Registration No. 333-    

 

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 September 30, 2014, had an installed base of over 1,200 systems globally. As of September 30, 2014, we had 254 employees located across four regions: Israel, the United States, Europe and the Asia Pacific region. For the fiscal year ended December 31, 2013, we generated revenues of $49.4 million, representing an increase of 26.1% over the prior fiscal year, and recorded net income of $1.1 million. In 2013, we generated 56.2% of our revenues from the Americas, 29.0% from EMEA and 14.8% from the Asia Pacific region. For the nine months ended September 30, 2014, we generated revenues of $47.5 million, representing a 38.9% increase compared to the nine months ended September 30, 2013, and recorded net income of $1.8 million. For the nine months ended September 30, 2014, we generated 54.1% of our revenues from the Americas, 29.3% from EMEA and 16.6% 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.

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 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 teams’ 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.

•   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.

Our Principal Shareholder

Following the closing of this offering, entities affiliated with Fortissimo Capital Fund II (Israel) L.P. will beneficially own          % of our outstanding shares in the aggregate (or           % 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.

The Offering

Ordinary shares we are offering	ordinary shares (or               if the underwriters exercise in full their option to purchase additional ordinary shares)
Ordinary shares to be outstanding immediately after this offering	ordinary shares (or               if the underwriters exercise in full their option to purchase additional ordinary shares)
Use of proceeds	We estimate that we will receive net proceeds from this offering of approximately $               million, or $               million if the underwriters exercise in full their option to purchase additional ordinary shares, based on an assumed initial public offering price of $          , the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, sales and marketing activities, research and development, and general and administrative matters. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we are not currently a party to, or involved with, discussions regarding any material acquisition that is probable. 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 Market  symbol	We intend to apply to have our ordinary shares listed on the NASDAQ Global Market under the symbol “KRNT.”

Unless otherwise indicated, the number of ordinary shares to be outstanding after this offering is based on 3,296,450 ordinary shares outstanding as of November 30, 2014 assuming the conversion of all outstanding Series A-1 preferred shares into an equal number of ordinary shares and excludes 402,149 ordinary shares reserved for issuance under our equity incentive plans in respect of which, as of September 30, 2014, we had outstanding options to purchase 333,932 ordinary shares at a weighted average exercise price of $8.96 per share.

Unless otherwise indicated, all information in this prospectus:

•   reflects the conversion of all outstanding Series A-1 preferred shares into an equal number of ordinary shares which will occur immediately prior to the closing of this offering;

•   assumes an initial public offering price of $          per ordinary share, the midpoint of the price range set forth on the cover page of this prospectus;

•   assumes no exercise by the underwriters of their option to purchase up to an additional          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          -for-          share split effected on          by means of a share dividend of          ordinary shares for each ordinary share then outstanding.

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 and 2013 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The summary consolidated statements of income data for the nine months ended September 30, 2013 and 2014 and the summary consolidated balance sheet data as of September 30, 2014 are derived from our unaudited interim consolidated financial statements included 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,								Nine Months Ended  September 30,
		2012				2013				2013				2014
		(in thousands, except share amounts and per share data)
Consolidated Statements of Income:
Revenues		$	39,167			$	49,395			$	34,185			$	47,495
Cost of revenues(1)			22,741				27,953				19,652				26,855
Gross profit			16,426				21,442				14,533				20,640
Operating expenses:
Research and development(1)			4,839				7,443				4,878				6,851
Sales and marketing(1)			4,668				7,734				5,357				7,569
General and administrative(1)			3,092				3,278				2,366				3,716
Total operating expenses			12,599				18,455				12,601				18,136
Operating income			3,827				2,987				1,932				2,504
Finance expenses, net			285				460				333				199
Income before taxes on income			3,542				2,527				1,599				2,305
Taxes on income			1,228				1,393				1,013				476
Net income		$	2,314			$	1,134			$	586			$	1,829
Net earnings per ordinary share(2)
Basic		$	1.69			$	0.83			$	0.43			$	1.34
Diluted		$	1.57			$	0.75			$	0.39			$	1.18
Weighted average number of ordinary shares used in computing income per ordinary share(2)
Basic			1,366,310				1,366,310				1,366,310				1,368,565
Diluted			1,472,521				1,507,690				1,506,672				1,547,013
Pro forma net earnings per ordinary share(3)
Basic						$	0.34							$	0.56
Diluted						$	0.33							$	0.53
Weighted average number of ordinary shares used in computing pro forma income per ordinary share(3):
Basic							3,293,450								3,295,705
Diluted							3,434,830								3,474,153

		As of September 30, 2014
		Actual				Pro forma(4)			Pro forma as adjusted(4)
		(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	4,273
Working capital(5)			14,799
Total assets			32,096
Total long-term liabilities			1,978
Total shareholders’ equity			17,799

 

		Year Ended December 31,								Nine Months Ended  September 30,
		2012				2013				2013				2014
		(in thousands)
Supplemental Financial Data:
Adjusted EBITDA(6)		$	4,690			$	4,281			$	2,915			$	4,021

___________________

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

		Year Ended December 31,								Nine Months Ended  September 30,
		2012				2013				2013				2014
		(in thousands)
Share-based Compensation Expense:
Cost of revenues		$	10			$	11			$	8			$	59
Research and development			13				21				14				43
Sales and marketing			36				66				50				122
General and administrative			18				28				20				289
Total share-based compensation expense		$	77			$	126			$	92			$	513

(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 2w 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 2d to our consolidated financial statements included elsewhere in this prospectus.

(4)  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          ordinary shares in this offering at an assumed initial public offering price of $          per ordinary share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, (c) a one-time payment in the aggregate amount of $          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.

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

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

		Year Ended December 31,								Nine Months Ended  September 30,
		2012				2013				2013				2014
		(in thousands)
Reconciliation of Net Income to Adjusted EBITDA:
Net income		$	2,314			$	1,134			$	586			$	1,829
Finance expenses, net			285				460				333				199
Taxes on income			1,228				1,393				1,013				476
Depreciation and amortization			786				1,168				891				1,004
Share-based compensation expense			77				126				92				513
Adjusted EBITDA		$	4,690			$	4,281			$	2,915			$	4,021

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 euro (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).

 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 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 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

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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 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.

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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 intended use of 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, 2014. 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 September 30, 2014, we had 169 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.

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.

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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. As of December 31, 2013, 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 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.

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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.

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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 develop 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 and increase our global 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.

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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 $          million, or approximately $          million if the underwriters exercise in full their option to purchase additional ordinary shares, based on an assumed initial public offering price of $          per ordinary share.

A $1.00 increase (decrease) in the assumed initial public offering price of $          per ordinary share would increase (decrease) the net proceeds that we receive from this offering by approximately $          million, assuming that the number of ordinary shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 100,000 shares in the number of ordinary shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $          million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

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. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, sales and marketing activities, research and development, and general and administrative matters. We do not currently have any material acquisitions or investments planned however we may use a portion of the net proceeds to acquire or invest in complementary companies, products or technologies. 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. Until we use the proceeds we receive from this offering for the above mentioned purposes, we intend to invest the net proceeds in short-term, investment-grade interest-bearing securities.

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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.

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CAPITALIZATION

The following table presents our capitalization as of September 30, 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 an equal number of ordinary shares immediately prior to the closing of this offering; and

•   on a pro forma as adjusted basis, to give further effect to the issuance of ordinary shares in this offering, at an assumed initial public offering price of $          per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

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 September 30, 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: 4,020,280 shares authorized (actual and pro forma) and          shares authorized (pro forma as adjusted); 1,369,310 shares issued and outstanding (actual), 3,296,450 shares issued and outstanding (pro forma), and           shares issued and outstanding (pro forma as adjusted)		$	3			$				$
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)			5				—				—
Additional paid-in capital			12,432
Accumulated other comprehensive income (loss)			(120	)
Retained earnings			5,479
Total shareholders’ equity			17,799
Total capitalization		$	17,799			$				$

The preceding table excludes 402,149 ordinary shares reserved for issuance under our equity incentive plans as of September 30, 2014 in respect of which we had outstanding options to purchase 333,932 ordinary shares at a weighted average exercise price of $8.96 per share.

A $1.00 increase (decrease) in the assumed initial public offering price of $          would increase (decrease) the pro forma as adjusted amount of each of additional paid-in capital, total shareholders’ equity and total capitalization by approximately $          million, assuming that the number of ordinary shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

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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 September 30, 2014 was $          million, or $          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 September 30, 2014 would have been approximately $          million, equivalent to $          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 an equal number of 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          ordinary shares offered in this prospectus to the number of ordinary shares outstanding; (4) a one-time payment in the aggregate amount of $          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 $          per ordinary share and the immediate pro forma as adjusted dilution to new investors:

Assumed initial public offering price per ordinary share						$
Pro forma consolidated net tangible book value per ordinary share as of September 30, 2014		$
Increase in net tangible book value per ordinary share attributable to the offering
Pro forma as adjusted net tangible book value per ordinary share after giving effect to the offering
Dilution per ordinary share to new investors						$

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

The table below summarizes, as of September 30, 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 an assumed initial public offering price of $        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								%		$						%		$
New investors
Total							100	%		$					100	%

The above discussion and tables are based on          ordinary shares issued and outstanding as of September 30, 2014, on a pro forma as adjusted basis as described above.

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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          , or approximately           %, of the total pro forma number of our ordinary shares outstanding after this offering.

The preceding table excludes 402,149 ordinary shares reserved for issuance under our equity incentive plans as of September 30, 2014 in respect of which we had outstanding options to purchase 333,932 ordinary shares at a weighted average exercise price of $8.96 per share.

