Elbit Vision Systems (EVSNF) 20-F 2016 FY Annual report (foreign)

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, 2016

Or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐ 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………………..   For the transition period from     to

Commission File No. 000-28580

________________________

ELBIT VISION SYSTEMS LTD.

(Exact name of Registrant as specified in its charter)

________________________

N/A	ISRAEL
(Translation of Registrant’s name into English)	(Jurisdiction of incorporation or organization)

7 Bareket Street, P.O.B. 3047, Industrial Park, Caesarea, Israel 3088900

(Address of principal executive offices)

Mr. Yaron Menashe, CFO

Telephone: +972- 4-610-7609

E-mail: yaron@evs.co.il

Bareket 7, Industrial Park Caesarea

P.O.B 3047, Caesarea , Israel

 (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:

None

Securities registered or to be registered pursuant to Section 12(g) of the Act:

Ordinary Shares, nominal value 10.00 New Israeli Shekel per share

(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:

 9,384,988 Ordinary Shares, NIS 10.00 nominal value per share

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 (&232.405 of this chapter) during the preceding 12 months (or for a shorter period that the registrant was required to submit and pot 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

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

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

If "Other" has been checked in response to the previous question, indicate by check mark which financial statements 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  R No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

  £ Yes  £  No

The following is the Annual Report on Form 20-F for the fiscal year ended December 31, 2016 of  Elbit Vision Systems Ltd. or E.V.S. All references to "E.V.S.", "us", "we", "our" or the "company" refer to E.V.S. and its consolidated subsidiaries.

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FORWARD LOOKING STATEMENTS

In addition to historical information, this annual report on Form 20-F contains forward-looking statements. Some of the statements under "Item 3. Risk Factors", "Item 5. Operating and Financial review and Prospects" and elsewhere in this Annual Report, constitute “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or other future financial performance, and are identified by words such as "may", "will", "should", "expect", "scheduled", “project”, “plan”, “intend”, "anticipate", "believe", "estimate", "aim", "potential", or "continue". These forward-looking statements are subject to certain risks, uncertainties and assumptions about us that could cause actual results to differ materially from those reflected in the forward-looking statements.

Assumptions relating to forward-looking statements involve judgment with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives will be achieved. Factors that could cause actual results to differ from our expectations or projections include the risks and uncertainties relating to our business described in this annual report under Item 3. Risk Factors, Item 5. Operating and Financial Review and Prospects, and elsewhere in this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof, except as required by applicable law. In addition to the disclosure contained herein, readers should carefully review any disclosure of risks and uncertainties contained in other documents that we file from time to time with the Securities and Exchange Commission or SEC.

To the extent that this Annual Report contains forward-looking statements, as distinct from historical information, we desire to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and we are therefore including this statement for the express purpose of availing ourselves of the protections of the safe harbor with respect to tall forward-looking statements.

‑‑‑‑‑‑‑‑‑‑‑‑

We have prepared our consolidated financial statements in United States Dollars and in accordance with accounting principles generally accepted in the United States, as applicable to our consolidated financial statements for all fiscal periods for which financial data is presented herein. All references herein to “Dollars” or “$” are to United States Dollars, and all references to “Shekels” or “NIS” are to New Israeli Shekels. Unless otherwise stated, all capitalization information was adjusted to reflect the Company's 1-for-10 reverse share split, effective as of March 27, 2017.

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PART I

ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS	7
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	7
ITEM 3.	KEY INFORMATION	7
	RISK FACTORS	7
	RISK FACTORS RELATED TO OUR BUSINESS	8
	RISK FACTORS RELATED TO OUR ORDINARY SHARES	11
	RISK RELATED TO DOING BUSINESS IN ISRAEL	15
ITEM 4.	INFORMATION ON THE COMPANY	20
	HISTORY AND DEVELOPMENT OF THE COMPANY	20
	BUSINESS OVERVIEW	23
	ORGANIZATIONAL STRUCTURE	31
	PROPERTY, PLANTS AND EQUIPMENT	32
ITEM 4A.	UNRESOLVED STAFF COMMENTS	32
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	32
	SELECTED FINANCIAL DATA	32
	OPERATING RESULTS	35
	LIQUIDITY AND CAPITAL RESOURCES	40
	RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC	41
	TREND INFORMATION	42
	OFF-BALANCE SHEET ARRANGEMENTS	43
	TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS	43
		��
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	44
	DIRECTORS AND SENIOR MANAGEMENT	44
	COMPENSATION	47
	BOARD PRACTICES	48
	EMPLOYEES	57
	SHARE OWNERSHIP	59

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ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	60
	MAJOR SHAREHOLDERS	60
	RELATED PARTY TRANSACTIONS	61
ITEM 8.	FINANCIAL INFORMATION	64
	CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION	64
	SIGNIFICANT CHANGES	64
ITEM 9.	THE OFFER AND LISTING	64
	OFFER AND LISTING DETAILS	64
	MARKETS	67
ITEM 10.	ADDITIONAL INFORMATION	67
	MEMORANDUM AND ARTICLES OF ASSOCIATION	67
	MATERIAL CONTRACTS	78
	EXCHANGE CONTROLS	79
	TAXATION	80
	DOCUMENTS ON DISPLAY	86
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	87
	FOREIGN CURRENCY EXCHANGE	87
	INTEREST RATE RISK	88
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	88
PART II
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	88
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	88
ITEM 15.	CONTROLS AND PROCEDURES	88
ITEM 16.	[RESERVED]	90
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	90
ITEM 16B.	CODE OF ETHICS	90
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	90
ITEM 16D.	EXEMPTIONS FROM THE LISTING AND STANDARDS OF AUDIT COMMITTEES	91
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILLIATED PURCHASERS	91
ITEM 16F.	CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT	91
ITEM 16G.	CORPORATE GOVERNANCE	91
ITEM 16H.	MINE SAFETY DISCLOSURE	91
PART III
ITEM 17.	FINANCIAL STATEMENTS	91
ITEM 18.	FINANCIAL STATEMENTS	91
ITEM 19.	EXHIBITS	91

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PART I.

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.  KEY INFORMATION

A.The selected financial data is incorporated by reference to Item 5 of this annual report and should be read in conjunction with our consolidated financial statements and the notes thereto, which are set forth in Item 18, “Financial Statements” and are incorporated by reference, and other financial information appearing in Item 5 of this annual report.

B.Not applicable

C.Not applicable

D.Risk Factors

This annual report and statements that we may make from time to time herein may contain forward-looking information. There can be no assurance that actual results will not differ materially from our expectations, statements or projections. Factors that could cause actual results to differ from our expectations, statements or projections include the risks and uncertainties relating to our business described below.

RISK FACTORS

An investment in the securities of Elbit Vision Systems Ltd., or EVS, is speculative and involves a high degree of risk. Therefore, you should not invest in our securities unless you are able to bear a loss of your entire investment. You should carefully consider the following factors as well as the other information contained herein before deciding to invest in our ordinary shares. Factors that could cause actual results to differ from our expectations, statements or projections include the risks and uncertainties relating to our business described below. This annual report and statements that we may make from time to time herein may contain forward-looking information. There can be no assurance that actual results will not differ materially from our expectations, statements or projections. The information in this annual report is complete and accurate as of this date, but the information may change after the date of this annual report.

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Risk Factors Related to our Business

We have a history of losses and may not be profitable in the future.

While we have generated net income every year since 2010, with the exception of 2013, our net income remains relatively small. In 2010, 2011, 2012, 2014, 2015 and 2016, our net income was $2.6 million, $1.09 million, $0.82 million, $0.66 million, $2.1 million and $2 million respectively. There is no certainty that we will continue to generate net income or that our net income will increase over time.

In June 2010, we restructured our bank loans from Bank Leumi Le Israel B.M. and Bank Hapoalim B.M. (the "Banks"), which we completed to fully repay in September 2016. Although the terms of the restructure agreement were favorable to the Company, there is no guarantee that we will be profitable in the future. We may have to sell additional equity or debt securities and reorganize our credit facilities in order to continue as a going concern.  There is no certainty that we will be successful in these efforts, or complete them in a timely fashion. For more information on the restructuring of our loans with the Banks, see Item 10, "Material Contracts".

We intend to continue pursuing businesses to acquire in order to expand our business into new markets.

Our current business strategy includes selective expansion into new markets. Our future success and growth depends upon our successful penetration of these new markets.

We may seek opportunities to further expand our product line, customer base and technical talent through other acquisitions in the automated inspection industry. Acquisitions inherently involve numerous risks, such as the diversion of management’s attention from other operational matters, the inability to realize expected synergies resulting from the acquisition, failure to commercialize purchased technologies, and the impairment of acquired intangible assets resulting from technological obsolescence or lower-than-expected cash flows from the acquired assets. The inability to effectively manage these risks could have a material adverse effect on our operating results.

More specifically, should we fail to develop products which provide the necessary standards of inspection,  given the capital investments that we have made in order to penetrate these new markets, such failure could adversely affect our longer-term plans for expanding our business and may even cause the cessation of our business. For further information, see Item 4, “Information on the Company - History and Development of the Company”; and Item 10, “Additional Information - Material Contracts”.

Competition in the automated inspection industry is intense. If we are unable to distinguish our products as superior to those of our competitors, our business may be seriously harmed.

Several companies working with the textile, non-woven and technical fabric industries, such as BarcoVision, IsraVision, AMETEK Surface Vision, Wintriss, Protechna, Futec and Sheltonvision, have developed products with similar visual inspection or quality monitoring capabilities.

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It is possible that systems developed by these or other future competitors will prove more effective than our systems and that our potential customers will prefer them. The competition for the development and sale of advanced automated inspection systems in other industries and for other applications is also intense. To the extent that providers of automated inspection systems may choose to focus on or develop advanced automated inspection technology for the industries for which we attempt to develop products, we could face significant competition in the future. If we are unable to maintain our competitive advantage in the industries in which we operate or are unable to convince potential customers of the superiority of our products in markets in which we seek to compete, our business may be seriously harmed. There can be no assurance that our potential competitors will not develop products that will render our products less competitive. Our potential competitors operating in other industries may be more established, benefit from greater market recognition and have greater financial, production and marketing resources than we have.

Fluctuations in the market may create periodic increases in expenses and/or reductions in demand that would be difficult to offset.

We have experienced, and may continue to experience in the future, significant fluctuations in revenues and operating results from quarter to quarter as a result of a number of factors, many of which are outside our control. These factors include the timing of significant orders and shipments, product mix, delays in shipment, installation and/or acceptance of systems, capital spending patterns of customers, customer manufacturing cycles, trade shows, anticipated new product introductions by us or by others, competition and pricing, new product introductions by us or our competitors, the timing of research and development expenditures, expansion of marketing and support operations, changes in material costs, production or quality problems, currency fluctuations, disruptions in sources of supply, regulatory changes and general economic conditions. Moreover, due to the relatively fixed nature of many of our costs, including personnel and facilities costs, we would not be able to reduce costs in any quarter to compensate for any unexpected shortfall in net sales, and such a shortfall would have a proportionately greater impact on our results of operations for that quarter. Thus, changes in the number of systems shipped in any given quarter can produce substantial fluctuations in net sales, gross profits and net income from quarter to quarter. These or other factors could have a material adverse effect on our business and operating results.

We cannot guarantee market acceptance of our products.

Our success depends on the acceptance of our products by existing and new customers. Market acceptance of our automated visual inspection and quality monitoring systems will depend, in large part, on the pricing of the products and our ability to demonstrate the cost and quality advantages of our systems over human visual inspection and quality monitoring. There can be no assurance that we will be able to market our products successfully or that any of our current or future products will be accepted in the marketplace.

We may have flaws in the design or manufacture of our products.

If flaws in either the design or manufacture of our products were to occur, including products of businesses we currently own, we could experience a rate of failure in our products that could result in significant delays in shipment and material repair or replacement costs. While we engage in extensive product quality programs,  processes and management systems, including ISO 9001 and such other programs which actively monitor and evaluate the quality of our component suppliers and contract manufacturers, there can be no assurance that these actions will be sufficient to avoid a product failure rate that results in substantial delays in shipment, significant repair or replacement costs, or potential damage to our reputation, any of which could have a material adverse effect on our operating results.

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Our international sales could be adversely affected by changes in domestic and foreign regulations.

Our systems have been sold primarily in the United States, Europe and the Far East. We are subject to the risks inherent in international business activities. These risks include unexpected changes in regulatory requirements, compliance with a wide variety of foreign laws and regulations, import restrictions, tariffs and other trade barriers, staffing and managing foreign operations, transportation delays and seasonal reduction of business activities. Additionally, if for any reason exchange or price controls or other restrictions on conversion of foreign currencies were imposed, our business could be adversely affected.

General economic conditions may adversely affect the Company’s results.

Current uncertainty in global economic conditions, including the disruption in financial and credit markets, may pose a risk to the overall economy that could impact demand for our and our customers’ products, as well as our ability to manage commercial relationships with our customers, suppliers and creditors. If the situation continues or worsens, our business could be negatively impacted, including such areas as reduced demand for our products and services, or supplier or customer disruptions, which could reduce our revenues or our ability to collect our accounts receivable and have a material adverse effect on our financial condition and results of operations.

We may not be successful in keeping pace with the rapid technological changes that characterize our industry.

The technology incorporated in automated inspection and quality monitoring systems is characterized by rapid changes. Moreover, the emergence of new technologies can rapidly render existing products obsolete and unmarketable. Our ability to continue to anticipate changes in technology and industry standards, and successfully develop and introduce new and enhanced products that can gain market acceptance on a timely basis is a critical factor in our ability to grow and to remain competitive. In addition, we intend to diversify our business by developing new products based on our own technology. There can be no assurance that we will timely or successfully complete the development of new or enhanced products or successfully manage transitions from one product release to the next, or that our future products will achieve market acceptance.

We depend on a limited number of key personnel who would be difficult to replace.

Our success depends in a large part on certain of our personnel, including our sales representatives, executive, research and development personnel and our technical staff. The loss of the services of these personnel would have a material adverse effect on us. There is considerable competition for the services of such personnel. There can be no assurance that we will be able either to retain our current personnel or acquire additional qualified personnel as needed.

10

We may not be able to protect our intellectual proprietary rights.

We rely primarily upon a combination of trademark, copyright, know-how, trade secrets and contractual restrictions to protect our intellectual property rights. In addition, our employees who have access to confidential information are required to sign confidentiality and invention assignment agreements. We currently have one approved U.S. patent, which we announced on September 8, 2016 (application 14/009,557) entitled On-Loom Fabric Inspection System and Method, which covers the workings of our iBar product for on-loom inspection of woven fabrics in order to identify weaving faults during manufacture. We believe that these efforts to protect our proprietary information provide only limited protection. Our confidentiality and non-competition agreements may not be enforceable and our proprietary technology may not remain a secret. Others may develop similar technology and use this technology to compete with us. Despite our efforts to protect our proprietary rights, former employees and other unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary.For more information, see Item 4, “Information on the Company -- Business Overview -- Intellectual Property Rights”.

We may become involved in litigation.

From time to time, we may be subject to various claims and lawsuits by competitors, customers, or other parties arising in the ordinary course of business. For more information, see Item 8, “Financial Information - Litigation”.

Risk Factors Related to Our Ordinary Shares

We may require additional financing.

In the fourth quarter of 2009, our then controlling shareholder, Mivtach Shamir ("Mivtach"), through its wholly-owned subsidiary, M.S.N.D. Real Estate Holdings Ltd., invested an aggregate amount of approximately $1.8 million in our company. Mivtach invested approximately $1.2 million in cash and approximately an additional $627,000, through the conversion of outstanding loans plus interest. Mivtach also loaned us an aggregate of approximately $850,000 during the first quarter of 2010, and we have entered into an agreement with Mivtach pursuant to which we will repay the loan over five (5) years in equal quarterly installments, plus interest at the US Dollar annual LIBOR rate. During 2015 we fully repaid the loan.

In June 2010, we restructured our bank debt with our Banks. Pursuant to the terms of the restructuring, the Banks forgave approximately $2.4 million of our debt and the debt of our former subsidiary, ScanMaster. It was further agreed that we will repay debt of $1 million to the Banks over a period of five (5) years, and we will repay an additional amount of $600,000 over a period of ten (10) years. The debt restructuring was contingent upon the consummation of the sale of ScanMaster, which was completed in June 2010. The Banks' approval was further contingent upon certain commitments made by Yaron Menashe, our chief financial officer and Sam Cohen, our chief executive officer, who, as of March 28, 2017, hold an aggregate of approximately 34.01% of our issued shares. In September 2016 we completed the full repayment of the abovementioned debt to the Banks.

In December 2012 we completed a non-brokered private placement transaction, or the 2012 Private Placement Transaction, pursuant to which we sold 526,316 of our ordinary shares (on a split-adjusted basis) to Mr. Avi Gross for gross proceeds of $500,000. Under the 2012 Private Placement Transaction, Mr. Gross provided us with a convertible loan and we issued Mr. Gross two warrants to purchase additional ordinary shares of our company. On June 10, 2013, Avi Gross exercised the convertible loan and one of the warrants (the "First Warrant"). Consequently, we issued an additional 588,236 ordinary shares (on a split-adjusted basis) to Avi Gross upon this exercise. On December 27 2015, Mr. Gross exercised the second warrant (the "Second Warrant") at a price of $1,000,000 . Consequently, we issued an additional 588,236 ordinary shares (on a split-adjusted basis) to Avi Gross upon this exercise. For more information on the 2012 Private Placement Transaction see Item 4.A “History and Development of the Company – Recent Developments”.

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In July 2014 we completed a non-brokered private placement transaction, or the 2014 Private Placement Transaction, pursuant to which we sold an aggregate of 416,667 of our ordinary shares (on a split-adjusted basis) to SMD Advanced Technologies Ltd. ("SMD"), an Israeli private company controlled by Mr. Yaacov Kotlicki ("Mr. Kotlicki"), for gross proceeds of $250,000 and warrants to purchase up to 208,334 of our ordinary shares (on a split-adjusted basis), for an aggregate exercise price of up to $166,666. On December 27,2015, SMD exercised warrants at a price of $146,667. Consequently, we issued an additional 183,334 ordinary shares (on a split-adjusted basis) to SMD upon this exercise. In accordance with a Form SC 13G/A filed by SMD and Mr. Kotlicki on February 14, 2017, as of such date SMD and Mr. Kotlicki do not hold any of our ordinary shares. For more information on the 2014 Private Placement Transaction see Item 4.A “History and Development of the Company – Recent Developments”.

Despite these transactions, there is no guarantee that the measures taken to restructure our debt, the full repayment of said debt and the measures taken to raise additional funds will be sufficient to continue running our operations, and we may determine that it is in our best efforts to sell additional equity or debt securities and seek to obtain additional financing. We may not, however, be able to obtain additional financing on terms satisfactory to us, if at all.

Given the existing potential for significant dilution in light of the large number of our ordinary shares we have registered as well as employee options to purchase approximately 419,042 of our ordinary shares (on a split-adjusted basis), which since recent increases in our share price are exercisable at a price below that of the public market, our ability to complete additional debt or equity financing may be very limited. For more information regarding our refinancing, change in controlling shareholders or share registration obligations, see Item 7, “Major Shareholders and Related Party Transactions-Related Party Transactions” and Item 10, “Additional Information - Material Contracts”.

The large number of shares available for future sale could adversely affect the price of our ordinary shares.

As of March 28, 2017 a total of 9,771,491of our ordinary shares (on a split-adjusted basis) were issued and outstanding or convertible into our ordinary shares within 60 days. Of these securities, 53.57% are held by affiliates.

Should the convertible securities be exercised or the registered shares be sold, the increase in the number of our shares in the market could adversely affect the market price of our ordinary shares and materially impair our future ability to raise capital through an offering of equity securities and could result in increased volatility in the price of our shares.

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Our ordinary shares may be affected by limited trading volume and may fluctuate significantly in price.

Our ordinary shares are traded on the Over-the-Counter Bulletin Board (OTCQB). Trading in our ordinary shares has been limited and there can be no assurance that an active trading market for our ordinary shares will develop. As a result, this could adversely affect our shareholders' ability to sell our ordinary shares in short time periods, or possibly at all. Thinly traded ordinary shares can be more volatile than ordinary shares traded in an active public market. Our 1-for-10 revesre share split effective March 27, 2017, may not have a positive effect over the trading in our ordinary shares. The average daily trading volume of our ordinary shares in February, 2017 was 1,377 shares (on a split-adjusted basis). The high and low bid price of our ordinary shares for the last two years has been $4.2 and $1.425, respectively (on a split-adjusted basis). Our ordinary shares have experienced, and are likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our ordinary shares without regard to our operating performance.

Our Ordinary Shares are deemed to be “Penny Stock” which may make it more difficult for investors to sell their shares due to suitability requirements.

Our ordinary shares are deemed to be “penny stock” as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are shares:

· with a price of less than $5.00 per share;

· that are not traded on a “recognized” national exchange;

· whose prices are not quoted on the NASDAQ automated quotation system; or

· in issuers with net tangible assets less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $5.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years.

Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may reduce the potential market for our ordinary shares by reducing the number of potential investors. This may make it more difficult for our shareholders to sell shares to third parties or to otherwise dispose of them. This could cause our share price to decline. Our 1-for-10 revesre share split effective March 27, 2017, may not have a positive effect over the establishment of a potential market for our ordinary shares, over the ability to sell our shares and/or over the share price of our ordinary shares.

13

Our ordinary shares are currently traded on the OTC Bulletin Board and may be difficult to buy and sell.

On November 19, 2003, our ordinary shares were delisted from The Nasdaq SmallCap Market and are now traded on the OTC Bulletin Board as a result of our failure to comply with the $2.5 million minimum shareholder equity requirement. Consequently, selling and buying our securities has become more difficult because of delays in the timing of transactions and in obtaining accurate quotations. Furthermore, broker-dealers are subject to an SEC rule that imposes additional sales practice requirements on broker-dealers who sell low-priced securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written agreement to the transaction prior to sale. These factors may affect the ability of broker-dealers to sell our ordinary shares and of shareholders to sell our ordinary shares in the secondary market and in turn could result in lower prices and larger spreads in the bid and ask prices for our ordinary shares than might otherwise be obtained. Our 1-for-10 revesre share split effective March 27, 2017, may not have a positive effect over the ability to sell our shares and/or over the share price of our ordinary shares. For more information, see Item 4, “Information on the Company -- History and Development of the Company” and Item 9, “The Offer and Listing -- Market and Share Price History”.

Our 1-for-10 revesre share split effective March 27, 2017 may have an adverse effect over the liquidity of our ordinary shares and may be perceived in a negative manner by investors, analysts or other share market participants

Following the approval of our shareholders dated May 2, 2016, on March 24, 2017 we implemented a reverse share split of our ordinary sharesat an exchange ratio of 1-for-10, such that every ten outstanding ordinary shares were converted into one ordinary share par value NIS 10.00, such that our ordinary shares commenced trading on a split-adjusted basis when the market opened on March 27, 2017. The reverse share split may result our ordinary shares not to be traded at a price in proportion to the decrease in the number of outstanding ordinary shares resulting from the share split, the liquidity of our ordinary shares may be adversely affected by the reduced number of shares that are outstanding and available for trading after the reverse share split, and the reverse share split may be perceived in a negative manner by investors, analysts or other share market participants.

Our results are affected by volatility in the securities markets.

We were effected by the downturn in the world economy which began in 2008, following which the securities markets in general have experienced increased volatility, which has particularly affected the market prices of equity securities of many hi-tech companies, including companies that have a significant presence in Israel. Although the volatility of these companies’ securities has often been unrelated to their operating performance, they experienced and may continue to experience difficulties in raising additional financing required to effectively operate and grow their businesses. Such failure and the volatility of the securities market in general, and in relation to our shares in particular, may affect our ability to raise additional financing in the future.

14

Risks Related to Doing Business in Israel

Conditions in Israel may affect our operations.

We are incorporated under the laws of, and our corporate offices, research and development operations and production facilities are located in, Israel. Although almost all of our current sales are made to customers outside Israel, we are nonetheless directly influenced by the political, economic and military conditions affecting Israel and the Middle East. Any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could have a material adverse effect on our business, financial condition and results of our operations.

From October 2000 until recently, there was an increase in violence between Israel and the Palestinians, primarily but not exclusively in the West Bank and Gaza Strip. The election of representatives of the Hamas militant group in January 2006 to a majority of seats in the Palestinian Legislative Council, their taking over the Gaza Strip, as well as the war with the Islamic militant group Hezbollah in Lebanon in July and August 2006 created additional regional unrest and uncertainty. The hostilities with Hamas in the Gaza Strip further significantly escalated in December 2008 and January 2009. In November 2012, Israel engaged in an armed conflict under which Israel was the target of terrorist attacks executed against civilian targets in various parts of Israel, which included wide-spread rocket strikes. During the summer of 2014, another escalation in violence among Israel, Hamas, the Palestinian Authority and other groups took place. This escalation became known as "Operation Protective Edge", which resulted in missiles being fired from the Gaza Strip into Southern and Central Israel, as well as civil insurrection of Palestinians in the West Bank. Since October 2015, and to a lesse extent since mid-2016, Israel is experiencing another escalation in violence with the Palestinian population, which resulted in clashes between Israel and armed Palestinians in the West Bank and in Israeli cities. Since February 2011, Egypt experienced significant political turbulence, following the resignation of Hosni Mubarak as president. This instability may lead to deterioration of the political and economic relationships that exist between the State of Israel and Egypt. In addition, since April 2011, internal conflict in Syria has escalated, and evidence indicates that chemical weapons have been used in the region. Intervention may be contemplated by outside parties in order to prevent further chemical weapon use. Similar civil unrest and political turbulence has occurred in other countries in the region and is affecting the political stability of those countries, including the emergence of Islamic State, or ISIS, as a significant destabilizing force in the region. Following swift conquering operations, ISIS gained control of vast areas in the Middle East, including in Iraq and Syria, which contributed to the turmoil experienced in these areas. As a result, the United States and Russian armed forces have engaged in limited operations to defeat ISIS and other rebel groups operating in Syria. In addition, Israel is reported to be considering a pre-emptive attack on Iran which is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza and Hezbollah in Lebanon. These situations may potentially escalate in the future to more violent events which may affect Israel and us. Ongoing and revived hostilities with the Palestinians, Arab countries or Iran might require more widespread military reserve service by some of our employees, which could have an adverse effect on our business. In addition, several Arab and Muslim countries still restrict business with Israeli companies. We could be adversely affected by restrictive laws or policies directed towards Israel or Israeli businesses. The political and security situation in Israel and/or in the surrounding countries could have a material adverse effect on our business, operating results and financial condition and may even result in parties with whom we have contracts claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations and could make it more difficult for us to raise capital. Many of our facilities are located in Israel. Since we do not have a detailed disaster recovery plan that would allow us to quickly resume business activity, we could experience serious disruptions if acts associated with this conflict result in any serious damage to our facilities. Any insurance coverage we may have may not adequately compensate us for losses that may occur and any losses or damages incurred by us could have a material adverse effect on our business. We cannot give any assurance that security and political conditions will not have such an effect in the future. Any future armed conflicts or political instability in the region would likely negatively affect business conditions and harm our results of operations. We cannot predict the effect on us of these uprisings, an increase in hostilities or any future armed conflict, political instability or violence in the region. Any events that affect the State of Israel or the surrounding region may impact us in unpredictable ways.

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Furthermore, all non-exempt male adult permanent residents of Israel under the age of 40, or older for reserves officers or citizens with certain occupations, as well as certain female adult citizens and permanent residents of Israel, are obligated to perform military reserve duty and may be called to active duty under emergency circumstances. We believe that a maximum of 7 of our employees, 16%  of our employees at any one time, could be called for active duty under emergency circumstances. There have been significant call-ups of military reservists in the past, and it is possible that there will be additional call-ups in the future. While we have operated effectively despite these conditions in the past, we cannot assess what impact such conditions may have in the future, particularly if emergency circumstances arise. Our operations could be disrupted by the extended absence of one or more of our executive officers or key employees or a significant number of our other employees due to military service. Any disruption in our operations would harm our business.

The Israeli rate of inflation may negatively impact our costs if it exceeds the rate of devaluation of the New Israeli Shekel against the U.S. Dollar.

Most of our sales are made in U.S. Dollars. We occasionally agree to make sales in other currencies, usually the Euro. This exposes us to market risk from changes in foreign exchange rates vis-à-vis the U.S. Dollar. We usually do not utilize foreign currency exchange contracts to mitigate these risks. Under these contracts, increases or decreases in our foreign currency transactions are partially offset by gains and losses on the forward contracts, so as to mitigate the possibility of foreign currency transaction gains and losses. However, our Dollar costs in Israel will increase if inflation in Israel exceeds the devaluation of the NIS against the Dollar or if the timing of such devaluation lags behind inflation in Israel. There can be no assurance that we will not incur losses from such fluctuations. For more information, see Item 5, “Operating and Financial Review and Prospects -- Operating Results -- Impact of Inflation and Devaluation on Results of Operations, Liabilities and Assets” and Item 11, “Quantitative and Qualitative Disclosures about Market Risk -- Foreign Currency Exchange and Interest Rate Risk”.

