| o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| o | 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 number 000-31151
RadView Software Ltd.
(Exact name of Registrant as specified in its charter)
ISRAEL
(Jurisdiction of incorporation or organization)
14 Hamelacha Street, Park Afek, Rosh Ha’ayin 48091 Israel
(Address of principal executive offices)
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 NIS 0.01 per share
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:NONE
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:158,571,330 Ordinary Shares, nominal value NIS 0.01 per share, as of December 31, 2008 and 158,571,330 Ordinary Shares, nominal value NIS 0.01 per share, as of June 30, 2009.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yeso Nox
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.
Yeso Nox
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.
Yesx Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)*.
Yeso Nox
*The registrant has not yet been phased into the interactive data requirements.
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 filero | Accelerated filero | Non-accelerated filerx |
Indicate by check mark which financial statement item the registrant has elected to follow:
Item 17o Item 18x
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAPx
International Financial Reporting Standards as issued by the International Accounting Standards Boardo
Othero
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17o Item 18o
If this is an annual report, indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Nox
ii
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.D: Risk Factors,” “Item 4: Information on the Company,” “Item 5: Operating and Financial Review and Prospects” and elsewhere in this annual report, constitute forward-looking statements. These statements relate to future events or other future financial performance, and are identified by terminology such as “may,” “will,” “should,” “expect,”“scheduled,” “plan,” “intend,”“anticipate,” “believe,” “estimate,” “aim,”“potential,” or “continue” or the negative of those terms or other comparable terminology. 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. These forward-looking statements are based, among other things, on assumptions in connection with :
| — | the price and market liquidity of our ordinary shares; |
| — | our ability to attain necessary working capital; |
| — | the market demand for our products; |
| — | our ability to retain key technical and management personnel; and |
| — | our future performance, sales, gross margins, expenses (including stock-based compensation expenses) and cost of revenues. |
Assumptions relating to the foregoing 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 or plans 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.D: Risk Factors,”“Item 5: Operating and Financial Review and Prospects” and elsewhere in this annual 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 (the “SEC”).
References to websites in this Form 20-F do not incorporate the contents of such websites.
iii
Not required.
Not required.
Unless the context otherwise requires, “RadView”, “us”, “we” and “our” refer to RadView Software Ltd. and its subsidiaries.
The selected consolidated financial data set forth below as of December 31, 2007 and 2008 and for each of the years ended December 31, 2006, 2007 and 2008 are derived from our audited consolidated financial statements, which are included in Item 18 of this Annual Report on Form 20-F. The selected consolidated financial data as of December 31, 2004 and 2005 and for the years ended December 31, 2004 and 2005 are derived from our audited consolidated financial statements, which are not included in this Annual Report on Form 20-F. The data should be read in conjunction with and is qualified by reference to our Consolidated Financial Statements and the Notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 20-F.
1
| Year Ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||
| (In thousands, except share and per share data) | |||||||||||||||||
| Consolidated Statements of Operations Data: | |||||||||||||||||
| Revenues: | |||||||||||||||||
| Software licenses | $ | 2,456 | $ | 3,138 | $ | 1,757 | $ | 1,225 | $ | 1,687 | |||||||
| Services | 2,207 | 2,507 | 2,526 | 1,895 | 1,754 | ||||||||||||
| Total revenues | 4,663 | 5,645 | 4,283 | 3,120 | 3,441 | ||||||||||||
| Cost of revenues: | |||||||||||||||||
| Software licenses | 86 | 147 | 80 | 26 | 89 | ||||||||||||
| Services | 327 | 255 | 133 | 66 | 55 | ||||||||||||
| Total cost of revenues | 413 | 402 | 213 | 92 | 144 | ||||||||||||
| Gross profit | 4,250 | 5,243 | 4,070 | 3,028 | 3,297 | ||||||||||||
| Operating expenses: | |||||||||||||||||
| Sales and marketing | 3,542 | 3,287 | 2,475 | 2,687 | 1,057 | ||||||||||||
| Research and development | 2,631 | 2,229 | 1,512 | 1,890 | 1,231 | ||||||||||||
| General and administrative | 1,831 | 2,004 | 1,671 | 1,729 | 1,105 | ||||||||||||
| Total operating expenses | 8,004 | 7,520 | 5,658 | 6,306 | 3,393 | ||||||||||||
| Operating loss | (3,754 | ) | (2,277 | ) | (1,588 | ) | (3,278 | ) | (96 | ) | |||||||
| Financial income (expenses), net | (26 | ) | (188 | ) | (210 | ) | (358 | ) | (337 | ) | |||||||
| Income Tax | - | - | - | (331 | ) | 77 | |||||||||||
| Net Loss | (3,780 | ) | (2,465 | ) | (1,798 | ) | (3,967 | ) | (356 | ) | |||||||
| Deemed dividend on convertible preferred shares and | - | - | (882 | ) | (850 | ) | - | ||||||||||
| exercise of additional investment rights during the year | |||||||||||||||||
| Net loss attributable to ordinary shares | $ | (3,780 | ) | $ | (2,465 | ) | $ | (2,680 | ) | $ | (4,817 | ) | $ | (356 | ) | ||
| Basic and diluted net loss per ordinary share | $ | (0.19 | ) | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.08 | ) | $ | (0.01 | ) | ||
| Weighted average number of ordinary shares used in | |||||||||||||||||
| computing basic and diluted net loss per ordinary share | 19,826 | 20,526 | 20,526 | 60,488 | 76,905 | ||||||||||||
| As of December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||
| Cash and cash equivalents | $ | 2,163 | $ | 166 | $ | 229 | $ | 880 | $ | 243 | |||||||
| Working capital (deficit) | (142 | ) | (2,369 | ) | (1,984 | ) | (1,810 | ) | (2,379 | ) | |||||||
| Total assets | 3,914 | 1,591 | 1,367 | 2,179 | 1,181 | ||||||||||||
| Total shareholders' equity (deficit) | (84 | ) | (2,381 | ) | (2,039 | ) | (2,107 | ) | (2,368 | ) | |||||||
| Capital Stock | 56,813 | 56,981 | 59,891 | 64,835 | 64,938 | ||||||||||||
2
Not applicable
Not applicable
In addition to risks and uncertainties in the ordinary course of business that are common to all businesses, important factors that are specific to our industry and our company could materially impact our future performance and results. We have provided below a list of these risk factors that should be reviewed in connection with our securities. These are not all the risks we face and other factors currently considered immaterial or unknown to us may impact our future operations.
Substantial litigation regarding intellectual property rights exists in the software industry. We expect that software products may be increasingly subject to third-party infringement claims as the number of competitors in our industry segments grows and the functionality of products in different industry segments overlaps.
Third parties may make a claim of infringement against us with respect to our products and technology or claims that our intellectual property rights are invalid. Any claims, with or without merit, could:
| — | be time-consuming to defend; |
| — | result in costly litigation; |
| — | divert management's attention and resources; |
| — | delay product delivery, or |
| — | result in substantial damage awards. |
In addition, if our products were found to infringe a third party’s proprietary rights, we could be required to enter into royalty or licensing agreements in order to continue to be able to sell our products. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. A successful claim of product infringement against us and our failure or inability to license the infringed or similar technology could have a material adverse effect on our business.
We expect to depend on sales of our WebLOAD product for a substantial majority of our revenues for the foreseeable future.
We anticipate that revenues from our WebLOAD product will constitute a substantial majority of our revenues for the foreseeable future. Consequently, any decline in the demand for our WebLOAD product would have a material adverse effect on our business.
If we fail to develop new products or fail to enhance our existing products to respond to emerging technologies and industry trends, we will likely lose market share to our competitors and our revenues will likely decline.
The target market for our products is characterized by rapid technological change, frequent new product introductions, changes in customer requirements, evolving industry standards and significant competition. We expect to introduce new versions and develop enhancements to our existing products. Our future financial performance depends upon our ability to timely identify new market trends and Internet technology and to develop and commercialize software that is compatible with these emerging trends and technologies. We may not accurately identify trends and technologies or we may experience difficulties that delay or prevent the successful development, introduction or marketing of new or enhanced software products in the future. In addition, our products may not meet the requirements of the marketplace or achieve market acceptance. If we fail to successfully and timely develop and deploy new products or product enhancements, we may lose market share to our competitors and our revenues may decline.
Our existing software products could become obsolete and unmarketable with the introduction of products, web applications or computer systems employing new technologies or industry standards.
3
The commercial web application performance and testing solutions market is intensely competitive, subject to rapid change and significantly affected by new product introductions and other activities of market participants. Our primary competitors include companies which offer performance-testing software, such as Mercury Interactive (HP), Borland, IBM, Neotys and Compuware. Some of our competitors have longer operating histories, better brand recognition, a larger installed base of customers and substantially greater financial, technical, marketing and other resources than we do. As a result, they may be able to respond more quickly to new or changing opportunities, technologies, standards or customer requirements.
If our current software products become obsolete and we fail to introduce new products, our business will not be viable. Further, if our competitors introduce products earlier or that are more responsive than our products to emerging technologies and market trends, we will lose market share to our competitors and our revenues may decline.
New competitors could emerge or our customers or distributors could internally develop alternatives to our products and either development could impair our sales.
We may face competition from emerging companies as well as established companies who have not previously entered the market for performance testing products. Established companies may not only develop their own performance testing tools, but they may also acquire or establish product integration, distribution or other cooperative relationships with our current competitors. New competitors or alliances among competitors may emerge and rapidly acquire significant market share due to factors such as greater brand name recognition, a larger installed customer base and significantly greater financial, technical, marketing and other resources and experience.
Many of our competitors also have broader and more established distribution channels that may be used to deliver competing products directly to customers through bundling or other means. If competitors were to bundle competing products with their products, the demand for our products might be substantially reduced and our ability to distribute our products successfully would be substantially diminished. The entry of new competitors into our market could reduce our sales, require us to lower our prices, or both. Many of the factors that affect competition are outside our control, and there can be no assurance that we can maintain or enhance our competitive position against current and future competitors.
We expect that competition will intensify in the future and that additional competitors will enter the market with innovative competing products that may change the competitive landscape. Increased competition is likely to result in pricing pressures, reduced margins and may result in the failure of our products to achieve or maintain market acceptance, any of which could have a material adverse effect on our business, results of operations and financial condition.
Defects in our products may increase our costs and diminish the demand for our products.
Our products are complex and they have occasionally contained, and may in the future contain, undetected errors when first introduced or when new versions are released. If our products do not perform as intended in specific company environments, we may incur warranty costs, be subject to liability and experience delays. Regardless of the source of the errors, we must divert the attention of our engineering personnel from our research and development efforts to address any errors. Any insurance policies that we may have may not provide sufficient protection should a claim be asserted. Moreover, the occurrence of errors, whether caused by our products or the products of another vendor, may result in significant customer relation problems and injury to our reputation and may impair the market acceptance of our products and technology.
Failure to develop strategic relationships could limit our growth.
We believe that our success in penetrating our target markets depends in part on our ability to develop and maintain strategic relationships with resellers, systems integrators and distribution partners. If we are unable to maintain our existing marketing and distribution relationships, or fail to enter into additional relationships, we will have to devote substantially more resources to direct sales and marketing of our products. In addition, licenses of our products through indirect channels have been limited to date. Our existing relationships do not, and any future relationships may not, afford us exclusive marketing or distribution rights. Therefore, our partners could reduce their commitment to us at any time in the future. Many of these partners have multiple relationships and they may not regard us as significant for their business. In addition, these partners may terminate their relationships with us, pursue other relationships with our competitors or develop or acquire products that compete with our products. Even if we succeed in entering into these relationships, they may not result in additional customers or revenues.
4
Open source technology development may create competition with our products.
The nature of open source is that software is free to use and the source code is provided without charge. One of the characteristics of open source software is that anyone can offer new software products for free under an open source licensing model in order to gain rapid and widespread market acceptance. Such competition can develop without the degree of overhead and lead time required by traditional technology companies. It is possible for new competitors with the greater resources than ours to develop open source solutions, potentially reducing the demand for our solutions. Our Open Source Edition of WebLOAD, which now consists of our non-proprietary load engine, may be used by competitors to simulate web application loads in order to build performance testing products that may target our customer market. We may not be able to compete successfully against current and future competitors. Competitive pressure and/or the availability of open source software may result in price reductions, reduced revenue, reduced operating margins and loss of market share, any of which could materially adversely affect our business.
Our products contain third party open source software, and failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products.
Our products are distributed with software programs licensed to us by third party authors under “open source” licenses, which may include the GPL, the GNU Lesser Public License, or LGPL, the BSD License and the Apache License. These open source software programs can include, without limitation, Snort®, Linux, Apache, Openssl, Etheral, IPTables, Tcpdump and Tripwire. These third party open source programs are typically licensed to us for a minimal fee or no fee at all, and the underlying license agreements generally require us to make available to the open source user community the source code for such programs, as well as the source code for any modifications or derivative works we create based on these third party open source software programs. Included with our software are copies of the relevant source code and licenses for the open source programs. Alternatively, we include instructions to users on how to obtain copies of the relevant open source and licenses. Additionally, if we combine our proprietary software with third party open source software in a certain manner, we could, under the terms of certain of these open source license agreements, be required to release the source code of our proprietary software. This could allow our competitors to create similar products, which would result in a loss of our product sales.
We may not be able to protect our intellectual property rights and we may lose a valuable asset or engage in costly and time-consuming litigation attempting to protect our rights.
Our success depends upon the protection of our technology, trade secrets and trademarks. To protect our rights to our intellectual property, we rely on a combination of trade secret protection, patent law, trademark law, confidentiality agreements and other contractual arrangements. The protective steps we have taken may be inadequate to deter infringement or misappropriation. We may be unable to detect the unauthorized use of our intellectual property or take appropriate steps to enforce our intellectual property rights. Policing unauthorized use of our products and technology is difficult. In addition, the laws of some foreign countries in which we currently or may in the future sell our products do not protect our proprietary rights to as great an extent as do the laws of the United States.
With the introduction of our earlier Open Source Edition in 2007, we exposed portions of our proprietary technology to the public which may have led to unintended access to our confidential proprietary software. The reach of the open source community, beyond geographic borders, makes difficult the ability to police the proper use and protection of our software. Failure to adequately protect against or to promptly detect unauthorized use of our intellectual property could devalue our proprietary content and impair our ability to compete effectively. Defending our intellectual property rights could result in the expenditure of significant financial and managerial resources, whether or not the defense is successful. Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop similar technology, or duplicate our products or our other intellectual property. We may have to resort to litigation to enforce our intellectual property rights, to protect our trade secrets or know-how or to determine the scope, validity or enforceability of our intellectual property rights. Our protective measures may prove inadequate to protect our proprietary rights, and any failure to enforce or protect our rights could cause us to lose a valuable asset.
The success of our business depends on our senior management, whose knowledge of our business and expertise would be difficult to replace.
Our success depends largely on the continued contributions of our senior management. Employment agreements with our senior management team and other key personnel do not require a specified service obligation. We also do not carry life insurance on our senior management or other key personnel. If one or more members of our senior management were to terminate their employment, we could experience delays in product development, loss of sales and diversion of management resources.
5
We may not be able to retain our existing personnel, which could negatively impact development, sales and support of our products.
In the past we have reduced the size of our workforce in order to reduce our operating expenses. As a result, our success depends on our ability to retain our existing experienced employees. If we fail to retain our current employees, our revenues could decline. Competition for qualified personnel is intense, and we may not be able to retain our highly qualified personnel. Our future success also depends upon the continued service of our key sales, marketing and support personnel. In addition, our products and technologies are complex and we are substantially dependent upon the continued service of our existing engineering personnel. None of our key employees are bound by an employment agreement that requires a specified service obligation. If we are not able to retain our existing personnel, we could have difficulty developing, selling or supporting our products.
We do not have sufficient insurance to cover all of our potential product liability and warranty claims.
Companies use our products to assure the performance of their web applications. In many cases, web applications serve critical business functions. The sale and support of our products may entail the risk of product liability or warranty claims based on our products not detecting critical errors or problems with web applications that fail in a “live” environment and cause companies financial loss. In addition, the failure of our products to perform to customer expectations could give rise to warranty claims. Although we seek to limit our exposure to claims under our license terms and we carry general liability insurance, it is unlikely that our insurance would cover potential claims of this type and our insurance may not be adequate to protect us from all liability that may be imposed. If we are subject to any claims, our results of operations may be materially adversely affected. We may be subject to intellectual property infringement claims that, with or without merit, could be costly to defend or settle.
We have had losses since our inception and might continue to incur losses in the future.
We incurred net losses of $2.7 million in 2006, $4.8 million in 2007 and $0.36 million in 2008. As of December 31, 2008, we had an accumulated deficit of $67.5 million. We expect to incur losses for the foreseeable future and cannot be certain if, or when, we will achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future.
We will need additional capital to finance our operations.
We will need to raise additional capital to finance our operations unless we are able to generate cash from operations. To date we have been unable to generate cash from operations. Cash used in operating activities was, $1.9 million in 2006, $3.5 million in 2007 and $0.6 million in 2008.
In August 2006, the Company completed a financing transaction under which the investors made an initial investment of $1.5 million, with the investors having the right to invest an additional $2.25 million over the 18 month period after the closing, out of which they invested $0.7 million during 2006 and $1 million during 2007 to date. In March and May 2007, the Company completed two private placements for the purchase of our ordinary shares and warrants to purchase ordinary shares, raising approximately $3.4 million. At the annual shareholders meeting in December 2008, the shareholders approved the terms of a credit facility for up to $4 million that may be advanced upon the Company’s request. Any request for future cash withdrawals from this facility, except for the $0.5 million discussed below, will be subject to the discretion of the principal shareholder that granted the facility; the Company has not made a request under the credit facility to date. There is no assurance as to any additional amounts that the investors in each of these transactions will elect to invest beyond the investments to date. The principal shareholder under the 2008 credit facility has agreed in advance to comply with a request made by the Company for up to $0.5 million within the next twelve months. With the availability of the $0.5 million, as agreed by the principal shareholder, and cash generated from operations, we expect that current funds will be sufficient to fund operations for the next twelve months.
Our ability to actively seek out other forms of financing or pursue strategic alternatives is significantly restricted under the terms of the 2006 financing.
We are restricted in our ability to seek other financing or pursue other strategic alternatives without the approval of the holders of our Preferred Shares. As a result, in the event that alternative financing is needed but not approved by the holders of Preferred Shares, our ability to continue operations will be materially adversely affected.
6
Our sales cycle depends partly on factors outside our control and may cause our revenues to vary significantly.
Our customers view the purchase of our products as an important decision. As a result, our customers may take a long time to evaluate our products before making their purchase decisions and this could result in a long, and often unpredictable, sales and implementation cycle for our products. This may cause our revenues and results of operations to vary significantly from period to period. In addition, we may expend significant sales and marketing expenses during the evaluation period before the customer places an order with us. Our customers often begin by purchasing our products on a pilot basis before they decide whether or not to purchase additional licenses for broader use within their organizations.
We usually have no significant order backlog. This makes revenues in any quarter substantially dependent upon orders we receive and deliver in that quarter. Because of this, our revenues and results of operations in any quarter may not meet market expectations or be indicative of future performance and it may be difficult for an investor to evaluate our prospects.
Our operating results may fluctuate, and if we fail to meet the expectations of our investors, our share price may decrease significantly and shareholders could lose part or all of their investment.
Our revenues and operating results have varied significantly in the past and are likely to continue to vary significantly in the future. Our future operating results may fluctuate significantly and may not meet the expectations of investors.
The factors that may cause fluctuations of our operating results include the following:
| — | the size, timing and terms of sales of our products and services; |
| — | unexpected delays we may encounter in introducing new versions of our existing products as well as any new future products and services; |
| — | our ability to successfully retain our direct sales force and international sales organization; |
| — | our ability to establish and maintain relationships with our partners; |
| — | the fixed nature of expenses such as base compensation and rent; and |
| — | transaction costs, including legal, investment banking and accounting fees, in connection with extraordinary activities, such as obtaining financing or pursuing our strategic alternatives. |
Due to these and other factors, we believe that period-to-period comparisons of our results of operations may not be meaningful and should not be relied upon as indicators of our future performance. It is possible that in future periods our results of operations may be below the expectations of public market analysts and investors. If this occurs, the price of our ordinary shares may decline.
The deteriorating general economic outlook may adversely affect our business.
Our business depends on the overall demand for our products and services and on the economic health of our current and potential customers. As widely reported, financial markets throughout the world have been experiencing extreme disruption in recent months, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others, failure and potential failures of major financial institutions and unprecedented government support of financial institutions. These developments and the related general economic downturn may adversely affect our business in a number of additional ways, including impacts beyond those typically associated with other recent downturns in the U.S. and foreign economies. The slowdown may adversely affect the budgeting and purchasing behavior of our customers, which could adversely affect our product sales. The current tightening of credit in financial markets and the general economic downturn may adversely affect the ability of our customers, suppliers and channel partners (e.g., testing service providers and resellers) to obtain financing for significant purchases and operations and to perform their contractual obligations with us. As a result, we could encounter, among other adverse effects, a decrease in or cancellation of orders for our products and services, and an increase in additional reserves for uncollectible accounts receivable being required.
We are unable to predict the duration and severity of the current economic downturn and disruption in financial markets or their effects on our business, but the consequences may be materially adverse and more severe than other recent economic slowdowns. To the extent that general economic conditions continue to worsen and information technology spending declines, the demand for our products and services, and therefore our future revenues, could be materially and adversely affected.
7
We may fail to maintain effective internal control in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to evaluate the effectiveness of our internal control over financial reporting on an annual basis and furnish a report with management’s assessment. Our management is also required to report on the effectiveness of our disclosure controls and procedures. We believe that significant time, effort and expense, including time of senior management will continue to be required to design, maintain and evaluate the internal control system over financial reporting under these rules. For these reasons, the costs involved in achieving Section 404 compliance could have a material adverse effect on our business, results of operations and prospects.
Risks Relating To Our Financing Transaction
There has been and will continue to be substantial dilution to our existing shareholders as a result of the 2006 financing.
At the closing of our 2006 financing, we issued to the investors 25,000,000 Preferred Shares, convertible debt that could be convertible into 25,000,000 Preferred Shares, and warrants to purchase up to an additional 18,750,000 Preferred Shares. The investors had the additional right, within 18 months after the closing, to purchase up to an additional 75 million Preferred Shares and warrants to purchase up to a total of 56,250,000 additional Preferred Shares. That additional investment right was exercised in part in three additional investments by one of the investors under that financing, as described below, as a result of which we issued to that investor 56,666,668 Preferred Shares and warrants to purchase up to an additional 42,500,000 Preferred Shares. The remainder of the additional investment rights expired in March 2008. As a result, the investors in the 2006 financing have the ability, upon conversion of the Preferred Shares and convertible debt and exercise of the warrants, to acquire up to 167,916,668 of our ordinary shares.
The three additional investments by one of the investors as described above were made pursuant to three addendums to the purchase agreement for the 2006 financing, each of which granted to the investor a new option to purchase Preferred Shares and warrants to purchase Preferred Shares equal to the amount acquired under the additional investments. The new options have expired. See Item 4B. – “Business Overview – Recent Financings” and Item 7B – “Related Party Transactions” for further discussion of the new options.
In addition, in connection with the Meitav private placements by certain institutional investors in March 2007 and May 2007, the Company issued to those investors a total 56,378,980 ordinary shares and warrants to purchase up to an additional 39,465,286 ordinary shares. The Company has issued to its advisor in the private placements warrants to purchase 2,818,949 ordinary shares.
In addition, under the 2008 credit facility that may be provided by a principal shareholder, any loans taken by the Company will be convertible into ordinary shares at any time prior to repayment, at a conversion price per ordinary share equal to $0.01 and the Company undertook to grant warrants to acquire ordinary shares in a dollar amount equal to 50% of the principal amount of each loan. If the Company draws the maximum amount of the credit facility, the shareholder will be entitled to 400,000,000 ordinary shares upon conversion of the loans and will receive warrants to purchase 200,000,000 ordinary shares. See Item 4B. – “Business Overview – Recent Financings” and Item 7B – “Related Party Transactions” for further discussion of the 2008 credit facility.
Fortissimo and other investors in the 2006 financing have control over most matters submitted to a vote of the shareholders, thereby limiting the power of other shareholders to influence corporate action.
As of May 31, 2009, Fortissimo Capital Fund GP, LP, or Fortissimo, owned 47.6% of our outstanding ordinary shares and, together with certain other investors in the 2006 financing with which Fortissimo shares voting rights, owned 53.9% of our outstanding ordinary shares (including the ordinary shares issuable upon conversion of the Preferred Shares held by them) and together with those other investors, owned 69.3% of our outstanding shares, including shares issuable on exercise of warrants and additional investment rights and conversion of debt (but excluding shares issuable under the 2008 credit facility, no portion of which has been drawn). See Item 7A. – “Major Shareholders”. Fortissimo and these investors are parties to a voting agreement to vote their shares with Fortissimo, as a result of which, Fortissimo has the power to substantially influence the outcome of most matters submitted to a vote of shareholders, including the election of members of our board and the approval of significant corporate transactions. This concentration of ownership may also have the effect of making it more difficult to obtain approval for a change in control of RadView. In addition, Fortissimo is also entitled to nominate a majority of the members of our board of directors to be designated as preferred directors. These preferred directors have been granted approval authority over significant corporate actions and transactions.
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As a result, Fortissimo has substantial control over both the voting shares and our board of directors, which may significantly limit the power of all other shareholders and our existing directors to influence corporate actions.
Additionally, Fortissimo may exercise its control over our business to affect directly or indirectly other aspects of our operations, such as our business strategy, management structure, and personnel. There can be no assurance that any changes resulting from the influence of Fortissimo will not materially adversely affect our business.
We will incur additional costs in connection with the 2006 financing.
We incur costs and expenses arising directly from the financing such as interest expense and amortization of deferred financing charges and warrants. In addition, we are required to pay to Fortissimo a management fee in a minimum amount of $50,000 per year, plus an additional amount up to $70,000 per year, such additional amount payable from our annual profits, if any. These additional expenses will materially adversely affect our results of operations if we are not able to increase our revenues and/or decrease our other expenses.
Our ordinary shares are listed on the Over-the-Counter Bulletin Board, or OTCBB.
Our shares are quoted on the OTCBB. Until September 2004, our shares were traded on the Nasdaq SmallCap Market. As a result of being traded on the OTCBB, our shareholders and we have experienced and may in the future experience negative consequences, including:
| — | a less liquid trading market for our ordinary shares; |
| — | loss of investor confidence that could result in the decline in the trading price or volume of our ordinary shares; |
| — | decrease of our reputation with prospects, customers, employees and vendors, any of which may have a material adverse affect on our business; and |
| — | reduced access to capital markets in the event we need to raise additional capital. |
The 2006 financing and Meitav investments may have an adverse effect on the market price of our ordinary shares.
Under the terms of the 2006 financing and the Meitav investments, our ordinary shares may be issued as a result of the conversion of convertible securities and debt or the exercise of warrants. In the event these ordinary shares would be sold at prices that are below the market price of our ordinary shares at the time of exercise or conversion, the market price of our ordinary shares may decline.
The market price of our ordinary shares has fluctuated and may continue to fluctuate significantly.
Our share price has fluctuated and may continue to fluctuate significantly. Fluctuations in our share price can occur for reasons that may be unrelated to operating results, including stock market-wide downturns and events in the technology industry as well as in Israel. These fluctuations may adversely affect the market price of our ordinary shares.
There may be an adverse effect on the market price of our shares as a result of shares being available for sale in the future.
In connection with previous capital raising activities, including our private placement in March 2004 and revolving line of credit facility in 2005, we have outstanding several series of warrants to purchase our ordinary shares at various exercise prices. In connection with the 2006 financing, we have issued a substantial number of Preferred Shares and warrants to purchase Preferred Shares, as well as convertible debt that is convertible into Preferred Shares. In connection with the 2008 credit facility, we our obligated to issue warrants to purchase our ordinary shares. Our ordinary shares may be issued as a result of the conversion of our convertible securities or the exercise of warrants. Under the terms of the 2006 financing, the Meitav private placements, the warrant under the 2005 credit facility, and the warrants issuable under the 2008 credit facility, the ordinary shares underlying the securities issued in those transactions and certain other securities outstanding prior to those transactions may be registered for resale to the public or may become freely tradeable under Rule 144.
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If our current or future shareholders sell substantial amounts of our ordinary shares, including shares issued upon the conversion of Preferred Shares or convertible debt, or upon the exercise of outstanding options and warrants, then the market price of our ordinary shares may decline.
These sales might also make it more difficult for us to sell equity or equity-related securities in the future at a time and place that we deem appropriate.
Following the 2006 financing, the privileges and rights of our ordinary shareholders are junior to the rights of our preferred shareholders.
In connection with the 2006 financing, our Articles of Association were amended to allow for the creation of Preferred Shares and establishment of their rights and preferences, which include the following:
| — | Preferred Shares vote on an as-converted basis with ordinary shares on all matters presented at a general meeting of shareholders; |
| — | Preferred Shares are entitled to nominate a majority of the members of the board of directors; |
| — | Preferred Shares have a priority preference upon liquidation; and |
| — | Preferred Shares have protective rights over significant corporate actions, such as approval of mergers and acquisitions, voluntary liquidation or dissolution, declaration of dividends, amendments to the articles of association, sale or transfer of assets, and issuance of securities with equal or superior rights. |
As a result, the rights granted to holders of our Preferred Shares may have an adverse effect on the rights and preferences of our ordinary shareholders.
Conditions in Israel affect our operations and may limit our ability to produce and sell our products, which could have a material adverse effect on our business.
Our principal offices and many of our subcontractors and suppliers are located in Israel. Accordingly, political, economic and military conditions in Israel affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since October 2000, there has been a marked increase in hostilities between Israel and the Palestinians. In January 2006, Hamas, an Islamic movement responsible for many attacks against Israelis, won the majority of the seats in the Parliament of the Palestinian Authority. The election of a majority of Hamas-supported candidates is a major obstacle to relations between Israel and the Palestinian Authority, as well as to the stability in the Middle East as a whole. In addition, the future of the “peace process” with the Palestinians is uncertain and has deteriorated due to Palestinian violence, with the threat of a large-scale attack by Palestinians on Israeli civilians and key infrastructure remaining a constant concern. The past few years of renewed terrorist attacks by the Palestinians has severely affected the Israeli economy in many ways. In June 2007, there was an escalation in violence in the Gaza Strip resulting in Hamas effectively controlling the Gaza Strip and a further escalation in violence has occurred during the first few months of 2008. In July 2006, Israel became involved in a major military conflict with the Hezbollah organization in Lebanon, which subjected the north of Israel to missile attacks. In December 2008, Israel was involved in a military conflict with Hamas, which subjected the South of Israel to missile attacks. Ongoing violence between Israel and the Palestinians as well as tension between Israel and the neighboring Syria and Lebanon may have a material adverse effect on our business, financial condition and results of operations. In addition, several countries still restrict business with Israel and with companies doing business in Israel. We could be adversely affected by adverse developments in the “peace process” or by restrictive laws or policies directed towards Israel or Israeli businesses.
Additionally, in recent years Israel has undergone a period of recession in economic activity, resulting in low growth rates and growing unemployment. Our operations could be adversely affected if the economic conditions in Israel deteriorate. Furthermore, Israel is a party to certain trade agreements with other countries, and material changes to these agreements could have a material adverse effect on our business.
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If our key personnel are required to perform military service, we could experience disruptions in our business.
A number of our key personnel in Israel have standing obligations to perform periodic reserve duty in the Israel Defense Forces and are subject to be called for active military duty at any time. If our key personnel are absent from our business for a significant period of time, we may experience disruptions in our business that could affect the development, sales or technical support of our products. As a result, we might not be able to compete in the market and our results of operations could be harmed.
Because substantially all of our revenues are generated in U.S. dollars, while a portion of our expenses is incurred in New Israeli Shekels, or NIS, inflation in Israel could harm our results of operations.
A substantial portion of our revenues are generated in U.S. dollars, while a portion of our expenses, primarily salaries and related expenses incurred in our Israeli facility, is in NIS. This foreign currency exposure gives rise to market risk associated with exchange rate movements of the U.S. dollar against the NIS. Our Israeli-based employees’ salaries are influenced by inflation in Israel. As a result, any increase in the rate of inflation in Israel may have a negative impact on our dollar-measured operating results unless the inflation in Israel is offset by a devaluation of the NIS in relation to the U.S. dollar. In 2004, the rate of inflation in Israel was increased by 1.2% and the value of the U.S. dollar decreased in relation to the NIS by 1.6%. In 2005, the rate of inflation in Israel was increased by 2.4% and the value of the U.S. dollar increased in relation to the NIS by 6.8%. In 2006, the rate of inflation in Israel decreased by 0.1% and the value of the U.S. dollar decreased in relation to the NIS by 8.2%. In 2007, the rate of inflation in Israel decreased by 3.4% and the value of the U.S. dollar decreased in relation to the NIS by 8.97%. In 2008, the rate of inflation in Israel increased by 3.8% and the value of the U.S. dollar decreased in relation to the NIS by 1.1%. If future inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags behind increases in inflation in Israel, our results of operations may be materially adversely affected. We cannot predict any future trends in the rate of inflation in Israel or trends in the rate of exchange between the NIS and the dollar. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be materially adversely affected.
Israeli regulations may impact our ability to engage in research and development and export of our products in accordance with our current practices.
Israeli law requires us to obtain a government license to engage in research and development of, and export of, the encryption technology incorporated in our products. We currently have government licenses to engage in production of our encryption technology in our products in their 40- and 128-bit versions. Our research and development activities in Israel would need to be modified to transfer this activity to our U.S. development organization, and our current practice of exporting our products from Israel to the U.S., with embedded encryption technology, would need to be changed if:
| — | the Israeli government revokes our current licenses; |
| — | our licenses fail to cover the scope of the technology in our products; or |
| — | Israeli laws regarding research and development export or use in general of encryption technologies were to change. |
We currently benefit from government programs and tax benefits that may be discontinued or reduced.
We currently receive tax benefits and were approved for research and development grants for 2007 of up to approximately $460,000 and for 2008 of up to approximately $200,000 under Government of Israel programs, out of which we have received, as of May 31, 2009, the amount of $409,500 out of the entire grant from 2007 and approximately $180,000 out of the entire grant from 2008; in order to receive the full amount of the 2008 grant we are required to submit the Company’s 2008 annual report. We have filed an application for a new grant in the amount of $330,000 for 2009, as of the first quarter of 2009, but we cannot assure that an agreement for such grant will be concluded. In order to maintain our eligibility for these programs and benefits, we must continue to meet specified conditions, including making specified investments in property and equipment. We may not be able to continue to meet all of these conditions. In addition, some of these programs restrict our ability to manufacture particular products or transfer particular technology outside of Israel. If we fail to comply with these conditions in the future, the benefits received could be canceled and we could be required to refund any payments previously received under these programs or to retroactively pay tax on any income at a higher tax rate than that applying under these benefits.
