Prospectus

Filed Pursuant to Rule 424(b)(4)

Registration No. 333-202291

 

7,100,000 Shares

Kornit Digital Ltd.

Ordinary Shares

______________________

This is Kornit Digital Ltd.’s initial public offering. We are selling 7,100,000 of our ordinary shares.

The initial public offering price is $10.00 per share. Prior to this offering, there has been no public market for our ordinary shares. Our ordinary shares have been approved for listing on the NASDAQ Global Select Market under the symbol “KRNT.”

 

 

Per Share

 

 

Total

 

Public offering price

 

$

10.00

 

 

$

71,000,000

 

Underwriting discounts and commissions(1)

 

$

0.70

 

 

$

4,970,000

 

Proceeds, before expenses, to us

 

$

9.30

 

 

$

66,030,000

 

_________

 (1)  See “Underwriting” for a description of the compensation payable to the underwriters.

The underwriters may also exercise their option to purchase up to an additional 1,065,000 ordinary shares from us, at the public offering price, less the underwriting discounts and commissions, for 30 days after the date of this prospectus.

We are an “emerging growth company” as defined under federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings.

Investing in our ordinary shares involves risks that are described in the ‘‘Risk Factors’’ section beginning on page 9 of this prospectus.

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

The underwriters expect to deliver the ordinary shares to purchasers on or about April 8, 2015.

______________________

Barclays Citigroup
   
William Blair Stifel
   
Canaccord Genuity Needham & Company

 

The date of this prospectus is April 1, 2015.

 

 

Table of Contents

 

 

Page

 

Prospectus Summary

 

 

1

 

Risk Factors

 

 

9

 

Special Note Regarding Forward-Looking Statements

 

 

26

 

Use of Proceeds

 

 

27

 

Dividend Policy

 

 

28

 

Capitalization

 

 

29

 

Dilution

 

 

30

 

Selected Consolidated Financial Data

 

 

32

 

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

 

 

35

 

Industry

 

 

52

 

Business

 

 

56

 

Management

 

 

67

 

Principal Shareholders

 

 

88

 

Certain Relationships and Related Party Transactions

 

 

90

 

Description of Share Capital

 

 

93

 

Shares Eligible for Future Sale

 

 

100

 

Taxation and Israeli Government Programs Applicable to our Company

 

 

102

 

U.S. and Israeli Tax Consequences for our Shareholders

 

 

105

 

Underwriting

 

 

112

 

Expenses Related to this Offering

 

 

117

 

Experts

 

 

117

 

Legal Matters

 

 

117

 

Enforceability of Civil Liabilities

 

 

117

 

Where You Can Find Additional Information

 

 

118

 

Index to Consolidated Financial Statements

 

 

F-1

 

 
 

Neither we nor the underwriters have authorized anyone to provide information different from that contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus prepared by us or on our behalf. Neither we nor the underwriters take any responsibility for, and can provide no assurance as to the reliability of, any information other than the information in this prospectus, any amendment or supplement to this prospectus, and any free writing prospectus prepared by us or on our behalf. Neither the delivery of this prospectus nor the sale of our ordinary shares means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy our ordinary shares in any circumstances under which such offer or solicitation is unlawful.

This prospectus includes statistical data, market data and other industry data and forecasts, which we obtained from market research, publicly available information and independent industry publications and reports that we believe to be reliable sources.

i

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our ordinary shares. You should read the entire prospectus carefully, including “Risk Factors” and our consolidated financial statements and notes to those consolidated financial statements, before making an investment decision. Unless the context otherwise requires, all references to “Kornit,” “we,” “us,” “our,” “the Company” and similar designations refer to Kornit Digital Ltd. and its subsidiaries.

Our Company

We develop, design and market innovative digital printing solutions for the global printed textile industry. Our vision is to revolutionize this industry by facilitating the transition from analog processes that have not evolved for decades to digital methods of production that address contemporary supply, demand and environmental dynamics. We focus on the rapidly growing high throughput, direct-to-garment, or DTG, segment of the printed textile industry. Our solutions include our proprietary digital printing systems, ink and other consumables, associated software and value added services that allow for large scale printing of short runs of complex images and designs directly on finished garments. Our solutions are differentiated from other digital methods of production because they eliminate the need to pre-treat fabrics prior to printing, thereby offering custom decorators, online businesses, brand owners and contract printers the ability to digitally print high quality images and designs on a variety of fabrics in a streamlined and environmentally-friendly manner. When compared to analog methods of production, our solutions also significantly reduce production lead times and enable customers to more efficiently and cost-effectively produce smaller quantities of individually printed designs, thereby mitigating the risk of excess inventory, which is a significant challenge for the printed textile industry.

There are a number of trends within the global printed textile industry that we believe are resulting in greater demand for our solutions. Consumers are increasingly seeking to differentiate themselves by wearing customized and personalized garments with colorful and intricate images and designs. Brand owners and contract printers are seeking methods to shorten time to market and reduce production lead times in order to more efficiently and cost-effectively produce smaller runs of printed textiles and reduce the risk of excess inventory while concurrently meeting consumer demands. Simultaneously, regulatory bodies and consumers are increasingly focused on social responsibility and eco-friendly manufacturing, demanding that printed textile manufacturers reduce the negative environmental impact associated with the manufacturing of printed textiles. Our solutions address these trends by enabling our customers to print in a time efficient, cost-effective and environmentally friendly manner.

We have developed and offer a broad portfolio of differentiated digital printing solutions for the DTG market that provide solutions to challenges faced by participants in the global printed textile industry. Our DTG solutions utilize our patented wet-on-wet printing methodology that eliminates the common practice of separately coating and drying textiles prior to printing. This methodology also enables printing on a wide range of untreated fabrics, including cotton, wool, polyester, lycra and denim. Building on the expertise and capabilities we have accumulated throughout our history in developing and offering differentiated solutions for the DTG market, we are in the advanced stages of finalizing a digital printing solution aimed at another segment of the printed textile industry, the roll-to-roll, or R2R, market.

We were founded in 2002 in Israel, shipped our first system in 2005 and, as of December 31, 2014, had an installed base of over 1,200 systems globally. As of December 31, 2014, we had 251 employees located across four regions: Israel, the United States, Europe and the Asia Pacific region. In 2014, we generated revenues of $66.4 million, representing an increase of 34.4% over the prior fiscal year, and recorded net income of $3.0 million. In 2014, we generated 55.4% of our revenues from the Americas, 27.1% from EMEA and 17.5% from the Asia Pacific region.

Industry Overview

The retail value of the global textile industry was over $1 trillion in 2013 and is projected to grow between 2% and 5% annually through 2018, according to a November 2014 report by InfoTrends, a provider of market intelligence on the digital imaging industry. The global printed textile industry represents a sub-segment of the global textile industry. The global printed textile industry involves printing on fabric rolls, finished garments and unsewn pieces of cut fabric at various stages along the value chain in the production of goods for the apparel, household, technical and display end markets.

1

The global printed textile industry can be categorized into clothing, household, technical and displays. We estimate that the vast majority of the approximately 33 billion square meters of projected annual output of the global printed textile industry in 2015 will be produced using analog print methods, specifically screen printing, carousels for printing on garments and rotary screen printers for printing on rolls of fabric. Our assessment is based on data provided in a 2014 report by Smithers Pira, a provider of market intelligence on the printed textile industry. The Pira report provides digital printing output estimates for 2014 and projects the analog printing output for 2015 as well as the annual digital textile printing growth rate through 2019, which we used to calculate a projected digital output of approximately 780 million square meters for 2015, representing approximately 2% of total projected annual global printed textile output in 2015. According to the Pira report, digital textile printing output is forecasted to grow at approximately 20% per year globally for the foreseeable future. Within digital textile printing, clothing applications represent the greatest amount of digital printed textile output and are projected to grow at a faster rate than household, technical and display applications.

Our Solutions

Our solutions include a combination of proprietary digital textile printing systems, ink and other consumables and associated software as well as value added services. Our line of DTG systems offers a range of performance options depending on the needs of the customer. These options include the number and size of printing pallets, number of print heads, printing throughput and process ink colors, as well as other customizable features. We categorize our DTG systems into two groups that are focused on the high throughput segment of the DTG market.

   Entry Level. Our entry level systems consist of our Breeze and Thunder systems. The Breeze and Thunder allow businesses to adopt digital technology with a limited upfront investment and use the same technology as our high throughput systems but with smaller garment printing areas and at lower throughput levels.

   High Throughput. Our high throughput systems, which consist of our Avalanche family of systems, Storm II and Paradigm II, offer high throughput printing capabilities and are designed for customers who conduct large scale printing of small runs of a variety of images and designs.

Our ink and other consumables consist of our patented NeoPigment ink, proprietary binding agent, priming fluid, wiping fluid, and flushing fluid. Our pigment based inks are available in seven colors and are formulated for use exclusively in our systems. Our patented wet-on-wet printing methodology combines the use of pigments rather than dyes in conjunction with our proprietary binding agent, and enables us to print on a wide range of fabrics without the need for a separate pre-treatment process or system reconfiguration, resulting in minimal setup times for each run and high throughput levels. We are also investing in the development of new ink formulas for our new systems in order to expand the range of fabrics on which we can print and further improve the quality of our high resolution images and designs.

Our Competitive Strengths

The following are our key competitive strengths:

   Leading player in fast-growing digital DTG printing market. We are a leading player in the fast-growing digital DTG printing market based on our sales and installed base of more than 1,200 systems globally. We estimate that global revenue from digital textile printing equipment and ink will grow at a 17% compound annual growth rate between 2014 and 2019 based on the estimate of such revenue for 2014 and the projection for 2019, in each case, contained in the Pira report. We believe that high throughput DTG and R2R applications in the textile printing market are positioned to grow at a rate greater than the 17% projected industry growth rate between 2014 and 2019. The Pira report estimates that the DTG market has an addressable opportunity of five to 10 billion garments a year, with over 300,000 sites globally printing primarily t-shirts and other apparel.

   Disruptive technology that enables our customers to adopt new or improve existing business models. Our digital printing solutions allow our customers to develop new or improve existing business models by enabling them to produce short to medium runs of high-quality customized garments efficiently. This facilitates online business models that manufacture on a “produce to order” basis and allows brand owners to produce garments in house.

   Attractive business model. Our existing and growing installed base of systems results in recurring sales of ink and other consumables. Recurring sales of ink and other consumables have historically offered us visibility into a significant

2

component of our results of operations. We believe that our recurring sales model also enables us to foster close customer relationships and allows us to provide value added services to our customers.

   Robust intellectual property portfolio driven by an innovation-based culture. Our intellectual property portfolio reflects over a decade of significant investments in digital textile printing, which we believe creates significant barriers to entry.

   Extensive product portfolio and strong new product pipeline. Our DTG systems are suited for smaller commercial operators with limited budgets, as well as mass producers with mature operations and complex needs. In addition, we plan to introduce two new solutions to market: the Allegro, a one-step, integrated R2R printing and drying system, and the Vulcan, a cost-effective digital substitution for carousel screen printing.

   Environmentally friendly printing processes. A significant portion of global industrial water pollution comes from textile treatment and dyeing. Our printing process eliminates the need for separate pre-treatment, as well as steaming, washing or rinsing of textiles during the printing process, which leads to a significant reduction in water consumption compared to conventional printing methods.

