We are offering 728,262
ordinary shares to certain institutional investors at a price of $4.60 per share under securities purchase agreements dated August
14, 2018 between us and such investors.
Our ordinary shares
are traded on the Nasdaq Capital Market under the symbol “ABIL.” Our listed warrants trade on the OTC Pink under the
symbol “ABIWF”. The closing price of our ordinary shares, as reported on the Nasdaq Capital Market on August 13, 2018,
was $5.99. The closing price of our warrants, as reported on the OTC Pink on August 13, 2018, was $0.055. Our ordinary shares
may be delisted from the Nasdaq Capital Market (See “
Our Business – Nasdaq Delisting Determination”
on
page S-10
and
“
Risk Factors
—
Our ordinary shares could be delisted from the Nasdaq Capital Market if
we fail to regain compliance with the Nasdaq’s stockholders’ equity continued listing standards on the schedule required
by the Nasdaq Capital Market. Our ability to publicly or privately sell equity securities and the liquidity of our ordinary shares
could be adversely affected if we are delisted from the Nasdaq Capital Market
” on page S-10).
The aggregate market
value of our outstanding voting and non-voting common equity held by non-affiliates on June 26, 2018, as calculated in accordance
with General Instruction I.B.5. of Form F-3, was approximately $11 million. We have not issued any securities pursuant to Instruction
I.B.5. of Form F-3 during the 12 calendar month period that ends on and includes the date hereof.
We are an emerging
growth company as that term is used in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act and, as such, we have
elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings.
Our auditors have expressed
substantial doubt about our ability to continue as a going concern.
We have retained H.C.
Wainwright & Co., LLC to act as our exclusive placement agent in connection with the offering. The placement agent has agreed
to use its “reasonable best efforts” to sell the securities offered by this prospectus supplement and the accompanying
prospectus. We have agreed to pay the placement agent fees, in respect of ordinary shares placed by the placement agent, set forth
in the table below, which assumes that we sell all of the ordinary shares we are offering.
We expect to deliver
the ordinary shares being offered pursuant to this prospectus supplement on or about August 16, 2018.
RISK FACTORS
You should consider
carefully the risks and uncertainties described below, together with all of the other information in this prospectus supplement,
the accompanying prospectus and in the documents incorporated by reference herein. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not
material, may also become important factors that adversely affect our business. If any of the following risks actually occurs,
our business, financial condition, results of operations and future prospects could be materially and adversely affected. In addition,
please read “About this Prospectus Supplement” and “Cautionary Note Regarding Forward-Looking Statements”
in this prospectus supplement, where we describe additional uncertainties associated with our business and the forward-looking
statements included or incorporated by reference in this prospectus supplement and the accompanying prospectus. If any of the following
risks actually occurs, then our business, financial condition or results of operations could be materially adversely affected,
the trading of our securities could decline, and you may lose all or part of your investment therein. Please note that additional
risks not currently known to us or that we currently deem immaterial also may adversely affect our business, results of operations,
financial condition and prospects.
Risks Related to our Financial Position
We have incurred net losses and negative
cash flows in the years ended December 31, 2017 and 2016 and the three months ended March 31, 2018 and can provide no assurance of
our future operating results.
We currently have limited
product revenues. We have experienced net losses and negative cash flows from operating activities during the years ended December
31, 2017 and 2016 and the three month period ended March 31, 2018. For the years ended December 31, 2017 and 2016 and the three
months ended March 31, 2018, we incurred net losses of $9.1 million, $8.1 million and $3.0 million, respectively. As
of March 31, 2018, we had an aggregate accumulated deficit of $21.0 million. We expect to incur additional operating losses
for the foreseeable future. There can be no assurance that we will be able to achieve sufficient revenues to support our operations
or be profitable in the future.
The report of our independent registered
public accounting firm contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern.
Our audited consolidated
financial statements for the year ended December 31, 2017 were prepared under the assumption that we would continue our operations
as a going concern. Our independent registered public accounting firm has included a “going concern” explanatory paragraph
in its report on our consolidated financial statements for the year ended December 31, 2017, indicating that there is a substantial
doubt about our ability to continue as a going concern. If we are unable to improve our liquidity position, by, among others things,
increasing our revenues, raising capital through public or private offerings or reducing our expenses, we may exhaust our cash
resources and will be unable to continue our operations. If we cannot continue as a viable entity, our shareholders would likely
lose most or all of their investment in us.
Even if this offering closes, we
will need significant additional capital, which we may be unable to obtain. If we are unable to raise capital, we will be forced
to reduce or eliminate our operations.
Revenues generated
from our operations are not presently sufficient to sustain our operations. As of March 31, 2018, we had total cash and cash equivalents
of $0.7 million, negative working capital of $3.4 million and a capital deficiency of $2.4 million. Based on our projected cash
flows and our cash balances as of the date of this prospectus supplement, our management is of the opinion that without fund raising
we have sufficient capital to finance our operations through the next two months assuming the utilization in full of our line
of credit described in the next sentence. On April 11, 2018, we obtained a six-month bank line of credit of NIS 11 million ($3.1
million) secured by our controlling shareholders, Anatoly Hurgin, who is also our Chief Executive Officer and Chairman, and Alexander
Aurovsky, who is also our Chief Technology Officer and a director. To date, we have drawn down NIS 5.5 million ($1.5 million)
on the line of credit. With estimated proceeds from this offering totaling approximately $2.8 million after deducting the placement
agent fee and estimated offering expenses payable by us, at our expected burn rate following this offering, the proceeds from
this offering will be sufficient for up to six months assuming the utilization in full of our line of credit described above.
Even if this offering
closes, we will need to raise significant additional capital and if we are unable to obtain additional sufficient financing, we
will be forced to reduce the scope of, or eliminate our operations. We will also have to reduce marketing, customer service or
other resources devoted to our products. Any of these factors will materially harm our business and results of operations.
There can be no assurance
that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable
to us. We may be required to pursue sources of additional capital through various means, including debt or equity financings. Any
additional capital raised through the sale of equity or equity-linked securities will dilute our current shareholders’ ownership
in us, potentially substantially, and could also result in a substantial decrease in the market price of our ordinary shares. Also,
the terms of securities we may issue in future capital transactions may be more favorable for new investors. Newly issued securities
may include preferences, superior voting rights, the issuance of warrants or other derivative securities, and the issuances of
incentive awards under equity employee incentive plans, which may have additional dilutive effects. Further, we may incur substantial
costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing and
distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities
we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. Our ability to obtain
needed financing may be impaired by such factors as the capital markets, our history of losses, and our litigations and SEC investigation
which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing
activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that
we reduce our operations accordingly, we may be required to cease operations.
Our ordinary shares could be delisted
from the Nasdaq Capital Market if we fail to regain compliance with the Nasdaq’s stockholders’ equity continued listing
standards. Our ability to publicly or privately sell equity securities and the liquidity of our ordinary shares could be adversely
affected if we are delisted from the Nasdaq Capital Market.
On January 12, 2018,
we received a notification from the Staff that we are not in compliance with Nasdaq Listing Rule 5550(b)(1) due to our failure
to maintain a Minimum Shareholders’ Equity Requirement, or any alternatives to such requirement. In order to maintain our
listing on the Nasdaq Capital Market, we submitted a plan of compliance addressing how we intended to regain compliance, which
was accepted by the Staff on March 7, 2018. We had until July 11, 2018, to evidence compliance with the Minimum Shareholders’
Equity Requirement.