The Government of Israel has reduced the benefits available under these programs at various times over past years and has amended the specified conditions that must be met in order to achieve or maintain eligibility. You can see more information regarding recent changes in Item 10E below and in Note 11(b) to the Notes to Consolidated Financial Statements. We cannot guarantee that these programs and tax benefits will continue in the future at their current levels or at all. If the Government of Israel reduces or ends these tax benefits, our business, financial condition and results of operations could be materially adversely affected.
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It may be difficult to enforce a U.S. judgment against us or against certain of our directors, or to assert U.S. securities laws claims in Israel or serve process on these persons.
We are incorporated in Israel. The chairman of the board of our directors and other directors are nonresidents of the United States and a portion of our assets is located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us or any of those persons or to effect service of process upon these persons in the United States. It may also be difficult to enforce civil liabilities under U.S. federal securities laws in original actions instituted in Israel.
Provisions of the Israeli law could delay, prevent, or make difficult, a change of control, thereby depressing the price of our ordinary shares.
Provisions of the Israeli Companies Law may have the effect of delaying, preventing or making more difficult a merger with, or acquisition of, RadView. The Israeli Companies Law generally provides that a merger be approved by both the board of directors of a company and a majority of the shares present and voting on the proposed merger at a meeting called upon with at least 21 days notice. For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the shares not held by the other party to the merger (or by any person who holds 25% or more of the shares or the right to appoint 25% or more of the directors of the other party or its general manager) vote against the merger. Upon the request of any creditor of a party to the proposed merger, a court may delay or prevent the merger if it concludes that there is a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of the merging company. Finally, a merger may not be completed unless at least 50 days have passed since the filing of the merger proposal signed by both parties with the Israeli Registrar of Companies.
The Israeli Companies Law also provides that an acquisition of shares in a public company on the open market must be made by means of a tender offer if, as a result of the acquisition, the purchaser will become a 25% or greater shareholder of the company unless there is already another 25% or greater shareholder of the company. Similarly, an acquisition of shares must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company, unless there is already a 45% shareholder of the company. In any event, if as a result of an acquisition of shares the acquirer will hold more than 90% of a company’s shares, the acquisition must be made by means of a tender offer for all of the shares. Finally, Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an Israeli company and a foreign company, less favorably than United States tax law. For example, Israeli tax law may subject a shareholder who exchanges our ordinary shares for shares in another corporation to immediate taxation.
These Israeli laws could have the effect of inhibiting third party attempts to acquire RadView.
We were incorporated in Israel in 1991 as a private company under the Israeli Companies Ordinance, 1983 under the name RadView Software Ltd. and conducted all our operations in Israel from 1993 until April 2000, when we relocated our corporate offices to the United States. We relocated our headquarters back to Israel in 2006. We maintain our research and development operations in Israel. In August 2000, we completed the initial public offering of our ordinary shares, raising $35.3 million after offering costs.
Our corporate headquarters and research and development facilities are located at 14 Hamelacha St., Park Afek, Rosh Ha’Ain, 48091, Telephone +972-03-915-7060. Our US sales office is located at 991 Highway 22 West, Bridgewater, New Jersey, 08807.
Radview develops and markets software for testing the performance, scalability and reliability of internet applications. Our software allows companies to accelerate the development and deployment of their web applications and enables the successful implementation of their strategies involving their websites. We also provide support and maintenance services to our installed base of customers.
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Our current customers include approximately 2,000 organizations from all major industries including Best Western, Citigroup, Deutsche Bank, Macy’s, Georgia Tech, Morningstar, Symantec, Lockheed Martin and Motorola.
We provide an integrated suite of products that comprehensively verifies the performance, scalability, and integrity of web applications throughout the development lifecycle. Together our innovative products provide all the technology needed to implement an organized, efficient process for automated testing through central consoles, seamless script sharing and support for open-standards. By using our family of products customers can detect and resolve issues faster and improve the quality of their web applications.
In February 2009, we re-focused our marketing efforts on our commercial WebLOAD Professional products using the standard enterprise sales model for our direct sales force and channel partners. The open source initiative, which we introduced in April 2007, did not yield the anticipated benefits and therefore, in February 2009, we discontinued a portion of that program and removed the proprietary components of the open source edition of the product. The Open Source Edition now offers only our non-proprietary load engine which may attract developers interested in simulating web application loads, but does not provide a commercial alternative for the customers to whom we offer WebLOAD Professional.
In August 2006, we closed a financing led by Fortissimo Capital Fund GP LP, or Fortissimo, and a group of co-investors that included one of our directors and two existing shareholders, for an initial investment of $1.5 million consisting of $750,000 for the purchase of 25,000,000 convertible preferred shares, or Preferred Shares, at a purchase price of $0.03 per share, and $750,000 as a convertible loan. The investors also had the right to purchase up to an additional 75 million Preferred Shares at a price of $0.03 per share, for up to a total of $2.25 million, within 18 months after the closing of the initial investment. The additional investment rights were exercised in part, as described below, and the remainder of these rights have expired.
The Preferred Shares are convertible, at the election of the holder, into our ordinary shares on a one-for-one basis. In addition to voting rights similar to our ordinary shares, Preferred Shares are also entitled to nominate a majority of the members of our board of directors and have voting control over significant corporate actions. Preferred Shares also have a preference in liquidation over our ordinary shares. The investors also received warrants to purchase up to 18,750,000 Preferred Shares with respect to the initial investment and up to a total of 56,250,000 additional Preferred Shares in the event they made the additional investment. The warrants have an exercise price of $0.04 per share and are exercisable for a period of five years from date of issuance.
The convertible loan under the August 2006 financing is due to be repaid on August 18, 2009. The investors have agreed to extend the loan payment date to June 30, 2010 and during the extension period, the loan shall be non-convertible and without interest.
In order to secure required financing in the last quarter of 2006 and the first quarter of 2007, the Company requested Fortissimo to accelerate the exercise of its right under the financing to make additional investments. The Company and Fortissimo entered into a series of addendum to the share purchase agreement of April 2006 for Fortissimo’s additional investment and purchase as follows: the purchase on December 24, 2006 of 23,333,334 Preferred Shares and 17,500,000 Preferred Warrants for an investment of $0.7 million (the “First Addendum”), the purchase on February 7, 2007 of 16,666,667 Preferred Shares and 12,500,000 Preferred Warrants for an investment of $ 500,000 (the “Second Addendum”), and the purchase on March 20, 2007 of 16,666,667 Preferred Shares and 12,500,000 Preferred Warrants for an investment of $ 500,000 (the “Third Addendum”).
Pursuant to each of the First, Second and Third Addendums, respectively, and in consideration of the acceleration of the additional investment rights, the Company undertook to grant Fortissimo a new option (each a “New Option”) to acquire, on the same terms and conditions, the same number of shares and warrants as purchased under the respective Addendum. Each New Option was subject to the right of the Company for a period of 12 months from the date of issuance of the New Option (and subject to RadView having available surplus) to buy back any shares purchased under the Addendum. Fortisimo did not exercise the New Options. The Company did not exercise its rights to buy back any shares purchased under the Addendums and these rights have expired.
In March and May 2007, we closed two private placements for our ordinary shares led by Meitav Underwriting Ltd., or Meitav, and several institutional investors, totaling approximately $3.4 million for the purchase of 56,378,980 ordinary shares at a price per share of $0.06 and warrants to purchase 39,465,286 ordinary shares at a price per share of $0.06. The maximum number of ordinary shares potentially owned by the Meitav investors as a result of the private placements in 95,844,266 ordinary shares, assuming the exercise of all available warrants.
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In December 2008, the Board and shareholders approved the terms of a convertible credit facility that may be provided to us by Fortissimo, our principal shareholder (the “2008 Credit Facility”). Any future cash withdrawals from this facility, except for the $0.5 million discussed below, will be subject to the discretion of Fortissimo. The Credit Facility is for an amount up to $4 million, in one or more loans, to be determined by Fortissimo at its sole discretion upon our request (each the “Loan”). Each Loan shall have a 3 year term, which may be extended for 2 additional one year terms by agreement of Fortissimo and us. The Loans shall bear interest at 8%, compounded annually, payable together with the repayment of the principal of the respective Loan. A Loan (or any part thereof) may be repaid at any time prior to its due date, at our discretion. Each Loan is convertible into Ordinary Shares, at the option of Fortissimo, at any time prior to repayment, at a conversion price per ordinary share equal to $0.01, the trading price at the time the 2008 Credit Facility was approved (the “Conversion Price”). As security for the repayment of the Loans, we shall grant Fortissimo (i) a fixed charge on our intellectual property, and (ii) a floating charge on our tangible and intangible assets, junior to all of our outstanding charges at the time of the Loan. We have also agreed that upon each draw down of a Loan, Fortissimo will be issued a warrant to acquire ordinary shares in a dollar amount equal to 50% of the principal amount of the Loan at a purchase price per share equal to the Conversion Price. Fortissimo has agreed to in advance to comply with a request by the Company under this 2008 Credit Facility up to $0.5 million within the next twelve months.
In November 2008, we announced the launch of WebLOAD Professional version 8.3, which includes a new analytical model, improved support for the WebLOAD IDE, and enhanced productivity.
Distributed Computing Environments
Historically, companies relied on traditional client/server applications to perform internal business processes and share information. The rapid growth and acceptance of the Internet has fundamentally changed the way companies now conduct business and has enabled the proliferation of distributed computing environments.
Today, these distributed computing environments have the following attributes:
| — | Scope: may include any combination of client/server environments, the Internet, intranets and extranets; |
| — | Structure: may be composed of a complex system of rapidly evolving hardware and software technologies, all of which may be geographically dispersed throughout the world; |
| — | Usage: commonly used to communicate, obtain and share information, sell goods and services, interact with customers, suppliers and partners; and |
| — | Accessibility: users can access the application from any location at any time. |
An integral element of software technology used in today’s distributed computing environments is the web application.
Characteristics of Web Applications
Web applications are becoming the standard for new application software. We believe that web applications will eventually displace legacy client/server systems. Web applications have the following characteristics that present significant challenges to their successful development, deployment and ongoing operation:
| — | Complexity. Web applications typically involve the integration of many hardware and software components and technologies from multiple vendors often requiring close collaboration among a wide array of technology, media and graphic specialists; |
| — | Unpredictable Loads and Stresses. Web applications are available to a potentially large number of users and can be subject to large traffic spikes; |
| — | Nonstop Operation. Due to the business-critical nature of website initiatives, web applications must be available to users on a constant basis with minimal or no downtime for upgrades or modifications. Also, given the nature of the Internet, where websites can be accessed by users from all over the world, from different time zones, operation must be available 24x7; |
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| — | Rapidly Evolving Technologies. Web applications are typically developed using software that is continuously changing as new technologies and standards emerge; with emerging new technologies such as those appearing under the Web 2.0, SOA and RIA (Rich Internet Applications), which continue to rapidly change the nature and complexity of web and Internet applications; and |
| — | Continuous Modifications and Updates. Web applications are typically modified and updated on a continuous basis as companies add new content and functionality and incorporate new technologies and standards. |
Importance of Web Application Integrity and Performance
As companies move various aspects of their businesses to corporate intranets, extranets and the Internet, they are placing greater reliance on their web applications. At the same time, web applications continue to become more complex, which produces a higher risk of failure. If a company’s web applications operate erroneously, perform poorly, or fail entirely, the resulting financial and business costs can be substantial, including lost revenues, customer defections, business interruptions and damage to a company’s reputation. In order to successfully compete, companies must rapidly deploy web applications of high quality and robust performance.
The performance of web applications includes the following key elements:
| — | Integrity: must operate as designed with full functionality accurately intact; |
| — | Scalability:must be able to accommodate very large numbers of concurrent users and complex usage patterns; |
| — | Efficiency:must operate rapidly and efficiently without deteriorating response time or processing bottlenecks; and |
| — | Reliability: must consistently function as intended over prolonged periods when deployed and integrated into a company’s existing and evolving systems. |
Our Market Opportunity and Solutions
We believe that the distributed environment segment of the automated software quality, or ASQ, market is where virtually all the growth of the ASQ market will be realized in the next few years, and that there is a significant market opportunity for solutions that test and verify the integrity, scalability, efficiency and reliability of web applications to facilitate their rapid deployment. This is due to the expanded use of the Internet and corporate intranets and extranets, the need for high quality software, and the increase in the criticality of web applications for the success of businesses.
We are a premier provider of software that enables companies to assure the integrity and performance of business-critical web applications. We address the functionality and performance requirements of web applications throughout their product lifecycle, from initial design through development, deployment and ongoing modifications and upgrades. In meeting these requirements, companies are able to mitigate the financial and business costs that can result from unsuccessful deployment and failures of their web applications. Companies that test their web applications using our solutions benefit from earlier detection of potentially costly problems such as performance bottlenecks, scalability issues, and functionality limitations. This results in significantly reduced costs and the improved time to market needed to successfully launch high performing, reliable web applications.
See “Sales and Marketing” for a discussion of our marketing channels and sales methods.
In our view, this growing market opportunity would be best addressed by solutions such as ours, that:
| — | efficiently and accurately simulate real world operating conditions; |
| — | offer integrated and comprehensive performance assessment capabilities; |
| — | allow performance assessment and error detection early in development process; |
| — | provide detailed performance analysis to assist companies in better identifying and quickly resolving performance bottlenecks and other problems; |
| — | enable collaboration among all parties involved in the development and deployment of web applications; |
| — | provide open and extensible tools, that can be tailored and customized by our users to fit to their own specific needs; and |
| — | enable rapid development of new tools and features by incorporating other open source software projects. |
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Commercial competition
The web application performance and testing solutions market is intensely competitive, subject to rapid change and significantly affected by new product introductions and other activities of market participants. Our primary competitors include companies who offer application-testing software, such as HP/Mercury Interactive, Compuware, and Borland. We also compete against companies that provide a broader spectrum of development tools that include application-testing functionality, such as IBM/Rational Software. In addition, we compete with companies like Neotys whose main offering is application performance management software.
We expect that competition will intensify in the future and that additional competitors will enter the market with innovative products that may change the competitive landscape. Increased competition is likely to result in pricing pressures, reduced margins and may result in the failure of our products to achieve or maintain market acceptance, any of which could have a material adverse effect on our business, results of operations and financial condition.
We anticipate that there will be continuing consolidation in the web application products market and related markets such as computer software, media and communications. Our competitors may be acquired by, receive investments from, or enter into other commercial relationships with, larger, well-established and well-financed companies. As a result, they may be able to respond more quickly to new or changing opportunities, technologies, standards or customer requirements. Many of these competitors also have broader and more established distribution channels that may be used to deliver competing products directly to customers through bundling or other means. If competitors were to bundle competing products with their products, the demand for our products might be substantially reduced and our ability to distribute our products successfully would be substantially diminished.
We believe the principal competitive factors affecting our market include:
| — | the ability to accurately emulate client-user interactions with the web application, including efficient simulation of very large numbers of users, extreme fluctuations in traffic and complex user demands placed on web applications; |
| — | breadth and depth of features for detecting and resolving software errors early in the development cycle; |
| — | ease of use and interactive user features; |
| — | price and total cost of use, including hardware and training requirements; |
| — | ability to stay technically current and compatible with rapidly emerging and changing web technologies and standards; and |
| — | compatibility with the user's existing network components and software systems. |
To expand our customer base, we must continue to innovate and improve the performance of our products. Although we believe that our products compete favorably with respect to these factors, our market is subject to constant change.
Our success and ability to compete depend upon our proprietary technology. In addition, we rely on patent, copyright, trade secret and trademark law to protect our proprietary information. We also typically enter into an agreement with each of our employees, consultants and customers to control their access to and distribution of our software, documentation and other proprietary information. Nevertheless, a third party could copy or otherwise obtain our software or other proprietary information without our authorization, or could develop software competitive to ours. We face additional exposure to this risk in connection with the earlier version of our Open Source Edition, available prior to February 2009, when that edition contained some of our proprietary features. Although those proprietary features are no longer available, by its nature the source code of at least a portion of our technology was freely available to a community of developers. Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop similar technology or duplicate our products or our other intellectual property.
In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. We expect that it will become more difficult for us to monitor the use of our products as we increase our international presence.
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There has been substantial litigation in the software and Internet industries regarding intellectual property rights. It is possible that, in the future, third parties can claim that we, or our current or potential future products, infringe on their intellectual property. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in industry segments overlaps. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product licensing delays, require us to license or pay royalties for certain products in order to continue to sell our products, or pay substantial damages. Licensing or royalty agreements, if required, may not be available on terms acceptable to us or at all. As a result, our business could be harmed.
Our Strategy
Our objective is to be a leading provider of software for testing the performance, scalability and reliability of Internet applications. Our strategy is to market and sell WebLOAD using the standard enterprise sales model, offering the product via our direct sales force and channel partners.
Increase Revenues and Control Costs to Achieve Profitability
Our net loss attributed to ordinary shares was $2.7 million in 2006, $4.8 million in 2007 and $0.36 million in 2008. The increase in net loss in 2006 resulted primarily from the recording of an $0.88 million deemed dividend attributable to the preferred shares in the original 2006 financing and related additional investments. The deemed dividend reflects an adjustment of the financing components in light of their relative fair value. The increase in net loss in 2007 resulted primarily from decrease in revenues and an increase in research and development expenses due to the Open Source project and an increase in sales and marketing expenses and a recording of an $0.85 million deemed dividend attributable to the preferred shares in the original 2006 financing and related additional investments. The decrease in net loss in 2008 resulted primarily from an increase in revenues and a decrease in our operating expenses due to costs reductions and reductions in personnel. We have lowered our operating costs in each of the past five years to more closely align costs with our expected revenues. We expect a decrease in 2009 in our research and development expenses as well as sales and marketing costs and our general and administration costs. We are focused on increasing our revenues while continuing to control costs in order to further reduce our net loss with the objective to ultimately achieve profitability and positive cash flow in the future.
Maintain and Extend Product Leadership
In 2006, we introduced WebLOAD IDE, a new tool for recording, authoring and debugging of test scripts, replacing the AAT and Browser Playback tools, which were part of the WebLOAD product line. In December 2007, we announced the launch of WebLOAD 8.2, which, among other things, introduced improvements to the stability and performance of the WebLOAD IDE, and included support for testing the Adobe Flex rich application environment and for testing multimedia streaming.
In 2008, we introduced WebLOAD Professional 8.3, with new analysis and reporting tools, improved support for Adobe Flex rich internet applications and enhancements to the usability and functionality of the WebLOAD IDE. We will continue to develop WebLOAD Professional, to introduce new add-ons to support additional protocols and development environments.
Develop and Expand Strategic Relationships
We believe that strategic relationships with industry leaders will enable us to accelerate our market penetration and visibility, and maintain our technology leadership. We collaborate with leading technology companies and Internet software and service providers. These strategic relationships help to ensure that our software is optimized for use with their product offerings and allow us to promote market awareness of our products. We plan to continue to develop strategic technology and marketing relationships with leading providers of web-related software.
We further believe that certain proprietary technologies used in our products may have alternative uses for other companies in their respective markets, such as combining our software product offerings with hardware platforms meeting the specific needs of a customer.
Leverage Our Installed Customer Base
To date, we have licensed our software to over 2,000 companies worldwide of which approximately 300 have renewed their software-support agreement with us. A portion of our product orders are received from existing customers and distribution channels. These orders are typically the result of support and maintenance renewals and upgrades or expansions to their previously purchased licenses. For example, upon payment of additional license fees, an existing customer of our load-testing product may increase either or both the maximum number of allowable simulated users that can be generated from within the product and the number of end-users allowed to operate the product.
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In addition, as we introduce new products that complement our existing products, we believe there is an opportunity to increase our revenues through our installed customer base, in addition to sales to new customers.
Provide Solutions that Contribute to a Low Total Cost of Ownership
Companies purchase testing solutions based on several criteria, including the total cost of ownership. Factors that contribute to the total cost of ownership for testing solutions include, among others, the costs of testing software, hardware used to simulate user load traffic, training, and designing, writing and maintaining test scripts. We believe our software contributes to a low total cost of ownership in many ways, including:
| — | We offer competitive prices and flexible licensing options for our software solutions; |
| — | Our software efficiently simulates user load traffic which reduces the cost of hardware required to perform tests; |
| — | Our open-standards scripting language reduces the learning requirements for users and simplifies test script generation and reduces script maintenance; and |
| — | Our software runs on a variety of platforms allowing users to leverage the infrastructure they already own or have access to. |
Our current product line consists of:
| — | WebLOAD Professional: software that assures the performance of web applications by efficiently simulating very large numbers of users, extreme fluctuations in traffic and the complex user demands placed on web applications within an operating environment. |
| — | WebLOAD Open Source Load Engine: the free open source edition of our product which provides a simple load engine which enables only simulating web application loads, with no user interface or features for editing or executing the load test script. |
| — | WebRM: an enterprise software management tool for WebLOAD that promotes efficient use of resources, facilitates collaboration and enables increased productivity by allowing developers, quality assurance, or QA, and information technology staff to share the same testing resources throughout the application development life cycle. |
As part of our focus on performance testing, we discontinued sales of WebLOAD Analyzer and discontinued development and sales of the WebFT and TestView Suite products. We have not supported the existing customers for any of these products beyond April 2008. The phase-out of support and maintenance has not had a material impact on our customer base.
Our products are designed specifically for web-based applications, and employ Internet-standard technologies. Using a standards-based approach makes our products easier to use and readily adaptable to new technology standards.
Key features of our software include:
Comprehensive Performance Software. Our software provides an integrated solution to simultaneously verify the integrity, scalability, efficiency and reliability of web applications. In addition, our software can assess a web application’s overall performance, the performance of an application’s specific components and determine critical thresholds where performance starts to deteriorate.
Designed for Web Applications. Our software is specifically designed for the complex web-based computing environment and is based on Internet standards, such as JavaScript, Java, ActiveX, HTML, XML, and DOM. This enables efficient simulation of very large numbers of users, extreme fluctuations in traffic and complex user demands placed on web applications. This also makes our software easier to use and allows it to be readily adaptable to emerging Internet technologies.
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Detailed Performance Analysis. Our software automatically monitors over 75 performance criteria and supports an extensive number of additional user-defined criteria. Companies using our products have the ability to verify the performance of web applications for each simulated user or transaction. By identifying and recording the root cause of a problem, our comprehensive measurement and reporting mechanisms expedite the process of problem resolution.
Verification Early in the Development Lifecycle. Our software assists companies in identifying and resolving issues with their web applications at every point in the development life cycle. Resolving issues as early as possible in the development life cycle can lower the cost of developing web applications and accelerate the deployment of scalable, high performance web applications.
Ease of Use. All of our test scripts are generated using JavaScript, the programming language most commonly used by web application developers. This avoids the learning curve and costs associated with other products that utilize proprietary scripting languages.
Efficient Use of Resources. We design our products to run on a variety of platforms and make efficient use of a company’s available computer resources, thereby reducing the hardware requirements and investments needed to simulate heavy user traffic. In addition, our software allows users to share company resources on an as-needed basis.
WebLOAD Professional
Using WebLOAD Professional, customers create test scripts that simulate users’ interactions with web applications. These scripts are written in JavaScript, the web standard for application scripting. WebLOAD includes recorders that enable customers to rapidly generate scripts by copying interactions between a web browser and a web application. WebLOAD also enables more advanced users to create highly complex interactions using JavaScript and WebLOAD IDE – WebLOAD’s script authoring tools.
WebLOAD can simultaneously run multiple scripts that reflect different user interactions with the underlying application. These differences may be task based. For example, a retail application might mix site visitors that browse with purchasers, or based on other user characteristics such as their connection speed, the browser they are using, or their Secure Socket Layer, or SSL, which is an encryption configuration.
WebLOAD Professional executes scripts for multiple simulated users, or virtual clients, on load generation machines, such as existing servers, that are centrally managed by the customer. The customer can schedule these virtual clients independently to simulate fluctuating user traffic patterns. Alternatively, a customer can use WebLOAD’s proprietary Cruise Control feature, which steadily increases the number of virtual clients interacting with an application until that application fails to perform based on one or more customer-defined performance criteria. Cruise Control allows our customers to readily and rapidly determine the maximum user load their application can support while maintaining specified performance criteria.
WebLOAD efficiently generates large numbers of virtual clients requiring significantly less computer memory than competing products with comparable functionality. This benefits companies by significantly reducing the cost of hardware required to simulate large numbers of users.
While a performance session is running, WebLOAD generates over 75 different pre-defined statistical measurements, which are displayed to the user in real time. Our customers can also add an extensive number of user-defined measurements and timers, as well as monitor the performance profile of the components within a customer’s Internet architecture. WebLOAD reports these data points on a per client and per transaction level, thus providing detailed information about the potential causes of any detected application failures during the simulation and allowing customers to rapidly and effectively address any performance issues. Customers can analyze this performance data and readily export it to industry-standard, third party formats, such as Microsoft Excel.
WebLOAD Professional supports all modern web development technologies, such as Web 2.0, Ajax, Web Services, SOA, etc. During 2007 and 2008 we completed the development of add-ons to support Adobe Flex, RTSP/RTP and other multimedia protocols which, were released, and are available for purchase separately from WebLOAD Professional, and added to it to increase its functionality.
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WebRM
WebRM addresses the needs of companies to systematically verify web application quality and standardize their web application performance solution across the application design, development, quality assurance and information technology functions. It allows companies to share WebLOAD resources, so that a web application’s architecture, design, implementation and hardware environment can all be tested using the same technology at each step of the development life cycle. Verification performed earlier in the development process generally results in earlier problem detection, lower costs and more rapid application development. Companies using WebRM can therefore capitalize on WebLOAD’s comprehensive, integrated, standard-based approach to facilitate the rapid delivery of higher quality web applications.
Key features and benefits of WebRM include flexible management of resources: Customers who license WebRM receive a fixed number simulated users, or virtual clients, which may be distributed throughout the enterprise on an as-needed basis. For example, a customer with a license for 10,000 virtual clients could allocate all 10,000 virtual clients for use in one performance session, or alternatively, could conduct several concurrent performance sessions with any number of virtual clients, up to an aggregate of 10,000 virtual clients.
To date, we have licensed our software to approximately 2,000 customers worldwide, of which approximately 300 have renewed their software-support agreement with us. Our customers include companies across a broad range of industries, including financial services, technology, retail, manufacturing, government, telecommunication, health care and education.
Our customers are located primarily in the United States, Canada, Europe, Asia Pacific, and Israel. Revenues derived from customers in the United States as a percent of total revenues were, 68.8% in 2006 57% in 2007 and 59% in 2008. We expect to continue to derive the majority of our revenues from customers in the United States
Sales. We sell our products through a direct sales force and through channel partners. Our direct sales force consists of sales personnel and sales engineers located at our corporate headquarters in Israel, as well as an office in the United States. Our channel partners consist of testing services providers, web system integrators, independent software vendors and international distributors in Europe, Israel and Asia. Revenues from our indirect distribution channels as a percentage of total revenues were, 18.5% in 2006, 14% in 2007 and 28% in 2008. In the future, we expect to expand our network of indirect channel partners to increase revenues from sales through them.
Marketing. We engage in a variety of corporate and product marketing activities and provide product information through our website. We offer free trials of our WebLOAD Professional that can be downloaded from our website. Our marketing programs are aimed at informing customers and prospects of the benefits of our software, increasing the market awareness of our products and generating demand for our products. Our marketing activities include public relations initiatives, focused lead generation activities, participation in trade shows and conferences, web seminars, and cultivating relationships with key technology analysts.
We offer a range of support and maintenance and training services to our customers. We believe that providing a high level of customer service and technical support is necessary to achieve rapid product implementation, which in turn, is essential to customer satisfaction and continued license sales and revenue growth. We provide telephone and e-mail technical support from Dallas, Texas, Banglore, India, and from our development center in Israel. Support and maintenance agreements are generally purchased for 12-month terms. We track support requests through a series of customer databases, including current status reports and historical customer interaction logs. We use customer feedback as a source of ideas for product improvements and enhancements. We also provide training (introductory and advanced) and consulting to assist our customers in the development and deployment of web-based applications using our products.
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Our research and development efforts are focused on enhancing our core technology and developing additional functionality and capabilities for our products. We conduct our research and development from our facility in Israel. Our software development approach consists of a methodology that provides guidelines for planning, controlling and implementing projects. This approach uses a cross-functional, team-based development and release process. Our development group works closely with our sales and marketing groups, who provide customer and market requirements, and senior management who provide strategic input, to assist in defining product direction and to ensure that the right products are brought to market.
Members of our research and development group have extensive experience working with web technologies and software testing solutions. We believe that our future performance will depend in large part on our ability to enhance our current product line, develop new products and provide innovative solutions for verifying the performance and scalability of web applications. Our research and development expenses were, $1.5 million in 2006, $1.9 million in 2007 and $1.2 million in 2008. We received approval for a grant in the amount of up to approximately $460,000 in 2007 and up to $200,000 in 2008 from the Office of the Chief Scientist of the Israel Ministry of Industry, Trade and Labor for participation in our research and development programs. As of May 31, 2009, we have received the amount of US$409,500 out of the entire grant for 2007 and $180,000 out of the entire grant for 2008. In order to receive the full amount of the grant of 2008 we are required to submit the Company’s 2008 annual report. We have filed an application for an additional grant in the amount of $330,000 for 2009, as of the beginning of the year, but we cannot assure that an agreement for such grant will be concluded.
Our technologies are built on an open, portable architecture based on industry standard technologies. Our products may be deployed on Windows NT, Windows 2000, Windows XP, Windows 2003, Sun Solaris and Linux operating systems. Our products incorporate the Internet standard scripting language, JavaScript, enabling our customers to easily develop, deploy and manipulate the scripts required to assess the performance of their web applications. We have also extended JavaScript to enable integration of Java, ActiveX and XML and work with other standard web technologies, such as SSL encryption schemes. Integration with these standard technologies helps ensure our products are available for use regardless of the customer’s operating environment.
Use of JavaScript as a core technology enables our products to perform extensive functional verification capabilities. Our DOM extensions readily make XML available to the script developer in a familiar setting making it easier to extend a web application to include XML interactions. Our efficient browser emulator minimizes the use of computer memory, thereby enabling companies to simulate a larger number of virtual clients in order to place considerable load, or stress, on the underlying application infrastructure.
We have developed an application architecture that scales to any arbitrary test size, delivering consistent throughput for any arbitrary load size, independent of the number of machines used to generate the load. We employ a 32-bit, multi-threaded and multi-process implementation, which dynamically adjusts and allocates new processes as the load requirements are raised. This ensures that load generators are optimized for the test and the load demanded of them, as well as readily taking advantage of multi-processor machines to increase performance.
See Item 10D.
In Israel – RadView Software Ltd., an Israeli company, is our corporate headquarters and principal operational center for research and development and for international sales.
In the US – RadView Software Inc., a New Jersey corporation with offices in New Jersey, is our wholly-owned subsidiary and a site of our sales and support center. We have three inactive wholly-owned subsidiaries in Europe: RadView Software (UK), RadView GmbH in Germany and RadView AB in Sweden.
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We do not own any real property. We lease approximately 3,446 square feet of office space in Rosh Ha’ayin, Israel for our corporate headquarters, research and development and international sales operations under a lease being finalized and which will expire in December 2010. In addition, we rent an office suite in Bridgewater, New-Jersey under a lease which is renewed on a quarterly basis. We are currently subleasing our former sales office in Burlington, Massachusetts to a third party under a lease expiring in July 2009. We believe that the properties leased by us are adequate for all of our present and near-term needs.
Not Applicable
The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto filed as an exhibit to this annual report.
Certain of the following discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. In some cases, forward-looking statements are identified by words such as “believe,” “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” and similar expressions. In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in Item 3D. Risk Factors.
RadView develops and markets software for testing the performance, scalability and reliability of internet applications.
We derive our revenues from licensing the rights to use our software products. We derive the majority of our services revenues from support and maintenance arrangements and, to a lesser extent, from training and consulting services. Substantially all of our revenues are denominated in U.S. dollars.
A portion of our software license revenues, and to a lesser extent our services revenues, was derived from royalty fees, license fees and engineering service fees from technology license transactions. Revenues recognized under such arrangements totaled to $928,000 in 2005 and $496,000 in 2006. In 2007 and 2008, no such revenues were recognized.
We measure our operating success using both financial and non-financial metrics. The financial metrics include revenue, gross profit, operating expenses, and loss from operations, as well as cash position and operating cash flow. Other key metrics include product orders by industry segment, average deal size, repeat customer orders, and the portion of revenue that is generated by indirect channels.
We have incurred net losses since our inception. Our net loss attributed to ordinary shares was, $2.7 million in 2006, $4.8 million in 2007 and $0.36 million in 2008. The increase in our net loss in 2006 resulted primarily from the recording of an $0.88 million deemed dividend attributable to the preferred shares purchased in the original 2006 financing and related additional investments. Such deemed dividend reflects an adjustment of the financing components in light of their relative fair value. The increase in our net loss in 2007 resulted primarily from the decrease of revenues and the launch of the Open Source project and a recording of an $0.85 million deemed dividend attributable to the preferred shares purchased in the original 2006 financing and related additional investments. The decrease in our net loss in 2008 resulted primarily from the increase in revenues and decrease in operational costs. If we are to achieve future profitability, we must continue to increase our revenues while maintaining lower operating expenses.
Cash used in operating activities was $1.9 million in 2006, $3.5 million in 2007 and $0.6 million in 2008, attributable primarily to our net losses, partially offset by noncash charges such as depreciation expense, stock-based compensation and amortization on debt discount along with changes in current assets and liabilities. We expect that operating expenses will constitute a material use of our cash resources
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In August, 2006, we closed a financing led by Fortissimo Capital Fund GP, LP, or Fortissimo, along with several co-investors including one of our directors and two existing shareholders, to provide for a minimum initial investment of $1.5 million and up to $2.25 million of additional investments, at the election of the investors, over 18 months; Fortissimo made three additional investments to date, for a total amount of $1.7 million, and the remainder of the additional investment rights have expired.
In March and May 2007, we closed private placements for investments by institutional investors led by Meitav Underwriting Ltd., or Meitav, for an investment of approximately $3.4 million.