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In the past, we received Israeli government grants for certain of our research and development activities. The terms of those grants may require us, in addition to payment of royalties, to satisfy specified conditions in order to manufacture products and transfer technologies outside of Israel. We may be required to pay penalties in addition to repayment of the grants, which may also impair our ability to sell our technology outside of Israel.

Some of our research and development efforts were financed in part through royalty-bearing grants that we received from the Office of the Chief Scientist of the Israeli Ministry of Economics and Industry (formerly the Ministry of Industry, Trade and Labor) (the "OCS"), known today as the Israel Innovation Authority (the "Authority"). With respect to certain grants we are committed to pay royalties at a rate of 3% to 5% from the sales of the relevant device, up to the repayment of the grant, with the addition of interest and linkage to the Israeli CPI Index. The repayment terms were not dependent upon a timetable. Regardless of any royalty payment, we are further required to comply with the requirements of the Israeli Encouragement of Industrial Research and Development Law, 1984, as amended, or the R&D Law, and related regulations, with respect to those past grants. Prior to the enactment of the R&D Amendment, as further elaborated below, when a company developed know-how, technology or products using OCS grants, the terms of these grants and the R&D Law restricted the transfer of such know-how, and the transfer of manufacturing or manufacturing rights of such products, technologies or know-how outside of Israel, without the prior approval of the OCS. Therefore, if aspects of our technologies were deemed to have been developed with OCS funding, the discretionary approval of an OCS committee would have been required for any transfer to third parties outside of Israel of know-how or manufacturing or manufacturing rights related to those aspects of such technologies. Furthermore, the OCS was able to impose certain conditions on any arrangement under which it permits us to transfer technology or development out of Israel and may not grant such approvals at all.

Additionally, the transfer of OCS-supported technology or know-how outside of Israel could have involved the payment of significant amounts, depending upon the value of the transferred technology or know-how, the amount of OCS support, the time of completion of the OCS-supported research project and other factors. These restrictions and requirements for payment could have impaired our ability to sell our technology assets outside of Israel or to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel.

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On July 29, 2015, the Israeli Parliament, the Knesset, enacted Amendment Number 7 to the R&D Law (the "R&D Amendment"). Following the R&D Amendment, the OCS was replaced with the Authority, which is comprised of a Council body, the Chief Scientist, the Director General and a member of the Research Committee. According to the R&D Amendment, the Council has broad discretion regarding material matters, including with respect to the new funding programs ("Tracks"), is required to determine certain characteristics regarding the type of Benefits granted ("Benefit", as defined under the R&D Amendment, includes grants, loans, exemptions, discounts, guarantees and additional means of assistance, but with the exclusion of purchase of shares), well as their scope, conditions for receipt and the identity of the party which is permitted to use such Benefits, and may determine additional matters, including delay in payment of a Benefit and requests for provision of guarantees for its receipt, payment of an advance by the Authority, the type of know-how to be developed and requirements regarding its full or partial ownership, provisions regarding transfer, disclosure or exposure of know-how to third parties in Israel and abroad (including payment or non-payment for the same, as well as caps for such payments), requirements with respect to manufacturing in Israel and transfer of manufacturing abroad (including payment for such transfer), performance of innovative activities for the benefit of third parties, etc. In addition, while the pre-R&D Amendment regime provided base-line default terms and conditions with respect to the core issues relevant for OCS grant recipients (including ownership and royalty arrangements), as provided above, these default provisions have been largely rescinded by the R&D Amendment. Many of these matters are now being decided separately for each Track by the Council, based on certain guidelines stipulated in the R&D Amendment. Such guidelines provide, for example, that considerable preference should be given to having ownership of OCS-funded know-how and rights vest with the Benefit recipient and/or with an Israeli company, with transfer of know-how and related rights abroad to be permitted only in exceptional circumstances. In addition, the R&D Amendment determines that the transfer of manufacturing rights abroad, whether under a license or otherwise, shall only be allowed in special circumstances. Nonetheless, these matters are merely guidelines, and the essential matters will be determined by the Council in its discretion. While the R&D Amendment is designated to provide flexibility in the rapidly changing business environment, leaving the above essential matters to the Council's discretion currently causes much ambiguity as to the implementation of the R&D Amendment. In addition, it should be noted that the pre-R&D Amendment regulations which determined material matters such as royalty rates, changes to royalty rates upon transfer of manufacturing rights abroad etc. have been rescinded, thus adding to the current uncertainty created by the R&D Amendment.

In addition, we qualified for a program operated by Israeli Ministry of Economics and Industry (the "Ministry of Economics Program"), under which the Israeli government participates in some of our expenses relating to the realization of potential economic growth in China, by providing grants of up to NIS 1,333,000, paid during a three year period commencing September 2015. With respect to such grants, we are committed to pay annual royalties at a rate of 3% of our growth from sales to China per annumm, with the addition of interest and linkage, until the earlier of (i) the lapse of five years from the first year during which we are not entitled to receive grants under the programs, or (ii) the full repayment of the grant. The grants shall also be fully repaid upon the merger of the Company (in which case, the repayment shall be borne on the surviving company), if the company is acquired (in which case, the repayment shall be borne on the acquiring company) and if the business or division for which the grants were granted were sold (in which case, the repayment shall be borne on the acquiring company). Failure to fully repay the grants when due may result non-qualification of the Company for any additional grants from the Israeli Ministry of Economics and Industry, including from the OCS.

Israeli courts might not enforce judgments rendered outside of Israel.

We are incorporated in Israel. Most of our executive officers and directors are non-residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. It may be difficult to effect service of process within the U.S. upon us or upon any such officers and directors or professional advisors or to realize in the U.S. upon judgments of U.S. courts predicated upon the civil liability of the company or such persons under U.S. federal securities laws. There is some degree of doubt amongst legal experts as to whether Israeli courts would (i) enforce judgments of U.S. courts obtained against the company or such officers and directors or professional advisors predicated solely upon the civil liabilities provisions of U.S. federal securities laws, or (ii) impose liabilities in original actions against the company or such officers and directors and professional advisors predicated solely upon such U.S. laws. Therefore, it may be difficult to enforce a judgment obtained in the United States against any such persons or us.

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An investor may also find it difficult to bring an original action in an Israeli court to enforce liabilities based upon U.S. federal securities laws against us or against our directors or officers. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws and rule that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear such 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. Therefore it may also be difficult to enforce civil liabilities under U.S. federal securities laws in original actions instituted in Israel.

There can be no certainty that we will pay dividends in the foreseeable future and any return on investment may be limited to the value of our ordinary shares.

Under the Israeli Companies Law, 1999 (the "Israeli Companies Law"), dividends may only be paid out of profits legally available for distribution (the "Profits Criteria") and provided that there is no reasonable concern that such payment will prevent us from satisfying our existing and foreseeable obligations as they become due. In addition, a competent court may approve, as per a motion to be filed by a company in accordance with the Israeli Companies Law requirements, a payment which does not meet the Profits Criteria, provided that the court was convinced that there is no reasonable concern that such payment will prevent the company from satisfying its existing and foreseeable obligations as they become due. There can be no certainty that we will declare or pay cash dividends in the foreseeable future and we may retain future earnings, if any, to finance the growth and development of our business. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will only occur if our share price appreciates.

Your rights and responsibilities as a shareholder will be 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 Memorandum of Association, our Articles of Association, and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and customary manner in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders, and to refrain from misusing his power, including, among other things, when voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable to shareholder votes on, among other things, amendments to a company’s articles of association, increases in a company’s authorized share capital and mergers and interested party transactions requiring shareholder approval. A shareholder also has a general duty to refrain from exploiting any other shareholder of his or her rights as a shareholder. 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 has a duty of fairness toward the company. Israeli law does not define the substance of this duty of fairness, but provides that remedies generally available upon a breach of contract will apply also in the event of a breach of the duty to act with fairness. Because Israeli corporate law has undergone extensive revision in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.

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

Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders, including shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. These provisions of Israeli law could delay, prevent or impede a merger with or an acquisition of our company, which could prevent a change of control, even when the terms of such transaction are favorable to us and our shareholders and therefore potentially depress the price of our shares.

ITEM 4.INFORMATION ON THE COMPANY

A.History and Development of the Company

Our legal and commercial name is Elbit Vision Systems Ltd. We were established in Israel on September 2, 1992 and organized pursuant to the Israel Companies Ordinance, 1983, which was replaced by the Israeli Companies Law. We commenced independent commercial operations on January 1, 1994, as a subsidiary of Elbit Systems Ltd., or Elbit. Prior to such date, our business operated as a division of Elbit. In July 1996, we consummated an initial public offering of 2,000,000 ordinary shares. Effective December 29, 2000, our ordinary shares were delisted from the NASDAQ National Market and traded on the Over-the-Counter Bulletin Board until June 21, 2001, at which time they were transferred to the NASDAQ SmallCap Market. On November 19, 2003, our ordinary shares were delisted from the NASDAQ SmallCap Market and we are currently traded on the Over-the-Counter Bulletin Board (OTCQB). On March 27, 2017, we completed a 1-for-10 reverse share split of our ordinary shares, intended, among other things, to make our ordinary shares a more attractive investment for large US institutional investors (many of whom do not regularly invest in stocks trading below $1.00 per share). There can be no assurance that the reverse share split will have such result. From July 1996 until May 4, 1999, our ordinary shares were quoted under the symbol EVSNF. From May 4, 1999, until November 18, 2003, they were quoted under the symbol EVSN, and since November 19, 2003 our ordinary shares have been quoted under the symbol EVSNF.OB. For further information, see Item 3, “Key Information -- Risk Factors -- Risk Factors Related to Our Ordinary Shares” and Item 9, “The Offer and Listing -- Market and Share Price History”.

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We have historically designed, developed, manufactured, marketed and supported automatic inspection and quality monitoring systems for the textile and other fabric industries.

In the third quarter of 2002, our management took the strategic decision to leverage our expertise in designing visual inspection systems and expand our business into new industrial fields. Since then, we have focused on an overall strategy of expanding our product portfolio and penetrating new markets. As part of this strategy we acquired two businesses, Panoptes Ltd., or Panoptes and ScanMaster Systems (IRT) Ltd. or ScanMaster and its subsidiary IRT ScanMaster Systems Inc., or  ScanMaster, Inc., which operated in the fields of optical vision and non-destructive ultrasonic inspection application, respectively.

In September, 2004, we completed the acquisition of ScanMaster, a company that at the time developed, manufactured and marketed automated ultrasonic inspection and imaging equipment for the aircraft, aerospace, train, rail, pipe, plate and automotive industries.

In January 2006, we, together with our then subsidiary ScanMaster, consummated the acquisition of the business, assets, and shares of Panoptes, an innovator of machine vision systems for surface inspection, technical fabrics, textiles, glass and other woven materials.

Due to the economic downturn, large capital investment required by the industry coupled with the long payment cycle, in June 2010, we sold ScanMaster and substantially all of the assets of ScanMaster Inc. to a group of purchasers including our former chief executive officer and chairman of the board, David Gal and Ofer Sela, our former executive vice president, R&D Operations (the "ScanMaster Transaction").

Recent Developments

Since January 1, 2016, the company has experienced the following significant developments:

2012 Private Placement Transaction

Pursuant to the 2012 Private Placement Transaction, consummated on December 10, 2012, we sold 526,315 ordinary shares to Mr. Avi Gross at a price per share of $0.95 for gross proceeds of $500,000 (on a split-adjusted basis). Additionally, under the 2012 Private Placement Transaction, Mr. Gross provided our company with a $300,000 convertible loan, or the Convertible Loan, at a price per share of $0.95. As part of the 2012 Private Placement Transaction, Mr. Gross also received two warrants to purchase our ordinary shares: the First Warrant  for the exercise of up to $200,000 of our ordinary shares, at a price per share of $0.95 (on a split-adjusted basis), and the Second Warrant for the exercise of up to $1,000,000 of our ordinary shares, at a price per share of $2 (on a split-adjusted basis), unless the Company achieves gross revenues of less than $19,000,000 for the year ending December 31, 2014, in which case the exercise price per share shall be reduced to $1.7 (on a split-adjusted basis). In August 2014, our audit committee and board of directors approved an amendment to the Second Warrant, pursuant to which the exercise price for the Second Warrant was fixed at $1.7 per share (on a split-adjusted basis). The Second Warrant was originally exercisable during the period between June 10, 2013 and February 5, 2015 but was amended to extend the expiration date to December 31, 2015. On June 10, 2013, Avi Gross exercised the Convertible Loan and the First Warrant (following an amendment reducing the exercise price of each of the Convertible Loan and the First Warrant to US$ 0.85 (on a split-adjusted basis)). Consequently, we issued an additional 588,235 ordinary shares (on a split-adjusted basis) to Avi Gross upon this exercise. On December 27, 2015, Avi Gross exercised the Second Warrant. Consequently, we issued an additional 588,235 (on a split-adjusted basis) ordinary shares to Avi Gross upon this exercise.

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Following the consummation of the 2012 Private Placement Transaction and the exercise of the Convertible Loan, the First Warrant and the Second Warrant, Mr. Gross’ holding in the Company amount, as of December 31, 2016, to 1,702,786 ordinary shares (on a split-adjusted basis), constituting 18.14% of the outstanding share capital of the Company.

Additionally, in accordance with the 2012 Private Placement Transaction and following the above referenced exercises, as long as Mr. Gross continues to hold at least 5% of the Company’s issued and outstanding shares, Mr. Gross, is entitled to appoint either a representative to attend all board meetings (subject to certain limitations)  in a non-voting, observer capacity, or, alternatively, a nominee to be elected as a director to our board of directors. On May 1 2014, Mr Gross nominated and our board appointed Mr. Natan Avisar as Mr. Gross' appointee to serve on our board by filling a vacancy. On January 12, 2015, our annual general meeting approved the appointment of Mr. Natan Avisar as a director until our next annual general meeting, and on May 2, 2016, our annual general meeting re-approved his appointment.

For more information regarding the 2012 Private Placement Transaction, see Item 10, “Additional Information – Material Contracts”.

2014 Private Placement Transaction

Pursuant to the 2014 Private Placement Transaction, consummated on July 10, 2014, we sold an aggregate 416,666 ordinary shares (on a split-adjusted basis) to SMD at a price per share of 0.6$ (on a split-adjusted basis) for gross proceeds of $250,000, and issued to SMD the first warrant to purchase up to 125,000 ordinary shares (on a split-adjusted basis) for an aggregate exercise price of up to $100,000. Under the terms of this transaction, SMD's investment was to be consummated in three tranches – the first tranche of $150,000 was paid upon the closing of the transaction in consideration for the issuance of 250,000 ordinary shares (on a split-adjusted basis) and a three year warrant to purchase up to 125,000 of our ordinary shares (on a split-adjusted basis), for an aggregate exercise price of up to $100,000. The remaining tranches were paid in November 2014, upon our achievement of certain business milestones, such that SMD paid a further $100,000 in consideration for the issuance of 166,666 ordinary shares (on a split-adjusted basis) and the issuance of a three year warrant to purchase up to 83,333 ordinary shares (on a split-adjusted basis) for an aggregate exercise price of up to $66,666. On December 27, 2015, SMD exercised the warrants, for an exercise price of $146,667. Consequently, we issued an additional 183,333 ordinary shares (on a split-adjusted basis) to SMD upon this exercise.

Additionally, in accordance with the 2014 Private Placement Transaction and following the above referenced exercise, as long as SMD continues to hold at least 5% of the Company’s issued and outstanding shares, SMD is entitled to appoint a representative to attend all board meetings in a non-voting, observer capacity.

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In accordance with a Form SC 13G/A filed by SMD and Mr. Kotlicki on February 14, 2017, as of such date SMD and Mr. Kotlicki do not hold any of our ordinary shares

For more information regarding the 2014 Private Placement Transaction, see Item 10, “Additional Information – Material Contracts”.

Significantly Increased Revenues in 2015 Compared to 2014

Our total annual revenues for the 2015 fiscal year were $9.13 million, representing an increase of 37.3%, compared to the total annual revenues of approximately $6.65 million in 2014 (which itself was an increase of 56% over the previous year). For more information regarding 2014 financials see Item 8, “Financial Information”.

Principal capital expenditures and divestitures

From January 1, 2016 to December 31, 2016 our capital expenditures totaled approximately $7thousand, (compared to $15 thousand during 2015 and $9 thousand during 2014), of which approximately $7 thousand (compared to $13 thousand during  2015  and $7 thousand during 2014) can be attributed to acquisitions of computers for office use. We have financed our capital expenditures from internal resources, and expect to continue to finance our capital expenditures in a similar manner in 2017.

B.Business Overview

Following the ScanMaster Transaction and as of June 2010, we operate in only in the industry of Automated Optical Inspection Industry, or AOI.

The AOI has traditionally been a labor-intensive industry. The principle stages of the textile manufacturing process include raw materials production, yarn spinning, fabric‑forming, fabric spreading, fabric cutting and fabric finishing. End uses for textiles include fabric for apparel, home textiles, industrial fabric and technical fabric.

In recent years, web manufacturers have successfully incorporated automation technology into their manufacturing process. While automation has permeated virtually every component of the textile manufacturing process, inspection and quality monitoring remain principally labor-intensive operations and consequently can be impediments to greater efficiency and profitability. Web manufacturers inspect fabric in order to:

· determine the quality of the fabric, thereby enabling a determination of its end usage and price;

· locate, label and trace major defects (a requirement in the industry) for rapid identification in later stages of the manufacturing process;

· prevent the reoccurrence of defects caused by manufacturing equipment; and

· reduce rebate payments for textiles delivered with defects.

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Fabric inspection can be performed at various stages of the production process and is often performed two to three times during a complete production cycle. Manual inspection of fabrics is generally performed by running the fabric over a wide table under appropriate lighting. A human inspector is generally expected to detect a variety of defects, including holes of various sizes and shapes, tears, cuts, thick ends, missing threads, width distortion and variations in the fabric density and width, and mark them according to their type and location on the fabric roll. In the case of inspection of printed fabrics, the human inspector is expected to detect defects such as misfits, lint, stick-ins and off-center and narrow prints. Inspectors inspecting dyed fabrics are also expected to detect variations in the color and shades of the dyed fabric.

Human inspection of fabrics is unreliable for the following reasons:

· the inspection environment is influenced by factors such as the speed at which the fabric passes in front of the inspector, the lighting in the testing area and the distance and angle at which the inspector views the fabric. Differences in inspection environments can lead to varying assessments of fabric quality;

· the accuracy of the inspection is affected by the attention span and fatigue of the human inspector, who is normally expected to view fabrics for a period of several hours;

· perception problems caused by the fatigue of specific nerve cells in the case of patterned and printed material;

· manual inspection is performed by numerous persons worldwide, each with a different perception of product quality; and

· certain technical fabric is produced at a very high speed and therefore defects cannot be observed by the human eye.

These factors have led to inconsistent assessments of fabric quality and have caused fabric inspection to be a time‑consuming and costly process. These limitations also make it difficult to establish a reliable industry‑wide standard for fabric quality. The limitations of manual inspection, along with the general trend in the web industry towards automation, in order to reduce costs and improve quality, have created an opportunity for an effective automatic visual inspection and quality monitoring systems for various niche markets in the web industry.

The EVS Solution for the AOI

We develop and have acquired sophisticated automatic visual inspection systems for manufacturers of industrial web products. Our systems are designed to overcome the limitations of human visual inspection. Our systems combine high‑performance computer processing with unique image processing capabilities based on proprietary vision understanding and interpretation algorithms. The unique image processing capabilities include image acquisition, mathematical transformation, image analysis and learning and decision-making elements. The mathematical algorithms which enable these image interpretations and understanding capabilities are performed by high-speed dedicated parallel processing computers based on specialized architectures which are capable of performing tens, and in some of our products, hundreds of billions of operations per second. These algorithms enable our systems to recognize fabric flaws in real time and to learn the types and severity of the flaws a customer wishes to detect, ignoring flaws that do not fall into such categories. Our systems then analyze detected defects and provide information regarding their nature. Our systems are an integral part of the manufacturing process and can be integrated with the customer’s management information systems, providing valuable information for the production planning process. We believe that our systems enable customers to reduce direct labor, increase manufacturing efficiency and improve product quality.

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Products

We currently offer four families of visual inspection systems: IQ-TEX, for the visual inspection and quality monitoring of woven fabric; IQ-TEX Lite, for the visual inspection and quality monitoring ofknitted, non-woven, tire cord, film, metal, coated and technicalfabrics; Broken Filaments Analyzer (BFA), for the detection of broken filament defects in glass fabric; and On Loom Inspection (I-Bar), for the automatic visual quality inspection system that is integrated with the weaving loom and monitors selected fabric types such as carbon, tire cord and other high cost technical fabric, while weaving.

IQ-TEX Family of Products

The IQ-TEX family of automatic web inspection systems is designed to provide textile manufacturers with a comprehensive solution to their quality monitoring, grading and cutting needs. IQ-TEX systems detect numerous types of defects on any unicolor web, including: yarn and weaving faults; holes; oil, water and dye stains; missing threads; starting marks; broken yarn; and dyeing, coating and finishing irregularities. They then provide the manufacturer with information regarding the location, size and shape of the defect. Depending on the model, IQ-TEX systems can detect defects as small as 0.05 mm on any web width. The IQ-TEX systems can detect at web speed of up to 1,100 meters per minute. In addition, IQ-TEX systems can be configured to mark defects during inspection and advise the user as to the most efficient manner to cut web to eliminate unacceptable defects.

The modular design of the IQ-TEX systems enables their use for a wide range of applications throughout the fabric-forming process, including greige, dyed fabrics and finished fabrics, and for inspection of a variety of fabrics including those used for apparel, home textile and technical and industrial textiles. The modular design also enables the configuration of the system to match the manufacturer’s demands with respect to matters such as web width, web speed, desired resolution, auxiliaries, information distribution channels within the plant and grading standards. IQ-TEX systems can be integrated in-line with existing textile production equipment or can be used as off-line stand-alone units to inspect web after manufacturing is complete.

Quality Monitoring Process

The IQ-TEX quality monitoring process is comprised of three primary phases: the pre-inspection phase, the inspection phase and the post-inspection phase.

Pre-Inspection Phase. The pre-inspection phase is the preliminary learning stage in which a sample of web of acceptable quality is scanned through the system. Based on the information obtained, the system creates a parameters file for the web style to be inspected that defines the statistical features of a “good” web based on the customer's specifications. The system then uses these parameters to learn what to look for when inspecting the fabric. Once the system has learned the parameters of the sample, the system is ready to begin inspecting the fabric.

Inspection Phase. The system moves the inspected web through the image acquisition unit. The image acquisition unit acquires the image of the web being inspected and transforms video signals of the web into digital signals for processing and analysis. This unit then transfers the web image to the system’s computer. The computer processes the web image and distinguishes between inherent product irregularities and product defects. It then groups product defects according to their size, direction and shape, and grades them in terms of severity. The system displays a map of the defects in real-time, stores the defect image and records information with respect to each defect detected. The system may also be programmed to activate external units such as marking units and alarms upon detection of a defect.

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Post-Inspection Phase. Following the inspection of the fabric, the system provides an inspection report, which may be printed or archived, containing a record of each defect that has been detected, statistics regarding the type and position of the defect, and the overall grading of the rolls according to pre-defined guidelines. In the in-line mode, the inspection report may be sent directly to the manufacturer's host computer, thereby enabling an operator to take immediate actions to remedy the cause of the defects or to take actions to eliminate such defects in the future. The images can also be analyzed using the video album workstation described below, enabling customers to identify the cutting points for optimal web yield, and to re-grade the fabric.

Models

IQ-TEX systems are currently available in IQ-TEX4 model and also in IQ-TEX4 Lite model. The IQ-TEX4 model includes improved capabilities for the detection of defects, as well as additional innovative technologies for system styles tuning and defects sorting. The 2 models cover a full range of applications.

· The IQ-TEX4 is based on the integration of our Smart Video Camera technology into the I-TEX products, mainly for woven textile range applications, such as grey fabric, dyed & finished, denim, glass fabric (for PCB) etc. The IQ-TEX is a more compact, powerful and flexible version of IQ-TEX, and can operate at a maximum speed of up to 800 meters per minute. It includes improved capabilities for the detection of defects in complex fabrics, such as denim, and high-speed configuration for an in-line inspection of non-woven fabric. The list price for the IQ-TEX ranges between $110,000 and $240,000 depending on the configuration. The IQ-TEX4 Lite is based on the same hardware as is used in the IQ-TEX4 system.

· The IQ-TEX4 Lite has a light mechanical frame (the system is equipped with a camera box), which is designed for easy and flexible installation on a wide range of web production lines such as non-woven, paper, tire cord, film, composite materials, laminated materials, metal, etc. The system allows us to offer solutions to new market segments using our vast experience from the textile industry. The list price for the IQ-TEX4 Lite ranges between $35,000 and $200,000 depending on the configuration and the web production type.

Modules

We offer the following three modules for defect analysis and cut optimization for our IQ-TEX4 and IQ-TEX4 Lite systems: the Video Album workstation, the OCC (Optimization & cut control) and the Smart Table.

Video Album Workstation. This module is a stand-alone PC-based station for review and analysis of defect images and data using a Windows-based interface. The images and inspection results are automatically transferred from the system’s computer to the video album workstation via a local area network.

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The Video Album workstation enables rapid review of web images and provides visual documentation of defects and over all roll quality. The video album workstation enables review of all recorded information, such as images and data, for each defect. This information enables:

· reviewing and editing of defect data;

· generation of management reports;

· archiving of defect data; and

· definition of points of interest and mandatory cutting points for the cutting table and OCC system.

Cut Optimization. Software that enables the user to cut a large “IQ-TEX Inspected” rollof web into smaller rolls while optimizing the fabric’s yield per class (A, B, C, etc.) according to the user’s specifications. Our OCC software offers the following benefits:

· maximizes web roll selling price;

· reduces the quantity of second and third quality product; and

· consistent fulfillment of customer's demands.

Smart Table. The Smart Table interfaces the IQ-TEX system with the cutting table and provides users with the following benefits:

· allows for an accurate stop or slowing the table speed at “points of interest” which were defined on the video album such as: selected defects, cutting points and mending points;

· contains a trigger for invisible ink or metallic label defect marking signs; and

· operates the roll cutting device following the cut optimization results.

These modules can be purchased separately or together to form the IQ-TEX Inspected Process, which provides an integrated link between the web-forming and cutting segments of the textile industry.

Accessories

We offer an extensive line of accessories designed to provide, along with the IQ-TEX4 systems, a comprehensive solution for the web inspection and grading process. These accessories include invisible ink or sticker marking units, alarm sets, IR ink for marking and external connecting devices for marking and measuring.

Broken Filaments Analyzer (BFA)

The Broken Filaments Analyzer, or the BFA, is a visual inspection system designed for the detection of broken filaments in glass fabrics used for the electronic printed circuit board, or PCB, industry. Broken glass filaments are small filaments that protrude from glass fabric, generally used for the PCB industry. Broken glass filaments are hardly visible to the human eye at low web speeds, and are practically invisible at normal production speeds. They can be as small as a few microns and as short as 0.5 millimeters. Broken glass filaments can cause defects in the lamination of glass fabrics and the production of printed circuit boards, and may short-circuit or disconnect the end product incorporating the PCB. For this reason, it is important to effectively detect broken glass filaments and grade glass web in terms of broken filament content. Human inspectors are unable to effectively detect broken glass filaments.

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The BFA utilizes proprietary processing and software technology, cameras and lighting systems to inspect glass web in real-time at speeds exceeding 120 meters per minute. The broken filaments detected by the BFA are displayed on a monitor that shows the running map of the fabric in real time, and are recorded for further analysis. The BFA produces a detailed report of each web roll, showing the broken filaments distribution in the roll, its statistics and the fabric’s grading. The BFA is integrated with the IQ-TEX4 system, which can be used for the detection of other defects in glass fabrics, and with the Video Album to provide a more comprehensive solution to the visual inspection and quality monitoring of glass fabrics. The BFA can also be used for the detection of surface defects in other fabrics or webs including airbags and technical fabrics. The list price for the BFA system ranges between $90,000 and $150,000, depending on the configuration.

On Loom Inspection (iBar)

The On Loom Inspection, or the iBar, is a tool for textile manufacturers to maximize profit, with complete raw material utilization.

The first application of this solution is for monitoring production looms to ensure that the highest priced textile component, raw material, gives maximum product yield. The iBar provides complete reel and process inspection during the formation of the fabric web, by using high resolution micro-cameras mounted into a slim extruded aluminum housing with customizable LED illumination, allowing for defect detection and alarm activation, we can also stop the Loom on repet defects. The iBar may be flexibly installed, thus enabling it to be mounted directly on the loom or knit machine looking directly at the reed or needles. When detecting defects, the iBar categorizes them, saves them and displays them on the interface, thus providing real-time feedback and defect elimination, designated to enable manufacturers to improve input-output ratios.

Sales and Markets

Sales Network

We market our products through in-house sales personnel in conjunction with independent sales representatives. We believe that our network of sales representatives will enable us to introduce new products and to penetrate additional web manufacturers around the world. We intend to further expand our international network of sales representatives by entering into relationships with additional sales representatives and forming joint ventures in target markets.