On July 12, 2018, we
received a letter from the Staff indicating that we did not meet the Staff’s July 11, 2018 deadline to regain compliance
with Nasdaq Listing Rule 5550(b)(1) due to our failure to maintain a minimum of $2,500,000 in shareholders’ equity or any
alternatives to such requirement. As a result, we would have been subject to delisting on July 23, 2018 unless we requested a hearing
before a Nasdaq Listing Qualifications Panel, or the Panel. On July 19, 2018, we requested a hearing before the Panel, and a hearing
has been scheduled for August 30, 2018. During the hearing, we will present our plan of compliance and request a further extension
of time. The Panel has the discretion to grant us up to an additional 180 calendar days from July 12, 2018 to regain compliance.
Our request for a hearing in front of the Panel has automatically stayed any delisting or suspension action pending the issuance
of a final decision by the Panel; however, the Nasdaq has broad discretionary public interest authority that it can exercise to
apply additional or more stringent criteria for the continued listing of our ordinary shares, or suspend or delist securities.
The proceeds from this offering will not be sufficient for us to regain compliance with the Minimum Shareholders’ Equity
Requirement, of Nasdaq and there can be no assurance that the Panel will ultimately grant an extension of the compliance period.
Previously, on October
11, 2017, we received notification from the Staff that we were not in compliance with the minimum bid price requirement set forth
in Nasdaq Listing Rule 5550(a)(2). Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of
$1.00 per share and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists
if the deficiency continues for a period of 30 consecutive business days. Based on the closing bid price of our ordinary shares
for the 30 consecutive business days ended October 10, 2017, we no longer met the minimum bid price requirement. In accordance
with Nasdaq Listing Rule 5810(c)(3)(A), we had an initial Minimum Bid Price Compliance Period, to regain compliance with the minimum
bid price requirement. On December 27, 2017, we implemented a 1-for-10 consolidation of our ordinary shares with a market effective
date of March 23, 2018. One of the primary intents for the consolidation was that the anticipated increase in the price of our
ordinary shares immediately following and resulting from a reverse stock split due to the reduction in the number of issued and
outstanding ordinary shares would help us meet the price criteria for continued listing on the Nasdaq Capital Market. On April
9, 2018, we received a notification from the Staff that we had regained compliance with the Nasdaq Listing Rule 5550(a)(2).
In addition, previously,
on April 19, 2017, we received notification from the Staff that as a result of the resignation of all of our independent directors
from our board of directors in April 2017, we were no longer in compliance with Nasdaq Listing Rules 5605(b)(1), 5605(c)(2), 5605(d)(2)
and 5605(e) as the board was no longer comprised of a majority of independent directors nor does it have an audit committee, compensation
committee or nominating committee. On May 18, 2017, Nasdaq notified us that we regained compliance following the appointment of
Levi Ilsar, Brigadier General (Ret.) Eli Polak and Nimrod Schwartz to our board of directors and the audit, compensation and nominating
committees thereof. In addition, on June 6, 2017 we received notification from the Staff that we were not in compliance with the
minimum bid price requirement set forth in Nasdaq’s Listing Rule 5550(a)(2). On June 23, 2017, we received a notification
from the Staff that we had regained compliance with Nasdaq Listing Rule 5550(a)(2).
If we are delisted
from the Nasdaq Capital Market, our ordinary shares may be eligible for trading on an over-the-counter market in the United States.
In the event that we are not able to obtain a listing on another U.S. stock exchange or quotation service for our ordinary shares,
it may be extremely difficult or impossible for shareholders to sell their ordinary shares in the United States. Moreover, if we
are delisted from the Nasdaq Capital Market, but obtain a substitute listing for our ordinary shares in the United States, it will
likely be on a market with less liquidity, and therefore experience potentially more price volatility than experienced on the Nasdaq
Capital Market. Shareholders may not be able to sell their ordinary shares on any such substitute U.S. market in the quantities,
at the times, or at the prices that could potentially be available on a more liquid trading market. As a result of these factors,
if our ordinary shares are delisted from the Nasdaq Capital Market, the price of our ordinary shares is likely to decline. Delisting
also could have other negative results, including the potential loss of confidence by employees, the loss of institutional investor
interest and fewer business development opportunities. Moreover, if our ordinary shares were delisted from Nasdaq, we will no longer
be exempt from certain provisions of the Israeli Securities Law, and therefore will have increased disclosure requirements.
Risks Related to our Business
Our revenues are highly dependent
on the successful implementation and customer adoption of ULIN, the customer adoption of which has been limited.
In November 2015, we
introduced ULIN, a product based on a new technology allowing for the interception of communication in GSM, UMTS and LTE cellular
networks without, in most cases, the involvement of mobile network operators. We expected that ULIN would be a major growth driver
of our sales and revenues. However, since the introduction of ULIN, customer adoption of ULIN has been much slower than we had
anticipated, and while we have seen significant interest in ULIN and its advanced capabilities, during the year ended December
31, 2016, we only completed one ULIN sale (which was our first ULIN sale). During the year ended December 31, 2017, we suspended
recognizing revenues for this sale due to collectability issues. In January 2018, we completed an additional sale of ULIN however
due to technical implementation issues encountered with the solution, we have not recognized any revenue from such sale to date.
We believe that the limited customer adoption to date of ULIN, notwithstanding its competitive advantages over tactical interception
solutions, is primarily due to its increased costs compared to such tactical interception solutions, as well as the market’s
desire for a product capable of intercepting data communication in addition to the content of voice calls and SMS, and ULIN’s
inability to intercept cellular communication within some network operators. We believe that continued increase in usage of new
communication channels and the technological developments in the cellular communications industry (such as an increased number
of cellular networks, mobile operators and frequencies), which have resulted in tactical cellular interception systems becoming
more complex and expensive, will contribute to the competitive strength and distinctiveness of ULIN, which in turn will result
in an increased demand for ULIN. However, we cannot assure you that the market or demand for ULIN will grow as we believe (if at
all).
Furthermore, ULIN sales
cycles have taken longer than expected to complete. We believe that the significant increase in the length of the ULIN sales cycle,
compared to our legacy tactical interception solutions is primarily due to the difficulties described above and the lengthy purchasing
approval processes for ULIN, oftentimes requiring the approval of the most senior levels of government.
Our ULIN offering has
and will continue to require significant attention from our management and other key personnel and may require expansion of our
sales network to accommodate the higher value and complexity of ULIN sales as well as the currently expected demand.
Furthermore, since
the introduction of ULIN, while we have continued to offer our legacy tactical cellular interception solutions, we have experienced
a significant decline in sales of our existing portfolio of solutions and products within the cellular interception category and
we cannot assure you that ULIN will not render a substantial percentage of our existing product portfolio obsolete. In addition,
increased usage of new communication channels and technological developments in the cellular communications industry (such as an
increased number of cellular networks, mobile operators and frequencies) have resulted in cellular interception systems becoming
more complex, expensive and limited in their interception capabilities, which we believe in turn have also had an adverse effect
on sales of our legacy tactical cellular interception solutions. If we are unable to achieve increased customer adoption of ULIN,
our business, financial condition and results of operations would be materially adversely affected.
Slow customer adoption
and extended sales cycles of ULIN, as well as decline in sales of our existing portfolio of solutions and products, resulted in
a 82% decrease in revenues for the year ended on December 31, 2017 compared to the year ended on December 31, 2016, as well as
a 68% decrease in revenues compared to the year ended on December 31, 2015.
ULIN sales are dependent on a reseller
agreement with one supplier, which automatically terminates in January 2019.