   Experienced management team. We believe that our management team’s industry expertise, long history with our company and extensive experience in running global publicly traded companies will enable us to execute our growth strategy.

Our Strategy

The following are the key elements of our growth strategy:

   capitalize on continued growth of the digital DTG market;

   focus on fast-growing web-to-print businesses;

   drive adoption of digital DTG printing solutions by customers who primarily use screen printing carousels; and

   extend our technological leadership through ongoing research and development and continuing to introduce new products.

Risks

Investing in our ordinary shares involves risks. You should carefully consider the risks described in “Risk Factors” section beginning on page 9 before making a decision to invest in our ordinary shares. If any of these risks actually occur, our business, financial condition or results of operations would likely be materially adversely affected. In such case, the trading price of our ordinary shares would likely decline, and you may lose all or part of your investment. The following is a summary of some of the principal risks we face:

   If the market for digital textile printing does not develop as we anticipate, our sales may not grow as quickly as expected and our share price could decline.

   If our customers use alternative ink or other consumables in our systems, our gross margin could decline significantly, and our business could be harmed.

   Our failure to compete successfully could cause our revenues and demand for our solutions to decline.

   A significant portion of our sales is concentrated among two of our independent distributors and our business would be adversely affected by a decline in sales by, or the loss of, either of these independent distributors.

   Our quarterly results of operations have fluctuated in the past and may fluctuate in the future due to variability in our revenues.

3

   If our relationships with suppliers, especially with single source suppliers of components, were to terminate, our business could be harmed.

   If we cannot successfully market our systems to major brand owners and fashion designers, our future growth and prospects could be harmed.

   Disruption of operations at our manufacturing site or those of third-party manufacturers could prevent us from filling customer orders on a timely basis.

   We may not be able to introduce new systems or other technological enhancements to the market on the timescales that we project. 

   Our Allegro system, which we expect to launch commercially in the next 18 months, may not achieve market acceptance or gain adequate market share.

   If we are unable to obtain patent protection for our solutions or otherwise protect our intellectual property rights, our business could suffer.

   We may become subject to claims of intellectual property infringement by third parties or may be required to indemnify our distributors or other third parties against such claims, which, regardless of their merit, could result in litigation, distract our management and materially adversely affect our business, results of operations or financial condition.

Our Principal Shareholder

Following the closing of this offering, entities affiliated with Fortissimo Capital Fund II (Israel) L.P. will beneficially own 52.4% of our outstanding shares in the aggregate (or 50.5% if the underwriters exercise in full their option to purchase additional shares). Following the closing of this offering, we will not be a party to and are not otherwise aware of any voting agreement among our shareholders. For further information about the ownership of our ordinary shares following this offering, see “Principal Shareholders.”

Our Corporate Information

We were incorporated under the laws of the State of Israel on January 16, 2002. Our principal executive offices are located at 12 Ha’Amal Street, Rosh Ha’Ayin 4809246, Israel, and our telephone number is +972-3-908-5800. Our website address is www.kornit.com. The information contained on, or that can be accessed through, our website does not constitute a part of this prospectus and is not incorporated by reference herein. We have included our website address in this prospectus solely for informational purposes. Our agent for service of process in the United States is Kornit Digital North America Inc., located at 10541-10601 North Commerce Street, Mequon, Wisconsin 53092, and its telephone number is (262) 518-0200.

Throughout this prospectus, we refer to various trademarks, service marks and trade names that we use in our business. The “Kornit Digital” design logo and other trademarks or service marks of Kornit Digital Ltd. appearing in this prospectus are the property of Kornit Digital Ltd. We have several other registered trademarks, service marks and pending applications relating to our solutions. Although we have omitted the “®” and “™” trademark designations for such marks in this prospectus, all rights to such trademarks are nevertheless reserved. Other trademarks and service marks appearing in this prospectus are the property of their respective holders.

4

The Offering

Ordinary shares we are offering

7,100,000 ordinary shares (or 8,165,000 if the underwriters exercise in full their option to purchase additional ordinary shares)

 

 

Ordinary shares to be outstanding immediately after this offering

28,701,965 ordinary shares (or 29,766,965 if the underwriters exercise in full their option to purchase additional ordinary shares)

 

 

Use of proceeds

We will receive net proceeds from this offering of approximately $63.5 million, or $73.4 million if the underwriters exercise in full their option to purchase additional ordinary shares, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds from this offering to obtain additional capital, to increase our financial flexibility and visibility in the marketplace, to create a public market for our ordinary shares and to facilitate our future access to the public equity markets. While we do not currently have specific plans for the net proceeds resulting from this offering, we expect to use the net proceeds for general corporate purposes. We do not currently have any acquisitions or investments planned however we may use a portion of the net proceeds to acquire or invest in complementary companies, products or technologies in the future. See “Use of Proceeds” on page 27 for additional information.

 

 

Risk factors

Investing in our ordinary shares involves a high degree of risk and purchasers of our ordinary shares may lose part or all of their investment. See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares.

 

 

Proposed NASDAQ Global Select Market symbol

Our ordinary shares have been approved for listing on the NASDAQ Global Select Market under the symbol “KRNT.”

Unless otherwise indicated, the number of ordinary shares to be outstanding after this offering is based on 21,601,965 ordinary shares outstanding as of March 16, 2015 assuming the conversion of all outstanding Series A-1 preferred shares into 12,628,741 ordinary shares and excludes (1) 3,456,281 ordinary shares reserved for issuance under our equity incentive plans in respect of which, as of March 16, 2015, we had outstanding options to purchase 2,790,312 ordinary shares at a weighted average exercise price of $2.13 per share and (2) 242,425 ordinary shares reserved for issuance under our Employee Stock Purchase Plan.

Unless otherwise indicated, all information in this prospectus:

   reflects the conversion of all outstanding Series A-1 preferred shares into 12,628,741 ordinary shares which will occur immediately prior to the closing of this offering;

   assumes no exercise by the underwriters of their option to purchase up to an additional 1,065,000 ordinary shares from us;

   gives effect to the adoption of our amended and restated articles of association prior to the closing of this offering, which will replace our articles of association currently in effect;

   reflects a 10-for-1 share split effected on May 24, 2012 by means of a share dividend of nine ordinary shares or Series A-1 preferred shares for each ordinary share or Series A-1 preferred shares, respectively, then outstanding; and

   reflects a further 1-for-6.5531 share split effected on March 17, 2015 by means of a share dividend of 5.5531 ordinary shares for each ordinary share then outstanding.

5

Summary Consolidated Financial Data

The following tables set forth our summary consolidated financial data. You should read the following summary consolidated financial data in conjunction with, and it is qualified in its entirety by reference to, our historical financial information and other information provided in this prospectus, including “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

The summary consolidated statements of income data for the years ended December 31, 2012, 2013 and 2014 and summary consolidated balance sheet data as of December 31, 2014 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The historical results set forth below are not necessarily indicative of the results to be expected in future periods. Our financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP.

 

 

Year Ended December 31,

 

 

 

2012

 

 

2013

 

 

2014

 

 

 

(in thousands, except share and per share data)

 

Consolidated Statements of Income:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

39,167

 

 

$

49,395

 

 

$

66,364

 

Cost of revenues(1)

 

 

22,741

 

 

 

27,953

 

 

 

37,187

 

Gross profit

 

 

16,426

 

 

 

21,442

 

 

 

29,177

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(1)

 

 

4,839

 

 

 

7,443

 

 

 

9,475

 

Sales and marketing(1)

 

 

4,668

 

 

 

7,734

 

 

 

10,616

 

General and administrative(1)

 

 

3,092

 

 

 

3,278

 

 

 

5,266

 

Total operating expenses

 

 

12,599

 

 

 

18,455

 

 

 

25,357

 

Operating income

 

 

3,827

 

 

 

2,987

 

 

 

3,820

 

Finance expenses, net

 

 

285

 

 

 

460

 

 

 

15

 

Income before taxes on income

 

 

3,542

 

 

 

2,527

 

 

 

3,805

 

Taxes on income

 

 

1,228

 

 

 

1,393

 

 

 

782

 

Net income

 

$

2,314

 

 

$

1,134

 

 

$

3,023

 

Net earnings per ordinary share(2)

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.26

 

 

$

0.13

 

 

$

0.34

 

Diluted

 

$

0.24

 

 

$

0.11

 

 

$

0.29

 

Weighted average number of ordinary shares used in computing income per ordinary share(2)

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

8,953,565

 

 

 

8,953,565

 

 

 

8,969,588

 

Diluted

 

 

9,649,573

 

 

 

9,880,049

 

 

 

10,446,353

 

Pro forma net earnings per ordinary share(3)

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

$

0.14

 

Diluted

 

 

 

 

 

 

 

 

 

$

0.13

 

Weighted average number of ordinary shares used in computing pro forma income per ordinary share(3):

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

21,598,329

 

Diluted

 

 

 

 

 

 

 

 

 

 

23,075,094

 

6

 

 

As of December 31, 2014

 

 

 

Actual(4)

 

 

Pro forma(5)

 

 

Pro forma as
adjusted(5)

 

 

 

(in thousands)

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,993

 

 

$

4,993

 

 

$

68,184

 

Working capital(6)

 

 

15,186

 

 

 

15,186

 

 

 

78,377

 

Total assets

 

 

34,714

 

 

 

34,714

 

 

 

97,905

 

Total long-term liabilities

 

 

2,025

 

 

 

2,025

 

 

 

2,025

 

Total shareholders’ equity

 

 

19,351

 

 

 

19,351

 

 

 

82,542

 

 

 

 

Year Ended December 31,

 

 

 

2012

 

 

2013

 

 

2014

 

 

 

(in thousands)

 

Supplemental Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA(7)

 

$

4,690

 

 

$

4,281

 

 

$

6,069

 

______________

(1) Includes share-based compensation expense as follows:

 

 

Year Ended December 31,

 

 

 

2012

 

 

2013

 

 

2014

 

 

 

(in thousands)

 

Share-based Compensation Expense:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

$

10

 

 

$

11

 

 

$

96

 

Research and development

 

 

13

 

 

 

21

 

 

 

86

 

Sales and marketing

 

 

36

 

 

 

66

 

 

 

207

 

General and administrative

 

 

18

 

 

 

28

 

 

 

508

 

Total share-based compensation expense

 

$

77

 

 

$

126

 

 

$

897

 

 (2) Basic and diluted net earnings per ordinary share is computed based on the basic and diluted weighted average number of ordinary shares outstanding during each period. For additional information, see notes 2v and 10 to our consolidated financial statements included elsewhere in this prospectus.

(3)   Pro forma basic and diluted net earnings per ordinary share and pro forma weighted average shares outstanding assumes the conversion of all of our outstanding Series A-1 preferred shares into ordinary shares, which will occur upon the closing of this offering, but does not give effect to the issuance of ordinary shares in connection with this offering. For additional information on the conversion of the Series A-1 preferred shares, see note 2c to our consolidated financial statements included elsewhere in this prospectus.

(4)   Reflects the payment of $0.7 million of expenses related to this offering through December 31, 2014.