Our independent sales representatives do not have the authority to enter into contracts on our behalf or otherwise bind us. To promote our products, we devote significant resources towards participation in the key annual textile and technical textile, equipment trade shows. We also advertise in trade magazines, conduct customer seminars and provide demonstrations at our customers' sites.

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We maintain sales and support centers located in the United States, Europe, Asia, and Israel. When a high level of technical expertise is needed, the sales effort is supported by product marketing managers and our engineers who work closely with customers and potential customers to find solutions to their current and future web inspection challenges. We work closely with customers in a continuous improvement process on selected technical aspects of our products. Such improvements often become standard on products sold worldwide. A specified number of training classes are included in the purchase price of our products. Subsequent training is provided for a nominal fee.

Relationships with Leading Equipment Manufacturers

Another important element of our marketing strategy is to establish and strengthen relationships with leading textile equipment manufacturers. These relationships bolster our marketing abilities and assist us in ensuring that our products are technically advanced and designed in conjunction with the development of the textile manufacturers' web inspection requirements and industry trends.

Sales by Principal Markets

In 2014, approximately 26% of our sales were in the United States, approximately 46% were in Europe, and approximately 28% were in the Far East. In 2015, approximately 29% of our sales were in the United States, approximately 26% were in Europe, and approximately 45% were in the Far East. In 2016, approximately 29% of our sales were in the United States, approximately 30% were in Europe, and approximately 41% were in the Far East. No customers accounted for more than 10% of our net sales in any of the years 2014, 2015 or 2016.

Seasonality

Historically, our highest level of net sales has generally been in the fourth quarter of each year. Nevertheless, we have experienced and may in the future experience significant fluctuations in revenues and operating results from quarter to quarter as a result of a number of factors, many of which are outside our control. For more information, see Item 3, “Key Information – Risk Factors – Risk Factors Related to Our Business – Fluctuations in the Market”.

Manufacturing

The principal manufacturing and assembly of our basic systems are conducted by subcontractors. We perform logistics and purchasing activities, integration and final testing in-house. In addition, we perform the software installation and configuration, final hardware configuration, quality control and any special system customization needed for a particular customer. Production is based upon firm customer commitments and anticipated orders and is generally planned one to three months in advance. We contract with third party subcontractors to perform the manufacturing of our systems so that we can focus on design and product development strengths and minimize fixed costs and capital expenditures. Our engineers work closely with subcontractors to increase manufacturing yields, lower manufacturing costs and assure quality. Some of the electronic components included in our product are manufactured especially for us by exclusive suppliers. If any of these exclusive suppliers stop manufacturing these components we will need to find alternative suppliers, which may take substantial time and involve substantial costs. Our reliance on exclusive suppliers involves several risks, including a potential inability to obtain adequate supplies of these components and reduced control over pricing and timely delivery of these components. We believe that we maintain a sufficient inventory of these components to meet our foreseeable needs. However, if our single source supplier ceases to produce these components, we would have to transfer the manufacture of the components to another supplier or suppliers.  We estimate that such a transfer would take approximately up to six months and could delay the production and supply of our products, which could harm our results of operations.

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Competition

We believe that the capabilities of our technology, along with our experience in implementing these technologies and our wide customer base, provide us with a competitive advantage over potential competitors such as small suppliers of automatic inspection solutions with PC-based technologies. These suppliers, who offer low-cost solutions for low-end applications such as Non-Woven, have attempted to penetrate the field of textile inspection. Yet, thus far, such attempts have not been commercially successful.

We are targeting the technical fabric industry as a high potential market for our automatic inspection systems. The main competitor on this industry is AMETEK Surface Vision (formerly known as the Cognex Surface Inspection Systems Division), based in the United States. AMETEK Surface Vision is specialized on supplying machine vision components for the industry. We believe that our capabilities for supplying “tailor made” solutions for our customers together with the high growth rate of the technical fabric industry, will allow us to produce revenues from it.

The presence of competitors in the textile automatic inspection field may increase awareness of the benefits of automatic fabric inspection, and may help us enlarge our market. However, it is possible that systems developed by these or other future competitors will prove more effective than our IQ-TEX4 systems or that potential customers will prefer them for other reasons. If we are unable to maintain our technological advantage or are unable to convince potential customers of the superiority of our IQ-TEX4 systems, our business would be seriously harmed.

Several manufactures of equipment for the fabric manufacturing industry offer products that compete with our Shade Variation Analyzer. Our main competitor is Mahlo GmbH & Co. KG.

The competition for the development and sale of advanced automated vision systems in other industries and for other applications is intense. To the extent providers of automated vision systems choose to focus on or develop advanced automated vision technology for the fabric industry or other industries for which we attempt to develop products, we could face significant competition in the future. Potential competitors may be more established, benefit from greater market recognition and have greater financial, production and marketing resources than we do.

Intellectual Property Rights

We currently have one approved U.S. patent, which we announced on September 8, 2016 (application 14/009,557) entitled On-Loom Fabric Inspection System and Method. The patent covers the workings of our iBar product for on-loom inspection of woven fabrics in order to identify weaving faults during manufacture. We rely primarily upon a combination of trademark, copyright, know-how, trade secrets and contractual restrictions to protect our intellectual property rights.

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Our employees who have access to confidential information are required to sign confidentiality and invention assignment agreements. We believe that such measures provide only limited protection of our proprietary information, and there is no assurance that our proprietary technology will remain a secret or that others will not develop similar technology and use this technology to compete with us. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.

We have registered trademarks with respect to the name “I-TEX” in the Mexico, Spain, Italy, Turkey, Portugal, Brazil, France, China and Japan, and have filed applications for registered trademarks for the name “I-TEX” in India. We have registered trademarks of the name and design “I-TEX Inspected” in Taiwan, South Africa, United States, Mexico, Brazil, Germany, France, Turkey, Italy, China and the European Union. We also have registered trademarks with respect to the name “PRIN-TEX” in Spain, Italy, France, Turkey and Japan. In addition, we have a registered trademark with respect to the name “KNI-TEX” in Italy. We also have a registered trademark with respect to the name “EVS” in the European Union, Japan and the United States. Our trademark rights include rights associated with the use of our trademarks. Significant and protracted litigation may be necessary to protect our intellectual property rights, to determine the scope of the proprietary rights of others or to defend against claims of infringement. Item 8, “Financial Information -- Litigation” below contains a description of a past patent infringement claim.

Governmental Regulation Affecting the Company

As a company which focuses on research and development and which receives grants from the Government of Israel, we are affected by the terms of the grants that we receive from the OCS, or from the Authority following the R&D Amendment. Under the terms of grants, we previously received, we are responsible to pay royalties based on the net sales of our products. In addition, manufacturing of products developed with these grants must be performed in Israel, or we may be subject to the payment of additional royalties. Approval must be obtained to transfer technologies developed through projects in which the government participates. Following the R&D Amendment, the royalties rates or certain restrictions may be amended. See Item 5, “Operating and Financial Review and Prospects -- Research and Development, Patents and Licenses, etc.”

C.Organizational Structure

We own all of the issued and outstanding shares of our subsidiaries EVS US, Inc., or EVS US, and Panoptes LTD. EVS US is incorporated in Delaware, USA. EVS US predominantly functions as a sales and support center for our products. Panoptes is incorporated in Israel.

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D.Property, Plants and Equipment

Our headquarters and manufacturing facilities are located at 7 Bareket Street, P.O.B. 3047, Industrial Park, Caesarea, Israel 3088900. We do not own any real property. Between June 30, 2010 and June 2014 we leased approximately 7,650 square feet at our facilities in Israel, at an annual rent of approximately $83thousand under a lease agreement. In June 2014 the lease agreement automatically renewed for an additional 4 year term, until June 2018, with a one-time automatic 6% increase in the annual rent (plus linkage to the Israeli Consumer Price Index) over the entire additional period. In 2016 we signed an amendment to the lease agreement, pursuant to which we lease the facilities for a five year term with an option to extend the lease for an additional five year term. Under the amended lease agreement, the lessor agreed to fund the renovation of the facilities in exchange to payment of higher annual rent, such that the annual rent for the initial five year term is approximately $92 thousand , and the annual rent for the optional five year period will be mutually agreed on, if the lease is extended. EVS US leases approximately 5,400 square feet office space in Greenville, South Carolina  USA, at an annual rent of approximately $12 thousand. This lease will expire in October 2017, after which the Company will seek to either renew the lease or to enter into a new lease agreement.

We believe that our current facilities are adequate for our operations as currently conducted. In the event that additional facilities are required, we believe that we could obtain such additional facilities at commercially reasonable prices.

ITEM 4.A.UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Selected Financial Data (Incorporated by reference in Item 3A)

The selected financial data for the years ended December 31, 2016, December 31, 2015, December 31, 2014, December 31, 2013 and December 31, 2012, are derived from the financial statements that have been audited by Brightman Almagor & Co., a member of Deloitte Touche Tohmatsu, independent auditors. Our financial statements have been prepared in accordance with U.S. GAAP. The financial data set forth below should be read in conjunction with the financial statements, related notes and other financial information contained in this annual report. For discussion of our significant accounting principles, see Note 2 of our Consolidated Financial Statements incorporated herein by reference. All capitalization terms have been adjusted to reflect the effect of the reverse share split effective as of March 27, 2017.

(in U.S. thousand Dollars )	2012			2013			2014			2015			2016
Statement of Operations Data:
Net sales		6,708			4,258			6,644			9,128			10,146
Cost of sales		2,961			2,479			3,145			3,882			4,530
Gross profit		3,747			1,779			3,499			5,246			5,616
Research and development expenses, net		682			625			560			765			1,378
Marketing and selling expenses, net		1,371			1,022			1,187			1,411			1,254
General and administrative expenses		734			866			729			808			826
Total operating expenses		2,787			2,513			2,476			2,984			3,458
Operating profit (loss)		960			(734	)		1,023			2,262			2,158
Other income (expenses)		(2	)		-			-			-			-
Financing income (expenses), net		(134	)		(278	)		(365	)		(144	)		(134	)
Profit (loss) before taxes		824			(1,012	)		658			2,118			2,024
Taxes on income		-			-			-			-			-
Net Profit (Loss)		824			(1,012	)		658			2,118			2,024
Basic earnings (loss) per share (1)		0.12			(0.13	)		0.08			0.25			0.22
Diluted earnings (loss) per share (1)		0.12			(0.13	)		0.08			0.25			0.22
Weighted average number of shares outstanding-Basic (1)		7,004			7,815			8,218			8,546			9,337
Weighted average number of shares outstanding-Diluted (1)		7,163			7,815			8,351			8,568			9,592

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	2012			2013			2014			2015			2016
Balance Sheet Data:
Working capital		1,251			332			1,062			4,169			5,674
Total assets		4,207			2,840			3,629			6,792			8,158
Total liabilities		4,481			3,712			3,242			3,093			2,358
Accumulated deficit		(41,908	)		(42,920	)		(42,262	)		(40,144	)		(38,120	)
Shareholders' equity (deficiency)		(274	)		(872	)		387			3,699			5,800

(1) Computed on the basis set forth in Note 2 to our Consolidated Financial Statements.

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward‑looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward‑looking statements as a result of certain factors.

Most of our revenues are generated in U.S. dollars, and a significant portion of our expenses are incurred in U.S. Dollars, or are linked to the U.S. Dollar. Consequently, we use the U.S. Dollar as our functional currency. Transactions and balances originally denominated in U.S. Dollars are presented in the financial statements in their original amounts, and non-Dollar transactions and balances have been translated into U.S. Dollars using the exchange rates in effect on the date of a transaction or balance. Our consolidated financial statements have been prepared in accordance with U.S. GAAP.

The financial statements of our subsidiaries the functional currency of which is the U.S. Dollar, but which are presented in a currency other than U.S. Dollars, have been translated into U.S. Dollars. Monetary balance sheet items have been translated using the exchange rates in effect on the balance sheet date and all non-monetary balance sheet items have been translated using the historical exchange rates in effect on the date of the transaction. Statement of income items have been translated using the average exchange rate for the period presented.

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Critical Accounting Policies

The preparation of our financial statements in conformity with the U.S. generally accepted accounting principles requires us 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 amount of revenues and expenses during the reporting period. These are our management’s best estimates based on experience and historical data. Actual results could differ from those estimates.

Specific accounting policies we utilize require higher degrees of judgment than others in their application. These include revenue recognition on long-term contract work. Our policy and related procedures for revenue recognition on long-term contract work are summarized below.

A. Revenue recognition

1)Sale of products:

(a)General

Revenues from sales of products and supplies are recognized when an arrangement exists, delivery has occurred and title passed to the customer, Group’s  price to the customer is fixed or determinable and collectibility is reasonably assured.

In some cases, the Company grants its customers a trial period, usually several months, in order to evaluate prototype of the system’s performance. In case that the systems performance meets the customer’s requirements, it purchases the system at the end of the trial period. The Company does not recognize sales revenue from products shipped to customers for trial until such products are actually purchased. Until purchased, these products are recorded as consignment inventory at the lower of cost or market. As of December 2016, the Company has $148 thousands in consignment.

(b)Right to return

The Group does not provide its customers, in the normal course of business, a right  to return purchased products.

(c)Multiple Deliverables

The Company's multiple deliverable arrangements consist primarily of tangible products and professional services. The Company is unable to establish VSOE for all deliverables in an arrangement with multiple elements. Further, the Company is unable to reliably determine what similar competitor products’ and services' selling prices are on a standalone basis and therefore is not able to determine TPE. As the Company is unable to establish VSOE or TPE, it uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a standalone basis. The Company determines BESP for a product or a service based on its past and current pricing practices. The determination of BESP is made through consultation with and formal approval by the Company’s management.

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 (2) Services rendered

Service revenue in respect of the Group’s products is recognized ratably over the contractual period, or as services are performed.

(3) Deferred income

The deferred income balance as of December 31, 2015 and 2016 include amounts of revenues that were invoiced and cash was received, but deferred due to elements of the arrangements not yet delivered as of year end.

A. Operating Results

I. Financial Data

The following table sets forth, for the periods indicated, our selected financial data as a percentage of net sales:

	2014			2015			2016
Net sales		100.0			100.0			100.0
Cost of sales		47.3			42.5			44.6
Gross profit		52.7			57.5			55.4
Research and development expenses, net		8.4			8.4			13.6
Marketing and selling expenses, net		17.9			15.5			12.4
General and administrative expenses		11			8.9			8.1
Total operating expenses		37.3			32.7			34.1
Operating income		15.4			24.8			21.3
Financing expenses, net		(5.5	)		(1.6	)		(1.3	)
Income  before taxes		9.9			23.2			19.9
Taxes on Income		-			-			-
Net Profit		9.9			23.2			19.95

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

Sales

Sales in 2016 increased by approximately 11% to $10.15 million compared with sales of $9.1 million in 2015. The increase in revenue for the year ended December 31, 2016, was due to our substantial marketing efforts in the Far East markets designated to increase our sales and strengthen our operations in this market, as well as to sales of the iBar.

Cost of Revenues

Cost of revenues consists of component costs, hardware costs, technical support costs, royalty payments, compensation costs and overheads related to the production and assembly of our products. Cost of revenues as a percentage of net sales was 44.6% in 2016 compared with 42.5% in 2015. The increase in cost of revenues as a percentage of net sales was mainly due to hiring and traning new field engineers to install and provide support to our customer.

Gross Profit

In 2016 our gross profit was $5.6 million as compared to $5.2 million in 2015. Gross profit as a percentage of net sales was 55.4% in 2016 as compared to 57.5% in 2015. The decrease in our gross profit as a percentage of revenue in 2016 was mainly due to increase in costs attributed to the hiring and traning of new field engineers to install and provide support to our customer.

Research and Development Costs

Our research and development expenses consist of our total costs less grants from the Government of Israel. Gross research and development expenditures consist primarily of salaries and related costs of employees and subcontractors engaged in ongoing research and development, and, to a lesser extent, costs of materials, depreciation and other expenditures. Net research and development expenses in 2016 increased to $1.38 million, compared to $0.76 million in 2015, an increase of 80%. This increase is attributed to the Company's additional investments in the development of its existing products and new products and hiring additional 6 software engineers,  and to payment of severance pay for two Company employees whose employment was terminated by the Company.

Sales and Marketing Expenses

Marketing and sales expenditures consist primarily of costs relating to promotion, advertising and trade shows, payroll and related expenses, sales commissions, travel expenses. Marketing and sales expenses amounted to $1.25 million in 2016, compared to $1.4 million in 2015. The decrease in our marketing and sales expenses was primarily due to a decrease in sale commissions paid due to the different  commission mix which we were required to pay in connection with the 2016 sales compared to the commission mix we were required to pay in 2015.

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General and administrative Expenses

General and administrative expenses consist of payroll and related expenses, doubtful and bad accounts, professional fees paid to auditors, legal advisors and other consultants and other related expenses. As a percentage of net sales, general and administrative expenses decreased to 8.1% in 2016 from 8.9% in 2015. General and administrative expenses in 2016 were $0.83 million, compared to $0.8 million in 2015. The decrease in general and administrative expenses as a percentage of net sales, was due to the increase in revenues.

Financial Expenses

Financial expenses consist interest on loans from banks, currency translation adjustments between the U.S. Dollar and NIS exchange rate imposed on our assets and liabilities. Financial expenses in 2016 were $0.13 million compared to $0.14 million in 2015. The decrease was mainly attributed to the full repayment of our Bank loans in September 2016.

Profit/Loss

In 2016 we recorded a net profit of $2 millionas compared to a net profit of $2.1 million in 2015. The moderate decrease in net profit in 2016 compared to 2015 was attributed to increase in sales offset by increase in research and development expenses.

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

Sales

Sales in 2015 increased by approximately 38% to $9.1 million compared with sales of $6.6 million in 2014. The increase in revenue for the year ended December 31, 2015, was due to our substantial marketing efforts in the Chinese and Indian markets designated to increase our sales and strengthen our operations in this market, as well as to sales of the iBar, our newly introduced product.

Cost of Revenues

Cost of revenues consists of component costs, hardware costs, technical support costs, royalty payments, compensation costs and overheads related to the production and assembly of our products. Cost of revenues as a percentage of net sales was 42.5% in 2015 compared with 47.3% in 2014. The decrease in cost of revenues as a percentage of net sales was mainly due to the increase of revenues in 2015.

Gross Profit

In 2015 our gross profit was $5.2 million as compared to $3.5 million in 2014. Gross profit as a percentage of net sales was 57.5% in 2015 as compared to 52.7% in 2014. The increase in our gross profit as a percentage of revenue in 2015 was mainly due to increase in sales while maintaining a high profitability rate for our different products sold.

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Research and Development Costs

Our research and development expenses consist of our total costs less grants from the Government of Israel. Gross research and development expenditures consist primarily of salaries and related costs of employees and subcontractors engaged in ongoing research and development, and, to a lesser extent, costs of materials, depreciation and other expenditures. Net research and development expenses in 2015 increased amounted to $0.76 million, compared to $0.56 million in 2014, an increase of 36%. This increase is attributed to the Company's additional investments in the development of its existing products and new products.

Sales and Marketing Expenses

Marketing and sales expenditures consist primarily of costs relating to promotion, advertising and trade shows, payroll and related expenses, sales commissions, travel expenses. Marketing and sales expenses amounted to $1.4 million in 2015, compared to $1.2 million in 2014. The increase in our marketing and sales expenses was primarily due to payment of sales commission on sales, which increased due to increase of our sales.

General and administrative Expenses

General and administrative expenses consist of payroll and related expenses, doubtful and bad accounts, professional fees paid to auditors, legal advisors and other consultants and other related expenses. As a percentage of net sales, general and administrative expenses decreased to 8.9% in 2015 from 11% in 2014. General and administrative expenses in 2015 were $0.8 million, compared to $0.73 million in 2014. The decrease in general and administrative expenses as a percentage of net sales, was due to the increase in revenues. The minor increase in general and administrative expenses was mainly due to the writing off of doubtful accounts.

Financial Expenses

Financial expenses consist primarily of interest on our loans from banks, which loans and credit lines were used to finance our operations in 2010 and 2009. Additionally, expenses consist of currency translation adjustments between the U.S. Dollar and NIS exchange rate imposed on our assets and liabilities. Financial expenses in 2015 were $0.15 million compared to $0.36 million in 2014. The decrease was mainly due to revaluation of warrants granted to Mr. Avi Gross in 2014, which led to an increase in our financial expenses in 2014 compared to 2013 of $330, and which had no effect on our financial expenses in 2015.

Profit/Loss

In 2015 we recorded a net profit of $2.1 millionas compared to a net profit of $0.66 million in 2014. This change was primarily due to increase in our revenues from sales of our products and improvement introduced to our production process.

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Impact of Inflation and Devaluation on Results of Operations, Liabilities and Assets

Prior to 1986, the Israeli economy was characterized by high rates of inflation and devaluation of the Israeli currency against the U.S. Dollar and other currencies. However, since the institution by the Israeli government of an economic recovery program in 1985, inflation, while continuing, has been significantly reduced and, devaluation has largely ceased with the NIS increasing in value against most other currencies including the US Dollar in recent years. Since the majority of our revenues are denominated and paid in U.S. Dollars, we believe that inflation and fluctuations in the U.S. Dollar exchange rate have no material effect on our revenue. Inflation and U.S. Dollar exchange rate fluctuations, however, have some effect on our expenses and, as a result, on our net income. The cost of our Israel operations, as expressed in U.S. Dollars, is influenced by the extent to which any increase in the rate of inflation in Israel is not offset (or is offset on a lagging basis) by a devaluation of the NIS in relation to the U.S. Dollar. For more information, see the discussion regarding inflation in Item 3, “Key Information -- Risk Factors --General Risks” and Item 11, “Quantitative and Qualitative Disclosures about Market Risk -- Foreign Currency Exchange and Interest Rate Risk”.

The exchange rate between NIS and the U.S. Dollar has fluctuated during the  twelve month period ended December 31, 2016 from a high of NIS 3.983 to the Dollar to a low of NIS 3.746 to the Dollar. The high and low exchange rates between the NIS and U.S. Dollar during the six most recent months, as published by the Bank of Israel, were as follows:

MONTH	HIGH 1 U.S. dollar =		LOW 1 U.S. dollar =
August 2016		3.829		3.754
September 2016		3.786		3.746
Ocotber 2016		3.856		3.778
November 2016		3.876		3.799
December 2016		3.867		3.787
January 2017		3.860		3.769
February 2017		3.768		3.659

The average exchange rate, using the average of the exchange rates on the last day of each month during the period, for each of the five most recent fiscal years, was as follows:

Period	Exchange Rate
January 1, 2012 – December 31, 2012	3.858 NIS/$1
January 1, 2013 – December 31, 2013	3.6 NIS/$1
January 1, 2014 – December 31, 2014	3.577 NIS/$1
January 1, 2015 – December 31, 2015	3.885 NIS/$1
January 1, 2016 – December 31, 2016	3.841 NIS/$1

In 2012, the Israeli economy recorded inflation of approximately 1.63% and the Dollar increased in value against the NIS by approximately 2.3%. In 2013, the Israeli economy recorded inflation of approximately 1.8% and the Dollar devalued against the NIS by approximately 6.5%. In 2014, the Israeli economy recorded deflation of approximately 0.2% and the Dollar decreased in value against the NIS by approximately 12%. In 2015, the Israeli economy recorded deflation of approximately 1% and the Dollar increased in value against the NIS by approximately 0.3%. In 2016, the Israeli economy recorded deflation of approximately 0.2% and the Dollar decreased in value against the NIS by approximately 1.2.

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From time to time, we engage in hedging or other transactions intended to manage the risks relating to foreign currency exchange rate or interest rate fluctuations. Although, we do not undertake such transactions on a regular basis, our management may determine that it is necessary to further minimize such risks.

Governmental Policies Affecting Company Operations

The discussion regarding governmental regulation is hereby incorporated by reference to Item 4, “Information on the Company -- Business Overview -- Governmental Regulation Affecting the Company” and the discussion regarding political policies is hereby incorporated by reference to Item 3, “Key Information -- Risk Factors -- General Risks -- Conditions in Israel”.

B.Liquidity and Capital Resources

Prior to our initial public offering in July 1996, our principal source of financing for our operations and working capital requirements were loans from Elbit and grants from the Government of Israel. In July 1996, we raised approximately $15.7 million, net of expenses, through the initial public offering of our securities. Since our initial public offering, we have financed our operations primarily through (i) cash reserves, (ii) cash generated from operations, (iii) grants from the Government of Israel, (iv) the use of a bank credit line (v) receipt of a convertible loan, and (vi) private placements of our securities. As of December 31, 2016, we had a working capital of $5.7 million.

We anticipate that we will continue to incur significant operating expenses in connection with the development and marketing of our products. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may sell additional equity or debt securities or seek to obtain additional credit facilities.

As of December 31, 2016, our ratio of current assets to current liabilities was 3.8 compared with 3 on December 31, 2015. The increase between 2015 and 2016 was due to the increase in our net profit during 2016.

During the years 2015 and 2016, we had no short-term marketable securities. Our trade receivables decreased to $1.1 million at the end of 2016 compared to $1.4 million recorded at the end of 2015. We had no material other receivables during either of 2015 or 2016. Our trade payables decreased to $0.8 million recorded at the end of 2016 compared to $1.2 million recorded at the end of 2015. Our other payables increased to $1 million compare to $0.4 million recorded at the end of 2015. We generated $2 million in cash from operating activities in 2016 compared to utilizing $1.5 million in 2015. This generation of our cash was due to our profit in 2016. Our inventory increased from $1.4 million as of December 31, 2015 to $1.65 million as of December 31, 2016. Inventory as a percentage of revenues as of December 31, 2016 was 16.3% compared with 15.5% as of December 31, 2015. Our capital expenditures on property during 2015 and 2016 were not material.

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Investments

Our cash and cash equivalents increased to $4.5 million at the end of 2016 compared to $3.3 million recorded at the end of 2015. Short term restricted deposits were $0.11 million at the end of 2016 compared to $0.07 recorded at the end of 2015. This increase in cash and cash equivalents was due to net profit in 2016.

Borrowing

For information on our existing loans, see Item 10, "Additional Information – Material Contracts."

Capital Expenditure

The discussion regarding the ScanMaster and Panoptes acquisitions are hereby incorporated by reference to Item 4, “Information on the Company -- History and Development of the Company” and Item 10, “Additional Information -- Material Contracts”.

C.Research and Development, Patents and Licenses, etc.

Our research and development group focuses on adapting our technologies to the development of new products for applications in the web industries as well as enhancing our existing products. We devote a significant portion of our resources to improving our current systems through enhancements in the areas of sharpness of resolution, processing speed, sensor accuracy and illumination. We also continually work to enhance the ease of use and flexibility of our systems' software and to develop product add-ons to augment our systems currently in use by customers. These product add-ons are being designed to further integrate our systems into each phase of our customers' manufacturing process.

We have a number of product and technology initiatives underway at any given time. Our research and development activities have generally resulted in periodic introductions of new products, new auxiliaries and upgrades to our existing products.

As of March 31, 2017, our research and development staff consisted of 8 full-time employees, all of whom are located in Israel and hold advanced technical degrees. Our research and development staff engages in hardware, electro-optics development, real-time software development, PC software development. In 2016 our gross research and development expenditures for the web industry were approximately $1.38 million, as compared to $0.76 million in 2015.

We currently have one approved U.S. patent , which we announced on September 8, 2016 (application 14/009,557) entitled On-Loom Fabric Inspection System and Method. The patent covers the workings of our iBar product for on-loom inspection of woven fabrics in order to identify weaving faults during manufacture.

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Research and Development Grants

The Government of Israel encourages research and development projects oriented towards products for export through the OCS, or through the Authority following the R&D Amendment. Since inception, we have received grants from the OCS for the development of various systems and products. Under the terms of these grants, as in effect prior to the R&D Amendment, a royalty of 3% to 5% of the net sales of products developed from a project funded by the OCS had to be paid, beginning with the commencement of sales of products developed with grant funds and ending when 100% of the dollar value of the grant was repaid. The terms of Israeli government participation also required that the manufacture of products developed with government grants be performed in Israel, unless a special approval was granted by the OCS. Such approval, if granted, was generally subject to an increase in the total amount to be repaid to the OCS to between 120% and 300% of the amount granted, depending on the extent of the manufacturing which was to be conducted outside of Israel. Separate Israeli government consent was required to transfer to third parties technologies developed through projects in which the government participated. Such restrictions did not apply to exports from Israel of products developed with such technologies. Following the R&D Amendment and the formation of the Authority which replaced the OCS, the terms of research and development government funds will be determined by the Authority, thus leaving a great deal of ambiguity regarding such terms. For more information, see Item 10, “Additional Information -- Taxation”.

Pursuant to regulations effective prior to the R&D Amendment with regard to OCS grants received under programs approved after January 1, 1999, repayments of such grants were subject to interest at an annual rate of LIBOR for 12 months applicable to Dollar deposits, which accrued annually based on the LIBOR rate published on the first day of each year.

Royalty-bearing grants received from the Government of Israel for research and development are offset against our gross research and development expenditures on development of products only for the textile industry.