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

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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 and 2013 and selected consolidated balance sheet data as of December 31, 2012 and 2013 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated statements of income data for the nine months ended September 30, 2013 and 2014 and the selected consolidated balance sheet data as of September 30, 2014 are derived from our unaudited interim consolidated financial statements included 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,								Nine Months Ended  September 30,
		2012				2013				2013				2014
		(in thousands, except share amounts and per share data)
Consolidated Statements of Income:
Revenues		$	39,167			$	49,395			$	34,185			$	47,495
Cost of revenues(1)			22,741				27,953				19,652				26,855
Gross profit			16,426				21,442				14,533				20,640
Operating expenses:
Research and development(1)			4,839				7,443				4,878				6,851
Sales and marketing(1)			4,668				7,734				5,357				7,569
General and administrative(1)			3,092				3,278				2,366				3,716
Total operating expenses			12,599				18,455				12,601				18,136
Operating income			3,827				2,987				1,932				2,504
Finance expenses, net			285				460				333				199
Income before taxes on income			3,542				2,527				1,599				2,305
Taxes on income			1,228				1,393				1,013				476
Net income		$	2,314			$	1,134			$	586			$	1,829
Net earnings per ordinary share(2)
Basic		$	1.69			$	0.83			$	0.43			$	1.34
Diluted		$	1.57			$	0.75			$	0.39			$	1.18
Weighted average number of ordinary shares used in computing income per ordinary share(2)
Basic			1,366,310				1,366,310				1,366,310				1,368,565
Diluted			1,472,521				1,507,690				1,506,672				1,547,013
Pro forma net earnings per ordinary share(3)
Basic						$	0.34							$	0.56
Diluted						$	0.33							$	0.53
Weighted average number of ordinary shares used in computing pro forma income per ordinary share(3):
Basic							3,293,450								3,295,705
Diluted							3,434,830								3,474,153

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		As of December 31,								As of September
		2012				2013				30, 2014
		(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	4,663			$	5,329			$	4,273
Working capital(4)			12,193				12,881				14,799
Total assets			24,407				31,627				32,096
Total long-term liabilities			1,372				1,617				1,978
Total shareholders’ equity			14,311				15,608				17,799

 

		Year Ended  December 31,								Nine Months Ended  September 30,
		2012				2013				2013				2014
		(in thousands)
Supplemental Financial Data:
Adjusted EBITDA(5)		$	4,690			$	4,281			$	2,915			$	4,021

__________________

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

		Year Ended December 31,								Nine Months Ended  September 30,
		2012				2013				2013				2014
		(in thousands)
Share-based Compensation Expense:
Cost of revenues		$	10			$	11			$	8			$	59
Research and development			13				21				14				43
Sales and marketing			36				66				50				122
General and administrative			18				28				20				289
Total share-based compensation expense		$	77			$	126			$	92			$	513

__________________

(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 2w 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 2d 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,								Nine Months Ended  September 30,
		2012				2013				2013				2014
		(in thousands)
Reconciliation of Net Income to Adjusted EBITDA:
Net income		$	2,314			$	1,134			$	586			$	1,829
Finance expenses, net			285				460				333				199
Taxes on income			1,228				1,393				1,013				476
Depreciation and amortization			786				1,168				891				1,004
Share-based compensation expense			77				126				92				513
Adjusted EBITDA		$	4,690			$	4,281			$	2,915			$	4,021

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

The following discussion should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this prospectus. You should read the following discussion in conjunction with “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”

Overview

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.

Our business is driven by the changing dynamics in the global printed textile industry, which is undergoing a transition from analog to digital printing methods. Recent technological advancements in digital printing technology have enabled printing of high resolution images and designs on textiles in large volumes and at high throughput levels. For example, these capabilities have enabled online businesses, whose business models are tailored to the growing demand for customized and personalized goods, to cater to customers who order single units or small runs of a particular design. We have identified the high throughput segment of the DTG market as a high growth area and have therefore focused our solutions to primarily address that area. We believe our early innovation in digital printing solutions has enabled us to evolve into a company that provides a comprehensive digital printing solution for the growing global printed textile industry and seek to further our presence by penetrating the roll-to-roll, or R2R, market in the next 18 months.

We offer a broad portfolio of digital printing systems for the DTG market. We target customers that manufacture textiles in large quantities with a variety of high throughput digital printing systems. We market our systems to different customers based on their desired throughput level, overall cost of ownership, the allowable space in their manufacturing facilities, the degree of preexisting knowledge they have of printing among other considerations. Most of our sales in recent years have been to high throughput manufacturers, which we believe will continue to grow in the next several years. At the same time, we are seeking to expand our presence into the mass production market with the commercial launch of our Vulcan system, targeted to occur within the next 24 months. Furthermore, we believe that our advanced technology and years of experience in digital textile printing will enable us to penetrate the R2R market after the commercial launch of our Allegro system, which is targeted within the next 18 months. Our solutions also include our proprietary NeoPigment ink and other consumables, associated software and value added services.

We sell the majority of our solutions through a global network of approximately 50 independent distributors and value added resellers that we refer to as our channel partners. Our channel partners, in turn, sell the solutions they purchase from us to customers directly or, in some cases, act as facilitators of our direct sales process. Our independent distributors are generally responsible for identifying potential leads, working with our sales force to convert leads into buying customers and maintaining relationships with our customers. Maintenance and support for our systems is performed either by our own service organization or by service engineers employed by our distributors. This varies among the four regions that we currently serve, depending on the infrastructure we have established in each particular region. We provide professional services directly to some of our customers in all regions.

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We have an attractive business model that results in recurring sales of ink and other consumables driven by our growing installed base of systems. Our ink and other consumables are specially formulated to enable our systems to operate at the highest throughput level while adhering to high print quality requirements.

We intend to capitalize on the continued growth of the DTG market by expanding our diverse global customer base, with particular focus on the fast-growing web-to-print businesses. We also seek to increase our sales to existing customers, particularly sales of our ink and other consumables. We plan to accomplish these goals by investing in our direct sales force, developing new applications for existing systems, introducing new solutions and growing our relationships with channel partners. Since sales of our ink and other consumables are directly linked to the number and mix of our systems that are sold, installed and active worldwide, engaging with our customers before and after sales is a key contributor to growth. We intend to drive growth by focusing our efforts on sales of our higher throughput industrial systems, which generally utilize larger amounts of ink and other consumables due to their greater capacity and higher throughput levels.

We were founded in 2002 in Israel, shipped our first system in 2005 and, as of September 30, 2014, had an installed base of over 1,200 systems globally. As of September 30, 2014, we had 254 employees located across four regions: Israel, the United States, Europe and the Asia Pacific region. For the fiscal year ended December 31, 2013, we generated revenues of $49.4 million, representing a 26.1% increase over the prior fiscal year, and recorded net income of $1.1 million. In 2013, we generated 56.2% of our revenues from the Americas, 29.0% from EMEA and 14.8% from the Asia Pacific region. For the nine months ended September 30, 2014, we generated revenues of $47.5 million, representing a 38.9% increase compared to the nine months ended September 30, 2013, and recorded net income of $1.8 million. For the nine months ended September 30, 2014, we generated 54.1% of our revenues from the Americas, 29.3% from EMEA and 16.6% from the Asia Pacific region.

Components of Our Results of Operations

Revenues

Systems, Ink and Other Consumables, Value Added Services

Substantially all of our revenues are generated from sales of our systems and ink and other consumables. A majority of our revenues is currently derived from sales of our systems, although we are targeting an equal mix of revenues from our systems compared to ink and other consumables in the medium term. We do not consider the period to period change in our total installed base to be a helpful metric in assessing our performance because we currently sell a number of different systems that have significantly different throughput characteristics and average selling prices. Accordingly, since we have not experienced material changes in the prices at which we sell ink and other consumables, we believe the best measure of the success of our strategy is the amount of the increase in revenues from ink and other consumables that is generated in each period.

We also generate a small portion of our revenues from the provision of spare parts to our distributors and customers, value added services consisting of time and material based support, post-warranty service contracts. In the future, we expect to generate revenues from other professional application development services.

We principally sell our products through independent distributors who resell them to customers. Sales by our distributors accounted for approximately 72% of our revenues during the nine months ended September 30, 2014 and approximately 63% in 2013. The balance of our revenues are generated through direct sales.

We recognize revenues from sales of our systems upon installation of the system in the customer’s premises when installation is undertaken by us, provided that the collection of the resulting receivable is probable, there is persuasive evidence of an arrangement, no significant obligations in respect of installation remain and the price is fixed or determinable. This is also the case for sales made through independent distributors unless the independent distributor installs the system in which case we recognize revenues upon shipment to the independent distributor provided all other revenue recognition criteria are met. We recognize revenues net of discounts and returns. Revenues from ink and other consumables are generally recognized upon shipment. Revenues from provision of value added services are generally recognized at the time such support services are provided. See “—Critical Accounting Estimates—Revenue Recognition”. 

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Geographic Breakdown of Revenues

The following table sets forth the geographic breakdown of revenues from sales to customers located in the regions indicated below for the periods indicated:

		Year Ended December 31,																Nine months Ended September 30,
		2012								2013								2013								2014
		$				%				$				%				$				%				$				%
		(in thousands except percentages)
United States		$	16,886				43.1	%		$	22,022				44.6	%		$	14,877				43.5	%		$	22,898				48.3	%
Americas (non-U.S.)			5,230				13.4				5,732				11.6				4,596				13.5				2,778				5.8
EMEA			11,921				30.4				14,311				29.0				9,470				27.7				13,935				29.3
Asia Pacific			5,130				13.1				7,330				14.8				5,242				15.3				7,884				16.6
Total revenues		$	39,167				100.0	%		$	49,395				100.0	%		$	34,185				100.0	%		$	47,495				100.0	%

Cost of Revenues and Gross Profit

Cost of revenues consists primarily of payments to the third-party contract manufacturers who assemble our systems and who are responsible for ordering most of the components for those systems. Cost of revenues also includes components for our systems for which we are responsible, such as print heads, as well as raw materials for ink and other consumables.  Cost of revenues includes personnel expenses, such as operation and supply chain employees, and related overhead for the manufacturing of our systems, as well as expenses for service personnel involved in the installation and support of our systems and overhead for the manufacturing process of ink and other consumables. We expect cost of revenues to increase in absolute dollars due to increased revenues, but remain relatively constant or decrease as a percentage of total revenues, as we continue to improve our manufacturing processes and supply chain and as the costs related to our service infrastructure, which have a fixed component, are leveraged across a larger installed base.

Gross profit is revenues less cost of revenues. Gross margin is gross profit expressed as a percentage of total revenues. Our gross margin has historically fluctuated from period to period as a result of changes in the mix of the systems that we sell and the amount of revenues that we derive from ink and other consumables versus systems. In general, we generate higher gross margins from our high throughput systems compared to entry level systems. In addition, customers that purchase our high throughput systems generally use larger quantities of ink and other consumables, which generate higher margins than sales of systems.

We currently provide maintenance and support for all of our systems sold in the United States even if the sale is made through a distributor. We are seeking to increase the number of customers that rely on us to provide maintenance and support for their systems by expanding our maintenance and support capabilities. In addition to driving gross margin improvement, we believe this will provide an opportunity for direct contact with customers with the goal of reducing system down-time, educating customers about optimal use of our systems to drive increased utilization, expanding the variety of print applications and increasing sales of post-warranty service contracts and other professional application development services. Our service operations have not been profitable on a standalone basis since they have historically been focused on serving the one-year warranty that is included in the price of our systems. In the future, we will seek to generate greater revenues from our service offering, and thereby leverage the fixed cost component associated with it, by increasing sales of post-warranty service contracts and providing other professional services. 

Operating Expenses

Our operating expenses are classified into three categories: research and development expenses, sales and marketing expenses, and general and administrative expenses. For each category, the largest component is generally personnel costs, consisting of salaries and related personnel expenses, including share-based compensation expenses. Operating expenses also include allocated overhead costs for facilities, including rent payments under our facilities leases. We expect personnel and allocated costs to continue to increase as we hire new employees to support the continued growth of our business. In the medium term, we expect operating expenses to decrease as a percentage of revenues.