Our ULIN sales are
based on a reseller agreement granting us a worldwide exclusive right to sell ULIN, which agreement following a recent amendment
automatically terminates in January 2019 and may be terminated by either party under certain specific circumstances. We may not
be able to further extend the agreement or may not be able to do so on terms favorable to us. The ULIN supplier is a third party
supplier and, as such, we have no ability to exert any influence over the business or employees of the supplier. Further, the supplier
is a recently established corporation with a short operating history and is unknown in the industry. If the supplier ceases operations
or is unable to deliver ULIN in the quantities and requisite quality required by us, is unable to attract or retain its key personnel
or fails to adequately upgrade and develop ULIN in order for it to remain competitive, our business, financial condition and results
of operations could be materially adversely affected. In addition, under the reseller agreement and during its term, at the end
of each contract year in which we sell less than $10.0 million of products resulting in less than $5.0 million payments to the
supplier, we are required to pay the supplier a 15% penalty against the shortfall amount. Accordingly, for the years ended December
31, 2017 and 2016 and the three months ended March 31, 2018, we paid penalty payments to the supplier in the amounts of $1.8 million,
$1.5 million and $0.4 million, respectively, and are currently paying penalty payments of $125,000 per month, which as of October
20, 2018, will be reduced to 30,000 Euros per month. Further, during the term of the reseller agreement, we must obtain the supplier’s
consent to, among other things, manufacture, sell or market any product which is competitive with ULIN. If the supplier does not
give its timely consent to any such action, our business, financial condition and results of operations would be materially adversely
affected.
We are under an investigation by
the SEC and recently received a “Wells” notice and if SEC enforcement action is initiated, even if ultimately resolved
favorably for us, such action would have a material adverse impact on our reputation, business, financial condition, results of
operations or cash flows.
On February 16, 2017,
we received a subpoena from the SEC. The subpoena requested, among other things, information regarding the transaction with Cambridge,
the restatement that occurred in May 2016, and financial and business information. In furtherance of the investigation, the SEC
obtained testimony from the Company’s officers among others. The Company and its officers have been fully cooperating with
the investigation. On July 3, 2018, the SEC issued a “Wells” notice to Anatoly Hurgin and Alexander Aurovsky,
our controlling shareholders who are also officers and directors, in connection with the ongoing investigation. The Wells notice
indicated that the Staff of the SEC’s Division of Enforcement has made a preliminary determination to recommend that the
SEC authorize the institution of an enforcement action against us and Messrs. Hurgin and Aurovsky that would allege, among others,
violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 14(a) of the Securities Exchange Act of 1934. A Wells
notice is neither a formal allegation of wrongdoing nor a finding that any violations of law have occurred. Rather, it provides
us and Messrs. Hurgin and Aurovsky with an opportunity to respond to issues raised by the SEC and offer their perspective prior
to any SEC decision to institute proceedings. On August 10, 2018, we and Messrs. Hurgin and Aurovsky made a Wells submission in
response to the Wells notice. If enforcement action is initiated, this could result in us and Messrs. Hurgin and Aurovsky being
subject to an injunction and cease and desist order from further violations of the securities laws as well as monetary penalties
of disgorgement, pre-judgment interest, a civil penalty, and in the case of Messrs. Hurgin and Aurovsky only, a bar from serving
as an officer or director. If enforcement action is initiated, even if ultimately resolved favorably for us, this would have a
material adverse impact on our reputation, business, financial condition, results of operations or cash flows.
Adverse outcomes in our outstanding
litigation matters, or in new litigation matters that arise in the future, could negatively affect our business,
results of operations, financial condition and cash flows.
We and our officers
are defendants in multiple lawsuits. See “Prospectus Summary—Legal Proceedings” for further details. We intend
to engage in a vigorous defense of the lawsuits. In certain circumstances, we are obliged to indemnify our current and former officers
who are named as defendants in these lawsuits. However, we are unable to predict the outcome of any of these matters at this time.
Any conclusion of these matters in a manner adverse to us could have a material adverse effect on our business, results of operation,
financial condition and cash flows. For example, we may be required to pay substantial damages, incur payments of fines and penalties,
incur substantial costs not covered by our directors’ and officers’ liability insurance, suffer a significant adverse
impact on our reputation, and management’s attention and resources may be diverted from other priorities, including the execution
of business plans and strategies that are important to our ability to grow our business, any of which could have a material adverse
effect on our business. In addition, we recently entered into an agreement with our insurer pursuant to which we agreed to discharge
our insurer from liability with respect to any U.S. claims (excluding the Ladragor Litigation in Israel, as described further in
“Prospectus Summary—Legal Proceedings”) in consideration for an aggregate settlement amount of $5.0 million,
of which $2.5 million is to be used for settlement of the New York Class Action Litigation and the remaining amount is to be used
to cover various defense and legal costs. Accordingly, no insurance proceeds will be available for any U.S. claims other than with
respect to the settlement of the New York Class Action Litigation. If we do not have sufficient funds to settle or pay any damages
and costs with respect to any U.S. claims not covered by insurance, this would have a material adverse effect on our business,
financial condition and results of operation.
We face risks relating to government spending and contracts
with governments and governmental agencies.
All of our revenues
to date have been generated from engagements with various governments around the world, including national, regional and local
governmental agencies, either directly or through resellers or integrators. We expect that sales to governments and governmental
agencies, including through resellers or integrators, will continue to be the primary source of our revenues for the foreseeable
future. Slowdowns, recessions, economic instability, political unrest, government changes, armed conflicts or natural disasters
around the world may cause governments and governmental agencies to delay, reduce or even cancel planned spending, reduce the scope
of or terminate projects, even if already budgeted, or decide to change priorities and reallocate budgets, all of which could adversely
affect our business.
Sales to governments
and governmental agencies, including through resellers or integrators, are subject to special risks, such as delays in funding,
termination of contracts or sub-contracts at the convenience of the government or applicable governmental agency, reduction or
modification of contracts or sub-contracts in the event of changes in the government’s policies or priorities, as a result
of budgetary constraints or for other reasons, collection difficulties, increased or unexpected costs resulting in losses or reduced
profits under fixed price contracts, and governmental agencies’ right to audit and investigate government contractors.
In addition, the market
for the solutions and products we sell is highly dependent on the spending cycle and scope of federal, state, local and municipal
governments, as well as those of security organizations in international markets. We cannot assure you that these spending cycles
will materialize as we expect and that we will be positioned to benefit from these potential opportunities.
Furthermore, our engagements
provide for customer acceptance of our solutions with a right of return, regardless of any previous partial acceptance. Failure
to obtain customer acceptance for the complete solutions or if the customer exercises its right of return, or, generally, termination
of the engagement, would generally not entitle us to reimbursement for our incurred costs for work performed. While such occurrences
have not happened in the past, we cannot be certain that we will not experience problems in the future in our performance of such
government engagements.
For most solutions and products,
we rely on third party suppliers, manufacturers and partners, and if these relationships are interrupted we may not be able to
obtain substitute suppliers, manufacturers or partners on favorable terms or at all and we may be subject to other adverse effects.
We rely on non-affiliated
suppliers and original equipment manufacturer, or OEM, partners for most non-standard products or components which may be critical
to our solutions, including both hardware and software, and on manufacturers of assemblies that are incorporated into our solutions.
During the years ended December 31, 2017, 2016 and 2015, expenses incurred with respect to our three largest suppliers comprised
27%, 72% and 70% of our cost of revenues, respectively, and one supplier accounted for 17%, 40% and 43% of our cost of revenues
in such years, respectively.