At the annual shareholders meeting in December 2008, the shareholders approved the terms of a credit facility for up to $4 million that may be advanced upon the Company’s request. Any future withdrawals from this facility, except for the $0.5 million discussed below, will be subject to the discretion of Fortissimo, the principal shareholder that granted the facility; the Company has not made a request under the credit facility to date. Fortissimo has agreed in advance to comply with a request of up to $0.5 million within the next twelve months. With the availability of the $0.5 million, as agreed by Fortissimo, we expect that we will have sufficient funds in order to maintain current operations, at least for the next twelve months.
Our cash balance was $243,000 as of December 31, 2008. We believe that our existing cash and cash equivalents, that include the proceeds available from the additional investments by Fortissimo in 2007 and the Meitav-led investments, as well as the availability of the $0.5 million in respect of the 2008 credit facility, will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next twelve months.
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. To fully understand and evaluate our reported financial results, we believe it is important to understand the significant estimates and judgments applied as they relate to our policies for revenue recognition, software development costs, and accounting for stock options. More detailed descriptions of these policies are provided in Note 2 to the Consolidated Financial Statements.
The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
We generally derive our revenues from two primary sources:
| — | Software products; and |
| — | Software maintenance and services and training. |
We recognize product and licenses revenue in accordance with Statement of Position (SOP) No. 97-2, “Software Revenue Recognition”, as amended by SOP No. 98-9, “Modification of SOP No. 97-2, Software Revenue Recognition, With Respect to Certain Transactions” (collectively, “SOP 97-2”). We recognize product and license revenue when persuasive evidence of an arrangement exists, the product has been delivered, there are no uncertainties surrounding product acceptance, there are no significant future performance obligations, the license fees are fixed or determinable, and collection of the license fee is considered probable. Amounts received in advance of meeting these criteria are deferred. Fees for arrangements with payment terms extending beyond customary payment terms are considered not to be fixed or determinable, in which case revenue is deferred and recognized when payments become due from the customer or are actually collected, providing that all other revenue recognition criteria have been met. As required by SOP 97-2, we determine the value of the product component of our multiple-element arrangements using the residual method when vendor specific objective evidence (VSOE) of fair value exists for the undelivered elements of the support and maintenance agreements. VSOE is based on the price charged when an element is sold separately or renewed. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.
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Our software updates and maintenance provides customers with rights to unspecified software product upgrades released during the term of the agreement. Our support services grant our customers telephone access to technical support personnel during the term of the service. We recognize revenues from software updates, maintenance and services ratably over the term of the agreement.
The Company’s long-lived assets are reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
We are not involved in any legal proceedings that are material to our business or financial condition. A former employee commenced a proceeding in February 2009 seeking a total of approximately NIS920,600 for severance and vacation payments and certain other claims in connection with the period of employment with the Company. The Company responded to the claims denying any liability and does not believe the claims will be successful or, if so, in a material amount. The matter has been referred to mediation for a possible negotiated resolution.
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 prescribes the use of the liability method whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be reversed. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
On January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income tax.
We account for equity-based compensation in accordance with SFAS No. 123(R), “Share-Based Payment.” Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods. Determining the fair value of stock-based awards at the grant date requires the exercise of judgment, including the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ from our estimates, equity-based compensation expense and our results of operations would be impacted.
We estimate the fair value of employee stock options using a Black-Scholes-Merton valuation model. The fair value of an award is affected by our stock price on the date of grant as well as other assumptions, including the estimated volatility of our stock price over the expected term of the awards, and the estimated period of time that we expect employees to hold their stock options. The risk-free interest rate assumption is based upon United States treasury interest rates appropriate for the expected life of the awards. We use the historical volatility of our publicly traded stock options in order to estimate future stock price trends. In order to determine the estimated period of time that we expect employees to hold their stock options, we use the “Simplified Method” as there is no adequate historical experience to provide other reasonable estimates. Our expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future.
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The fair value for options granted in 2006, 2007 and 2008 is estimated at the date of grant using a Black-Scholes-Merton options pricing model with the following weighted average assumptions:
| Year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||||
| Expected life of option | 4 years | 4 years | 4 years | ||||||||
| Dividend yield | 0 | % | 0 | % | 0 | % | |||||
| Expected volatility | 109 | % | 109 | % | 109 | % | |||||
| Risk-free interest rate | 4.72 | % | 4.74 | % | 4.74 | % | |||||
The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends. Share based payments are expensed straight-line.
The Company applies SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employee for Acquiring, or in Conjunction with Selling Goods or Services, with respect to options and warrants issued to nonemployees. SFAS No. 123 requires the use of option valuation models to measure the fair value of the options and warrants at the measurement date. No options or warrants were granted to nonemployees in 2006, 2007 or 2008.
A substantial portion of the Company’s revenues are in U.S. dollars, while a portion of our expenses, primarily salaries and related expenses incurred in our Israeli facility, is in NIS. The Company’s management believes that the U.S. dollar is the primary currency of the economic environment in which the Company operates. Thus, the functional and reporting currency of the Company is the U.S. dollar.
Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52,“Foreign Currency Translation”. Changes in currency exchange rates between the Company’s functional currency and the currency in which a transaction is denominated are included in the Company’s results of operations as financial income (expense) in the period in which the currency exchange rates change.
All exchange gains and losses from the above-mentioned re-measurement are reflected in the statements of operations and were not material for all periods presented. The representative rate of exchange was U.S. $1.00 to New Israeli Shekel (“NIS”) NIS 4.225 at December 31, 2006, US $1.00 to NIS 3.846 on December 31, 2007 and US $1.00 to NIS 3.802 on December 31, 2008.
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The following table sets forth the consolidated statement of operations data as a percentage of total revenues for the periods indicated:
| For the Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||||
| Revenues: | |||||||||||
| Software licenses | 41.0 | % | 39.3 | % | 49 | % | |||||
| Services | 59.0 | % | 60.7 | % | 51 | % | |||||
| Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | |||||
| Cost of revenues: | |||||||||||
| Software licenses | 1.9 | % | 0.8 | % | 2.6 | % | |||||
| Services | 3.1 | % | 2.2 | % | 1.6 | % | |||||
| Total cost of revenues | 5.0 | % | 3 | % | 4.2 | % | |||||
| Gross profit | 95.0 | % | 97.0 | % | 95.8 | % | |||||
| Operating expenses: | |||||||||||
| Research and development | 35.3 | % | 60.6 | % | 35.8 | % | |||||
| Sales and marketing | 57.8 | % | 86.1 | % | 30.7 | % | |||||
| General and administrative | 39.0 | % | 55.4 | % | 32.1 | % | |||||
| Total operating expenses | 132.1 | % | 202.1 | % | 98.7 | % | |||||
| Operating loss | (37.1 | )% | (105.1 | )% | (2.8 | )% | |||||
| Financial expense, net | (4.9 | )% | (11.5 | )% | (9.8 | )% | |||||
| Deemed dividend | (20.6 | )% | (27.2 | )% | (0.0 | )% | |||||
| Net loss attributable to ordinary shares | (62.6 | )% | (154.4 | )% | (10.4 | )% | |||||
Total Revenues. Total revenues were $3.12 million in 2007 and $3.44 million in 2008. Total revenues increased by $0.32 million, or 10.3% due to a $462,000 increase in product revenues and a $141,000 decrease in services revenues.
Software License. Software license revenues consist primarily of revenues from the license of our software products to end-users and resellers. Software license revenues were $1.225 million in 2007 and $1.687 million in 2008. Software license revenues increased by $462,000, or 38%, due to increase in sales.
Services. Service revenues consist primarily of revenue from annual support and maintenance contracts and, to a lesser extent, training and consulting services. Services revenues were $1.9 million in 2007 and $ 1.8 in 2008. Services revenues decreased by $141,000, or 7%, due to decrease in support and maintenance renewals.
Cost of Software Licenses. Cost of software licenses consists principally of royalties due to the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor. Cost of software licenses was $26,000, or 0.8% of software license revenue in 2007 compared to $89,000, or 2.6% of software license revenue in 2008. The increase in the cost of software licenses resulted from increase in royalty-bearing products sales in 2008.
Cost of Services. Cost of services consists principally of personnel related costs associated with customer support and training. Cost of services was $66,000, or 2% of service revenues in 2007 compared to $55,000, or 1.6% of service revenues in 2008. This decrease was due to lower personnel costs for support and maintenance services resulting from reductions in personnel and salary-related costs in 2008.
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Research and Development. Research and development expenses consist principally of salaries and related expenses required to develop and enhance our products. Research and development expenses were $1.9 million, or 60.6% of total revenues in 2007 compared to $1.2 million, or 35.8% of total revenues in 2008. This decrease resulted primarily from the reduction in personnel and salary-related costs. We expect that our research and development expenses will not increase over the next year.
Sales and Marketing. Sales and marketing expenses consist principally of salaries and commissions for sales personnel, recruiting costs, trade show costs, travel and other marketing costs such as lead generation activities, advertising and product promotion. Sales and marketing expenses were $2.7 million, or 86% of total revenues in 2007 compared to $1.1 million, or 30.7% of total revenues in 2008. The decrease in sales and marketing costs relate to reductions in personnel and salary-related costs. We expect that our sales and marketing expenses will not increase over the next year.
General and Administrative. General and administrative expenses consist principally of executive, finance and administrative salaries and related expenses, and costs of being a publicly held company. General and administrative expenses were $1.7 million, or 55.3% of total revenues in 2007 compared to $1.1 million, or 32.1% of total revenues in 2008. This decrease resulted primarily from reductions in personnel and salary-relatedcosts. We expect that our general and administrative expenses will decrease in 2009 due to a reduction in personnel.
Financial Income (Expense), Net. Interest expense, net was $312,000 in 2008 resulting primarily from interest expense arising from discount amortization and interest of convertible loan received from a related party. We expect that our interest expense, net may decrease in the middle of 2009 as a result of completion of the interest and discount amortization of convertible loan and warrants costs in connection with financings that occurred during 2006.
Currency translation gains and losses were $70,000 in 2007 and $25,000 in 2008. The decrease resulted from exchange rate fluctuations between the U.S. dollar and the New Israeli Shekel.
Income Taxes. Income Taxes expenses were $0.3 million in 2007 due to the company’s evaluation for its taxes exposures according to FIN 48 compared to $0.1 million benefit in 2008 due to release of its taxes exposures according to FIN 48 with respect to closed tax years.
We have an estimated net operating loss carry forward for Israeli tax purposes totaling approximately $ 29.3 million through December 31, 2008 that would reduce future Israeli income taxes, if any. These net operating losses may be carried forward indefinitely and offset against future taxable business income. We expect that during the period these losses are utilized, our income would be substantially tax exempt.
Our U.S. subsidiary has net taxable losses for U.S. Federal and state tax purposes totaling approximately $37.2 million through December 31, 2008. Utilization of U.S. net operating losses may be subject to substantial annual limitation due to “Change in ownership” provision 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.
The Company and its subsidiary provide a valuation allowance on the entire deferred tax asset in respect of the carryforward losses, due to the uncertainty regarding future realization. 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 carryforward will not be realized in the foreseeable future. Deferred taxes in respect of other temporary differences are immaterial.
Total Revenues. Total revenues were $4.28 million in 2006 and $3.12 million in 2007. Total revenues decreased by $1.16 million, or 27.5% due to a $532,000 decrease in product revenues and a $631,000 decrease in services revenues.
Software License. Software license revenues consist primarily of revenues from the license of our software products to end-users, resellers, and technology partners. Software license revenues were $1.757 million in 2006 and $1.225 million in 2007. Software license revenues decreased by $532,000, or 30%, due to a decrease in sales.
Services. Service revenues consist primarily of revenue from annual support and maintenance contracts and, to a lesser extent, training and consulting services. Services revenues were $2.5 million in 2006 and $ 1.9 in 2007. Services revenues decreased by $600,000, or 24%, due to services to Opnet in 2006 that did not proceed in 2007.
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Cost of Software Licenses. Cost of software licenses consists principally of direct product costs, such as product media and packaging, as well as royalties due to third parties. Cost of software licenses was $80,000, or 4.6% of software license revenue in 2006 compared to $26,000, or 0.8% of software license revenue in 2007. The reduction in the cost of software licenses resulted from lower third-party royalty payments attributable to decreased revenues from royalty-bearing products in 2007.
Cost of Services. Cost of services consists principally of personnel related costs associated with customer support and training. Cost of services $133,000, or 5.2% of service revenues in 2006 compared to $66,000, or 2% of service revenues in 2007. This decrease was due to lower personnel costs for support and maintenance services resulting from reductions in personnel and salary-related costs in 2007.
Sales and Marketing. Sales and marketing expenses consist principally of salaries and commissions for sales personnel, recruiting costs, trade show costs, travel and other marketing costs such as lead generation activities, advertising and product promotion. Sales and marketing expenses were $2.5 million, or 57.8% of total revenues in 2006 compared to $2.7 million, or 86% of total revenues in 2007. The increase in sales and marketing costs relate primarily to the launch of the open source product and the marketing activities related to this launch.
Research and Development. Research and development expenses consist principally of salaries and related expenses required to develop and enhance our products. Research and development expenses were $1.5 million, or 35.3% of total revenues in 2006 compared to $1.9 million, or 60.6% of total revenues in 2007. This increase resulted primarily from the resources allocated to the open source product.
General and Administrative. General and administrative expenses consist principally of executive, finance and administrative salaries and related expenses, and costs of being a publicly held company. General and administrative expenses were $1.7 million, or 39% of total revenues in 2006 compared to $1.7 million, or 55.3% of total revenues in 2007.
Financial Income (Expense), Net. Interest expense, net was $287,000 in 2007 resulting primarily from interest expense arising from discount amortization and interest of convertible loan received from a related party.
Currency translation gains and losses were $50,000 in 2006 and $70,000 in 2007. The increase resulted from exchange rate fluctuations between the U.S. dollar and the New Israeli Shekel.
Income Taxes. We have an estimated net operating loss carry forward for Israeli tax purposes totaling approximately $ 23.5 million through December 31, 2007 that would reduce future Israeli income taxes, if any. These net operating losses may be carried forward indefinitely and offset against future taxable business income.
Our U.S. subsidiary has net taxable losses for U.S. Federal and state tax purposes totaling approximately $37.2 million through December 31, 2007.
A substantial majority of our revenues is received, and a majority of our expenses is incurred, in U.S. dollars. Revenues denominated in U.S. dollars as a percent of total revenues were 85.7% in 2006, 80.9% in 2007 and 84.1% in 2008. Expenses denominated in U.S. dollars as a percent of total expenses were 53.3% in 2006, 35.8% in 2007 and 21% in 2008
A portion of our expenses, mainly salary and personnel costs related to our employees in Israel, is incurred in New Israeli Shekels, or NIS. The salaries of our Israel-based employees are partially linked to increases in the Israeli consumer price index. As a result, the U.S. dollar cost of our Israeli operations is influenced by inflation in Israel as well as the currency exchange rate between the NIS in relation to the U.S. dollar. Any increase in the rate of inflation in Israel may have a negative effect on our operating results, unless such inflation is offset by a devaluation of the NIS in relation to the U.S. dollar. Exchange rates between the NIS and the U.S. dollar fluctuate continuously, and therefore exchange rate fluctuations and especially larger periodic devaluations will have an impact on our operating results and period-to-period comparisons of its results. The effects of foreign currency translations are reported in our financial statements in current operating results.
In addition to our operations in Israel, we also conduct sales operations in the U.S. and Europe. Transactions denominated in currencies other than the U.S. dollar or NIS were not material.
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We currently do not invest in, or hold for trading or other purposes, any financial instruments subject to market risk. Except for a $750,000 convertible loan obtained during 2006, and the 2008 Credit Facility, we currently do not have any outstanding borrowings or other credit facilities.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The impact of SFAS 141R on the Company’s consolidated results of operations and financial condition will depend on the nature and size of acquisitions, if any, subsequent to the effective date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51". SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS No. 160 on its consolidated financial statement.
In February 2008, the FASB issued FSP No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13", and FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157". Collectively, the Staff Positions defer the effective date of Statement 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least annually, and amend the scope of Statement 157. As described in Note 4, the Company adopted Statement 157 and the related FASB staff positions except for those items specifically deferred under FSP No. FAS 157-2.
In June 2008, the FASB issued EITF No. 07-5 “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in shareholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. The Company believes adopting this statement will have no impact on the consolidated financial statements.
Effective December 31, 2008, the Company adopted FASB Staff Position (FSP) APB 14-1. “Accounting for Convertible debt Instruments that may be settled in cash upon conversion”. FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Therefore this part of the standard will not be effective for the Company until our fiscal year ended December 31, 2009, unless the Company elects early adoption. The Company is currently evaluating the potential impact, if any, of the adoption of FSP APB 14-1 on its consolidated financial statement.
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Israeli companies are currently subject to tax at the rate of 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and years thereafter. However, we have derived, and expect to continue to derive, a substantial portion of our income under our Approved Enterprise capital investment program. Subject to compliance with applicable requirements, such income will be tax exempt for a period of two years and will be subject to a reduced corporate tax rate of 25% in the following five to eight years, subject to the level of foreign shareholders holdings in our ordinary shares. Tax benefits for each capital investment program are only effective in restricted periods according to the Encouragement of Capital Investments Law. If we do not comply with the applicable requirements, the tax benefits may be canceled. We believe that we comply with these conditions. If we operate under more than one approval, or if our capital investments are only partially approved, our effective tax rate will be a weighted combination of the various applicable tax rates. We may not be able to obtain approval for additional Approved Enterprise programs. Since we have incurred tax losses through December 31, 2008, we have not yet used the tax benefits for which we are eligible.
Under U.S. federal income tax laws, we will be treated a passive foreign investment company, or PFIC, in any tax year if, in such tax year, either 75% or more of our gross income is passive in nature, also referred to as the Income Test, or, on average for such tax year, 50% or more the fair market value of our assets produce or are held for the production of passive income, also referred to as the Asset Test. We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change from year to year. Classification as a PFIC may have important and adverse tax implications to U.S. Holders. For purposes of this summary, a U.S. Holder is a holder of our ordinary shares that is, for U.S. income tax purposes:
| — | a citizen or resident of the United States; |
| — | a domestic U.S. corporation; |
| — | an estate, the income of which is subject to U.S. federal income tax regardless of the source of its income; and |
| — | any trust if either (i) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all the substantial decisions of the trust, or (ii) the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person. |
In applying the Asset Test, the average fair market value of our assets is determined on the basis of the average fair market value of our assets as of the end of each quarter of the tax year. The value of the total assets of a publicly traded foreign corporation is generally equal to the sum of the aggregate value of its outstanding stock plus its liabilities. Although we may no longer be “publicly traded” for this purpose, we believe our share price continues to provide the best indication of the fair value of our assets for this purpose.
Based on the composition of our income and assets for purposes of the Income Test and the Asset Test, respectively, we believe that we were a PFIC for the 2002 and 2003 tax years, but we do not believe we were a PFIC for the 2004, 2005, 2006, 2007 and 2008 tax years. There can be no assurance that we will not be treated as a PFIC in any future tax year. Although we generally will be treated as a PFIC as to any U.S. Holder if we are a PFIC for any year during such U.S. Holder’s holding period of our ordinary shares, such U.S. Holder may avoid the consequences of PFIC classification for years after we cease to be a PFIC by making an election, as described below. In view of the complexity of the issues regarding our treatment as a PFIC, U.S. Holders are urged to consult their own tax advisors for guidance as to our status as a PFIC.
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There are no U.S. federal income tax consequences to a non-U.S. Holder if we are classified as a PFIC.
If we are a PFIC for U.S. federal income tax purposes for any year during a U.S. Holder’s holding period of our ordinary shares and such U.S. Holder does not make either of the special elections described below, any gain recognized by such U.S. Holder upon the sale of ordinary shares, or upon the receipt of certain distributions, will be treated as ordinary income. Such income generally would be allocated ratably over the U.S. Holder’s holding period of our ordinary shares. The amount allocated to prior years, with certain exceptions, will be subject to tax at the highest tax rate in effect for those years and an interest charge will be imposed on the amount of deferred tax on the income allocated to the prior taxable years.
Although we generally will be treated as a PFIC as to any U.S. Holder if we are a PFIC for any year during such U.S. Holder’s holding period, if we cease to satisfy the requirements for PFIC classification, the U.S. Holder may avoid PFIC classification for subsequent years by electing to recognize gain based on the unrealized appreciation in the ordinary shares through the close of the tax year in which we cease to be a PFIC. Additionally, if we are a PFIC, a U.S. Holder who acquires ordinary shares from a decedent will be denied the normally available step-up in tax basis for our ordinary shares to fair market value at the date of death and instead will have a tax basis equal to the lower of fair market value or the decedent’s tax basis.
For any tax year in which we are determined to be a PFIC, U.S. Holders may elect to treat their ordinary shares as an interest in a qualified electing fund, or a QEF Election, in which case such U.S. Holders would be required to include in income currently their proportionate share of our earnings and profits in years in which we are a PFIC regardless of whether distributions of such earnings and profits are actually distributed to such U.S. Holders.
Any gain subsequently recognized upon the sale of their ordinary shares by such U.S. Holders generally would be taxed as capital gain and a denial of the basis step-up at death would not apply.
A U.S. Holder may make a QEF Election with respect to a PFIC for any taxable year of the U.S. Holder. A QEF Election is effective for the year in which the election is made and all subsequent taxable years of the U.S. Holder. Procedures exist for both retroactive elections and the filing of protective statements. A U.S. Holder making the QEF Election must make the election on or before the due date, as extended, for the filing of the U.S. Holder’s income tax return for the first taxable year to which the election will apply.
A U.S. Holder must make a QEF Election by completing Form 8621,Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, and attaching it to their U.S. federal income tax return, and must satisfy additional filing requirements each year the election remains in effect. We intend to provide to each U.S. Holder, upon request, the tax information required to make a QEF Election and to make subsequent annual filings.
As an alternative to a QEF Election, a U.S. Holder of PFIC shares that are “marketable” generally may be able to avoid the imposition of the special tax and interest charge described above by electing to mark to market the ordinary shares, or a Mark-to-Market Election. Our ordinary shares ceased being “marketable” for purposes of the Mark-to-Market Election in 2004, however, and as a result, any such election made by a U.S. Holder for a prior year terminated automatically as of the beginning of our 2004 tax year.
U.S. Holders should consult their own tax advisors regarding the eligibility, manner and advisability of making a QEF Election, the consequences of the automatic termination of any existing Mark-to-Market Election in 2004, and the effect of these elections on the calculation of the amount of foreign tax credit that may be available to them.
A U.S. Holder who beneficially owns shares of a PFIC must file Form 8621 with the U.S. Internal Revenue Service for each tax year in which the U.S. Holder holds shares in a PFIC. This form describes any distributions received with respect to these shares and any gain realized upon the disposition of these shares.
The summary above is based on current provisions of the United States Internal Revenue Code of 1986, as amended, final, temporary and proposed U.S. Treasury Regulations promulgated thereunder, and administrative and judicial interpretations thereof, all of which are subject to change, possibly with retroactive effect. This summary is limited to a description of certain of the material U.S. federal income tax consequences to U.S. Holders of our status as a PFIC and does not consider any other aspects of U.S. federal income taxation that may be relevant to U.S. Holders, nor does it consider all aspects of the PFIC regime that may be relevant to particular U.S. Holders by reason of their particular circumstances. This summary is directed only to U.S. Holders that hold ordinary shares as capital assets and does not address the considerations that may be applicable to particular classes of U.S. Holders, including tax-exempt organizations, holders of ordinary shares as part of a “straddle,” “hedge” or “conversion transaction,” U.S. Holders who own, directly, indirectly or through attribution, 10% or more of our outstanding ordinary shares, and persons who own ordinary shares through a partnership or other pass-through entity.
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Rules relating to the income tax consequences of being treated as a PFIC are very complex. U.S. Holders are urged to consult their own tax advisors regarding the application of the PFIC rules to their investment in our ordinary shares.
We have received a participation grant from the Office of the Chief Scientist (“OCS”) of Israel’s Ministry of Industry, Trade and Labor in our Open Source Web Testing project for 2007, in the amount of up to approximately US$460,000. As of May 31, 2009, we have received the amount of US$409,500 out of the entire grant and there is no further amount expected to be received in connection with this project. In addition, we have received a participation grant from the OCS in our Load and Performance Testing project for 2008, in the amount of up to approximately US$200,000. As of May 31, 2009, we have received the amount of US$180,000 out of the entire grant. In order to receive the full amount of the grant we are required to submit the Company’s 2008 annual report. Although a new application was submitted to the OCS in the first quarter of 2009 for a grant of up to US$ 330,000 we cannot assure that the application will be approved.
Under the Law for the Encouragement of Industrial Research and Development, 1984 (the “Research Law”), research and development programs approved by a research committee of the OCS, are eligible for grants in exchange for payment to the Government of royalties from the sale of products developed in accordance with the Program. In order to be eligible, the applicant must be an Israeli company that proposes to invest in the development of industrial know-how, the development of new products, the development of new processing or manufacturing procedures or the development of significant improvements to an existing process or product. A committee of the OCS reviews the applications, evaluates the feasibility of the proposal, determines whether or not to approve a grant, and also determines the extent of Chief Scientist funding (within a range specified by the law) for approved projects. Depending on the nature of the project, the OCS grants generally amount up to 50% of the approved research expenses.
Under the terms of the grant for which we received approval from the OCS, and subject to the agreement and other documents ancillary thereto, we are obligated to pay royalties of between 3% and 4.5% on sales of products incorporating know-how developed within the framework of each funded program or derived therefrom (including ancillary services in connection therewith), up to an aggregate of up to 100% of the dollar-linked value of the total grants received. The royalties payable are subject to interest on the U.S. dollar-linked value of the total grants received at the annual rate of LIBOR applicable to U.S. dollar deposits at the date the grants received.
The Research Law requires that the manufacture of any product developed as a result of research and development funded by the Israeli Government take place in Israel. If any of the manufacturing is performed outside of Israel, the company would ordinarily be required to pay royalties at an increased rate and to increase the aggregate repayment amount to between 120% and 300% of the grant amount, depending on the manufacturing volume that is performed outside Israel, except in special cases that receive the prior approval of the research committee, and subject to certain payments to be made to the Israeli Government (generally an amount no less that the aggregate grants plus interest less royalties paid).
The Research Law also provides that know-how from the research may not be transferred to third parties in Israel without prior approval of the research committee. This approval, however, is not required for the sale or export of any products resulting from such research and development. Approval of such transfer of know-how may be granted in specific circumstances, only if the recipient abides by the provisions of the Research Law and related regulations, including the restrictions on the transfer of know-how and the obligation to pay royalties in an amount that may be increased. The Research Law further provides that the know-how developed under an approved research and development program may not be transferred to any third parties outside Israel.
The Research Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The law requires the grant recipient and its controlling shareholders and interested parties to notify the Office of the Chief Scientist of any change in control of the recipient or a change in the holdings of the significant stockholders of the recipient that results in a non-Israeli becoming an interested party directly in the recipient and requires the new interested party to undertake to the Office of the Chief Scientist to comply with the Research Law. In addition, the rules of the Office of the Chief Scientist may require prior approval of the Office of the Chief Scientist or additional information or representations in respect of certain of such events.
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In recent years, the funds available for Office of the Chief Scientist grants out of the annual budget of the State of Israel have been reduced, and the Israeli authorities have indicated that the government may further reduce or abolish Office of the Chief Scientist grants in the future.
We are incorporated under the laws of Israel. Our offices and product development and manufacturing facilities are located in Israel. As a consequence, we are directly affected by political, economic and military conditions in Israel. Our operations would be substantially impaired if major hostilities involving Israel should occur or if trade between Israel and its present trading partners should be curtailed. See also Item 3D–Risk Factors.
Political and Economic Conditions
Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. While a peace agreement between Israel and Egypt was signed in 1979, economic relations have been limited. A peace agreement between Israel and Jordan was signed in 1994. However, as of the date hereof, Israel has not entered into any peace agreement with Syria or Lebanon. No prediction can be made as to whether any other written agreements will be entered into between Israel and its neighboring countries, whether a final resolution of the area’s problems will be achieved, the nature of any such resolution or whether civil unrest will resume and to what extent such unrest would have an adverse impact on Israel’s economic development or on our operations in the future.
There is substantial uncertainty about how or whether any peace process will develop or what effect it may have upon us. Since October 2000, there has been a substantial deterioration in the relationship between Israel and the Palestinians which has resulted in increased violence. The future effect of this deterioration and violence on the Israeli economy and our operations is unclear. In January 2006, Hamas, an Islamic movement responsible for many attacks against Israelis, won the majority of the seats in the Parliament of the Palestinian Authority. The election of a majority of Hamas-supported candidates is a major obstacle to relations between Israel and the Palestinian Authority, as well as to the stability in the Middle East as a whole. In addition, the future of the “peace process” with the Palestinians is uncertain and has deteriorated due to Palestinian violence, with the threat of a large-scale attack by Palestinians on Israeli civilians and key infrastructure remaining a constant concern. The past few years of renewed terrorist attacks by the Palestinians has severely affected the Israeli economy in many ways. In June 2007, there was an escalation in violence in the Gaza Strip resulting in Hamas effectively controlling the Gaza Strip and a further escalation in violence has occurred during the first few months of 2008. In July 2006, Israel became involved in a major military conflict with the Hezbollah organization in Lebanon, which subjected the north of Israel to missile attacks. In December 2008, Israel was involved in a military conflict with Hamas, which subjected the South of Israel to missile attacks. Ongoing violence between Israel and the Palestinians as well as tension between Israel and the neighboring Syria and Lebanon may have a material adverse effect on our business, financial condition and results of operations. In addition, several countries still restrict business with Israel and with companies doing business in Israel. We could be adversely affected by adverse developments in the “peace process” or by restrictive laws or policies directed towards Israel or Israeli businesses.
Some of our employees are obligated to perform annual reserve duty in the Israel Defense Forces and may, at any time, be called for active military duty. While we have operated effectively under those and similar requirements in the past, no assessment can be made of the full impact of such requirements on us in the future, particularly if emergency circumstances occur.
In recent years Israel has undergone a period of recession in economic activity, resulting in low growth rates and growing unemployment. Our operations could be adversely affected if the economic conditions in Israel deteriorate.
In 1998, the Israeli currency control regulations were liberalized dramatically. As a result, Israeli citizens can generally freely purchase and sell Israeli currency and assets. The Government of Israel has periodically changed its policies in these areas. There are currently no Israeli currency control restrictions on remittances of dividends on ordinary shares or proceeds from the sale of ordinary shares; however, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.
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The costs of our operations in Israel are generally incurred in New Israeli Shekels (“NIS”). If the inflation rate in Israel exceeds the rate of devaluation of the NIS against the US Dollar in any period, the costs of our Israeli operations, as measured in US Dollars, could increase. Israel’s economy has, at various times in the past, experienced high rates of inflation.
Like many Israeli companies, we receive tax benefits from the Israeli Government. We also participate in programs sponsored by the Israeli Government. The reduction or termination of any such programs or tax benefits, especially those benefits available as a result of the “Approved Enterprise” status of facilities in Israel, could have a materially adverse effect on our business.
Cash and cash equivalents totaled $229,000 as of December 31, 2006, $880,000 as of December 31, 2007 and $243,000 as of December 31, 2008. Restricted cash totaled $26,000 as of December 31, 2007 and December 31, 2008.
Cash used in operating activities was $1.9 million in 2006, $3.5 million in 2007 and $0.6 million in 2008. Cash used in operating activities has resulted substantially from our reported net losses partially reduced by noncash items such as depreciation, stock-based compensation and amortization of debt discount, and changes in current assets and liabilities and deferred revenues.
Cash used in operating activities in 2006 was due primarily to a net loss of $1.8 million, a decrease of $269,000 in accounts receivable, a decrease of $63,000 in accrued severance pay, and a decrease of $574,000 in deferred revenue, partially offset by noncash items, an increase of $125,000 in accrued expenses and a decrease of $142,000 in accounts payable. Accounts receivable decreased as a result of revenues reduction and due to the absence of incremental amounts to be collected under technology license agreements as opposed to 2005 when a technology license agreement was entered into in December 2005. Deferred revenues decreased due primarily to the recognition of deferred technology license fees during 2006 and vendor maintenance contracts. Accounts payable decreased due to payments before year end and a decrease in the US subsidiary’s activity.
Cash used in operating activities in 2007 was due primarily to a net loss of $3.9 million, an increase of $241,000 in accounts receivable, a decrease of $54,000 in accrued severance pay, partially offset by noncash items, an increase of $380,000 in accrued expenses, an increase of $55,000 in deferred revenue and a decrease of $144,000 in accounts payable. Accounts receivable increased as a result of incremental amounts to be collected under technology license agreements. Deferred revenues decreased due primarily to the recognition of vendor maintenance contracts. Accounts payable decreased due to payments before year end and a decrease in the US subsidiary’s activity.
Cash used in operating activities in 2008 was due primarily to a net loss of $0.36 million, a decrease of $603,000 in accrued expenses, and a decrease of $290,000 in deferred revenue, partially offset by noncash items, a decrease of $279,000 in accounts receivable and amortization of debt discount, long-term convertible loan discount and deferred financing costs of $263,000. Accrued expenses decreased due to reduction of personnel and tax liabilities. Deferred revenues decreased due primarily to the recognition of deferred technology license fees during 2008. Accounts receivable decreased as a result of decrease in sales in the last quarter of 2008.
Cash used in investing activities was $21,000 in 2006, $52,000 in 2007 and $10,000 in 2008. Cash used in investing activities in 2006 was for the purchase of $40,000 in property and equipment partially offset by the decrease in restricted cash of $19,000. Cash used in investing activities in 2007 was for the purchase of $47,000 in property and equipment and for the increase in restricted cash of $5,000. Cash used in investing activities in 2008 was for the purchase of $10,000 in property and equipment.
Cash provided by financing activities was $2.0 million in 2006 consisting, as more fully described below, primarily of the net proceeds from a share purchase agreement in August 2006 for 25,000,000 of our preferred shares, plus warrants and additional investment rights for an aggregate purchase price of $750,000, a convertible loan of $750,000 and a subsequent investment of $700,000 in December 2006 of 23,333,334 of our preferred shares, plus warrants. The proceeds from the share purchase in 2006 were offset by issuance costs and a $70,000 repayment under the revolving line of credit. Cash provided by financing activities was $4.2 million in 2007 consisting, as more fully described below, primarily of the net proceeds from an additional investment of Fortissimo in February and March 2007 for 33,333,334 of our preferred shares and a private offering led by Mietav Underwriting Ltd. in March and May 2007 for 56,378,980 of our preferred shares, plus warrants and additional investment rights.