The following table sets forth net research and development expenses, the grants received from the OCS and the gross research and development expenditures (including possible royalty payments to the OCS) for the periods indicated.

(inthousands)	2012		2013		2014		2015		2016
Researchanddevelopmentexpenses, net	$	682	$	625	$	560	$	765	$	1,378
OCSgrants		-		-		-		-		-
Gross research and development expenditures	$	682	$	625	$	560	$	765	$	1,378

D.Trend Information

While any fluctuations in the AOI sector will have a substantial effect on us, based on our experience of this market (with the exception of 2008), we expect the industry to remain relatively stable for the foreseeable future.

As a result of the fact that our products are used in several industries including textiles, technical fabrics, glass fabrics and non-woven fabrics, fluctuations in any one of these industries is unlikely to have material adverse affect on us.

We are developing additional products which will allow for greater penetration in markets where we currently operate, as well as allowing us to enter new markets with competitive products both technologically and in price.

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We have taken the strategic decision to enter into OEM agreements with certain equipment manufacturers in various fields in order to create products which are better tailored for the applicable industry and supplement our base customers with the existing customers of these equipment manufacturers.

In recent years, the textile industry has been expanding its operations in the Far East. As a result, we have been making and will continue to make efforts to align ourselves with these changes by, amongst other things, entering into agreements with local agents across the region.

Further, there has been a substantial increase in the manufacture of non-woven fabrics and technical fabrics in the Far East as compared to recent years, this is a result of many manufacturers setting up production infrastructure in China in addition to their production facilities in the West. We intend to continue our efforts to invest in the necessary resources to remain competitive in our field especially with respect to our operational efforts in the Far East.

E.Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements which have or are reasonably likely to have a material current or future effect on the financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, of our company and its subsidiaries.

F.Tabular Disclosure of Contractual Obligations 

Our significant financial and contractual obligations as of December 31, 2016, and the periods in which such obligations are due are as follows:

	Payments and Amount of Commitment Expiration Per Period (U.S. Dollars in thousands)
ContractualObligations	TotalAmountsCommitted		Lessthan1 Year		1-3 Years		3-5 Years		Over5 years
Operating Car Lease Obligations		46		39		7		-		-
Operating Building Lease Obligations		501		113		207		181		-
Total		547		152		214		181		-

G.Safe Harbor

 Not applicable.

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ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.Directors and Senior Management

As of March 27, 2017, our directors, senior managers and key employees were as follows:

Name	Age	Position
Josef Ran*	69	director and chairman of the board
Sam Cohen (1)	50	director and chief executive officer
Yaron Menashe (2)	41	director and chief financial officer
Ervin Leibovici (3)*	57	external director
Yaky Yanay*	46	director
Orit Stav*	47	external director
Natan Avisar	52	director

(1) As of March 28, 2017, Mr. Cohen holds 1,588,901 of our ordinary shares (on a split-adjusted basis), in addition to options to purchase 20,000 of our ordinary shares (on a split-adjusted basis), constituting (if all the convertible securities held by him were exercised) 17.1% of the outstanding ordinary shares of the company.

(2) As of March 27, 2017, Mr. Menashe holds 1,603,241 of our ordinary shares (on a split-adjusted basis), in addition to options to purchase 27,000 of our ordinary shares (on a split-adjusted basis), constituting (if all the convertible securities held by him were exercised) 17.32% of the outstanding ordinary shares of the company.

(3) Mr. Leibovici's first three-year term as external director commenced on December 11, 2016, as  approved by the extraordinary general meeting of the Company's shareholders on October 5, 2016.

* Beneficially owns less than  1% of our outstanding ordinary shares.

Josef Ran served as president and CEO of the Company from 1998 until 2000 after being VP of Elbit Systems for many years and managing several companies in the Elbit group. He was elected as a director on April 28, 2013, selected as Chairman of the Board of Directors on May 16, 2013 and re-elected for service as a director by our annual general meeting on January 12, 2015 for additional term until our next annual general meeting. Mr. Ran currently serves as a member of the advisory board of Plasan Sasa Ltd., a company specializing in the field of composite materials and survivability systems, and as the active Chairman of TorTech Nano Fibers Ltd., a subsidiary of Plasan Sasa, established for the developments and manufacture of an innovating material in the field of carbon nano-fiber. Mr. Ran also currently manages JRC (Ran) Ltd., a turn-around and investment banking company established by him. Since 2009 Mr. Ran has served as an active chairman of Palbam Ltd. (Stainless Steel) Quality Ltd., a company operating in the field of SS metal work and magnesium. Since 2001 Mr. Ran has served as a partner in Magna B.S.P. Ltd., a company specializing in sensitive 3D security cameras. From 2007 until 2011, Mr. Ran served as the active chairman of Cabiran (1991) Ltd., an aluminum "Lost Wax" method casting house, and from 2007 until 2009, Mr. Ran served as the active chairman of Bental Industries Ltd., a producer of power and motion components. From 2000 until 2007 Mr. Ran served as an active chairman of Plasan Sasa. From 2006 until 2014 Mr. Ran served as a Strategic Advisor to the Israeli Chief Scientist at the Ministry of Economy.

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Sam Cohen joined the company in 2003 and has served as our chief executive officer and director since June 2010 and was re-elected for additional one-year terms since. On January 12, 2015, Mr. Cohen was re-elected for service as a director by our annual general meeting for additional term until our next annual general meeting. From June 2010 until March 2012, Sam Cohen was also chairman of our board of directors. In 1993 Mr. Cohen was a key figure in the establishment of our U.S. subsidiary where he served as Operations Manager, Technical Director, Regional Sales Manager and Senior Marketing Manager. Prior to joining the company, Mr. Cohen served as VP of Sales and Marketing at OptiTex, a company specializing in innovative 2D and 3D CAD/CAM fashion design software. Mr. Cohen has held R&D roles in several Israeli firms, including Play-Tech and Romtech. Mr. Cohen holds a B.A. in Business Administration from Southern Wesleyan University, USA.

Yaron Menashe has served as our chief financial officer since December 2006. Mr. Menashe has served as a director of the company since June 2010 and was re-elected for additional one-year terms since. On January 12, 2015, Mr. Menashe was re-elected for service as a director by our annual general meeting for additional term until our next annual general meeting. Between the years 2000 and 2003, Mr. Menashe worked as a senior auditor at KPMG.Mr. Menashe holds a bachelor's degree in economics and accounting from the Haifa University, Israel and is a Certified Public Accountant in Israel.

Yaky Yanay was elected to our board of directors in July 2010 and was re-elected for additional one-year terms since. On January 12, 2015, Mr. Yanay was re-elected for service as a director by our annual general meeting for additional term until our next annual general meeting. From 1999 until 2002, Mr. Yanay worked as a manager at Ernst &Young Israel. From 2002 until 2006, Mr. Yanay served as our chief financial officer. From 2006 and until February 2014 and from March 2013 and until February 2014, Mr. Yanay served as the chief financial officer and Executive Vice President, respectively of Pluristem Therapeutics, Inc. (NasdaqCM: PSTI), a biotechnology company specializing in the research and development of cell therapy products for the treatment of various disorders ("Pluristem"). Since February 2014, Mr. Yanay serves as the President and Chief Operating Officer of Pluristem. Mr. Yanay holds a Bachelor of Business Administration and Accounting from the College of Management and he is a Certified Public Accountant in Israel.

Orit Stav currently serves on the board of directors of several companies, including Aran Research & Development Ltd., Israel Canada Ltd., I.B.I Amban Investments Management Ltd. and Priortech Ltd. From 2006 until 2009, Ms. Stav served as the manager of the Israel office of Siemens Venture Capital ("SVC"), the venture capital arm of Siemens AG, during which time she represented the fund in all of its investment activities in Israel. From 1998 until 2005, Ms Stav served as an investment partner at Platinum Neurone Ventures, an Israeli venture capital fund, specializing in investments in the later-stage and growth-stage companies in the fields of Communications, Information Technology, Semiconductors and Medical Devices. Ms. Stav holds a bachelor's degree in Economics and Management from the University of Tel Aviv and an MBA from the University of Hertfordshire, UK.

Natan Avisar was elected to our board of directors on May 1, 2014, by the members of our board of directors to fill a vacancy, and in accordance with the terms of the 2012 Private Placement Transaction. On January 12, 2015, Mr. Avisar was elected for service as a director by our annual general meeting until our next annual general meeting. Since 2012, Mr. Avisar has served as the chief executive officer of AGA Holdings, a private equity investment company specializing in real estate projects in Europe and the United States, and investments in international trading and manufacturing companies. From 2006 until 2012 Mr. Avisar served as the Executive Vice President of Operations of Divatex Home Fashions Inc., a major distributer of bed linen products in the United States. From 2003-2005, Mr. Avisar was a Senior Vice President, Finance and Operations, of Scitexvision America, a subsidiary of Scitex Ltd. Mr. Avisar has an LLB and BA in Accounting and Economics from the University of Tel Aviv, Israel.

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Ervin Leibovici was elected for service for an initial three-year term as our external director commencing December 11, 2016 by the extraordinary general meeting of the Company's shareholders, dated October 5, 2016. Mr. Leibovici currently acts as CEO of Nuergo, and in addition serves on the board of several companies, including EcoFer Technologies, and CropX. Mr. Leibovici served as VP Head of Developed Markets Division of Netafim where he was responsible for customer facing sales, marketing, business development and support activities as well as complex manufacturing and a logistics network of multiple production sites. Prior to that, Mr. Leibovici also acted as CEO of Bitband, and EMEA Region Manager at Silicon Graphics among others. Mr. Leibovici holds a Bachelor of Applied Sciences degree in Computer Science from the Technion – Israel Institute of Technology, and an MBA from the University of Tel Aviv.

Board of Directors

Our directors, who are not external directors, commence their term when they are elected at the annual general meeting of our shareholders until the following annual general meeting. Amos Uzani served as an external director until December 11, 2016, when his third and last three-year term as external director expired. Mr Uzani was replaced by Mr. Ervin Leibovici who commenced his first three-year term as external director on December 11, 2016. Our second external director, Ms. Stav, was re-elected to serve for an additonal three year term as an external director commencing October 2016.

In accordance with the 2012 Private Placement Transaction, for as long as Mr. Avi Gross continues to hold at least 5% of the Company’s issued and outstanding shares, he is entitled to appoint either a representative to attend all board meetings (subject to certain limitations) in a non-voting, observer capacity, or, alternatively, a nominee to be elected as a director to our board of directors, currently Mr. Natan Avisar. For more information on the 2012 Private Placement Transaction see Item 4.A “Recent Developments”.

In accordance with the 2014 Private Placement Transaction, if SMD holds at least 5% of the Company’s issued and outstanding shares, it is entitled to appoint a representative to attend all board meetings in a non-voting, observer capacity. As of the date hereof, SMD has yet to appoint such an observer and does not have such right in light of its current holdings of the Company's issued and outstanding shares as reported by in on Form 13G/A of February 14, 2017. For more information on the 2014 Private Placement Transaction see Item 4.A “Recent Developments”.

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B.Compensation

During 2016, we paid to all our directors and officers a total of approximately $0.45  million in salaries, fees and bonuses. This does not include money spent on automobiles made available to our officers, expenses (including business travel, professional and business association dues and expenses) reimbursed to officers and other fringe benefits commonly reimbursed or paid by companies in Israel. For information regarding option plans under which directors and officers were granted with options, see Item 6.E “Share Ownership”.

The table below reflects the compensation granted to the Company's five most highly compensated office holders (as defined in the Companies Law) during or with respect to the year ended December 31, 2016. For purposes of the table below "compensation" includes amounts accrued or paid in connection with consultancy fees, bonuses, equity-based compensation, retirement or termination payments, benefits and perquisites such as car and phone and any undertaking to provide such compensation. All amounts reported in the table are in terms of cost to the Company, as recognized in its financial statements for the year ended December 31, 2016, plus compensation paid to such executives following the end of the year in respect of services provided during the year. All amounts are in U.S dollars.

Name and Principal Position(1)	Fee(2)		Equity-Based Compensation(3)		All OtherCompensation(4)		Total
Sam Cohen – CEO and Director		197		2		20		219
Yaron Menashe -  CFO and Director		172		3		12		187
Josef Ran – Director		12		0		-		12
Yaky Yanay – Director		11		-		-		11
Natan Avisar –Director		11		1		-		12

(1) All executive officers are engaged with the Company on a full time (100%) basis expect for directors.

(2) Fee includes the total annual fee as agreed in each office holder's respective services agreement.

(3) Represents the equity-based compensation expenses recorded in the Company's consolidated financial statements for the year ended December 31, 2016 based on the option's value, calculated in accordance with accounting guidance for equity-based compensation.

(4) Includes leased car expenses and mobile phone expenses.

Pension and Retirement Benefits

We offered no pension or retirement benefits to our directors and key personnel in 2016.

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C.Board Practices

Articles of Association

Our articles of association provide for a board of directors of no fewer than two and not greater than nine members. On February 21, 2006, our shareholders approved the adoption of new articles of association. On May 2, 2016, our shareholders approved an amended to our articles of association to reflect the 1-for-10 reverse share split approved by our shareholders on such date.

Our articles of association provide that any director may, by written notice, appoint another person to serve as a substitute director and may cancel such appointment. A person may not serve as a substitute director for more than one director and may not serve both as a director and as a substitute director. Appointment of a substitute director for a member of a committee of the board of directors is only permitted if the substitute is a member of the board of directors and does not regularly serve as a member of such committee. If the committee member being substituted is an external director, such substitute may only be another external director possessing the same expertise as the external director being substituted and may not be a regular member of such committee.

The term of appointment of a substitute 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. Any substitute director shall have all of the rights and obligations of the director appointing him or her, except the power to appoint a substitute, unless the instrument appointing him provides otherwise, and the right to remuneration. The substitute director may not act at any meeting at which the director appointing him or her is present. Unless the time period or scope of any appointment is limited by the appointing director, the appointment is effective for all purposes, but will expire upon the expiration of the appointing director’s term. To our knowledge, no director currently intends to appoint any other person as a substitute director, except if the director is unable to attend a meeting of the board of directors.

Israeli Companies Law Requirements

Pursuant to the Companies Law, any person effectively acting as director without being duly appointed as such, and any person preventing a director from using his own independent judgment, is subject to the same legal obligations and liabilities that are applicable to directors.

The Companies Law requires Israeli companies with shares that have been offered to the public in or outside of Israel to appoint no less than two external directors. No person may be appointed as an external director if the person or the person’s relative, partner, employer or any entity under the person’s control, has or had, on or within the two years preceding the date of the person’s appointment to serve as external director, any affiliation with the company or any entity controlling, controlled by or under common control with the company. The term “affiliation” includes:

· an employment relationship;

· a business or professional relationship maintained on a regular basis;

· control; and

· service as an office holder.

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In addition, pursuant to the recently enacted Amendment 27 to the Companies Law ("Amendment 27") a business or professional relationship maintained on a regular basis will not constitute affiliation if the relationship commenced after the appointment of the outside director for office, the company and the outside director consider the relationship to be negligible and the audit committee approved, based on information presented to it, that the relationship is negligible, and the outside director declared that he did not know and could not have reasonably known about the formation of the relationship and has no control over their existence or termination.

Relatives of the controlling shareholder may also not be appointed as external directors. If the company does not have a controlling shareholder or a shareholder who holds company shares entitling him to vote at least 25% of the votes in a shareholders meeting, no person may be appointed as an external director if the person or the person’s relative, partner, employer or any entity under the person’s control, has or had, on or within the two years preceding the date of the person’s appointment to serve as external director, any affiliation on the date of the person's appointment with the Chairman of the Board, chief executive officer, substantial shareholder or chief financial officer.

No person may serve as an external director if the person, the person’s relative, spouse, employer or any entity controlling or controlled by the person, has a business or professional relationship with someone with whom affiliation is prohibited, even if such relationship is not maintained on a regular basis, except negligible relationships.

A company, entity controlling or entity under common control with the company may not grant an external director, his spouse or child, any benefit, and may not appoint him, his spouse or child, to serve as an officer of the company or of an entity under common control with the company, may not employ or receive professional services in consideration from him or an entity controlled by him unless two years have passed as of the end of service as external director in the company, and regarding a relative who is not a spouse or child – unless one year has passed as of the end of service as external director.

A person shall be qualified to serve as an external director only if he or she possesses accounting and financial expertise or professional qualifications. At least one external director must posses accounting and financial expertise. The conditions and criteria for possessing accounting and financial expertise or professional qualifications were determined in Companies Law regulations promulgated by the Israeli Minister of Justice in consultation with the Israeli Securities Authority. The regulations mandate that a person is deemed to have “expertise in finance and accounting” if his or her education, experience and qualifications provide him or her with expertise and understanding in business matters - accounting and financial statements, in a way that allows him or her to understand, in depth, the company’s financial statements and to encourage discussion about the manner in which the financialdata is presented.

The company's board of directors must evaluate the proposed external director's expertise in finance and accounting, by considering, among other things, his or her education, experience and knowledge in the following: (i) accounting and auditing issuestypical to the field in which the company operates and to companies of a size and complexity similar to such company; (ii) a company's independent public accountant’s duties and obligations; (iii) preparing company financial statements and their approval in accordance with the Companies Law and the Israeli Securities Law.

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A director is deemed to be “professionally qualified” if he or she meets any of the following criteria: (i) has an academic degree in any of the following professions: economics, business administration, accounting, law or public administration; (ii) has a different academic degree or has completed higher education in a field that is the company’s main field of operations, or a field relevant to his or her position; or (iii) has at least five years experience in any of the following, or has a total of five years experience in at least two of the following: (A) a senior position in the business management of a corporation with significant operations, (B) a senior public position or a senior position in public service, or (C) a senior position in the company's main field of operations. The board of directors here too must evaluate the proposed external director's "professional qualification" in accordance with the criteria set forth above.

The candidate to serve as an external director must sign a declaration stating that the criteria above have been met, as required by law for the appointment of such candidate as an external director.

No person may serve as an external director if the person’s position or other business activities create, or may create, a conflict of interest with the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director. If, at the time external directors are to be appointed, all current members of the board of directors are of the same gender, then at least one external director must be of the other gender.

External directors are to be elected by a majority vote at a shareholders’ meeting, provided that either:

· the majority of shares voted at the meeting, including at least a majority of the shares held by non-controlling shareholders and disinterested parties that were voted at the meeting, vote in favor of election of the director; or

· the total number of shares held by non-controlling shareholders and disinterested parties that voted against the election of the director does not exceed two percent of the aggregate voting rights in the company.

The initial term of an external director is three years and, and may be extended for up to two additional three year terms (unless otherwise restricted in the articles of association to one additional term), provided that with respect to the appointment for each such additional three-year term, one of the following has occurred:  (i) the reappointment of the external director has been proposed by one or more shareholders holding together 1% or more of the aggregate voting rights in the company and the appointment was approved at the general meeting of the shareholders by a simple majority, provided that: (1)(x) in calculating the majority, votes of controlling shareholders or shareholders having a personal interest in the appointment as a result of an affiliation with a controlling shareholder and abstentions are disregarded and (y) the total number of shares of shareholders who do not have a personal interest in the appointment as a result of an affiliation with a controlling shareholder and/or who are not controlling shareholders, present and voting in favor of the appointment exceed 2% of the aggregate voting rights in the company, and (2) pursuant to amendment to the Companies Law ("Amendment 22"), effective as of January 10, 2014, the external director who has been nominated in such fashion is not a linked or competing shareholder, and does not have or has not had, on or within the two years preceding the date of such person’s appointment to serve as another term as external director, any affiliation with a linked or competing shareholder. The term “linked or competing shareholder” means the shareholder(s) who nominated the external director for reappointment or a material shareholder of the company holding more than 5% of the shares in the company, provided that at the time of the reappointment, such shareholder(s) of the company, the controlling shareholder of such shareholder(s) of the company, or a company under such shareholder(s) of the company’s control, has a business relationship with the company or are competitors of the company; the Israeli Minister of Justice, in consultation with the Israeli Securities Authority, may determine that certain matters will not constitute a business relationship or competition with the company; (ii) the reappointment of the external director has been proposed by the board of directors and the appointment was approved by the majority of shareholders required for the initial appointment of an external director; or (iii) pursuant to a recently enacted amendment to the Companies Law ("Amendment 26"), effective as of November 25, 2014, the external director has proposed himself for reappointment and the reappointment was approved in accordance with Sub-section (i) above.

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External directors may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to the company. Each committee of a company’s board of directors must include at least one external director.

An external director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with service provided as an external director.

Currently, Mr. Leibovici and Ms. Stav serve as our external directors.

Audit Committee

The Companies Law requires public companies to appoint an audit committee. The responsibilities of the audit committee pursuant to the Companies Law include identifying irregularities in the management of our business and approving related party transactions as required by law, classifying company transactions as extraordinary transactions or non-extraordinary transactions and as material or non-material transactions in which an officer has an interest (which will have the effect of determining the kind of corporate approvals required for such transaction), assessing the proper function of the company’s internal audit regime and determining whether its internal auditor has the requisite tools and resources required to perform his role and to regulate the company's rules on employee complaints, reviewing the scope of work of the company’s independent accountants and their fees, and implementing a whistleblower protection plan with respect to employee complaints of business irregularities. Pursuant to Amendment 22, the responsibilities of the audit committee under the Companies Law also include the following matters: (i) to establish procedures to be followed in respect of related party transactions with a controlling shareholder (where such are not extraordinary transactions), which may include, where applicable, the establishment of a competitive process for such transaction, under the supervision of the audit committee, or individual, or other committee or body selected by the audit committee, in accordance with criteria determined by the audit committee; and (ii) to determine procedures for approving certain related party transactions with a controlling shareholder, which were determined by the audit committee not to be extraordinary transactions, but which were also determined by the audit committee not to be negligible transactions. Under the Companies Law, an audit committee must consist of at least three directors, including all the external directors of the company, and a majority of the members of the audit committee must be independent directors.

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The Companies Law defines independent directors as either external directors or directors who: (1) meet the requirements of an external director, including the requirement to possess accounting and financial expertise or professional qualifications, with Audit Committee confirmation of such; (2) have been directors in the company for an uninterrupted duration of no more than 9 years (and any interim period during which such person was not a director which is less than 2 years shall not be deemed to interrupt the duration); and, (3) were classified as such by the company.

The chairman of the board of directors, any director employed by or otherwise providing services to the company, a controlling shareholder or any relative of a controlling shareholder, and any director who derives his salary primarily from a controlling shareholder may not be a member of the audit committee.

According to the Companies Law: (1) the chairman of the audit committee must be an external director, (2) all audit committee decisions must be made by a majority of the committee members, of which the majority of members present are independent directors and include at least one of the external directors, and (3) any person who is not eligible to serve on the audit committee is further restricted from participating in its meetings and votes, unless the chairman of the audit committee determines that such person’s presence is necessary in order to present a certain matter, provided however, that company employees who are not controlling shareholders or relatives of such shareholders may be present in the meetings but not in the actual votes and likewise, company counsel and secretary who are not controlling shareholders or relatives of such shareholders may be present in meetings and decisions if such presence is requested by the audit committee.

Currently, Mr. Amos Uzani, Ms. Orit Stav and Mr. Yaky Yanay serve on the audit committee of the board of directors.

Compensation Committee

Pursuant to a recent amendment to the Companies Law, which was passed in November 2012, or Amendment 20, the board of directors of an Israeli company, whose shares or debt instruments are publicly traded, such as our company, is required to appoint a compensation committee.

The number of members in the compensation committee shall not be less than three, and all of the company's external directors must be members of the compensation committee and they are to constitute a majority of the members of the compensation committee, with one of the external directors serving as the chairman of the compensation committee. The following may not be a member of the compensation committee: (i) the chairman of the board of directors; (ii) any director employed by or otherwise providing services to the company or to the controlling shareholder or entity under such controlling shareholder's control; (iii)any director who derives his salary primarily from a controlling shareholder; or (iv) a controlling shareholder or any relative of a controlling shareholder.Pursuant to Amendment 27, the audit committee may serve as the company's compensation committee, provided that it meets the composition requirements of the compensation committee.

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The responsibilities of the compensation committee include the following:

1. To recommend to the board of directors as to the compensation policy or Compensation Policy, for officers, as well as to recommend, once every three years to extend the compensation policy subject to receipt of the required corporate approvals;

2. To recommend to the board of directors as to any updates to the Compensation Policy which may be required;

3. To review the implementation of the Compensation Policy by the company;

4. To approve transactions relating to terms of office and employment of certain company office holders, which require the approval of the compensation committee pursuant to the Israeli Companies Law; and

5. To exempt, under certain circumstances, a transaction relating to terms of office and employment from the requirement of approval of the shareholders meeting.

Pursuant to Amendment 20, the Compensation Policy shall be determined based, inter alia, on the following parameters: (a) advancements of the goals of the company, its working plan and its long term policy; (b) creating proper incentives to its officers, while taking into consideration, among others, the company's risk management policy; (c) the company's size and the nature of its operations; (d) with respect to variable components of officers’ remuneration, such as bonuses and issuance of securities, the contribution of the respective officer to obtaining the company's goals and maximizing profits, all in accordance with a long term perspective and the position of the officer.

In addition, the Compensation Policy is to take into consideration, inter alia, the following issues: the education, skills, expertise and achievements of the officer, previous agreements with the officer, the role and the areas of responsibility of the officer, the long term performance of the officer, the correlation between the proposed compensations to the average salary of other employees of the company and of employees employed through third parties (manpower companies and cleaning and security services) and the effect of such gaps on the employment relationship in the company. In addition, with respect to the variable component of compensation, if any, the Compensation Policy should provide for the board of directors to reduce the value of the variable component from time to time or to set a cap on the exercise value of convertible securities components that are not paid out in cash. If the terms of office and employment include retirement grants then the Compensation Policy is to also take in consideration: the term of office of the officer, the terms of employment during such period, the results of the company during said period and the officer's contribution to reaching the company's goals and profit and the circumstances leading to the retirement.

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Furthermore, the Compensation Policy must set forth standards and rules on the following issues: (a) with respect to variable components of compensation - basing the compensation on long term performance and measurable criteria (though an insubstantial portion or the whole of the variable components, to the amount of up to three monthly salaries in case of a cash bonus, can be discretion based awards taking into account the contribution of the officer to the company. Pursuant to Amendment 27, variable components equal to three month salaries of the relevant office holders, on an annual basis, shall be considered a non-material portion of the variable components); (b) establishing the appropriate ratio between variable components and fixed components and placing a cap on such variable components; (c) setting forth a rule requiring an officer to return amounts paid, in the event that it is later revealed that such amounts were paid on the basis of data which prove to be erroneous and resulted in an amendment and restatement of the company’s financial statements; (d) determining minimum holding or vesting periods for equity based variable components of compensation, while taking into consideration appropriate long term incentives; and (e) setting a cap on grants or benefits paid upon termination.

The board of directors of a company is obligated to adopt a Compensation Policy after considering the recommendations of the compensation committee. The final adoption of the Compensation Committee is subject to the approval of the shareholders of the company, which such approval is subject to certain special majority requirements, as set forth in Amendment 20, pursuant to which one of the following must be met:

(i) the majority of the votes includes at least a majority of all the votes of shareholders who are not controlling shareholders of the company or who do not have a personal interest in the Compensation Policy and participating in the vote; abstentions shall not be included in the total of the votes of the aforesaid shareholders; or

(ii) the total of opposing votes from among the shareholders described in subsection (i) above does not exceed 2% of all the voting rights in the company.

Nonetheless, even if the shareholders of the company do not approve the Compensation Policy, the board of directors of a company that is not a public sub-subsidiary may approve the Compensation Policy, provided that the compensation committee and, thereafter, the board of directors determined, based on detailed, documented, reasons and after a second review of the Compensation Policy, that the approval of the Compensation Policy is for the benefit of the company.

Currently, Mr. Leibovici and Ms. Stav serve as our external directors.

Executive Compensation Policy

On December 2, 2013, an Extraordinary General Meeting of the Shareholders of the Company took place, approving the Executive Compensation Policy (the “Policy”), which had been recommended by the Compensation Committee and approved by the Board of Directors, for the Company’s directors and office holders, in accordance with the requirements of the Israeli Companies Law. The Policy was re-approved by our shareholders on October 5, 2016.

The Policy includes, among other issues prescribed by the Israeli Companies Law, a framework for establishing the terms of office and employment of the office holders, a recoupment policy, and guidelines with respect to the structure of the variable pay of office holders.

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Each of our compensation committee and board of directors may engage compensation advisors and other professionals to assist in formulating compensation packages in line with the Policy, including, without limitation, to assist in collecting relevant data, framing the appropriate factors to be considered and evaluating the different factors being considered.

All compensation arrangements of office holders are to be approved in the manner prescribed by applicable law.  Our office holders, including External Directors or Independent Directors, may waive their entitlement to their compensation, subject to applicable law. The Policy clarifies that no office holder may be paid any compensation to the extent such compensation would cause a breach of any covenant contained in any of the Company’s bank loan facility agreements.