(5)   Pro forma gives effect to the conversion into ordinary shares of all of our outstanding Series A-1 preferred shares. Pro forma as adjusted gives effect to (a) the same item as "pro forma," (b) the issuance and sale of 7,100,000 ordinary shares in this offering at the initial public offering price of $10.00 per ordinary share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, (c) a one-time payment in the aggregate amount of $750,000 to our sponsor, Fortissimo Capital, in connection with the termination of our existing management services agreement with them and (d) the payment of $250,000 in the aggregate to certain of our employees, including some of our executive officers, for their contribution to completing this offering.

(6)   Working capital is defined as total current assets minus total current liabilities.

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(7)   The following table reconciles net income to Adjusted EBITDA for the periods presented:

 

 

Year Ended December 31,

 

 

 

2012

 

 

2013

 

 

2014

 

 

 

(in thousands)

 

Reconciliation of Net Income to Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,314

 

 

$

1,134

 

 

$

3,023

 

Finance expenses, net

 

 

285

 

 

 

460

 

 

 

15

 

Taxes on income

 

 

1,228

 

 

 

1,393

 

 

 

782

 

Depreciation and amortization

 

 

786

 

 

 

1,168

 

 

 

1,352

 

Share-based compensation expense

 

 

77

 

 

 

126

 

 

 

897

 

Adjusted EBITDA

 

$

4,690

 

 

$

4,281

 

 

$

6,069

 

Adjusted EBITDA is a non-GAAP measure defined as net income before finance expenses, net (including foreign exchange gains and losses), income taxes, depreciation and amortization, and share-based compensation for a given period. Adjusted EBITDA is not a measure of our financial performance under U.S. GAAP and should not be considered an alternative to net income or any other performance measures derived in accordance with U.S. GAAP. Accordingly, you should consider Adjusted EBITDA along with other financial performance measures, including net income, and our financial results presented in accordance with U.S. GAAP. Other companies, including companies in our industry, may calculate Adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure. We understand that although Adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

   Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

   Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; and

   Although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

We believe that Adjusted EBITDA is a useful measure for analyzing the performance of our core business because it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by changes in foreign exchange rates that impact financial assets and liabilities denominated in currencies other than the dollar (affecting finance expenses, net), tax positions (such as the impact on periods or companies of changes in effective tax rates), the age and book depreciation of fixed assets (affecting relative depreciation expense) and share-based compensation expense (because it is a non-cash expense).

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RISK FACTORS

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below, in addition to the other information set forth in this prospectus, including the consolidated financial statements and the related notes included elsewhere in this prospectus, before purchasing our ordinary shares. If any of the following risks actually occur, our business, financial condition, cash flows, and results of operations could be materially adversely affected. In that case, the trading price of our ordinary shares would likely decline and you might lose all or part of your investment.

Risks Related to Our Business and Our Industry

If the market for digital textile printing does not develop as we anticipate, our sales may not grow as quickly as expected and our share price could decline.

The global printed textile industry is currently dominated by analog printing processes, the most common of which are screen printing and carousel printing. If the global printed textile industry does not more broadly accept digital printing as an alternative to analog printing, our revenues may not grow as quickly as expected, or may decline, and our share price could suffer. Widespread adoption of digital textile printing depends on the willingness and ability of businesses in the printed textile industry to replace their existing analog printing systems with digital printing systems. These businesses may decide that digital printing processes are less reliable, less cost-effective, of lower quality, or otherwise less suitable for their commercial needs than analog printing processes. For example, screen printing currently tends to be faster and less expensive than digital printing on a cost per print basis for larger production runs. Even if businesses are persuaded as to the benefits of digital printing, we do know whether potential buyers of digital printing systems will delay their investment decisions. As a result, we may not correctly estimate demand for our solutions, which could cause us to fail to meet customer needs in a timely manner or fail to take advantage of economies of scale in the production of our solutions.

If our customers use alternative ink or other consumables in our systems, our gross margin could decline significantly, and our business could be harmed.

Our business model benefits significantly from recurring sales of our ink and other consumables for our existing and growing installed base of systems. Third parties sell, and purchasers of our systems can seek to buy, alternative versions of our ink or other consumables. We are aware of a small number of instances in which customers are using such third party inks in our systems. These third-party ink and other consumables may be less expensive or otherwise more appealing to our customers than our ink and other consumables. Significant sales of third-party inks and other consumables to our customers could adversely impact our revenues and would have a more significant effect on our gross margins and overall profitability.

Given the sensitivity of our systems and, in particular, print heads to lower quality ink, which may cause our print heads to clog or otherwise malfunction, our systems operate at the highest throughput level only when using our ink and other consumables in order to protect them from damage. In addition, since we are unable to control the impact of third-party inks, their use voids the warranty that comes with our systems. We have also sought to protect the proprietary technology underlying our ink through patents and other forms of intellectual property protections. These steps that we have taken to ensure the smooth operation of our systems and our ability to fully invoke all our intellectual property rights may be challenged. Any reduction in our ability to market and sell our ink and other consumables for use in our systems may adversely impact our future revenues and our overall profitability.

Our failure to compete successfully could cause our revenues and demand for our solutions to decline.

The principal competition for our digital printing systems comes from manufacturers of screen printing systems.  Our principal competitor in the high throughput digital direct-to-garment, or DTG, market is Aeoon Technologies GmbH. We also face competition from Brother International Corporation, Seiko Epson Corporation and a number of smaller competitors with respect to our entry level systems. Some of our current and potential competitors have larger overall installed bases of customers, longer operating histories and greater name recognition than we have. In addition, many of these competitors

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have greater sales and marketing resources, more advanced manufacturing operations, broader distribution channels and established relationships with channel partners, and greater customer support resources than we have. Current and future competitors may be able to respond more quickly to changes in customer demands and devote greater resources to the development, promotion and sale of their printers and ink and other consumables than we can. Our current and potential competitors may also develop and market new technologies that render our existing solutions unmarketable or less competitive. In addition, if these competitors develop products with similar or superior functionality to our solutions at prices comparable to or lower than ours, we may be forced to decrease the prices of our solutions in order to remain competitive, which could reduce our gross margins.

A significant portion of our sales is concentrated among two of our independent distributors and our business would be adversely affected by a decline in sales by, or the loss of, either of these independent distributors.

We are subject to revenue concentration with respect to two of our independent distributors. In 2013 and 2014, Hirsch International Corporation and SPSI, Inc., both distributors in the United States, accounted for 20% and 25% of our revenues in each such period, respectively, in the case of Hirsch, and 13% and 15% of our revenues in each such period in the case of SPSI, respectively. We have entered into non-exclusive distributor agreements with each of these distributors with a term that ends in April 2017 subject to automatic renewal for successive one-year periods unless one party notifies the other party that it does not wish to renew the agreement. These distributors may fail to devote the same level of attention to our solutions as they currently do, elect to distribute competitors’ products or be less successful than distributors of competitors’ products in their territories and, as a result, sales of our solutions may suffer. In addition, our relationships with these distributors could be terminated with little or no notice if these distributors become subject to bankruptcy or other similar proceedings or otherwise become unable or unwilling to continue their business relationship with us and we may not be able to find qualified and successful replacements for our distributors in a timely manner. Due to the concentration of our revenues with these distributors, any such event could have a material adverse effect on our results of operations. Additionally, a default by one or more independent distributors that has a significant receivables balance could harm our financial condition.

Our quarterly results of operations have fluctuated in the past and may fluctuate in the future due to variability in our revenues.

Our revenues and other results of operations have fluctuated from quarter to quarter in the past and could continue to fluctuate in the future. Our revenues depend in part on the sale and delivery of our systems, and we cannot predict with certainty when sales transactions for our systems will close or when we will be able to recognize the revenues from such sales, which generally occurs upon delivery and installation of our systems. Customers that we expect to purchase our systems may delay doing so due to a change in their priorities or business plans, including as a result of adverse general economic conditions that may disproportionately impact the ability of the small businesses that constitute a significant portion of our customer base to expend capital or access financing sources. Such conditions could also force us to reduce our prices or limit our ability to profit from economies of scale, which could harm our gross margins. As a result of these factors, we may fail to meet market expectations for any given quarter if sales that we expect for that quarter are delayed until subsequent quarters. Moreover, the closing of an especially large transaction in a particular quarter may make it more difficult for us to meet market expectations in subsequent quarters, and our failure to close a large transaction in a particular quarter could adversely impact our revenues for that quarter.

In addition, while we recently started implementing a means of collecting real time data about our customers’ consumption of ink and other consumables when using our systems, we have thus far done so only to a limited extent and, accordingly, our ability to predict consumption is limited. Our customers generally purchase our ink and other consumables on an as-needed basis, and delays in making such purchases by a number of customers could result in a meaningful shift of revenues from one quarter to the next. Moreover, because ink and other consumables have a shelf life of up to 12 months, we typically maintain inventories of ink and other consumables sufficient to cover our average sales for one quarter. These inventories may not match customers’ demands for any given quarter, which could cause shortages or excesses in our inventory of ink and other consumables and result in fluctuations of our quarterly revenues. These inventory requirements may also limit our ability to profit from economies of scale in the production and marketing of our ink and other consumables.

Furthermore, we base our current and future expense levels on our revenue forecasts and operating plans, and our expenses are relatively fixed in the short term, due in part to long lead times required for ordering certain components of our systems and ordering assembly of our systems by third-party manufacturers. Accordingly, we would likely not be able to reduce our

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costs sufficiently to compensate for an unexpected shortfall in revenues during a particular quarter, and even a relatively small decrease in revenues could disproportionately and adversely affect our financial results for that quarter. The variability and unpredictability of these and other factors could result in our failing to meet financial expectations for a given period.

If our relationships with suppliers, especially with single source suppliers of components, were to terminate, our business could be harmed.

We maintain an inventory of parts to facilitate the timely assembly of our systems, production of our ink and other consumables, and servicing our installed base. Most components are available from multiple suppliers, although certain components used in our systems and ink, such as our print heads and emulsion, are only available from single or limited sources as described below.

   The print heads for our systems are supplied by a sole supplier, FujiFilm Dimatix, Inc., or FDMX. We entered into an agreement with FDMX in 2006, pursuant to which FDMX sells us certain off-the-shelf print heads and additional products, including ink, all of which FDMX regularly sells to providers of inkjet systems. The agreement renews automatically for successive one-year periods, but FDMX or we can terminate the agreement upon 90 days’ notice prior to the end of the current term. The agreement provides that beginning with the start of the first one-year renewal period, FDMX may increase the prices of the products that we purchase from it upon 90-days’ prior notice. We have entered into new pricing terms with FDMX on an annual basis which have constituted a new agreement starting a new initial term. Our current agreement terminates on January 5, 2016. Our agreement further provides that FDMX may, at its option, discontinue products supplied under the agreement, provided that we are given 180 days’ notice of the planned discontinuance and are provided with an end of life purchase program. 

   The emulsion used in our ink is supplied by BG Bond, a subsidiary of Ashtrom Ltd., a large Israeli industrial company. We currently purchase the emulsion on a purchase order basis.

The loss of either of these suppliers, or of a supplier for which there are limited other sources, could result in the delay of the manufacture and delivery of our systems. For instance, FDMX has from time to time indicated that it may discontinue manufacturing the print head that we currently source from it and use in our systems, although it has never provided notice that it is actually doing so. In the event FDMX discontinues manufacturing the print head, we would be required to qualify a new print head for our systems. In order to minimize the risk of any impact from a disruption or discontinuation in the supply of print heads, emulsion or other components from limited source suppliers, we maintain an additional inventory of such components, in addition to the end of life purchase program that would be available to us if the products we purchase from FDMX were discontinued. Nevertheless, such inventory may not be sufficient to enable us to continue supplying our products should we need to locate and qualify a new supplier.