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Research and Development Expenses. The largest component of our research and development expenses is salaries and related personnel expenses for our research and development employees. Research and development expenses also include purchases of laboratory supplies; beta testing of our systems; and allocated overhead costs for facilities, including rent payments under our facilities leases. We record all research and development expenses as they are incurred. We expect research and development expenses to increase in absolute terms as we continue to hire additional engineers and chemists and establish new beta sites for additional systems that we develop. Our current research and development efforts are primarily focused on beta testing of our Allegro R2R system, completing the development of our Vulcan DTG printing system, and enhancing our current DTG systems with new features and functionality, improving system reliability and uptime and making our systems even more user-friendly. We are also investing in the development of new ink formulas for our new systems and 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.

Sales and Marketing Expenses. The largest component of our sales and marketing expenses is salaries and related personnel expenses for our marketing, sales and other sales-support employees. Sales and marketing expenses also include advertising and promotions, including trade shows, distributor open houses, and media advertising; sales-based commissions; and allocated overhead costs for facilities, including rent payments under our facilities leases. We market our solutions using a combination of internal marketing professionals and our network of channel partners. We expect sales and marketing expenses to continue to increase in absolute terms in the near term as we add sales and marketing personnel, add new distributors as we expand to new territories, and strengthen relationships with existing distributors.

General and Administrative Expenses. The largest component of our general and administrative expenses is salaries and related personnel expenses for our executive officers, financial staff, information technology staff, and human resources staff. General and administrative costs also include fees for accounting and legal services and allocated overhead costs for facilities, including rent payments under our facilities leases. We expect our general and administrative expenses to increase in absolute terms as our sales continue to grow and as we begin operating as a public company.

Financial Income (Expenses), Net

Financial income (expenses), net consists of foreign currency exchange gains or losses and, to a lesser extent, interest income. Foreign currency exchange changes reflect gains or losses related to changes in the value of our non-U.S. dollar denominated financial assets, primarily cash and cash equivalents, and trade payables and receivables. As of September 30, 2014, we did not have any indebtedness for borrowed amounts. Interest income consists of interest earned on our cash, cash equivalents and short-term bank deposits. We expect interest income to vary depending on our average investment balances and market interest rates during each reporting period.

Taxes on Income

The standard corporate tax rate in Israel for 2014 and thereafter is 26.5% and was 25.0% in 2012 and 2013. At the parent company level, a small amount of the taxable income of Kornit Digital was taxed prior to 2014 at the 25.0% rate.  However, as discussed in greater detail below under “Taxation — Israeli Tax Considerations and Government Programs,” 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 these benefits, referred to as “beneficiary enterprise” and “preferred enterprise” status, prior to 2014, substantially all of the income that we generated was exempt from income tax resulting in an overall effective tax rate, on a blended basis, of approximately 5%. Although Kornit Technologies had (and continues to have) net operating loss carryforwards, prior to 2014 we were unable to apply them to offset the amount of Israeli taxable income that we generated. As a result, we were subject to taxes on our taxable income at the parent company level.

Starting from January 1, 2014, we have consolidated the results of our Israeli operations for tax purposes such that future net operating loss carryforwards of Kornit Technologies can be used to offset Israeli taxable income from us. Kornit Technologies currently generates sufficient net operating loss carryforwards to offset the taxable income of the parent. Accordingly, we do not expect to be subject to income tax in Israel in 2014 and our effective tax rate will be the blended rate of our Israeli tax obligations and those of our non-Israeli subsidiaries in their respective jurisdictions of organization. 

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Under the Investment Law and other Israeli legislation, we are entitled to certain additional tax benefits, including accelerated depreciation and amortization rates for tax purposes on certain assets, deduction of public offering expenses in three equal annual installments and amortization of other intangible property rights for tax purposes.

Comparison of Period to Period Results of Operations

The following tables set forth our results of operations in dollars and as a percentage of revenues for the periods indicated:

		Year Ended December 31,								Nine Months Ended  September 30,
		2012				2013				2013				2014
		(in thousands)
Revenues		$	39,167			$	49,395			$	34,185			$	47,495
Cost of revenues			22,741				27,953				19,652				26,855
Gross profit			16,426				21,442				14,533				20,640
Operating expenses:
Research and development			4,839				7,443				4,878				6,851
Sales and marketing			4,668				7,734				5,357				7,569
General and administrative			3,092				3,278				2,366				3,716
Total operating expenses			12,599				18,455				12,601				18,136
Operating income			3,827				2,987				1,932				2,504
Finance expenses			285				460				333				199
Income before taxes on income			3,542				2,527				1,599				2,305
Taxes on income			1,228				1,393				1,013				476
Net income		$	2,314			$	1,134			$	586			$	1,829

 

		Year Ended December 31,								Nine Months Ended  September 30,
		2012				2013				2013				2014
		(as a % of revenues)
Revenues			100.0	%			100.0	%			100.0	%			100.0	%
Cost of revenues			58.1				56.6				57.5				56.5
Gross profit			41.9				43.4				42.5				43.5
Operating expenses:
Research and development			12.4				15.1				14.3				14.4
Sales and marketing			11.9				15.7				15.7				16.0
General and administrative			7.9				6.6				6.9				7.8
Total operating expenses			32.2				37.4				36.9				38.2
Operating income			9.7				6.0				5.6				5.3
Finance expenses, net			0.7				0.9				1.0				0.4
Income before taxes on income			9.0				5.1				4.6				4.9
Taxes on income			3.1				2.8				3.0				1.0
Net income			5.9	%			2.3	%			1.6	%			3.9	%

Comparison of the Nine Months Ended September 30, 2013 and 2014

Revenues

Revenues increased by $13.3 million, or 38.9%, to $47.5 million in the first nine months of 2014, as compared to $34.2 million in the first nine months of 2013. Substantially all of the growth in revenues resulted from an increase of $8.9 million in system revenues and an increase of $3.6 million from the sale of ink and other consumables. The substantial majority of the growth in system revenues was attributable to a change in the mix of systems sold, specifically sales of more

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high throughput systems in this period, which sell for higher average selling prices than our entry level systems. The increase in ink and other consumables revenues was due to higher sales volumes of ink and other consumables.

Cost of Revenues and Gross Profit

Cost of revenues increased by $7.2 million, or 36.6%, to $26.9 million in the first nine months of 2014, as compared to $19.7 million in the first nine months of 2013. Gross profit increased by $6.1 million, or 42.1%, to $20.6 million in the first nine months of 2014, as compared to $14.5 million in the first nine months of 2013. Gross margin was 43.5% in the first nine months of 2014 compared to 42.5% in the first nine months of 2013. The increase in gross margin is related to a 9.8% increase in systems gross margin partially offset by a 2.5% decrease in gross margin from ink and other consumables in each case compared to the same period in the prior year. The increase in system gross margin resulted from an increase in sales of higher margin high throughput systems while the decrease in ink and other consumables gross margin resulted mainly from higher costs of revenues related to increased rent expense due to the expansion of the facility where we manufacture our ink and other consumables and increased headcount expense relating to increased production of ink and other consumables.

Operating Expenses

		Nine Months Ended September 30,
		2013								2014								Change
		Amount				% of Revenues				Amount				% of Revenues				Amount				%
		($ in thousands)
Operating expenses:
Research and development		$	4,878				14.3	%		$	6,851				14.4	%		$	1,973				40.4	%
Sales and marketing			5,357				15.7				7,569				16.0				2,212				41.3
General and administrative			2,366				6.9				3,716				7.8				1,350				57.1
Total operating expenses		$	12,601				36.9	%		$	18,136				38.2	%		$	5,535				43.9	%

Research and Development. Research and development expenses increased by 40.4% in the first nine months of 2014 compared to the first nine months of 2013. This resulted primarily from an increase of $1.1 million in salaries and related personnel expenses due to the hiring of additional personnel, of which $0.1 million was due to currency fluctuations. This increase related primarily to an increase in expenses relating to development of our new Vulcan system for the DTG market. As a percentage of total revenues, our research and development expenses did not increase materially in 2014 compared to 2013.

Sales and Marketing. Sales and marketing expenses increased by 41.3% in the first nine months of 2014 compared to the first nine months of 2013. This increase was primarily due to an increase of $1.4 million in salaries and related personnel expenses due to the hiring of sales and marketing personnel in 2014, an increase of $0.3 million in marketing activities, including trade shows and online marketing activities, of which $0.1 million was due to currency fluctuations. As a percentage of total revenues, our sales and marketing expenses rose slightly during this period, from 15.7% in 2013 to 16.0% in 2014. This increase reflects our strategy of continuing to increase our presence in new markets in which we operate and creating increased market awareness of our company from intensified marketing efforts.

General and Administrative. General and administrative expenses increased by 57.1% in the first nine months of 2014 compared to the first nine months of 2013. This resulted primarily from an increase of $0.9 million in salaries and related personnel expenses due to the hiring of additional personnel reflecting an increase in headcount compared to the previous year and management changes. As a percentage of our total revenues in those years, such expenses slightly increased, from 6.9% in 2013 to 7.8% in 2014 reflecting the expansion of our management team.

Finance Expenses, Net

Finance expenses for the nine months ended September 30, 2013 were $0.3 million. For the same period in 2014, finance expenses were $0.2 million. This decrease resulted primarily from the effects of exchange rates on our non-dollar denominated financial assets, specifically the exchange rate of the U.S. dollar to the NIS.

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Taxes on Income

Taxes on income for the nine months ended September 30, 2013 were $1.0 million. For the same period in 2014, taxes on income were $0.5 million. Our effective tax rate was 20.7% for the nine months ended September 30, 2014 compared to 63.4% for the nine months ended September 30, 2013. Our tax rate in 2013 reflected a full valuation allowance applied against the current loss for tax purposes incurred by our Israeli subsidiary, Kornit Technologies, which was not consolidated for tax purposes with our parent entity, Kornit Digital, which generates taxable income. Starting in 2014, we have consolidated Kornit Technologies for tax purposes resulting in significantly lower taxable income and a correspondingly lower effective tax rate.

Comparison of the Years Ended December 31, 2012 and 2013

Revenues

Revenues increased by $10.2 million, or 26.0%, to $49.4 million in 2013 from $39.2 million in 2012. The growth in revenues in 2013 was primarily attributable to an increase in the volume of the products that we sold. Specifically, during this period we had a $6.3 million increase in sales of ink and other consumables and a $3.7 million increase in sales of systems. The smaller relative increase in revenues from systems resulted from sales of a fewer number of systems particularly in the first half of the year while the larger relative increase in revenues from ink and other consumables was due to the impact of systems sold in prior periods generating demand for such consumables.

Cost of Revenues and Gross Profit

Cost of revenues increased by $5.3 million, or 22.9%, to $28.0 million in 2013, as compared to $22.7 million in 2012. Gross profit increased by $5.0 million, or 30.5%, to $21.4 million in 2013, as compared to $16.4 million in 2012. Gross margin was 43.4% in 2013 compared to 41.9% in 2012. This increase in gross margin was primarily attributable to a 1.8% increase in gross margin from ink and other consumables partially offset by a 2.6% decrease in systems gross margin, which was primarily due to sales of lower margin systems.