Our recoupment policy relating to office holder compensation allows for the recovery of all or a portion of any compensation paid to our office holders that was paid during the previous three years on the basis of financial data included in our financial statements in any fiscal year that were found to be inaccurate and were subsequently restated. In such event, we will seek reimbursement from the office holders to the extent such office holders would not have been entitled to all or a portion of such compensation, based on the financial data included in the restated financial statements. Our compensation committee will be responsible for approving the amounts to be recouped and for setting terms for such recoupment from time to time. Notwithstanding the aforesaid, the recoupment policy will not be triggered in the event of a financial restatement due to changes in the applicable reporting or accounting standards. The above noted recoupment policy does not derogate from any relevant recoupment or clawback provisions under any applicable law or regulatory rules which apply to us.

All of our office holders may be incentivized through cash bonuses and/or long-term equity-based incentives to provide the office holder with a stake in our success – thus linking the office holder’s long-term financial interests with the interests of our shareholders. In accordance with the Policy, the incentives are developed through a program that sets performance targets based on each office holder’s role and scope. Actual payments are driven by the business and individual performance vis-à-vis the performance targets set at the beginning of the year. The formula for the performance targets and the maximum variable components payable to each office holder (other than directors) shall be presented and recommended by management and reviewed and approved by our compensation committee and our board of directors. The formula for the performance targets and the maximum variable components payable to any employee office holders who are also directors shall be presented and recommended by our compensation committee and reviewed and approved by our board of directors and our shareholders. Under the Policy, the maximum annual cash bonus for non-sales office holders shall not exceed an amount equal $250,000 per office holder. The commission bonus paid to sales executives whose compensation is tied directly to sales achievements, will be based upon revenues generated by the office holder and/or his/her team or division, and shall not exceed an amount equal to 5.5% of Company revenues within the relevant sales territory. The maximum annual value of the equity-based long-term compensation components of all officer holders and other employees of the Company shall not exceed 5% of the Company’s issued and outstanding equity, and in any event no more than 0.25% of such issued and outstanding equity per individual.

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Unless otherwise specified in the terms of the variable compensation of an office holder, our Policy dictates that the board of directors shall have discretion to unilaterally reduce such office holder's variable compensation. Equity based compensation may be granted in any form permitted under our equity incentive plans, as in effect from time to time (collectively, the "Equity Incentive Plans"), including stock options, restricted share units and restricted stock. Equity grants to office holders shall be made in accordance with the terms of the Equity Incentive Plans. All equity-based incentives granted to our office holders shall be subject to vesting periods in order to promote long-term retention of the awarded office holders.  Unless determined otherwise in a specific award agreement approved by the compensation committee and the board of directors, grants to our office holders other than directors shall vest gradually over a period of between two to four years. Option grants to our non-employee directors will vest on a monthly basis over a period of three years. Other than as may be required pursuant to the covenants under the Company’s bank loan agreements with respect to certain minimum ownership thresholds by each of our Chief Executive Officer and Chief Financial Officer, the Company does not have any equity ownership guidelines that require any of our office holders to hold a stated number or fixed percentage of our ordinary shares, nor do they have to continue to hold for any period of time shares in the Company which they acquired as a result of the exercise of fully vested equity grants. The value of the equity-based compensation shall be calculated on the grant date, according to acceptable valuation practices at the time of grant. The board of directors shall not have discretion to limit the value of the equity-based compensation at the time of exercise. The board of directors may, following approval by our compensation committee, extend the period of time for which an award to an office holder is to remain exercisable, or make provisions with respect to the acceleration of the vesting period of any office holder’s awards, including, without limitation, in connection with a corporate transaction involving a change of control. On January 12, 2015, our annual general meeting approved, pursuant to approvals of our compensation committee and board of directors, an amendment to the Policy, according to which, the exercise price of equity-based compensation shall be determined as of the date on which the board of directors approves the award of such compensation, according to acceptable valuation practices at the time of such approval on the date of the approval by the Board, instead of  on the date grant was approved by the Company’s shareholders.

Our compensation committee will periodically review the Policy and monitor its implementation, and recommend to our board of directors and shareholders to amend the Policy as it deems necessary from time to time. The term of the Policy shall be three years as of the date of its re-approval on October 5, 2016. Following such three year term, the Policy, including any revisions recommended by our compensation committee and approved by our board of directors, as applicable, will be brought once again to the shareholders for approval.

Internal Auditor

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, or an affiliate, or a relative of an office holder or affiliate, and he may not be the company’s independent accountant or its representative.  Fahn Kanne, Grant Thornton serves as our internal auditor.

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D.Employees

As of March  23, 2017, we employ a total of 44 individuals on a full time basis. Of these individuals, 22 are employees of our company and 22 are engaged as independent contractors. Of these individuals, 22 are employed in Israel, 6 are employed in Europe, 3 are employed in the United States, and 13 are employed in Asia.

2016

As of December 31, 2016, we employed a total of 44 full time persons of which 21 were engaged as independent contractors.

2015

As of December 31, 2015, we employed a total of 40 full time persons of which 19 were engaged as independent contractors.

2014

As of December 31, 2014, we employed a total of 36 full time persons of which 16 were engaged as independent contractors.

We believe that our success will depend, in large part, on our ability to attract and retain highly-skilled engineering, managerial and sales and marketing personnel. Competition for such personnel is intense.

Our employees are not part of a collective bargaining Agreement. However, in Israel we are subject to certain labor statutes and national labor court rulings, as well as certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists' Associations). These provisions of collective bargaining agreements are applicable to our employees by virtue of expansion orders issued in accordance with relevant labor laws by the Israeli Ministry of Labor and Welfare, and which apply such agreement provisions to our employees even though they are not directly part of a union that has signed a collective bargaining agreement. The labor statutes and labor court rulings that apply to our employees principally concern the minimum wage laws, procedures for dismissing employees, determination of severance pay, leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions for employment. The expansion orders which apply to our employees principally concern the requirement for mandatory pension schemes, transportation allowance, annual recreation allowance, the lengths of the workday and workweek, and periodic automatic adjustment of wages relative to increases in the Consumer Price Index in Israel. We generally provide our employees with benefits and working conditions beyond the required minimums.

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Israeli law generally requires severance pay, which may be funded by Managers' Insurance and/or a pension fund described below, upon the retirement or death of an employee or termination of employment without cause (as defined in the law). The payments to the manger’s insurance and/or pension fund in respect of severance pay amount to approximately 8.33% of an employee’s wages, in the aggregate. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Such amounts also include payments for national health insurance. The payments to the National Insurances Institute are equal to approximately 16% of an employee’s wages, of which the employee contributes approximately 62.5% and the employer contributes approximately 37.5%.

Although not legally required, we contribute funds on behalf of most of our employees to a fund known as “Managers' Insurance”. This fund provides a combination of savings plan, insurance and severance pay benefits to the employee, giving the employee a lump sum payment upon retirement and securing the severance pay, if legally entitled, upon termination of employment. We decide whether each employee is entitled to participate in the plan, and each employee who agrees to participate contributes an amount equal to 6% of a salary and the employer contributes between 12.5% and 14.83% of a salary.

Following the recently enacted Regulation Regarding Supervision of Financial Services (Provident Funds), 2014 (the "Provident Funds Regulations"), as of January 1, 2016, employers are required to provide the pension funds with certain information regarding the payments being transferred, including the transfer dates, the means of transfer and the account from which the transfer was made and in which the transfer was received. Employers are also required to provide information regarding their employees' wages and taxable and exempt components of the payments transferred. Employers are also required to provide pension funds with certain information upon cessation of payment to the relevant employee's fund, including the reason for such cessation and notice regarding the status of the severance pay in the event of termination of employment. After receipt of the required information, the pension fund is required to provide the employee a notice of cessation of payment and the effect such cessation will have on the employee's rights in the pension fund. Furthermore, the Provident Funds Regulations require pension fund to provide employers feedback regarding payments transferred to the pension funds of their employees in the relevant company. In addition, late payments may bear interest, and employers may require pension funds to repay amounts paid in excess.

Generally, all nonexempt adult male citizens and permanent residents of Israel, under the age of 40, or older for reserves officers or citizens with certain occupations, as well as certain female adult citizens and permanent residents of Israel, are obligated to perform annual military reserve duty and are subject to being called for active duty at any time under emergency circumstances. Some of our officers and employees are obligated to perform annual reserve duty. While we have operated effectively under these requirements since we began operations, no assessment can be made as to the full impact of such requirements on our workforce or business if conditions should change, and no prediction can be made as to the effect on us of any expansion of such obligations.

All of our employees have entered into confidentiality agreements. We have also granted certain employees options to purchase shares of our ordinary shares under our option plan.

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We consider our relationship with our employees to be good and we have never experienced a strike or work stoppage.

E.Share Ownership

Of the persons listed in Item 6.A, “Directors, Senior Management and Employees”, Sam Cohen holds 1,588,901 of our ordinary shares (on a split-adjusted basis) and options to purchase 20,000 of our ordinary shares (on a split-adjusted basis), constituting (if all his convertible securities were exercised) 17.1% of the outstanding ordinary shares of the company; and Yaron Menashe holds 1.603,241 of our ordinary shares (on a split-adjusted basis) and options to purchase 27,000 of our ordinary shares (on a split-adjusted basis), constituting (if all his convertible securities were exercised) 17.32% of the outstanding ordinary shares of the company.

Employee Share Option Plans

We maintain the following share option plans for our employees and the employees of our subsidiaries. In addition to the discussion below, see Note 9 to our consolidated financial statements. All capitalization terms below were adjusted to reflect the 1-for-10 reverse share split.

In November 2003, the board of directors adopted a share option plan pursuant to which 200,000 ordinary shares were reserved for issuance upon the exercise of options to be granted to our directors, officers, employees and consultants. The number of ordinary shares issuable under the share option plan was increased by 150,000 ordinary shares. As of March 28, 2017, options to purchase 5,750 of such ordinary shares were outstanding. 2,750 of the outstanding options have an exercise price of $4 per share and 3,000 of the outstanding options have an exercise price of $7.5 per share. As of March 28, 2017, all of the options were vested. All of the outstanding options terminate ten years following the date of grant if not exercised earlier. The 2003 Share Option Plan is administered by a committee of the board of directors, which designates the optionees and dates of grant. The option exercise price is determined by our board of directors. All recent grants were made at an exercise price equal to or above the fair market value of our shares. The options are non-assignable except by the laws of descent. The last date on which the options could be granted was November 2013, and the 2003 Share Option Plan expired in accordance with its terms upon which expiration any unallocated shares under this plan were returned to the general pool of registered but unissued share capital of the Company. The remaining outstanding options will be exercisable for a period up to ten years from the date of grant and will generally vest as to 25-33% commencing the beginning of the second year after the grant and as to an additional 25-33% in each of the remaining years thereafter, assuming continuous employment with us through such periods.

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In March 2006, the board of directors adopted a share option plan pursuant to which 200,000 ordinary shares were reserved for issuance upon the exercise of options to be granted to our directors, officers, employees and consultants. The number of ordinary shares issuable under the share option plan may be increased by the board of directors from time to time. In 2012 the number of ordinary shares issuable under the share option plan was increased to 350,000 and on August 8, 2014 was further increased to . As of March 28, 2017, options to purchase 400,000 of such ordinary shares were outstanding. 170,000 of the outstanding options have an exercise price of $0.5 per share, 42,002 of the outstanding options have an exercise price of $0.7 per share, 84,501 of the outstanding options have an exercise price of $0.8 per share, 15,000 of the outstanding options have an exercise price of $0.9 per share, 10,,000of the outstanding options have an exercise price of $1 per share, 12,500 of the outstanding options have an exercise price of $1.48 per share, 16,000 of the outstanding options have an exercise price of $1.75 per share, 10,000 of the outstanding options have an exercise price of $2.15 per share, 10,500 of the outstanding options have an exercise price of $2.5 per share, 14,000 of the outstanding options have an exercise price of $3 per share, 3,000 of the outstanding options have an exercise price of $3.2 per share, 10,000 of the outstanding options have an exercise price of $4.6 per share, 2,500 of the outstanding options have an exercise price of $4.9 per share. As of March 28, 2017, 354,503 of the options were vested. All of the outstanding options terminate either ten years following the date of grant if not exercised earlier or 6 months after termination of the employee. The 2006 Share Option Plan is administered by a committee of the board of directors, which designates the optionees and dates of grant. The option exercise price is determined by our board of directors. All recent grants have been made at an exercise price equal to or above the fair market value of our shares. The options are non-assignable except by the laws of descent. The last date on which the options could be granted was March, 2016. The remaining options will be exercisable for a period up to ten years from the date of grant and will generally vest as to 25%-33% commencing the beginning of the second year after the grant and as to an additional 25%-33% in each of the remaining years thereafter, assuming continuous employment with us through such periods.

In August 2016, the board of directors adopted a share option plan pursuant to which 250,000 ordinary shares were reserved for issuance upon the exercise of options to be granted to our directors, officers, employees and consultants. The number of ordinary shares issuable under the share option plan may be increased by the board of directors from time to time. As of March 28, 2017, options to purchase 32,000 of such ordinary shares were outstanding. 6,000 of the outstanding options have an exercise price of $2.9 per share, 17,000 options have an exercise price of $3.18 per share and 9,000 options have an exercise price of $3.3 per share.

ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.Major Shareholders

The following table and notes set forth information, as of March 28, 2017, concerning the beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of our securities by (i) any person who is known to own at least 5% of our ordinary shares and (ii) our directors and officers as a group. The voting rights of our major shareholders do not differ from the voting rights of holders of all of our ordinary shares. All capitalization information provided below was adjusted to reflect the 1-for-10 reverse share split.

Identity of Person or Group	Amount Beneficially Owned		Percent of Class
Sam Cohen (1)(3)		1,608,901		17.1	%
Yaron Menashe (2)(3)		1,630,241		17.32	%
All directors and officers as a group (4)		3,578,645		37.58	%
Avi Gross		1,702,786		18.14	%

The percentages in this table are based on 9,384,974ordinary shares currently issued and outstanding plus options exercisable within 60 days.

(1) Includes 20,000 ordinary shares issuable upon the exercise of an option exercisable within 60 days.

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(2) Includes 27,000 ordinary shares issuable upon the exercise of an option exercisable within 60 days.

(3) Neither Mr. Sam Cohen nor Mr. Yaron Menashe is party to any voting agreement with respect to their share holdings in the company.

(4) Includes all of the shares deemed as beneficially owned by Mr. Cohen and Mr. Menashe and options currently exercisable by directors and officers within 60 days.

As of March 28, 2017, there were a total of 52 holders of record of our ordinary shares, of which 20 were registered in the United States. Such United States shareholders were, as of such date, the holders of record of approximately 44.95%  of our outstanding ordinary shares.

Voting Agreements

As of March 28, 2017, we are not aware of any voting agreements with respect to the voting rights of our shares.

B.Related Party Transactions

Creditor Agreement

In connection with the ScanMaster Transaction, on May 31, 2010, we entered into a creditor agreement with ScanMaster, or the Creditor Agreement, pursuant to which ScanMaster agreed to repay its outstanding debt owed to our company in the amount of $675,000. Under the terms of the agreement, ScanMaster is obligated to pay $675,000 with interest at a rate of annual US Dollar LIBOR per annum plus VAT, in equal quarterly payments over ten (10) years commencing January 1, 2011. Additionally, pursuant to the Creditor Agreement, in the event that ScanMaster's agreement with Israel Railway Ltd. is terminated other than by ScanMaster's initiation, and ScanMaster fails to enter into any agreements for the inspection of rail tracks for a period of two years following the closing of the transaction contemplated in the Creditor Agreement, we are obligated to forgive any unpaid portion of ScanMaster's debt, up to a maximum of $450,000. Accordingly, since the Agreement between ScanMaster and Israel Railway Ltd. was terminated and ScanMaster did not enter into any other agreement for the inspection of rail tracks for a period of two years following the closing of the transaction contemplated in the Creditor Agreement, in June 2012, we forgave $450,000 of ScanMaster’s debt.

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Mivtach Investment and Loan

In connection with the refinancing of our debt, on May 26, 2010 we entered into a Loan Agreement with M.S.N.D. Real Estate Holdings Ltd. which set forth the terms and conditions of our debt refinancing. For a description of the Mivtach Investment and Loan and additional information, See Item 3.D “Risk Factors”.

Consulting Agreement with Cycloes Ltd. (wholly owned by Sam Cohen)

On June 2, 2010 we agreed in principle to enter into a consulting agreement with Cycloes Ltd., a company wholly owned by Sam Cohen, our chief executive officer ("Cycloes Agreement"). Pursuant to the Cycloes Agreement, we will engage Cycloes Ltd. as an independent contractor in order to retain the chief executive officer services of Sam Cohen, upon the following principle terms: (i) a monthly fee of NIS 50,000; (ii) reimbursement of reasonable expenses incurred in connection with the performance of the consulting services; and (iii) a car and mobile phone provided for the purpose of fulfilling the consulting services.

On August 31, 2010, the terms of the Cycloes Agreement were approved by our audit committee our board of directors and shareholders. In June 2010, Mr. Cohen was appointed as a member and chairman of our board of directors.

As part of the debt restructuring agreements with our banks, the agreement provided for an automatic increase of the monthly fee by 25% as of October 1, 2011, subject to our achievement of various financial milestones. In accordance with the Companies Law, the terms of the agreement were subsequently reapproved by our shareholders on January 17, 2012, and the monthly fee increase retroactively to NIS 62,500 as of October 1, 2011 (the "Amended Cycloes Agreement"). Since the duration of the Amended Cycloes Agreement exceeds three years, the agreement is required to be re-approved by the shareholders every three years. On January 12, 2015, our annual general meeting so re-approved the Amended Cycloes Agreement. For more information regarding our restructuring agreements with our banks, see Item 10, "Additional Information - Material Contracts".

Consulting Agreement with Yaron Financial Services Ltd. (wholly owned by Yaron Menashe)

On June 2, 2010 we agreed in principle to enter into a consulting agreement with Yaron Financial Services Ltd., a company wholly owned by Yaron Menashe, our chief financial officer ("Yaron Financial Agreement"). Pursuant to the Yaron Financial Agreement, we will engage Yaron Financial Services Ltd. as an independent contractor in order to retain the services of Yaron Menashe as our chief financial officer upon the following principle terms: (i) a monthly fee of NIS 43,000; (ii) reimbursement of reasonable expenses incurred in connection with the performance of the consulting services; and (iii) a car and mobile phone provided for the purpose of fulfilling the consulting services.

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On August 31, 2010, the terms of the agreement were approved by our audit committee, our board of directors and shareholders. In June 2010, Mr. Menashe was appointed a member of our board of directors.

As part of the debt restructuring agreements with our banks, the agreement provided for an automatic increase of the monthly fee by 25% as of October 1, 2011, subject to our achievement of various financial milestones. In accordance with the Companies Law, the terms of the agreement were subsequently reapproved by our shareholders on January 17, 2012, and the monthly fee increase retroactively to NIS 53,750 as of October 1, 2011 (the "Amended Yaron Financial Agreement"). Since the duration of the Amended Yaron Financial Agreement exceeds three years, the agreement is required to be re-approved by the shareholders every three years. On January 12, 2015, our annual general meeting so re-approved the Amended Yaron Financial Agreement.

For more information regarding our restructuring agreements with our banks, see Item 10, "Additional Information - Material Contracts".

Loan Arrangement with Sam Cohen and Yaron Menashe

As a condition to our debt restructuring agreement with our two banks, in June 2010, each of Mr. Sam Cohen and Yaron Menashe undertook two financial commitments toward the company. Each of Mr. Cohen and Mr. Menashe provided us with a loan in the amount of US $50,000. The repayment of this loan shall occur in one of the following two ways: (i) commencing July 1, 2012 subject to compliance with the repayment terms of two pre-existing loans; or (ii) Commencing 2013 upon our request, where such request is accompanied by a confirmation letter issued by a certified external auditor confirming the following conditions (the "Repayment Conditions"): (a) existence of net profit for distribution; (b) existence of positive cash flow from ongoing operations; (c) the repayment amount shall not exceed 50% of the net profit for distribution and/or the positive cash flow from ongoing operations, the lower of the two, and in any case shall not exceed the outstanding loan amount; and (d) the auditor's confirmation provides that our tangible share capital is greater than zero. DuringAs of December 31, 2014 the Company fully repaid the loans by meeting the Repayment Conditions.

Further, each of Messrs. Cohen and Menashe agreed to the delayed payment by our company of the first US $50,000 of their salary until July 2011 and further agreed to the delayed repayment until fully repaid in December 2014.

Remuneration Arrangement with Natan Avisar

On January 12, 2015, our annual general meeting approved the remuneration terms to be paid to Mr. Natan Avisar in connection with his service as a director in the Company on behalf of Mr. Avi Gross. According to the remuneration arrangement, Mr. Natan Avisar is entitled to receive the fixed remuneration terms set forth in the Companies Law Regulations (Rules Relating to the Compensation and Reimbursement of External Directors), for annual fees and for participation in meetings of our board of directors and its committees, and the grant of options to purchase 17,000 of our ordinary shares (on a split-adjusted basis) under the 2006 Share Option Plan, at an exercise price equal to the closing price of the ordinary shares on the Over the Counter market in the United States, on the date the award was approved by our board of directors, which shall vest in equal portions each quarter for three yearsfrom the date on which the board approved the award, for as long as Mr. Avisar continues to serve as a director on our board.

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C.Interests of Experts and Counsel

Not applicable.

ITEM 8.FINANCIAL INFORMATION

A.Consolidated Statements and Other Financial Information

Our consolidated financial statements and other financial information are incorporated herein by reference to pages F1-F28.

Export Sales

In  2014, 2015 and 2016  96.8%, 98.2% and 96.2% of our sales, respectively, amounting to  $6.4 million, $8.96 million and $9.76 million respectively, were due to our products being exported outside of Israel.

Litigation

From time to time we are a party to various litigation matters incidental to the conduct of our business. Except as disclosed above, there is no pending or threatened legal proceeding to which either we or any of our directors, members of our senior management or affiliates are a party to, that, in the opinion of our management, is likely to have a material adverse effect on our future financial results or financial condition.

Dividend Distributions

To date, we have never paid any cash dividends on our ordinary shares and there can be no assurance that we will pay cash dividends in the foreseeable future.

B.Significant Changes

No significant changes have occurred since the date of the consolidated financial statements included in this annual report.

ITEM 9.THE OFFER AND LISTING

A.Offer and Listing Details and C. Markets

Market and Share Price History

All capitalization information provided below was adjusted to reflect the 1-for-10 reverse share split.

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In July 1996, we consummated an initial public offering of 200,000 ordinary shares. At such time, our ordinary shares were quoted on the NASDAQ National Market. Our ordinary shares were quoted on the NASDAQ National Market from July 1996. Effective December 29, 2000, our ordinary shares were delisted from the NASDAQ National Market. From that time our shares traded on the Over-the-Counter Bulletin Board until June 21, 2001, when they were transferred to the NASDAQ SmallCap Market. On November 19, 2003 our ordinary shares were delisted from the SmallCap Market and following a seven business day period in which the shares were traded on the Pink Sheets (as a result of an error by the NASDAQ Listings Qualifications Panel), our ordinary shares were listed on the Over-the-Counter Bulletin Board from November 28, 2003. In March 2017, we completed a reverse share split at a ratio of 1-for-10, such that every ten outstanding ordinary shares were converted into one ordinary share par value NIS 10.00. For further information, see Item 3, “Key Information -- Risk Factors -- Risk Factors Related to Our Ordinary Shares” and Item 4, “Information on the Company -- History and Development of the Company”. From July 1996 until May 4, 1999, our ordinary shares were quoted under the symbol EVSNF. From May 4, 1999, until November 18, 2003, they were quoted under the symbol EVSN, and since November 19, 2003 our ordinary shares have been quoted under the symbol EVSNF.OB. Our ordinary shares are not listed on any other stock exchange and have not been publicly traded outside the United States.

The table below sets forth the high and low bid prices of the ordinary shares, as reported by the NASDAQ National Market, NASDAQ SmallCap Market or the Over-the-Counter Bulletin Board as applicable, during the indicated fiscal periods as reported by such exchange (All capitalization information provided below was adjusted to reflect the 1-for-10 reverse share split.):

Period	High ($)		Low ($)
March 2017		4.2		2.66
February 2017		3.8		3.3
January 2017		3.39		2.79
December 2016		3.1		2.71
November 2016		3.4		3
October 2016		3.5		3.1
First quarter 2017		4.2		2.66
Fourth quarter 2016		3.5		2.71
Third quarter 2016		3.55		2.455
Second quarter 2016		2.9		2.2
First quarter 2016		3.499		2.3
Fourth quarter 2015		2.671		2.570
Third quarter 2015		1.974		1.925
Second quarter 2015		1.706		1.691
First quarter 2015		1.524		1.496
Year ended 2016		3.55		2.2
Year ended 2015		2		1.9
Year ended 2014		1.8		0.4
Year ended 2013		0.7		0.5
Year ended 2012		1.1		0.6

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Lack of Liquidity

The delisting of our ordinary shares from the NASDAQ markets, significantly affects the ability of investors to trade our securities and negatively affects the liquidity of our ordinary shares. "Penny stock" rules may make buying or selling our ordinary shares difficult, severely limiting the market price of our ordinary shares and the liquidity of our shares in the U.S. Trading in our ordinary shares may be subject to the "penny stock" regulations adopted by the SEC. These regulations generally define a "penny stock" to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser's written agreement to execute the transaction. Unless an exception is available, the regulations require delivery, prior to any transaction involving a "penny stock," of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our stock, which could severely limit the liquidity of our stock.

Our ordinary shares are traded on the Over-the-Counter Bulletin Board. Trading in our ordinary shares has been limited and there can be no assurance that an active trading market for our ordinary shares will develop. As a result, this could adversely affect our shareholders' ability to sell our ordinary shares in short time periods, or possibly at all. Thinly traded ordinary shares can be more volatile than ordinary shares traded in an active public market.

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In March 2017 we completed a reverse share split, intended to make our Ordinary Shares a more attractive investment for large US institutional investors (many of whom do not regularly invest in stocks trading below $1.00 per share) and to allow for a possible return of the Ordinary Shares to the Nasdaq Capital Market, which would require a minimum bid price of $3.00 per share. There can be no assurance that we will be able to return to the Nasdaq Capital Market following the reverse share split.

B.Plan of Distribution

 Not applicable

C.Markets

See Item 9.A, "Offer and Listing Details" for more information regarding the stock exchanges on which our shares are traded.

D.Selling Shareholders

Not applicable

E.Dilution

 Not applicable

F.Expenses of the Issue

 Not applicable

ITEM 10.  ADDITIONAL INFORMATION

A.Share Capital

 Not applicable

B.Memorandum and Articles of Association

Our shareholders approved our articles of association on February 21, 2006. Our objective as stated in our articles of association is to engage in any lawful act or activity for which companies may be organized under the Israeli Companies Law, as amended.

Following the completion of the reverse share split we have one class of outstanding securities, our ordinary shares, par value NIS 10.00 per share. No preferred shares are currently authorized.

Holders of our ordinary shares have one vote per share, and are entitled to participate equally in the payment of dividends and share distributions and, in the event of our liquidation, in the distribution of property after satisfaction of liabilities to creditors. Our articles may be amended by a resolution carried at a general meeting by a majority of the shares voting on such resolution. The shareholders rights may not be modified in any other way unless otherwise expressly provided in the terms of issuance of the shares.

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Our articles of association require that we hold our annual general meeting of shareholders each year no later than 15 months from the last annual meeting, at a time and place determined by the board of directors, upon at least 21 days prior notice to our shareholders. In addition, general meetings will require at least 35 days’ prior notice to the extent required with respect to certain matters as required under the regulations issued pursuant to the Israeli Companies Law.No business may be commenced until a minimum quorum under applicable law, which currently provides for two or more shareholders holding at least one-quarter of the voting rights are present in person or by proxy. A meeting adjourned for lack of a quorum is adjourned to the same day in the following week at the same time and place. At the reconvened meeting, in the event a quorum is not present within half an hour of the time fixed for the meetings commencement, then any two shareholders present shall constitute a quorum, regardless of the number of shares held by them.

Shareholders may vote in person or by proxy, and will be required to prove title to their shares as required by the Companies Law pursuant to procedures established by the board of directors. Resolutions regarding the following matters must be passed at a general meeting of shareholders:

· amendments to our articles of association;

· appointment or termination of our auditors;

· appointment and dismissal of directors, other than temporary directors which may be appointed by other directors;

· approval of acts and transactions requiring general meeting approval under the Companies Law;

· increase or reduction of our authorized share capital;

· any merger as provided in Section 320 of the Companies Law;

· the exercise of the board of directors’ powers by a general meeting, if the board of directors is unable to exercise its powers and the exercise of any of its powers is vital for our proper management, as provided in Section 52(a) of the Companies Law.

A meeting of our shareholders shall be convened by our board of directors, at the request of any two directors or one quarter of the officiating directors, or by request of one or more shareholders holding at least 5% of our issued share capital. Within 21 days of receipt of the request, the board must convene a meeting and send out notices setting forth the date, time and place of the meeting.

The Israeli Companies Law

The Israeli Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An office holder, is defined in the Israeli Companies Law, as a (i) director, (ii) general manager, (iii) chief business manager, (iv) deputy general manager, (v) vice general manager, (vi) any other person assuming the responsibilities of any of the forgoing positions without regard to such person's title or (vii) another manager directly subordinate to the general manager.