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There was no net cash provided by financing activities in 2008.
In August 2006, we closed a financing with Fortissimo Capital Fund GP LP, or Fortissimo, on behalf of several limited partnerships in which it serves as general partner and other co-investors including one of our directors and two existing shareholders, or the Investors. The initial financing was for $1.5 million consisting of $750,000 to purchase 25,000,000 of convertible preferred shares, or Preferred Shares, at a price of $0.03 per share and $750,000 as a convertible loan. The financing also provided for an additional investment, at the option of the Investors, to purchase up to an additional 75 million Preferred Shares for up to $2.25 million, at a price of $0.03 per share, for a period of 18 months after the closing of the initial investment. Each Preferred Share is convertible into one of our ordinary shares, subject to adjustment for anti-dilution events. Each Preferred Share receives the same voting rights as ordinary shares, except Preferred Shares are entitled to elect the majority of our board of directors and have approval rights over specified actions. Each Preferred Share is entitled to a preference in liquidation over our ordinary shares. The Investors also received warrants to purchase up to 18,750,000 Preferred Shares in connection with the initial investment and up to 56,250,000 Preferred Shares in the event they make the additional investment. The additional investment rights were exercised in part, as described below, and have otherwise expired. The warrants have an exercise price of $0.04 per share for a period of five years from date of issuance.
The convertible loan under the August 2006 financing is due to be repaid on August 18, 2009. The investors have agreed to extend the loan payment date to June 30, 2010 and during the extension period, the loan shall be non-convertible and without interest.
In order to secure additional financing in the last quarter of 2006 and the first quarter of 2007, the Company requested Fortissimo to accelerate the exercise of its right under the financing to make additional investments. The Company and Fortissimo entered in a series of addendum to the share purchase agreement of April 2006 for Fortissimo’s additional investment and purchase as follows: the purchase on December 24, 2006 of 23,333,334 Preferred Shares and 17,500,000 Preferred Warrants for $0.7 million (the “First Addendum”), the purchase on February 7, 2007 of 16,666,667 Preferred Shares and 12,500,000 Preferred Warrants for $0.5 million (the “Second Addendum”) and the purchase on March 20, 2007 of 16,666,667 Preferred Shares and 12,500,000 Preferred Warrants for $0.5 million (the “Third Addendum”).
Pursuant to each of the First, Second and Third Addendums, respectively, and in consideration of the acceleration of the additional investment rights, the Company undertook to grant Fortissimo a new option (each a “New Option”) to acquire on the same terms and conditions the same number of shares and warrants as purchased under the respective Addendum. The New Option is subject to the right of the Company for a period of 12 months from the date of issuance of the New Option to buy back any shares and warrants purchased under the Addendum by payment to Fortissimo of the purchase price paid for the shares and warrants under the Addendum plus interest at the annual rate of 8%. The Company did not exercise its rights to buy back any shares purchased under the Addendums and these rights have expired.
The convertible loan under the financing bears interest at 8.0% per annum. The convertible loan plus, at the election of the Investors, any accrued interest thereon, is convertible into Preferred Shares at a conversion price of $0.03 per share. The convertible loan matures three years from the closing date of the initial investment and, if not converted by such date, becomes due and payable 30 days thereafter.
The financing also provided for us to enter into a management services agreement with Fortissimo, under which Fortissimo will provide management and board services in consideration a minimum fee of $50,000 per year payable quarterly (the “Fixed Fee”) plus an additional amount of up to $70,000 payable at the end of each year that we are profitable, provided that such additional amount may not to exceed the available profits (the “Additional Fee”).
In March and May 2007, we closed two private placements for our ordinary shares to several institutional investors led by Meitav Underwriting Ltd., or Meitav, totaling approximately $3.4 million for the purchase of 56,378,980 ordinary shares at a price per share of $0.06 and warrants to purchase 39,465,286 ordinary shares at a price per share of $0.06.
35
In December 2008, the Board and shareholders approved the terms of a convertible credit facility that may be provided to us by Fortissimo (the “2008 Credit Facility”). Any future cash withdrawals from this facility, except for the $0.5 million discussed below, will be subject to the discretion of Fortissimo. The Credit Facility is for an amount up to $4 million, in one or more loans, to be determined by Fortissimo at its sole discretion upon our request (each the “Loan”). Each Loan shall have a 3 year term, which may be extended for 2 additional one year terms by agreement of Fortissimo and us. The Loans shall bear interest at 8%, compounded annually, payable together with the repayment of the principal of the respective Loan. A Loan (or any part thereof) may be repaid at any time prior to its due date, at our discretion. Each Loan is convertible into Ordinary Shares, at the option of Fortissimo, at any time prior to repayment, at a conversion price per ordinary share equal to $0.01, the price at which our shares were traded when the 2008 Credit Facility was approved, (the “Conversion Price”). As security for the repayment of the Loans, we shall grant Fortissimo (i) a fixed charge on our intellectual property, and (ii) a floating charge on our tangible and intangible assets, junior to all of our outstanding charges at the time of the Loan. We have also agreed that upon each draw down of a Loan, Fortissimo will be issued a warrant to acquire ordinary shares in a dollar amount equal to 50% of the principal amount of the Loan at a purchase price per share equal to the Conversion Price. Fortissimo has agreed in advance to comply with a request of up to $0.5 million within the next twelve months.
We expect that operating expenses will constitute a material use of our cash resources. We believe that our existing cash and cash equivalents and cash provided from out ongoing operations, along with the availability of $0.5 million, as agreed by Fortissimo, will be sufficient to meet our anticipated needs for working capital for at least the next twelve months.
We lease all of our office facilities under noncancellable operating leases that expire over varying terms through 2009 and 2010.
Not Applicable
Our research and development expenses were $1.5 million in 2006, $1.9 million in 2007 and $1.2 million in 2008. For additional information, see Item 4B. – “Business Overview – Research and Development”.
Not applicable
Not applicable
The following table of our material contractual obligations as of December 31, 2008, summarizes the aggregate effect that these obligations are expected to have on our cash flows:
| Payments due by Period | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||
| (In thousands) | |||||||||||||||||
| Operating leases | $ | 118 | $ | 59 | $ | 59 | $ | - | $ | - | |||||||
| Severance pay(1) | 284 | 44 | - | - | 240 | ||||||||||||
| Fin 48 provision(2) | 556 | - | - | - | - | ||||||||||||
| Total | $ | 958 | $ | 103 | $ | 59 | $ | - | $ | 240 | |||||||
| (1) | Severance pay relates to accrued severance obligations to our Israeli employees as required under Israeli labor laws. These obligations are payable only upon the termination of the respective employee and may be reduced if the employee’s termination is voluntary. |
| (2) | Uncertain income tax position under FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) are due upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 10 of our Consolidated Financial Statements for further information regarding the Company’s liability under FIN 48. |
36
The following table contains certain information about our directors, and executive officers:
| Name | Age | Position |
|---|---|---|
| Jaron Lotan | 51 | Chairman of the Board |
| Yochai Hacohen | 43 | Director |
| Rami Goraly | 42 | Chief Executive Officer, Director |
| Amira Paz | 43 | Vice President of Finance (Principal Financial Officer) |
| Shai Beilis | 60 | Director |
| Hadas Gazit Kaiser | 33 | External Director |
| Amir Livne | 48 | External Director |
| Eli Blatt | 46 | Director |
| Merav Davidson | 42 | Director |
JARON LOTAN has served as a Director and the Chairman of the Board since May 2006. Mr. Lotan served as the President and Chief Executive Officer of Technomatix Technologies Ltd., a provider of digital manufacturing solutions, from October 2002 until the sale of that company to UGS Corp. in April 2005. He was appointed Chief Executive Officer of Technomatix in January 2004. Following the acquisition of Technomatix Technologies Ltd., Mr. Lotan served as Senior Vice President of UGS Corp. from April 2005 until September 2005. Prior to joining Technomatix in October 2002, he was corporate executive vice president for business and strategy at Orbotech Ltd., a supplier of automated optical inspection and other productivity solutions for the electronics industry, responsible for the worldwide sales, marketing and support organization, corporate marketing activities, and strategy and business development. Prior to this, Mr. Lotan served as president of the Orbotech PCB Division and president of Orbotech Europe. Before joining Orbotech in 1992, he co-founded and served as general manager, North America for Rosh Intelligent Systems, a software company offering knowledge-based solutions to customer support organizations. Mr. Lotan holds a B.A. in Economics and Mathematics and an M.A. in Economics both from the Hebrew University in Jerusalem, Israel.
YOCHAI HACOHEN has served as a Director of the Company since February 2006. On June 11, 2006, Mr. Hacohen was appointed as interim President and Chief Executive Officer, which appointment was made permanent by action of the Board of Directors on December 26, 2007. On April 7, 2008, Mr. Hacohen stepped down as CEO and was replaced by Mr. Rami Goraly. Mr. Hacohen remains a member of the Board of Directors. Mr. Hacohen joined Fortissimo in May 2004 and became a partner in January 2005. He currently serves on the boards of directors of Fortissimo Acquisition Corp. and Advanced Answers on Demand Inc. From October 2003 through May 2004, Mr. Hacohen served as the General Manager of a U.S. division of Magal Security Systems Ltd., a provider of hardware and software solutions for the surveillance market. From October 1998 through September 2002, Mr. Hacohen served as the Director of EMEA Sales and Marketing for the video recording division of Nice Systems Ltd., a provider of digital video and audio recording solutions. Mr. Hacohen holds a B.Sc. degree in Biotechnology and M.B.A. degree in Marketing from Tel Aviv University.
RAMI GORALY serves as the Company’s Chief Executive Officer since April 7, 2008 and as a Director since December 2008. Mr. Goraly previously served as RadView’s Vice President of Marketing from June 2006. From 2005-2006 Mr. Goraly was the CEO of Telrad Connegy Ltd., a provider of converged telecommunication solutions and from 2004-2005 Mr. Goraly was the CEO of SweetIM provider of an interactive content for instant messaging platform. From 1996 through 2004, Mr. Goraly worked in the United States, where he founded and served as the CEO of Accept Software Corporation, a leading developer of enterprise product planning solutions. Other positions held by Mr. Goraly include management positions in Cheyenne Software Inc. (acquired by Computer Associates) and Check Point Software Technologies Ltd. Mr. Goraly received bachelor degrees in Economics and Accounting from Tel Aviv University, and an MBA degree from the Cass Business School in London.
37
AMIRA PAZ serves as Vice President of Finance since February 2008. Prior to joining RadView, Ms. Paz served for a period of ten years as Chief Financial Officer in three Formula-Group software companies: Tiltan Systems Engineering Ltd., Enformia Software Ltd. and Idit Technologies Ltd. Ms. Paz is a licensed CPA in Israel and holds a BA in Economics and Business Management from Ben-Gurion University, an MBA in Finance and Accounting from Tel-Aviv University and an LL.M from Bar-Ilan University.
SHAI BEILIS has served as a Director since May 1998 and served as Chairman of the Board from May 2001 until May 2006. Mr. Beilis has been the Chairman and Managing Partner of Formula Ventures Ltd. since December 1998. From January 1995 until joining Formula Ventures Ltd., Mr. Beilis served as the Chief Executive Officer of Argotec Ltd., a wholly-owned subsidiary of Formula Systems (1985) Ltd., established in 1993 to capitalize on investment opportunities in the IT sector, where he was responsible for initiating, overseeing and managing Argotec’s investments. Before joining Formula Systems (1985) Ltd., Mr. Beilis served as Chief Executive Officer of Clal Computers and Technology Ltd. and was employed by Digital Equipment Corporation. Mr. Beilis serves as a director for several private companies and until February 2008, served as a director in Blue Phoenics Ltd. Mr. Beilis is a director and principal shareholder of Shem Basum, Ltd. Mr. Beilis holds a B.S. degree in Mathematics and Economics from the Hebrew University in Jerusalem, Israel and a M.S. degree in Computer Science from the Weizmann Institute of Science.
HADAS GAZIT KAISER serves as an External Director of the Company since October 2007. Mrs. Gazit Kaiser is the Chief Financial Officer and Finance Director of Emblaze Ltd. (LSE:BLZ.L), a publicly traded company on the London Stock Exchange. Before becoming the CFO of Emblaze in December 2006, Mrs. Gazit Kaiser acted as the Vice President of Finance for the Emblaze group of companies and as the CFO of Emblaze Mobile. Prior to joining Emblaze, Mrs. Gazit Kaiser was with TTI Team Telecom International (NASDAQ:TTIL), where she acted as the budget control manager from August 2003 to September 2005. From August 2000 to August 2003, Mrs. Gazit Kaiser acted as a manager at Ernst & Young Global (Kost, Forer Gabbay & Kasierer) where she conducted accounts of both private and publicly traded companies in Israel and abroad, especially in the technology, venture capital and investments industries. Mrs. Gazit Kaiser is a Certified Public Accountant in Israel and received an MBA in Finance and a BA in Economics and Accounting both from Tel Aviv University.
AMIR LIVNE serves as an External Director of the Company since December 2008. Mr. Livne is Vice President Product Strategy and Portfolio Management at Siemens PLM, a division of Siemens AG (NYSE:SI). Previously, Mr. Livne held a similar position at UGS PLM, which was acquired by Siemens in 2007. Between 1997 and 2004, Mr. Livne served as Executive VP of Business Development and Strategy at Tecnomatix (NASDQ: TCNOF, acquired by UGS in early 2005). Prior to joining Tecnomatix, between 1994 and 1997, Mr. Livne worked as a Senior Consultant at Booz, Allen and Hamilton, a management consulting firm. Mr. Livne holds an MBA from the University of Michigan in Ann Arbor and B.A. and M.A. degrees in Computer Science, both from Tel Aviv University. Mr. Livne replaced David Assia as an External Director following the expiration of Mr. Assia’s term in November 2008.
MERAV DAVIDSON serves as a Director of the Company since December 2008. Ms. Davidson is currently an independent consultant to Enterprise Software companies in different stages of development. From 2004 through 2007 Ms. Davidson served in several positions in Mercury Interactive, California, including Vice President – Business Operations (before and after the acquisition of Hewlett Packard) and Vice President – Mercury Managed Services. Between the years 1999 and 2004, Ms. Davidson served in several positions with Mercury Interactive, Israel, including Vice President – Mercury Managed Services, Director – Mercury Managed Services Operations, and Director – Application Performance and Management R&D. Between the years 1997 and 1999, Ms. Davidson was Manager of Application Development in Onset Technologies. Between the years 1991 and 1997, Ms. Davidson served in several positions in Mercury Interactive’s support organization in the USA and R&D organization in Israel. Ms. Davidson holds a B.Sc degree in Electrical Engineering from Tel Aviv University.
ELI BLATT has served as Director of the Company since April 2006. Mr. Blatt joined Fortissimo as a partner in January 2005. From March 1999 through May 2004, Mr. Blatt served as the Chief Financial Officer and Vice President of Operations of Noosh, Inc., a supplier of cross-enterprise e-business software solutions. From September 1997 through February 1999, Mr. Blatt served as the Director of Operations for CheckPoint Software Technologies Inc., an internet security company, where he was responsible for OEM operations, product licensing and customer service. Mr. Blatt currently serves on the board of directors of Telrad Networks Ltd., Fortissimo Acquisition Corp, Soda-Club Holdings Ltd. and Advanced Answers on Demand Inc. Mr. Blatt holds a B.Sc. degree in Industrial Engineering from Tel Aviv University and an MBA degree from Indiana University. Mr. Blatt also served as a fighter pilot in the Israeli air force.
38
The Company reimburses its directors for expenses incurred to attend meetings of the Board of Directors and any committees of the Board of Directors. To date, the Company has made annual cash payments in the amount of $5,000 to each of its non-employee directors and has granted options to purchase ordinary shares to its directors from time to time. The Company makes an annual cash payment in accordance with the rate permitted by applicable Israeli law and regulations. The current rates paid by the company are an annual fee of NIS 18,280, which is approximately $5,540 and a meeting participation fee of NIS 1,220, which is approximately $370. This compensation will apply to our existing external directors, Mr. Amir Livne and Ms. Hadas Gazit Kaiser. In addition, each of the external directors shall be entitled to options to purchase up to 792,856 ordinary shares at an exercise price equal to fair market value. Pursuant to the terms of the management services agreement entered into by the Company and Fortissimo, Messrs. Hacohen and Blatt are not entitled to cash remuneration or compensation for their services as directors as such other than the management fee payable to Fortissimo under the management services agreement. Mr. Hacohen, who served as the Company’s Chief Executive Officer and President on an interim basis from June 2006 through April 2008, received cash compensation and options from the Company for such service as an employee director. Mr. Rami Goraly is entitled to options from the Company for his service as an employee director.
The following table sets forth the aggregate compensation paid or accrued for services rendered to the Company in all capacities for the fiscal year ended December 31, 2008 by its directors and executive officers
| Salaries, Directors Fees, Service Fees, Commissions and Bonuses | Pension, Retirement and Similar Benefits | |||||||
|---|---|---|---|---|---|---|---|---|
| All directors and officers as a group (then 9 persons) | $ | 382,400 | $ | 22,540 | ||||
Such remuneration does not include amounts expended by the Company for expenses, including business association dues and expenses, reimbursed to such officers, and other fringe benefits commonly reimbursed or paid by companies in the location at which the particular executive officer is located. See also Item 7 – “Major Shareholders and Related Party Transactions” for a discussion of the stock options granted to directors and executive officers.
Jaron Lotan, as the Chairman of the Board, was granted an option to purchase 455,000 ordinary shares under the Key Employee Share Incentive Plan, equivalent to one percent of the Company’s issued and outstanding ordinary shares and preferred shares, on an as-converted basis, immediately after the closing of the initial investment in the 2006 financing by the Fortissimo Entities and other investors. Mr. Lotan was entitled to anti-dilution protection for any additional investments pursuant to the 2006 financing, by way of the grant of additional options to purchase one percent of the incremental number of issued and outstanding ordinary shares and preferred shares (on an as-converted basis) immediately following each additional investment. In furtherance of that anti-dilution commitment, Mr. Lotan was granted additional options for a total of 566,666 ordinary shares upon the closings of the additional investments made by the Fortissimo Entities in December 2006 and February and March 2007. The options are now fully vested. Additionally, as a bonus to Mr. Lotan, Mr. Lotan was granted an option to acquire 1,350,994 ordinary shares (representing up to one percent of the Company’s issued and outstanding ordinary shares and preferred shares (on an as-converted basis)) which option will vest over four years and will receive the same anti-dilution protection as described above. The exercise price of the options granted to Mr. Lotan was between $0.06 and $0.08 and any further options to be granted to him shall be at an exercise price equal to the market price on the then current date of grant.
Yochai Hacohen was both a director and an employee of the Company, serving as the Chief Executive Officer and President from July 1, 2006 (on an interim basis until December 2006 when the appointment was made permanent). On April 7, 2008, Mr. Hacohen stepped down as CEO and was replaced by Mr. Rami Goraly. In connection with his services as Chief Executive Officer and President, the Company has paid to Mr. Hacohen an annual salary of $125,000 (effective as of June 11, 2006), which was increased by 20% on the anniversary of the effective date. Mr. Hacohen is entitled to options under the Company’s Key Employee Share Incentive Plan for a total of 4,750,000 ordinary shares, such options to vest in quarterly parts over four years as of December 26, 2006. The options continue to vest as long as Mr. Hacohen serves as a director in the Company. In the event of a change in control of the Company, 50% of all then unvested options shall become immediately vested.
Rami Goraly has been a director of the Company since December 2008 and has been CEO since April 2008. In connection with his services as a director, the Board authorized and the shareholders approved the grant to Mr. Goraly of options under the Company’s Key Employee Share Incentive Plan to purchase a total of 8,000,000 Ordinary Shares. The option grant will be formally documented by year end 2009 and when completed, will have the following vesting schedule: twenty five percent (25%) of the options will be vested as of January 1, 2009 (the “First Vesting Date”) and the remaining seventy five percent (75%) of the options shall vest in 12 equal parts quarterly over a three (3) year period following the First Vesting Date. The exercise price of the options will be $0.015. Mr. Goraly also holds options for a total of 500,000 Ordinary Shares which were granted to him in 2007 and are subject to vesting as follows: 25% to vest as of October 2007, with the remainder to vest quarterly over three years. The exercise price of the options is $0.06.
39
As of December 31, 2008, all directors and officers as a group (then 9 persons, excluding one director whose term expired during 2008), held options to purchase 8,415,516 of our ordinary shares (excluding 8,000,000 options which were approved for grant to Rami Goraly and 792,856 options which were approved for grant to Amir Livne but not yet formally documented). Out of such options, 955,000 expire in 2011 and 7,460,516 expire in 2012, at exercise prices ranging from $0.06 to $0.945.
Our Board of Directors is currently comprised of 8 directors. The directors are elected at the annual shareholders meeting, to serve until the next annual meeting of our shareholders and until their respective successors are elected and qualified, with the exception of the external directors who, by rule of the Israeli Companies Law 1999, serve for three years. The Board of Directors has established two committees, the Audit Committee and the Compensation Committee, each of which is briefly described below.
The Board of Directors does not have a nominating committee or any committee performing similar functions; however, the Board of Directors has adopted the nominations process described below with respect to the consideration and nomination of candidates to serve on the Board of Directors. The Board of Directors adopted a nominating process rather than a nominating committee because the nominating process provides greater flexibility and improved participation by allowing all eligible members to contribute instead of assigning the duties to a static group of members.
Under the Companies Law and the regulations promulgated pursuant thereto, Israeli companies whose shares have been offered to the public in, or that are publicly traded outside of, Israel are required to appoint at least two natural persons as “external directors”. No person may be appointed as an external director if the person, or a relative, partner or employer of the person, 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 an external director, any affiliation with the company to whose board the external director is proposed to be appointed or with any entity controlling or controlled by such company or by the entity controlling such 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 (which term includes a director).
In addition, 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 interfere with the person’s ability to serve as an external director or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange. If, at the time of election of an external director, all other directors are of the same gender, the external director to be elected must be of the other gender. The external directors must have professional qualifications to serve as a director, and at least one of the external directors must be a financial expert.
External directors are elected for a term of three years and may be re-elected for one additional three-year term. Each committee of a company’s Board of Directors that has the authority to exercise powers of the Board of Directors is required to include at least one external director and its audit committee must include all external directors.
External directors are elected at the general meeting of shareholders by a simple majority, provided that the majority includes at least one-third of the shareholders who are not controlling shareholders, who are present and voting, or that the non-controlling shareholders who vote against the election hold one percent or less of the voting power of the company.
Under the Companies Law an external director cannot be dismissed from office unless: (i) the Board of Directors determines that the external director no longer meets the statutory requirements for holding the office, or that the external director is in breach of the external director’s fiduciary duties and the shareholders vote, by the same majority required for the appointment, to remove the external director after the external director has been given the opportunity to present his or her position; (ii) a court determines, upon a request of a director or a shareholder, that the external director no longer meets the statutory requirements of an external director or that the external director is in breach of his or her fiduciary duties to the company; or (iii) a court determines, upon a request of the company or a director, shareholder or creditor of the company, that the external director is unable to fulfill his or her duty or has been convicted of specified crimes.
Officers serve at the discretion of the Board or until their successors are appointed.
40
The Audit Committee of the Board of Directors currently consists of Shai Beilis, Hadas Gazit Kaiser and Amir Livne who commenced his services in December 2008. David Assia served as a member of the Audit Committee from his election in 2002 until the expiration of his second three-year tem in November 2008. Hanna Lerman served as a member of the Audi Committee from her election in August 2006 until her resignation from the Board of Directors in April 2007. Kathleen Cote also served as a member of the Audit Committee until her resignation from the Board of Directors in April 2006. The Israeli Companies Law requires a public company to maintain an audit committee comprised of at least three persons, including two external directors, none of whom may be chairman of the Board of Directors, a director employed by or providing other services to a company and a controlling shareholder or any relative of a controlling shareholder.
The responsibilities of our Audit Committee include identifying flaws in the management of our business, making recommendations to the Board of Directors as to how to correct them and deciding whether to approve actions or transactions which by law require Audit Committee approval. The Audit Committee may not approve an action or transaction with a controlling shareholder or with an office holder unless at the time of approval two external directors are serving as members of the Audit Committee and at least one participated in the meeting at which the action or transaction was approved.
In order to comply with the Sarbanes-Oxley Act of 2002, the Board of Directors has expanded the role of the Company’s Audit Committee to provide assistance to the Board of Directors in fulfilling its legal and fiduciary obligations with respect to matters involving the accounting, auditing, financial reporting and internal control functions of the Company. In carrying out these duties, the Audit Committee must meet at least once in each fiscal quarter with management at which time, among other things, it reviews, and either approves or disapproves, the financial statements of the Company for the immediately preceding fiscal quarter and conveys its conclusions in this regard to the Board of Directors. The Audit Committee also monitors generally the services provided by the Company’s external auditors to ensure their independence, and reviews, and either approves or disapproves, all audit and non-audit services provided by them. The Company’s external and internal auditors must also report regularly to the Audit Committee at its meetings, and the Audit Committee discusses with the Company’s external auditors the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the Company’s financial statements, as and when it deems it appropriate to do so.
Under the Sarbanes-Oxley Act of 2002, the Audit Committee is also responsible for the appointment, compensation, retention and oversight of the work of the Company’s external auditors. However, under Israeli law, the appointment of external auditors requires the approval of the shareholders of the Company. Accordingly, the appointment of the external auditors is approved and recommended to the shareholders by the Audit Committee and ratified by the shareholders. Furthermore, pursuant to the Company’s Articles of Association, the Board of Directors is the organ that has the authority to determine the compensation of the external auditors.
The Company has adopted an Audit Committee Charter which sets forth the responsibilities of the committee. A copy of this charter is available upon written request to the Company at its address in Israel.
The Compensation Committee currently consists of Jaron Lotan, Shai Beilis and Amir Livne. David Assia served as a member of the Compensation Committee until the expiration of his term in November 2008. William Geary served as a member of the Compensation Committee until his resignation from the Board of Directors in February 2006.
Each of the members of the Compensation Committee is an independent director under the rules of the Securities and Exchange Commission. Pursuant to authority delegated by the Board of Directors, the Compensation Committee is responsible for reviewing and administering the Company’s stock option plans and reviewing and approving salaries and other incentive compensation of the Company’s directors, officers and employees including recommendations to the Board of Directors with respect to the grant of stock options to officers and employees. A copy of the Compensation Committee charter is available upon written request to the Company at its address in Israel.
41
As noted above, the Board of Directors does not have a nominating committee. However, the Board of Directors has adopted a set of written procedures (the “Nominations Process”) to be followed by the Company’s independent directors, consisting of Jaron Lotan, Shai Beilis, Hadas Gazit Kaiser and Amir Livne. The Nominations Process requires the independent directors to assist the Board of Directors in its selection of individuals (i) as nominees for election to the Board of Directors at each annual meeting of the Board of Directors or (ii) to fill any vacancies or newly created directorships on the Board of Directors. A copy of the Nominations Process is available upon written request to the Company at its registered address.
Identification and Evaluation of Candidates for Board Membership
The independent directors may utilize a variety of methods for identifying and evaluating candidates for director. Candidates may come to the attention of the independent directors through current directors, management, professional search firms, shareholders or other persons. Candidates may be considered by the independent directors at any point during the year. The independent directors have sole authority to retain search firms to assist them identifying director candidates. They are required to exercise their business judgment in carrying out their responsibilities under the Nominations Process in a manner they reasonably believe to be in the best interests of the Company and its shareholders. In connection with their evaluation of a candidate, the independent directors may conduct candidate interviews, make inquiries of the person recommending the candidate, engage an outside search firm to gather additional information, or rely on the knowledge of the Board of Directors or management.
In evaluating a candidate, the independent directors may consider, among other things, a candidate’s personal and professional integrity, demonstrated ability and judgment, business experience, relevant expertise, and reputation. The Company believes that having directors with relevant experience in business and industry and other areas is beneficial to the Board of Directors as a whole, and that directors with such backgrounds can provide useful perspectives on significant risks and competitive advantages and in understanding the challenges that the Company faces. The independent directors may also consider, in accordance with applicable law, the current size and composition of the Board of Directors and the needs of the Board of Directors and its committees. The Nominations Process calls for the independent directors to develop and revise, as appropriate, selection criteria for nominees to the Board of Directors, which include the following minimum qualifications that must be met by a candidate:
| — | The highest personal and professional ethics and integrity; |
| — | Proven achievement and competence in the candidate's field and the ability to exercise sound business judgment; |
| — | Skills that are complementary to those of the existing directors; and |
| — | The ability to assist and support management and make significant contributions to the Company’s success. |
Preferred Directors
In addition to the Nominations Process, in connection with the 2006 financing as described in Item 4B – “Business Overview – Recent Developments” and Item 7B – “Related Party Transactions”, Fortissimo is entitled to nominate up to four of seven board members to serve as Preferred Directors. The responsibilities and privileges of Preferred Directors are also described in Item 10B – “Memorandum and Articles of Association”. Currently, Jaron Lotan, Yochai Hacohen and Eli Blatt serve as Preferred Directors, having been designated as such by Fortissimo following the 2006 financing.
As of December 31, 2008, we had 22 employees (including 1 contractor) worldwide, of whom 11 were employed in research and development, 4 in sales and marketing, 2 in technical support, and 5 in management and administration. Out of our employees, 2 are based in the United States, 19 are based in Israel and 1, a contractor, is based in India. None of our employees is represented by a labor union and we consider our relations with employees to be good.
Although our Israeli employees are not party to any collective bargaining agreement, all of our Israeli employees are subject to Israeli labor laws and certain provisions of collective bargaining agreements among the Government of Israel, the General Federation of Labor in Israel and one or more employer’s associations. These provisions and laws concern the length of the workday, minimum daily wages for workers, procedures for dismissing employees, determination of severance pay, adjustments of wages to increases in the Israeli consumer price index, and other conditions of employment.
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See table under Item 7: "Major Shareholders and Related Party Transactions" below.
The Key Employee Share Incentive Plan. The Board of Directors and the Company’s shareholders approved the Key Employee Share Incentive Plan (1996) (the “Key Employee Plan”) in 1996 and amended the plan in 2002. The Company has reserved for issuance an aggregate of 21,214,609 ordinary shares under the Key Employee Plan, such that, along with the ordinary shares reserved under the US Plan (as defined below), the total number of ordinary shares reserved by the Company is equal to 15% of the issued and outstanding shares of the Company; as of May 31, 2009, the Company had granted options for a total of 21,590,128 ordinary shares (excluding 8,000,000 options which were approved for grant to Rami Goraly and 792,856 options which were approved for grant to Amir Livne but not yet formally documented), of which 10,929,356 had been terminated or expired (and thus became available for future grant) and 2,465,331 had been exercised. As a result, 1,760,981 ordinary shares are available for future grant as of May 31, 2009 (after taking into account the 8,000,000 options which were approved for grant to Rami Goraly and 792,856 options which were approved for grant to Amir Livne but not yet formally documented).
The shareholders also authorized the Board of Directors to increase the number of ordinary shares reserved under the Key Employee Plan such that, if as a result of future dilutive issuances of shares of the Company, the total number of shares reserved under the Key Employee Plan and the US Plan (as defined below) in the aggregate falls below 10% of the then issued and outstanding shares of the Company (including preferred shares on an as converted basis), the Board may further increase the number of shares available under the Key Employee Plan to equal 10% of the then issued and outstanding shares of the Company (including preferred shares on an as converted basis) without the need for further shareholder approval.
The United States Share Incentive Plan. The Board of Directors and the Company’s shareholders approved the United States Share Incentive Plan (the “US Plan”) in 2000 and amended the US Plan in 2002. The Company had previously reserved for issuance an aggregate of 3,950,000 ordinary shares under the US Plan. As of May 31, 2009, the Company had granted options to purchase a total of 5,113,855 ordinary shares, of which 3,684,808 had been terminated or expired (and thus became available for future grant) and 407,547 had been exercised. As a result, 2,520,953 ordinary shares are available for future grant as of May 31, 2009.
The Employee Share Purchase Plan. In November 2002, the Company established an employee share purchase plan (the “ESPP”) which permits the eligible employees of the Company to purchase ordinary shares of the Company at 85% of the lesser of the closing market price on the first day or the last day of the applicable three month offering period. Employees may participate in the ESPP through regular payroll deductions of up to 10% of their pre-tax gross salary. Subject to adjustments for stock splits, stock dividends and similar events, a maximum of 1,500,000 ordinary shares may be issued under the ESPP. No ordinary shares were issued in connection with the ESPP in 2006, 2007 and 2008 as no plan was available during those years. As of May 31, 2009, there are 1,491,791 ordinary shares available for issuance under the ESPP.
The Board of Directors adopted the 1997 Option Plan to provide for the grant by the Company of nonqualified option awards to employees of RAD-Bynet Group of companies, then affiliated companies. Through December 31, 2000, all available authorized options under this plan had been granted. No options were granted under this plan since completion of the initial public offering in August 2000. The Company accounted for these options in accordance with SFAS No. 123 utilizing the Black-Scholes option-pricing model. As of December 31, 2008, there were no options outstanding under this plan.
The purpose of the Key Employee Plan is to attract, retain and motivate employees, directors and consultants through the issuance of stock options and to encourage ownership of ordinary shares by employees, directors and consultants of the Company. The Key Employee Plan is administered by the Compensation Committee, which has the authority to submit recommendations to the Board of Directors as to the issuance of options under the plans. Under the Israeli Companies Law, the authority to issue options vests exclusively with the Board of Directors. Subject to the provisions of the Key Employee Plan, the Compensation Committee determines the persons to whom options will be granted, the number of shares to be covered by each option and the terms and conditions upon which an option may be granted, and has the authority to administer the provisions of the Key Employee Plan. All employees, directors and consultants of the Company and its affiliates are eligible to participate in the Key Employee Plan. Approximately 30 individuals are eligible to participate in this plan.
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Options granted under the Key Employee Plan may be either (i) options intended to benefit from the provisions of Section 102 of the Israeli Income Tax Ordinance (New Version), 1961 and the rules promulgated thereunder, or (ii) stock options not designed to so benefit.
Stock options granted under the Key Employee Plan may not be granted at a price less than the par value of the ordinary shares on the date of grant. If any option award, or any part thereof, under the Key Employee Plan has not been exercised and the shares covered thereby not paid for within sixty-two (62) months after the date of grant (or any other period set forth in the instrument granting such option award), such option award, or such part thereof, and the right to acquire such shares, shall terminate.