In October 2015, we
entered into an agreement with a third party supplier who designs and licenses ULIN. This agreement may in the future account for
a significant portion of our vendor costs as well as our revenue generation. See the risk factor
“ULIN sales are depended
on a reseller agreement with one supplier, which automatically terminates in January 2019.”
Our competitiveness,
business and future growth is highly dependent on our ability to retain access to these suppliers and contractors as well as their
technology. Our reliance on a limited number of suppliers involves risks. In the event that a key supplier, including in particular
the supplier of ULIN, ceases operations or otherwise ceases to do business with us, it may take a substantial amount of time and
expense for us to secure substitute suppliers. Certain of our suppliers also offer products that compete with our solutions. We
may also purchase technology, license intellectual property rights and oversee third party development and localization of certain
products and components, in some cases, by or from companies that may compete with us or work with our competitors. In addition,
in certain cases, we may be dependent on sole-source suppliers for some components. If any of these sole-source suppliers fails
to meet our needs, we may not have readily available alternatives. Our ability to fill our supply needs could jeopardize our ability
to satisfactorily and timely complete our obligations under our government and other contracts.
If these suppliers,
manufacturers or partners experience financial, operational, manufacturing capacity or quality assurance difficulties, cease production
and sale of the products we buy from them entirely, or there is any other disruption, including loss of license, OEM or distribution
rights, including as a result of the acquisition of a supplier or partner by a competitor, we may be required to locate alternative
sources of supply or manufacturing, to internally develop the applicable technologies, or to redesign and/or remove certain features
from the products and solutions we offer, any of which would be likely to increase expenses, create delivery delays and negatively
impact our sales. Although we endeavor to put in place contracts with key providers, and attempt to identify redundant suppliers,
we may not be able to enter into such contracts or purchase from redundant suppliers. If we are able to enter into such contracts,
we may not be successful in obtaining adequate protections, these agreements may be short-term in duration and the counterparties
may be unwilling or unable to stand behind such protections. Moreover, these types of contractual protections offer limited practical
benefits to us in the event our relationship with a key provider is interrupted. In addition, by utilizing third party suppliers,
manufacturers and partners, we run the risks that the reputation and competitiveness of the products, solutions and services we
offer may deteriorate as a result of the reduction of our control over quality and delivery schedules and the consequent risk that
we will experience supply interruptions and be subject to escalating cost; and our competitiveness may be harmed by the failure
of our subcontractors to develop, implement or maintain manufacturing methods appropriate for our product portfolio and our customers.
Further, as suppliers
discontinue their products, modify them in manners incompatible with our current use or use manufacturing processes and tools that
could not be easily migrated to other vendors, we could have significant delays in product availability, which would have a significant
adverse impact on our results of operations and financial condition. Although we believe that we can obtain alternative sources
of supply in the event our suppliers are unable to meet our requirements in a timely manner, we cannot assure you that our alternative
sources of supply would be sufficient to avoid a material interruption or delay in deliveries and in availability.
If we cannot retain and recruit key
personnel, our business may suffer and our ability to operate and grow our business may be impaired.
We depend on the continued
service and performance of our senior management and key personnel, including Anatoly Hurgin, our Chief Executive Officer, and
Alexander Aurovsky, our Chief Technology Officer, to run and grow our business. As of August 13, 2018, we employed 15 individuals
on a full-time basis and two individuals on a part-time basis, comprised of administrators, marketing and technical personnel.
We may not be able to continue to retain and attract such personnel and the loss of the services of these persons could adversely
affect our business. Members of our senior management team may resign at any time (subject to applicable contractual advance notice
periods). At present, the pending litigations to which we and our executives and certain of our former directors are a party and
the SEC investigation, as well as the implementation of procedures relating to compliance with the United States Foreign Corrupt
Practices Act, or the FCPA, require significant management time and could divert the attention of our management from our business
operations. In addition, if enforcement action is initiated by the SEC against Messrs. Hurgin and/or Aurovsky (see “Prospectus
Summary—Recent Developments—Wells Notice”), either one of them could be subject to a bar from serving as an officer
or director which would have a material adverse effect on our business and results of operations and may require us to cease operations.
To remain successful
and to grow, we also need to retain existing employees and attract new employees who understand and/or have experience with the
solutions and products we offer and our markets, especially new markets and growth areas we may enter. As we grow, we must also
enhance and expand our management team to execute on new and larger agendas and challenges and recruit and retain qualified personnel,
such as project managers, to execute, commercialize, market and sell the solutions and products we offer. The market for qualified
personnel is limited in the areas of emerging technology and recruitment of qualified personnel is competitive in the geographic
markets in which we operate. We may be at a competitive disadvantage to companies with greater brand recognition or financial resources
in recruiting. An inability to attract and retain highly qualified employees may have a material adverse effect on our results
of operations and financial position. Moreover, if we are not able to properly balance investment in personnel with growth in our
business, our profitability may be adversely affected. There can be no assurance that we will be able to successfully recruit and
integrate new employees. There is often intense competition to recruit highly skilled employees in the technology industry, and
we may not be able to offer current and potential employees a compensation package that is satisfactory in order to retain or recruit
them.
We face risks related to the concentration
of customers with whom we do business and, if we are unable to establish and maintain our relationships with such customers, our
business and ability to grow could be materially adversely affected.
We conduct business
with a relatively small number of customers, including third party resellers and agents, each of which could be material to our
business. With respect to sales in many regions and countries, we sell to third party resellers that, in turn, resell the products
and solutions we offer to various security and intelligence agencies, military forces, law enforcement agencies and homeland security
agencies. For example, in the years ended December 31, 2017, 2016 and 2015, one significant reseller accounted for 45%, 47% and
66% of our revenues, respectively, and one other reseller in each such periods accounted for 25%, 32% and 13% of our revenues,
respectively. Our sales to relatively few significant resellers and customers could continue to account for a substantial percentage
of our sales in the foreseeable future. There can be no assurance that we will be able to retain these key resellers and customers
or that such resellers and customers will not cancel purchase orders, reschedule or decrease their level of purchases. Loss, cancellation,
deferral of business by, or failure to receive new contracts, renewals or follow-on contracts from, such resellers and customers
could have a material adverse effect on our business and operating results.
To remain successful,
we must maintain our existing relationships as well as identify and establish new relationships with other customers, including
third party resellers and agents. We must often compete with other suppliers for these relationships and our competitors often
seek to establish exclusive relationships with these sales channels or to become a preferred partner for them. Our ability to establish
and maintain our relationships is based on, among other things, factors that are similar to those on which we compete for end customers,
including features, functionality, ease of use, installation, maintenance and price.
As our market opportunities
change, our reliance on particular distribution channels may increase or we may need to create new channels to address changing
market needs, which may negatively impact our growth and gross margins. Certain of our current distribution channels currently
compete with us or may enter into markets in competition with us, which could result in the termination of our relationship with
them or lead to a significant reduction in sales through such channels. There can be no assurance that we will be successful in
maintaining, creating or expanding these distribution channels.
In addition, the execution
of our growth strategy also depends on our ability to create new alliances with certain market players in certain markets. Even
if we are able to enter into such alliances, it may be under terms that are not favorable to us, or we may not be able to realize
the benefits that are anticipated through such alliances. If we are not successful at these efforts, we may lose sales opportunities,
customers and market share, which may have a material adverse effect on our business and results of operations.
The industry in which we operate
is characterized by rapid technological changes, evolving industry standards and changing market potential from area to area, and
if we cannot anticipate and react to such changes, our financial results may suffer.