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The Israeli Companies Law requires that an office holder of a company 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 addition, if the transaction is an extraordinary transaction, as defined under Israeli law, the office holder must also disclose any personal interest held by the office holder's spouse, siblings, parents, grandparents, descendants, spouse's descendants as well as the siblings and parents of the office holder's spouse) and the spouses of any of the foregoing, or by any corporation in which the office holder is a 5% or greater shareholder, holder of 5% or more of the voting power, director or general manager or in which he or she has the right to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction not in the ordinary course of the company's business, not on market terms, or that is likely to have a material impact on the company's profitability, assets or liabilities.

In the case of a transaction that is not an extraordinary transaction, after the office holder complies with the above disclosure requirement, only board approval is required unless the articles of association of the company provide otherwise. The transaction must be for the benefit of the company. If the transaction is an extraordinary transaction, then, in addition to any approval required by the articles of association, it must also be approved by the audit committee and by the board of directors, and, under specified circumstances, by a meeting of the shareholders.

In all matters in which an individual has a personal interest, including matters of his/her terms of employment and compensation, he/she shall not be permitted to vote on the matter or be present at the audit committee and/or board of directors meeting in which the matter is considered; however, with respect to an office holder, he/she may be present at the meeting discussions if the chairman determines that the office holder has to present the matter. However, should a majority of the audit committee or of the board of directors have a personal interest in the matter then:

a) all of the directors shall be permitted to vote on the matter and attend the meeting in which the matter is considered; and

b) the matter requires approval of the shareholders at a general meeting.

According to the Israeli Companies Law, the personal interest disclosure requirements discussed above also apply to a controlling shareholder of a public company.

Such requirements also apply to certain shareholders of a public company who have a personal interest in the adoption by the shareholders of certain proposals with respect to (i) certain private placements that will increase their relative holdings in the company, (ii) certain special tender offers or forced bring along share purchase transactions, (iii) election of external directors, (iv) approval of a compensation policy governing the terms of employment and compensation of office holders, (v) approval of the terms of employment and compensation of the general manager, (vi) approval of the terms of employment and compensation of office holders of the company when such terms deviate from the compensation policy previously approved by the company’s shareholders, and (vii) approving the appointment of either (1) the chairman of the board or his/her relative as the chief executive officer of the company, or (2) the chief executive officer or his/her relative as the chairman of the board of directors of the company. If any shareholder casting a vote at a shareholders meeting in connection with such proposals as aforesaid does not notify the company if he, she or it has a personal interest with respect to such proposal, his, her or its vote with respect to the proposal will be disqualified.

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The term “controlling shareholder” is defined as a shareholder who has the ability to direct the activities of a company, other than if this power derives solely from the shareholder’s position on the board of directors or any other position with the company, and the definition of "controlling shareholder" in connection with matters governing: (i) extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, (ii) certain private placements in which the controlling shareholder has a personal interest, (iii) certain transactions with a controlling shareholder or relative with respect to services provided to or employment by the company, (iv) the terms of employment and compensation of the general manager, and (v) the terms of employment and compensation of office holders of the company when such terms deviate from the compensation policy previously approved by the company’s shareholders, also includes shareholders that hold 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company (and the holdings of two or more shareholders which each have a personal interest in such matter will be aggregated for the purposes of determining such threshold).

In general, extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and agreements relating to non-office holder employment and compensation terms of a controlling shareholder (or a relative of such) or to the provision of services to the company by such controlling shareholder (or relative of such), require the approval of the audit committee, the board of directors and the shareholders of the company. Agreements relating to the terms of office and employment of a controlling shareholder (or relative of such) as an office holder in the company require the approval of the compensation committee, the board of directors and the shareholders of the company.

The shareholder approval for such matters requiring shareholder disclosure of a personal interest as noted above, generally must either include at least one-half of the shares held by non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who vote against the transaction must not represent more than two percent of the voting rights in the company. The shareholder approval for approving the appointment of either (1) the chairman of the board or his/her relative as the chief executive officer of the company, or (2) the chief executive officer or his/her relative as the chairman of the board of directors of the company, must either include, pursuant to Amendment 27, at least regular majority of the shares held by non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who vote against the transaction must not represent more than two percent of the voting rights in the company. Agreements and extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, or agreements relating to any employment terms of a controlling shareholder (or relative if such) or to the provision of services to the company by such controlling shareholder (or relative if such), as aforesaid, with duration exceeding three years, are subject to re-approval once every three years by the audit committee (or compensation committee, as applicable), the board of directors and the shareholders of the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest may be approved in advance for a period exceeding three years if the audit committee determines such approval reasonable under the circumstances.

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The board of directors of an Israeli company whose shares or debentures are publicly traded is obligated to adopt a compensation policy governing the terms of office and employment of office holders, after considering the recommendations of the compensation committee. The final adoption of the compensation policy is subject to the approval of the shareholders of the company. Such shareholder approval is subject to certain special majority requirements, as set forth in the Israeli Companies Law, pursuant to which the shareholder majority approval must also either include a majority of the shares held by non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who voted against the transaction must not represent more than two percent of the voting rights in the company.

Nonetheless, even if the shareholders of the company do not approve the proposedcompensation policy, the board of directors of a company may approve the proposed compensation policy, provided that the compensation committee and, thereafter, the board of directors resolved, based on detailed, documented, reasons and after a second review of the compensation policy, that the approval of such compensation policy is for the benefit of the company.

Pursuant to the Israeli Companies Law, the terms of office and employment of an office holder in a public company should be in accordance with the company’s compensation policy. Nonetheless, provisions were established in the Israeli Companies Law that allow a company, under special circumstances, to approve terms of office and employment that are not in line with the approved compensation policy.

Terms of office and employment of office holders who are neither directors nor the general manager and which comply with the company’s compensation policy require approval by the (i) compensation committee; and (ii) the board of directors.  Approval of terms of office and employment for such office holders which do not comply with the compensation policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having  taken into account the various policy considerations and mandatory requirements set forth in the Israeli Companies Law with respect to office holder compensation, and (ii) the shareholders of the company approved the terms of office and employment for such office holders by means of the special majority required for approving the compensation policy (as detailed above).

Terms of office and employment of the general manager which comply with the company’s compensation policy require approval by the (i) compensation committee; (ii) the board of directors and (iii) the shareholders of the company by means of the special majority required for approving the compensation policy (as detailed above). Approval of terms of office and employment for the general manager which do not comply with the compensation policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having  taken into account the various policy considerations and mandatory requirements set forth in the Israeli Companies Law with respect to office holder compensation, and (ii) the shareholders of the company approved the terms of office and employment for the general manager which deviate from the compensation policy by means of the special majority required for approving the compensation policy (as detailed above).  Notwithstanding the foregoing, a company may be exempted from receiving shareholder approval with respect to the terms of office and employment of a proposed candidate for general manager if such candidate meets certain independence criteria, the terms of office and employment are in line with the compensation policy, and the compensation committee has determined for specified reasons that presenting the matter for shareholder approval would thwart the proposed engagement.

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Terms of office and employment of office holders (including the general manager) that are not directors may nonetheless be approved by the company despite shareholder rejection, provided that a company’s compensation committee and thereafter the board of directors have determined to approve such terms of office and employment based on detailed reasoning, after having re-examined the proposed terms of office and employment, and having taken the shareholder rejection into consideration.

Terms of office and employment of directors which comply with the company’s compensation policy require approval by the (i) compensation committee; (ii) the board of directors and (iii) the shareholders of the company. Approval of terms of office and employment for directors of a company which do not comply with the compensation policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having  taken into account the various policy considerations and mandatory requirements set forth in the Israeli Companies Law with respect to office holder compensation, and (ii) the shareholders of the company have approved the terms by means of the special majority required for approving the compensation policy (as detailed above).

Under the Companies Regulations (Relief from Related Party Transactions), 5760-2000, promulgated under the Israeli Companies Law, as amended, certain extraordinary transactions between a public company and its controlling shareholder(s) do not require shareholder approval. Such extraordinary transactions must be approved by both the board of directors and the audit committee and (i) must involve the extension of an existing transaction that was duly approved and does not involve any significant change in the terms of the existing transaction or the change is solely for the benefit of the company; (ii) is solely for the benefit of the company; (iii) is with the controlling shareholder or another person in which the controlling shareholder has an interest and the transaction is in accordance with the terms of a master agreement that was duly approved; (iv) is with the controlling shareholder or another person in which the controlling shareholder has an interest, the purpose of which is a transaction of theirs with a third party or a joint proposal to enter into a transaction with a third party, and the terms of the transaction that apply to the controlling shareholder are not significantly different from the terms that apply to the controlling shareholder or an entity controlled by him (while taking into account the extent of their respective involvement in the transaction); or (v) is between companies controlled by the controlling shareholder, or between the public company and the controlling shareholder or another person in which the controlling shareholder has a personal interest, and the transaction is on market terms, within the ordinary course of business and does not harm the company. In addition, under such regulations, directors’ compensation and employment arrangements in a public company do not require the approval of the shareholders if both the compensation committee and the board of directors agree that such arrangements are solely for the benefit of the company. Also, employment and compensation arrangements for an office holder that is a controlling shareholder of a public company, or the provision of directors and officers insurance for the chief executive officer, do not require shareholder approval if certain criteria are met.

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Private placements in a public company require approval by a company’s board of directors and shareholders in the following cases:

· A private placement that meets all of the following conditions:

i. The private placement will increase the relative holdings of a shareholder that holds five percent or more of the company’s outstanding share capital, assuming the exercise of all of the securities convertible into shares held by that person, or that will cause any person to become, as a result of the issuance, a holder of more than five percent of the company's outstanding share capital.

ii. 20 percent or more of the voting rights in the company prior to such issuance are being offered.

iii. All or part of the consideration for the offering is not cash or registered securities, or the private placement is not being offered at market terms.

· A private placement which results in anyone becoming a controlling shareholder of the public company.

In addition, under the Israeli Companies Law, certain transactions or a series of transactions are considered to be one private placement. Any placement of securities that does not fit the above description may be issued at the discretion of the board of directors.

Provisions Restricting Change in Control of Our Company

Tender Offer. A person wishing to acquire shares or any class of shares of a publicly traded Israeli company and who would as a result hold over 90% of the company’s issued and outstanding share capital or of a class of shares which are listed, is required by the Companies Law to make a tender offer to all of the company’s shareholders for the purchase of all of the issued and outstanding shares of the company. If the shareholders who do not respond to the offer hold less than 5% of the issued share capital of the company, and more than half of the shareholders without a personal interest in accepting the offer approved the tender offer, then all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. Notwithstanding the above, if those shareholders who do not approve constitute less than 2% of the issued and outstanding share capital of the company then the full tender will be accepted and all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. The Israeli Companies Law provides for an exception regarding the threshold requirements for a shareholder that prior to and following February 2000 holds over 90% of a company's issued and outstanding share capital. However, the shareholders may petition the court to alter the consideration for the acquisition (provided, however, that subject to certain exceptions, the terms of the tender offer may state that a shareholder that accepts the offer waives such right).

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The Israeli Companies Law provides that an acquisition of shares of a public company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company. This rule does not apply if there is already another 25% shareholder of the company. Similarly, the Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company, if there is no 45% or greater shareholder of the company. Under the Companies Regulations (Relief for Public Companies whose Shared are Traded on Exchanges outside of Israel) the above requirements for a special tender offer do not apply in instances whereby according to the laws of the foreign jurisdiction there are limitations regarding the acquisition of a controlling interest in the company of any specified portion or the acquisition of a controlling interest of any specified portion necessitates an offer by the potential acquirer of a controlling interest to acquire shares from amongst the publicly traded shares. The Israeli Securities Authority is of the view that U.S. securities laws and exchange regulations of various exchanges do not purport to limit the acquisition of controlling interests in a company, do not require the potential acquirer of a controlling interest to make an offer to acquire shares from the public, and as such Israeli companies that are publicly traded in the United States of America cannot benefit from these relief regulations and are thus subject to the general provisions of the Israeli Companies Law which require a special tender offer as outlined above.

Merger. The Israeli Companies Law permits merger transactions if approved by each party’s board of directors and the majority of each party’s shares voted on the proposed merger at a shareholders’ meeting called on at least 21 days’ prior notice, or 35 days prior notice to the extent required under the regulations to the Companies Law. Under the Israeli Companies Law, merger transactions may be approved by holders of a simple majority of our shares present, in person or by proxy, at a general meeting and voting on the transaction. In determining whether the required majority has approved the merger, if shares of a company are held by the other party to the merger, or by any person holding at least 25% of the outstanding voting shares or 25% of the means of appointing directors of the other party to the merger, then a vote against the merger by holders of the majority of the shares present and voting, excluding shares held by the other party or by such person, or anyone acting on behalf of either of them, is sufficient to reject the merger transaction, provided, however, that if the transaction is an extraordinary transaction with a controlling shareholder or in which a controlling shareholder has an interest, then the approvals required will be the corporate approvals under the Companies Law for such extraordinary transaction (i.e. approval of the audit committee, board of directors and shareholders vote, which shareholder approval must either include at least one-half of the shares held by disinterested shareholders who are present, in person or by proxy, at the meeting, or, alternatively, the total shareholdings of the disinterested shareholders who vote against the transaction must not represent more than two percent). If the transaction would have been approved but for the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered to the shareholders. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be executed unless at least 30 days have passed from the receipt of the shareholders’ approval and 50 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli Registrar of Companies.

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The Israeli legislature, the Knesset, approved the Sixteenth Amendment to the Israeli Companies Law which came into effect during 2011 (the "Sixteenth Amendment"), Amendment 20 which came into effect at the end of 2012, Amendment 22 which came into effect at the beginning of 2014, Amendment 26 which came into effect during July 2014 and Amendment  27 which came into effect on 17 February, 2016. The purposes of these amendments to the Israeli Companies Law were to revise and enhance existing provisions governing corporate governance practices of Israeli companies, to regulate executive pay in Israeli publicly traded companies and to revise and enhance existing provisions governing approval of executive compensation. The principal provisions set forth in these amendments to the Israeli Companies Law are incorporated into the above discussions of the Company. Additional changes to the Israeli Companies Law pursuant to these recently passed amendments include:

· Code of Corporate Conduct. A code of recommended corporate governance practices has been attached to the Companies Law; In the explanatory notes to the legislation, the Knesset noted that an "adopt or disclose non-adoption" regulation would be issued by the Israeli Securities Authority with respect to such code. As of the date of this Annual Report, the Israeli Securities Authority has issued reporting instructions with respect to this code which are applicable only to publicly traded companies whose securities are traded solely on the Tel Aviv Stock Exchange and which report solely to the Israeli Securities Authority.

· Fines. The Israeli Securities Authority shall be authorized to impose fines on any person or company performing a violation, in connection with a publicly traded company which reports to the Israeli Securities Authority, and specifically designated as a violation under the Sixteenth Amendment.

Although we expect to be in compliance with the Israeli Companies Law, there is no assurance that we will not be required to adjust our current corporate governance practices, as discussed in this annual report, pursuant to the provisions of these recently passed amendments to the Companies Law.

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

· any amendment to the articles of association;

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· an increase of the company's authorized share capital;

· a merger; or

· approval of interested party transactions which require shareholder approval.

Furthermore, the Israeli Companies Law requires that a shareholder refrain from acting in a discriminatory manner towards other shareholders.

The Israeli Companies Law does not describe the substance of the aforementioned duties of shareholders, but provides that laws applicable to a breach of contract, adjusted according to the circumstances and taking into account the status within the company of such shareholder, shall apply to a breach of such duties. With respect to the obligation to refrain from acting discriminatorily, a shareholder that is discriminated against can petition the court to instruct the company to remove or prevent the discrimination, as well as provide instructions with respect to future actions.

In addition, the Israeli Companies Law dictates that any controlling shareholder, any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of a company's articles of association, has the power to appoint or prevent the appointment of an office holder in the company, is under a duty to act with fairness towards the company.

The Israeli Companies Law requires that specified types of transactions, actions and arrangements be approved as provided for in a company's articles of association and in some circumstances by the audit committee or the compensation committee, by the board of directors and by the shareholders.

See also Item 6, “Directors, Senior Management And Employees – Directors And Senior Management”

Home Country Practices

Below is a concise summary of the significant ways in which our corporate practices, which are in accordance with Israeli law and practice, including the provisions of the Israeli Companies Law, differ from the requirements which may be applicable to domestic U.S. listed companies:

· Distribution of annual and quarterly reports to shareholders – Under Israeli law we are not required to distribute annual and quarterly reports directly to shareholders and the generally accepted business practice in Israel is not to distribute such reports to shareholders. We do however make our audited financial statements available to our shareholders prior to our annual general meeting and furnish our quarterly and annual financial results with the Securities and Exchange Commission on Form 6-K.

· Independence, Nomination and Compensation of Directors – A majority of our board of directors may not necessarily be comprised of independent directors. Our board of directors contains two external directors in accordance with the provisions of the Israeli Companies Law. Israeli law does not require, nor do our external directors conduct, regularly scheduled meetings at which only they are present. In addition, with the exception of our external directors, our directors are elected for terms of one year or until the following annual meeting, by a general meeting of our shareholders. The nominations for director which are presented to our shareholders are generally made by our board of directors. One or more shareholders of a company holding at least one percent of the voting power of the company may nominate a currently serving external director for an additional three year term. Israeli law does not require the adoption of and our board has not adopted a formal written charter or board resolution addressing the nomination process and related matters. Compensation of our directors and other officers of the Company is determined in accordance with Israeli law.

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· Executive Compensation – We follow the provisions of the Israeli Companies Law with respect to matters in connection with the composition and responsibilities of our compensation committee, office holder compensation, and any required approval by the shareholders of such compensation. Israeli law, and our amended and restated articles of association, do not require that a compensation committee composed solely of independent members of our board of directors determine (or recommend to the board of directors for determination) an executive officer’s compensation; nor do they require that the Company adopt and file a compensation committee charter. Instead, our compensation committee has been established and conducts itself in accordance with provisions governing the composition of and the responsibilities of a compensation committee as set forth in the Israeli Companies Law. Furthermore, the compensation of office holders is determined and approved by our compensation committee and our board of directors, and in certain circumstances by our shareholders, either in consistency with our previously approved Executive Compensation Policy or, in special circumstances in deviation therefrom, taking into account certain considerations set forth in the Israeli Companies Law. The requirements for shareholder approval of any office holder compensation, and the relevant majority or special majority for such approval, are all as set forth in the Israeli Companies Law. Thus, we will seek shareholder approval for all corporate actions with respect to office holder compensation requiring such approval under the requirements of the Israeli Companies Law, including seeking prior approval of the shareholders for the Executive Compensation Policy and for certain office holder compensation.

· Quorum – Under Israeli law a company is entitled to determine in its articles of association the number of shareholders and percentage of holdings required for a quorum at a shareholders meeting. Our Articles of Association provide that a quorum of two or more shareholders, present in person or by proxy, holding shares conferring in the aggregate more than twenty five (25%) percent of the voting power of the Company is required for commencement of business at a general meeting.

· Approval of Related Party Transactions – All related party transactions are approved in accordance with the requirements and procedures for approval of interested party acts and transactions, set forth in sections 268 to 275 of the Israeli Companies Law.

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· Shareholder Approval – We seek shareholder approval for all corporate action requiring such approval, in accordance with the requirements of the Israeli Companies Law.

· Equity Compensation Plans - We do not necessarily seek shareholder approval for the establishment of, and amendments to, stock option or equity compensation plans, as such matters are not subject to shareholder approval under Israeli law. We will attempt to seek shareholder approval for our stock option or equity compensation plans (and the relevant annexes thereto) to the extent required in order to ensure they are tax qualified for our employees in the United States However, even if such approval is not received, then the stock option or equity compensation plans will continue to be in effect, but the Company will be unable to grant options to its U.S. employees that qualify as Incentive Stock Options for U.S. federal tax purpose. Our stock option or other equity compensation plans are also available to our non-U.S. employees, and provide features necessary to comply with applicable non-U.S. tax laws.

C.Material Contracts

ScanMaster Transaction

In June 2010, pursuant to a series of agreements, we completed the sale of ScanMaster to a group of purchasers led by David Gal, our former chief executive officer and chairman of our board of directors, and Ofer Sela, who previously served as our executive vice president, research and development.

In connection with the ScanMaster Transaction, we entered into a Creditor Agreement. For more information regarding this agreement, see Item 7.B “Related Party  Transactions”.

Debt Restructure Agreement with the Banks

In June 2010, we completed the restructuring of our bank debt to our Banks. Pursuant to the terms of the debt restructuring, the Banks forgave $2.4 million of debt from our company and our former subsidiary ScanMaster. Further, the Banks agreed to a more flexible repayment schedule whereby we will repay approximately $1 million over a period of five (5) years, and will repay an additional $600,000 over a period of ten (10) years. The debt restructuring was contingent upon the sale of ScanMaster, which was completed in June 2010. The debt restructuring was further conditioned upon certain commitments made by Sam Cohen, our chief executive officer, and Yaron Menashe, our chief financial officer. Mr. Menashe and Mr. Cohen each committed to provide a loan to the company in an amount of $50,000, the repayment of which was scheduled to commence on January 1, 2013, subject to us meeting certain milestones set by the Banks. During 2014 the Company fully repaid the loans provided by Messrs. Cohen and Menashe. In September 2016 we completed the full repayment of the bank loans.

Framework Agreement with Bank Hapoalim Ltd.

On May 27, 2010, we entered into a framework agreement with Bank Hapoalim Ltd. (the "Framework Agreement"), pursuant to which Bank Hapoalim Ltd. (the "Bank"), as part of the ScanMaster Transaction, consented to the sale of ScanMaster, subject to the fulfillment of certain financial restructuring conditions and milestones and subject to our entering into a full debt restructuring agreement with the Bank by June 30, 2010. In addition, the Bank agreed to waive certain outstanding debts owed to the Bank by ScanMaster. The Framework Agreement further set forth the repayment terms of the loans granted by Messrs. Cohen and Menashe to our company.

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Mivtach Investment and Loan

In the fourth quarter of 2009, our then controlling shareholder, Mivtach, through its wholly-owned subsidiary, M.S.N.D. Real Estate Holdings Ltd., invested an aggregate amount of $1.8 million in our company. Mivtach invested $1.2 million in cash and an additional $627,000 through the conversion of outstanding loans plus interest. Mivtach also loaned us an aggregate of approximately $850,000 during the first quarter of 2010, For more information regarding this investment see Item 3.D, “Risk Factors”.

2012 Private Placement Transaction between the Company and Avi Gross

Under the 2012 Private Placement Transaction, which was completed in December 2012, the company and Mr. Avi Gross entered into a Registration Rights Agreement, pursuant to which the company agreed to use its best efforts in order to prepare and file with the SEC, by December 10, 2013, a Registration Statement to cover the resale of the shares purchased by Mr. Gross as part of the 2012 Private Placement Transaction, with such shares to include those shares that are issuable to Mr. Gross subject to the exercise of the Convertible Loan, the First Warrant and the Second Warrant. For additional information regarding the 2012 Private Placement Transaction see Item 4, “Recent Developments – 2012 Private Placement Transaction”. We filed such Registration Statement with the SEC on December 4, 2013 and it was declared effective by the SEC on January 10, 2014.

2014 Private Placement Transaction between the Company and SMD Advanced Technologies Ltd.

For information regarding the 2014 Private Placement Transaction see Item 4, “Recent Developments – 2014 Private Placement Transaction”.

D.Exchange Controls

In 1998, the Government of Israel removed the general prohibition against engaging in foreign currency transactions under the Israel Currency Control Law. Pursuant to the new general permit, most transactions in foreign currency are permitted. Any dividends or other distributions paid in respect of ordinary shares and any amounts payable upon the dissolution, liquidation or winding up of our affairs, as well as the proceeds of any sale in Israel of our securities to an Israeli resident are freely repatriable into non-Israeli currencies at the rate of exchange prevailing at the time of conversion, provided that Israeli income tax has been paid on (or withheld from) such payments. Because exchange rates between the NIS and the U.S. Dollar fluctuate continuously, U.S. shareholders will be subject to any such currency fluctuation during the period from when such dividend is declared through the date that the payment is made in U.S. Dollars. For further discussion with respect to such currency fluctuation, see Item 5, “Operating and Financial Review and Prospects --Impact of Inflation and Devaluation on Results of Operations, Liabilities, and Assets.”

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There are currently no Israeli currency control restrictions on remittances of dividends on our ordinary shares, proceeds from the sale of the shares or interest or other payments to non-residents of Israel, except under certain circumstances, for shareholders who are subjects of countries that are, or have been, in a state of war with Israel.

E.Taxation

The following is a summary of the material tax consequences in the United States and Israel to individual and corporate residents of the United States and Israel resulting from the sale of ordinary shares (i) issuable to the selling security holders pursuant to the exercise of the Warrants and (ii) held by the selling security holders. To the extent that the discussion is based on tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the tax authorities will accept the views expressed in this summary.

Israeli Tax Considerations

The following is a summary of the current tax law applicable to companies in Israel, with special reference to its effect on us. The following also contains a discussion of specified Israeli Government programs benefiting us. To the extent that the discussion is based on tax legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax authorities in question. The discussion is not intended, and should not be taken, as legal or professional tax advice and is not exhaustive of all possible tax considerations.

WE RECOMMEND THAT IN ADDITION TO REVIEWING THE DISCUSSION BELOW, PROSPECTIVE PURCHASERS AND HOLDERS OF OUR ORDINARY SHARES CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES, ISRAELI OR OTHER TAX CONSEQUENCES TO THEM, BASED UPON THEIR PARTICULAR CIRCUMSTANCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.

General Corporate Tax Structure

Israeli companies are generally subject to corporate tax at the rate of 25% of their taxable income beginning in 2016 and thereafter. Capital gains derived by an Israeli company are now generally subject to tax at the same rate as the corporate tax rate.

In 2006, transfer pricing regulations came into force, following the introduction of Section 85A of the Israeli Tax Ordinance (New Version), 5721- 1961, referred to herein as the Israeli Tax Ordinance, under Amendment 132. The transfer pricing rules require that cross-border transactions between related parties be carried out implementing an arms’ length principle and reported and taxed accordingly.

In 2008, the Knesset passed an amendment to the Income Tax Law (Inflationary Adjustments), 1985, which limits the scope of the law starting in 2008 and thereafter. Starting in 2008, the revenues for tax purposes are measured in nominal values, excluding certain adjustments for changes in the consumer price index carried out in the period up to December 31, 2007. The amended law includes, among other provisions, the elimination of the inflationary additions and deductions and the additional deduction for depreciation for the period starting in 2008.

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Law for the Encouragement of Industrial Research and Development, 1984

Under the pre-R&D Amendment regime, research and development programs that met specified criteria and were approved by a governmental committee of the OCS were eligible for grants or loans of up to 50% of the project’s expenditures, as determined by the research committee, in exchange for the payment of royalties from the sale of products developed under the program, subject to meeting certain criteria. Regulations under the R&D Law generally provided for the payment of royalties to the OCS of 3-5% on sales of products and services derived from a technology developed using these grants until 100% of the dollar-linked grant is repaid. Our obligation to pay these royalties was contingent on our actual sale or commercialization of such products and services. In the absence of income derived from such products, no payment was required. Effective for grants received from the OCS under programs approved after January 1, 1999, the outstanding balance of the grants was subject to interest at a rate equal to the 12 month LIBOR applicable to dollar deposits that was published on the first business day of each calendar year. Following the full repayment of the grant, there was no further liability for royalties.

The terms of the Israeli government participation also required that the manufacture of products developed with government grants be performed in Israel. However, under the regulations of the R&D Law, if any of the manufacturing was performed outside of Israel, assuming we received approval from the OCS for the foreign manufacturing, we could be required to pay increased royalties. The increase in royalties depended upon the extent of the manufacturing volume that was performed outside of Israel as follows:

Extent of Manufacturing Volume Outside of Israel	Royalties to the Chief Scientist as percentage of Grants
less than 50%	120%
between 50% and 90%	150%
90% and more	300%

In general, the technology developed with the OCS grants could not be transferred to Israeli third parties without the prior approval of a governmental committee under the R&D Law and could not be transferred to non-Israeli third parties. Not just transfer of know-how was prohibited, but also transfer of any rights in such know-how. This approval, however, was not required for the export of any final products developed using the grants. Approval of the transfer of technology could be granted in specific circumstances only if the recipient abided by the provisions of the R&D Law and related regulations, including the restrictions on the transfer of know-how and the obligation to pay royalties in an amount that could be substantially increased.