An option granted under the Key Employee Plan is exercisable, during the optionholder’s lifetime, only by the optionholder and is not transferable by him or her except by will or by the laws of descent and distribution.
Options granted under the US Plan may be either (i) options intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or (ii) non-qualified stock options. Incentive stock options may be granted under the US Plan to employees of the Company and its affiliates. Non-qualified stock options may be granted to consultants, directors and employees of the Company and its affiliates.
The aggregate fair market value (determined at the time of grant) of shares issuable pursuant to incentive stock options that become exercisable in any calendar year under any incentive stock option plan of the Company may not exceed $100,000. Incentive stock options granted under the US Plan may not be granted at a price less than the fair market value of the ordinary shares on the date of grant, or 110% of fair market value in the case of options granted to an employee holding 10% or more of the voting stock of the Company. Non-qualified stock options granted under the US Plan may not be granted at an exercise price less than the par value per share of the ordinary shares on the date of grant. Incentive stock options granted under the US Plan expire not more than ten years from the date of grant, or not more than five years from the date of grant in the case of incentive stock options granted to an employee holding 10% or more of the voting stock of the Company. An option granted under the US Plan is exercisable, during the optionholder’s lifetime, only by the optionholder and is not transferable by him or her except by will or by the laws of descent and distribution, or as otherwise determined by the Board of Directors and set forth in the applicable option agreement.
After the termination of the optionholder’s employment with the Company, or cessation of status as a director or consultant of the Company (other than by reason of death, disability or termination for cause as defined in the Key Employee Plan), all rights in respect of options held at the date of termination shall terminate within two weeks after the termination or cessation of status. In the event of the optionholder’s death, stock options held by the estate of the employee generally may be exercised, to the extent exercisable on the date of death, by the optionholder’s survivors at any time prior to the earlier of the option’s specified expiration date or three months from the date of the optionholder’s death. If an optionholder is unable to continue to be employed by the Company or to provide services to the Company, by reason of his becoming incapacitated while in the employ or service of the Company as a result of an accident or illness or other cause which is approved by the Committee, such optionholder shall continue to enjoy rights under the Key Employee Plan on such terms and conditions as the Committee in its discretion may determine. Generally, in the event of the optionholder’s termination for cause, all outstanding and unexercised options are forfeited.
If the ordinary shares shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any ordinary shares as a dividend on its outstanding ordinary shares, the number of ordinary shares deliverable upon the exercise of an option granted under the Key Employee Plan shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. If the Company is to be consolidated with or acquired by another entity in a merger, sale of all or substantially all of the Company’s assets or otherwise, an optionholder, upon exercising an option under the Key Employee Plan, shall be entitled to receive for the purchase price paid upon such exercise the securities he or she would have received if he or she had exercised such option prior to such action.
The Key Employee Plan may be amended by the Board of Directors. Each grantee is responsible for all personal tax consequences of the grant and the exercise thereof.
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Under the provisions of Section 102 of the Israeli Income Tax Ordinance, an Israeli employee issued options to purchase shares in the Company under a qualifying share incentive plan will not incur a tax liability at the time the options are issued or exercised, such tax being deferred until the sale of the shares purchased pursuant to the options. Section 102 generally requires that a trustee hold the options for a minimum of two years, in order for the tax benefit to apply. In the event that an employee will cease to be employed by the Company prior to completion of the 2-year holding period, such employee, under certain circumstances, will be required to pay the greater of (a) the tax payable at the time of the grant of options, together with interest and linkage differentials, (b) the tax payable on the date of cessation of his employment and (c) the tax payable two years from the date of the grant of options, unless the cessation of employment results from the death of the employee or for reasons which are beyond the employee’s control.
Upon sale of the shares purchased with the options, the employee will be liable for tax at a rate of up to 50%, depending on the employee’s marginal tax rate, for the net gain in value of the shares between the value on the date of grant and their value on the date of sale. The trustee is required to withhold 30% of the total consideration received from such a sale. The Company will withhold any remaining tax payable by the employee, according to the employee’s actual tax rate.
In the event that Section 102 is not applicable to the options, the taxation of the optionee will be governed by Section 3(i) of the Israeli Income Tax Ordinance. Under this section, there is no deferral of tax until the sale of shares, and exercise of the options constitutes a taxable event. Upon the exercise of the options, tax will be paid on the difference between the exercise price and the fair market value on the exercise date. In addition, upon the sale of the shares received pursuant to the exercise of the options tax will be paid on the difference between the fair market value of the shares on the date the shares were purchased and the price at which they were sold.
Under Section 3(i), the tax paid on the exercise date will be ordinary income tax. The type of tax paid upon the ultimate sale of the shares, however, will be capital gains tax.
The following is a description of certain U.S. federal income tax consequences of the issuance and exercise of options under the US Plan:
Incentive Stock Options. An incentive stock option does not result in taxable income to the optionee or deduction to the Company at the time it is granted or exercised, provided that no disposition is made by the optionee of the shares acquired pursuant to the option within two years after the date of grant of the option nor within one year after the date of issuance of shares to him (the “ISO holding period”). However, the difference between the fair market value of the shares on the date of exercise and the option price will be an item of tax preference includable in “alternative minimum taxable income.” Upon disposition of the shares after the expiration of the ISO holding period, the optionee will generally recognize long term capital gain or loss based on the difference between the disposition proceeds and the option price paid for the shares. Such gain will be eligible for the 20 percent maximum rate introduced by the Taxpayers Relief Act of 1997 if the shares have been held for more than 18 months after option exercise, otherwise such gain will be eligible for the 28% maximum rate. If the shares are disposed of prior to the expiration of the ISO holding period, the optionee generally will recognize taxable compensation, and the Company will have a corresponding deduction, in the year of the disposition, equal to the excess of the fair market value of the shares on the date of exercise of the option over the option price. Any additional gain realized on the disposition will normally constitute capital gain. If the amount realized upon such a disqualifying disposition is less than fair market value of the shares on the date of exercise, the amount of compensation income will be limited to the excess of the amount realized over the optionee’s adjusted basis in the shares.
Non-Qualified Stock Options. The grant of a non-qualified option will not result in taxable income to the optionee or deduction to the Company at the time of grant. The optionee will recognize taxable compensation, and the Company will have a corresponding deduction, at the time of exercise in the amount of the excess of the then fair market value of the shares acquired over the option price. Upon disposition of the shares, the optionee will generally realize capital gain or loss, and his basis for determining gain or loss will be the sum of the option price paid for the shares plus the amount of compensation income recognized on exercise of the option.
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The following table sets forth certain information known to us regarding the beneficial ownership of the Company’s ordinary shares as of May 31, 2009, unless otherwise indicated, by: (i) each person known by the Company to beneficially own more than 5% of the Company’s ordinary shares; and (ii) all of the Company’s directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, ordinary shares under options and warrants held by that person that are currently exercisable or exercisable within 60 days of May 31, 2009 are considered outstanding. These shares, however, are not considered outstanding when computing the percentage ownership of each other person. Except as indicated in the footnotes to this table and pursuant to state community property laws, each shareholder named in the table has sole voting and investment power for the shares shown as beneficially owned by them. Ownership percentages are based on 158,571,330 ordinary shares outstanding on May 31, 2009, excluding 134,000 shares held as treasury shares. Unless otherwise noted below, the address of each of the Company’s directors and executive officers is c/o RadView Software Ltd., 14 Hamelacha Street, Park Afek, Rosh Haayin, 48091, Israel.
| Name of Beneficial Owner: | Total Shares Beneficially Owned | Percentage of Ordinary Shares | ||||||
|---|---|---|---|---|---|---|---|---|
| Five Percent Shareholders: | ||||||||
| Fortissimo Capital Fund (1) | 169,583,334 | 69.3 | % | |||||
| Perfect Provident Fund Ltd (2) | 34,586,514 | 20.0 | % | |||||
| Psagot Provident Fund Ltd. (3) | 21,930,000 | 13.1 | % | |||||
| Tamir Fishman Provident and Education Funds Ltd. (4) | 19,060,400 | 11.5 | % | |||||
| Meitav Gemel Ltd. (5) | 14,101,678 | 8.6 | % | |||||
| Directors and Executive Officers (9): | ||||||||
| Rami Goraly(6) | 3,343,750 | 2.1 | % | |||||
| Jaron Lotan(7) | 1,708,683 | 1.1 | % | |||||
| Shai Beilis (8) | 8,075,623 | 4.8 | % | |||||
| Amir Livne | - | - | ||||||
| Hadas Gazit Kaiser (9) | 346,874 | * | ||||||
| Yochai Hacohen (10) | 2,968,750 | 1.8 | % | |||||
| Eli Blatt | - | - | ||||||
| Merav Davidson | - | - | ||||||
| All executive officers and Directors as a group (9 persons) (6) (7) (8) (9) (10) (11) | 16,443,680 | 9.4 | % | |||||
| * Represents beneficial ownership of less than one percent of the Company’s ordinary shares. |
(1) Information is derived in part from Amendment No. 3 to Schedule 13 D, filed on March 27, 2007 by Fortissimo Capital Funds G.P. L.P. (“FFC-GP”), Fortissimo Capital Fund L.P. (“FFC Cayman”), Fortissimo Capital Fund (Israel) L.P. (“FFC-Israel”), and Fortissimo Capital Funds (Israel DP), L.P. (“FFC-Israel-DP”) (Collectively, the “Fortissimo Entities”). Includes 150,729,167 ordinary shares owned of record by the Fortissimo Entities: 4,779,243 ordinary shares owned of record by FFC Cayman, 136,210,432 ordinary shares owned of record by FFC Israel, and 9,739,491 ordinary shares owned of record by FCC-Israel-DP. FFC GP, in its capacity of being the sole general partner of FFC-Israel, FFC-Israel-DP and FFC Cayman, controls and manages each of the Fortissimo Entities. Accordingly, FFC GP is the beneficial owner of the ordinary shares held by each of the Fortissimo Entities. FFC GP, in its capacity as the general partner of each of the Fortissimo Entities, has the voting and dispositive power over the ordinary shares held by each of them. FFC GP may be deemed to be the indirect beneficial owner of the ordinary shares directly beneficially owned by the Fortissimo Entities.
Each of the Fortissimo Entities share voting power over 158,125,001 ordinary shares and share dispositive power over 169,583,334 ordinary shares. None of the Fortissimo Entities has sole voting power or sole dispositive power over our ordinary shares. Pursuant to a shareholders agreement among the Fortissimo Entities and Yehuda Zisapel, Shem Basum Ltd. and Michael Chill (the “Co-Investors”) in connection with the financing in August 2006, the number of ordinary shares for which there is shared voting power includes 7,395,834 ordinary shares held by Shem Basum Ltd. and Michael Chill and the number for which there is shared dispositive power includes 18,854,167 ordinary shares held by all the Co-Investors. However, the Fortissimo Entities disclaim beneficial ownership of the Co-Investor shares. The Fortissimo address is: 14 Hamelacha Street, Park Afek, Rosh Ha’ayin, 48091 Israel.
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(2) Information is derived from Schedule 13D, filed on June 18, 2007 by Perfect Provident Fund Ltd. (“Perfect”) and from the records of the Company. Includes 22,820,698 ordinary shares owned of record by Perfect; 1,091,968 ordinary shares owned of record by Perfect Central Compensation Fund; and 10,673,848 ordinary shares owned of record by Perfect Education Fund. On June 1, 2009, a merger occurred between Altshuler Shaham Provident Funds Ltd. (“Altshuler Shaham”) and Perfect. As a result, the above-mentioned funds are managed by Altshuler Shaham, which is held by Altshuler Shaham Ltd. (which is owned by Kalman Shaham, Gilad Altshuler and Roni Bar) and Perfect (Y.N.E.) Capital Markets Ltd. (which is held indirectly by Yair Levinstein, Nir Malka, Orna Brenner and Daniel Brenner. Any economic interest or beneficial ownership in any of the securities held by Altshuler Shaham are held for the benefit of the members of the fund. The address of Altshuler Shaham is 19A Habarzel Street, Tel Aviv, Israel.
(3) Information is derived from Schedule 13G, filed on February 9, 2009 by Prisma Investment House Ltd. (“Prisma”), the assets of which were acquired by Psagot Provident Fund Ltd. in April 2009, and from records of the Company. Includes 21,930,000 ordinary shares, beneficially owned by provident funds, continuing education funds and compensation funds (Hermon Provident Fund, Aazmon Provident Fund, Tavor Provident Fund and Signon Hermon Provident Fund) managed by Psagot Provident Fund Ltd., a wholly owned subsidiary of Psagot Investment House Ltd, controlled indirectly by James G. Dinan and Daniel A. Schwartz. Any economic interest or beneficial ownership in any of the securities held by Psagot Provident Fund Ltd. are held for the benefit of the members of the fund. The address of Psagot is: Africa Tower, 14 Ahad Ha’am Street, Tel Aviv, Israel.
(4) Information is derived form Schedule 13G, filed on February 16, 2009 by Tamir Fishman Provident and Education Funds Ltd. (“Tamir Fishman”). Includes a total of 19,060,400 ordinary shares: 3,063,400 ordinary shares are owned of record by Tamir Fishman Severance Pay Fund – General; 6,893,500 ordinary shares are owned of record by Tamir Fishman Education Fund – General; 8,262,000 ordinary shares are owned of record by Tamir Fishman Provident Fund – General; 289,000 ordinary shares are owned of record by Tamir Fishman Education Fund – Shares; and 552,500 ordinary shares are owned of record by Tamir Fishman Provident Fund – Shares. Tamir Fishman, as manager of the funds, has sole voting and investment power and is beneficial owner of the 19,060,400 ordinary shares (including warrants) owned of record by the foregoing funds. Any economic interest or beneficial ownership in any of the securities held of record by the foregoing funds is held for the benefit of the members of the funds. The address of Tamir Fishman and each of the foregoing funds is: 21 Ha’arbaa Street, Tel Aviv, 64739, Israel.
(5) Information is derived from Meitav Gemel Ltd. (“Meitav”). Includes a total of 14,101,678 ordinary shares owned of record by the provident, education and severance funds managed by Meitav: 5,043,339 ordinary shares owned of record by Meitav Tagmulim Clali; 3,201,661 ordinary shares owned of record by Meitav Histalmut Clali; 1,048,339 ordinary shares owned of record by Meitav Pizuim Clali; 410,839 ordinary shares owned of record by Meitav Tagmulim Shares; 212,500 ordinary shares owned of record by Meitav Hishtalmut Shares; 2,234,161 ordinary shares owned of record by Meitav Chisachon Gemel; 1,617,339 ordinary shares owned of record by Meitav Chisachon Hishtalmut; and 333,500 ordinary shares owned of record by Meitav Chisachon Pizuim. Meitav, as manager of the funds, has sole voting and investment power and is beneficial owner of the 14,101,678 ordinary shares (including warrants) owned of record by the foregoing funds. Any economic interest or beneficial ownership in any of the securities held of record by the foregoing funds is held for the benefit of the members of the funds. The address of Meitav is Museum Tower, 4 Berkowitz Street, Tel Aviv 61180 Israel.
(6) Includes 2,500,000 options that are vested and 500,000 options that are exercisable within 60 days of May 31, 2009 in accordance with the vesting schedule for the options approved for grant but not yet formally documented. Also includes 31,250 options exercisable within 60 days of May 31, 2009 from a previous grant.
(7) Includes 94,854 options exercisable within 60 days of May 31, 2009.
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(8) Information is derived in part from Amendment No. 2 to Schedule 13G/A, filed on February 20, 2004 by Formula Ventures L.P., FV-PEH, L.P. and Formula Ventures (Israel) L.P. Includes 1,108,593 ordinary shares owned of record by Formula Ventures L.P; 311,947 ordinary shares owned of record by FV-PEH L.P.; 356,140 ordinary shares owned of record by Formula Ventures (Israel) L.P.; 6,289,143 ordinary shares owned of record by Shem Basum Ltd., and 9,800 ordinary shares and an option for 125,000 ordinary shares exercisable within 60 days of May 31, 2007 owned directly and of record by Shai Beilis, the principal shareholder and a director of Shem Basum Ltd. Shai Beilis, one of RadView’s directors, is the CEO and Managing Director of Formula Ventures Ltd., which is the general partner of Formula Ventures L.P., Formula Ventures (Israel) L.P. and FV-PEH L.P. Shai Beilis disclaims beneficial ownership of the shares held of record by Formula Ventures L.P., FV-PEH L.P. and Formula Ventures (Israel) L.P., except to the extent of his pecuniary interest therein. Shai Beilis has sole voting and investment power and is the beneficial owner of the 6,289,143ordinary shares owned of record by Shem Basum Ltd. Formula Ventures L.P., Formula Ventures (Israel) L.P. and FV-PEH L.P. are part of an affiliated group of investment entities managed by Formula Ventures Ltd. and Formula Ventures Partners (Cayman Islands) Ltd., a subsidiary thereof. Shai Beilis, Nir Linchevski and Benny Maiden, by virtue of their board of positions in Formula Venture Ltd., and Shai Beilis and Nir Linchevski, by virtue of their board positions in Formula Venture Partners (Cayman Islands) Limited, each share voting and dispositive power with respect to the shares held by Formula Ventures L.P., FV-PEH and Formula Ventures (Israel) L.P. Decisions with respect o voting and investment of the shares owned of record are made by majority vote and as CEO, Shai Beilis shares voting and investment power over ordinary shares held by Formula Ventures L.P., FV-PEH L.P., Formula Ventures (Israel) L.P. and Shem Basum Ltd. The address of Formula Ventures (Israel) L.P., Formula Ventures L.P., FV-PEH L.P. and Shai Beilis is 11 Galgalei Haplada St. Herzliya, Israel, 46733.
(9) Includes 49,553 options exercisable within 60 days of May 31, 2009.
(10) Includes 296,875 options exercisable within 60 days of May 31, 2009.
(11) Excludes former directors who served on the Board of Directors for all or a portion of 2008 and who held no beneficial ownership of the Company’s ordinary shares as of May 31, 2009, and former Executive Officers.
As of May 31, 2009, there were 138 record holders of ordinary shares, of which 86 were registered with addresses in the United States, representing approximately 12% of the outstanding ordinary shares. However, the number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of the ordinary shares are held of record by brokers and other nominees.
The Company’s Board of Directors and the shareholders approved the new options for Preferred Shares and warrants to acquire Preferred Shares (the “New Options”) included in the series of addendum to the 2006 financing by Fortissimo and other investors. See Item 4B. – “Business Overview – Recent Financings” for a further description of the 2006 financing and New Options. Each Addendum was included as an Exhibit to the Company’s Annual Report on Form 20-F for the year 2006.
The principal participants in the 2006 financing were Fortissimo (an entity affiliated with two of the Company’s directors, Mr. Yochai Hacohen and Eli Blatt) and Shem Basum Ltd. (an entity controlled by Mr. Shai Beilis, a director of the Company) as well as Yehuda Zisapel (then a significant shareholder of the Company).
Initial Investment. As described above, at the closing of the 2006 financing, the investors made an initial investment of $1.5 million, consisting of $750,000 for the purchase of 25,000,000 convertible Preferred Shares at a purchase price of $0.03 per share, and $750,000 as a loan convertible into Preferred Shares. As part of the initial investment, the investors also received warrants to purchase 18,750,000 Preferred Shares at an exercise price of $0.04 per share exercisable for a period of five years from date of issuance. The convertible loan under the August 2006 financing is due to be repaid on August 18, 2009. The investors have agreed to extend the loan payment date to June 30, 2010 and during the extension period, the loan shall be non-convertible and without interest.
Additional Investment Rights. Under the 2006 financing, the investors had the right, within 18 months after the closing in August 2006, to purchase up to an additional 75 million Preferred Shares at a price of $0.03 per share for a total investment of up to $2.25 million, and warrants to purchase up to a total of 56,250,000 additional Preferred Shares, each at an exercise price of $0.04 per share exercisable for a period of five years from date of issuance. The additional investment rights were exercised in part, as described below, and have otherwise expired.
Addendum to Purchase Agreement. In order to secure required financing in the last quarter of 2006 and the first quarter of 2007, the Company requested Fortissimo to accelerate the exercise of its right under the financing to make additional investments. The Company and Fortissimo entered in a series of addendum to the share purchase agreement of April 2006 for Fortissimo’s additional investment and purchase as follows: the purchase on December 24, 2006 of 23,333,334 Preferred Shares and 17,500,000 Preferred Warrants for an investment of $0.7 million (the “First Addendum”), the purchase on February 7, 2007 of 16,666,667 Preferred Shares and 12,500,000 Preferred Warrants for an investment of $ 500,000 (the “Second Addendum”), and the purchase on March 20, 2007 of 16,666,667 Preferred Shares and 12,500,000 Preferred Warrants for an investment of $ 500,000 (the “Third Addendum”).
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New Options. Pursuant to each of the First, Second and Third Addendums, respectively, and in consideration of the acceleration of the additional investment rights, the Company undertook to grant Fortissimo a new option (each a “New Option”) to acquire on the same terms and conditions the same number of shares and warrants as purchased under the respective Addendum. Each New Option is subject to the right of the Company (subject to RadView having available surplus) for a period of 12 months from the date of issuance of the New Option to buy back any shares and warrants purchased under the Addendum by payment to Fortissimo of the purchase price paid for the shares under the Addendum plus interest at the annual rate of 8%. The Company did not exercise its rights to buy back any shares purchased under the Addendums and these rights have expired.Registration Rights. In connection with the 2006 financing, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with (i) the investors and (ii) with other shareholders who are affiliated with the investors, specifically, with Zohar Zisapel and certain Formula Ventures entities (identified in Item 7A – “Major Shareholders”). Pursuant to the Registration Rights Agreement, upon demand of the investors, the Company will file a registration statement to permit the resale of the ordinary shares underlying the Preferred Shares and warrants issued in the investment and other ordinary shares held by the parties to the Registration Rights Agreement. The Company will also, upon request, include such securities in a registration statement that the Company may file for other purposes. The Company will bear all the expenses of the registration, other than commissions or transfer taxes in connection with the resale of the shares under the Registration Statement. When the shares are registered, they may be freely transferable without restriction under the Securities Act, absent other securities law restrictions.
Management Services Agreement. As part of the 2006 financing, the Company entered into a management services agreement with Fortissimo, pursuant to which, Fortissimo, through its employees, officers and directors, provides management services and advises and provides assistance to the Company’s management concerning the Company’s affairs and business. In consideration of the performance of the management services and the board services, the Company agreed to pay to Fortissimo (i) The Fixed Fee, payable in quarterly installments; and (ii) The Additional Fee, payable at the end of the fiscal year, commencing in 2006, in the event that the Company is profitable in such fiscal year, provided that such additional management fees shall be payable only out of profits of the Company of such fiscal year. The management services agreement became effective upon the closing of the 2006 financing and may not be terminated for so long as the Board of Directors includes at least three Preferred Directors.
Indemnity Undertakings to the Directors and Officers. In August 2006, the Company approved indemnification agreements to indemnify a director for any expenses incurred by the director in connection with any event that fall within one or more categories of covered indemnifiable events, as these terms are defined in the indemnification agreements, related to any act or omission of the director while serving as an office holder of the Company, or serving or having served as a director or officer, at the Company’s request, of any subsidiary of the Company, or any other corporation or partnership.
The categories of indemnifiable events provided for in the indemnification agreements include actions in connection with any sale or purchase of securities made by the company or shareholders and, investments of the Company in other corporations, merger or other reorganization, actions in connection with the business of the Company, sale or purchase of other entities or assets, and the division of consolidations thereof, actions in connection with labor relation, employment matters and trade relations, actions in connection with development of products and any distribution, sale or license of such product developed, actions in connection with intellectual property, actions taken pursuant to or in accordance with the policies and procedures of the Company, approval of corporate actions, in good faith, claims of failure to exercise business judgment and a reasonable level of proficiency, exercise and care, violations of laws requiring the Company to obtain regulatory and governmental approvals, claims in connection with publishing or providing any information on behalf of the Company, claims in connection with any announcement or statements made in good faith.
Under the indemnification agreements, the Company has undertaken to indemnify the directors against all expenses, judgments and amounts paid in settlement incurred by the director with respect to any specific indemnifiable event up to a total limit amount of $1.5 million for all of the directors and officers covered by the indemnification agreements to be entered into by the Company.
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The indemnification agreements also provide for the Company to advance all expenses incurred by the director in connection with an indemnifiable event. The director will repay such amounts advanced if, when, and to the extent, that a court of competent jurisdiction determines that the director should not be permitted to be so indemnified under applicable law.
The indemnification provided under the indemnification agreements continues for any action taken or not taken by the director while serving as a director even if he or she no longer served in such capacity at the time of the action, suit or other covered proceeding. An indemnification agreement will terminate, among other instances, upon the lapse of five years from the termination, for whatever reason, of the director’s service as an office holder of the Company.
In addition, under the indemnification agreements, the Company exempts and releases each director from any and all liability to the Company related to any breach by each director of his duty of care to the Company, to the maximum extent permitted by law.
In December 2008, the Board and shareholders approved the Credit Facility to be provided to us by Fortissimo, at the discretion of Fortissimo. See Item 4B. – “Business Overview – Recent Financings” for a further description of the Credit Facility. Fortissimo is an entity affiliated with two of the Company’s directors, Mr. Yochai Hacohen and Eli Blatt.
As described above, the 2008 Credit Facility is for an amount up to $4 million, in one or more loans (each a “Loan”). Any request for future cash withdrawals from this facility, except for the $0.5 million discussed below, will be subject to the discretion of Fortissimo. Each Loan shall have a 3 year term, which may be extended for 2 additional one year terms by agreement of Fortissimo and us. The Loans shall bear interest at 8%, compounded annually, payable together with the repayment of the principal of the respective Loan. A Loan (or any part thereof) may be repaid at any time prior to its due date, at our discretion. Each Loan is convertible into Ordinary Shares, at the option of Fortissimo, at any time prior to repayment, at a conversion price per Ordinary Share equal to $0.01, the trading price at the time the 2008 Credit Facility was approved (the “Conversion Price”). As security for the repayment of the Loans, we shall grant Fortissimo (i) a fixed charge on our intellectual property, and (ii) a floating charge on our tangible and intangible assets, junior to all of our outstanding charges at the time of the Loan. We have also agreed that upon each draw down of a Loan, Fortissimo will be issued a warrant to acquire Ordinary Shares in a dollar amount equal to 50% of the principal amount of the Loan at a purchase price per share equal to the Conversion Price. Fortissimo has agreed in advance to comply with our request, if needed, for up to $0.5 million within the next twelve months.
To date, we have not drawn on the 2008 Credit Facility.
Not applicable.
See Item 18.
A former employee commenced a proceeding in February 2009 seeking a total of approximately NIS 920,600 for severance and vacation payments and certain other claims in connection with the period of employment with the Company. The Company responded to the claims denying any liability and does not believe the claims will be successful or if so, in a material amount. The matter has been referred to mediation for a possible negotiated resolution.
The Company does not currently have a dividend policy. The declarations and payment of any cash dividends in the future will be determined by the Board of Directors in light of the conditions exiting at that time. This will include our earnings and financial condition. We may only pay cash dividends in any fiscal year, out of “profits”, as defined under Israeli law. Any dividends paid out of Approved Enterprise earnings (i.e., tax exempt income) will be liable to tax. As we cannot currently distribute dividends, no provision has been made for this additional tax in our Financial Statements.
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Not applicable.
Set forth below are high and low reported prices for our ordinary shares on the OTC Bulletin Board for the periods indicated.
| OTCBB | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Period | High ($) | Low ($) | |||||||||
| 2004 | Annual | 0.98 | 0.15 | ||||||||
| 2005 | Annual | 0.24 | 0.06 | ||||||||
| First Quarter | 0.24 | 0.16 | |||||||||
| Second Quarter | 0.21 | 0.16 | |||||||||
| Third Quarter | 0.20 | 0.11 | |||||||||
| Fourth Quarter | 0.15 | 0.06 | |||||||||
| 2006 | Annual | 0.14 | 0.06 | ||||||||
| First Quarter | 0.14 | 0.08 | |||||||||
| Second Quarter | 0.11 | 0.08 | |||||||||
| Third Quarter | 0.10 | 0.07 | |||||||||
| Fourth Quarter | 0.09 | 0.06 | |||||||||
| 2007 | Annual | 0.12 | 0.04 | ||||||||
| First Quarter | 0.07 | 0.04 | |||||||||
| Second Quarter | 0.11 | 0.06 | |||||||||
| Third Quarter | 0.12 | 0.06 | |||||||||
| Fourth Quarter | 0.12 | 0.06 | |||||||||
| December | 0.09 | 0.06 | |||||||||
| 2008 | Annual | 0.08 | 0.01 | ||||||||
| First Quarter | 0.08 | 0.04 | |||||||||
| Second Quarter | 0.05 | 0.03 | |||||||||
| Third Quarter | 0.05 | 0.02 | |||||||||
| Fourth Quarter | 0.04 | 0.01 | |||||||||
| December | 0.04 | 0.01 | |||||||||
| 2009 | January | 0.02 | 0.01 | ||||||||
| February | 0.01 | 0.01 | |||||||||
| March | 0.01 | 0.01 | |||||||||
| April | 0.01 | 0.01 | |||||||||
| May | 0.03 | 0.003 | |||||||||
| June (until June 26) | 0.03 | 0.021 | |||||||||
Not applicable.
Our shares are quoted on the OTCBB. Until September 2004, our shares were traded on the Nasdaq SmallCap Market.
Not applicable.
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Not applicable.
Not applicable.
Not applicable.
In August 2006 the Company adopted amended and restated Articles of Association.
Set forth below is a summary of certain provisions of our Memorandum and Articles of Association. This summary is not complete and should be read together with our Memorandum and Articles of Association, previously filed.
| 1. | Objects of the Company: |
The Company’s objects and purposes are outlined in the Memorandum of Association. These objects include: the development, manufacture and marketing of products in the electronics field generally and specifically in the field of computer communication. The Company’s Articles of Association (Article 3) provide that the Company operates in accordance with business considerations to generate profits.
| 2. | Provisions related to the directors of the Company: |
(a) The Board of Directors may issue shares and other securities, which are convertible or exercisable into shares, up to the limit of the Company’s authorized share capital.
(b) Approval of certain transactions under the Companies Law: RadView is subject to the provisions of the Israeli Companies Law 1999, which became effective on February 1, 2000. The Companies Law codifies the fiduciary duties that an Office Holder has to the Company. An “Office Holder” is defined in the Companies Law as any Director, General Manager or any other Manager directly subordinate to the General Manager and any other person with similar responsibilities. An Office Holder’s fiduciary duties consist of a Duty of Loyalty and a Duty of Care.
The Duty of Loyalty includes: the avoidance of any conflict of interest between the Office Holder’s position in the Company and his personal affairs; the avoidance of any competition with the company; the avoidance of any exploitation of any business opportunity of the Company in order to receive personal advantage for himself or others; and a duty to reveal to the Company any documents or information relating to the Company’s affairs that the Office Holder has received due to his position.
The Duty of Care requires an Office Holder to act at a level of care that a reasonable Office Holder in the same position would employ under the same circumstances. This includes the duty to utilize reasonable means to obtain (1) information regarding the appropriateness of a given action brought for his approval or performed by him by virtue of his position and (2) all other information of importance pertaining to the foregoing actions.
Under the Companies Law, all arrangements with regard to the compensation of Office Holders who are not Directors require the approval of the Board of Directors. Arrangements regarding the compensation of Directors require Audit Committee, Board and Shareholder approval.
The Companies Law requires that an Office Holder of a company promptly disclose to the company’s Board of Directors any personal interest that he or she may have, and all related material information known to him in connection with any existing or proposed transaction by the company. This disclosure must be made by the Office Holder, whether orally or in writing, no later than the first meeting of the company’s board of directors which discusses the particular transaction. An Office Holder is deemed to have a “personal interest” if he, certain members of his family, or a corporation in which he or any one of those family members is a 5% or greater shareholder or exercises or has the right to exercise control, has an interest in a transaction with the company. An “Extraordinary Transaction” is defined as a transaction, other than in the ordinary course of business, not on market terms, or that is likely to have a material impact on the company’s profitability, assets or liabilities.
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In the case of a transaction that is not an Extraordinary Transaction, after the Office Holder complies with the above disclosure requirements, only board approval is required. The transaction must not be adverse to the company’s interests. In the case of an Extraordinary Transaction, the company’s Audit Committee and the Board of Directors, and, under certain circumstances, the shareholders of the company must approve the transaction, in addition to any approval stipulated by the Articles of Association. An Office Holder who has a personal interest in a matter that is considered at a meeting of the Board of Directors or the Audit Committee may not be present at this meeting or vote on this matter, unless a majority of the members of the Board of Directors or Audit Committee, respectively, have a personal interest in the matter, in which case they may all be present and vote, after which the matter must be approved by the shareholders of the Company.
In addition, Article 50 of our Articles of Association provides that Directors who are not employees of the Company and who are not external Directors shall not receive any compensation from the Company, unless approved by the shareholders, and that expenses incurred by a Director in connection with his service as such may be reimbursed if authorized by the Board.
(c) The Board has broad borrowing powers for the purposes of the Company (Article 44.3.1).
(d) The Company’s Articles of Association do not contain provisions regarding the retirement of directors under an age limit requirement, nor do they contain a provision requiring a Director to hold any Company shares in order to qualify as a Director.
3. Rights, Preferences and Restrictions attached to each class of Shares:
(a) Rights to shares in the Company’s Profits: The Company may effect a distribution to its Shareholders to the extent permitted by the Companies Law. Except as permitted by the Companies Law or Companies Regulations, distributions shall not be made except out of the profits of the Company legally available for such distributions (Article 60).