The markets for the
products and solutions we sell are characterized by rapidly changing technology and evolving industry standards. The introduction
of products and solutions embodying new technology, new delivery platforms and the commoditization of older technologies, together
with the emergence of new industry standards, technological hurdles and protection measures, can exert pricing pressure on existing
products and solutions and/or render them unmarketable or obsolete. For example, new industry standards for cellular networks are
introduced from time to time, such as the proposed 5G networks. Moreover, the market potential and growth rates of the markets
we serve are not uniform and are rapidly evolving.
It is critical to our
success that we are able to anticipate and respond to changes in technology and industry standards and new customer challenges
by consistently offering new, innovative, high-quality products and solutions that meet the changing needs of our customers. See
the risk factor “
For most solutions and product
s
, we rely on third party suppliers, manufacturers and partners,
and if these relationships are interrupted we may not be able to obtain substitute suppliers, manufacturers or partners on favorable
terms or at all and we may be subject to other adverse effects.
” We must also successfully identify, enter into and prioritize
areas of growing market potential, including by launching and driving demand for new and enhanced solutions and products. If we
are unable to execute on these strategic priorities, or if our competitors are able to do so more rapidly, we may lose market share
or experience slower growth, and our profitability and other results of operations may be materially adversely affected.
We cannot assure you
that the market or demand for the products and solutions we sell will grow (if at all), that we will successfully introduce new
products or solutions, or new applications for existing products and solutions, that such new products, solutions or applications
will achieve market acceptance or that the introduction of new products or technological developments by others will not render
the products and solutions in our current portfolio obsolete. See the risk factor “
Our revenues depend on the successful
implementation and customer adoption of ULIN, the customer adoption of which has been limited.”
In addition, certain
of the solutions and products we sell must readily integrate with major third party security, telephone, front-office and back-office
systems. Any changes to these third party systems could require such products to be redesigned, and any such redesign might not
be possible on a timely basis or may not achieve market acceptance. Furthermore, some of the solutions and products we sell rely
on weaknesses of commonly used protocols and if such weakness were identified and patched and we were unable to respond to such
technological challenges in a timely manner, our business may be adversely affected. If we are unable to offer solutions and products
that are competitive in technology and price and responsive to customer needs, there would be a material adverse effect on our
business, financial condition and results of operations.
Our solution has the
ability to intercept cellular communication. However, ways of communication continue to change and evolve in such a way that parties
are able to communicate via mobile applications rather than via standard cellular communication protocols. Communication via mobile
applications has become more common, as has the use of such applications over WiFi networks. The challenges this poses are twofold;
the applications are encrypted and so too are the WiFi network connections. This has resulted in communication becoming more secure
and therefore interception with the use of our products has become increasingly difficult. Should this trend continue to rise,
our products might become more redundant.
In order to successfully
compete in all sectors of our business, including security projects awarded through competitive bids, we may commit to provide
certain technologies and solutions which are still under development or which will have to be developed (including by third parties),
licensed or acquired specifically for that customer. This may increase the risk of technological difficulties that may prevent
us from complying with our contractual obligations, expose us to possible penalties and legal claims, and affect the profitability
of a project, which may have a negative impact on our business, financial condition and results of operations.
If we do not have access to the most current technology,
we may not be able to market our products and services.
The security industry
is constantly changing to meet new requirements, which result from new threats to government and industry, both from potential
threats to persons and property, to industrial and governmental espionage, as well as general concern about personal and family
safety. In order to meet these needs we must both anticipate problems and develop methods for reducing the potential risk. We rely
primarily on the performance and design characteristics of our products in marketing our products, which requires access to state-of-the
art technology in order to be competitive. Our business could be impaired if we cannot obtain licenses for such updated technology
or develop state-of-the-art technology ourselves. If we cannot meet the developing challenges, we will not be able to market our
interception and geolocation products successfully.
We face risks relating to large projects.
The larger and more
complex our customers’ projects are, the greater the risks associated with such projects. Moreover, these risks are increased
due to our need to custom design our solutions to meet each customer’s specific needs. These risks may include exposure to
penalties and liabilities resulting from a breach of contract, inability to fully integrate the needed products with any third
party products and inability to effectively combine various technologies into customized solutions. In some of these projects we
may use domestic or foreign subcontractors for various planning aspects, solution development, integration, delivery and successful
and timely completion. We may be held liable for the failure of our subcontractors, from whom we may have no or limited recourse.
Additionally, to the extent that we cannot engage such subcontractors, partners or specialists or cannot engage them on a competitive
basis, our ability to complete a project in a timely fashion or at a profit may be impaired.
We may experience fluctuations
in being selected for such large projects, which correspondingly may result in substantial fluctuations in our income and results
of operations, as revenues from large projects are likely to be a single occurrence and nonrecurring. In addition, there may be
fluctuations in cash collection and revenue recognition with respect to such projects due to, among other things, a substantial
period of time often elapsing from the time we enter into negotiations until we actually sell the project to the specific customer.
The sophisticated nature of the solutions
and products we sell, customization of solutions based on specific customer needs, sales cycle and unpredictable sales terms and
timing may create uncertainty in, or negatively impact, our operating results and make such results more volatile and difficult
to predict.
The timing of our sales
cycle ranges from as little as a few weeks to more than a year. Our larger sales, which we emphasize in our sales strategy, typically
require a minimum of a few months to consummate. As the length or complexity of a sales process increases, so does the risk of
not successfully closing the sale. Larger sales are often made by competitive bid, which also increases the time and uncertainty
associated with such opportunities. In addition, because many of our solutions are sophisticated, customers may also require education
on the value and functionality of our solutions as part of the sales process, further extending the time frame and uncertainty
of the process. Longer sales cycles, competitive bid processes, customizing solutions based on specific customer needs and the
need to educate customers means that:
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There
is greater risk of customers deferring, scaling back or cancelling sales as a result of, among other things, their receipt of
a competitive proposal, changes in budgets and purchasing priorities or the introduction or anticipated introduction of new or
enhanced products and solutions either by us or our competitors during the process.
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We may make a significant investment of time and money in opportunities that do not come to fruition, which investment may not be usable or recoverable in future projects.
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We may be required to bid on a project in advance of the completion of its design or be required to begin implementation of a project in advance of finalizing a sale, in either case, increasing the risk of unforeseen technological difficulties or cost overruns.
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We face greater downside risks if we do not correctly and efficiently deploy limited personnel and financial resources and convert such sales opportunities into orders.
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Additionally, after
the completion of a sale of a specific solution or a more sophisticated product, our customers may need assistance from us in making
full use of the functionality of these solutions or products, in realizing all of their benefits or in implementation generally.
If we are unable to assist our customers in realizing the benefits they expect from the solutions and products that we sell, demand
for such solutions and products may decline and our operating results may be adversely affected.
Our uneven sales patterns could significantly
impact our revenues and earnings.
The timing in which
transactions are entered into may shift from one quarter to another, due to, among other things, a shifting by our buyers of their
buying decisions, resulting in the shifting of bookings and revenues from one quarter to another. Additionally, because we emphasize
larger transactions with a higher value in our sales strategy, a substantial period of time often elapses from the time we enter
into negotiations until we actually sell the product to the specific customer, and the deferral or loss of one or more significant
orders or a delay in a large implementation could therefore materially adversely affect our operating results, especially in a
given quarter.
In addition to the
foregoing, our ability to forecast our operating results from quarter to quarter and from year to year is impacted by the fact
that pricing, margins and other deal terms may vary substantially from transaction to transaction, especially across business lines.