Operating Expenses

		Year Ended December 31,
		2012								2013								Change
		Amount				% of Revenues				Amount				% of Revenues				Amount				%
		($ in thousands)
Operating expenses:
Research and development		$	4,839				12.4	%		$	7,443				15.1	%		$	2,604				53.8	%
Sales and marketing			4,668				11.9				7,734				15.7				3,066				65.7
General and administrative			3,092				7.9				3,278				6.6				186				6.0
Total operating expenses		$	12,599				32.2	%		$	18,455				37.4	%		$	5,856				46.5	%

Research and Development. Research and development expenses increased by 53.8% in 2013 compared to 2012.  This resulted primarily from an increase of $1.1 million in salaries and related personnel expenses, of which $0.3 million was due to currency fluctuations, and an increase of $0.7 million primarily in materials and  related costs for our two beta sites in 2013 compared to 2012, in each case, related to the Allegro and Vulcan systems.  As a percentage of total revenues, our research and development expenses increased relatively from 12.4% in 2012 to 15.1% in 2013, reflecting our increased focus on development of these new systems.

Sales and Marketing. Sales and marketing expenses increased by 65.7% in 2013 compared to 2012. This increase was primarily due to an increase of $1.6 million in salaries and related personnel costs due to increased recruiting of sales and marketing personnel in 2013 as part of our strategic sales and marketing initiatives, of which $0.1 million was due to currency fluctuations, and an increase of $0.7 million in marketing activities, including trade shows and corporate rebranding

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in 2013. As a percentage of total revenues, our sales and marketing expenses rose during this period, from 11.9% in 2012 to 15.7% in 2013. This increase reflects our strategic determination to improve our presence in our active territories and deepen relationships with our existing distributors and entering into new markets, while also increasing market awareness of our company by intensifying our marketing efforts and adding distribution channels.

General and Administrative. General and administrative expenses increased by 6.0% in 2013 compared to 2012, reflecting an increase in headcount generated by increased activity across all areas of our business in each of those years compared to the previous year. Despite the absolute increase in general and administrative expenses in 2013 compared to 2012, as a percentage of our total revenues in those years, such expenses decreased, from 7.9% in 2012 to 6.6% in 2013, reflecting our increased revenues as well as our efforts to manage our expansion efficiently.

Finance Expenses, Net

Finance expenses increased from $0.3 million in 2012 to $0.5 million in 2013. This increase was primarily attributable to expenses arising from foreign currency fluctuations in 2013, as changes in the U.S. dollar in relation to the NIS and other currencies resulted in foreign currency exchange losses.

Taxes on Income

Taxes on income increased from $1.2 million in 2012 to $1.4 million in 2013. This increase was primarily attributable to the change in our subsidiaries operating on a cost-plus basis to a low-cost distributor basis. This was due to a decision to expand the functions performed by the subsidiaries to include sales and marketing activities, which resulted in the subsidiaries generating more taxable income.

Quarterly Results of Operations and Seasonality

The following tables present our unaudited condensed consolidated quarterly results of operations in dollars and as a percentage of revenues for the periods indicated. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The historical quarterly results presented are not necessarily indicative of the results that may be expected for any future quarters or periods.

The quarterly supplemental financial measures below include quarterly Adjusted EBITDA, which is a non-GAAP financial measure. See “Summary—Summary Consolidated Financial Data” for a description of how we calculate Adjusted EBITDA.  A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure and a discussion about the limitations of this non-GAAP financial measure is provided below.

		Three Months Ended
		Mar. 31, 2013				June 30, 2013				Sep. 30, 2013				Dec. 31, 2013				Mar. 31, 2014				June 30, 2014				Sep. 30, 2014
		(in thousands)
Consolidated Statements of Income Data:
Revenues		$	8,478			$	11,807			$	13,900			$	15,210			$	13,262			$	15,739			$	18,494
Gross profit			3,014				5,574				5,945				6,909				4,499				6,843				9,298
Operating income (loss)			(539	)			1,031				1,440				1,055				(1,586	)			643				3,447
Net income (loss)		$	(1,091	)		$	683			$	994			$	548			$	(1,713	)		$	372			$	3,170

 

		Three Months Ended
		Mar. 31, 2013				June 30, 2013				Sep. 30, 2013				Dec. 31, 2013				Mar. 31, 2014				June 30, 2014				Sep. 30, 2014
		(as a % of revenues)
Consolidated Statements of Income Data:
Revenues			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%
Gross profit			35.6				47.2				42.8				45.4				34.0				43.5				50.3
Operating income (loss)			(6.4	)			8.7				10.4				6.9				(12.0	)			4.1				18.6
Net income (loss)			(12.9	)			5.8				7.1				3.6				(12.9	)			2.4				17.1

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		Three Months Ended
		Mar. 31, 2013				June 30, 2013				Sep. 30, 2013				Dec. 31, 2013				Mar. 31, 2014				June 30, 2014				Sep. 30, 2014
		(in thousands)
Supplemental Financial Data:
Adjusted EBITDA		$	(199	)		$	1,378			$	1,736			$	1,366			$	(1,201	)		$	1,164			$	4,058
Reconciliation of net income (loss) to Adjusted EBITDA:
Net income (loss)		$	(1,091	)		$	683			$	994			$	548			$	(1,713	)		$	372			$	3,170
Finance expenses (income), net			262				11				60				127				(8	)			102				105
Taxes on income			324				334				355				380				135				168				173
Depreciation and amortization			278				319				294				277				307				336				361
Share-based compensation expense			28				31				33				34				78				186				249
Adjusted EBITDA		$	(199	)		$	1,378			$	1,736			$	1,366			$	(1,201	)		$	1,164			$	4,058

Quarterly Revenue Trends. Our quarterly revenues increased year-over-year for all periods presented due to increased sales of our systems, particularly increased sales of our industrial systems, and increased sales of ink and other consumables due to our growing installed base. Comparisons of our year-over-year total quarterly revenues are more meaningful than comparisons of our sequential results due to seasonality in sales of our solutions. Our fourth quarter has historically been our strongest quarter for sales due to increased sales of ink and other consumables to our customers in response to increased demand from consumers around the holiday season. As a result, the first quarter is generally our weakest quarter due to lower sales of ink and other consumables. While we believe that these seasonal trends have affected and will continue to affect our quarterly results, our growth has largely mitigated seasonal trends to date. We do not know whether our business will become more seasonal in the future. Historical patterns in our business may therefore not be a reliable indicator of our future sales activity or performance.

Quarterly Gross Profit and Margin Trends. Our quarterly gross profit increased year-over-year for all periods presented. Our quarterly gross margin has fluctuated over the periods presented due to lower sales of higher margin ink and other consumables in the first quarter. In addition, in the first quarter of 2014, gross profit was also impacted by pricing strategies implemented during 2013 to increase sales of entry level systems.

Quarterly Operating Expense Trends. Our quarterly operating expenses increased year-over-year for all periods presented primarily due to the addition of personnel in connection with the expansion of our business. Research and development expenses generally increased sequentially over the periods as we increased our headcount to support continued investment in our future solutions, increased expenditures relating to beta sites and increased overhead allocations. Sales and marketing expenses increased significantly over the periods as we incurred costs associated with commission expenses to sales people, personnel costs associated with increases in headcount and an increase in overhead allocations. In addition, sales and marketing expenses vary from quarter to quarter based on timing of trade shows, which generally occur in the second and fourth quarters. General and administrative expenses increased over the periods primarily due to an increase in personnel costs, legal expenses and professional services fees related to preparing to be a public company.

Liquidity and Capital Resources

We had $4.3 million of cash and cash equivalents as of September 30, 2014 and $5.3 million as of December 31, 2013. We fund our operations with cash generated from operating activities. In the past, we have also raised capital through the sale of equity securities to investors in private placements.

Our cash requirements have principally been for working capital and, to a lesser extent, capital expenditures. Our working capital requirements reflect the growth in our business and its seasonality. Historically, we have funded our working capital (primarily inventory) and capital expenditures from cash flows provided by our operating activities, investments in our equity securities and cash and cash equivalents on hand. Our capital expenditures relate primarily to our manufacturing facility for the production and bottling of our ink and other consumables in Kiryat Gat, Israel, as well as investment in our research and development labs in Rosh Ha’ayin, Israel. In addition to investments in those facilities, our capital investments have

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included improvements and expansion of our distribution and corporate facilities to support our growth and investment and improvements in our information technology.

The most significant element of our working capital requirements is for inventory. We fund the procurement of the components of our systems that are assembled by our third-party manufacturers. Due to the growth in our business, our inventory strategy has included increasing inventory levels to meet anticipated customer demand for our solutions. This includes maintaining an inventory of systems and inks and other consumables at levels that we expect to sell during the successive months. We are in the process of implementing changes to our inventory and manufacturing practices in order to better control our components inventory. Based on these initiatives, we expect inventory to continue to increase in the short term, but at a lower rate than the rate of revenue growth.

As of December 31, 2014, we had two lines of credit with Israeli banks in a total amount of up to $3.0 million, all of which were undrawn. These lines of credit are unsecured and availability is based on our maintenance of a 30% ratio of total shareholders’ equity to total assets and, for one line of credit, our maintenance of a minimum of $1.0 million cash and cash equivalents at the end of each fiscal quarter. Interest rates across our credit lines varied from 2.2% to 5.3% as of December 31, 2014. Each line of credit prohibits us and our subsidiaries from encumbering our assets and we would be required to obtain the consent of the bank, or repay any amounts borrowed, in the event that we undergo a change of control. 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 or the right to appoint a director. We do not anticipate either of these events to occur immediately following the closing of this offering, although they may occur in the future.

Based on our current business plans, we believe that our cash flows from operating activities, our existing cash resources and the net proceeds to us from this offering will be sufficient to fund our projected cash requirements for at least the next 12 months without drawing on our lines of credit. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities and expansion into new geographic locations, the timing and extent of spending to support product development efforts, the timing of introductions of new solutions and the continuing market acceptance of our solutions as well as other business development efforts.

The following table presents the major components of net cash flows for the periods presented:

		Year Ended December 31,								Nine Months Ended September 30,
		2012				2013				2013				2014
		(in thousands)
Net cash provided by (used in) operating activities		$	(1,042	)		$	2,738			$	2,719			$	(1,713	)
Net cash provided by (used in) investing activities			(3,121	)			(2,103	)			(1,654	)			693
Net cash provided by financing activities			—				—				—				—

Net Cash Provided by (Used in) Operating Activities

Nine Months Ended September 30, 2014

Net cash used in operating activities in the nine months ended September 30, 2014 was $1.7 million.

Our inventory balance on September 30, 2014 was $13.7 million, representing a $1.7 million increase in inventory compared to December 31, 2013, due to continued implementation of our strategy to grow inventory to support increased sales of parts and systems in finished goods and raw materials and spare parts. In particular, during the nine months ended September 30, 2014, we accumulated inventory of our ink and other consumables outside of Israel and continued to increase our inventory of parts and finished assemblies of our systems to facilitate the flexibility to meet short lead time demands from our customers.