Other risks stemming from our reliance on suppliers include:

   if we experience an increase in demand for our solutions, our suppliers may be unable to provide us with the components that we need in order to meet that increased demand;

   our suppliers may encounter financial hardships unrelated to our demand for components, which could inhibit their ability to fulfill our orders and meet our requirements;

   we may experience production delays related to the evaluation and testing of products from alternative suppliers;

   we may be subject to price fluctuations due to a lack of long-term supply arrangements for key components;

   we or our suppliers may lose access to critical services and components, resulting in an interruption in the manufacture, assembly and shipment of our systems; and

   fluctuations in demand for components that our suppliers manufacture for others may affect their ability or willingness to deliver components to us in a timely manner.

If any of these risks materialize, the costs associated with developing alternative sources of supply or assembly in a timely manner could have a material adverse effect on our ability to meet demand for our solutions. Our ability to generate revenues could be impaired, market acceptance of our solutions could be adversely affected, and customers may instead purchase or use alternative products. We may not be able to find new or alternative components of a requisite quality or reconfigure our systems and manufacturing processes in a timely manner if the necessary components become unavailable. As a result, we could incur increased production costs, experience delays in the delivery of our solutions and suffer harm to our reputation, which may have an adverse effect on our business and results of operations.

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If we cannot successfully market our systems to major brand owners and fashion designers, our future growth and prospects could be harmed.

A key element of our strategy for growing our business is to market and sell digital printing systems to contract printers that serve major textile brand owners and fashion designers. Accordingly, we are investing in efforts to educate leading textile brand owners and fashion designers about the potential benefits of digital textile printing. Although we have successfully marketed our systems to online businesses and custom decorators, we have limited experience marketing our systems to brand owners and fashion designers. If our efforts to expand awareness of our systems do not succeed or do not influence major brand owners and fashion designers to adopt our digital printing technologies, or if there is a significant reduction in the popularity of printed textiles, especially those that are customized or personalized, among the consumers to whom such brand owners and fashion designers cater, our future growth and prospects could suffer.

Disruption of operations at our manufacturing site or those of third-party manufacturers could prevent us from filling customer orders on a timely basis.

We manufacture our ink and other consumables at our facility in Kiryat Gat, Israel. We also rely on contract manufacturing services provided by ITS Industrial Techno Logic Solutions Ltd. in Israel to assemble the majority of our systems and receive contract manufacturing services from IFAT Technologies Ltd. with respect to certain of our systems. We expect that almost all of our revenues in the near term will be derived from the systems and ink and other consumables manufactured at these facilities. If operations in any of these facilities were to be disrupted due to a major equipment failure or power failure lasting beyond the capabilities of backup generators or other events outside of our reasonable control, our manufacturing capacity could be shut down for an extended period, we could experience a loss of raw materials or finished goods inventory and our ability to operate our business would be harmed. In addition, in any such event, the repair or reconstruction of our or our third-party manufacturers’ manufacturing facilities and storage facilities could take a significant amount of time. During this period, we or our third-party manufacturers would be unable to manufacture some or all of our systems or we may not be able to produce our ink and other consumables. In addition, we currently have only a limited inventory of our systems and ink and other consumables that we can supply to our customers in the event that our manufacturing is disrupted.

We may not be able to introduce new systems or other technological enhancements to the market on the timescales that we project. 

Our growth plan includes the introduction of new systems. For example, we are seeking to penetrate the roll-to-roll, or R2R, market with the commercial launch of our Allegro system, which is targeted to occur within the next 18 months. We are also seeking to expand our presence in the industrial market with the commercial launch of our Vulcan system, which is targeted to occur within the next 24 months. The process of developing new or improved solutions is expensive, complex and involves uncertainties. The success of new or improved solutions depends on several factors, including appropriate component and raw materials costs, timely completion and introduction, reliability and stability, differentiation of new or improved solutions, and market acceptance. There can be no assurance that we will be successful in developing and marketing our new or improved solutions in a timely manner or that our new or improved solutions will adequately address market demands. Furthermore, we may experience unanticipated delays in the availability of new or improved solutions, and may fail to meet customer expectations with respect to the timing of such availability.

Our Allegro system, which we expect to launch commercially in the next 18 months, may not achieve market acceptance or gain adequate market share.

Our Allegro system, which is currently in beta testing, is our first R2R printing system. Although the Allegro is based on the technology used in our DTG printing systems and we have experience in marketing our systems and ink and other consumables to the DTG printing market, the Allegro is our first R2R system. The market for digital R2R printers is more mature than the market for digital DTG printers, and we expect to face significant competition from major textile printer and ink manufacturers in the R2R market, such as MS Printing Solutions SRL, Reggiani Macchine S.P.A., and Durst Phototechnik AG. In addition, we expect to focus marketing efforts for our R2R systems towards customers with more capital-intensive operations, such as fabric converters, who source large quantities of fabric and convert untreated fabrics into finished materials to be sold to garment and home décor manufacturers. This differs from the customer base that we currently serve in the DTG market. We cannot ensure that the significant investments that we have made in distribution, sales and

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customer service teams in preparation for the launch of the Allegro will enable us to market, sell and distribute the Allegro as planned. Market acceptance of the Allegro will depend on, among other things, the system demonstrating a real advantage over existing printers, the success of our sales and marketing teams in creating awareness of the Allegro, the sales price of the Allegro relative to alternative printers, customer recognition of the value of our technology, the effectiveness of our marketing campaigns, and the general willingness of potential customers to try new technologies. In the event that we are unable to achieve market acceptance of the Allegro, our growth and future prospects may be adversely affected.

If we fail to effectively manage our growth, our business and operations will be negatively affected, and as we invest in the growth of our business, our operating and net profit margins could decline in the near-term.

We have experienced significant growth in a relatively short period of time and intend to continue to grow our business. Our revenues grew from $49.4 million in 2013 to $66.4 million in 2014. Our headcount increased from 109 as of December 31, 2011 to 251 as of December 31, 2014, and during such period we hired our current Chief Executive Officer and Chief Financial Officer. We plan to hire additional employees in 2015 across all areas of our company. Our rapid growth has placed significant demands on our management, sales and operational and financial infrastructure, and our growth will continue to place significant demands on these resources. Further, in order to manage our future growth effectively, and in connection with our transition to a public company, we must continue to improve and expand our IT and financial infrastructure, operating and administrative systems and controls and efficiently manage headcount, capital and processes. We may not be able to successfully implement these improvements in a timely or efficient manner, and our failure to do so may materially impact our projected growth rate.

We are subject to extensive environmental, health and safety laws and regulations which, if not met, could have a material adverse effect on our business, financial condition and results of operations.

Our manufacturing and development facilities use chemicals and produce waste materials, which require us to hold business licenses that may include conditions set by the Ministry of Environmental Protection for the operations of such facilities. We are also subject to extensive environmental, health and safety laws and regulations governing, among other things, the use, storage, registration, handling and disposal of chemicals and waste materials, the presence of specified substances in electrical products, air, water and ground contamination, air emissions and the cleanup of contaminated sites. While we have currently not identified any material non-compliance with these laws and regulations, in the future they could potentially require the expenditure of significant amounts in the event of non-compliance and/or remediation. If we fail to comply with such laws or regulations, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of our toxin permit, business permits, or other permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those relating to personal injury, including exposure to hazardous substances that we use, store, handle, transport, manufacture or dispose of, or property damage. Some environmental, health and safety laws and regulations allow for strict, joint and several liability for remediation costs, regardless of comparative fault. We may be identified as a potentially responsible party under such laws. Such developments could have a material adverse effect on our business, financial condition and results of operations. Environmental, health and safety laws and regulations may also change from time to time. Complying with any new requirements may involve substantial costs and could cause significant disruptions to our research, development, manufacturing, and sales.

Exchange rate fluctuations between the U.S. dollar and the Israeli shekel, the Euro and other non-U.S. currencies may negatively affect our earnings.

The dollar is our functional and reporting currency. However, a significant portion of our operating expenses are incurred in Israeli shekels, or NIS. As a result, we are exposed to the risk that the NIS may appreciate relative to the dollar, or, if the  NIS instead devalues relative to the dollar, that the inflation rate in Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag behind inflation in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar-denominated results of operations would be adversely affected. To protect against an increase the dollar-denominated value of expenses paid in NIS during the year, we plan to institute a foreign currency cash flow hedging program, which will seek to hedge a portion of the economic exposure associated with our anticipated NIS-denominated expenses using derivative instruments. We expect that the substantial majority of our revenues will continue to be denominated in U.S. dollars for the foreseeable future and that a significant portion of our expenses will continue to be denominated in NIS.  We cannot provide any assurances that our hedging activities, once implemented, will be successful in protecting us in full from adverse impacts from currency exchange rate fluctuations since we only plan to

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hedge a portion of our foreign currency exposure, and we cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the NIS against the dollar. For example, based on annual average exchange rates, the dollar  appreciated by 7.8% against the NIS in 2012, depreciated by 6.4% against the NIS in 2013 and depreciated by 0.9% against the NIS in 2014. This depreciation was further compounded by inflation in Israel of 1.8% in 2013 and deflation in Israel of 0.2% in 2014. If the dollar cost of our operations increases, our dollar-measured results of operations will be adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosure About Market Risk—Foreign Currency Risk.”

Our business could suffer if we are unable to attract and retain key employees.

Our success depends upon the continued service and performance of our senior management and other key personnel. Our senior executive team is critical to the management of our business and operations, as well as to the development of our strategies. The loss of the services of any of these personnel could delay or prevent the continued successful implementation of our growth strategy, or our commercialization of new applications for our systems and ink and other consumables, or could otherwise affect our ability to manage our company effectively and to carry out our business plan. Members of our senior management team may resign at any time. High demand exists for senior management and other key personnel in our industry. There can be no assurance that we will be able to continue to retain such personnel.

Our growth and success also depend on our ability to attract and retain additional highly qualified scientific, technical, sales, managerial and finance personnel. We compete to attract qualified personnel, and, in some jurisdictions in which we operate, the existence of non-competition agreements between prospective employees and their former employers may prevent us from hiring those individuals or subject us to lawsuits from their former employers. While we attempt to provide competitive compensation packages to attract and retain key personnel, some of our competitors have greater resources and more experience than we have, making it difficult for us to compete successfully for key personnel. If we cannot attract and retain sufficiently qualified technical employees for our research and development operations on acceptable terms, we may not be able to continue to develop and commercialize our solutions or new applications for our existing systems. Further, any failure to effectively integrate new personnel could prevent us from successfully growing our company.

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

We generally enter into non-competition agreements with our employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors or clients for a limited period. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefiting from the expertise that our former employees or consultants developed while working for us. For example, Israeli labor courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer that have been recognized by the courts, such as the secrecy of a company’s trade secrets or other intellectual property.

We may need substantial additional capital in the future, which may cause dilution to our existing shareholders, restrict our operations or require us to relinquish rights to our pipeline products or intellectual property. If additional capital is not available, we may have to delay, reduce or cease operations.