The extended time frame and uncertainty associated with many of our sales opportunities also make it difficult for us to accurately
forecast our revenues (and attendant budgeting and guidance decisions) and increases the volatility of our operating results from
period to period. In addition, in light of the fact that ULIN is a relatively new solution with unpredictable sales cycles, with
multiple pricing models, our revenue visibility is significantly reduced, which makes it harder to provide adequate forecasts.
Until we have clarity on the sales cycle, and a better understanding of the timing and implementation for a relatively small number
of larger deals, we shall not provide forecasts.
We have not always
met, and we might not meet in the future, our expectations or those of industry analysts in a particular future quarter or a fiscal
year, including as a result of the factors described in these Risk Factors.
We are subject to complex, evolving
regulatory requirements that may be difficult and expensive to comply with and that could negatively impact our business.
Our business and operations
are subject to regulatory requirements in Israel and elsewhere, including, among other things, with respect to government contracts,
export control, labor, tax, anti-bribery, anti-corruption, data privacy and protection, and communications monitoring and interception.
Regulatory requirements are subject to constant change that may have a material impact on our operations. Compliance with these
regulatory requirements may be onerous, time-consuming, and expensive, especially where these requirements vary from jurisdiction
to jurisdiction or where the jurisdictional reach of certain requirements is not clearly defined or seeks to reach across national
borders. Regulatory requirements in one jurisdiction may make it difficult or impossible to do business in another jurisdiction.
We may also be unsuccessful in obtaining permits, licenses or other authorizations required to operate our business, such as for
the marketing or sale or import or export of products, solutions and services that we offer.
We cannot assure you
that our methods of and policies for doing business will be adequate for new markets, including the United States, or that we will
be able to modify such methods or policies in a manner that allows us to enter into specific markets, including the United States.
Violations of applicable laws or regulations, including by our officers, employees, contractors or agents, may harm our reputation
and deter governments and governmental agencies and other existing or potential customers or partners from purchasing our solutions.
Furthermore, non-compliance with applicable laws or regulations could result in fines, damages and criminal sanctions against us,
our officers or our employees, restrictions on the conduct of our business, and damage to our reputation.
Our business, results of operations
and financial condition could be materially adversely affected by changes in the legal and regulatory environment.
Our business, results
of operations and financial condition could be materially adversely affected if laws, regulations or standards relating to our
business (including the solutions and products that we offer), the Company or our employees (including labor laws and regulations)
are implemented or changed. Among these laws and regulations, there are requirements in Israel and other territories in relation
to import and export controls, data privacy and protection, anti-bribery and anti-corruption, labor, tax and environmental and
social issues. While we make efforts to comply with such requirements, we cannot assure you that we will be fully successful in
our efforts. Failure to comply with applicable laws and regulations could result in fines, damages, civil liability and criminal
sanctions against us, our officers and our employees and prohibit us from conducting our business and damage our reputation.
The occurrence of privacy
or information security breaches (or the belief that any such breach has occurred) in the operation of our business, or by third
parties using a product or solution obtained through us, could harm our business, financial condition and operating results. Some
of our customers use the solutions and products that we offer to compile and analyze highly sensitive or confidential information.
We may come into contact with such information or data when we perform service or maintenance functions for our customers. The
perception or fact that any of our employees has improperly handled sensitive information of a customer or a customer’s end
user could negatively impact our business. If, in handling this information, we fail to comply with applicable privacy legislation
or procedures, we could incur civil liability to governments or governmental agencies or any customers and individuals whose privacy
was compromised.
Further, governments
around the world are adopting a growing number of compliance and regulatory initiatives that are driven by events and concerns
such as accounting scandals, security threats and economic conditions. We cannot assure you that we will be successful in our efforts
to effectively respond to new initiatives and standards, that such changes will not negatively affect the demand for the products,
solutions and services we offer, or that our competitors will not be more successful or prepared than us in responding to these
new initiatives and standards.
We may be limited in
our ability to transfer or outsource certain aspects of our business to certain jurisdictions, and may be limited in our ability
to undertake development activities in certain jurisdictions, which may impede our efficiency and adversely affect our business
results of operations.
Our solutions may contain defects
or may be vulnerable to cyber-attacks, which could expose us to both financial and non-financial damages.
Many of our existing
solutions are, and future solutions are expected to be, sophisticated and may develop operational problems. New products and new
product versions, and the incorporation of third party products into our solutions, also give rise to the risk of defects or errors.
These defects or errors may relate to the operation or the security of the products and solutions we sell and could result in product
returns, loss of or delay in market acceptance of the products and solutions, loss of our competitive position or claims by customers
or others, which would seriously harm our revenues, financial condition and results of operations. Moreover, even well-designed
and tested products and solutions may be vulnerable to cyber-attacks. If we do not discover and remedy such defects, errors or
other operational or security problems until after a product or solution has been released to customers, we may incur significant
costs to correct such problems and/or become liable for substantial damages for product liability claims or other liabilities.
Furthermore, correcting and repairing such errors, failures or defects could also require significant expenditures of our capital
and other resources and could cause interruptions, delays or cessation of our product licensing. The identification of errors in
the products and solutions we sell, the detection of bugs by our customers, or a successful cyber-attack on one of the products
and solutions even absent a defect or error, may damage our reputation in the market as well as our relationships with existing
customers, which may result in our inability to retain our customers or attract new customers, which could have a material adverse
effect on our results or financial condition.
We are dependent on the efforts of contractors for projects
in which we serve as subcontractor.
For certain projects,
we act as subcontractors and depend on the conduct of and our relationship with the relevant general contractor. If one or more
of these contractors experience financial or operational difficulties, we could experience an interruption in our operations. There
is a risk that we may have disputes with our contractors arising from, among other things, the quality and timeliness of work performed
by us, in which case our operating results could temporarily suffer until such disputes are resolved. Furthermore, disagreements
with our contractors could lead to the assertion of rights and remedies under their contracts and increase the cost of the project
or result in a contractor’s unwillingness to perform further work on the project. If any contractor is unable or unwilling
to perform according to the negotiated terms and timetable of its own agreement for any reason or terminates the agreement, we
may be required to be engaged by a substitute contractor in order to continue our work on the project, which would likely result
in significant project delays and increased costs.
Our employees or other third parties
may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which
could cause significant liability for us, harm our reputation or otherwise result in other consequences that may have a material
adverse effect on our business, financial condition and results of operations.
We are exposed to the
risk that our employees, resellers, agents or independent contractors may engage in fraudulent conduct or other illegal activities.
Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities
to us that violates export control laws or other regulations or manufacturing standards. Furthermore, the protection of our proprietary
data and that of our customers is critical to our reputation and the success of our business. Our customers have a high expectation
that we will adequately protect their confidential information. If any person, including any of our employees, negligently disregards
or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data,
we could be subject to monetary damages, fines and/or criminal prosecution. Unauthorized disclosure of sensitive or confidential
data, whether through systems failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us
to lose customers.
We are subject to the
FCPA, which generally prohibits U.S. companies, as well as foreign companies with a class of securities listed on a national securities
exchange in the United States or quoted on the over-the-counter market in the United States, such as us, from engaging in bribery
or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. We operate in parts of the
world that are recognized as having governmental and commercial corruption and in certain circumstances, strict compliance with
anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal policies and procedures
will always protect us from improper conduct by our employees, resellers, agents or independent contractors and due to lack of
resources, we have been unable to implement our internal policies and procedures completely which exposes us to additional risks.
In the event that we believe or have reason to believe that our employees or agents have or may have violated applicable laws,
including anti-corruption laws, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances,
which can be expensive and require significant time and attention from senior management. Any such violation could result in substantial
fines, sanctions, civil and/or criminal penalties, and curtailment of operations in certain jurisdictions, and might adversely
affect our business, financial condition or results of operations. In addition, actual or alleged violations could damage our reputation.
