other distribution on the Ordinary Shares or any other securities of the Company, until all accrued and unpaid dividends on the preferred shares, and all other amounts due and owing in respect of the preferred shares, have been paid, in full. As of the date of this annual report, none of the preferred shares were issued and outstanding.
 
Each shareholder is entitled to one vote for each ordinary share held. Each director is elected to serve until the next annual general meeting of shareholders and until his or her successor has been elected.  Our articles do not grant shareholders any rights to share in our profits other than through dividends.  In the event that we go into liquidation, any surplus is distributed to the shareholders in proportion to the amount paid by each on account of the nominal value of the shares paid.  No account is taken of any premiums paid in excess of the nominal value.
 
We may issue and redeem redeemable shares and redeemable warrants. There are no sinking fund provisions recorded in our Articles.  The directors may only make calls upon shareholders in respect of sums unpaid on their shares.  Our Articles contain no provisions which discriminate against any existing or future shareholder as a result of said shareholder holding a substantial number of shares.
 
According to our articles of association, any resolution on the change of the Company’s share capital by way of the creation of new shares, or cancellation of unissued registered shares, with preferred or qualified rights is deemed a change of our articles of association and as such requires the vote of a simple majority of the shareholders participating in the general meeting, subject to those actions that require the special affirmative consent of HCP FVE or the director appointed on its behalf (see “Material Contracts” below for further information with respect to these protective provisions).If at any time our share capital is divided into different classes of shares, we may change the rights of shareholders by way of a resolution of the general meeting, subject to the consent of the shareholders of the class whose rights are being impaired by the proposed change.
 
Description of Preferred Shares
 
We have 10,000,000 preferred shares authorized. These preferred shares may be issued upon conversion of the Convertible Notes note issued to HCP FVE on December 5, 2016 (see “Recent Developments - Sale of Convertible Note to HCP-FVE, LLC”). The preferred shares bear a number of rights and preferences, including dividend rights, conversion rights, redemption rights, and liquidation preference as fully set forth in our amended and restated articles of association (see “Chapter K:  Rights, Preferences and Privileges of the Series A Preferred Shares” to our amended and restated articles of association provided in “Item 19 – Exhibits – Exhibit 1.1” for a full description of these rights).  Upon withdrawal from the Credit Facility (see “Recent Developments – Credit Facility”), the Convertible Note, plus accrued interest, will be exchanged for secured notes that will be junior to the Senior Loan with an interest rate of Prime plus 4.0% and the convertibility to convertible preferred shares will be cancelled.
 
Meetings of Shareholders
 
An annual general meeting must be held once in each year and not later than fifteen months after the preceding annual general meeting.  All shareholders are entitled to attend and vote or vote by proxy at annual general meetings.  Notice of annual general meetings may be sent by us by personal delivery, post, facsimile or telex to shareholders at the address recorded in our records. Any notice sent by post to a shareholder’s address that is situated outside of Israel must be sent by airmail. Any general meeting that is not an annual general meeting is called an extraordinary general meeting.  All shareholders are entitled to attend and vote or vote by proxy at extraordinary general meetings.
 
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Our Board of Directors may convene an extraordinary general meeting when and as it sees fit.  In addition the Board must, according to statute, convene an extraordinary general meeting if it receives a demand to do so from either (i) at least two directors, (ii) at least one quarter of the directors of the Board or (iii) one or more shareholders who hold (A) an aggregate of at least five percent of our issued share capital and one percent of all voting rights, or (B) at least five percent of all voting rights.  Any demand by a person or persons, as described in (i), (ii) and/or (iii) of this paragraph, who wish to demand that an extraordinary general meeting be convened must be made in writing and sent to our registered office.  The demand must detail the objects of the meeting and must be signed by all those making the demand.
 
Notice of an annual general meeting and of an extraordinary general meeting must be sent in advance to all shareholders recorded in our register of shareholders in accordance with the dates required according to the applicable law.  Such notice must include the place, date and hour of the meeting, the agenda for the meeting, the proposed resolutions and instructions for proxy voting.
 
The determining date as to share ownership for purposes of attending and voting at a general meeting is as set forth in the decision to convene a general meeting but not earlier than 21 day before the scheduled general meeting date and not later than 4 days prior to such scheduled meeting date;  Notwithstanding the foregoing, Israeli companies such as ours whose shares have been listed for trade both on the TASE and recognized foreign stock exchange, which issue proxy statements to their shareholders in conformity with the law of the count