Based on our current business plan, we believe our cash flows from operating activities and our existing cash resources will be sufficient to meet our currently anticipated cash requirements through the next 12 months without drawing on our lines of credit or using the net proceeds from this offering. Nevertheless, to the extent our anticipated cash requirements change, we may seek additional funding in the future. This funding may consist of equity offerings, debt financings or any other means to expand our sales and marketing capabilities, develop our future solutions or pursue other general corporate purposes. Securing additional financing may divert our management from our day-to-day activities, which may adversely affect our ability to market our current solutions and develop and sell future solutions. Additional funding may not be available to us on acceptable terms, or at all.

To the extent that we raise additional capital through, for example, the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder. The incurrence of indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our ordinary shares to decline.

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Further, while we have two lines of credit from Israeli banks in a total amount of up to $3.0 million, all of which is undrawn as of December 31, 2014, the lines of credit contain change of control provisions that, absent a waiver or amendment, could cause us to be in default or require us to repay any amounts borrowed under certain circumstances. Specifically, we would be in default under one of our lines of credit if our controlling shareholder, Fortissimo Capital, ceases to control us. However, because the agreement provides an exception for changes of control that occur as a result of a listing on a stock exchange, such as the NASDAQ, we do not expect to be in default under this line of credit for this reason following the closing of this offering. Any borrowings under our second line of credit would become repayable if Fortissimo Capital ceases to hold 25.0% of our issued and outstanding shares and no longer has the right to appoint 25% of our directors. While Fortissimo will no longer have the right to appoint any directors following the closing of this offering, we do not anticipate that Fortissimo will cease to hold 25.0% of our issued and outstanding shares, although they may hold less than 25.0% in the future.

If we are unable to raise additional capital when required and on acceptable terms, we may be required to delay, scale back or discontinue the development, manufacturing scale-up or commercialization of our current and future solutions, which would have a material adverse effect on our business, operating results and prospects and on our ability to develop our solutions.

We have a significant presence in international markets and plan to continue to expand our international operations, which exposes us to a number of risks that could affect our future growth.

We have a worldwide sales, marketing and support infrastructure that is comprised of independent distributors and value added resellers, and our own personnel resulting in a sales, marketing and support presence in over 100 countries, including markets in North America, Western and Eastern Europe, the Asia Pacific region and Latin America. We expect to continue to increase our sales headcount, our applications development headcount, our field support headcount, our marketing headcount and our engineer headcount and, in some cases, establish new relationships with distributors, particularly in markets where we currently do not have a sales or customer support presence. As we continue to expand our international sales and operations, we are subject to a number of risks, including the following:

   greater difficulty in enforcing contracts and accounts receivable collection, as well as longer collection periods;

   increased expenses incurred in establishing and maintaining office space and equipment for our international operations;

   fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business;

   greater difficulty in recruiting local experienced personnel, and the costs and expenses associated with such activities;

   general economic and political conditions in these foreign markets;

   economic uncertainty around the world, including continued economic uncertainty as a result of sovereign debt issues in Europe and Latin America;

   management communication and integration problems resulting from cultural and geographic dispersion;

   risks associated with trade restrictions and foreign legal requirements, including the importation, certification, and localization of our solutions required in foreign countries, such as high import taxes in Brazil and other Latin American markets where we sell our products;

   greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties;

   the uncertainty of protection for intellectual property rights in some countries;

   greater risk of a failure of employees to comply with both U.S. and foreign laws, including antitrust regulations, the U.S. Foreign Corrupt Practices Act (FCPA), and any trade regulations ensuring fair trade practices; and

   heightened risk of unfair or corrupt business practices in certain regions and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, or irregularities in, financial statements.

Any of these risks could adversely affect our international operations, reduce our revenues from outside the United States or increase our operating costs, adversely affecting our business, results of operations and financial condition and growth prospects. There can be no assurance that all of our employees and channel partners will comply with the formal policies we have and will implement, or applicable laws and regulations. Violations of laws or key control policies by our employees

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and channel partners could result in delays in revenue recognition, financial reporting misstatements, fines, penalties or the prohibition of the importation or exportation of our software and services and could have a material adverse effect on our business and results of operations.

If we are unable to obtain patent protection for our solutions or otherwise protect our intellectual property rights, our business could suffer.

The success of our business depends on our ability to protect our proprietary technology, brand owners and other intellectual property and to enforce our rights in that intellectual property. We attempt to protect our intellectual property under patent, trademark, copyright and trade secret laws, and through a combination of confidentiality procedures, contractual provisions and other methods, all of which offer only limited protection.

As of December 31, 2014, we owned seven issued patents in the United States and five provisional or pending U.S. patent applications. We also had 10 patents issued in non-U.S. jurisdictions, and two pending Patent Cooperation Treaty patent applications, which are counterparts of our U.S. patent applications. The non-U.S. jurisdictions in which we have issued patents are China, the European Union, Hong Kong and Japan. We may file additional patent applications in the future. The process of obtaining patent protection is expensive, time-consuming, and uncertain, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner all the way through to the successful issuance of a patent. We may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions. Furthermore, it is possible that our patent applications may not issue as granted patents, that the scope of our issued patents will be insufficient or not have the coverage originally sought, that our issued patents will not provide us with any competitive advantages, and that our patents and other intellectual property rights may be challenged by others through administrative processes or litigation resulting in patent claims being narrowed, invalidated, or unenforceable. In addition, issuance of a patent does not guarantee that we have an absolute right to practice the patented invention. Our policy is to require our employees (and our consultants and service providers, including third-party manufacturers of our systems and components, that develop intellectual property included in our systems) to execute written agreements in which they assign to us their rights in potential inventions and other intellectual property created within the scope of their employment (or, with respect to consultants and service providers, their engagement to develop such intellectual property), but we cannot assure you that we have adequately protected our rights in every such agreement or that we have executed an agreement with every such party. Finally, in order to benefit from the protection of patents and other intellectual property rights, we must monitor and detect infringement and pursue infringement claims in certain circumstances in relevant jurisdictions, all of which are costly and time-consuming. As a result, we may not be able to obtain adequate protection or to effectively enforce our issued patents or other intellectual property rights.

In addition to patents, we rely on trade secret rights, copyrights, trademarks, and other rights to protect our proprietary intellectual property and technology. Despite our efforts to protect our proprietary intellectual property and technology, unauthorized parties, including our employees, consultants, service providers or customers, may attempt to copy aspects of our solutions or obtain and use our trade secrets or other confidential information. We generally enter into confidentiality agreements with our employees, consultants, service providers, vendors, channel partners and customers, and generally limit access to and distribution of our proprietary information and proprietary technology through certain procedural safeguards. These agreements may not effectively prevent unauthorized use or disclosure of our intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our intellectual property or technology. We cannot assure you that the steps taken by us will prevent misappropriation of our intellectual property or technology or infringement of our intellectual property rights. In addition, the laws of some foreign countries where we sell or distribute our solutions do not protect intellectual property rights and technology to the same extent as the laws of the United States, and these countries may not enforce these laws as diligently as government agencies and private parties in the United States. Based on the 2013 report on intellectual property rights protection and enforcement published by the Office of the United States Trade Representative, such countries included Ukraine (designated a priority foreign country) and Chile, China, India, Indonesia, Russia and Thailand (designated as priority watch list countries).

If we are unable to protect our trademarks from infringement, our business prospects may be harmed.

We own trademarks that identify “Kornit” and “NeoPigment” among others, and have registered these trademarks in certain key markets. Although we take steps to monitor the possible infringement or misuse of our trademarks, third parties may violate our trademark rights. Any unauthorized use of our trademarks could harm our reputation or commercial interests. In addition, efforts to enforce our trademarks may be expensive and time-consuming, and may not effectively prevent infringement.

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We may become subject to claims of intellectual property infringement by third parties or may be required to indemnify our distributors or other third parties against such claims, which, regardless of their merit, could result in litigation, distract our management and materially adversely affect our business, results of operations or financial condition.

There can be no assurance that third parties will not assert that our solutions, services and intellectual property infringe, misappropriate or otherwise violate their intellectual property or other proprietary rights.

In February 2015, one of our U.S. distributors, Hirsch, provided us with a letter Hirsch received from Direct Imaging Systems, Inc. (“DIS”), claiming that Hirsch was infringing on a DIS patent (no. 6,095,628), which expires in August 2016, through its distribution of our Breeze printing system. Although we were not contacted by DIS in February 2015, and have not since been contacted by them, and are not named in the complaint, we may be joined to the claim at a future date.  In addition, our agreement with Hirsch contains an undertaking by us to indemnify Hirsch against claims by third parties alleging that our products infringe third party intellectual property rights and may therefore be required to indemnify Hirsch for its expenses and any losses associated with this claim. As a condition to Hirsch seeking indemnification from us, we are entitled to assume sole control at our expense of the defense and any decision to settle the claim, and Hirsch would be required to provide us with reasonable cooperation at our expense. See “Business—Legal Proceedings—Direct Imaging Systems, Inc.”

Intellectual property disputes, such as the third-party claim described above, can be costly and disruptive to our business operations by diverting the attention and energies of management and key technical personnel, and by increasing our costs of doing business. Even if a claim is not directly against us, our agreements with distributors generally require us to indemnify them against losses from claims that our products infringe third party intellectual property rights and entitle us to assume the defense of any claim as part of the indemnification undertaking. Our assumption of the defense of such a claim may result in similar costs, disruption and diversion of management attention as a claim that is directly against us. We may not prevail in any such dispute or litigation, and an adverse decision in any legal action involving intellectual property rights could harm our intellectual property rights and the value of any related technology.

Adverse outcomes in intellectual property disputes could:

   require us to redesign our technology or force us to enter into costly settlement or license agreements on terms that are unfavorable to us;

   prevent us from manufacturing, importing, using, or selling some or all of our solutions;

   disrupt our operations or the markets in which we compete;

   impose costly damage awards; and

   require us to indemnify our distributors and customers.

We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.

A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee in the course and as a result of or arising from his or her employment with a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patent Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine whether the employee is entitled to remuneration for his inventions. Recent decisions by the Committee (which have been upheld by the Israeli Supreme Court on appeal) have created uncertainty in this area, as it held that employees may be entitled to remuneration for their service inventions despite having specifically waived any such rights. However, a recent decision by the Committee held that such right can be waived by the employee. The Committee further held that an explicit reference to the waived right is not necessary in every circumstance in order for the employee’s waiver of such right to be valid. Such waiver can be formalized in writing or orally or be implied by the actions of the parties in accordance with the rules of interpretation of Israeli contract law. We generally enter into assignment-of-invention agreements with our employees pursuant to which such individuals assign to us all rights to any inventions created in the scope of their employment or engagement with us. Although our employees have agreed to assign to us

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service invention rights and have specifically waived their right to receive any special remuneration for such assignment beyond their regular salary and benefits, we may face claims demanding remuneration in consideration for assigned inventions.

Undetected defects in the design or manufacturing of our products may harm our business and results of operations.