Furthermore, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time
and attention of our senior management.
In connection with
ongoing implementation of internal controls to comply with applicable anti-corruption laws regarding distributors, resellers and
agents, we identified press reports that one of our resellers in Latin America may be subject to local law enforcement investigations
concerning price manipulation and corruption in the reseller’s sale of software products to government entities, although
the local press reports do not identify us and we have not been able to confirm the investigations or whether any investigations
implicate sales of our solutions. Following our own review of the reseller, we ceased accepting orders from the reseller.
The confidential nature of our engagements
and the technologies incorporated into the products and solutions we sell may restrict us in our public disclosures and marketing
efforts.
To date, all our revenues
have been generated from engagements with governments and governmental agencies, including through resellers or integrators. Such
governments and governmental agencies restrict us from identifying them as our customers due to the sensitive nature of the products
and solutions that we sell and the projects we undertake on their behalf. Furthermore, our engagements with such governments and
governmental agencies, or with the applicable resellers or integrators, oftentimes contain information, including information concerning
specific aspects of the technologies incorporated into the products and solutions we sell, which information is either classified
or sensitive, in each case, due to ongoing military operations, homeland security issues or criminal prevention activity and is
largely classified under such governments’ and governmental agencies’ guidelines. Accordingly, in our marketing and
sales materials, we may not be able to identify our customers, the purpose for which certain products or solutions were sold or
the projects we are involved in. Moreover, the classified nature of our engagements may require us to be more conservative in our
public disclosures regarding such engagements, and in some instances apply for confidential treatment under Rule 24b-2 of the Exchange
Act. These limitations could adversely affect our marketing and sales efforts.
We are subject to risks associated
with doing business globally.
The countries and regions
in which we have our most significant operations include Latin America, Asia and Africa, and we intend to continue to expand our
operations internationally. We sell throughout the world and intend to continue to increase our penetration of international markets.
Our operations are subject to risks inherent in conducting business globally and under the laws, regulations and customs of various
jurisdictions and geographies. We believe our business may suffer if we are unable to successfully expand into new regions, as
well as maintain and expand our existing foreign operations. In addition to risks related to currency exchange rate fluctuations,
risks that affect our foreign operations include changes in exchange controls, changes in taxation and potentially adverse tax
consequences in operating in certain countries, import limitations, policies and procedures that protect local suppliers, recruitment
and retention of foreign employees, export control restrictions, changes in or violations of applicable law or regulations, economic
and political instability, disputes between countries, diminished or insufficient protection of intellectual property, competition
in foreign countries, product customization or localization issues, challenges in collection of accounts receivable and longer
payment cycles, and disruption or destruction of operations in a significant geographic region regardless of cause, including war,
terrorism, riot, civil insurrection or social unrest. Any of these risks could have an adverse effect on our business, results
of operations and financial condition.
As we continue to explore
the expansion of our global reach, an increasing focus of our business may be in emerging markets. In many emerging markets we
may face risks that are more significant than if we were to do business in developed countries, including risks relating to underdeveloped
legal systems, unstable governments and economies, and potential governmental actions affecting the flow of goods and currency.
We cannot assure you that one or more of these factors will not have a material adverse effect on our international operations,
business, financial condition and results of operations.
We are subject to extensive government
regulations, which if violated, could prohibit us from conducting a significant portion of our business and result in criminal
liability.
Regulatory agencies
in the countries where we have significant operations may have laws and/or regulations concerning the exporting and importing of
security devices, which may restrict sales of certain products to bona fide law enforcement agencies in these countries. If we
violate any of these laws or regulations, we may be subject to civil or criminal prosecutions. If we are charged with any such
violations, regardless of whether we are ultimately cleared, we may be unable to sell our products.
Intense competition in our markets
and competitors with greater resources than us may limit our market share, profitability and growth.
We face aggressive
competition from numerous and varied competitors in all of our markets, making it difficult to maintain our market share, remain
profitable, invest and grow. We will also encounter new competitors as we expand into new markets. Our competitors may be able
to more quickly develop or adapt to new or emerging technologies, better respond to changes in customer needs or preferences, better
identify and enter into new areas of growth or devote greater resources to the development, promotion and sale of their products.
Some of our competitors have, in relation to us, longer operating histories, larger customer bases, longer standing relationships
with customers, superior brand recognition and significantly greater financial, technical, marketing, customer service, public
relations, distribution or other resources, especially in new markets we may enter. Consolidation among our competitors may also
improve their competitive position. In addition, system integrators, as well as infrastructure vendors, may decide in the future
to enter our market space and compete with us by comprehensive solutions. We also face competition from solutions developed independently
by our customers. To the extent that we cannot compete effectively, our market share and, therefore, results of operations could
be materially adversely affected.
Because price and related
terms are key considerations for many of our customers, we may, from time to time, have to accept less-favorable payment terms,
lower our sales prices, and/or reduce our cost structure. If we are forced to take these kinds of actions to remain competitive
in the short-term, such actions may adversely impact our ability to compete in the long-term.
New potential entrants
to our markets may lead to the widespread availability and standardization of some of the products, solutions and services we offer,
which could result in the commoditization of such products, solutions and services and drive us to lower our prices.
Incorrect or improper use of the
products and solutions in our portfolio or failure to properly provide professional services and maintenance services could result
in negative publicity and legal claims.
The products and solutions
we sell are complex and are deployed in a wide variety of network environments. The proper use of these products and solutions
requires training and, if the products and solutions are not used correctly or as intended, insufficient results may be produced.
The products and solutions may also be intentionally misused or abused by our customers. The incorrect or improper use of these
products and solutions or our failure to properly provide professional services and maintenance services, including installation,
training, project management, product customizations and consulting to our customers may result in losses suffered by our customers,
which could result in negative publicity or other legal claims against us. Furthermore, the use of our solutions by a government
to conduct interception in violation of such government’s laws could result in negative publicity or even legal claims against
us.
For certain solutions, we rely on
software from third parties. If we lose the right to use that software, we would have to spend additional capital to either redesign
our existing solutions or acquire new software from third parties.
We integrate and utilize
various third party software products as components of our solutions. Our business could be disrupted if functional versions of
these software products were either no longer available to us on commercially reasonable terms or at all. In addition, some of
our third party vendors use proprietary technology and software code that could require significant redesign of our solutions in
the case of a change in vendor. If we lost the right to use such third party software, we would be required to spend additional
capital to either redesign our solutions, or acquire or license new software from third parties. As a result, we might be forced
to limit the features available in our current or future offerings and commercial releases of our solutions could be delayed.
Furthermore, if we
were required to or otherwise determined to utilize software components from certain jurisdictions, such as Israel, local export
control laws would impose a regulatory burden that may materially affect our business and operations.
Political or public perception factors
may adversely affect our business.
We may experience negative
publicity or other adverse impacts on our business if we sell to countries that are considered disfavored by the media or political
or social rights organizations even though such transactions may be permissible under applicable law.
Our business may be impacted by changes in general economic
conditions.
Our business is subject
to risks arising from changes in domestic and global economic conditions, and adverse economic conditions in markets in which we
operate may harm our business. If our clients significantly reduce spending in areas in which our solutions are utilized, or prioritize
other expenditures over our solutions, our business, results of operations and financial condition would be materially adversely
affected.