(b) Dividend rights: A Shareholder shall be entitled to receive dividends or bonus shares, upon the resolution of the Board, provided in each case the distribution is permitted in accordance with the provisions of the Companies Law and consistent with the rights attached to the shares held by such Shareholder. The Shareholders entitled to receive dividends or bonus shares shall be those who are registered in the Register on the date of the resolution approving the distribution or allotment, or on such later date, as may be determined in such resolution (Article 61.1). Any dividend or other moneys payable in cash in respect of a Share may be paid by check sent by registered mail to, or left at the registered address of the person entitled thereto or by transfer to a bank account specified by such person, or to such person and at such address as the person entitled thereto may direct in writing (Article 61.5). The Board of Directors of the Company may settle, as it deems fit, any difficulty arising with regard to the distribution of bonus Shares, distributions of dividends or otherwise, and in particular, to issue certificates for fractions of Shares and sell such fractions of Shares in order to pay their consideration to those entitled thereto, to set the value for the distribution of certain assets and to determine that cash payments shall be paid to the Shareholders on the basis of such value, or that fractions whose value is less than NIS 0.01 shall not be taken into account. The Board may pay cash or convey these certain assets to a trustee in favor of those people who are entitled to a dividend or to a capitalized fund, as the Board shall deem appropriate (Article 61.9). If the Company at any time shall make a distribution of its assets to the holders of its Ordinary Shares, as a dividend in liquidation or partial liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends, the holders of Preferred Shares shall be entitled to receive without payment of any additional consideration a sum equal to the amount of such assets as would have been payable to such holder as owner of that number of Ordinary Shares receivable by exercise of the conversion rights herein had such holder been the holder of record of such Ordinary Shares on the record date for such distribution, and an appropriate provision therefor shall be made a part of any such distribution (Article 33.7).
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(c) Rights to share in any surplus in the event of liquidation: Subject to applicable Law, in a Liquidation Event and/or a Deemed Liquidation (as defined in the Articles), the proceeds of such Liquidation Event and/or Deemed Liquidation shall be paid as follows (unless the majority of the holders of Preferred Shares elects otherwise): (i) the holders of Preferred Shares shall be entitled to receive prior to and in preference to the holders of all other Shares in the Company, for each Preferred Share then held, the respective Original Issue Price (adjusted for any Recapitalization Event), plus any declared and unpaid dividends thereon (the “Preference Amount”); and (ii) after the payment in full of the Preference Amount, and to the extent any assets remain legally available for distribution by the Company, the holders of Ordinary Shares shall be entitled to receive for each Ordinary Share held, an amount per share up to the Price Per Share, adjusted for any Recapitalization Event (the “Ordinary Share Preference Amount”) and (iii) after the payment in full in accordance with (i) and (ii) above, then the remaining assets legally available for distribution, if any, shall be distributed to the holders of the Preferred Shares (on an as-converted basis) and Ordinary Shares, pro-rata to the number of shares outstanding (on an as converted basis) (Article 67.1). If the funds or assets available for distribution are less than the amount needed to pay the Preference Amount, the holders of Preferred Shares shall be entitled to receive a pro rata portion of the amount available for distribution, based on the Preference Amount to which each Preferred Shareholder is entitled hereunder. If, after the payment in full of the Preference Amount, the remaining funds or assets available for distribution, if any, are less than the amount needed to pay the Ordinary Share Preference Amount, the holders of Ordinary Shares shall be entitled to receive a pro rata portion of the amount available for distribution, based on the Ordinary Shares Preference Amount to which each Ordinary Shareholder is entitled hereunder (Article 67.2).
(d) Voting Rights: No Shareholder shall be entitled to vote at any General Meeting (or be counted as a part of the lawful quorum thereat), unless all calls and other sums then payable by him in respect of his Shares in the Company have been paid (Article 34.1). Any Shareholder entitled to vote may vote either personally (or, if the Shareholder is a company or other corporate entity, by a representative authorized by him in accordance with the Articles) or by proxy, or by deed of vote (Article 34.3).
(e) Election of Directors: The Directors are elected at each Annual General Meeting by a resolution adopted by an ordinary majority; provided, however, that external Directors are elected in accordance with the Companies Law and/or any securities exchange rule applicable to the Company and the holders of Preferred Shares are entitled to nominate a majority of the Directors. The Directors shall serve in office until the close of the next Annual General Meeting, unless their office is vacated earlier in accordance with the provisions of applicable Law or the Articles (Article 46.3.1). The General Meeting, by a resolution adopted by an ordinary majority, or the Board, upon approval of the majority of the Directors of the Company, may elect any person as a Director, to fill an office which became vacant, and also in any event in which the number of members of the Board is less than the maximum set in Article 46.1 (i.e. not less than 5 and no more than 9). Any Director elected in such manner shall serve in office until the next Annual Meeting. Notwithstanding the foregoing, if a Director is appointed by the Board as aforesaid, and the vacant office was originally occupied by a Preferred Director, then the new Director shall be elected by a resolution adopted by the remaining Preferred Directors (Article 46.3.3).
(f) Protective Provisions for Preferred Shares. So long as any of the preferred shares are outstanding and preferred shareholders hold at least 20% of the issued and outstanding shares of the Company, on an as-converted basis, or 50% of the original amount of the convertible loan remains outstanding, the Company will not effect any of the following actions without the consent of a majority of the preferred shareholders: amend the Articles of Association or change the Company’s share capital; alter the rights, preferences or privileges of the preferred shares; declare or pay any dividends or make any distributions on any of the Company’s shares, other than on the preferred shares; redeem any of the Company’s shares ranking junior or equal to the preferred shares, except for repurchases of shares under the Company’s stock option plans and redemption of preferred shares; authorize or issue any shares having rights and/or preferences senior to or equal with the preferred shares with respect to voting, dividends redemption or liquidation; a sale of the Company by sale of all or substantially all of the Company’s issued and outstanding shares, merger, consolidation sale of assets or otherwise; sale or transfer of all or a material part of the Company’s intellectual property assets; or voluntary dissolution or cessation of operations of the Company.
(g) Additional Rights of Preferred Shares: Preferred Shares are convertible, at the discretion of the holder, in the ratio of one ordinary share for one preferred share, subject to anti-dilution adjustments, as described below; vote on an as-converted basis with ordinary shares on all matters presented at a general meeting of shareholders; receive anti-dilution adjustments to the conversion ratio of the preferred shares upon issuances of securities by the Company at a price below the original issue price of the preferred shares; and receive a preemptive right to participate in subsequent equity financings of the Company.
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(h) Redemption Provisions: With respect to any consolidation of issued shares into shares of larger nominal value, and with respect to any other action which may result in fractional shares, the Board of Directors of the Company may settle any difficulty which may arise with regard thereto, as it deems appropriate, including by redeeming, in the case of redeemable shares, and subject to applicable Law, such shares or fractional shares sufficient to preclude or remove fractional shareholdings (Article 8.2(c)). So long as any of the Preferred Shares are outstanding and the holders of the Preferred Shares hold at least twenty percent (20%) of the issued and outstanding shares of the Company [or fifty percent (50%) of the original amount of the convertible loan remains outstanding], the Company will not, without the written consent of the Preferred Majority, either directly or by amendment, merger, consolidation, or otherwise, redeem, purchase or otherwise acquire any of the Company’s shares ranking junior or pari passu with the Preferred Shares (except for: (i) repurchases of Ordinary Shares from participants of an ESOP or arrangements approved by the Board upon termination of employment; and (ii) redemptions of Preferred Shares)(Article 35.4).
(i) Capital Calls by the Company: The Board may, from time to time, make such calls as it may deem appropriate upon Shareholders in respect of any sum unpaid in respect of Shares held by such Shareholders (Article 13.1).
(j) Discrimination: No provision in the Company’s Articles of Association discriminates against an existing or prospective holder of securities, as a result of such shareholder owing a substantial amount of shares.
| 4. | Modification of Rights of Holders of Stock |
The general meeting of shareholders may adopt by an ordinary majority to increase its registered capital by the creation of new shares. Any such increase shall be in such amount and shall be divided into shares of such nominal amounts, and such shares shall confer such rights and preferences, and shall be subject to such restrictions, as such resolution of the General Meeting shall provide (Article 6.1). The rights attached to any class of issued Shares, may be modified or abrogated by the Company by a resolution of the General Meeting adopted by an Ordinary Majority, provided that any modification that would directly alter the rights attached to such class shall require the consent in writing of the holders of more than fifty percent (50%) of the issued shares of such class or a resolution of a separate Class Meeting adopted by an Ordinary Majority. Unless otherwise provided by the Company’s Articles of Association, the increase of the authorized and registered number of shares of an existing class of shares, or the issuance of additional shares thereof, shall not be deemed, for purposes hereof, to alter the rights attached to the previously issued Shares of such class or of any other class. When effecting an increase of the authorized and registered share capital under Article 6, or when modifying rights of shares under Article 7, the Company may provide for shares with such preferred or deferred rights or rights of redemption or other special rights and/or such restrictions, whether in regard to dividends, voting, repayment of share capital or otherwise, as may be stipulated in the adopted resolutions (Article 7).
| 5. | General Meetings |
An annual General Meeting of the Company’s shareholders shall be held once every calendar year, within a period of no more than 15 months after the last annual General Meeting (Article 22.1). The annual meeting’s agenda shall include a discussion of the Board of Directors’ reports and the financial statements as required by law. The annual meeting shall appoint an auditor (or renew the term of appointment thereof), appoint the directors pursuant to the Company’s Articles of Association and discuss all the other matters which must be discussed at the Company’s annual general meeting, pursuant to the articles or the Law, as well as any other matter determined by the Board of Directors (Article 22.2).
Extraordinary General Meeting – the Board of Directors of the Company may convene such General Meeting and shall be required to do so upon the demand of any 2 directors or a quarter of the directors (whichever is lower) or any 1 or more shareholders holding at least 5% of the issued share capital of the Company (Article 23.2). The Board of Directors of the Company shall announce the Extraordinary General Meeting within 21 days from receipt of such demand and the date for the meeting shall be no later than 35 days from publication of such announcement (Article 23.3).
Notice to the Company’s shareholders regarding the convening of a General Meeting shall be sent to all the shareholders listed in the Company’s shareholders’ register at least 21 days prior to the meeting and shall be published in other ways insofar as required by the law, unless a shorter period is permitted by law (provided that such period is not less than 7 days prior to the date fixed for the meeting). The accidental omission to give notice of a meeting to any member, or the non-receipt of notice sent to such member, shall not cause the cancellation of the resolution adopted at the meeting, or the cancellation of acts based on such notice (Article 25.3).
Quorum – any 2 or more shareholders present in person or by proxy or who have delivered to the Company a deed of vote indicating their manner of voting, and who hold in the aggregate at least 33.3% of the voting power of the Company shall constitute a lawful quorum (Article 27.2). If within half an hour of the time appointed for the meeting no quorum is present, the meeting if convened by the Board upon the demand of any 2 directors or a quarter of the directors (whichever is lower) or any 1 or more shareholders holding at least 5% of the issued share capital of the Company, or if convened by a demanding shareholder in accordance with the law, shall be dissolved, but in any other case, it shall be adjourned for one week, to the same day, time and place, or to such day and at such time and place as the Chairman may determine with the consent of the holders of a majority of the voting power represented at the meeting in person or by proxy or by deed of vote and voting on the question of adjournment (Article 27.3). No business shall be transacted at any adjourned meeting except business, which might lawfully have been transacted at the meeting as originally called. At such adjourned meeting, any 2 shareholders present in person or by proxy or by deed of vote, shall constitute a lawful quorum.
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Subject to the restrictive provisions contained in Article 35, and to any special majority requirements mandated by law, all resolutions at any and all General Meetings, including those with respect to the matters detailed in Article 21.1, shall be adopted by an Ordinary Majority (Article 30.1). A resolution in writing, signed by all shareholders of the Company then entitled to attend and vote, shall be deemed to have been unanimously adopted (Article 31).
| 6. | Limitations on the rights to own securities |
There are no limitations on the rights to own the Company’s securities, including the rights of non-residents or foreign shareholders to do so.
| 7. | Change of Control |
Under the Companies Law, a merger is, generally, required to be approved by the shareholders and Board of Directors of each of the merging companies. Shareholder approval is not required if the company that will not survive is controlled by the surviving company. Additionally, the law provides some exceptions to the shareholder approval requirement in the surviving company. If the share capital of the company that will not be the surviving company is divided into different classes of shares, the approval of each class is also required, unless determined otherwise by the court. A majority of votes approving the merger shall suffice, unless the company (like in this case) was incorporated in Israel prior to the Companies Law of 1999, in which case a majority of 75% of the voting power is needed in order to approve the merger. Additionally, unless the court determines differently, a merger will not be approved if it is objected to by a majority of the shareholders present at the meeting, after excluding the shares held by the other party to the merger, by any person who holds 25% or more of the other party to the merger and by the relatives of and corporations controlled by these persons. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties of the merger. Also, a merger can be completed only after all approvals have been submitted to the Israeli Registrar of Companies and provided that 30 days have elapsed since shareholder approval was received and 50 days have elapsed from the time that a proposal for approval of the merger was filed with the Registrar.
The Companies Law also provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a holder of 25% or more of the voting power at general meetings.
This rule does not apply if there is already another holder of 25% or more of the voting power at general meetings. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a holder of more than 45% of the voting power of the company. This rule does not apply if someone else already holds 45% of the voting power of the company. An acquisition from a 25% or 45% holder, which turns the purchaser into a 25% or 45% holder respectively, does not require a tender offer. An exception to the tender offer requirement may also apply when the additional voting power is obtained by means of a private placement approved by the general meeting of shareholders. These tender offer requirements do not apply to companies whose shares are listed for trading outside of Israel if, under local law or the rules of the stock exchange on which their shares are traded, there is a limitation on the percentage of control which may be acquired or the purchaser is required to make a tender offer to the public.
Under the Companies Law, a person may not acquire shares in a public company if, after the acquisition, he will hold more than 90% of the shares or more than 90% of any class of shares of that company, unless a tender offer is made to purchase all of the shares or all of the shares of the particular class. The Companies Law also provides that as long as a shareholder in a public company holds more than 90% of the company’s shares or of a class of shares, that shareholder shall be precluded from purchasing any additional shares (an exemption exists where the shareholder held prior to and following February 2000, over 90% of any class of shares, in which case he may purchase additional shares by a tender offer that was accepted by a majority of the offerees). If a tender offer is accepted and less than 5% of the shares of the company are not tendered, all of the shares will transfer to the ownership of the purchaser. If 5% or more of the shares of the company are not tendered, the purchaser may not purchase shares in a manner which will grant him more than 90% of the shares of the company.
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In addition to the foregoing, Article 35.6 of the Company’s Articles of Association provides that so long as any of the Preferred Shares are outstanding and the holders of the Preferred Shares hold at least twenty percent (20%) of the issued and outstanding shares of the Company (or fifty percent (50%) of the original amount of the Convertible Loan remains outstanding), the Company will not, without the written consent of the Preferred Majority, either directly or by amendment, merger, consolidation, or otherwise, effect a sale of the Company by sale of all or substantially all of the Company’s issued and outstanding shares, merger, consolidation, sale of assets or otherwise.
| 8. | Disclosing share ownership |
The Company has no bylaw provisions governing the ownership threshold, above which shareholder ownership must be disclosed.
Our material contracts outside of the ordinary course of business were: (i) the 2006 share purchase agreement and related documents for the financing with Fortissimo and certain other investors, copies of which were filed with the Company’s Proxy Statement for the annual shareholders meeting in August 2006, (ii) the Addendums to the share purchase agreement with Fortissimo for the additional investments with new options, copies of which were filed with the Company’s Proxy Statement for the annual shareholders meeting in October 2007, (iii) the private placements led by Meitav, copies of which were filed as exhibits to the 2006 Annual Report, and (iv) the Credit Facility provided by Fortissimo. See Item 4B – “Business Overview – Recent Financings” and Item 7 – “Major Shareholders and Related Party Transactions” for a description of each.
All exchange control restrictions imposed by the State of Israel have been removed, although there are still reporting requirements for foreign currency transactions. Legislation remains in effect, however, pursuant to which currency controls can be imposed by administrative action at any time.
Pursuant to the General Permit issued by the Israeli Controller of Foreign Currency, at the Bank of Israel (under the Currency Control Law, 1978), non-residents of Israel who purchase our ordinary shares will be able to convert any proceeds from the sale of these ordinary shares, as well as dividend and liquidation distributions, if any, into non-Israeli currency, provided that Israeli Income Tax has been paid (or withheld) on such amounts (to the extent applicable).
The following is a summary of the material Israeli tax consequences, Israeli foreign exchange regulations and certain Israeli government programs affecting the Company.
To the extent that the discussion is based on new tax or other legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax or other authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
ISRAELI TAX CONSIDERATIONS
On January 1, 2003 a comprehensive tax reform took effect in Israel. Pursuant to the reform, resident companies are subject to Israeli tax on income accrued or derived in Israel or abroad. In addition, the concept of “controlled foreign corporation” was introduced according to which an Israeli company may become subject to Israeli taxes on certain income of a non-Israeli subsidiary if the subsidiary’s primary source of income is passive income. The tax reform also substantially changes the taxation of capital gains.
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General Corporate Tax Structure
Israeli companies are generally subject to income tax on their taxable income at the rate of 31% for the year 2006, 29% for 2007, 27% for 2008, 26% for 2009 and 25% for year 2010 and thereafter, and are subject to capital gains tax at a rate of 25% for capital gains (other than gains deriving from the sale oflisted securities) derived after January 1,2003.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959.
The Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”) provides certain tax and financial benefits to investment programs that have been granted such status. The Investment Law provides that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry and Trade of the State of Israel, be designated as an “Approved Enterprise”. Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, e.g., the equipment to be purchased and utilized pursuant to the program. The tax benefits derived from any such certificate of approval relate only to taxable income attributable to the specific Approved Enterprise. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted combination of the applicable rates. Income derived from activity that is not integral to the activity of the enterprise should not be divided between the different enterprises and should not enjoy tax benefits.
The principal stated objectives of the Investment Law are to promote the development of industry, the creation of jobs and the growth of exports. The Investment Center of the Ministry of Industry and Trade granted RadView an Approved Enterprise status under “Alternative Benefits Program Status”. This status entitles the Company to a benefit period of seven years on income derived from this program as follows: (a) a full income tax exemption for the first two years and (b) a reduced income tax rate of 25%, instead of the regular rate of 31% in 2006, for the remaining five-year period. Depending on the level of non-Israel investments in the Company, the period for which the Company is entitled to a reduced tax rate of 25% can be extended to eight years. The period of the benefit is limited to 12 years from commencement of production or 14 years from the date of approval. As the Company has not yet reported any taxable income, the benefit period has not yet commenced.
The benefits from the Company’s approved enterprise programs are dependent upon the Company fulfilling the conditions stipulated by the Law for Encouragement of Capital Investments, 1959 and the regulations published under this law, as well as the specific criteria in the Company’s approved enterprise programs. If the Company does not comply with these conditions, the tax benefits may be canceled, and the Company may be required to refund the amount of the canceled benefits, with the addition of linkage differences and interest. As of the date of this Annual Report on Form 20-F, the Company believes it complies with these conditions.
If the Company distributes a cash dividend out of retained earnings which were tax exempt due to its approved enterprise status, the Company would have to pay a 25% corporate tax on the amount distributed, and a further 15% withholding tax would be deducted from the amounts distributed to the recipients.
As of December 31, 2008, the Company does not have retained earnings and accordingly, no tax-exempt income. Tax-exempt income attributable to the Approved Enterprise cannot be distributed to shareholders without subjecting the Company to taxes except upon complete liquidation of the Company. If the retained tax-exempt income is distributed in a manner other than upon the complete liquidation of the Company, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not elected alternative tax benefits. The Company’s board of directors does not intend to distribute any amounts of its undistributed tax-exempt income as dividends.
An amendment to the Investment Law that became effective on April 1, 2005, limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise, such as provisions generally requiring that at least 25% of the Approved Enterprise’s income will be derived from export. Additionally, the amendment enacted major changes in the manner in which tax benefits are awarded so that companies no longer require Investment Center approval in order to qualify for tax benefits (although approval is required if grants are sought). Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set out by the amendment (a “Benefited Enterprise”). However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the Law as they were on the date of such approval. Therefore, the Company’s existing Approved Enterprise will generally not be subject to the provisions of the Amendment.
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As a result of the Amendment, tax-exempt income generated under the provisions of the new law as and when applicable will subject the Company to taxes upon distribution or liquidation and the Company may be required to record a deferred tax liability with respect to such tax-exempt income.
Income from sources other than the Approved Enterprise during the benefit period will be subject to tax at the regular corporate tax rate. Israeli companies are subject to income tax at the corporate tax rate of 34% for the 2005 tax year. On July 25, 2005, the Knesset (Israeli Parliament) passed the Law for the Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among others, a gradual decrease in the corporate tax rate in Israel to the following tax rates: 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009and 25% in 2010 and years thereafter.
Due to reported losses for tax purposes, the benefit period under the Approved Enterprise program has not yet commenced.
By virtue of this law, the Company is entitled to claim accelerated depreciation on equipment used by the Approved Enterprise during five tax years. The Company has received final approval in respect to the investment program. We cannot assure that we will receive approvals in the future for Approved or Benefited Enterprise status.
Tax Benefits and Grants 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, 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.
In case the tax deduction, in the year research and development expenditures are incurred, is not approved by the relevant Israeli government ministry, the Company will be entitled for the tax deduction over a period of three years.
Tax Benefits Under the Law for the Encouragement of Industry (Taxation), 1969
According to the Law for the Encouragement of Industry (Taxation), 1969, or the Industry Encouragement Law, an “Industrial Company” is a company resident in Israel that at least 90% of its income, in any tax year, determined in Israeli currency, exclusive of income from certain government loans, capital gains, interest and dividends, 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.
The following preferred corporate tax benefits are available to Industrial Companies, among others: (a) deduction of purchases of know-how and patents over an eight-year period for tax purposes; (b) deduction over a three-year period of expenses involved with the issuance and listing of shares on the Tel Aviv Stock Exchange or, on or after January I, 2003, on a recognized stock market outside of Israel; (c) an election under certain conditions to file a consolidated tax return with additional related Israeli Industrial Companies that satisfy conditions set forth in the law; and (d) accelerated depreciation rates on equipment and buildings.
Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
The Company currently qualifies as an “Industrial Company” under the Law for Encouragement of Industry (Taxes), 1969 and is therefore entitled to tax benefits, mainly accelerated depreciation of machinery and equipment and deduction of expenses incurred in connection with a public offering.
Special Provisions Relating to Taxation Under Inflationary Conditions
The Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the Inflationary Adjustments Law, is intended to adjust the corporate tax system to the rate of inflation, i.e., to tax profits on an inflation-adjusted basis.
Under the Inflationary Adjustments Law, results for tax purposes are measured in historical cost terms and are subject to a series of adjustments based on movements in the Israel consumer price index. We are taxed under this law. The discrepancy between the change in (I) the Israel consumer price index and (2) the exchange rate of the NIS to the dollar, each year and cumulatively, may result in a significant difference between taxable income and the income denominated in dollars as reflected in our financial statements. In addition, subject to certain limitations, depreciation of fixed assets and losses carried forward are adjusted for inflation on the basis of changes in the Israel consumer price index.
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The salient features of the Inflationary Adjustments Law can be described generally as follows:
(a) A special tax adjustment for the preservation of equity whereby certain corporate assets are classified broadly into fixed (inflation immune) assets and non-fixed assets. Where a company’s equity, as defined in such law, exceeds the depreciated cost of fixed assets, a deduction from taxable income that takes into account the effect of the applicable annual rate of inflation on such excess is allowed, up to a ceiling of 70% of taxable income in any single tax year, with the unused portion permitted to be carried forward, linked to the increase in the consumer price index. If the depreciated cost of fixed assets exceeds a company’s equity, then such excess multiplied by the applicable annual rate of inflation is added to taxable income.
(b) Subject to certain limitation set forth in the Inflationary adjustments Law, depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the increase in the Israel consumer price index.
(c) Gains on the sale of certain listed securities which are taxed at a reduced rate with respect to individuals are taxable at a company tax rate in certain circumstances. However, dealers in securities are subject to the regular tax rules applicable to business income in Israel. As of January 1, 2006, the relevant provisions governing taxation of companies on capital gains derived from the sale of traded securities are included in the Tax Ordinance, and the Adjustments Law no longer includes provisions in this regard.
(d) Accelerated depreciation rates on equipment and buildings.
Capital Gains Tax on Sales of Ordinary Shares
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between the real gain and the inflationary surplus. The real gain is the excess of the total capital gain over the inflationary surplus, computed on the basis of the increase in the Israel consumer price index between the date of purchase and the date of sale. Generally, up until the 2006 tax year, capital gains tax was imposed on Israeli resident individuals at a rate of 15% on real gains derived on or after January 1, 2003 from the sale of shares in, among others, Israeli companies publicly traded on Nasdaq or on a recognized stock exchange or regulated market in a country that has a treaty for the prevention of double taxation with Israel (such as our company). This tax rate was contingent upon the shareholder not claiming a deduction for financing expenses in connection with such shares (in which case the gain will be taxed at a rate of 25%), and did not apply to: (i) the sale of shares to a relative (as defined in the Israeli Income Tax Ordinance); (ii) the sale of shares by dealers in securities; (iii) the sale of shares by shareholders that report in accordance with the Inflationary Adjustment Law (that will be taxed at corporate tax rates for corporations and at marginal rates for individuals); or (iv) the sale of shares by shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement).
As of January 1, 2006, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 20% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such sale (i.e. such shareholder holds directly or indirectly, including jointly with others, at least 10% of any means of control in the company), the tax rate will be 25%.
Israeli companies are subject to the corporate lax rate on capital gains derived from the sale of shares, unless such companies were not subject to the Adjustments Law (or certain regulations) at the time of publication of the aforementioned amendment to the Tax Ordinance, in which case the applicable tax rate is 25%. However, the different tax rates will not apply to dealers in securities and shareholders who acquired their shares prior to an initial public offering.
The tax basis of shares acquired prior to January 1, 2003 will be determined in accordance with the average closing share price in the three trading days preceding January 1,2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.
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Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock exchange or regulated market outside of Israel, provided that such capital gains are not derived from a permanent establishment in Israel, that such shareholders are not subject to the Inflationary Adjustment Law 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 an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In some instances where our shareholders may be subject 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.
The US-Israel Tax Treaty
Pursuant to the Convention Between the Government of the United States of America and the Government of Israel with Respect to Taxes on Income, as amended (the “United States- Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a person who qualifies as a resident of the United States within the meaning of the United States-Israel Tax Treaty and who is entitled to claim the benefits afforded to such person by the United States- Israel Tax Treaty (a “Treaty United States Resident”) generally will not be subject to the Israeli capital gains tax unless such Treaty United States Resident holds, directly or indirectly, shares representing 10% or more of the Company’s voting power during any part of the 12- month period preceding such sale, exchange or disposition, subject to certain conditions. A sale, exchange or disposition of ordinary shares by a Treaty United States Resident who holds, directly or indirectly, shares representing 10% or more of the Company’s voting power at any time during such preceding 12-month period would be subject to such Israeli tax, to the extent applicable; however, under the United States-Israel Tax Treaty, such Treaty United States Resident would be permitted to claim a credit for such taxes against the United States federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations specified in the treaty. The United States-Israel Tax Treaty does not relate to United States state or local taxes.
Taxation of Non-Resident Holders of Ordinary Shares
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, income tax is withheld at the source at the following rates: (i) for dividends distributed prior to January 1,2006 – 25%; and (ii) for dividends distributed on or after January 1, 2006, 20%, or 25% for a shareholder that is considered a significant shareholder at any time during the 12-month period preceding such distribution; unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of shares who is a resident of the United States is 25% or 12.5% if such U.S. resident is a corporation which holds, directly or indirectly, shares representing at least 10% or more of our issued voting power during the part of the tax year which precedes the date of payment of the dividend and during the whole of its prior tax year. However, under the U.S.-Israel Tax Treaty and the Investments Law, dividends generated by an Approved Enterprise (or Benefiting Enterprise) are taxed at the rate of 15%.
Foreign Exchange Regulations
Dividends, if any, paid to the holders of the ordinary shares, and any amounts payable upon dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of the ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, ifpaid in Israeli currency, may be converted into dollars at the rate of exchange prevailing at the time of conversion.
UNITED STATES FEDERAL INCOME TAXES
The following general discussion sets forth the material United States federal income tax consequences applicable to the following persons who purchase, hold or dispose of the ordinary shares as capital assets (“U.S. Shareholders”): (i) citizens or residents (as defined for U.S. federal income tax purposes) of the United States; (ii) corporations or other entities taxable as corporations created or organized in or under the laws of the United States or any state thereof; (iii) estates, the income of which is subject to United States federal income taxation regardless of its source; and (iv) a trust if (a) a U.S. court is able to exercise primary supervision over its administration and (b) one or more U.S. persons have the authority to control all of its substantial decisions. This discussion is based on the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), United States Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, all as in effect as of the date of this Annual Report on Form 20-F. This discussion generally considers only U.S. Shareholders that will hold the ordinary shares as capital assets and does not consider (a) all aspects of U.S. federal income taxation that may be relevant to particular U.S. Shareholders by reason of their particular circumstances (including potential application of the alternative minimum tax), (b) U.S. shareholders subject to special treatment under the U.S. federal income tax laws, such as financial institutions, insurance companies, broker-dealers, tax-exempt organizations, financial institutions or foreign individuals or entities, (c) U.S. Shareholders owning directly or by attribution 10% or more of the Company’s outstanding voting shares, (d) U.S. Shareholders who hold the ordinary shares as part of a hedging, straddle or conversion transaction, (e) U.S. Shareholders who acquire their ordinary shares in a compensatory transaction, (f) U.S. Shareholders whose functional currency is not the dollar, or (g) any aspect of state, local or non-United States tax law.
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THE FOLLOWING SUMMARY DOES NOT ADDRESS THE IMPACT OF AN INVESTOR’S INDIVIDUAL TAX CIRCUMSTANCES. ACCORDINGLY, EACH INVESTOR SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF AN INVESTMENT IN THE ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE ST ATE, LOCAL OR FOREIGN TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
Distributions paid on ordinary shares (including any Israeli taxes withheld) to a U.S. Shareholder will be treated as ordinary dividend income for United States federal income tax purposes to the extent of the Company’s current and accumulated earnings and profits (as computed for U.S. federal income tax purposes). Such dividends, which will be treated as foreign source income for U.S. foreign tax credit purposes, generally will not qualify for the dividends-received deduction available to corporations. Distributions in excess of such earnings and profits will be applied against and will reduce the shareholder’s tax basis in the ordinary shares and, to the extent in excess of such tax basis, will be treated as gain from a sale or exchange of such ordinary shares.
The amount of the distribution will equal the US Dollar value of the distribution, calculated by reference to the exchange rate in effect on the date the distribution is received (or otherwise made available to the U.S. Shareholders), regardless of whether a payment in Israeli currency is actually converted to US Dollars at that time. U.S. Shareholders should consult their own tax advisors concerning the treatment of foreign currency gain or loss, if any, on any Israeli currency received which is converted into US Dollars subsequent to receipt.
Qualified dividend income received by an individual (as well as certain trusts and estates) U.S. Shareholder for taxable years beginning before January 1, 2009 are taxed at reduced rates of either 5 or 15 percent, depending upon the amount of such shareholder’s taxable income. If a non-corporate U.S. Shareholder does not hold ordinary shares for more than 60 days during the 120 day period beginning 60 days before an ex-dividend date, dividends received on ordinary shares are not eligible for reduced rates. Dividends received from a foreign corporation that was a passive foreign investment company (as further discussed below) in either the taxable year of the distribution or the preceding taxable year are not qualified dividend income. Qualified dividend income includes dividends received from a “qualified foreign corporation.” A “qualified foreign corporation” includes a foreign corporation whose shares are readily tradable on an established securities market in the United States as well as a foreign corporation that is entitled to the benefits of a comprehensive income tax treaty with the United States which includes an exchange of information program. Israel and the United States are parties to a comprehensive income tax treaty which includes an exchange of information program. The United States Treasury Department will periodically issue guidance regarding which income tax treaties will be satisfactory for treating a corporation as a “qualified foreign corporation”. In the event ordinary shares should not be readily tradable on an established securities market in the United States, non-corporate US Shareholders should consult their own tax advisors as to whether any distributions paid on ordinary shares will be taxed for United States federal income tax purposes at reduced tax rates.
Credit for Israeli Taxes Withheld
Subject to certain conditions and limitations, any Israeli tax withheld or paid with respect to dividends on the ordinary shares generally will be eligible for credit against a U.S. Shareholder’s United States federal income tax liability at such US. Shareholder’s election. The Code provides limitations on the amount of foreign tax credits that a US Shareholder may claim, including extensive separate computation rules under which foreign tax credits allowable with respect to specific categories of income cannot exceed the United States federal income taxes otherwise payable with respect to each such category of income. Dividends with respect to the ordinary shares generally will be classified as foreign source “passive income” for the purpose of computing a US Shareholder’s foreign tax credit limitations for U.S. foreign tax credit purposes. The availability of the Israeli withholding tax as a foreign tax credit will also be subject to certain restrictions on the use of such credits, including a prohibition on the use of the credit to reduce liability for the United States individual and corporate minimum taxes by more than 90%. Alternatively, US. Shareholders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax withheld or paid, but only for a year in which these U.S. Shareholders elect to do so for all foreign income taxes. The rules relating to foreign tax credits are complex, and you should consult your tax advisor to determine whether and if you would be entitled to this credit.
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Disposition of the Ordinary Shares
Subject to the discussion under the heading “Passive Foreign Investment Company Status” the sale or exchange of ordinary shares generally will result in the recognition of capital gain or loss in an amount equal to the difference between the amount realized on the sale or exchange and the U.S. Shareholder’s tax basis in the ordinary shares. Such gain or loss generally will be long-term capital gain or loss if the U.S. Shareholder’s holding period of the ordinary shares exceeds one year at the time of the disposition.
Certain limitations apply to the deductibility of capital losses by both corporate and non-corporate taxpayers. Under the Code, gain or loss recognized by a US. Shareholder on a sale or exchange of ordinary shares generally will be treated as US source income or loss for US foreign tax credit purposes. Under the tax treaty between the United States and Israel, however, gain derived from the sale, exchange or other disposition of ordinary shares by a holder who is a resident of the United States for purposes of the treaty and who sells the ordinary shares within Israel may be treated as foreign source income for U.S. foreign tax credit purposes. U.S. Shareholders should consult their own tax advisors regarding the treatment of any foreign currency gain or loss on any Israeli currency received in respect oft he sale, exchange or other disposition of ordinary shares.
Passive Foreign Investment Company Status
See discussion in Item 5A above.