Our systems, ink and other consumables, and associated software may contain undetected errors or defects when first introduced or as new versions are released. We have experienced these errors or defects in the past during the introduction of new systems and system upgrades. We expect that these errors or defects will be found from time to time in new or enhanced systems after commencement of commercial distribution or upon software upgrades. These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineers from our product development and customer service efforts and harm our reputation. We may experience a delay in revenue recognition or collection of due payments from relevant customers as a result of our systems’ inability to meet agreed performance metrics. In addition, the use of third-party inks may harm the operation of our systems and reduce customer satisfaction with them, which could harm our reputation and adversely affect sales of our systems. We may also be subject to liability claims for damages related to system errors or defects. Although we carry insurance policies covering this type of liability, these policies may not provide sufficient protection should a claim be asserted against us. Any product liability claim brought against us could force us to incur significant expenses, divert management time and attention, and harm our reputation and business. In addition, costs or payments made in connection with warranty and product liability claims and system recalls could materially affect our financial condition and results of operations.

We may acquire other businesses, which could require significant management attention, disrupt our business, dilute shareholder value, and adversely affect our results of operations.

As part of our business strategy and in order to remain competitive, we may acquire or make investments in complementary companies, products or technologies. However, we have not made any acquisitions to date, and as a result, our ability as an organization to acquire and integrate other companies, products or technologies in a successful manner is unproven. We may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by our customers, analysts and investors. In addition, if we are unsuccessful at integrating such acquisitions or the technologies associated with such acquisitions, our revenues and results of operations may be adversely affected. Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could adversely affect our financial condition or the value of our ordinary shares. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.

Risks Related to Our Ordinary Shares and the Offering

There has been no prior public market for our ordinary shares, and an active trading market may not develop.

Prior to this offering, there has been no public market for our ordinary shares. An active trading market may not develop following completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your ordinary shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your ordinary shares. An inactive market may also impair our ability to raise capital by selling our ordinary shares and may impair our ability to acquire other companies by using our ordinary shares as consideration.

Our share price may be volatile, and you may lose all or part of your investment.

The initial public offering price for the ordinary shares sold in this offering will be determined by negotiation between us and representatives of the underwriters. This price may not reflect the market price of our ordinary shares following this offering and the price of our ordinary shares may decline. In addition, the market price of our ordinary shares could be highly volatile and may fluctuate substantially as a result of many factors, including:

   actual or anticipated variations in our and/or our competitors’ results of operations and financial condition;

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   variance in our financial performance from the expectations of market analysts;

   announcements by us or our competitors of significant business developments, changes in service provider relationships, acquisitions or expansion plans;

   changes in the prices of our solutions;

   our involvement in litigation;

   our sale of ordinary shares or other securities in the future;

   market conditions in our industry;

   changes in key personnel;

   the trading volume of our ordinary shares;

   changes in the estimation of the future size and growth rate of our markets; and

   general economic and market conditions.

In addition, the stock markets have experienced extreme price and volume fluctuations. Broad market and industry factors may materially harm the market price of our ordinary shares, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. If we were involved in any similar litigation we could incur substantial costs and our management’s attention and resources could be diverted.

Future sales of our ordinary shares could reduce the market price of our ordinary shares.

If our existing shareholders, particularly our directors, their affiliates, or our executive officers, sell a substantial number of our ordinary shares in the public market, the market price of our ordinary shares could decrease significantly. The perception in the public market that our shareholders might sell our ordinary shares could also depress the market price of our ordinary shares and could impair our future ability to obtain capital, especially through an offering of equity securities. Substantially all of our shares outstanding prior to this offering and our shares issuable upon the exercise of options are subject to lock-up agreements with the underwriters that restrict the ability of their holders to transfer such shares without the prior written consent of Barclays Capital Inc. and Citigroup Global Markets Inc. for 180 days after the date of this prospectus. Consequently, upon expiration of the lock-up agreements, an additional approximately 21.5 million outstanding ordinary shares will be eligible for sale in the public market of which approximately 16.5 million ordinary shares will be subject to restrictions on volume and manner of sale pursuant to Rule 144 under the Securities Act of 1933, as amended. In addition, approximately 1.5 million shares underlying vested options will be eligible for sale in the public market on the same date. We intend to file one or more registration statements on Form S-8 with the U.S. Securities and Exchange Commission, or the Commission, covering all of the ordinary shares issuable under our share incentive plans and such shares will be available for resale following the expiration of the restrictions on transfer. The market price of our ordinary shares may drop significantly when the restrictions on resale by our existing shareholders lapse and these shareholders are able to sell our ordinary shares into the market. In addition, a sale by us of additional ordinary shares or similar securities in order to raise capital might have a similar negative impact on the share price of our ordinary shares. A decline in the price of our ordinary shares might impede our ability to raise capital through the issuance of additional ordinary shares or other equity securities, and may cause you to lose part or all of your investment in our ordinary shares.

Investors in this offering will experience immediate substantial dilution in net tangible book value.

The initial public offering price of our ordinary shares in this offering is considerably greater than the net tangible book value per share of our outstanding ordinary shares immediately after this offering. Accordingly, investors in this offering will incur immediate dilution of $7.16 per share, based on the initial public offering price of $10.00 per share. In addition, if outstanding options to purchase our ordinary shares are exercised in the future, you will experience additional dilution. See “Dilution.”

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Following the closing of this offering, entities and individuals affiliated with Fortissimo Capital Fund II (Israel) L.P., or Fortissimo Capital, will have a controlling influence over matters requiring shareholder approval, which could delay or prevent a change of control.

Following the closing of this offering, entities and individuals affiliated with Fortissimo Capital will beneficially own 52.4% of our ordinary shares or 50.5% if the underwriters exercise their option to purchase additional ordinary shares.

As a result, this shareholder could exert significant influence over our operations and business strategy and will have sufficient voting power to control the outcome of matters requiring shareholder approval. These matters may include:

   the composition of our board of directors, which has the authority to direct our business and to appoint and remove our officers;

   approving or rejecting a merger, consolidation or other business combination;

   raising future capital; and

   amending our articles of association, which govern the rights attached to our ordinary shares.

This concentration of ownership of our ordinary shares could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our ordinary shares that might otherwise give you the opportunity to realize a premium over the then-prevailing market price of our ordinary shares. This concentration of ownership may also adversely affect our share price.

We will be a “controlled company” within the meaning of NASDAQ Stock Market rules and, as a result, will qualify for, and intend to rely on, certain exemptions from certain corporate governance requirements.

As a result of the number of shares beneficially owned by Fortissimo Capital, after the completion of this offering, we will be a “controlled company” under the NASDAQ Stock Market rules. A controlled company is a company of which more than 50% of the voting power is held by an individual, group or another company. Pursuant to the controlled company exemption, we are not required to, and do not currently intend to comply with the requirements that (1) a majority of our board of directors consist of independent directors, and (2) we have a nominating committee composed entirely of independent directors. See “Management—Corporate Governance Practices.” Accordingly, you will not have the same protections afforded to shareholders of companies that are not controlled companies and are therefore subject to all of the corporate governance requirements of the NASDAQ Stock Market.

We have broad discretion as to the use of the net proceeds from this offering and may not use them effectively.

We do not currently have specific plans for the net proceeds resulting from this offering and expect to use the net proceeds for general corporate purposes. As such, our management will have broad discretion in the application of the net proceeds. Our shareholders may not agree with the manner in which our management chooses to allocate the net proceeds from this offering. The failure by our management to apply these funds effectively could have a material adverse effect on our business, financial condition and results of operations. Pending our use of the net proceeds from this offering, we may invest the proceeds in a manner that does not produce income. See “Use of Proceeds” on page 27 for additional information.

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

As a public company whose ordinary shares are listed in the United States, we will incur accounting, legal and other expenses that we did not incur as a private company, including costs associated with our reporting requirements under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act. We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the Commission and the NASDAQ Stock Market, and provisions of Israeli corporate and securities laws applicable to public companies. We expect that these rules and regulations will increase our legal and financial compliance costs, introduce new costs such as investor relations and stock exchange listing fees, and will make some activities more time-consuming and costly. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

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Changes in the laws and regulations affecting public companies will result in increased costs to us as we respond to their requirements. These laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur in order to comply with such requirements.

We have never paid cash dividends on our share capital, and we do not anticipate paying any cash dividends in the foreseeable future.

We have never declared or paid cash dividends on our share capital, nor do we anticipate paying any cash dividends on our share capital in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares will be investors’ sole source of gain for the foreseeable future. In addition, Israeli law limits our ability to declare and pay dividends, and may subject our dividends to Israeli withholding taxes. Furthermore, our payment of dividends (out of tax-exempt income) may retroactively subject us to certain Israeli corporate income taxes, to which we would not otherwise be subject.

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

As a foreign private issuer, in reliance on Rule 5615(a)(3) of the NASDAQ Listing Rules, which permits a foreign private issuer to follow the corporate governance practices of its home country, we will be permitted to follow certain Israeli corporate governance practices instead of those otherwise required under the corporate governance standards for U.S. domestic issuers. Following the listing of our ordinary shares on the NASDAQ Global Select Market, we intend to follow Israeli home country practices with regard to the quorum requirement for shareholder meetings. As permitted under the Israeli Companies Law, our articles of association to be effective upon the closing of this offering will provide that the quorum for any meeting of shareholders shall be the presence of at least two shareholders present in person, by proxy or by a voting instrument, who hold at least 25% of the voting power of our shares instead of 33 1/3% of our issued share capital. We may in the future elect to follow Israeli home country practices with regard to other matters such as the requirement to have a nominating committee or a compensation committee, separate executive sessions of independent directors or to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, issuances that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company). Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ corporate governance rules. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on NASDAQ may provide less protection than is accorded to investors of domestic issuers. See “Management—Corporate Governance Practices.”

As a foreign private issuer, we will not be subject to the provisions of Regulation FD or U.S. proxy rules and will be exempt from filing certain Exchange Act reports.

As a foreign private issuer, we will be exempt from a number of requirements under U.S. securities laws that apply to public companies that are not foreign private issuers. In particular, we will be exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file annual and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act and we will generally be exempt from filing quarterly reports with the SEC under the Exchange Act. We will also be exempt from the provisions of Regulation FD, which prohibits the selective disclosure of material nonpublic information to, among others, broker-dealers and holders of a company’s securities under circumstances in which it is reasonably foreseeable that the holder will trade in the company’s securities on the basis of the information. Even though we intend to comply voluntarily with Regulation FD, these exemptions and leniencies will reduce the frequency and scope of information and protections to which you are entitled as an investor.

We are not required to comply with the proxy rules applicable to U.S. domestic companies, including the requirement applicable to emerging growth companies to disclose the compensation of our Chief Executive Officer and other two most highly compensated executive officers on an individual, rather than on an aggregate, basis. Nevertheless, a recent amendment

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to the regulations promulgated under the Israeli Companies Law will require us, after we become a public company, to disclose in the notice of convening an annual general meeting the annual compensation of our five most highly compensated office holders on an individual basis, rather than on an aggregate basis, as was previously permitted for Israeli public companies listed overseas. This disclosure will not be as extensive as that required of a U.S. domestic issuer. We intend to commence providing such disclosure, at the latest, in the annual proxy statement for our 2015 annual meeting of shareholders, which will be furnished under cover of a Form 6-K, and we may elect to provide such information at an earlier date.

We would lose our foreign private issuer status if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We would also be required to follow U.S. proxy disclosure requirements, including the requirement to disclose more detailed information about the compensation of our senior executive officers on an individual basis. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we would lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.