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Trade payables decreased by $2.0 million from December 31, 2013 to September 30, 2014, primarily due to the mix of products sold in 2014, which led to a shift of production to a third-party manufacturer with shorter payment terms as well as obtaining components from suppliers with shorter payment terms. During the same period, we experienced an increase of $1.4 million in trade receivables despite the growth in our business. Our days sales’ outstanding, or DSO, for the nine months ended September 30, 2014 was 40 compared to 36 for the nine months ended September 30, 2013. Our relatively low DSO was primarily attributable to the payment terms that apply to our customers for systems, as a large portion of our cash

received for systems includes payments made before the systems are shipped. Since we have not historically experienced any material challenges with collections, changes in accounts receivable generally reflect activity in the final month of a given fiscal quarter or fiscal year. The net increases in accounts receivable balances in the nine months ended September 30, 2014 reflected the increased activity in the third quarter of that year compared to with the previous year.

Our operating cash flows to fund the above activities were driven by our net income of $1.8 million (adjusted upward to reflect $1.5 million of non-cash expenses) as well as a $0.4 million increase in deferred revenues. The increase in our deferred revenues in the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 primarily reflected strong product orders during the fourth quarter of 2013 resulting in a significant increase in the number of orders shipped in 2013 for which we received payment in 2014.

Year ended December 31, 2013

Net cash provided by operating activities during 2013 was $2.7 million.

Our inventory balance on December 31, 2013 was $12 million, representing a $3.3 million increase in inventory compared to December 31, 2012, due to continued implementation of our strategy to grow inventory to support increased sales of parts and systems. In particular, during 2013, we accumulated inventory of our ink and other consumables outside of Israel and increased our inventory of parts and assembled systems to facilitate the flexibility to meet short lead time demands from our customers.

Primarily as a result of the increase in inventory, trade payables increased by $2.8 million from December 31, 2012 to December 31, 2013 due to the timing of purchases for such inventory. During the same period, we experienced an increase of only $1.3 million in trade receivables despite the growth in our business. Our DSO for the year ended December 31, 2013 was 42 compared to 41 for the year ended December 31, 2012. As indicated above, our relatively low DSO was primarily attributable to the payment terms that apply to our customers for systems, as a large portion of our cash received for systems includes payments made before the systems are shipped. Since we have not historically experienced any material challenges with collections, changes in accounts receivable generally reflect activity in the final month of a given fiscal quarter or fiscal year. The net increases in accounts receivable balances in 2013 reflected the increased activity in the fourth quarter of that year compared to with the previous year.

Our operating cash flows to fund the above activities were driven by our net income of $1.1 million (adjusted upward to reflect $1.3 million of non-cash expenses) as well as a $1.2 million increase in deferred revenues. The increase in our deferred revenues in 2013 compared to 2012 primarily reflected strong product orders during the fourth quarter of 2013 resulting in a significant increase in the number of orders shipped in 2013 for which we received payment in 2014.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities was $0.7 million for the nine months ended September 30, 2014, which was primarily attributable to our shifting of long term deposits to short term, offset by the purchase of property. Net cash used in investing activities was $2.1 million in 2013, the majority of which consisted of purchase of property and equipment, and investments in short-term deposits as well as the purchase of a license to a digital R2R printer and all related technology, software and other intellectual property related to the printer from a third party.

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Contractual Obligations

Our contractual obligations as of December 31, 2013 are summarized in the following table:

		Payments Due by Period
		Total				2014				2015				2016				2017				2018 and After
Operating lease obligations(1)		$	3,209			$	1,197			$	1,053			$	714			$	196			$	49
Uncertain tax positions(2)			1,075				—				—				—				—				—
Purchase commitments(3)			2,932				2,932				—				—				—				—
Severance payment(4)			1,551				—				—				—				—				—
Management services fees(5)			600				120				120				120				120				120
Total		$	9,367			$	4,249			$	1,173			$	834			$	316			$	169

______________________

(1)  Operating lease obligations consist of our contractual rental expenses under operating leases of facilities and vehicles.

(2)  Consists of accruals for certain income tax positions under ASC 740 that are paid upon settlement, and for which we are unable to reasonably estimate the ultimate amount and timing of settlement. See Note 10(g) to our consolidated financial statements included elsewhere in this prospectus for further information regarding our liability under ASC 740. Payment of these obligations would result from settlements with tax authorities. Due to the difficulty in determining the timing of resolution of audits, these obligations are only presented in their total amount.

(3)  Consists of commitments to purchase inventory.

(4)  Severance payments of $1.6 million are payable only upon termination, retirement or death of our employees. Of this amount, $0.4 million is unfunded. Since we are unable to reasonably estimate the timing of settlement, the timing of such payments is not specified in the table. See also Note 2(t) to our consolidated financial statements appearing elsewhere in this prospectus.

(5)  Consists of management services fees payable to Fortissimo Capital pursuant to a management services agreement.  The amount payable annually is $120,000 plus the amount by which 5% of our net income, as defined in the management services agreement, exceeds this management fee, up to a maximum of $250,000 per year in the aggregate. Since we cannot know the amount that would be payable in the future, we have assumed the minimum amount is payable through 2018. We and Fortissimo Capital have agreed to terminate the management services agreement upon the consummation of this offering.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). These accounting principles are more fully described in note 2 to our consolidated financial statements included elsewhere in this prospectus and require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. We believe that the accounting policies discussed below are critical to our financial results and to the understanding of our past and future performance, as these policies relate to the more significant areas involving management’s estimates and assumptions. We consider an accounting estimate to be critical if: (1) it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making our estimate; and (2) changes in the estimate could have a material impact on our financial condition or results of operations.

Revenue Recognition

We generate revenues from the sale of our systems, ink and other consumables and value added services. We generate revenues from sale of our solutions directly to customers and indirectly through independent distributors.

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We recognize revenue when (1) persuasive evidence of a final agreement exists, (2) delivery has occurred or services have been rendered, (3) the selling price is fixed or determinable, and (4) collectability is reasonably assured. In respect of sale of products, installation of our systems and training, we consider the element in the arrangement to be a single unit of accounting. In accordance with ASC 605, we have concluded that our arrangements are generally consistent with the indicators suggesting that installation and training are essential to the functionality of our systems.

When an independent distributor is responsible for installation of our systems at customer sites, revenues from sales to the independent distributor are generally recognized upon shipment and when title and risk of loss have been transferred to the independent distributor. We account for such sales on a net basis since we are not the primary obligor in the arrangement. Products and services sold directly by us to customers are recognized based on the gross amount as we are the primary obligor in the arrangement, retain inventory risk for physical products, establish the price for our products, and assume the credit risk for amounts billed to its customers.

Revenues from ink and other consumable products are generally recognized upon shipment assuming all other revenue recognition criteria have been met.

In cases in which old systems are traded in as part of sales of new printers, the fair value of the old printer is recorded as inventory, provided that such value can be determined.

Our systems include a one-year warranty. After the initial warranty period, we offer customers optional extended warranty contracts ranging generally from one to three years. Revenues from extended warranties are recognized ratably, on a straight-line basis, over the period of the service. Unearned revenues are derived mainly from these prepaid agreements. We classify the portion of unearned revenue not expected to be earned in the subsequent 12 months as long-term.

We assess collectability as part of the revenue recognition process. This assessment includes a number of factors such as an evaluation of the creditworthiness of the customer, past due amounts, past payment history, and current economic conditions. If it is determined that collectability cannot be reasonably assured, we defer recognition of revenue until collectability is assured.

Inventories

Inventories are measured at the lower of cost or market value. Cost is computed using weighted average cost, on a first-in, first-out basis. Inventory costs consist of material, direct labor and overhead. We periodically assess inventory for obsolescence and excess and reduce the carrying value by an amount equal to the difference between its cost and the estimated market value based on assumptions about future demand and historical sales patterns. 

As of September 30, 2014, we had $13.7 million of inventory of which $6.3 million consisted of raw materials and components and $7.4 million consisted of completed systems, ink and other consumables. We recorded inventory write-offs in a total amount of $94,000 and $0.4 million for the years ended December 31, 2012 and 2013, respectively, and $53,000 for the nine months ended September 30, 2014. 

Share-Based Compensation

Option Valuations

Under U.S. GAAP, we account for share-based compensation for employees in accordance with the provisions of the FASB’s ASC Topic 718 “Compensation—Stock Based Compensation,” or ASC 718, which requires us to measure the cost of options based on the fair value of the award on the grant date.

We selected the binomial option pricing model as the most appropriate method for determining the estimated fair value of options. The resulting cost of an equity incentive award is recognized as an expense over the requisite service period of the award, which is usually the vesting period. We recognize compensation expense over the vesting period using the straight-line method and classify these amounts in the consolidated financial statements based on the department to which the related employee reports.

The determination of the grant date fair value of options using the binomial option pricing model is affected by estimates and assumptions regarding a number of complex and subjective variables. These variables are estimated as follows:

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•   Fair Value of our Ordinary Shares. Because our shares are not publicly traded, we must estimate the fair value of ordinary shares, as discussed in “—Ordinary Share Valuations” below.

•   Sub-Optimal Exercise Multiple. The sub-optimal exercise multiple represents an estimate of the amount of the increase in the fair value of our shares over the exercise price of the options at the date of expected exercise. We base this estimate on empirical studies of comparable third parties due to the lack of relevant exercise history for our company.

•   Risk-free Interest Rate. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with a term equivalent to the contractual life of the options.

•   Volatility. The expected share price volatility was based on the historical equity volatility of the ordinary shares of comparable companies that are publicly traded with adjustments to reflect our capital structure.

•   Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

•   Expected forfeiture rates. The expected forfeiture rates were based on an analysis of our historical forfeiture rates.

If any of the assumptions used in the binomial option pricing model change significantly, share-based compensation for future awards may differ materially compared with the awards granted previously.

The following table presents the weighted-average assumptions used to estimate the fair value of options granted to employees during the periods presented. The number of options granted to non-employees was immaterial.

		Year Ended December 31,								Nine Months Ended September 30,
		2012				2013				2013				2014
Sub-optimal exercise multiple			3.0-3.5				3.0-10.0				3.0-10.0				3.5-4.0
Risk-free interest rate			0.1%-1.8%				0.1%-2.5 %				0.1%-2.5%				0.1%-3.0%
Volatility			55%-71%				55%				55%				50%
Dividend yield			0%				0%				0%				0%

Ordinary Share Valuations

The following table presents the share options grants made between January 1, 2014 and the date of this prospectus and the related exercise price and estimated fair value per ordinary share at the grant date:

Date of Grant		Number of Shares Subject to Awards Granted				Exercise Price Per Share				Estimated Fair Value Per Ordinary Share at Grant Date
January 2014			31,000			$	10.50			$	26.75
April 2014			99,341				14.23				31.86
July 2014			20,991				13.54				41.34

In October 2014, we granted options to purchase 21,657 shares at an exercise price per share of $13.54. In November 2014, we granted options to purchase 37,863 shares with an exercise price per share of $13.54.

Based on the initial public offering price of $       per share, the intrinsic value of the awards outstanding as of September 30, 2014 was $      , of which $         related to vested options and $          related to unvested options.