Tax Consequences for Non-U.S. Holders of Ordinary Shares
Except as described in “Information Reporting and Back-up Withholding” below, a non-U.S. holder of ordinary shares will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, ordinary shares, unless:
| — | the item is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States and: |
| — | in the case of a resident of a country which has a treaty with the United States, the item is attributable to a permanent establishment; or |
| — | in the case of an individual, the item is attributable to a fixed place of business in the United States; |
| — | the non-U .S. holder is an individual who holds the ordinary shares as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition and does not qualify for an exemption; or |
| — | the non-U.S. holder is subject to tax under the provisions of U.S. tax law applicable to U.S. expatriates. |
Information Reporting and Back up Withholding
A non-corporate U.S. Shareholder may, under certain circumstances, be subject to information reporting requirements and “backup withholding” at a 30% rate on cash payments in the United States of dividends on, and the proceeds of disposition of, ordinary shares. Backup withholding will apply only if a U.S. Shareholder: (a) fails to furnish its social security or other taxpayer identification number (“TIN”) within a reasonable time after the request therefore; (b) furnishes an incorrect TIN; (c) is notified by the IRS that it has failed properly to report payments of interest and dividends; or (d) under certain circumstances, fails to certify, under penalty of perjury, that it has furnished a correct TIN and has not been notified by the IRS that it is subject to backup withholding for failure to report interest and dividend payments. U.S. Shareholders should consult their tax advisors regarding their qualification for exemption, if applicable. The amount of backup withholding from a payment to a U.S. Shareholder generally will be allowed as a credit against such U.S. Shareholder’s federal income tax liability and may entitle such U.S. Shareholder to a refund, provided that the required information is furnished to the IRS.
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Not applicable.
Not applicable.
The documents concerning the Company that are referred to in the form may be inspected at the Company’s office in Israel.
For information relating to the Company’s subsidiary, see Item 4–“Organizational Structure” as well as the Company’s Consolidated Financial Statements (Items 8 and 18 of this form).
We do not use derivative financial instruments in our investing portfolio. We place our investments in instruments that meet high credit quality standards such as money market funds, government securities, and commercial paper. We limit the amount of credit exposure to any one issuer. We do not expect any material loss with respect to our investment portfolio.
We conduct business in various foreign currencies, primarily in Europe and the Israel. As a result, we are exposed to the effect of foreign currency exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated revenues and expenses. We do not use foreign exchange forward contracts to hedge our foreign currency denominated receivables. Looking forward, there can be no assurance that changes in foreign currency rates, relative to the U.S. dollar, will not materially adversely affect our consolidated results. At December 31, 2008, a 10% strengthening of the U.S. dollar versus other currencies would have resulted in an increase of approximately $49,000 in our net assets position, while a 10% weakening of the dollar versus all other currencies would have resulted in a decrease of approximately $49,000.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, restricted cash and accounts receivables.
Cash, cash equivalents and restricted cash are invested mainly in U.S. dollars with major banks in Israel and the United States. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments.
Accounts receivable are derived from sales to customers located in the United States, Europe, Israel and APAC. The Company performs on-going credit evaluations of its customers and to date has not experienced any material losses. An allowance for doubtful accounts is maintained with respect to those amounts that the Company has determined to be doubtful of collection.
The Company has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.
Not applicable.
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Not applicable.
Item 14: Material Modifications to the Rights of Security Holders and Use of Proceeds
Not applicable.
(a) Disclosure controls and procedures
As of December 31, 2008, under the supervision and with the participation of our management, including our Chief Executive Officer and Vice President of Finance, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) was performed as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Vice President of Finance concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
(b) Management's Annual Report on Internal Control Over Financial Reporting.
Our management, under the supervision of our Chief Executive Officer and Vice President of Finance, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our Chief Executive Officer and Vice President of Finance assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, they used the criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our Chief Executive Officer and Vice President of Finance have concluded that, as of December 31, 2008, our internal control over financial reporting is effective based on those criteria. Notwithstanding the foregoing, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
(c) Change in Internal Control over Financial Reporting.
There were changes in the Company’s internal controls over financial reporting that occurred during the fiscal year ended December 31, 2008. As of December 31,2007 management identified significant deficiencies in our internal control that occurred in some processes due to lack of financial resources to ensure segregation of duties and not sufficient evidence of control since the control was not documented properly and have concluded that taken together these significant deficiencies may have constituted a material weakness. In order to remediate previous year material weaknesses the management has recruited additional personnel and redesigned processes and documentation.
(d) Other.
The Company believes that a control system, no matter how well designed and operated, can not provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with the Company have been determined.
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The Audit Committee of the Board of Directors currently consists of Shai Beilis, Hadas Gazit Kaiser and Amir Livne.
The Board of Directors has determined that Shai Beilis and Hadas Gazit Kaiser are “Audit Committee financial experts” as that term is defined in Item 401 of Regulation S-K under the Securities Exchange Act of 1934. Each of the members of the Audit Committee satisfies the independence requirements under Rule 10A(m)(3) of the Securities Exchange Act of 1934 and is an “independent director,” as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934.
The Company has adopted a code of ethics and business conduct (the “Code of Ethics”) which applies to its principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions. A copy of the Code of Ethics was attached as an Exhibit to the Annual Report on Form 20-F for year 2006. Written copies are available upon written request to the Company at its address in Israel. We will disclose any amendments or waivers to the Code of Ethics that apply to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions.
The Company’s consolidated financial statements at December 31, 2008 have been audited by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global. The Company’s audit committee has recommended that Kost Forer Gabbay & Kasierer continue to serve as the Company’s independent auditors for the fiscal year ending December 31, 2008. The Board of Directors proposes that the shareholders approve and ratify this appointment. Representatives of Kost Forer Gabbay & Kasierer are expected to be present at the Annual Meeting to respond to appropriate questions and will be given the opportunity to make a statement should they desire to do so.
The following table presents the aggregate fees for professional audit services and other services rendered by the Company’s independent auditors, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, in 2007 and 2008.
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | |||||||
| Audit Fees | $ | 62,000 | $ | 41,000 | ||||
| Audit Related Fees | 27,000 | $ | 15,000 | |||||
| Tax Fees | - | $ | 7,000 | |||||
| All Other Fees | 5,000 | |||||||
| $ | 94,000 | $ | 63,000 | |||||
Audit Fees consist of fees billed for the annual audit of the Company’s annual consolidated financial statements included in the Company’s Annual Report on Form 20-F for years 2007 forwards.
Audit Related Fees include fees billed for other audit services, which are those services that only the external auditor reasonably can provide, and include the review of documents filed with the SEC.
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Tax Fees include fees billed for tax compliance services, including the preparation of tax returns and claims for refund and tax consultations.
All Other Fees include fees billed for assistance with tax examinations by Israeli income tax authorities.
The Audit Committee is required to approve in advance any audit or permissible non-audit services performed by the Company’s independent auditors, the fees to be paid for those services and the time period over which those services are to be provided. On an annual basis, the independent auditors present a listing of all services they expect to perform for the Company in the ensuing one-year period, including fee estimates, in sufficient detail to enable the Audit Committee to perform an independence review of each proposed service. The pre-approval policies and procedures established by the Audit Committee require that the Audit Committee meet with the independent auditor and financial management prior to the audit to review planning and staffing, the scope of the proposed audit for the current year, the audit procedures to be utilized, and the proposed fees. With respect to any additional services proposed to be performed by the independent auditors during the year, management will evaluate the impact on the independent accountant’s independence and obtain Audit Committee approval for such service. During 2007 and 2008, 100% of the audit, audit-related and tax fees were pre-approved by the Audit Committee.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
The following financial statements are filed as part of this Annual Report:
67
To the Board of Directors and Shareholders of
RadView Software Ltd.
We have audited the accompanying consolidated balance sheets of RadView Software Ltd. and its subsidiaries (the “Company”) as of December 31, 2007 and 2008 and the related consolidated statements of operations, shareholders’ deficit and cash flows for each of the three years in the period ended December 31, 2008. 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of RadView Software Ltd. and its subsidiaries as of December 31, 2007 and 2008 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with U.S. generally accepted accounting principles.
| Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
| June 30, 2009 | A Member of Ernst & Young Global |
F - 2
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| CONSOLIDATED BALANCE SHEETS |
| U.S. dollars in thousands (except share data) |
| December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Note | 2007 | 2008 | |||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | 880 | $ | 243 | |||||||
| Restricted cash | 26 | 26 | |||||||||
| Accounts receivable (net of allowance for doubtful accounts of $ 46 as | |||||||||||
| of December 31, 2007 and $89 as of December 31, 2008) | 651 | 372 | |||||||||
| Prepaid expenses and other current assets | 3 | 204 | 289 | ||||||||
| Total current assets | 1,761 | 930 | |||||||||
| LONG-TERM INVESTMENTS: | |||||||||||
| Operating lease deposit | 40 | 40 | |||||||||
| Severance pay funds | 292 | 172 | |||||||||
| Total long-term investments | 332 | 212 | |||||||||
| PROPERTY AND EQUIPMENT, NET | 4 | 68 | 35 | ||||||||
| DEFERRED FINANCING COSTS RELATED TO CONVERTIBLE LOAN | 18 | 4 | |||||||||
| Total assets | $ | 2,179 | $ | 1,181 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 3
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| CONSOLIDATED BALANCE SHEETS |
| U.S. dollars in thousands (except share data) |
| December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Note | 2007 | 2008 | |||||||||
| LIABILITIES AND SHAREHOLDERS' DEFICIENCY | |||||||||||
| CURRENT LIABILITIES: | |||||||||||
| Accounts payable | $ | 284 | $ | 261 | |||||||
| Accrued expenses | 5 | 2,147 | 1,605 | ||||||||
| Deferred revenues | 1,140 | 850 | |||||||||
| Convertible loan | 7f | - | 593 | ||||||||
| Total current liabilities | 3,571 | 3,309 | |||||||||
| CONVERTIBLE LOAN | 7f | 344 | - | ||||||||
| ACCRUED SEVERANCE PAY | 371 | 240 | |||||||||
| COMMITMENTS AND CONTINGENT LIABILITIES | 6 | ||||||||||
| SHAREHOLDERS' DEFICIT: | 7 | ||||||||||
| Ordinary shares, NIS 0.01 par value - | |||||||||||
| Authorized: 550,000,000 shares as of December 31, 2007 and December | |||||||||||
| 31, 2008; Issued: 77,038,662 shares as of December 31, 2007 and | |||||||||||
| December 31, 2008; Outstanding: 76,904,662 shares as of December | |||||||||||
| 31, 2007 and 2008. | 188 | 188 | |||||||||
| Preferred A shares, NIS 0.01 par value - | |||||||||||
| Authorized: 225,000,000 shares as of December 31, 2007 and | |||||||||||
| December 31, 2008; Issued and outstanding: 81,666,668 shares as of | |||||||||||
| December 31, 2007 and December 31, 2008; | 191 | 191 | |||||||||
| Preferred B shares, NIS 0.01 par value - | |||||||||||
| Authorized: 150,000,000 shares as of December 31, 2007 and | |||||||||||
| December 31, 2008; Issued: None as of December 31, 2007 and | |||||||||||
| December 31, 2008 | - | - | |||||||||
| Treasury shares, at cost: 134,000 shares as of December 31, 2007 and | |||||||||||
| December 31, 2008 | (100 | ) | (100 | ) | |||||||
| Additional paid-in capital | 64,835 | 64,930 | |||||||||
| Accumulated deficit | (67,221 | ) | (67,577 | ) | |||||||
| Total shareholders' deficit | (2,107 | ) | (2,368 | ) | |||||||
| Total liabilities and shareholders' deficit | $ | 2,179 | $ | 1,181 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 4
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| U.S. dollars in thousands (except share and per share data) |
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Note | 2006 | 2007 | 2008 | |||||||||||
| Revenues: | 12 | |||||||||||||
| Software licenses | $ | 1,757 | $ | 1,225 | $ | 1,687 | ||||||||
| Services and maintenance | 2,526 | 1,895 | 1,754 | |||||||||||
| Total revenues | 4,283 | 3,120 | 3,441 | |||||||||||
| Cost of revenues: | ||||||||||||||
| Software licenses | 80 | 26 | 89 | |||||||||||
| Services and maintenance | 133 | 66 | 55 | |||||||||||
| Total cost of revenues | 213 | 92 | 144 | |||||||||||
| Gross profit | 4,070 | 3,028 | 3,297 | |||||||||||
| Operating expenses: | ||||||||||||||
| Research and development, net | 8 | 1,512 | 1,890 | 1,231 | ||||||||||
| Sales and marketing | 2,475 | 2,687 | 1,057 | |||||||||||
| General and administrative | 1,671 | 1,729 | 1,105 | |||||||||||
| Total operating expenses | 5,658 | 6,306 | 3,393 | |||||||||||
| Operating loss | (1,588 | ) | (3,278 | ) | (96 | ) | ||||||||
| Financial expenses, net | 9 | (210 | ) | (358 | ) | (337 | ) | |||||||
| Income tax (benefit) | 10 | - | 331 | (77 | ) | |||||||||
| Net loss | $ | (1,798 | ) | $ | (3,967 | ) | $ | (356 | ) | |||||
| Deemed dividend on Preferred A shares and exercise of | ||||||||||||||
| additional investment rights during the year | $ | (882 | ) | $ | (850 | ) | $ | - | ||||||
| Net loss attributed to Ordinary shares | $ | (2,680 | ) | $ | (4,817 | ) | $ | (356 | ) | |||||
| Basic and diluted net loss per Ordinary share | $ | (0.13 | ) | $ | (0.08 | ) | $ | (0.01 | ) | |||||
| Weighted average number of shares used in computing basic | ||||||||||||||
| and diluted net loss per Ordinary share (in thousands) | 20,526 | 60,488 | 76,905 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 5
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| STATEMENTS OF SHAREHOLDERS' DEFICIT |
| U.S. dollars in thousands (except share data) |
| Preferred A shares | Ordinary shares | Treasury shares | Additional paid-in capital | Accumulated deficit | Total shareholders deficit | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number of shares | Value | Number of shares | Value | Number of shares | Value | ||||||||||||||||||||||||
| Balance, January 1, 2006 | - | $ | - | 20,659,682 | $ | 51 | 134,000 | $ | (100 | ) | $ | 56,981 | $ | (59,313 | ) | $ | (2,381 | ) | |||||||||||
| Stock-based compensation | - | - | - | - | - | - | 128 | - | 128 | ||||||||||||||||||||
| Proceeds from private placement of Preferred A | |||||||||||||||||||||||||||||
| shares and warrants, net of issuance costs | |||||||||||||||||||||||||||||
| of $ 188 | 48,333,334 | 112 | - | - | - | - | 1,900 | - | 2,012 | ||||||||||||||||||||
| Deemed dividend on convertible Preferred shares | |||||||||||||||||||||||||||||
| and an exercise of additional investment rights | |||||||||||||||||||||||||||||
| during the year | - | - | - | - | - | - | 882 | (882 | ) | - | |||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (1,798 | ) | (1,798 | ) | ||||||||||||||||||
| Balance, December 31, 2006 | 48,333,334 | 112 | 20,659,682 | 51 | 134,000 | (100 | ) | 59,891 | (61,993 | ) | (2,039 | ) | |||||||||||||||||
| Proceeds from exercise of additional investment | |||||||||||||||||||||||||||||
| rights | 33,333,334 | 79 | - | - | - | - | 921 | - | 1,000 | ||||||||||||||||||||
| Proceeds from private placement of Ordinary | |||||||||||||||||||||||||||||
| shares and warrants, net of issuance costs | |||||||||||||||||||||||||||||
| of $ 203 | - | - | 56,378,980 | 137 | - | - | 3,042 | - | 3,179 | ||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | 131 | - | 131 | ||||||||||||||||||||
| Deemed dividend on exercise of additional | |||||||||||||||||||||||||||||
| investment rights during the year | - | - | - | - | - | - | 850 | (850 | ) | - | |||||||||||||||||||
| Cumulative effect of FIN 48 adoption | - | - | - | - | - | - | - | (411 | ) | (411 | ) | ||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (3,967 | ) | (3,967 | ) | ||||||||||||||||||
| Balance, December 31, 2007 | 81,666,668 | 191 | 77,038,662 | 188 | 134,000 | (100 | ) | 64,835 | (67,221 | ) | (2,107 | ) | |||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | 95 | - | 95 | ||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (356 | ) | (356 | ) | ||||||||||||||||||
| Balance, December 31, 2008 | 81,666,668 | $ | 191 | 77,038,662 | $ | 188 | 134,000 | $ | (100 | ) | $ | 64,930 | $ | (67,577 | ) | $ | (2,368 | ) | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 6
| RADVIEW SOFTWARE LTD. AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| U.S. dollars in thousands |
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (1,798 | ) | $ | (3,967 | ) | $ | (356 | ) | ||
| Adjustments required to reconcile net loss to net cash used in | |||||||||||
| operating activities: | |||||||||||
| Depreciation | 82 | 81 | 43 | ||||||||
| Stock-based compensation | 128 | 131 | 95 | ||||||||
| Amortization of debt discount, long-term convertible loan | |||||||||||
| discount and deferred financing costs | 94 | 262 | 263 | ||||||||
| Accrued interest of loan-term convertible loan | 38 | 59 | 61 | ||||||||
| Severance pay, net | (63 | ) | (54 | ) | (11 | ) | |||||
| Decrease (increase) in accounts receivable | 269 | (241 | ) | 279 | |||||||
| Increase in prepaid expenses and other current assets | (47 | ) | (38 | ) | (85 | ) | |||||
| Decrease in accounts payable | (142 | ) | (144 | ) | (23 | ) | |||||
| Increase (decrease) in accrued expenses | 125 | 380 | (603 | ) | |||||||
| Increase (decrease) in deferred revenue | (574 | ) | 55 | (290 | ) | ||||||
| Net cash used in operating activities | (1,888 | ) | (3,476 | ) | (627 | ) | |||||
| Cash Flows from investing activities: | |||||||||||
| Purchases of property and equipment | (40 | ) | (47 | ) | (10 | ) | |||||
| Restricted cash | 19 | (5 | ) | - | |||||||
| Net cash used in investing activities | (21 | ) | (52 | ) | (10 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Repayments under revolving line of credit | (70 | ) | - | - | |||||||
| Proceeds from private placements of Ordinary shares and | |||||||||||
| warrants, net | - | 3,179 | - | ||||||||
| Proceeds from private placement of convertible loan, Preferred | |||||||||||
| A shares and warrants, net | 2,042 | - | - | ||||||||
| Proceeds from exercise of additional investment rights | - | 1,000 | - | ||||||||
| Net cash provided by financing activities | 1,972 | 4,179 | - | ||||||||
| Increase (decrease) in cash and cash equivalents | 63 | 651 | (637 | ) | |||||||
| Cash and cash equivalents at the beginning of the year | 166 | 229 | 880 | ||||||||
| Cash and cash equivalents at the end of the year | $ | 229 | $ | 880 | $ | 243 | |||||
| Cash paid during the year for interest and taxes | $ | 16 | $ | 17 | $ | - | |||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 7
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 1: | – | OPERATIONS |
| RadView Software Ltd. (“the Company”) develops, markets and supports software that enables organizations to verify the scalability, efficiency and reliability of web applications, and facilitates their rapid development. |
| The Company has four wholly-owned subsidiaries in the United States, United Kingdom, Germany and Sweden. To date the British, Swedish and German subsidiaries are inactive. |
| The Company incurred net losses of approximately $ 1.8 million in 2006, approximately $ 4 million in 2007 and approximately $ 0.4 million in 2008, and had an accumulated deficit of approximately $ 67.6 million as of December 31, 2008. The Company has funded these losses principally from equity and debt financing proceeds including an initial public offering in August 2000, private placements in March 2005, August 2006 and during 2007, as well as proceeds from technology license arrangement. |
| The Company believes that it will have sufficient liquidity in order to maintain is current operations, at least for the next twelve months. The Company based its assessment on the expected collections from sales and based on a commitment from its controlling shareholder to support the Company by providing financing to allow the coverage of any budget deficit through the second quarter of 2010 up to an amount of $ 500 thousand. In case that the above will not result in sufficient liquidity resources the Company is also committed to take measures to reduce its operating costs in order to support its operations at least through December 31, 2009. Therefore, these financial statements do not include any adjustments that may be required should the Company will not be able to continue as a going concern. |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES |
| The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. The significant accounting policies followed in the preparation of the consolidated financial statements, applied on a consistent basis, are as follows: |
| a. | Use of estimates: |
| The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. |
| b. | Financial statements in U.S. dollars: |
| A substantially portion of the Company’s revenues are in U.S. dollars. The Company’s management believes that the U.S. dollar is the currency of the primary economic environment in which the Company and its subsidiaries operate. Thus, the functional and reporting currency of the Company is the U.S. dollar. |
| Accordingly, monetary accounts maintained in currencies other than the dollar are re-measured into dollars in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52, “Foreign Currency Translation”. Changes in currency exchange rates between the Company’s functional currency and the currency in which a transaction is denominated are included in the Company’s results of operations as financial income (expense) in the period in which the currency exchange rates change. |
F - 8
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| All exchange gains and losses from the above-mentioned remeasurement are reflected in the statements of operations and were not material for all periods presented. The representative rate of exchange was U.S.$ 1.00 = NIS 4.225 at December 31, 2006, NIS 3.846 at December 31, 2007 and NIS 3.802 at December 31, 2008. |
| c. | Principles of consolidation: |
| The consolidated financial statements include the accounts of RadView Software Ltd. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation. |
| d. | Cash equivalents and restricted cash: |
| Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less. Restricted cash is invested in a short-term bank deposit, which is used as security for Company’s guarantee for leased facilities. The deposit is in NIS and bears interest at an average rate of 3%. |
| e. | Allowance for doubtful accounts: |
| The Company provides an allowance for doubtful accounts against its accounts receivable. The reserve is computed for specific accounts, the collectability of which is doubtful based upon the Company’s experience. A summary of the allowance for doubtful accounts is as follows: |
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||||
| U.S. dollars in thousands | ||||||||||||
| Balance at the beginning of year | $ | 56 | $ | 46 | $ | 46 | ||||||
| Provision | - | - | $ | 43 | ||||||||
| Write-offs | (10 | ) | - | - | ||||||||
| Balance at the end of year | $ | 46 | $ | 46 | $ | 89 | ||||||
| f. | Property and equipment: |
| Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the assets as follows: |
| Estimated useful life | ||
|---|---|---|
| (In years) | ||
| Computers and equipment | 3 | |
| Office furniture and equipment | 3 to 6 | |
| Leasehold improvements | Over the shorter of the | |
| term of the lease or the | ||
| life of the asset |
F - 9
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| g. | Impairment of long-lived assets: |
| The Company’s long-lived assets are reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. During 2006, 2007 and 2008, no impairment losses have been identified. |
| h. | Severance pay: |
| In accordance with Israel’s Severance Pay Law, the Company is required to make severance payments to Israeli employees upon their termination of employment. The amount of such severance payments is based on the most recent monthly salary multiplied by the number of years of employment as of the balance sheet date. The Company has accrued for the estimated total cost of severance pay as computed as of the balance sheet date. Severance expense totaled $ 116,000 in 2006, $ 62,000 in 2007 and $ 100,000 in 2008. |
| The Company has partially funded its severance pay obligations by monthly deposits for insurance policies. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel’s Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies and is presented as an asset in the consolidated balance sheets. |
| i. | Revenue recognition: |
| The Company generates revenues mainly from licensing the rights to use its software products. The Company also generates revenues from support and maintenance services and, to a lesser extent,from training . The Company sells its products primarily through its direct sales force and, to a lesser extent, through resellers and distributors considered as end-users. |
| The Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition, and SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions”. Under SOP 97-2, revenues from software product licenses are recognized upon delivery of the software provided there is persuasive evidence of an agreement, the fee is fixed or determinable and collection of the related receivable is probable and no further obligations exist. Revenues under multiple-element arrangements, which may include software licenses, support and maintenance and training, are allocated to each element based on their respective fair values based on vendor-specific objective evidence. This objective evidence represents the price of products and services when sold separately. When vendor-specific objective evidence of fair value exists for undelivered elements but does not exist for delivered elements of a software arrangement, the Company uses the residual method for recognition of revenues, when all other revenue recognition criteria are met. |
F - 10
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| Under the residual method, the Company defers revenues related to the undelivered elements based on their vendor specific objective evidence of fair value and recognizes the remaining arrangement fee for the delivered elements. When vendor-specific objective evidence of fair value for undelivered elements does not exist, and the only undelivered element is services, revenues from the entire arrangement are recognized over the term of the service agreement. |
| Revenues from time-based licenses, support and maintenance agreements are recognized ratably over the term-of the time-based license or maintenance period, which is typically one year. Revenues from training are recognized as the services are performed. |
| The Company generally does not grant a right of return to its customers. When a right of return exists, revenue is deferred until the right of return expires, at which time revenue is recognized provided that all other revenue recognition criteria are met. |
| Revenue is recognized for software licenses sold to resellers or distributors at the time of delivery, provided that all revenue recognition criteria set forth in SOP 97-2 are fulfilled. |
| Amounts collected or billed prior to satisfying the above revenue recognition criteria are reflected as deferred revenue. Deferred revenue primarily represents deferred maintenance revenue. |
| j. | Research and development costs: |
| The Company has evaluated the establishment of technological feasibility of its products in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed”. The Company sells products in a market that is subject to rapid technological change, new product development and changing customer needs. Accordingly, the Company has concluded that technological feasibility is not established until the development stage of the product is nearly complete. The Company defines technological feasibility as the completion of a working model. The time period during which costs could be capitalized from the point of reaching technological feasibility until the time of general product release is very short. Consequently, the amounts that could be capitalized are not material to the Company’s financial position or results of operations. Therefore, the Company has charged all such costs to research and development expense in the period incurred. |
| k. | Advertising expenses: |
| Advertising expenses are charged to the consolidated statements of operations as they are incurred. Advertising expenses totaled $ 290,000 in 2006, $ 94,000 in 2007 and $ 30,000 in 2008. |
| l. | Royalty – bearing grants: |
| Royalty – bearing grants from the Government of Israel for funding approved research and development projects are recognized at the time the Company is entitled to such grants on the basis of the research and development costs incurred. Such grants are included as a reduction in research and development costs. |
| Research and development grants received or accrued by the Company in 2006, 2007 and 2008, accumulated to approximately $0, $ 388,000 and $ 192,000, respectively. |
F - 11
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| m. | Income taxes: |
| 1. | The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. SFAS No. 109 prescribes the use of the liability method whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be reversed. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. |
| 2. | On January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income tax. |
| n. | Stock-based compensation: |
| The Company accounts for stock-based compensation in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated income statements. |
| The Company recognizes compensation expenses for the value of its awards granted based on the straight line method over the requisite service period of each of the awards, net of estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures. |
| SFAS No. 123(R) requires the cash flows resulting from the tax deductions in excess of the compensation costs recognized for those stock options to be classified as financing cash flows. |
| The Company selected the Black-Scholes-Merton option pricing model as the most appropriate fair value method for its stock-options awards and values restricted stock based on the market value of the underlying shares at the date of grant. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. |
F - 12
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| The computation of expected volatility is based on realized historical stock price volatility of the Company. The interest rate for period within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The Company has historically not paid dividends and has no foreseeable plans to pay dividends. The options expected life represent the period the Company’s stock options expected to be outstanding and was determined based on the Simplified Method permitted by SAB 107 and extended by SAB 110 by the average of the vesting period and the contractual term. The Company currently using the Simplified Method as there no adequate historical experience available to provide other reasonable estimate. The company adopted SAB 110 effective January 1, 2008 and will continue to apply the Simplified Method since there is not enough historical experience of exercises at least for three years to provide reasonable estimate of the expected term for stock options grants. |
| The fair value for options granted in 2006, 2007 and 2008 is estimated at the date of grant using a Black-Scholes-Merton options pricing model with the following weighted average assumptions: |
| Year ended December 31, | ||||
|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||
| Expected life of option | 4 years | 4 years | 4 years | |
| Dividend yield | 0% | 0% | 0% | |
| Expected volatility | 109% | 109% | 109% | |
| Risk-free interest rate | 4.72% | 4.74% | 4.74% | |
| Share based payments are expensed on a straight-line basis. |
| o. | Fair value of financial instruments: |
| The carrying amounts of our financial instruments, including cash and cash equivalents, restricted cash, deposits, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of their generally short maturities. |
| Effective January 1, 2008, the Company adopted SFAS 157, “Fair Value Measurements”and, effective October 10, 2008, adopted FSP No. SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”, except as it applies to the nonfinancial assets and nonfinancial liabilities subject to FSP 157-2. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: |
| Level 1 | – | Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
| Level 2 | – | Includes other inputs that are directly or indirectly observable in the marketplace. | |
| Level 3 | – | Unobservable inputs which are supported by little or no market activity and significant to the overall fair value measurement. |
| The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. |
F - 13
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| p. | Basic and diluted net loss per share: |
| The Company applies the two class method as required by EITF No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128” (“EITF No. 03-6”). EITF No. 03-6 requires the loss per share for each class of shares (Ordinary and Preferred shares) to be calculated assuming 100% of the Company’s earnings are distributed as dividends to each class of shares based on their contractual rights. Basic net losses per share are computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net losses per share is computed based on the weighted-average number of Ordinary shares outstanding during the period, plus dilutive potential shares considered outstanding during the period, in accordance with Statement of Financial Standard No. 128, “Earnings Per Share”. |
| The calculation of diluted net loss per share excludes outstanding stock options, warrants and additional investment rights held by certain investors because their inclusion would be antidilutive, as set forth in the following table. |
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||||
| Number of shares in thousands | ||||||||||||
| Stock options | 6,596 | 11,138 | 10,661 | |||||||||
| Warrants | 1,333 | 1,333 | 1,333 | |||||||||
| Additional investment rights | 51,667 | 75,000 | 75,000 | |||||||||
| Warrants held by Comerica Bank | 353 | 353 | 353 | |||||||||
| Warrants held by an investor | 36,250 | 100,715 | 100,715 | |||||||||
| q. | Concentrations of credit risk: |
| Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, deposit, restricted cash, and accounts receivables. |
| Cash and cash equivalents, deposit and restricted cash are invested mainly in U.S. dollars with major banks in Israel and the United States. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk. |
| Accounts receivable are derived from sales to customers located in the United States, Europe, Israel and APAC. The Company performs on-going credit evaluations of its customers and to date has not experienced any material losses. An allowance for doubtful accounts is maintained with respect to those amounts that the Company has determined to be doubtful of collection. |
| The Company has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. |
| In 2006, one customer represented 12% of total 2006 revenues. There were no major customers in 2007 or 2008. |
F - 14
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| r. | Impact of recently issued accounting standards: |
| In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The impact of SFAS 141R on the Company’s consolidated results of operations and financial condition will depend on the nature and size of acquisitions, if any, subsequent to the effective date. |
| In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51". SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS No. 160 on its consolidated financial statement. |
| In February 2008, the FASB issued FSP No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13", and FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157". Collectively, the Staff Positions defer the effective date of Statement 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least annually, and amend the scope of Statement 157. As described in Note 4, the Company adopted Statement 157 and the related FASB staff positions except for those items specifically deferred under FSP No. FAS 157-2. |
| In June 2008, the FASB issued EITF No. 07-5 “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in shareholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. The Company believes adopting this statement will have no material impact on the consolidated financial statements. |
F - 15
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 2: | – | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| Effective December 31, 2008, the Company adopted FASB Staff Position (FSP) APB 14-1. “Accounting for Convertible debt Instruments that may be settled in cash upon conversion”. FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Therefore this part of the standard will not be effective for the Company until our fiscal year ended December 31, 2009, unless the Company elects early adoption. The Company is currently evaluating the potential impact, if any, of the adoption of FSP APB 14-1 on its consolidated financial statement. |
| NOTE 3: | – | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
| December 31 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | ||||||||
| U.S. dollars in thousands | |||||||||
| Government authorities | $ | 77 | $ | 205 | |||||
| Prepaid expenses | 50 | 43 | |||||||
| Other receivables | 77 | 41 | |||||||
| $ | 204 | $ | 289 | ||||||
| NOTE 4: | – | PROPERTY AND EQUIPMENT, NET |
| December 31 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | ||||||||
| U.S. dollars in thousands | |||||||||
| Computers and equipment | $ | 3,673 | $ | 3,683 | |||||
| Office furniture and equipment | 222 | 222 | |||||||
| Leasehold improvements | 202 | 202 | |||||||
| 4,097 | 4,107 | ||||||||
| Less - accumulated depreciation | 4,029 | 4,072 | |||||||
| $ | 68 | $ | 35 | ||||||
| Depreciation expenses were $ 82,000 in 2006, $ 81,000 in 2007 and $ 43,000 in 2008. |
F - 16
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 5: | – | ACCRUED EXPENSES |
| December 31 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | ||||||||
| U.S. dollars in thousands | |||||||||
| Employee compensation and related accruals | $ | 602 | $ | 326 | |||||
| Professional fees | 132 | 157 | |||||||
| Government authorities | 940 | 754 | |||||||
| Accrued interest on convertible loan | 97 | 158 | |||||||
| Royalties related to sales | 32 | 96 | |||||||
| Other accrued expenses | 344 | 114 | |||||||
| $ | 2,147 | $ | 1,605 | ||||||
| NOTE 6: | – | COMMITMENTS AND CONTINGENT LIABILITIES |
| a. | Lease obligations |
| The Company operates primarily from leased facilities. Lease agreements expire through July 2009 and December, 2010. Annual minimum future rental payments due under the lease agreements as of December 31, 2008 are approximately as follows: |
| Amount | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| For the year ending December 31, | |||||||||
| 2009 | $ | 59,000 | |||||||
| 2010 | 59,000 | ||||||||
| $ | 118,000 | ||||||||