We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our ordinary shares less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 effective on April 5, 2012, or the JOBS Act, and we may take advantage of certain exemptions from various requirements that are applicable to other public companies that are not emerging growth companies. Most of such requirements relate to disclosures that we would only be required to make if we cease to be a foreign private issuer in the future. Nevertheless, as a foreign private issuer that is an emerging growth company, we will not be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for up to five fiscal years after the date of this offering. We will remain an emerging growth company until the earliest of: (a) the last day of our fiscal year during which we have total annual gross revenues of at least $1.0 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above. We cannot predict if investors will find our ordinary shares less attractive as a result of our reliance on exemptions under the JOBS Act. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more volatile.

We have not yet determined whether our existing internal controls over financial reporting systems are compliant with Section 404 of the Sarbanes-Oxley Act, and we cannot provide any assurance that there are no material weaknesses or significant deficiencies in our existing internal controls.

Pursuant to Section 404 of the Sarbanes-Oxley Act and the related rules adopted by the SEC and the Public Company Accounting Oversight Board, starting with the second annual report that we file with the SEC after the consummation of this offering, our management will be required to report on the effectiveness of our internal control over financial reporting. In addition, once we no longer qualify as an “emerging growth company” under the JOBS Act and lose the ability to rely on the exemptions related thereto discussed above, our independent registered public accounting firm will also need to attest to the effectiveness of our internal control over financial reporting under Section 404. We have not yet commenced the process of determining whether our existing internal controls over financial reporting systems are compliant with Section 404 and whether there are any material weaknesses or significant deficiencies in our existing internal controls. This process will require the investment of substantial time and resources, including by our Chief Financial Officer and other members of our senior management. In addition, we cannot predict the outcome of this determination and whether we will need to implement remedial actions in order to implement effective internal control over financial reporting. The determination and any remedial actions required could result in us incurring additional costs that we did not anticipate. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. As a result, we may experience higher than anticipated operating expenses, as well as higher independent auditor fees during and after the implementation of these changes. If we are unable to implement any of the required changes

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to our internal control over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our operations, financial reporting and/or results of operations and could result in an adverse opinion on internal controls from our independent auditors.

Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company.

Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be determined in part by the market value of our ordinary shares, which is subject to change) are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. Our status as a PFIC may also depend on how quickly we use the cash proceeds from this offering in our business. Based on certain estimates of our gross income and gross assets, our receipt of the net proceeds of this offering, and the nature of our business, we do not expect that we will be classified as a PFIC for the taxable year ending December 31, 2015. There can be no assurance that we will not be considered a PFIC for any taxable year. If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than as capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are U.S. Holders (as defined in “U.S. and Israeli Tax Consequences for our Shareholders—United States Federal Income Tax Consequences”), and having interest charges apply to distributions by us and the proceeds of share sales. Certain elections exist that may alleviate some of the adverse consequences of PFIC status and would result in an alternative treatment (such as mark-to-market treatment) of our ordinary shares; however, we do not intend to provide the information necessary for U.S. holders to make qualified electing fund elections if we are classified as a PFIC.

Risks Related to Our Operations in Israel

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

Our headquarters, research and development and manufacturing facility, and the manufacturing facilities of our third-party manufacturers, are located in Israel. In addition, the majority of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. In recent years, these have included hostilities between Israel and Hezbollah in Lebanon and Hamas in the Gaza strip, both of which resulted in rockets being fired into Israel, causing casualties and disruption of economic activities. In addition, Israel faces threats from more distant neighbors, in particular, Iran. Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflict involving Israel could adversely affect our operations and results of operations.

Further, our operations could be disrupted by the obligations of personnel to perform military service. As of December 31, 2014, we had 166 employees based in Israel, certain of whom may be called upon to perform up to 54 days in each three year period (and in the case of non-officer commanders or officers, up to 70 or 84 days, respectively, in each three year period) of military reserve duty until they reach the age of 40 (and in some cases, depending on their specific military profession up to 45 or even 49 years of age) and, in certain emergency circumstances, may be called to immediate and unlimited active duty. Our operations could be disrupted by the absence of a significant number of employees related to military service, which could materially adversely affect our business and results of operations.

Several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies whether as a result of hostilities in the region or otherwise. In addition, there have been increased efforts by activists to cause companies and consumers to boycott Israeli goods based on Israeli government policies. Such actions, particularly if they become more widespread, may adversely impact our ability to sell our solutions.

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In addition, the shipping and delivery of our systems and ink and other consumables from our manufacturing facilities and those of our third-party manufacturers in Israel could be delayed or interrupted by political, economic, military, and other events outside of our reasonable control, including labor strikes at ports in Israel or at ports of destination, military attacks on transportation facilities or vessels, and severe weather events. If delivery and installation of our products is delayed or prevented by any such events, our revenues could be materially and adversely impacted.

The government tax benefits that we currently receive require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs.

We and our wholly-owned Israeli subsidiary, Kornit Digital Technologies Ltd., or Kornit Technologies, are entitled to various tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959, or the Investment Law. As a result of this status, the effective tax rate for our taxable income generated in Israel is expected to be between zero and 5% starting in 2014. However, if we do not meet the requirements for maintaining these benefits, they may be reduced or cancelled and the relevant operations would be subject to Israeli corporate tax at the standard rate, which is currently set at 26.5% for 2014 and onwards. In addition to being subject to the standard corporate tax rate, we could be required to refund any tax benefits that we have already received, plus interest and penalties thereon. Even if we continue to meet the relevant requirements, the tax benefits that our current beneficiary enterprises receive may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example, via acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs. See “Taxation and Israeli Government Programs Applicable to our Company—Law for the Encouragement of Capital Investments, 5719-1959.”

We received Israeli government grants for certain research and development activities. The terms of those grants require us to satisfy specified conditions and to pay penalties in addition to repayment of the grants upon certain events.

Our research and development efforts were financed in part through grants from the Israeli Office of the Chief Scientist, or OCS, totaling approximately $0.2 million. As of December 31, 2014, the balance of the principal and interest in respect of our commitments for future payments to the OCS totals approximately $0.2 million. Even following full repayment of any OCS grants, we must nevertheless continue to comply with the requirements of the Israeli Law for the Encouragement of Industrial Research and Development, 5744-1984, and related regulations, or collectively, the R&D Law. When a company develops know-how, technology or products using OCS grants, the terms of these grants and the R&D Law restrict the transfer outside of Israel of such know-how, and the manufacturing or manufacturing rights of such products, technologies or know-how, without the prior approval of the OCS. Therefore, if aspects of our technologies are deemed to have been developed with OCS funding, the discretionary approval of an OCS committee would be required for any transfer to third parties outside of Israel of know-how or manufacturing or manufacturing rights related to those aspects of such technologies. We may not receive those approvals. Furthermore, the OCS may impose certain conditions on any arrangement under which it permits us to transfer technology out of Israel.

The transfer of OCS-supported technology or know-how outside of Israel may involve the payment of significant penalties and other amounts, depending upon the value of the transferred technology or know-how, the amount of OCS support, the time of completion of the OCS-supported research project and other factors. These restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer manufacturing activities with respect to any product or technology outside of Israel. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with OCS funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the OCS.

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

Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital, otherwise, the acquirer may not own more than 90% of a company’s issued and outstanding share capital. Completion of the

24

tender offer also requires approval of a majority in number of the offerees that do not have a personal interest in the tender offer, unless at least 98% of the company’s outstanding shares are tendered. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer (unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek appraisal rights), may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition. See “Description of Share Capital—Acquisitions under Israeli Law” for additional information.

Our articles of association provide that our directors (other than external directors) are elected on a staggered basis, such that a potential acquirer cannot readily replace our entire board of directors at a single annual general shareholder meeting.

Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers involving an exchange of shares, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions in which the sellers receive shares in the acquiring entity that are publicly traded on a stock exchange, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of such shares has occurred. In order to benefit from the tax deferral, a pre-ruling from the Israel Tax Authority might be required.

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

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

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

The rights and responsibilities of the holders of our ordinary shares are governed by our articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who is aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.

25

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. In some cases, you can identify forward-looking statements by terminology such as “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms or other similar expressions. The statements we make regarding the following matters are forward-looking by their nature:

   our expectations regarding our future gross margins and operating expenses;

   our expectations regarding our growth and overall profitability;

   our expectations regarding the impacts of variability on our future revenues;

   our expectations regarding drivers of our future growth, including anticipated sales growth, penetration of new markets, and expansion of our customer base;

   our plans to expand into new product markets;

   our plans to continue to invest in research and development to introduce new systems and improved solutions;

   our expectations regarding the success of our new products and systems;

   the impact of government laws and regulations;

   our expectations regarding our tax classifications and reserves;

   our expectations regarding our anticipated cash requirements for the next 12 months;

   our plans to expand our international operations;

   our plans to file and procure additional patents relating to our intellectual property rights and the adequate protection of these rights;

   our plans to pursue strategic acquisitions or invest in complementary companies, products or technologies;

   our expectations regarding the time during which we will be an emerging growth company under the JOBS Act; and

   our expectations regarding the use of proceeds from this offering.

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, levels of activity, performance or achievements to differ materially from the results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the risks provided under “Risk Factors” in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus, to conform these statements to actual results or to changes in our expectations.

26

USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, of approximately $63.5 million, or approximately $73.4 million if the underwriters exercise in full their option to purchase additional ordinary shares.

The principal purposes of this offering are to obtain additional capital, to increase our financial flexibility and visibility in the marketplace, to create a public market for our ordinary shares and to facilitate our future access to the public equity markets. While we do not currently have specific plans for the net proceeds resulting from this offering, we expect to use the net proceeds for general corporate purposes. We do not currently have any acquisitions or investments planned however we may use a portion of the net proceeds to acquire or invest in complementary companies, products or technologies in the future. We will have broad discretion over the uses of the net proceeds in this offering, and, as of the date of this prospectus, we have not allocated the net proceeds to particular uses. We believe this will afford us significant flexibility to pursue our business strategies. Until we use the net proceeds we receive from this offering, we intend to invest those proceeds in short-term, investment-grade interest-bearing securities.

27

DIVIDEND POLICY

We have never declared or paid cash dividends to our shareholders and we do not intend to pay cash dividends in the foreseeable future. We currently intend to reinvest any earnings in developing and expanding our business. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on a number of factors, including future earnings, our financial condition, operating results, contractual restrictions, capital requirements, business prospects, our strategic goals and plans to expand our business, applicable law and other factors that our board of directors may deem relevant.

As a result, capital appreciation, if any, of our ordinary shares will be investors’ sole source of gain for the foreseeable future. In addition, Israeli law limits our ability to declare and pay dividends, and may subject our dividends to Israeli withholding taxes. Furthermore, our payment of dividends (out of tax-exempt income) may retroactively subject us to certain Israeli corporate income taxes, to which we would not otherwise be subject.

28

CAPITALIZATION

The following table presents our capitalization as of December 31, 2014:

•   on an actual basis;

•   on a pro forma basis, to give effect to the conversion of all outstanding Series A-1 preferred shares into 12,628,741 ordinary shares immediately prior to the closing of this offering; and

•   on a pro forma as adjusted basis, to give further effect to (1) the issuance of ordinary shares in this offering, at the initial public offering price of $10.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and (2) the adoption of our amended and restated articles of association to be effective upon the closing of this offering.