In the absence of a public trading market for our ordinary shares, with respect to each grant date, we develop an estimate of the fair value of our ordinary shares in order to determine an exercise price for each share-based award. We have determined the fair value of our ordinary shares using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Our board of directors exercised judgment and considered a number of objective and subjective

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factors to determine the best estimate of the fair value of our ordinary shares, including contemporaneous and retrospective valuations of our ordinary shares performed by an unrelated valuation specialist, valuations of comparable peer companies, operating and financial performance, the lack of liquidity of our share capital, and general and industry specific economic outlook.

For our valuations performed with respect to grants made after January 1, 2014, the fair value of our ordinary shares was estimated using an income approach. The income approach estimates the aggregate enterprise value of our company based on the present value of future estimated cash flows. Cash flows are estimated for future periods based on projected revenue and costs. These future cash flows are discounted to their present values using an appropriate discount rate. The discounted projected cash flows and a terminal value are summed together to arrive at an indicated aggregate enterprise value under the income approach. In applying the income approach, we derived the discount rate from an analysis of the weighted-average cost of capital of a group of seven comparable public company industry peers as of each valuation date and adjusted it to reflect the risks inherent in our business cash flows. We derived the terminal multiple from an estimate of our normalized cash flow and estimated growth rate after five years.

We allocated the estimated enterprise value among different classes of our shares by applying an option pricing method, or OPM. Under the OPM, ordinary and preferred shares are treated as call options, with the preferred shares having an exercise price based on the liquidation preference of the preferred shares. Ordinary shares will only have value if funds available for distribution to the shareholders exceed the value of the liquidation preference at the time of a liquidity event such as a merger, sale or initial public offering. The ordinary shares are modeled as call options with an exercise price equal to the liquidation preference of the preferred shares. The value of the call options is determined using the Black-Scholes-Merton option-pricing model. The OPM method requires significant assumptions; in particular, the time until investors in our company would experience an exit event and the volatility of our shares (which we determined based on the same public companies with business and financial risks comparable to our own).

We applied a discount to the resulting valuation due to the lack of marketability of our ordinary shares. We calculated this using a put option model based on the Finnerty model. The significant assumptions involved were the same as described above.

The dates of our valuations did not always coincide with the dates of our share-based compensation grants. In such instances, management’s estimates were based on the most recent valuation of our ordinary shares. For grants occurring between valuation dates, for financial reporting purposes, we applied a straight-line calculation considering the preceding and subsequent valuations and our assessment of additional objective and subjective factors we believed were relevant as of the grant date.

Taxes

We are subject to income taxes principally in Israel and the United States. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We recognize income taxes under the liability method. Tax benefits are recognized from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves when facts and circumstances change, such as the closing of a tax audit, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effects of any reserves that are considered appropriate, as well as the related net interest and penalties.

We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under U.S. GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. To make this judgment, we must make predictions of the amount and category of taxable income from various sources and weigh all available positive and negative evidence about these possible sources of taxable income.

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While we believe the resulting tax balances as of December 31, 2012 and 2013 and September 30, 2014 are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material. We have filed or are in the process of filing local and foreign tax returns that may be audited by the respective tax authorities. We believe that we adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement; however, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statute of limitations on potential assessments expire.

Quantitative and Qualitative Disclosure about Market Risk

Market risk is the risk of loss related to changes in market prices, including interest rates and foreign exchange rates, of financial instruments that may adversely impact our consolidated financial position, results of operations or cash flows.

Foreign Currency Exchange Risk

Due to our international operations, currency exchange rates impact our financial performance. In 2013, approximately 82% of our revenues were denominated in U.S. dollars and 18% of our revenues were denominated in Euros. Conversely, in 2013, approximately 73% of our purchases of raw materials and components of our systems and ink and other consumables are denominated in either NIS or in NIS prices that are linked to U.S. dollars. Similarly, a majority of our operating costs, which are largely comprised of labor costs, are denominated in NIS, due to our operations in Israel. Accordingly, our results of operations may be materially affected by fluctuations in the value of the U.S. dollar relative to the NIS and the Euro.

The following table presents information about the changes in the exchange rates of the NIS and the Euro against the U.S. dollar:

		Change in Average Exchange Rate
Period		NIS against the U.S. Dollar (%)				Euro against the U.S. Dollar (%)
2012			7.8			(7.7	)
2013			(6.4	)		3.5
2014 (through September 30, 2014)			(3.3	)		2.0

The figures above represent the change in the average exchange rate in the given period compared to the average exchange rate in the immediately preceding period. Negative figures represent depreciation of the U.S. dollar compared to the NIS. A 10% increase or decrease in the value of the NIS against the U.S. dollar would have decreased or increased our net income by approximately $2.8 million in 2013 and by approximately $2.5 million in the nine months ended September 30, 2014. A 10% increase or decrease in the value of the Euro against the U.S. dollar would have decreased or increased our net income by approximately $0.6 million in 2013 and by approximately $0.8 million in the nine months ended September 30, 2014.

For purposes of our consolidated financial statements, local currency assets and liabilities are translated at the rate of exchange to the U.S. dollar on the balance sheet date and local currency revenues and expenses are translated at the exchange rate at the date of the transaction or the average exchange rate dollar during the reporting period to the United States.

Although we have not hedged against these risks formally in the past, in 2013 we converted U.S. dollars to NIS a few weeks in advance of anticipated large NIS expense payments (such as payroll expenses) to hedge against the potential devaluation of the U.S. dollar relative to the NIS prior to the dates for such payments. We will continue to monitor exposure to currency fluctuations. Instruments that may be used to hedge future risks may include foreign currency forward and swap contracts. These instruments may be used to selectively manage risks, but there can be no assurance that we will be fully protected against material foreign currency fluctuations.

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

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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. In addition, since we only plan to hedge a portion of our foreign currency exposure, our results of operations may be adversely affected due to the impact of currency fluctuations on the unhedged aspects of our operations.

Other Market Risks

We do not believe that we have material exposure to interest rate risk due to the fact that we have no long-term borrowings.

We do not believe that we have any material exposure to inflationary risks.

Off-Balance Sheet Arrangements

Since our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.

New and Revised Financial Accounting Standards

The JOBS Act permits emerging growth companies such as us to delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Recently Issued and Adopted Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09) “Revenue from Contracts with Customers.” ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

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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 published 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.

There is a diverse ecosystem of businesses that utilize textile printing processes, such custom decorators, online businesses, brand owners and contract printers. Custom decorators of varying sizes use their own manufacturing facilities to print promotional, sports, educational and souvenir products. Online businesses use textile printing in a “produce to order” business model through online platforms that facilitate the rapid printing and shipping of customized and personalized goods to consumers. Brand owners typically use contract printers for textile production and printing and are increasingly aware of the benefits of various printing processes, which influences their choice of contract printer.

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 driven by projected compound annual growth rates from 2014 to 2019 of approximately 15% in North America, 20% in Western Europe, 20% in Eastern Europe and 21% in Asia. 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.

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. There is currently a global installed base of approximately 35,000 digital textile printers.

Trends in the Textile Printing Market

Textile printing is most commonly conducted using an analog printing method known as screen printing, which includes rotary screen printing and manual or automated carousel screen printing techniques. Rotary screen printing involves passing rolls of fabric through rotating cylinders that are engraved with the image or design to be printed, whereas carousel screen printing involves squeezing ink onto fabric through purpose-built mesh stencils.

Digital printing, which uses specially engineered inkjet heads to print designs and patterns directly onto fabrics, currently represents a small, but rapidly growing, portion of the global printed textile industry. Digital textile printing allows a full image or design to be printed on a garment or cut fabric in one manufacturing step compared to multiple steps in an analog printing process. Digital textile printing gives manufacturers the ability to print small runs in a cost-effective manner with a minimum order quantity of one unit. Demand for digital equipment and consumables is expanding due to the increasing acceptance of digital textile printing processes among industry participants and in order to respond to the following trends:

•   Increased demand for variety and complexity of images and designs. In order to distinguish themselves from the masses, consumers demand, and brand owners seek to supply, a wide range of styles that are innovative and diverse.

•   Mass customization and personalization. We believe consumers are increasingly seeking the ability to customize products by choosing preferred features from a menu of options, or the ability to personalize products by adding an individualized pattern.

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•   Reduced time between design and production. The digital textile printing process allows for samples to be quickly produced, evaluated, and modified, which permits brand owners to increase the frequency and variety of replenishment cycles in response to fashion trends.

•   Focus on reducing risk of excess inventory. The costly and time-consuming upfront setup required in analog production methods is avoided when using digital printing technologies. Therefore, digital printing enables the cost efficient production of a smaller quantity of garments which mitigates excess inventory risk and improves profitability.

•   Environmentally friendly production. Regulatory bodies and consumers are increasingly focused on social responsibility and eco-friendly manufacturing, demanding that custom decorators, online businesses, brand owners and contract printers reduce the negative environmental impact of textile treatment and dyeing, which represents a significant portion of total industrial waste water. Digital textile printing significantly reduces industrial water consumption and discharge of toxic chemicals by eliminating the need to wash screens for color changes and repeated use. We believe that this results in reduced environmental impact and, in turn, enables manufacturers to comply with regulatory and brand guidelines at a location of their choosing.

•   Reduced labor and physical space requirements. Digital textile printing requires significantly less labor to print an equivalent output due to the significant reduction in process steps. The digital textile printing process also reduces the need for floor space for manufacturing equipment by eliminating certain process steps and by consolidating multiple process steps into a single printing system. The combination of labor savings and smaller shop floor footprint, coupled with lower energy consumption and a lack of environmental impact, enables manufacturers to move production closer to consumers in a cost-effective manner.

Overview of Textile Printing Processes

The graphic and accompanying description below present various textile printing processes:

Analog Printing Processes

Screen printing is the most commonly used printing process for textiles. The two primary methods of screen printing are rotary screen printing and automated carousel screen printing.

The following chart summarizes the key steps involved in the analog printing process:

•   Rotary screen printing. Rotary screen printing is commonly used to print on outerwear, underwear, sportswear, upholstery and linens. It involves multiple, time-consuming process steps. Rolls of fabric pass through rotating

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cylinders that are engraved with the image or design to be printed. Each cylinder then applies ink of a different color, which forms part of the image or design. This process is generally used to print a pattern on a fabric roll that is then cut and sewn into finished products. Rotary screen engraving is a costly process that takes between four and five hours per cylinder and is frequently done offsite. Preparation of colors typically takes an additional 30 minutes and the setup of the printer itself typically takes nearly 1.5 hours. The process can require up to seven people. The maximum size of an image or design is limited based on the circumference of the cylinders, which is typically no more than 60 centimeters.