| Rent expense, net of sublease income was $ 204,000 in 2006, $ 182,000 in 2007 and $ 110,000 in 2008. |
| b. | Royalties |
| 1. | In May 2005, the Company entered into a distribution agreement with another third party to re-brand, market and distribute certain software products of a third party also under the Company’s private label name of WebLOAD Analyzer. The Company is required to pay royalties to the third party based on the Company’s selling price for end-user revenues from the WebLOAD Analyzer product. |
| Royalties incurred in connection with these royalty arrangements totaled, $ 28,000 in 2006 and $ 18,000 in 2007, and have been classified as cost of license revenues. No royalties incurred in 2008. |
F - 17
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 6: | – | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) |
| 2. | The Company participated in programs sponsored by the Israeli Government for the support of research and development activities. The Company is obligated to pay royalties to the Office of the Chief Scientist of Israel’s Ministry of Industry, Trade and Labor (“the OCS”) amounting to 3%-4.5% of the sales of the products and other related revenues generated from such activities sponsored, up to 100% of the grants received, linked to the U.S. dollar and bear interest at the rate of LIBOR (as of December 31, 2008 – 2.19%). Total amount of grants received or accrued, net of royalties paid or accrued, as of December 31, 2008, is approximately $ 580,000. |
| 3. | As of December 31, 2007 and 2008, the Company has an outstanding contingent obligation to pay royalties in the amount of approximately $ 31,000 and $ 96,000, respectively, in respect of these grants. |
| NOTE 7: | – | SHAREHOLDERS’ DEFICIT |
| a. | Authorized Ordinary share capital: |
| Ordinary shares confer upon their holders voting rights, the right to receive dividends or bonus shares, if declared, and the right to share in the excess assets upon liquidation of the Company after the Preferred A and B shares. |
| b. | Authorized Preferred shares: |
| Preferred shares confer upon their holders voting rights on an as-converted basis with Ordinary shares on all matters presented at a general meeting of shareholders, a right to nominate a majority of the members of the board of directors, priority preference upon liquidation; and protective rights over significant corporate actions, such as approval of mergers and acquisitions, voluntary liquidation or dissolution, declaration of dividends, amendments to the articles of association, sale or transfer of assets, and issuance of securities with equal or superior rights. |
| c. | Treasury shares: |
| As of December 31, 2008, the Company holds 134,000 of its Ordinary shares as treasury shares at an aggregate cost of approximately $ 100,000. Although such shares are legally considered outstanding, the Company has no dividend or voting rights associated with its treasury shares. |
| d. | Dividends |
| The Company has never paid cash dividends to shareholders. |
F - 18
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 7: | – | SHAREHOLDERS’ DEFICIT (Cont.) |
| e. | Private placement 2004: |
| In March 2004, the Company completed a private placement (the “Private Placement”) of its Ordinary shares, additional investment rights to purchase Ordinary shares (the “Additional Investment Rights”) and four series of warrants to purchase Ordinary shares (the “Warrants”) pursuant to a securities purchase agreement (the “Purchase Agreement”) between the Company and certain purchasers named therein (the “Purchasers”), in reliance on an exemption under Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder. |
| In connection with the Private Placement from March 2004, the Company issued to the Purchasers Additional Investment Rights to purchase additional Ordinary shares, exercisable until June 17, 2005. There were no exercises of Additional Investment Rights. |
| The Company also issued to the Purchasers four series of Warrants of which the following series of warrants are outstanding as of December 31, 2008 (in September 2006, series B and D warrants expired): |
| Series | Term | Exercise price | Number of Ordinary shares | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Series A warrants | Four and a half years | $ | 0.98 | 1,000,000 | ||||||||
| Series C warrants | Four and a half years | $ | 0.98 | 333,332 | ||||||||
| 1,333,332 | ||||||||||||
| The Warrants were initially exercisable for the number of shares indicated above, subject to anti-dilution adjustments and, with respect to the Series C warrants, subject to the conditions indicated below. The Series A warrants became exercisable beginning September 11, 2004 for a term as noted in the table above. One half of the Series C warrants became exercisable on September 20, 2004, the date the Company’s Ordinary shares were delisted from the Nasdaq SmallCap Market. Because the Additional Investment Rights were not exercised before the delisting event, the other one-half of the Series C warrants are not exercisable. |
| Pursuant to an evaluation of the terms of the Purchase Agreement under the provisions of EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the Company has classified all the above derivative financial instruments issued in connection with the private placement as equity. |
F - 19
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 7: | – | SHAREHOLDERS’ DEFICIT (Cont.) |
| f. | Private placement 2006: |
| On April 4, 2006, the Company signed definitive agreements for financing with an external investor on behalf of several limited partnerships in which it serves as general partner and other potential co-investors including one of the Company’s directors and two existing shareholders (the “Investors”). On August 18, 2006, the Company’s shareholders approved the abovementioned agreement and the Company closed the financing, receiving $ 1.5 million to purchase in consideration for 25,000,000 convertible Preferred A shares (the “Preferred shares”), and a convertible loan. The convertible loan bears interest at 8.0% per annum. The convertible loan plus any accrued interest thereon is convertible into Preferred shares at a conversion price of $ 0.03 per share, at the election of the Investors. The convertible loan matures three years from the closing date and, if not converted by such date, would become due and payable 30 days thereafter. The convertible loan is secured by a fixed charge on the Company’s accounts receivable and intellectual property and a floating charge on all of its assets. |
| The Private Placement also provides additional investment rights, at the option of the Investors, to invest up to an additional $ 2.25 million of Preferred A shares at a price of $ 0.03 per share for a period of 18 months after the closing of the initial investment (“Additional Iinvestment Rights”). Each Preferred A share is convertible into one of the Company’s Ordinary shares, subject to adjustment for anti-dilution events. Each Preferred A share receives the same voting rights as Ordinary shares, except that the Preferred shares are entitled to elect the majority of the Company’s board of directors and have approval rights over specified actions. Each Preferred share is entitled to a preference in liquidation over Ordinary shares. The Investors also received warrants to purchase 18,750,000 Preferred B shares with respect to the initial investment and would receive warrants for up to 56,250,000 Preferred B shares with respect to the exercise of Additional Investment Rights, each at an exercise price of $ 0.04 per share for a period of five years from date of issuance. |
| The consideration of $ 1.5 million from the initial investment was allocated based on the relative fair value of the convertible Preferred A shares, convertible loan, the warrants and the Additional Investment Right in accordance with APB 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”. The total amount of the discount on the convertible loan and the beneficial conversion feature calculated based on the guidance in EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”amounting to $ 750,000, is amortized as interest expenses over the term of the convertible loan. At December 31, 2008, the unamortized balance on the discount on convertible loan was $ 157,000. The Company also calculated the beneficial conversion feature on the Preferred A issued in accordance with EITF 98-5 and EITF 00-27 and recorded $ 212,000 as a deemed dividend. |
| In November and December 2006, the investors exercised Additional Investment Rights pursuant to the Share Purchase Agreement dated April 4, 2006, described above, in the Company in the amount of $ 700,000. The additional investment was pursuant to the Share Purchase Agreement dated April 4, 2006, described above. In consideration of the additional investment, the Company issued to the Investors a total of 23,333,334 Preferred A shares and Warrants to purchase 17,500,000 Preferred B shares. |
F - 20
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 7: | – | SHAREHOLDERS’ DEFICIT (Cont.) |
| The Company calculated the deemed distribution on the Preferred shares resulted from the exercise of the Additional Investment Rights and the issuance of the warrants in 2006 in accordance with the guidance of EITF 98-5 and EITF 00-27 and recorded an additional amount of $ 670,000 as a deemed dividend. |
| In February 8, 2007 and March 20, 2007, the Investors exercised Additional Investment Rights pursuant to the Share Purchase Agreement dated April 4, 2006, described above, in a total amount of $ 1,000,000. The additional investments were made pursuant to the Share Purchase Agreement entered into by the parties on April 4, 2006, described above. In consideration of the additional investments, the Company issued to the investor a total of 33,333,334 Preferred A shares and Warrants to purchase 25,000,000 Preferred B shares. |
| The Company calculated the deemed distribution on the Preferred shares resulting from the additional right and the issuance of the warrants in accordance to the guidance of EITF 00-27 and recorded an additional amount of approximately $ 850,000 as a deemed dividend. |
| In December 2006, and in February and March 2007, respectively, three addendum to the Share Purchase Agreement dated April 4, 2006 were signed concurrently with the respective Additional Investment (and were approved by the Company’s general meeting in October 2007) according to which the Company would issue to the Investors for no further consideration a new option under each addendum that would provide the Investors upon the exercise of the Additional Investment Rights the right to acquire an identical amount of shares and warrants as were available to the Investors before each exercise (“Additional shares and warrants”). |
| The addendum also included the right of the Company, for a period of twelve months from the date of each new option was issued, to buy back any shares purchased on the respective exercise of the Additional Investment Rights at the same price at which such securities were acquired plus 8% interest per annum. |
| g. | Private placement 2007: |
| On March 29, 2007 and May 10, 2007, the Company issued in a private placement to investors in Israel in consideration of $ 1,974,420 and $ 1,408,319, respectively net of issuance expenses of $ 118,000 and $ 85,000, respectively 32,907,000 and 23,471,980, respectively of its Ordinary shares and warrants to purchase up to 23,034,400 and 16,430,386 Ordinary shares, respectively at an exercise price per share of $ 0.06. The warrants are exercisable for five years from the closing date of the private placements. According to the agreements, the investors do not have the right to receive payment for liquidated damages if a registration statement on form F-3 is not declared effective. As of December 31, 2008, none of the shares were registered. |
| Pursuant to an evaluation of the terms of the Purchase Agreement under the provisions of EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the Company has classified all above derivative financial instruments issued in connection with the private placement as equity. |
F - 21
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 7: | – | SHAREHOLDERS’ DEFICIT (Cont.) |
| h. | Employee share purchase plan: |
| In November 2002, the Company established an employee share purchase plan (the “ESPP”) which permits the eligible employees of the Company to purchase shares of the Company’s Ordinary shares at 85% of the closing market price on either the first day or the last day of the applicable three-month period, whichever is lower. Employees may participate in the ESPP through regular payroll deductions of up to 10% of their pre-tax gross salary. Subject to adjustment for stock splits, stock dividends and similar events, a maximum of 1,500,000 Ordinary shares may be issued under the ESPP. No Ordinary shares were issued in connection with the ESPP in 2006, 2007 and 2008 as no plan was available to employees during these years. As of December 31, 2008, there are 1,491,791 Ordinary shares available for future issuance under the ESPP. |
| i. | Stock option plans: |
| The Company has approved for issuance an aggregate of 25,239,849 Ordinary shares for the issuance of stock options under three stock option plans as follows: |
| — | 21,214,609 Ordinary shares approved for issuance under a key employee share incentive plan (the “1996 Option Plan”) adopted in 1996 and amended in 2001 and 2003; |
| — | 3,950,000 Ordinary shares approved for issuance under the United States Share Incentive Plan (the “2000 Option Plan”) adopted in 2000 and amended in 2001. |
| The 1996 Option Plan provides for the grant by the Company of option awards to officers and employees of the Company and its subsidiaries and to non-employees. The options granted under the 1996 Option Plan vest ratably over vesting periods ranging from three to five years of employment and expire 62 months from the date of issuance. |
| The 2000 Option Plan provides for the grant by the Company of option awards to officers and employees of its U.S. subsidiary. Options granted under the 2000 Option Plan vest ratably over three to four years of employment and expire 10 years from the date of issuance. |
| Under all option plans, any options that are cancelled or forfeited before expiration become available for future grants. As of December 31, 2008, there are 10,553,837 options available for future grant under the 1996 Option Plan and 2,520,953 under 2000 option plan |
| Revolving line of credit facility: |
| In connection with an old facility which was terminated in January 2006, the Company issued to the bank a warrant to purchase 352,941 of the Company’s Ordinary shares at an exercise price of $ 0.17 per share. The warrant is exercisable immediately and has a term of seven years. The warrants were classified as equity and also provides for piggyback registration rights. These warrants are not affected by the early termination of the revolving line of credit facility. |
| At the grant date, the fair value of the warrants was determined to be $ 52,000 using the Black-Scholes option-pricing model assuming a risk free interest of 3.9%, a volatility factor of 120%, dividend yield of 0% and contractual life of seven years. |
F - 22
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 7: | – | SHAREHOLDERS’ DEFICIT (Cont.) |
| Transactions related to the Company’s stock option plans for each of the three years in the period ended December 31, 2008 are summarized as follows: |
| Options outstanding | Weighted average exercise price per share | Weighted average remaining contractual term (in years) | Aggregate intrinsic value | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding, January 1, 2006*) | 3,032,880 | $ | 0.36 | 5.71 | $ | - | |||||||||
| Granted | 5,613,333 | $ | 0.06 | ||||||||||||
| Forfeited, cancelled or expired | (2,050,612 | ) | $ | 0.36 | |||||||||||
| Outstanding, January 31, 2007 *) | 6,595,601 | $ | 0.11 | 5.01 | $ | - | |||||||||
| Granted (1) | 9,865,039 | $ | 0.07 | ||||||||||||
| Forfeited, cancelled or expired | (5,322,195 | ) | $ | 0.06 | $ | - | |||||||||
| Outstanding, January 1, 2008 *) | 11,138,445 | $ | 0.07 | 4.36 | |||||||||||
| Granted | 1,640,000 | $ | 0.06 | ||||||||||||
| Forfeited, cancelled or expired | (2,117,673 | ) | $ | 0.10 | $ | - | |||||||||
| Outstanding, December 31, 2008 *) | 10,660,772 | $ | 0.07 | 3.47 | |||||||||||
| Exercisable, December 31, 2006 | 1,028,417 | $ | 0.32 | $ | - | ||||||||||
| Exercisable, December 31, 2007 | 2,465,331 | $ | 0.12 | ||||||||||||
| Exercisable, December 31, 2008 | 5,025,240 | $ | 0.07 | 3.31 | |||||||||||
| *) | Includes 35,000 outstanding and exercisable options to consultants at a weighted average exercise price of $ 0.945 per share. |
| The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s stock price on December 31, 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2008. These amount changes are based on the value of the Company’s stock. Total intrinsic value of options exercised for the year ended December 31, 2008 is zero. |
| (1) | During 2006, the Company granted to the Chairman of the Company’s board an option to purchase 455,000 Ordinary shares equivalent to 1% of the Company’s issued and outstanding Ordinary and Preferred shares on an as converted basis. In addition as a form of anti-dilution protection as the investors exercise their additional investment rights, if at all, to purchase up to an additional 75,000,000 convertible Preferred shares as provided in the Share Purchase Agreement dated April 4, 2006 (see f above), the Chairman of the Company’s board will be granted at each closing an additional option to purchase 1% of the incremental number of issued and outstanding Ordinary and Preferred shares (on an as converted basis) following each subsequent closing. |
F - 23
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 7: | – | SHAREHOLDERS’ DEFICIT (Cont.) |
| During 2006 and 2007, pursuant to the exercise of the additional investment rights by the investor and pursuant to the anti-dilution provision described above, the Chairman of the Company’s board was granted an option for an additional 566,666 Ordinary shares. The exercise price of such additional options shall be equal to the then market price at the time of grant. The options shall vest as follows: 50% of the granted options shall vest over 6 months from their grant date and the remaining 50% shall vest on the first anniversary of their grant date provided that the Chairman of the Company’s board continues to serve as the Chairman of the board. A new vesting period began for each portion of options granted following exercise of the Additional Investment Rights. |
| In addition, the Chairman of the Company’s Board of Directors is entitled to an option to acquire 1% of the Company’s issued and outstanding Ordinary shares and Preferred shares (on an as-converted basis) as a bonus for 2007. The milestone was fulfilled in April 2007 and the Chairman was granted an option to acquire 1,350,994 Ordinary shares. |
| The Company granted its director and previous Chief Executive Officer option to purchase 4,750,000 Ordinary Shares, at an exercise price per share of the fair market price on the date of the grant. The options shall vest over a four year period in equal quarterly installments. The options shall be exercisable, in accordance with the terms of the stock options plan. |
| Stock-based compensation expenses included in the reported net loss totaled $ 128,000 in 2006, $ 131,000 in 2007 and $ 95,000 in 2008, as follows: |
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||||
| Research and development | $ | 10,000 | $ | 14,000 | $ | 17,000 | ||||||
| Selling and marketing | 13,000 | 10,000 | 5,000 | |||||||||
| General and administrative | 105,000 | 107,000 | 73,000 | |||||||||
| Total stock-based | ||||||||||||
| compensation expense | $ | 128,000 | $ | 131,000 | $ | 95,000 | ||||||
| Additional information related to the Company’s stock-based compensation awards is presented below, along with the additional disclosures required by SFAS 123(R). |
F - 24
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 7: | – | SHAREHOLDERS’ DEFICIT (Cont.) |
| The following table summarizes the weighted average fair value of options granted for each of the three years in the period ended December 31, 2008 at market price on date of grant: |
| For the Year Ended: | ||||||
|---|---|---|---|---|---|---|
| December 31, 2006: | ||||||
| Weighted average exercise price | $ | 0.07 | ||||
| Weighted average fair value on grant date | $ | 0.06 | ||||
| December 31, 2007: | ||||||
| Weighted average exercise price | $ | 0.07 | ||||
| Weighted average fair value on grant date | $ | 0.07 | ||||
| December 31, 2008: | ||||||
| Weighted average exercise price | $ | 0.06 | ||||
| Weighted average fair value on grant date | $ | 0.06 | ||||
| As of December 31, 2008, 5,025,240 options were vested and 5,633,032 options are expected to vest. As of December 31, 2008, there was $ 412,000 of total unrecognized compensation cost related to unvested stock options. Unrecognized compensation cost is expected to be recognized over a weighted average period of 3.47 years. Average fair value of shares vested during the year ended December 31, 2008 was $ 0.069. |
| NOTE 8: | – | RESEARCH AND DEVELOPMENT, NET |
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||||
| U.S. dollars in thousands | ||||||||||||
| Research and development costs, net: | ||||||||||||
| Salaries and social benefits | $ | 936 | $ | 1,292 | $ | 951 | ||||||
| Subcontractors and materials | 37 | 209 | 2 | |||||||||
| Other expenses | 539 | 777 | 470 | |||||||||
| 1,512 | 2,278 | 1,423 | ||||||||||
| Less - participation of Government funds | - | (388 | ) | (192 | ) | |||||||
| $ | 1,512 | $ | 1,890 | $ | 1,231 | |||||||
F - 25
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 9: | – | FINANCIAL EXPENSES, NET |
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||||
| Financial expenses : | ||||||||||||
| Interest income | (4 | ) | (54 | ) | (5 | ) | ||||||
| Interest expenses | $ | 164 | $ | 342 | $ | 317 | ||||||
| Foreign currency translation adjustments | 50 | 70 | 25 | |||||||||
| $ | 210 | $ | 358 | $ | 337 | |||||||
| NOTE 10: | – | TAXES ON INCOME |
| a. | Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985: |
| Results for tax purposes of RadView Software Ltd. are measured and reflected in accordance with the change in the Israeli Consumer Price Index (“CPI”). As described elsewhere, the Company’s consolidated financial statements are presented in U.S. dollars. The difference between the change in the Israeli CPI and the exchange rate between the U.S. dollar and the NIS causes a difference between taxable income or loss and the income or loss before taxes reflected in the consolidated financial statements. In accordance with SFAS No. 109, the Company has not provided deferred income taxes on this difference between the reporting currency and the tax bases of assets and liabilities. |
| Under the Income Tax (Inflationary Adjustments) Law, 1985 (“the Israeli law”), results for tax purposes in Israel are measured in real terms, in accordance with the changes in the Israeli Consumer Price Index (“Israeli CPI”). Accordingly, until 2007, results for tax purposes were measured in terms of earnings in NIS after certain adjustments for increases in the Israeli CPI. Beginning January 1, 2008, the Inflationary Adjustments Law was repealed and starting January 1, 2008 the financial results for tax purposes will be measured in nominal amounts. |
| b. | Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (“the Law”) |
| In 1998, the Company’s investment program totaling $ 66,000 was granted Approved Enterprise status under the Law. The Company elected to adopt the “Alternative Benefits” track This track entitles the Company to a benefit period of seven years on income derived from this program as follows: (a) a full income tax exemption for the first two years and (b) a reduced income tax rate of 25%, instead of the regular rate for the remaining five-year period. Depending on the level of non-Israel investments in the Company, the period for which the Company is entitled to a reduced tax rate of 25% can be extended to eight years. The period of the benefit is limited to 12 years from commencement of production or 14 years from the date of approval. As the Company has not yet reported any taxable income, the benefit period has not yet commenced. |
| The benefits from the Company’s approved enterprise programs are dependent upon the Company fulfilling the conditions stipulated by the Law for Encouragement of Capital Investments, 1959 and the regulations published under this law, as well as the specific criteria in the Company’s approved enterprise programs. If the Company does not comply with these conditions, the tax benefits may be canceled, and the Company may be required to refund the amount of the canceled benefits, with the addition of linkage differences and interest. As of the date of these financial statements, the Company believes it complies with these conditions. |
F - 26
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 10: | – | TAXES ON INCOME (cont.) |
| If the Company distributes a cash dividend out of retained earnings which were tax exempt due to its approved enterprise status, the Company would have to pay a 25% corporate tax on the amount distributed, and a further 15% withholding tax would be deducted from the amounts distributed to the recipients. |
| As of December 31, 2008, the Company does not have retained earnings and accordingly, no tax-exempt income. Tax-exempt income attributable to the Approved Enterprise cannot be distributed to shareholders without subjecting the Company to taxes except upon a complete liquidation of the Company. If the retained tax-exempt income is distributed in a manner other than upon the complete liquidation of the Company, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not elected alternative tax benefits. The Company’s board of directors does not intend to distribute any amounts of its undistributed tax-exempt income as dividends. |
| On April 1, 2005, an amendment to the Investment Law came into effect (the “Amendment”) and has significantly changed the provisions of the Investment Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a Beneficiary Enterprise, such as provisions generally requiring that at least 25% of the Beneficiary Enterprise’s income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits. |
| In addition, the Investment Law provides that terms and benefits included in any letter of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the Company’s existing Approved Enterprise will generally not be subject to the provisions of the Amendment. |
| As a result of the Amendment, tax-exempt income generated under the provisions of the new law will subject the Company to taxes upon distribution or liquidation and the Company may be required to record a deferred tax liability with respect to such tax-exempt income. |
| Income from sources other than the Approved Enterprise during the benefit period will be subject to tax at the regular corporate tax rate. Israeli companies are subject to income tax at the corporate tax rate of 31% for the 2006 tax year. On July 25, 2005, the Knesset (Israeli Parliament) passed the Law for the Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among others, a gradual decrease in the corporate tax rate in Israel to the following tax rates: 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter. |
| By virtue of this law, the Company is entitled to claim accelerated depreciation on equipment used by the Approved Enterprise during five tax years. The Company has received final approval in respect to the investment program. |
| c. | Tax benefits under Israel ‘s Law for the Encouragement of Industry (Taxation), 1969: |
| The Company currently qualifies as an “Industrial Company” under the Law for Encouragement of Industry (Taxes), 1969 and is therefore entitled to tax benefits, mainly accelerated depreciation of machinery and equipment and deduction of expenses incurred in connection with a public offering. |
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| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 10: | – | TAXES ON INCOME (cont.) |
| d. | Income (loss) before income tax: |
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||||
| U.S. dollars in thousands | ||||||||||||
| Israel | $ | 334 | $ | (2,044 | ) | $ | 532 | |||||
| United States | (2,132 | ) | (1,592 | ) | (965 | ) | ||||||
| $ | (1,798 | ) | $ | (3,636 | ) | $ | (433 | ) | ||||
| e. | Taxes on income are comprised of the following: |
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||||
| U.S. dollars in thousands | ||||||||||||
| Foreign | $ | - | $ | 115 | $ | - | ||||||
| Domestic | - | 216 | (77 | ) | ||||||||
| $ | - | $ | 331 | $ | (77 | ) | ||||||
| f. | Net operating losses: |
| As of December 31, 2008, the Company’s net operating tax loss carry forwards in Israel amounted to approximately $ 29.3 million. These net operating tax losses may be carried forward indefinitely and offset against future taxable business income. |
| The Company’s U.S. subsidiary’s tax losses through December 31, 2008 totaled approximately $ 37.2 million. These losses are available to offset future U.S. taxable income of the U.S. subsidiary subject to the limitation under rule 382 of the Internal Revenue Service, see below, and will expire between the years 2012 and 2026. |
| Utilization of U.S. net operating losses may be subject to substantial annual limitation due to “change in ownership” provision 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. |
| The Company and its subsidiary provide a valuation allowance on the entire deferred tax asset in respect of the carryforward losses, due to the uncertainty regarding future realization. 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 carryforward will not be realized in the foreseeable future. Deferred taxes in respect of other temporary differences are immaterial. |
| The main reconciling items between the statutory tax rate of the Company and the effective tax rate are the non-recognition of tax benefits from accumulated net operating losses carry forward among the various subsidiaries worldwide due to the uncertainty of the realization of such tax benefits and the effect of approved enterprise. |
F - 28
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 10: | – | TAXES ON INCOME (cont.) |
| g. | 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: |
| December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | ||||||||
| Operating loss carryforward and deductions | $ | 6,738 | $ | 7,325 | |||||
| Reserves and allowances | 863 | 371 | |||||||
| Net deferred tax asset before valuation allowance | 7,601 | 7,696 | |||||||
| Valuation allowance | (7,601 | ) | (7,696 | ) | |||||
| Net deferred tax asset | $ | - | $ | - | |||||
| As of December 31, 2008, the Company has provided valuation allowance of $ 7,696 in respect of deferred tax assets resulting from tax loss carryforward 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 carryforward and other temporary differences will not be realized in the foreseeable future. |
| h. | Final tax assessments: |
| The Company has received final tax assessments in Israel and in the US, regarding tax years through the end of 2004. |
| i. | Reconciliation of the tax expenses to the actual tax expenses: |
| The main reconciling items of the statutory tax rate of the Company (2006 – 31%, 2007 – 29%,2008 – 27%) to the effective tax rate (0%) are valuation allowances provided for deferred tax assets (in all reported periods) . |
| j. | Adoption of FIN 48 |
| Effective January 1, 2007, the Company adopted FIN 48, which prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Though the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous. Because of this, whether a tax position will ultimately be sustained may be uncertain. Prior to January 1, 2007, the impact of an uncertain tax position that did not create a difference between the financial statement basis and the tax basis of an asset or liability was included in the Company’s income tax provision if it was probable the position would be sustained upon audit. The benefit of any uncertain tax position that was temporary was reflected in the Company’s tax provision if it was more likely than not that the position would be sustained upon audit. |
F - 29
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 10: | – | TAXES ON INCOME (cont.) |
| Under FIN 48, the impact of an uncertain tax position that is more likely than not of being sustained upon audit by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Also, under FIN 48, interest expense is recognized on the full amount of deferred benefits for uncertain tax positions. |
| The Company adopted the provisions of FIN 48 as of January 1, 2007. The accumulated effects of applying FIN 48 have been recorded as an increase of $ 411,000 of the accumulated deficit and of income tax payable as of January 1, 2007, of which approximately $ 55,000 related to interest and penalties. |
| A reconciliation of the beginning and ending balances of the total amounts of the unrecognized tax benefits is as follows: |
| Unrecognized tax benefits | ||||||
|---|---|---|---|---|---|---|
| Balance at January 1, 2008 | $ | 633,000 | ||||
| Reductions based on tax positions related to the current year | - | |||||
| Additions for tax positions of prior years | - | |||||
| Reductions for tax positions of prior years | (77,000 | ) | ||||
| Balance at December 31, 2008 | $ | 556,000 | ||||
| The Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months. |
| The Company and its subsidiaries file income tax returns in Israel and in the USA. As of December 31, 2008, the Israeli tax returns of the Company are open to examination by the Israeli tax authorities for the tax years of 2005 through 2008. |
| NOTE 11: | – | RELATED PARTY BALANCES AND TRANSACTIONS |
| Balances with related parties consisted of the following: |
| December 31 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | ||||||||
| U.S. dollars in thousands | |||||||||
| Accounts receivable | $ | 4 | $ | - | |||||
| Accounts payable and accrued expenses | $ | 3 | $ | 14 | |||||
F - 30
| RADVIEW SOFTWARE LTD. AND ITS SUBSIDIARIES |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| NOTE 11: | – | RELATED PARTY BALANCES AND TRANSACTIONS (Cont.) |
| Transactions with related parties consisted of the following: |
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||||
| U.S. dollars in thousands | ||||||||||||
| Sales and marketing | $ | 6 | $ | 3 | $ | - | ||||||
| Research and development | 26 | 11 | - | |||||||||
| General and administrative | 33 | 55 | 50 | |||||||||
| Financial expenses, net | 136 | 322 | 331 | |||||||||
| Total costs and expenses | $ | 201 | $ | 391 | $ | 381 | ||||||
| NOTE 12: | – | DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE |
| The Company has adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. The Company operates in one reportable segment (see Note 1 for a brief description of the Company’s business). The total revenues are attributed to geographic areas based on the location of the end-user customer. |
| The Company’s revenues by its customers ’ geographic locations are as follows: |
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||||
| U.S. dollars in thousands | ||||||||||||
| United States | $ | 3,096 | $ | 1,879 | $ | 2,038 | ||||||
| Europe | 714 | 186 | 890 | |||||||||
| Israel | 142 | 704 | 191 | |||||||||
| Other | 331 | 351 | 322 | |||||||||
| $ | 4,283 | $ | 3,120 | $ | 3,441 | |||||||
| The Company’s long-lived assets by geographic location are as follows: |
| December 31 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | ||||||||
| U.S. dollars in thousands | |||||||||
| United States | $ | 8 | $ | - | |||||
| Israel | 60 | 35 | |||||||
| Total | $ | 68 | $ | 35 | |||||
| NOTE 13: | – | SUBSEQUENT EVENT |
| In February, 2009, a former employee commenced a proceeding for severance and vacation payments and certain other claims in connection with the period of employment with the Company. The Company denies all claims and any liability made by the former employee. Based on management estimation and the opinion of its legal counsel, no provision was recorded with respect to this claim. |
F - 31
The following exhibits are filed as part of this Annual Report:
| Exhibit No. | Description |
| 1.1 | Memorandum of Association of Registrant (English translation) (filed as Exhibit 3.1 to the Company's Registration Statement on Form F-1, No. 333-41526, and incorporated herein by reference) |
| 1.2 | Amended and Restated Form of Articles of Association of Registrant (filed as Appendix B to the Company's Proxy Statement for the Year Ended December 31, 2005, on Form DEF 14A, No. 000-31151 and incorporated herein by reference) |
| 1.3 | Form of Ordinary Share Certificate (filed as Exhibit 4.1 to the Company's Registration Statement on Form F-1, No. 333-41526, and incorporated herein by reference) |
| 2.1 | Registration Rights Agreement (filed as Appendix E to the Company's Proxy Statement for the year ended December 31, 2005 on Form DEF 14A, No. 000-31151, and incorporated herein by reference) |
| 4.1 | Amended and Restated Key Employee Share Incentive Plan (1996) (filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8, No. 333-67086, and incorporated herein by reference) |
| 4.2 | Amended and Restated United States Share Incentive Plan (2000) (filed as Exhibit 99.2 to the Company's Registration Statement on Form S-8, No. 333-67086, and incorporated herein by reference) |
| 4.3 | Employee Share Purchase Plan (filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended September 30, 2002, and incorporated herein by reference) |
| 4.4 | Development, Publishing and Distribution Agreement, dated as of February 7, 2003, between Ixia and RadView Software Ltd. (filed as Exhibit 10.1 to the Company’s Report on Form 8-K filed on July 7, 2004 and incorporated herein by reference) ** |
| 4.5 | Share Purchase Agreement between RadView Software Ltd. and Fortissimo Capital Fund GP, L.P. and certain other investors, dated as of April 4, 2006 (filed as Exhibit 10.18 to the Company's Form 10-K for the year ended December 31, 2005, and incorporated herein by reference) |
| 4.6 | Form of Warrant Issued to Fortissimo Capital Fund GP, L.P. and certain other investors, in connection with the Share Purchase Agreement identified in Exhibit 4.11 above and in connection with the Addendums identified in Exhibits 4.13, 4.14 and 4.15 below (filed as Exhibit 4.12 to the Company’s Form 20-F for the year ended December 31, 2006, and incorporated herein by reference). |
| 4.7 | Addendum Number One to Share Purchase Agreement between RadView Software Ltd. and Fortissimo Capital Fund GP, L.P., dated as of December 24, 2006 (filed as Exhibit 4.13 to the Company’s Form 20-F for the year ended December 31, 2006, and incorporated herein by reference). |
| 4.8 | Addendum Number Two to Share Purchase Agreement between RadView Software Ltd. and Fortissimo Capital Fund GP, L.P., dated as of February 7, 2007 (filed as Exhibit 4.14 to the Company's Form 20-F for the year ended December 31, 2006, and incorporated herein by reference). |
| 4.9 | Addendum Number Three to Share Purchase Agreement between RadView Software Ltd. and Fortissimo Capital Fund GP, L.P., dated as of March 20, 2007 (filed as Exhibit 4.15 to the Company's Form 20-F for the year ended December 31, 2006, and incorporated herein by reference). |
| 4.10 | Convertible Loan Agreement between RadView Software Ltd. and Fortissimo Capital Fund GP, L.P. and certain other investors, dated as of April 4, 2006 (filed as Exhibit 10.19 to the Company's Form 10-K for the year ended December 31, 2005, and incorporated herein by reference) |
| 4.11 | Form of Indemnification Agreement (filed as Appendix G to the Company's Proxy Statement for the year ended December 31, 2005 on Form DEF 14A, No. 000-31151, and incorporated herein by reference) |
68
| 4.12 | Managements Services Agreement between RadView Software Ltd. and Fortissimo Capital Fund GP, L.P. (filed as Appendix F to the Company's Proxy Statement for the year ended December 31, 2005 on Form DEF 14A, No. 000-31151, and incorporated herein by reference) |
| 4.13 | Form of Subscription Agreement for Private Placements led by Meitav Underwriting Ltd. in March and May 2007 (filed as Exhibit 4.19 to the Company's Form 20-F for the year ended December 31, 2006, and incorporated herein by reference). |
| 4.14 | Form of Warrant issued in connection with the Subscription Agreement identified in Exhibit 4.19 above (filed as Exhibit 4.20 to the Company’s Form 20-F for the year ended December 31, 2006, and incorporated herein by reference). |
| 8.1 | Subsidiaries of the Registrant (filed as Exhibit 21.1 to the Company's Form 10-K for the year ended December 31, 2001, and incorporated herein by reference) |
| 11.1 | Code of Ethics and Business Conduct (filed as Exhibit 11.1 to the Company’s Form 20-F for the year ended December 31, 2006, and incorporated herein by reference). |
| 12.1* | Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. |
| 12.2* | Certification by Vice President of Finance pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. |
| 13.1* | Certification by Chief Executive Officer and Vice President of Finance pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934. |
| 23.1* | Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global. |
| * | Filed herewith |
| ** | A request for confidential treatment was filed for certain portions of the indicated document. Confidential portions have been omitted and filed separately with the Commission as required by Rule 406. |
69
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.
RadView Software Ltd.
By: /s/ Rami Goraly —————————————— Rami Goraly Chief Executive Officer | By: /s/ Amira Paz —————————————— Amira Paz Vice President of Finance (Principal Financial Officer) |
Date: June 30, 2009
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