You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

 

As of December 31, 2014

 

 

 

Actual

 

 

Pro forma

 

 

Pro forma
as adjusted

 

 

 

(in thousands, except share and per share data)

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

Ordinary shares, NIS 0.01 par value: 26,345,297 shares authorized (actual and pro forma) and 200,000,000 shares authorized (pro forma as adjusted); 8,973,224 shares issued and outstanding (actual), 21,601,965 shares issued and outstanding (pro forma), and 28,701,965 shares issued and outstanding (pro forma as adjusted)(1)

 

$

22

 

 

$

54

 

 

$

72

 

Series A-1 preferred shares, NIS 0.01 par value: 1,927,220 shares authorized (actual) and no shares authorized (pro forma and pro forma as adjusted); 1,927,140 shares issued and outstanding (actual) and no shares issued and outstanding (pro forma and pro forma as adjusted)

 

 

32

 

 

 

 

 

 

 

Additional paid-in capital

 

 

12,770

 

 

 

12,770

 

 

 

75,943

 

Accumulated other comprehensive loss

 

 

(146

)

 

 

(146

)

 

 

(146

)

Retained earnings

 

 

6,673

 

 

 

6,673

 

 

 

6,673 

 

Total shareholders’ equity

 

 

19,351

 

 

 

19,351

 

 

 

82,542

 

Total capitalization

 

$

19,351

 

 

$

19,351

 

 

$

82,542

 

_____________

(1)   On March 17, 2015, we effected a 1-for-6.5531 share split by means of a share dividend of 5.5531 ordinary shares for each ordinary share then outstanding. The number of authorized and outstanding shares has been adjusted to reflect this share split.

The preceding table excludes 2,640,564 ordinary shares reserved for issuance under our equity incentive plans as of December 31, 2014 in respect of which we had outstanding options to purchase 2,578,328 ordinary shares at a weighted average exercise price of $1.47 per share.

29

DILUTION

If you invest in our ordinary shares in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per ordinary share after this offering. On a pro forma basis, our consolidated net tangible book value as of December 31, 2014 was $19.1 million, or $0.88 per ordinary share. Pro forma consolidated net tangible book value per ordinary share was calculated by:

   subtracting our consolidated liabilities from our consolidated tangible assets; and

   dividing the difference by the number of ordinary shares outstanding on a pro forma basis.

After giving effect to adjustments relating to this offering, our pro forma as adjusted consolidated net tangible book value on December 31, 2014 would have been approximately $81.6 million, equivalent to $2.84 per ordinary share. The adjustments made to determine our pro forma as adjusted consolidated net tangible book value are: (1) the conversion of all outstanding Series A-1 preferred shares into 12,628,741 ordinary shares; (2) an increase in consolidated tangible assets to reflect the net proceeds of this offering received by us as described under “Use of Proceeds”; (3) the addition of the 7,100,000 ordinary shares offered in this prospectus to the number of ordinary shares outstanding; (4) a one-time payment in the aggregate amount of $750,000 to our sponsor, Fortissimo Capital, in connection with the termination of our existing management services agreement with them; and (5) a payment of $250,000 in the aggregate to certain of our employees, including some of our executive officers, for their contribution to completing this offering.

The following table illustrates the immediate increase in our pro forma as adjusted consolidated net tangible book value of $1.61 per ordinary share and the immediate pro forma as adjusted dilution to new investors:

Initial public offering price per ordinary share

 

 

 

 

 

$

10.00

 

Pro forma consolidated net tangible book value per ordinary share as of December 31, 2014

 

$

0.88

 

 

 

 

 

Increase in net tangible book value per ordinary share attributable to the offering

 

 

1.96

 

 

 

 

 

Pro forma as adjusted net tangible book value per ordinary share after giving effect to the offering

 

 

 

 

 

 

2.84

 

Dilution per ordinary share to new investors

 

 

 

 

 

$

7.16

 

The table below summarizes, as of December 31, 2014, on the pro forma as adjusted basis described above, the differences between the number of ordinary shares purchased from us, the total consideration paid and the weighted average price per ordinary share paid by existing shareholders, on the one hand, and by new investors purchasing our ordinary shares in this offering, on the other hand, at the initial public offering price of $10.00 per ordinary share before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

Shares Purchased

 

 

Total Consideration

 

 

Average Price

 

 

 

Number

 

 

%

 

 

Amount

 

 

%

 

 

per Share

 

Existing shareholders

 

 

21,601,965

 

 

 

75.3

%

 

$

10,734,179

 

 

 

13.1

%

 

$

0.50

 

New investors

 

 

7,100,000

 

 

 

24.7

 

 

 

71,000,000

 

 

 

86.9

 

 

 

10.00

 

Total

 

 

28,701,965

 

 

 

100.0

%

 

$

81,734,179

 

 

 

100.0

%

 

 

 

 

The above discussion and tables are based on 28,701,965 ordinary shares issued and outstanding as of December 31, 2014, on a pro forma as adjusted basis as described above.

30

The discussion and table above assume no exercise of the underwriters’ option to purchase additional ordinary shares. If the underwriters exercise their option to purchase additional ordinary shares in full, the pro forma number of our ordinary shares held by new investors will increase to 8,165,000, or approximately 27.4%, of the total pro forma number of our ordinary shares outstanding after this offering.

The preceding table excludes 2,640,564 ordinary shares reserved for issuance under our equity incentive plans as of December 31, 2014 in respect of which we had outstanding options to purchase 2,578,328 ordinary shares at a weighted average exercise price of $1.47 per share.

If all of such outstanding options were exercised, pro forma as adjusted consolidated net tangible book value per share would be $2.73, dilution per ordinary share to new investors would be $7.27, the number of shares held by our existing shareholders would increase to 24,180,293, constituting 77.3% of our total issued shares (while new shareholders in this offering would only hold 22.7% of our issued shares), the total consideration amount paid by existing shareholders would increase to $14.5 million, or 17.0% of total consideration received by us for our shares (while the percentage of consideration paid by new shareholders in this offering would decrease to 83.0%) and the average price per share paid by our existing shareholders would instead be $0.60.

31

SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth our selected consolidated financial data. You should read the following selected consolidated financial data in conjunction with, and it is qualified in its entirety by reference to, our historical financial information and other information provided in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

The selected consolidated statements of income data for the years ended December 31, 2012, 2013 and 2014 and selected consolidated balance sheet data as of December 31, 2013 and 2014 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2012 has been derived from our audited consolidated financial statements not appearing in this prospectus. The historical results set forth below are not necessarily indicative of the results to be expected in future periods. Our financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP.

 

 

Year Ended December 31,

 

 

 

2012

 

 

2013

 

 

2014

 

 

 

(in thousands, except share amounts and per share data)

Consolidated Statements of Income:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

39,167

 

 

$

49,395

 

 

$

66,364

 

Cost of revenues(1)

 

 

22,741

 

 

 

27,953

 

 

 

37,187

 

Gross profit

 

 

16,426

 

 

 

21,442

 

 

 

29,177

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(1)

 

 

4,839

 

 

 

7,443

 

 

 

9,475

 

Sales and marketing(1)

 

 

4,668

 

 

 

7,734

 

 

 

10,616

 

General and administrative(1)

 

 

3,092

 

 

 

3,278

 

 

 

5,266

 

Total operating expenses

 

 

12,599

 

 

 

18,455

 

 

 

25,357

 

Operating income

 

 

3,827

 

 

 

2,987

 

 

 

3,820

 

Finance expenses, net

 

 

285

 

 

 

460

 

 

 

15

 

Income before taxes on income

 

 

3,542

 

 

 

2,527

 

 

 

3,805

 

Taxes on income

 

 

1,228

 

 

 

1,393

 

 

 

782

 

Net income

 

$

2,314

 

 

$

1,134

 

 

$

3,023

 

Net earnings per ordinary share(2)

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.26

 

 

$

0.13

 

 

$

0.34

 

Diluted

 

$

0.24

 

 

$

0.11

 

 

$

0.29

 

Weighted average number of ordinary shares used in computing income per ordinary share(2)

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

8,953,565

 

 

 

8,953,565

 

 

 

8,969,588

 

Diluted

 

 

9,649,573

 

 

 

9,880,049

 

 

 

10,446,353

 

Pro forma net earnings per ordinary share(3)

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

$

0.14

 

Diluted

 

 

 

 

 

 

 

 

 

$

0.13

 

Weighted average number of ordinary shares used in computing pro forma income per ordinary share(3):

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

21,598,329

 

Diluted

 

 

 

 

 

 

 

 

 

 

23,075,094

 

32

 

 

As of December 31,

 

 

 

2012

 

 

2013

 

 

2014

 

 

 

(in thousands)

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,663

 

 

$

5,329

 

 

$

4,993

 

Working capital(4)

 

 

12,193

 

 

 

12,881

 

 

 

15,186

 

Total assets

 

 

24,407

 

 

 

31,627

 

 

 

34,714

 

Total long-term liabilities

 

 

1,372

 

 

 

1,617

 

 

 

2,025

 

Total shareholders’ equity

 

 

14,311

 

 

 

15,608

 

 

 

19,351

 

 

 

 

Year Ended

December 31,

 

 

 

2012

 

 

2013

 

 

2014

 

 

 

(in thousands)

 

Supplemental Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA(5)

 

$

4,690

 

 

$

4,281

 

 

$

6,069

 

______________

(1) Includes share-based compensation expense as follows:

 

 

Year Ended

December 31,

 

 

 

2012

 

 

2013

 

 

2014

 

 

 

(in thousands)

 

Share-based Compensation Expense:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

$

10

 

 

$

11

 

 

$

96

 

Research and development

 

 

13

 

 

 

21

 

 

 

86

 

Sales and marketing

 

 

36

 

 

 

66

 

 

 

207

 

General and administrative

 

 

18

 

 

 

28

 

 

 

508

 

Total share-based compensation expense

 

$

77

 

 

$

126

 

 

$

897

 

______________

 (2) Basic and diluted net earnings per ordinary share is computed based on the basic and diluted weighted average number of ordinary shares outstanding during each period. For additional information, see note 2v and 10 to our consolidated financial statements included elsewhere in this prospectus.

(3)   Pro forma basic and diluted net earnings per ordinary share and pro forma weighted average shares outstanding assumes the conversion of all of our outstanding preferred shares into ordinary shares, which will occur upon the closing of this offering, but does not give effect to the issuance of shares in connection with this offering. For additional information on the conversion of the preferred shares see note 2c to our consolidated financial statements included elsewhere in this prospectus.

(4)   Working capital is defined as total current assets minus total current liabilities.

(5)   The following table reconciles net income to Adjusted EBITDA for the periods presented:

 

 

Year Ended December 31,

 

 

 

2012

 

 

2013

 

 

2014

 

 

 

(in thousands)

 

Reconciliation of Net Income to Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,314

 

 

$

1,134

 

 

$

3,023

 

Finance expenses, net

 

 

285

 

 

 

460

 

 

 

15

 

Taxes on income

 

 

1,228

 

 

 

1,393

 

 

 

782

 

Depreciation and amortization

 

 

786

 

 

 

1,168

 

 

 

1,352

 

Share-based compensation expense

 

 

77

 

 

 

126

 

 

 

897