The following chart depicts the analog rotary screen printing process:

•   Automated carousel screen printing. Automated carousel screen printing is commonly used to print on t-shirts and jeans. In automated carousel screen printing, a blade or squeegee squeezes printing paste or ink through mesh stencils onto fabric. The process typically employs a series of printing stations arranged in a carousel. At each station, one color of ink is pressed through specially prepared mesh stencils, or screens, on to the textile surface. Between color stations, there are also flash drying stations and cool down stations to ensure that deposited ink does not inadvertently mix with the next color to be applied. Preparation of the mesh stencils is a specialized process and its complexity is a function of the number of discrete color separations and screens that need to be prepared for a given design. The process of color separations, film production, and screen exposure and alignment, typically takes approximately 1.5 hours for six colors. Once the screens and color separations are complete, preparation of the carousel typically takes between 40 and 60 minutes. After being manually loaded, the textile moves along the carousel from station to station where each color is applied separately. Unlike rotary screen printing, carousel screen printing does not require fixing the image or design with steam or hot air and, in most cases, does not require washing and drying the textile afterward.

The following chart depicts the automated carousel screen printing process:

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The digital textile printing market principally includes two types of printing processes: 

•   Direct-to-Garment (DTG). In DTG printing, an inkjet printer prints directly on the textile. DTG printing allows for printing images and designs onto finished textiles, such as t-shirts that have already been sewn and dyed. The following chart summarizes the key steps involved in the DTG printing process:

•   Roll-to-Roll (R2R). In R2R printing, rolls of fabric pass in-line through wide-format inkjet printers that are utilized to directly print images and designs onto rolling fabric. The following chart summarizes the key steps involved in the R2R printing process:

Recent technological developments in digital printing have supported the adoption of digital printing by the global printed textile industry, including by leading fashion designers, apparel brands, and contract manufacturers. Digital printing systems are now capable of printing increasingly large volumes of textiles with complex, customized images and designs at high throughput levels, which have enabled the global printed textile industry to harness the advantages of digital textile printing in a cost-effective manner. Additionally, the growth of e-commerce has given rise to many online apparel and home décor vendors who are unencumbered by legacy manufacturing processes and who rely primarily on digital printing systems to serve their large customer bases. As a result of these trends, we believe that the global printed textile industry offers a significant and rapidly growing market for digital printing solutions.

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BUSINESS

Overview

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. With throughputs ranging from 40 to 300 garments per hour, our entry level and high throughput DTG solutions are suited to the needs of a variety of customers, from smaller commercial operators with limited budgets to mass producers with mature operations and complex manufacturing requirements. Our patented NeoPigment ink and other consumables have been specially formulated to be compatible with our systems and overcome the quality-related challenges that pigment-based inks have traditionally faced when used in digital printing. Our software solutions simplify workflows in the printing process, by offering a complete solution from web order intake through graphic job preparation and execution. We also offer customers maintenance and support services and value added services aimed at optimizing the use of our systems.

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. While the DTG market generally involves printing on finished garments, the R2R market is focused on printing on fabrics that are subsequently converted into finished garments. Our R2R solution utilizes our proprietary wet-on-wet printing methodology and houses an integrated dryer within the system. We believe it will be the first single-step, stand-alone R2R digital textile printing solution available on the market. We plan to market our R2R solution, the Allegro, to online businesses that require large variety and limited quantity orders and to fabric converters, who source large quantities of fabric and convert untreated fabrics into finished materials to be sold to garment and home décor manufacturers. We are targeting the commercial launch of the Allegro in the next 18 months and believe it will offer us a significant opportunity for growth.

We were founded in 2002 in Israel, shipped our first system in 2005 and, as of September 30, 2014, had an installed base of over 1,200 systems globally. As of September 30, 2014, we had 254 employees located across four regions: Israel, the United States, Europe and the Asia Pacific region. For the fiscal year ended December 31, 2013, we generated revenues of $49.4 million, representing an increase of 26.1% over the prior fiscal year, and recorded net income of $1.1 million. In 2013, we generated 56.2% of our revenues from the Americas, 29.0% from EMEA and 14.8% from the Asia Pacific region. For the nine months ended September 30, 2014, we generated revenues of $47.5 million, representing a

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38.9% increase compared to the nine months ended September 30, 2013, and recorded net income of $1.8 million. For the nine months ended September 30, 2014, we generated 54.1% of our revenues from the Americas, 29.3% from EMEA and 16.6% from the Asia Pacific region.

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. In 2013, we grew our revenues 26.1% compared to 2012 and, in the nine months ended September 30, 2014, we grew our revenues 38.9% compared to the same period in 2013. 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. The flexibility that our digital printing solutions provide to our customers, including custom decorators, online businesses, brand owners and contract printers, enable them to develop new or improve their existing business models. Custom decorators utilize our solutions to produce short to medium runs of high-quality customized garments quickly and efficiently, enabling them to increase average selling prices compared to screen printed garments. For online businesses, our solutions facilitate the creation of “produce to order” garment production with minimum order quantities of one unit, at high average selling prices, while achieving significant margins. Brand owners benefit from our solutions’ streamlined pre- and post-treatment processes that allow them to handle production needs in house as they reduce labor, physical space requirements, industrial water consumption and eliminate the need for waste water clearing mechanisms. Our solutions also benefit high-volume contract printers that provide printing services to brand owners and high-end garment manufacturers by allowing them to print high resolution images and designs at qualities that meet high fashion standards.

•   Attractive business model. We currently offer a broad portfolio of differentiated digital printing solutions for the digital DTG market. Our existing and growing installed base of systems results in recurring sales of ink and other consumables, which are specially formulated to enable our systems to operate at the highest throughput level. Recurring sales of ink and other consumables have historically offered us a degree of visibility into a significant component of our results of operations. We believe that our recurring sales model also enables us to foster close customer relationships as it facilitates ongoing engagement with our customers, which positions us to provide tailored solutions and expand our ability 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. We have developed a strong base of technology know-how, backed by our portfolio of intellectual property, featuring 17 issued patents and nine pending patent applications, covering wet-on-wet printing methodology, ink formulations, printing processes and related methods and systems. Our team of over 50 researchers and developers, including chemists, electrical engineers, system engineers and mechanical engineers, ensures that our systems remain technologically advanced, and are well engineered, user-friendly and highly reliable.

•   Extensive product portfolio and strong new product pipeline. With throughputs ranging from 40 to 300 garments per hour, 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 and the Vulcan. We are targeting a commercial launch of our Allegro system, a one-step, integrated R2R printing and drying system, in the next 18 months. We are also targeting a commercial launch of our Vulcan system, a cost-effective digital substitution for carousel screen printing that enables mass production of customized garments for the DTG market, in the next 24 months. We believe both solutions will offer capabilities that no other player in the global printed textile industry currently offers and will further strengthen our leading position in the digital printed textile market as well as provide additional growth opportunities for our business.

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•   Environmentally friendly printing processes. A significant portion of global industrial water pollution comes from textile treatment and dyeing. We believe that environmental factors are beginning to assume a significant role in the decision-making process of our existing and potential customers, with an increasing number of countries adopting restrictions on the use of technologies like screen printing that generate significant wastewater. 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. In addition, our inks are biodegradable and certified by leading industry groups as being safe for system operators, consumers and the environment. Finally, our systems offer energy saving processes that result in the use of significantly less power compared to traditional printing processes. We believe that these environmental benefits will further drive market penetration of our solutions and enable manufacturers to move production closer to the consumer in a cost-effective manner.

•   Experienced management team. We believe that our management teams’ 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 Chief Executive Officer, Gabi Seligsohn, was the President and Chief Executive Officer of Nova Measuring Instruments (NASDAQ:NVMI) for seven years prior to joining our company. Our Chief Financial Officer, Guy Avidan, was most recently the Chief Financial Officer of Audiocodes (NASDAQ:AUDC). Mr. Seligsohn and Mr. Avidan bring extensive experience of managing publicly traded companies. Our founder and Chief Technology Officer, Ofer Ben-Zur, has over 20 years of digital printing experience. Our Executive Vice President of Sales, Sarel Ashkenazy joined our company in 2004 and together with Mr. Ben-Zur, have helped us to develop into a strong global player.

Our Strategy

The following are the key elements of our growth strategy:

•   Capitalize on the continued growth of the digital DTG market. We believe there is an opportunity to expand our presence in the growing digital DTG market by increasing sales to existing customers, gaining new customers, introducing new applications, developing new features and functionality, improving system reliability and expanding customer know how in order to drive increased utilization of our systems. In order to achieve these goals, we plan to extend and deepen our presence in the geographies we currently serve as well as align our product roadmap with these opportunities. We also intend to further invest in our direct sales and marketing teams and application development professionals in order to better inform customers and prospective customers about the benefits of digital textile printing and the capabilities of our solutions, through direct communication as well as participation in trade shows and online advertising. We have not yet determined the amount that we will invest for these purposes.

•   Focus on fast-growing web-to-print businesses. We are increasingly focusing our marketing efforts on online companies whose business models are focused on mass customization and personalization. We already serve dozens of established web-to-print customers throughout the world, some of whom are expanding their businesses at exponential rates. In order to continue to do so, we intend to increase our direct sales force and, with our channel partners, identify strategic accounts that offer the opportunity for long-term business partnerships. We believe our technology is ideally suited for web-to-print businesses because it efficiently allows manufacturers the ability to print on-demand, small runs in a cost-effective manner and with excellent quality, starting with a minimum order quantity of one unit.

•   Drive adoption of digital DTG printing solutions by customers who primarily use screen printing carousels.  A majority of DTG printing jobs are done today utilizing screen printing carousels. While we have started to penetrate this market by offering standalone DTG solutions, such as our Avalanche and Storm II systems, we plan to deepen our penetration and further transition users of these analog systems to digital printing technologies through our Paradigm II system. Paradigm II is compatible with the majority of existing screen printing carousels and allows manufacturers to combine complex images and designs printed digitally with multiple embellishment effects, such as glitter, silicon, gel and burnout, typically performed using screen printing. 

•   Extend our technological leadership through ongoing research and development and continuing to introduce new products. We will seek to continue to differentiate ourselves and extend our technological leadership by investing in research and development. We intend to leverage our customer relationships to identify emerging industry needs and innovate and develop new intellectual property and applications that address those needs. We are also developing new systems and intend to develop and introduce additional systems in the future. Our product pipeline includes an

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industrial R2R system, the Allegro, which is expected to launch commercially in the next 18 months. We expect our Allegro system to be the first R2R printing system to allow for one-step R2R digital printing, versus existing digital R2R printers which require at least four pre- and post-processing steps. We also intend to leverage the success of our existing DTG solutions, such as Paradigm II, by introducing the Vulcan system, which will offer an alternative to carousel screen printing. The Vulcan will enable customers to print small runs at throughputs comparable to those achieved through carousel screen printing. We expect to launch the Vulcan commercially in the next 24 months. We have not yet determined the amount that we will invest for these purposes.

Our Systems

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. These systems reduce the need for floor space for manufacturing equipment by eliminating certain process steps and by consolidating multiple process steps into a single printing system. 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.

All of our DTG systems utilize our patented wet-on-wet printing methodology that involves spraying a wetting solution on the fabric before applying our proprietary pigment-based inks. This unique capability enables our systems to reach high throughput levels while still producing high quality images and designs. The wetting solution prevents the ink from bleeding into the textile and fixes the ink drops, which enables digital printing with high color-intensity and image sharpness. This methodology eliminates the common practice of separately coating and drying textiles prior to printing and allows for printing on a wide range of untreated fabrics.