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On July 29, 2015, the Israeli Parliament, the Knesset, enacted the R&D Amendment, effective as of January 1, 2016, which is designated to provide the ability to respond quickly to the challenges of a changing world, after reaching the conclusion that the pre-R&D Amendment regime was found not to have the required flexibility in today's rapidly changing world. Pursuant to the R&D Amendment, the OCS shall be replaced with the Authority, which will be comprised of a Council body, the Chief Scientist, the Director General and a member of the Research Committee. According to the R&D Amendment, the Council will have broad discretion regarding material matters, including with respect to the new funding programs ("Tracks"), will be required to determine certain characteristics (which are mainly technical but also include the type of Benefit ("Benefit", as defined under the R&D Amendment, includes grants, loans, exemptions, discounts, guarantees and additional means of assistance, but with the exclusion of purchase of shares),  to be granted as well as its scope, conditions for receipt of approval for the Benefit and the identity of the party which is permitted to perform the approved activities, and may determine additional matters, including delay in payment of the Benefit and requests for provision of guarantees for its receipt, payment of an advance by the Authority, what know-how will be developed and requirements regarding its full or partial ownership, provisions regarding transfer, disclosure or exposure of know-how to third parties in Israel and abroad (including payment or non-payment for the same, as well as ceilings for such payments), requirements with respect to manufacture in Israel and transfer of manufacture abroad (including payment for such transfer), performance of innovative activities for the benefit of third parties, etc. In addition, while the pre-R&D Amendment regime provided base-line default terms and conditions with respect to the core issues relevant for OCS grant recipients, as provided above, these default provisions have been largely rescinded by the R&D Amendment. Many of these matters will now be decided separately for each Track by the Council, based on certain guidelines stipulated in the R&D Amendment. Such guidelines provide, for example, that considerable preference should be given to having ownership of OCS-funded know-how and rights vest with the Benefit recipient and/or with an Israeli company, with transfer of know-how and related rights abroad to be permitted only in exceptional circumstances. In addition, the R&D Amendment determines that the transfer of manufacturing rights abroad, whether under a license or otherwise, shall only be allowed in special circumstances. Nonetheless, these matters are merely guidelines, and the essential matters will be determined by the Council in its discretion. While the R&D Amendment is designated to provide flexibility in the rapidly changing business environment, leaving the above essential matters to the Council's discretion currently causes much ambiguity as to the implementation of the R&D Amendment. In addition, it should be noted that it seems that the pre-R&D Amendment regulations which determined material matters such as royalty rates, changes to royalty rates upon transfer of manufacturing rights abroad etc. will be rescinded, thus adding to the current uncertainty created by the R&D Amendment.

In addition, the Israeli authorities have indicated in the past that the government may reduce or abolish grants from the OCS in the future and we cannot assure that this will not apply after the R&D Amendment. If the Israeli authorities intend to reduce or abolish Benefits from the Authority, than even if these Benefits are maintained, we cannot assure you that we will receive such Benefits in the future. We cannot assure you that applications to the Authority will be approved, the approval terms and, until approved, the amounts of any Benefits are not determinable.

Tax Benefits for Research and Development

Israeli tax law allows, under certain conditions, a tax deduction in the year incurred for expenditures (including capital expenditures) in scientific research and development projects, if the expenditures are approved by the relevant Israeli Government Ministry (determined by the field of research) and the research and development is for the promotion of the enterprise and is carried out by or on behalf of the company seeking such deduction. Such expenditures not so approved are required to be deducted over a three-year period.

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Law for the Encouragement of Industry (Taxes), 1969

Under the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law, Industrial Companies (as defined below) are entitled to the following tax benefits:

(a) Amortization of purchases of know-how and patents over eight years for tax purposes.

(b) The right to elect, under specified conditions, to file a consolidated tax return with other related Israeli Industrial Companies.

(c) Amortization of expenses incurred in connection with certain public securities issuances over a three-year period.

(d) Accelerated depreciation rates on equipment and buildings.

Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. Under the Industry Encouragement Law, an “Industrial Company” is defined as a company resident and incorporated in Israel, at least 90% of the income of which, in any tax year, determined in Israeli currency, exclusive of income from government loans, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production activity.

We believe that we currently qualify as an Industrial Company within the definition of the Industry Encouragement Law. No assurance can be given that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.

Capital Gains Tax on Sales of Our Ordinary Shares

As of January 1, 2012, an individual is subject to a 25% tax rate on real capital gains derived from the sale of shares, as long as the individual is not a "substantial shareholder" (generally a shareholder with 10% or more of the right to profits, right to nominate a director (or an officer), voting rights, the right to receive assets upon liquidation, or the right to direct a shareholder that holds any of the aforesaid rights with respect to the manner by which such shareholder is to exercise such right(s), and all regardless of the source of such right.) in the company issuing the shares. There will generally be no capital gains tax on the inflationary surplus.

An individual who is a substantial shareholder will be subject to tax at a rate of 30% in respect of real capital gains derived from the sale of shares issued by a company in which he or she is a substantial shareholder. The determination of whether the individual is a substantial shareholder will be made on the date on which the securities are sold. In addition, the individual will be deemed to be a substantial shareholder if at any time during the 12 months preceding the date of sale he or she was a substantial shareholder.

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For gains derived from the sale of the Company's shares acquired before January 1, 2012, and sold on or after such date, other rates of tax will apply depending upon the length of time for which such shares were held.

Non-Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale of shares in an Israeli corporation publicly traded on the TASE and/or on a foreign stock exchange, provided such gains do not derive from a permanent establishment of such shareholders in Israel and that such shareholders did not acquire their shares prior to the issuer’s initial public offering. However, non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of more than 25% in such non-Israeli corporation, or (ii) are  the beneficiaries of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.

In some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source.

Pursuant to the treaty between the governments of the United States and Israel with respect to taxes on income, or the U.S.-Israel tax treaty, the sale, exchange or disposition of our ordinary shares by a person who qualifies as a resident of the United States under the treaty and who is entitled to claim the benefits afforded by the treaty, will generally not be subject to Israeli capital gains tax. This exemption shall not apply to a person who held, directly or indirectly, shares representing 10% or more of the voting power in our company during any part of the 12‑month period preceding the sale, exchange or disposition, subject to certain conditions. A sale, exchange or disposition of our shares by a U.S. resident qualified under the treaty, who held, directly or indirectly, shares representing 10% or more of the voting power in our company at any time during the 12‑month period preceding such sale, exchange or disposition, would be subject to Israeli tax, to the extent applicable; however, under the treaty, this U.S. resident would be permitted to claim a credit for these taxes against the U.S. income tax with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. Having said this, in the event that one of the following two occurs, the aforesaid exemption shall not apply: (i) the capital gains arising from the sale of our company's shares will be attributable to a permanent establishment of the shareholder located in Israel; or (ii) the shareholder, being an individual, will be present in Israel for a period of time or several periods of time, which aggregate to a total of 183 days or more, during a single taxable year.

Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale.

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Taxation of Dividends

Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. These sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. On distributions of dividends other than bonus shares, or stock dividends, to Israeli individuals and foreign resident individuals and corporations we would be required to withhold income tax at the rate of 25% (or 30% in the case that such person is a substantial shareholder at the time in which dividend are being distributed or was a substantial shareholder during the 12 months that preceded the date of dividend distribution). If the income out of which the dividend is being paid is attributable to an Approved, Benefited or Preferred Enterprise under the Investment Law, the rate is 20%. A lower rate may be provided for in an applicable tax treaty. Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) is 25%. However, generally, and subject to certain conditions, the maximum rate of withholding tax on dividends that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital throughout the tax year in which the dividend is distributed as well as the previous tax year and the dividend is not paid from the profits of an Approved Enterprise, the Israeli tax withheld may not exceed 12.5%, or 15% in the case of dividends paid out of the profits of an Approved Enterprise (as such term is defined in the Investment Law). A non-resident of Israel who receives dividends from which tax was withheld is generally exempt from the duty to file returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel.

Residents of the United States will generally have taxes in Israel withheld at source. Such persons generally would be entitled to a credit or deduction for United States Federal income tax purposes for the amount of such taxes withheld, subject to limitations applicable to foreign tax credits.

Certain Reporting Requirements

Certain U.S. investors are required to file IRS Form 926, Return by U.S. Transferor of Property to a Foreign Corporation, and certain U.S. Investors may be required to file IRS Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, reporting transfers of cash or other property to us and information relating to the U.S. investor and us. Substantial penalties may be imposed upon a U.S. investor that fails to comply. Each U.S. investor should consult its own tax advisor regarding these requirements.

In addition, recently enacted legislation imposes new reporting requirements for the holder of certain foreign financial assets, including equity of foreign entities, if the aggregate value of all of these assets exceeds certain thresholds. Our shares are expected to be subject to these new reporting requirements unless the shares are held in an account at a domestic financial institution. Penalties may apply to any failure to comply with such reporting requirements. U.S. investors should consult their own tax advisors regarding the application of this legislation.

Backup Withholding Tax and Information Reporting Requirements

Generally, information reporting requirements will apply to distributions with respect to our shares or proceeds on the disposition of our shares paid within the United States (and, in certain cases, outside the United States) to U.S. investors other than certain exempt recipients, such as corporations. Furthermore, backup withholding (currently at 28%) may apply to such amounts if the U.S. investor fails to (i) provide a correct taxpayer identification number, (ii) report interest and dividends required to be shown on its U.S. federal income tax return, or (iii) make other appropriate certifications in the required manner. U.S. investors who are required to establish their exempt status generally must provide such certification on IRS Form W-9.

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Backup withholding is not an additional tax. Amounts withheld as backup withholding from a payment may be credited against a U.S. investor’s U.S. federal income tax liability and such U.S. investor may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.

Effective Corporate Tax Rate

Our effective tax rate in Israel was 0% in each of the years 2011-2016 (the regular rate of corporate tax being 24% in 2011, 25% in 2012 and 2013 and 26.5% in 2014 and 2015 and 25% in 2016).

Each prospective investor is advised to consult such person’s own tax advisor with respect to the specific tax consequences to such person of purchasing, holding or disposing of ordinary shares.

F.Dividends and Paying Agents

Not applicable

G.Statement by Experts

Not applicable

H.Documents on Display

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill the obligation with respect to such requirements by filing reports with the Securities and Exchange Commission. You may inspect and copy such material at the public reference facilities maintained by the Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of such material from the Securities and Exchange Commission at prescribed rates by writing to the Public Reference Section of the Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference room. The Securities and Exchange Commission maintains an Internet website at http://www.sec.gov that contains reports, proxy statements, information statements and other material that are filed through the Securities and Exchange Commission’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. We began filing through the EDGAR system on December 2, 2002.

As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. However, we generally do publicly announce our year-end results promptly and file annual report on Form 20-F containing financial statements audited by an independent accounting firm (commencing with the fiscal year ending December 31, 2012 within 180 days within four months after the end of each fiscal year) and file periodic information with the SEC under cover of Form 6-K. A copy of each report submitted in accordance with applicable United States law is available for public review at our principal executive offices.

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Any statement in this annual report about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the registration statement, the contract or document is deemed to modify the description contained in this annual report. We urge you to review the exhibits themselves for a complete description of the contract or document.

Our website is http://www.evs.co.il. We do not intend for any information contained on our internet website to be considered part of this annual report, and we have included our website address in this annual report solely as an inactive textual reference.We will post on our website any materials required to be posted on such website under applicable corporate or securities laws and regulations, including posting any XBRL interactive financial data required to be filed with the SEC, and any notices of general meetings of our shareholders.

I. Subsidiary Information

Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

In the course of our normal operations, we are exposed to market risks including fluctuations in foreign currency exchange rates, interest rates. Other than if we deem it to be necessary, we do not invest in derivative financial instruments or other market risk sensitive instruments.

Foreign Currency Exchange

The majority of our revenues is generated in, or linked to, U.S. Dollars. In addition, a substantial portion of our costs is incurred in NIS. We believe that the Dollar is the currency of the primary economic environment in which we operate. Thus, our functional and reporting currency is the Dollar.

Our operating and pricing strategies take into account changes in exchange rates over time. However, there can be no assurance that future fluctuations in the value of foreign currencies will not have an adverse material effect on our business, operating results or financial condition.

Market risk was estimated as the potential change in fair value resulting from a hypothetical 10% change in the year-end Dollar exchange rate.

As of December 31, 2016, we had accounts payable in NIS or in funds linked thereto in the amount of $0.54 million. Market risk was estimated as the potential increase in fair value resulting from a hypothetical 10% decrease in the year-end NIS/Dollar and the Euro/Dollar exchange rate. Assuming such decrease in the NIS/Dollar and the Euro/Dollar exchange rate, the fair value of our accounts payable would increase by $60 thousand.

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We do not presently engage in any hedging or other transactions intended to manage the risks relating to foreign currency exchange rate or interest rate fluctuations. However, we may in the future undertake such transactions, if management determines that it is necessary to offset such risks.

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to funds borrowed by us from banks and others. As of December 31, 2016 we had liabilities in the amount of $0.52 million. Market risk was estimated as the potential increase in fair value of our liabilities resulting from a hypothetical 10% increase in the year-end interest rate of our liabilities. Assuming such increase in the interest rates, the fair value of our cash and cash equivalents would decrease by approximately $2 thousand.

Israeli CPI Risk

Our exposure to market rate risk for changes in the Consumer Price Index, or CPI, relates primarily to funds we owe to the OCS and under the Ministry of Economics Program.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

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

None.

ITEM 15.CONTROLS AND PROCEDURES

Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of December 31, 2016 , have concluded that, as of such date, our disclosure controls and procedures were effective to ensure that the information required in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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(a) Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our chief executive officer and chief financial officer to allow timely decisions regarding required disclosure. Our management, including our chief executive officer and chief financial officer, conducted an evaluation of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), as of the end of the period covered by this Annual Report on Form 20-F. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effective.

 (b) Management's Annual Report on Internal Control over Financial Reporting

Our management, under the supervision of our chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Our company’s internal control over financial reporting is defined as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that:

— pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions;

— provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

— provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the framework for Internal Control-Integrated Framework set forth by The Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our company’s internal controls over financial reporting were effective as of December 31, 2016.

89

This management report on internal control over financial reporting shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or otherwise subject to the liabilities of that Section.

(c) Attestation Report of the Registered Public Accounting Firm

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting pursuant to amendments to the rules and forms of the Securities and Exchange Commission that were adopted in order to conform them to Section 404(c) of the Sarbanes-Oxley Act of 2002, as added by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection that permit us to provide only management’s report in this Annual Report.

(d) Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting identified with the evaluation thereof that occurred during the period covered by this annual report that have materially affected, or are reasonable likely to materially affect our internal control over financial reporting.

ITEM 15T.Controls and Procedures

Not applicable.

ITEM 16.[RESERVED]

ITEM 16.A.Audit Committee Financial Expert

Our board of directors has determined that Mr. Yaky Yanay is our audit committee financial expert and is independent in accordance with applicable Securities and Exchange Commission regulations.

ITEM 16.B. Code of Ethics

Our board of directors has adopted a code of ethics, which applies to all of our employees, officers and directors, including our chief executive officer, our chief financial officer and our principal accountant. We undertake to provide any person with a copy of our code of ethics, free of charge, upon written request.

ITEM 16.C. Principal Accountant Fees and Services

The following table presents fees for professional audit services rendered by our principal accountants, Brightman Almagor, Zohar & Co., for the audit of our consolidated annual financial statements for the years ended December 31, 2015 and December 31, 2016.

	2015		2016
Audit Fees (1)		33,000		33,000
Audit-Related Fees
Tax Fees				2,000
Other Fees		-		1,000
Total		33,000		36,000

(1) Includes annual audit services provided by the Company's independent auditor and assistance in preparation of OCS reports.

90

Pre-approval Policies and procedures

The audit committee approves all audit, audit-related services, tax services and other services provided by Brightman Almagor, Zohar & Co. Any services provided by Brightman Almagor, Zohar & Co. that are not specially included within the scope of the audit must be pre-approved by our audit committee prior to any engagement.

ITEM 16.D. Exemptions from the Listing and Standards of Audit Committees

Not applicable.

ITEM 16.E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Not applicable.

ITEM 16.F.Changes in Registrant's Certifying Accountant

Not applicable.

ITEM 16.G.Corporate Governance

Not applicable.

Item 16H.   Mine Safety Disclosure

Not Applicable.

PART III

ITEM 17.FINANCIAL STATEMENTS

Not applicable.

ITEM 18.FINANCIAL STATEMENTS

See pages F-1 to F-26.

ITEM 19.EXHIBITS

1.1 Articles of Association, as amended, of the Registrant. (*)

1.2 English summary from Hebrew original Memorandum of Association of the Registrant, incorporated by reference to our Registration Statement on Form F-1, File No. 333-03080, as amended, filed with the Commission on April 2, 1996.

91

4.1 Creditor Agreement between the Company and ScanMaster Systems (IRT) Ltd., incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010.

4.2 Loan Agreement between the Company and M.S.N.D. Real Estate Holdings Ltd. dated May 27, 2010, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010.

4.3 Debt Restructure Agreement between the Company and Bank Leumi LeIsrael Ltd. (English summary of the Hebrew language agreement.), incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010.

4.4 Framework Agreement between the Company and Bank Hapoalim Ltd. (English summary of the Hebrew language agreement), incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010.

4.5 Debt Restructure Agreement between the Company and Bank Hapoalim Ltd. (English summary of the Hebrew language agreement), incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010.

4.6 Loan Undertaking between the Company and Sam Cohen dated June 3, 2010, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010.

4.7 Loan Undertaking between the Company and Yaron Menashe dated June 3, 2010, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010.

4.8 Securities Purchase Agreement between the Company and Avi Gross dated December 11, 2012, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on April 29, 2013.

4.9 Registration Rights Agreement between the Company and Avi Gross dated December 11, 2012, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on April 29, 2013.

4.10 Convertible Loan Agreement between the Company and Avi Gross dated December 11, 2012, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on April 29, 2013.

4.11 Warrant dated December 11, 2012, issued to Avi Gross, exercisable for up to $200,000 of the Company’s ordinary shares, at a price per share of $0.095, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on April 29, 2013.

92

4.12 Warrant dated December 11, 2012, issued to Avi Gross, exercisable for up to $1,000,000 of the Company’s ordinary shares, at a price per share of $0.20, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on April 29, 2013.

4.13 Securities Purchase Agreement between the Company and SMD Advanced Technologies Ltd. dated July 10, 2014, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, filed with the Commission on April 30, 2015.

4.14 Warrant dated July 9, 2014, issued to SMD Advanced Technologies Ltd, exercisable for up to 1,250,000 of the Company’s ordinary shares, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, filed with the Commission on April 30, 2015.

4.15 Warrant dated November 26, 2014, issued to SMD Advanced Technologies Ltd, exercisable for up to 833,334 of the Company’s ordinary shares, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, filed with the Commission on April 30, 2015.

4.16 The Executive Compensation Policy of the Registrant, as amended, approved by the shareholders on December 2, 2013 and January 12, 2015, incorporated by reference to Annex A to Proposal 1 found in Exhibit 1 to the Form 6-K as filed with the Commission on October 24, 2013 and to Form 6-K filed with the Commission on December 11, 2014, respectively.

4.17 English summary from Hebrew original lease agreement between the Registrant and Gav Yam Cesarea Ltd. for the lease of the Registrant's headquarter and manufacturing facilities in Cesarea, Israel, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, filed with the Commission on March 29, 2016.

8.1 List of subsidiaries. (*)

12.1 Certification by Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. (*)

12.2 Certification by Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. (*)

13.1 Certification by Chief Executive Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (*)

13.2 Certification by Chief Financial Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (*)

15.1 Consent of Deloitte Brightman Almagor, certified public accountants (Israel). (*)

(*) Filed herewith.

93

SIGNATURES

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

April 6, 2017

ELBIT VISION SYSTEMS LTD.

By: /s/ Sam Cohen

Sam Cohen

Chief Executive Officer

94

ELBIT VISION SYSTEMS LTD.

(An Israeli Corporation)

2016 CONSOLIDATED FINANCIAL STATEMENTS

ELBIT VISION SYSTEMS LTD.

2016 CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets as of December 31, 2016 and 2015	F-3 - F-4
Statements of operations for the year ended December 31, 2016, 2015 and 2014	F-5
Statements of changes in shareholders’ equity for the years ended December 31, 2016, 2015 and 2014	F-6
Statements of cash flows for the year ended December 31, 2016, 2015 and 2014	F-7 - F-8
Notes to Financial Statements	F-9 - F-26

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Elbit Vision Systems Ltd.

We have audited the accompanying consolidated balance sheets of Elbit Vision Systems Ltd. and subsidiaries ("the Company") as of December 31, 2016 and 2015, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

Brightman Almagor Zohar & Co.

Certified Public Accountants

A member firm of Deloitte Touche Tohmatsu Limited

Tel Aviv, Israel

April 6, 2017

F - 2

ELBIT VISION SYSTEMS LTD.

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

		December 31,
	Note	2 0 1 6		2 0 1 5
Assets
CURRENT ASSETS:
Cash and cash equivalents			4,528		3,305
Restricted deposit (short term)	11A		111		69
Trade account receivables (net of allowance for doubtful account 2016- $61 thousands, 2015- $85 thousands)	12A1		1,136		1,383
Other receivables	12A2		286		78
Inventories	3		1,651		1,419
Total current assets			7,712		6,254
INVESTMENTS AND LONG-TERM RECEIVABLES:
Severance pay fund	6		140		193
Other long-term receivables and investment	4		35		67
			175		260
PROPERTY AND EQUIPMENT (net of accumulated depreciation and amortization)	5		29		36
OTHER ASSETS
Goodwill			242		242
Total assets			8,158		6,792

The accompanying notes are an integral part of the financial statements

F - 3

ELBIT VISION SYSTEMS LTD.

CONSOLIDATED BALANCE SHEETS (Cont.)

U.S. dollars in thousands

		December 31,
	Note	2 0 1 6			2 0 1 5
Liabilities and shareholders’ equity
CURRENT LIABILITIES:
Credit from banks	12C		-			149
Trade account payable			776			1,171
Deferred revenues	2I(3)		231			324
Other payables	12B		1,031			441
Total current liabilities			2,038			2,085
LONG-TERM LIABILITIES:
Long term loans (net of current maturities)	7		-			373
Other Long Terms Liabilities	8		165			429
Accrued severance pay	6		155			206
Total long-term liabilities			320			1,008
Total liabilities			2,358			3,093
SHAREHOLDERS' EQUITY:	9
Share capital - ordinary shares of NIS 10 par value (“Ordinary Shares”); Authorized - 12,000,000 Ordinary Shares as of December 31, 2016 and 2015 Issued and outstanding:
December 31, 2016 – 9,347,780 Ordinary shares (*)  December 31, 2015 – 9,320,725 Ordinary shares (*)			21,904			21,837
Additional paid-in capital			22,016			22,006
Accumulated deficit			(38,120	)		(40,144	)
Total shareholders’ Equity			5,800			3,699
Total liabilities and shareholders’ Equity			8,158			6,792

(*) Share data is retroactively adjusted to reflect 1 to 10 reverse stock split (refer to Note 15)

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

F - 4

ELBIT VISION SYSTEMS LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

		Year ended December 31,
	Note	2 0 1 6			2 0 1 5			2 0 1 4
Revenues:
Sale of products		9,234				8,085			5,718
Services rendered		912				1,043			926
			10,146			9,128			6,644
Cost of revenues:	12D
Cost of products sold			3,790			3,072			2,514
Cost of services rendered			740			810			631
			4,530			3,882			3,145
Gross profit			5,616			5,246			3,499
Research and development			1,378			765			560
Marketing and selling			1,254			1,411			1,187
General and administrative			826			808			729
Operating Profit			2,158			2,262			1,023
Financial expenses  - net	12E		(134	)		(144	)		(365	)
Profit before taxes on income			2,024			2,118			658
Taxes on income	10		-			-			-
Net Profit for the year			2,024			2,118			658
Profit per share:
Basic earnings per share			0.22			0.25			0.08
Diluted earnings per share			0.21			0.25			0.08
Weighted average number of shares used in
Computation of Profit per share  (*) –
Basic (in thousands)			9,338			8,546			8,218
Diluted (in thousands)			9,593			8,568			8,352

(*) Share data is retroactively adjusted as if the reverse stock split occurred at the beginning of the earliest Presented (refer to Note 15)

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

F - 5

ELBIT VISION SYSTEMS LTD.

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIENCY)

U.S. dollars in thousands

	Share capital				Additional						Total
	Number				paid-in			Accumulated			shareholders’
	of shares (***)		Amount		Capital			deficit			Equity (Deficiency)
	In thousands
BALANCE - January 1, 2014		8,080		18,554		23,494			(42,920	)		(872	)
CHANGES DURING 2014:
Profit for the year		-		-		-			658			658
Issuance of share capital and warrants (note 9a)(*)		438		1,221		(991	)		-			230
Reclassification of warrants to equity		-		-		330			-			330
Share based compensation expenses		-		-		41			-			41
BALANCE - DECEMBER 31, 2014		8,518		19,775		22,874			(42,262	)		387
Profit for the year		-		-		-			2,118			2,118
Issuance of share capital and warrants (note 9a)(**)		784		2,015		(867	)		-			1,148
Exercise of Share based compensation		19		47		(37	)		-			10
Share based compensation expenses		-		-		36			-			36
BALANCE - DECEMBER 31, 2015		9,321		21,837		22,006			(40,144	)		3,699
CHANGES DURING 2016:
Profit for the year		-		-		-			2,024			2,024
Exercise of Share based compensation		27		67		(43	)		-			24
Share based compensation expenses		-		-		53			-			53
BALANCE - DECEMBER 31, 2016		9,348		21,904		22,016			(38,120	)		5,800

(*) Net of share issuance costs in the amount of $20.

(**) Net of share issuance costs in the amount of $20.

(***) Share data is retroactively adjusted to reflect 1 to 10 reverse stock split (refer to Note 15)

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

F - 6

ELBIT VISION SYSTEMS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,
	2 0 1 6			2 0 1 5			2 0 1 4
Cash flows from operating activities:
Net profit		2,024			2,118			658
Adjustments to reconcile net profit to
Net cash provided by operating activities:
Depreciation and amortization		14			6			13
Revaluation of convertible loan and warrants		-			-			285
Liability for employee rights upon retirement		2			-			(5	)
Stock based compensation		53			36			41
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable		247			(482	)		112
Decrease in other accounts receivable		(208	)		32			10
Increase (decrease) in trade accounts payable		(395	)		534			(101	)
Changes in Deferred income		(93	)		(254	)		540
Increase (decrease) in other accounts payable		590			(16	)		(21	)
Increase in inventories		(232	)		(454	)		(100	)
Net cash provided by operating activities		2,002			1,520			1,432
Cash flows from investing activities:
Purchase of property and equipment		(7	)		(15	)		(9	)
Long-term receivables		32			12			8
Investment in restricted deposit		(42	)		(25	)		(10	)
Net cash used in investing activities		(17	)		(28	)		(11	)

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

F - 7

ELBIT VISION SYSTEMS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)

U.S. dollars in thousands

	Year ended December 31,
	2 0 1 6			2 0 1 5			2 0 1 4
Cash flows from financing activities:
Issuance of share capital and warrants - net of issuance costs		24			1,158			230
Short-term credit from bank – net		(149	)		(34	)		-
Repayments of loan from Shareholder		-			-			(200	)
Repayments of Long- terms loan		(264	)		(170	)		(354	)
Repayments of Long- terms loan from banks and other		(373	)		(208	)		(182	)
Net cash provided by (used in) financing activities		(762	)		746			(506	)
Net increase in cash and cash equivalents		1,223			2,238			915
Balance of cash and cash equivalents at Beginning of year		3,305			1,067			152
Balance of cash and cash equivalents at end of year		4,528			3,305			1,067
Non cash activities:
Reclassification of warrants to equity		-			-			330
Supplemental disclosure of cash flow
Information - cash paid during the year for:
Interest paid - net		20			19			39

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

F - 8

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 1   -      GENERAL

Elbit Vision Systems Ltd. (the “Company”) is an Israeli corporation, which, together with its subsidiaries (the “Group”), is principally engaged in the design, development, manufacturing and marketing automatic vision inspection and quality monitoring systems, and rendering services related to those systems.

Elbit Vision Systems Inc. (“EVS Inc.”) incorporated in Delaware U.S.A. is wholly-owned subsidiary, engaged in the selling and marketing of the Company’s products worldwide.

In September 2004, the Company completed the acquisition of the entire shareholding of ScanMaster Systems (IRT) Ltd. (“ScanMaster Ltd.”), an Israeli company and IRT ScanMaster System Inc. (“ScanMaster Inc.”), a New Hampshire corporation (collectively - “ScanMaster”).  ScanMaster is engaged in the development, manufacturing and marketing of equipment for the ultrasonic inspection of industrial parts and components for the automotive and transportation industries, the metal industry as well as applications for aircraft and jet engine inspection. During May 2010, the company sold all its shares in Scanmaster.

In 2009 the Company experienced significant difficulties in sales and incurred heavy losses that led the Company to sell its investment in ScanMaster Ltd. and the Assets and Liablities of ScanMaster Inc. The purchasers repay loan of $550 thousands in cash and undertook to repay the Company the sum of $675 thousands in satisfaction of all remaining debt owed by ScanMaster Ltd. to the Company, over a period of 10 years in equal quarterly installments starting January 1, 2011.Following this Loan agreement, in 2012 the loan was reduced in $450 thousands.

In connection with the sale the Company restructured its debt with the Banks. Pursuant to the agreements the banks forgave part of the debt such that the Company's remaining debt is $1.6 million dollars over a period of 10 years started January 1, 2011. During 2016 the Company repaid its bank loans.