DTG Systems

The following table summarizes key aspects of our DTG systems, all of which are compatible with a wide range of fabrics, including cotton, wool, polyester, lycra and denim and print at maximum resolutions ranging from 600 to 630 DPI. Our systems are currently unable to print at a level of quality acceptable for large scale manufacturing on dyed polyester or nylon.

System		Target Customer		Max.  Throughput		Colors		Max. Printing Area
Breeze		Entry Level		40 garments/hour		CMYK + White		14 x 18 in
Thunder		Entry Level		80 garments/hour		CMYK + White		14 x 18 in
Storm II		High Throughput		150 garments/hour		CMYK + White		20 x 28 in
Avalanche  1000		High Throughput		300 garments/hour		CMYK + White		23.5 x 35 in
Avalanche Hexa		High Throughput		250 garments/hour		CMYKRG + White		23.5 x 35 in
Avalanche DC Pro		High Throughput		200 garments/hour		CMYK + White + Discharge ink		23.5 x 35 in
Avalanche		High Throughput		200 garments/hour		CMYK + White		23.5 x 35 in
Paradigm II		High Throughput		200 garments/hour		CMYK		15.5 x 19.5 in

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Systems under Development

Our systems under development consist of a R2R system, the Allegro, and a DTG system, the Vulcan.

•   Allegro. Our Allegro system is the first R2R printing system to allow for one-step R2R printing, while most existing R2R printers require six steps. The Allegro is in beta testing at three customer sites and we are targeting its commercial launch within the next 18 months. The Allegro takes advantage of our patented wet-on-wet methodology to allow for in-line printing on various fabrics, without requiring a separate pre-treatment process, thereby avoiding the need to use textiles that are specifically designed for digital printing. The Allegro is designed to achieve high throughputs and does not require water or steam for any part of the printing process, making it friendly to the environment.

•   Vulcan. Our Vulcan system is designed to enable mass production of customized garments with high and consistent printing quality. It is designed to run at throughputs higher than any of our existing systems. The system’s architecture takes a different ergonomic approach to the sequence of loading and unloading of garments than that of our existing systems, enabling higher throughputs. We expect to begin beta testing of the Vulcan at customer sites in 2015 and are targeting its commercial launch within the next 24 months. Given the Vulcan’s ease of setup and high throughput levels, we are seeking to disrupt the core screen printed textile industry and target replacement of a significant installed base of automated carousels. The Vulcan also capitalizes on our advanced print head and ink technology to limit waste, allowing for installation in locations where carousels cannot be installed due to environmental, health and safety laws and regulations.

Ink and Other Consumables

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 allows 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 and 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.

We have developed two patented methods for printing on dark or colored fabrics. The first method involves printing a layer of specially formulated white ink as a base upon which to print colored images and designs. Printing on top of this foundation enhances color intensity and creates contrast against the dark or colored fabric. In addition, we have developed a patented discharge ink for printing on dark or colored fabrics. The discharge ink bleaches the fabric dye and applies colored ink in the locations where the discharge ink removed the fabric dye. This method, which is primarily used by brand owners and contract printers, allows the printing of high resolution images and designs without compromising the texture or feel of the garment.

Integrated Software

All of our systems arrive with our QuickP Production software installed. QuickP Production is a basic interface that allows users to control key operating parameters of our systems, such as ink dots per inch, or DPI, and import image files created using other Ruster Image Processing, or RIP, software. Almost all of our customers also purchase our QuickP Designer software. QuickP Designer is a software package that combines our own internally developed RIP software with other print job management capabilities and allows greater control over the image design process than QuickP Production, such as the ability to resize and reposition images and improve image quality. A single QuickP Designer license can be used to support multiple Kornit systems. We also offer our QuickP Plus 2.0 software suite, which provides customers with a full workflow solution from acceptance of online orders through production via our web application server. QuickP Plus 2.0 is at an early stage of adoption by customers and is currently installed at a few of our customer sites.

Our Services

Our services consist of maintenance and support, and professional services. We are seeking to increase the number of customers that rely on us to provide services for their systems by expanding our service capabilities. In addition to driving gross margin improvement, we believe this will provide us an opportunity for direct contact with customers with the goal of reducing system down-time, educating customers about optimal use of our systems to drive increased utilization, expanding the variety of print applications and increasing sales of post-warranty service contracts and other professional application development services.

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Professional Services

Our systems are designed such that customers can operate them without our assistance or that of our independent distributors. However, nearly all customers purchase our basic installation package and some take our advanced training program. Our advanced training program is an onsite tutorial ranging from three to five days, which includes customized consulting aimed at optimizing the use of our systems. Courses are also provided at our regional offices. We continuously seek to expand the number and content of the training programs. We provide professional services to customers in all regions.

Our Customers

Our diverse global customer base consisted of more than 800 customers as of September 30, 2014. Our customers include custom decorators, online businesses, brand owners and contract printers.

•   Custom Decorators. Our custom decorator customers produce and sell decorated garments, mostly t-shirts. Our systems allow custom decorators to produce short to medium runs of high-quality customized garments quickly and efficiently, which enables them to increase average selling prices and margins compared to their screen printed garments.

•   Online Businesses. The business model of our online business customers is based on “produce to order” garments, often in quantities of one, at high average selling prices and significant margins. Since the online customized apparel business is growing quickly, most of our online business customers serve more than one website and have multiple systems on their production floors. Some of these customers look to us to link them with other users of our systems around the world, to cater to their own global customer base, enabling them to shorten delivery times for the orders they process through their websites. Our systems’ one-step printing process allows these customers to produce customized garments with short setup time.

•   Brand Owners. Most brand owners use contract printers to produce their garments. Our systems offer an alternative to outsourcing in cases where brand owners prefer to handle their production needs in house. Several brand owners that own full or partial production capacity are adopting digital textile printing technology to achieve innovation in design, greater customization and shorter lead times to market, which our systems facilitate.

•   Contract Printers. Contract printers are high volume producers that are seeking industrial scale and cost-effective printing solutions. They provide printing services to brand owners and high-end garment manufacturers and primarily use analog printing technologies. Our contract printer customers typically purchase our Avalanche family of products for high productivity as well as our Paradigm II DTG system, which allows them to combine complex images and designs with multiple embellishment effects, such as glitter, silicon, gel and burnout, into their ordinary screen printed textiles.

Sales and Distribution

Our go to market strategy consists of a hybrid model of indirect and direct sales. We sell the majority of our solutions through a global network of independent distributors and value added resellers that we refer to as our channel partners. Our channel partners, in turn, sell the solutions they purchase from us to customers for whom we provide installation services, or sell and install our solutions on their own. Our channel partners work closely with our sales force and assist us by identifying potential sales targets, closing new business and maintaining relationships with and, in certain jurisdictions, providing support directly to our customers. Almost all of our independent distributors have our systems available for tradeshows, product demonstrations at their facilities, and other promotional activities. As of September 30, 2014, our global network of channel partners consisted of approximately 50 independent distributors and resellers. Sales by our distributors accounted for approximately 72% of our revenues during the nine months ended September 30, 2014 and approximately 63% in 2013. In addition to working closely with our channel partners, our direct sales force engages in direct sales in certain geographies, and also with our largest customers, irrespective of their location.

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The substantial majority of our sales in North America are performed through independent distributors. Hirsch International Corporation and SPSI, Inc. were our top two independent distributors by revenues in 2013 and during the nine months ended September 30, 2014, accounting for 20% and 24% of our revenues in each such period in the case of Hirsch, and 13% and 16% of our revenues in each such period in the case of SPSI, respectively. We entered into distributor agreements with Hirsch and SPSI, dated April 1, 2014, each with an initial term of three years, which will renew automatically for successive one-year periods unless one party notifies the other party that it does not wish to renew the agreement, by providing 90 days’ notice prior to the end of the initial term of renewal period, as applicable. Our agreement with Hirsch is a non-exclusive distribution contract across North America, including 28 states concentrated on the East and West Coasts, as well as five Canadian provinces. Our agreement with SPSI is a non-exclusive distribution contract across the United States, including 20 states mainly in the Midwest, Northwest, and Southwest regions. For both distributors, we maintain projected sales plans for a number of different print systems on a yearly basis and there is a minimum yearly sales requirement for systems and ink and other consumables.

Marketing

Our marketing strategy is aimed at positioning us as a global leader in digital textile printing. We are focused on increasing awareness of our brand and communicating the benefits of our disruptive technology and how it addresses market needs in order to develop leads and increase sales to existing customers. We market our systems as a comprehensive solution to the growing trend towards mass customization and personalization. We seek to execute our strategy by leveraging a combination of internal marketing professionals and a network of channel partners to communicate the value proposition and differentiation of our systems, generating qualified leads for our direct sales force and channel partners. By investing in analytics-driven lead development and through detailed interactions with key customers, we seek to create and update our product roadmaps and individual marketing plans to optimize distribution while helping facilitate the process of release, ramp-up and sales.

We use a variety of advanced inbound and outbound online marketing methods to reach and communicate with potential customers. Inbound methods include a variety of online marketing strategies comprised of search marketing (for example, search engine optimization and pay per click advertising), social media, blogs, syndication, webinars and white papers. Outbound channels include a fully automated e-mailer and web based customer nurturing and scoring process, as well as more traditional marketing methods such as print advertisements, direct mail and e-mail, tradeshows, newsletters and referrals. In addition, we have developed domestic and international onsite demonstration capabilities in our regional offices in the United States, Germany, Hong Kong and China and we also rely on demonstration facilities setup by our channel partners.

Manufacturing, Inventory and Suppliers

Manufacturing

The majority of our systems are assembled by ITS Industrial Techno Logic Solutions Ltd., or ITS, at its facilities in Kfar Saba, Israel. A portion of our systems are assembled by IFAT Technologies Ltd., or Ifat, at its facilities in Rehovot, Israel. Aside from our print heads, we source most of the components of our systems directly, which we believe allows us to manage our material costs and take advantage of the overall volume of systems manufactured at both facilities without the overhead of having in house manufacturing. 

We entered into our first manufacturing agreement with ITS in May 2009. We replaced that agreement with a new agreement dated November 19, 2014 pursuant to which ITS manufactures the Avalanche, Avalanche 1000, Storm II, and Allegro systems in accordance with our bill of materials, drawings and designs. The initial term of the new agreement is for two years and it renews automatically for successive one-year periods thereafter unless either party notifies the other party that it does not wish to renew the agreement by providing 30 days’ notice prior to the end of the initial two-year term or any subsequent one-year renewal term. Prices are set forth in the agreement and are determined separately with respect to the printers, services and raw materials.

Ifat manufactures some of our Avalanche systems and our Breeze, Thunder and Paradigm II systems on a purchase order basis in accordance with our bill of materials, drawings and designs.

We produce and bottle our ink and other consumables at our facility in Kiryat Gat, Israel using raw materials purchased from various suppliers for milling pigments and mixing, bottling and packaging.

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