NOTE 2   -      SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements are prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America.

A. Use of estimates in the preparation of financial statements:

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting years.  Actual results could differ from those estimates.

Estimates and assumptions which, in the opinion of management, are significant to the underlying amounts included in the financial statements and for which it would be reasonably possible that future events or information could change those estimates include: (i) impairment assessments of goodwill and long-lived assets; (ii) realization of deferred income tax assets; and (iii) provisions for obsolete and slow moving inventory. These estimates are discussed further throughout the accompanying notes.

F - 9

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 2   -      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

B. Functional Currency and Financial Statements in U.S. Dollars:

The currency of the primary economic environment in which operations of the company and its subsidiaries are conducted is the U.S. dollar (the “dollar”).

Virtually all sales by the Company and its subsidiaries are made outside Israel in non-Israeli currencies, mainly the dollar.  Most purchases of materials and components are made in dollars or in Israeli currency under contracts linked to the dollar. In addition, most marketing and service costs are incurred outside Israel, primarily in dollars, through the Company’s wholly-owned non-Israeli subsidiaries. Thus, the functional currency of the Company and its subsidiaries is the dollar.

Transactions in currencies other than each company's functional currency are translated based on the average currency exchange rates in accordance with the principles set forth in ASC 830-10, "Foreign Currency Translation".  All gains and losses from translation of monetary balance sheet items and transactions denominated in currencies other than the functional currency are recorded in the statements of income as financial income, net as they arise.

C. Principles of consolidation:

The consolidated financial statements include the financial statements of the company and its wholly-owned subsidiaries.

All material inter-company transactions and balances have been eliminated.

D. Cash Equivalents:

Cash equivalent consist of short-term highly liquid investments, that are readily convertible into cash with original maturities when purchased of three month or less.

E. Allowance for doubtful accounts:

The allowance for doubtful accounts has been made on the specific identification basis.

F. Inventories:

Inventories are stated at the lower of cost or market.  Cost is determined as follows:

Raw materials and spare parts - on moving average basis.

Products in process and finished products – on basis of production costs.

Inventories are written-down for estimated obsolescence, based on assumptions about future demand and market conditions.

G. Property and equipment:

(1) Property and equipment are stated at cost. Depreciation is calculated by the straight-line method over the estimated useful lives of assets, as follows:

	%
Machinery and equipment	10-33 (mainly 33%)
Office furniture and equipment	6-20
Vehicles	15-20

Leasehold improvements are amortized by the straight-line method over the term of the lease, or the estimated useful life of the improvements, whichever is shorter.

F - 10

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 2   -      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

G. Property and equipment: (Cont.)

(2) Impairment of long-lived assets - Impairment examinations and recognition are performed and determined based on the provisions of ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets” ("ASC 360-10"). ASC 360-10 requires that long-lived assets and certain identifiable assets held for use be reviewed for impairment on a periodic basis, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of an asset to be held and used is determined by a comparison of the carrying amount of the asset and the amount of undiscounted future net cash flows to be generated by the asset or assets group.  In the event that an asset is considered to be impaired, an impairment charge is recorded in the amount by which the carrying amount of the asset exceeds its estimated fair value.

H. Other assets- Goodwill and Intangible Assets:

· Goodwill

Under ASC 350-20, “Goodwill and Other Intangible Assets” ("ASC 350-10"), goodwill is not amortized to earnings, but rather is subject to periodic testing for impairment, at the reporting unit level, at least annually or more frequently if certain events or indicators of impairment occur.  Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.  Measurement of an impairment loss is an estimate, performed based on the following:  If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired.  If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.  The Group uses the discounted cash flow method to determine the fair value of the reporting unit.

The Company has designated December 31 of each year as the date on which it will perform its annual goodwill and impairment test.

I. Revenue recognition:

(1) Sale of products:

(a) General

Revenues from sales of products and supplies are recognized when an arrangement exists, delivery has occurred and title passed to the customer, Group’s price to the customer is fixed or determinable and collectibility is reasonably assured.

In some cases, the Company grants its customers a trial period, usually several months, in order to evaluate prototype of the system’s performance. In case that the systems performance meets the customer’s requirements, it purchases the system at the end of the trial period. The Company does not recognize sales revenue from products shipped to customers for trial until such products are actually purchased. Until purchased, these products are recorded as consignment inventory at the lower of cost or market as of December 31, 2016 the Company has $148 thousands in consignment.

F - 11

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 2   -      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

I. Revenue recognition: (Cont.)

(1) Sale of products: (Cont.)

(b) Right of return

The Group does not provide, in the normal course of business, a right of return to its customers.

(c) Multiple Deliverables

The Company's multiple deliverable arrangements consist primarily of tangible products and professional services. The Company is unable to establish VSOE for all deliverables in an arrangement with multiple elements. Further, the Company is unable to reliably determine what similar competitor products’ and services' selling prices are on a standalone basis and therefore is not able to determine TPE. As the Company is unable to establish VSOE or TPE, it uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a standalone basis. The Company determines BESP for a product or a service based on its past and current pricing practices. The determination of BESP is made through consultation with and formal approval by the Company’s management. We have establish processes to update BESP for each element, when appropriate, to ensure that it reflects recent pricing experience.

(2) Services rendered

Service revenue in respect of the Group’s products is recognized ratably over the contractual period, or as services are performed.

(3) Deferred income

The deferred income balance as of December 31, 2016 and 2015 include amounts of revenues that were invoiced and cash was received, but deferred due to elements of the arrangements not yet delivered as of year end.

J. Research and development:

Research and development expenses net of third party grants, are expensed as incurred.

The Company has no obligation to repay the grants if sales are not generated.

K. Advertising expenses:

Advertising expenses are expensed as in incurred. Advertising expenses for the years ended December 31, 2016, 2015 and 2014 were $ 103 thousands, $ 109 thousands and $ 52 thousands, respectively.

F - 12

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 2   -      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

L. Deferred income taxes:

The company accounts for income taxes in accordance with ASC 740-10, “Accounting for Income Taxes” ("ASC 740-10").  Deferred income taxes are determined by the asset and liability method based on the estimated future tax effects attributable to temporary differences between income tax bases of assets and liabilities and their reported amounts in the financial statements, and to carryforwards for tax losses and deductions.  Deferred tax balances are computed using the enacted tax rates to be in effect at the time when these differences are expected to reverse, as they are known at the balance sheet date.

Deferred tax assets and liabilities are classified as current or non-current according to the classification of the respective asset or liability, or the expected reversal date of the specific temporary difference, if not related to a specific asset or liability.

Valuation allowances in respect of deferred tax assets are established when it is more likely than not that all or a portion of the deferred income tax assets will not be realized.

M. Earning per share (“EPS”):

Basic and diluted net income per share are presented in conformity with ASC 260 ("Earnings per Share") for all years presented. Basic net income per share have been computed using the weighted-average number of ordinary shares outstanding during the year. In computing diluted earnings (loss) per share, the potential dilutive effect of outstanding equity awards is taken into account using the treasury stock method.Outstanding share options and shares issued and reserved for outstanding share options have been excluded from the calculation of basic and diluted net income per share to the extent such securities are anti-dilutive. The total number of options to purchase shares, excluded from the calculations of diluted net income per share, were 61,250, 278,401 and 0 for the years ended December 31, 2016, 2015 and 2014, respectively.

N. Stock-based compensation:

The Company recognizes $ 53 thousands of compensation expenses in 2016 as a result of the application of ASC 718-10. According to "share base compensation" accounting, the Company recorded compensation for stock options granted to employees and directors over the vesting period of the options based on the difference, if any, between the exercise price of the options and the market price of the underlying shares at that date.

As to information about the stock option plans and assumptions see Note 9b.

O. Reclassification:

Certain comparative figures have been reclassified to conform to the current year presentation.

P. Consentration of credit risk:

As of December 31, 2016 and 2015, the Group held cash and cash equivalents and short-term bank deposits, most of which were deposited with major Israeli, European, and U.S. banks. The Company is of the opinion that the credit risk in respect of these balances is insignificant.

The Group performs ongoing credit evaluations of its customers for the purpose of determining the appropriate allowance for doubtful accounts. In respect of sales to customers in emerging economies, the Group requires letters of credit from banks.

Q. Issuance of shares, warrants and a convertible note to an investor:

The December 2012 Agreement (see note 9A (3)), included a share, convertible debt instrument with stock warrants, and a beneficial conversion features. Under ASC 470-20-25, the Company separated the shares, debt instruments and the warrants based on their relative fair value for the liability components and for the equity components. The company accounted for the first warrants as an equity component and the second warrants as a liability component under the provision of ASC 815-10. In addition, the Company concluded that the liability component includes beneficial conversion features. Under ASC 470-20-25, issuers of certain debt instruments with beneficial conversion features need to allocate to an equity component. The Company separated it accordingly.

F - 13

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 3   -      INVENTORIES

Composition:

	December 31,
	2 0 1 6		2 0 1 5
Raw materials		1,379		1,066
Work in process		105		177
Finished products		167		176
		1,651		1,419

The balances are net of write-down of $643 thousands as of December 31, 2016 and 2015.

NOTE 4   -      OTHER LONG-TERM RECEIVABLES AND INVESTMENT

Composition:

	December 31,
	2 0 1 6		2 0 1 5
Deposits on leased vehicle and other (see also Note 8b2)		8		11
Loan to non-affiliated companies (see Note 1)		27		56
		35		67

NOTE 5   -      PROPERTY AND EQUIPMENT

A. Comprised as follows:

	December 31,
	2 0 1 6		2 0 1 5
Machinery and equipment		1,732		1,725
Leasehold improvements		24		24
Office furniture and equipment		44		44
		1,800		1,793
Less - accumulated depreciation and amortization		1,771		1,757
Net book value		29		36

B. Depreciation and amortization expenses totaled $14 thousands, $6 thousands, and $13 thousands, in the years ended December 31, 2016, 2015 and 2014, respectively.

NOTE 6   -      ACCRUED SEVERANCE PAY, NET

A. The Company's liability for severance pay is calculated in accordance with Israeli law based on the latest salary paid to employees and the length of employment in the Company.

Part of the liability is funded through individual insurance policies.

The policies are assets of the Company and, under labor agreement subject to certain limitation, they may be transferred to ownership of the beneficiary employees.

B. A U.S. subsidiary provides defined contribution plan for the benefit of its employees.  Under this plan, contributions are based on specific percentages of pay.

F - 14

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 7   -      LONG TERM LOANS

A. Composed as follows:

	December 31,
	2 0 1 6		2 0 1 5
Loans from banks		-		373

In June 2010, the Company signed new agreements with Bank Le'umi Le'Israel Ltd and Bank Hapoalim Ltd (the "Banks"), for the restructuring of its bank debt. Pursuant to the agreements with the Banks, the Banks forgave approximately $2.4M of debt from the Company and its subsidiary ScanMaster Systems (IRT) Ltd. ("ScanMaster Ltd."), and have agreed to the repayment by the Company of $1 million over 5 years and a further $600 thousands over 10 years.

In May 2010 the Company signed agreements with its major shareholders to loan US $100 thousands. The loan is repayable upon fulfillment of certain conditions (as further elaborated in the agreement) aimed to ensure the Company achieved financial stability prior to repayment.

Further, the Company's major shareholders agreed to delay payment of the first US $100 thousands of their salary until July 2011, at which time the company shall repay them in three equal monthly installments. In September 2016, the Company repay all its banks loans.

In May 2010 the Company signed loan agreement with Mivtach (former Shareholder) of approximately $850 thousands to which the Company will repay the loan over five years in equal quarterly installments, plus interest at the US Dollar annual LIBOR rate. The Company pay the last payment in October 2015.

B. The liabilities (net of current maturities) mature in the following years after the balance sheet dates:

	December 31,
	2 0 1 6		2 0 1 5
2016		-		149
2017		-		149
2018 and thereafter		-		75
		-		373

F - 15

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 8   -      OTHER LONG TERMS LIABILITIES

A. Royalties:

(1) The Company is committed to pay royalties to the Government of Israel based on proceeds from sales of products in the research and development of which the Government participates by way of grants.  At the time the grants were received, successful development of the related projects was not assured.

In the case of failure of a project that was partly financed as above, the Company is not obligated to pay any such royalties.

Under the terms of the Company’s funding from the Israeli Government, royalties of 3%-5% are payable on sales of products developed from a project so funded, up to 100% of the amount of the grant received by the Company (dollar linked); as from January 1, 2001 - with the addition of an annual interest rate based on Libor.

(2) The Company is committed to pay royalties to the Government of Israel in respect of marketing expenses in which the Government participated by way of grants.  At the time the grants were received, successful development of the related projects was not assured.  In the case of failure of a project that was partly financed as above, the Company is not obligated to pay any such royalties.  The royalties are payable at the rate of 4% of the increase in export sales, up to the amount of the dollar-linked grant received.  No royalties were paid in the reported years to the Government of Israel.

On November 7, 2007, the Company received a letter from the Ministry of Trade, Industry and Labor - Fund for the Encouragement of Marketing Abroad (the “Fund”), claiming that it had failed to pay royalties to the Fund since 1999 in the aggregate amount of $480 thousands. On November 21, 2007, the Company sent a letter to the Fund in which it stated that the Fund had not requested any of these royalties for many years despite the Company's written request to clarify the issue. In its letter the Company stated that a material amount of the royalties could no longer be claimed due to the operation of the statute of limitations and that in any event the Fund may be estopped from making at least part of the claims as a result of its non-response to the Company's inquiry. On December 18, 2007, the Company met with representatives of the Fund to discuss the issue. The Company have yet to receive a response to the meeting. The Company recorded an allowance of $ 90 thousands on acount of this claim.

On March 3, 2013, the Company received an email notification which was sent on behalf of the Ministry stating that the Company had received funding from the Fund in the past and requesting information relating to the Company's export revenues. The Company has not responded.

The maximum royalty amount payable the Company expects to pay to the Government of Israel under 1 and 2 above, at December 31, 2016 is approximately $215 thousands.

In January 2011 the Company signed an agreement with the office of the Chief  scientist of to repay the Copmany debt during the next ten years with monthly installment of $9.4 thousands (36 thousands NIS) per month.

F - 16

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 8   -      OTHER LONG TERMS LIABILITIES (Cont.)

B. Lease commitments

(1) The premises occupied by the Company and certain subsidiaries are rented under various operating lease agreements. The lease agreements for the premises expire in 2021.

To secure the amounts due to the lessor, the Company has deposited a total of $ 28 thousands.

Minimum lease commitments of the Company and the subsidiaries under the above leases, at rates in effect as of December 31, 2016, are as follows:

	$ in thousands
Year ending December 31:
2017		105
2018		95
2019		95
		295

The rental payments for the premises in Israel, which constitute most of the above amounts, are payable in Israeli currency linked to the US Dollar.

Rental expenses totaled $87 thousands, $86 thousands, and $92 thousands in the years ended December 31, 2016, 2015 and 2014, respectively.

(2) The Company leases motor vehicles under long-term operating lease agreements. The lease agreements expire on various dates ending in 2016 - 2018 (with prior notice of cancellation clauses).

Minimum lease commitments of the Company under the above leases, at rates in effect on December 31, 2016, are as follows:

	$ in thousands
2016		68
2017		36
2018		9
		113

To secure the amounts due to the lessor, the Company has deposited a total of $ 8 thousand. The deposits are unlinked and presented among other long-term receivables.

Lease expenses in 2016, 2015 and 2014, amounted to $94 thousands, $102 thousands and $98 thousands respectively.

C. Guarantees

As of December 31, 2016, the Company gave $83 thousands guarantees to its customers.

F - 17

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 9   -      SHAREHOLDER’ EQUITY

A. Authorized, issued and outstanding shares

(1) The Company’s Ordinary Shares are traded in the United States on the OTC Bulletin Board market under the symbol EVSNF.OB.

(2) In December 2012, The Company issued Mr. Gross some financial instruments in consideration of $760 thousands (net of $40 thousands issuance expenses) which include shares, warrants and a convertible note. The Company issued 526,316 ordinary shares for $0. 95 per share. The Company also issued warrants ("The first warrants") to purchase 210,526 of the Company's ordinary shares at an exercise price per share of $0.95 amounting $200 thousands, vested in fully upon issuance, exercisable through February 2015. The Convertible Note Agreement is on the principal amount of $300 thousands. The maturity date of the Note is, May 2013, after the maturity date the conversion option expires, and the loan is supposed to be returned in 12 monthly installments.

(3) The Note bears interest at a per annum rate of Libor rate. The Note and accrued interest are convertible to common stock of the Company at a conversion rate of $0.95 per share. In case that Mr. Gross would convert more than 50% of the aggregated amount of the principal amount of the convertible note and the first warrants, the Company would issue Mr. gross warrants ("the second warrants"). The principal amount of the second warrants would be in proportion to percentage converted/exercised from the principal amount of the convertible note and the first warrants. The second warrants could amount up to $1 miilion of the Company's ordinary shares at an exercise price per share of $1.7 or $2 depends on The company's revenue on the year ended 2014. The second warrants would be vested in fully upon issuance, exercisable through February 2015.

In May 2013 Mr. Gross convert the convertible note to Company's shares and the Company reduces the Conversion rate to $0.85 and postponed the exercisable date of the second warrants to December 2015. In August 2014 the Company set the exercise price of the second warrants to $1.7 accordingly, the Company reclassified the warrants to Equity. On December 31,2015 Mr. Gross exercise the second warrants for $1.7 per share

(4) In July 2014 The Company issued shares 416,667 to SMD Advanced Technologies Ltd. (“SMD”) controlled by Mr. Yaacov Kotlicki, and warrants to purchase another 183,334 shares for a price of $147 thousand valid until July 2017. During December 2015, SMD exercise its warrants.

F - 18

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 9   -      SHAREHOLDER’ EQUITY (Cont.)

B. Share option plans:

(1) The plans:

(a) In March 2006, the Board of Directors of the Company adopted the Employee Share Option Plan (2006) (hereafter - The 2006 Plan).

Under the 2006 plan, options to purchase an aggregate of 200,000 ordinary shares are available to be awarded to employees, directors or consultants of the Company or any of its subsidiaries. The Board of the Company increase the aggregate number of option to 450,000 for 2006 plan.

Under the 2006 plan, options usually exercisable over a period up to ten years following the date of grant, if not exercised earlier, or 6 months after termination of the employment, will generally vest as to 25-33% commencing the beginning of the second year after the grant and as to an additional 25-33% in each of the remaining years thereafter, assuming continuous employment with the Company through such periods.

The 2006 Plan is valid for ten years and will expire in March, 2016, except for options outstanding on that date.

(b) In August 2016, the Board of Directors of the Company adopted the Employee Share Option Plan (2016) (hereafter - The 2016 Plan).

Under the 2016 plan, options to purchase an aggregate of 250,000 ordinary shares are available to be awarded to employees, directors or consultants of the Company or any of its subsidiaries

Under the 2016 plan, options usually exercisable over a period up to ten years following the date of grant, if not exercised earlier, or 3 months after termination of the employment, will generally vest as to 25-33% commencing the beginning of the second year after the grant and as to an additional 25-33% in each of the remaining years thereafter, assuming continuous employment with the Company through such periods.

All of the outstanding options from the 2006 and 2016 plan are to expire no later than 10 years following the date of grant.

During 2015 and 2016, 19,000 and 25,389 options were exercised.

The 2006 and 2016 plans are subject to the terms stipulated by Section 102 of the Israeli Income Tax Ordinance.

The amount allowed as an expense for tax purposes, at the time the employee utilizes such benefit, is limited to the amount of the benefit that is liable to tax as labor income, in the hands of the employee; all being subject to the restrictions specified in Section 102 of the Income Tax Ordinance.

The aforementioned expense will be recognized in the tax year that the benefit is credited to the employee.

F - 19

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 9   -      SHAREHOLDER’ EQUITY (Cont.)

B. Share option plans: (Cont.)

(2) Options granted to employees:

(a) A summary of the status of the above plans in respect of options granted to employees, directors and consultant of the Company and its subsidiaries as of December 31, 2016, 2015 and 2014, and changes during the years ended on those dates, is presented below:

	Year ended December 31,
	2 0 1 6					2 0 1 5					2 0 1 4
				Weighted					Weighted					Weighted
				average					average					average
				exercise					exercise					exercise
	Number			price		Number			price		Number			price
Options outstanding at beginning of year		419,042			1.1		422,761			1		480,444			0.4
Changes during the year:
Granted (1)		52,000			3		53,500			1.7		114,000			0.8
Exercised		(27,100	)		1		(19,000	)		0.5		-			-
Forfeited		(11,667	)		1.8		(38,219	)		1.1		(171,683	)		9.2
Options outstanding at end of year		432,275			1.3		419,042			1.1		422,761			1
Options exercisable at year end		328,362			1		317,042			1		316,958			1.1
Weighted average fair value of options granted during the year (2)	$	1.3				$	1.2				$	0.4

(1) Options granted in 2016, 2015 and 2014 were granted with exercise price that was at market value or above.

F - 20

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 9   -      SHAREHOLDER’ EQUITY (Cont.)

B. Share option plans: (Cont.)

(2) Options granted to employees (Cont.):

(a) (Cont.)

(2) The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model in 2016 ,2015 and 2014, with the following weighted average assumptions:

	Year ended December 31,
	2 0 1 6			2 0 1 5			2 0 1 4
Dividend yield		0	%		0	%		0	%
Expected volatility		80	%		81	%		64	%
Risk-free interest rate		1.93	%		1.72	%		1.5	%
Expected life - in years		4			6.5			4

Dividend yield - Management used an expected dividend yield based primarily on past experience applicable as of the grant date.

Expected volatility - Management estimated volatility based on the historical volatility of the Company’s ordinary shares, being the only traded financial instrument of the Company, using in most cases daily observations of the Company's price share to determine the standard deviation.

Risk free interest rate - The risk-free interest rate is based on the implied yield in effect at the time of each option grant, based on U.S. Treasury zero-coupon bond issued with equivalent remaining terms.

Management estimates forfeiture rates at the date of grant, which are adjusted in subsequent periods if the actual forfeiture rates differ from those initially estimated. Management uses historical data to estimate pre-vesting option forfeiture rates and records share-based compensation expense only for those awards that are expected to vest.

(b) The following table summarizes certain information about options granted to employees and directors of the Company which were outstanding and exercisable under the above plans as of December 31, 2016:

Options outstanding						Options exercisable
				Weighted				Weighted
		Number		average		Number		average
		outstanding at		remaining		exercisable at		remaining
Exercise		December 31,		contractual		December 31,		contractual
prices		2016		life		2016		life
$				Years				Years
	0.5-3.2		413,275		0.03-9.82		309,362		0.03-8.88
	4-4.6		12,750		1.28-2.12		12,750		1.28-2.12
	4.9		2,500		2.01		2,500		2.01
	7.5-7.8		3,750		0.12-1.29		3,750		0.15-1.29
			432,275				328,362

F - 21

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 9   -      SHAREHOLDER’ EQUITY (Cont.)

B. Share option plans: (Cont.)

(2) Options granted to employees (Cont.):

(c) As of December 31, 2016 the aggregate intrinsic value for the option exercisable was $329 thousands with a weighted average remaining contractual life of 4.53 years.

The unrecognized compensation expenses calculated under the fair value method for stock options expected to vest as of December 31, 2016 is approximately $ 95 thousands and is expected to be recognized over a weighted average period of 3 year.

NOTE 10 -      TAXES ON INCOME

A. Tax Rates Applicable To The Income Of The Company:

The Company's taxable income is subject to income tax at the regular corporate rate of 25% and in US 35%.

B. Deferred Income Taxes:

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

	Year ended
	December 31,
	2 0 1 6			2 0 1 5
Net loss carry-forward		9,593			10,004
Other additions for tax Purposes		290			183
Net deferred tax asset before valuation allowance		9,883			10,187
Valuation allowance		(9,883	)		(10,187	)
Net deferred tax asset		-			-

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The most significant component of the Company's deferred tax assets is the accumulated net operating losses carry-forward among the two subsidiaries due to the uncertainty of the realization of such tax benefits.

The Company has provided a full valuation allowance in respect of deferred tax assets resulting from tax loss carry-forward and other temporary differences. Management currently believes that since the Company has a history of losses it is more likely than not that the deferred tax regarding the loss carry-forward and other temporary differences will not be realized in the foreseeable future.

F - 22

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 10 -      TAXES ON INCOME (Cont.)

B. Deferred Income Taxes: (Cont.)

Net profit (loss) was incurred as following:

	Year ended
	December 31,
	2 0 1 6		2 0 1 5
United States		608		(461	)
Israel		1,416		2,579
		2,024		2,118

C. Tax Loss Carry-Forwards:

Net operating loss carry-forwards as of December 31, 2016 are as follows:

Israel	37,510
United States *	610
	38,120

Net operating loss carry-forwards as of December 31, 2015 are as follows:

Israel	38,926
United States *	1,218
	40,144

Net operating losses in Israel may be carried forward indefinitely.

Net operating losses in the U.S. are available through 2027.

* Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization

NOTE 11 -      LIABILITIES SECURED BY PLEDGES AND RESTRICTION PLACED IN RESPECT OF LIABILITIES

A. The Company has registered fixed charge on bank deposits in favor of certain banks. The bank deposits are used to secure a credit line granted to the Company by the banks, and as collateral for guarantees provided to its customers.

As of December 31, 2016, the bank deposits amount to $83 thousands;

F - 23

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 12 -      SUPPLEMENTARY INFORMATION:

Composition:

	Year ended
	December 31,
	2 0 1 6			2 0 1 5
A.          Accounts receivable:
(1)        Trade - allowance for doubtful accounts:
Balance at beginning of year		85			60
Charged to statement of operations		(24	)		25
Balance at end of year		61			85
(2)        Other receivables:
Prepaid expenses		31			12
Israeli Government departments and agencies		170			57
Other		85			9
		286			78

	December 31,
	2 0 1 6		2 0 1 5
B.        Other payable:
Employees and employee institutions		392		75
Israeli Government departments and agencies		108		112
Provision for vacation and recreation pay		49		76
Provision for product warranty		138		113
Liability for commissions to agents		291		21
Accrued expenses and sundry		53		44
		1,031		441

C.        Credit from banks:
	% interest rate as of
	December 31,		December 31,
	2 0 1 6		2 0 1 6		2 0 1 5
Short-term loans from banks:
Linked to the Dollar (See Note 7(a))		2.5		-		149

D.        Cost of revenues:
	Year ended December 31,
	2 0 1 6		2 0 1 5		2 0 1 4
Industrial operations:
Materials consumed		2,712		2,263		1,635
Payroll and related expenses		518		504		479
Subcontracted work		347		306		278
Depreciation and amortization		-		1		2
Other production expenses		953		808		751
		4,530		3,882		3,145

F - 24

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 12 -      SUPPLEMENTARY INFORMATION: (Cont.)

E.         Financial expenses:
	Year ended December 31,
	2 0 1 6			2 0 1 5			2 0 1 4
Income:
Exchange differences	-				-			27
Other		6			2			2
		6			2			29
Expenses:
Interest
In respect of liability to related parties		-			-			11
In respect of credit from banks		20			19			28
Exchange differences		24			60			-
Revaluation of convertible loan and warrants		-			-			285
Other		96			67			70
		140			146			394
		(134	)		(144	)		(365	)

NOTE 13 -      RELATED PARTIES

Composition:

	Year ended December 31,
	2 0 1 6		2 0 1 5		2 0 1 4
Managements fees - included in General and administrative		402		430		343
Assets – Due from related party		81		-		-

F - 25

ELBIT VISION SYSTEMS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S dollars in Thousand

NOTE 14 -      GEOGRAPHICAL SEGMENTS

Geographic information:

(1) The Company’s revenues by geographic areas (based on location of customers) are as follows:

	Year ended December 31,
	2 0 1 6		2 0 1 5		2 0 1 4
North America (mainly the United States)		2,900		2,646		1,720
Germany		750		424		442
Italy		431		403		399
Turkey		127		200		241
UK		133		-		221
Russia		-		230		146
Other European countries		1,626		959		1,374
Thailand		600		41		10
China		2,638		2,824		1,420
India		213		598		80
Japan		68		437		200
Israel		383		165		210
Other Far Eastern countries		277		201		181
		10,146		9,128		6,644

(2) The Company’s long-lived assets by geographic areas are as follows:

	Year ended December 31,
	2 0 1 6		2 0 1 5
Israel		446		526
U.S.A.		-		12
		446		538

NOTE 15 -     SUBSEQUENT EVENTS

In January 2017, the Company's board of directors approved a 1-for-10 reverse stock split of the outstanding common stock and stock options of the Company. The reverse stock split became effective on March 24, 2017. Accordingly, (i) every ten shares of common stock have been combined into one share of common stock, (ii) the number of shares of common stock underlying each stock option have been proportionately decreased on a 1-for-10 basis, and the exercise price of each such outstanding stock option has been proportionately increased on a 1-for-10 basis. All option numbers, share numbers, share price and exercise prices have been adjusted within these consolidated financial statements, on a retroactive basis, to reflect this 1-for-10 reverse stock split

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