Disruption to the global
economy could also result in a number of follow-on effects on our business, including a possible slow-down resulting from lower
customer expenditures; inability of customers to pay for products, solutions or services on time, if at all; more restrictive export
regulations which could limit our potential customer base; negative impact on our liquidity, financial condition and share price,
which may impact our ability to raise capital in the market, obtain financing and secure other sources of funding in the future
on terms favorable to us.
In addition, the occurrence
of catastrophic events, such as hurricanes, storms, earthquakes, tsunamis, floods and other catastrophes that adversely affect
the business climate in any of our markets could have a material adverse effect on our business, financial condition and results
of operations. Some of our operations are located in areas that have been in the past, and may be in the future, susceptible to
such occurrences.
Our future success depends on our
ability to enhance our existing operations, execute on our growth strategy and properly manage investment in our business and operations.
A key element of our
strategy is to continue to invest in, enhance and secure our business and operations and grow organically. Investments in, among
other things, new markets, new solutions, technologies, infrastructure and systems, geographic expansion and headcount may all
be considered in order to execute this strategy. Our ability to implement this portion of our growth strategy is dependent on our
ability to market solutions and products on a larger scale, increase our brand recognition and enter into distribution and other
strategic arrangements with third party suppliers and distributors, as well as manage growth in administrative overhead and distribution
costs likely to result from our possible geographic expansion.
However, such investments
and efforts may not be successful, especially in new areas or new markets in which we have little or no experience, and even if
successful, may negatively impact our profitability. Our success depends on our ability to effectively and efficiently enhance
our existing operations and execute on our growth strategy, balance the extent and timing of investments with the associated impact
on expenses and profitability, balance our focus between new areas or new markets and the operation and servicing of our legacy
businesses and customers, capture efficiencies and economies of scale and compete in the new areas or new markets and with the
new solutions in which we have invested. If we are unable to effectively and efficiently enhance our existing operations, execute
on our growth strategy and properly manage our investments, focus and expenditures, our results of operations and market share
may be materially adversely affected.
Acquisition and investment activities
present certain risks to our business, operations and financial position.
Acquisitions and investments
may be a part of our growth strategy. Successful execution following the closing of an acquisition or investment is paramount to
achieving the anticipated benefits of the transaction. The process for acquiring a company may take from several months up to a
year and costs can vary greatly. We may also compete with others to acquire companies, and such competition may result in decreased
availability of, or an increase in price for, suitable acquisition candidates. In addition, we may not be able to consummate acquisitions
or investments that we have identified as crucial to the implementation of our strategy for other commercial or economic reasons.
As a result, it may be more difficult for us to identify suitable acquisition or investment targets or to consummate acquisitions
or investments on acceptable terms or at all. If we are not able to execute on any acquisition, we may not be able to achieve a
future growth strategy and may lose market share.
The process of integrating
an acquired company’s business or new technologies is challenging and may result in expected or unexpected operating or compliance
challenges, which may require significant expenditures and a significant amount of our management’s attention that would
otherwise be focused on the ongoing operation of our business.
Acquisitions and/or
investments may also result in the expenditure of available cash and amortization expenses or write-downs related to intangible
assets such as goodwill, any of which could have a material adverse effect on our operating results or financial condition. Investments
in immature businesses with unproven track records and technologies have an especially high degree of risk, with the possibility
that we may lose the value of our entire investment or incur additional unexpected liabilities. Large or costly acquisitions or
investments may also diminish our capital resources and liquidity or limit our ability to engage in additional transactions for
a period of time.
All of the foregoing
risks may be magnified as the cost, size or complexity of an acquisition or acquired company increases, or where the acquired company’s
products, market or business are materially different from ours, or where more than one integration is occurring simultaneously
or within a concentrated period of time.
We may not be able
to obtain the necessary regulatory approvals, including those of antitrust authorities and foreign investment authorities, in countries
where we seek to consummate acquisitions or make investments. For those and other reasons, we may ultimately fail to consummate
an acquisition, even if we announce the intended acquisition.
In addition, we may
require significant financing to complete an acquisition or investment, whether through bank loans, raising of debt or otherwise.
We cannot assure you that such financing options will be available to us on reasonable terms, or at all. If we are not able to
obtain such necessary financing, it could have an impact on our ability to consummate a substantial acquisition or investment and
execute a future growth strategy. Alternatively, we may issue a significant number of shares as consideration for an acquisition,
which would have a dilutive effect on our existing shareholders.
The mishandling or the perceived
mishandling of sensitive information could harm our business.
The products we sell
are in some cases used by customers to compile and analyze highly sensitive or confidential information and data, including information
or data used in intelligence gathering or law enforcement activities. While our customers’ use of the products in no way
affords us access to the customer’s sensitive or confidential information or data, we or our partners may receive or come
into contact with such information or data, including personally identifiable information, when we are asked to perform services
or support functions for our customers. We or our partners may also receive or come into contact with such information or data
in connection with the use of our solutions. While employee contracts generally contain standard confidentiality provisions, we
cannot assure the proper handling or processing of sensitive or confidential data by our employees. The improper handling of sensitive
or confidential data, or even the perception of such mishandling (whether or not valid), or other security lapses by us or our
partners or within the products, could reduce demand for such products or otherwise expose us to financial or reputational harm
or legal liability.
We may consider entering into the U.S. market, which may
expose our business to additional risks.
We may consider entry
into the U.S. market. The entrance into the U.S. market would subject us to U.S. regulatory requirements, including regarding customer
use of our solutions. As we anticipate that our future sales in the United States would be made primarily to U.S. governmental
agencies, we would be further exposed to all of the risks related to government contracts. See the risk factor “
We face
risks relating to government spending and contracts with governments and governmental agencies
” above. We would also
need to develop a strategy to differentiate the solutions we offer for sale within the United States from those outside of the
United States so that any non-U.S. products do not fall under U.S. export control restrictions. There can be no assurance that
we will develop a successful strategy to enter the U.S. market, or that we will be able to enter or successfully compete in that
market. As a result of the foregoing, we plan to be conservative in our approach to the U.S. market.
Risks related to Intellectual Property
and Data/Systems Security
The products and solutions we sell
may infringe or may be alleged to infringe on the intellectual property rights of others, which could lead to costly disputes or
disruptions for us and may require us to indemnify our customers and resellers for any damages they suffer.
The technology industry
is characterized by frequent allegations of intellectual property infringement. Any allegation of infringement against us could
be time consuming and expensive to defend or resolve, result in substantial diversion of management resources, cause shipment delays
or force us to enter into royalty or license agreements. If patent holders or other holders of intellectual property initiate legal
proceedings against us including either with respect to our own intellectual property or intellectual property we license from
third parties, we may be forced into protracted and costly litigation, regardless of the merits of these claims. On November 12,
2015, a lawsuit alleging patent infringement, violation of a non-disclosure agreement, trade secret misappropriation and unjust
enrichment, was submitted to the Central District Court in Israel by a company and an individual against Ability and our controlling
shareholders. The amount sought in the lawsuit for registration fee purposes is NIS 5 million (approximately $1.4 million), however
the plaintiffs did not specify the amount of the compensation demanded. The plaintiffs allege that certain GSM interception and
decryption systems sold by Ability apparently fall within the claim of an Israeli patent owned by the plaintiffs. Furthermore,
the plaintiffs demanded to immediately cease any infringement of the patent as well as any further use of the claimed technology,
including the further manufacture, export, sale or marketing of the alleged infringing products. See “Prospectus—Legal
Proceedings” for further details. We may not be successful in defending such litigation, including the pending litigation,
in part due to the complex technical issues and inherent uncertainties in intellectual property litigation, and may not be able
to procure any required royalty or license agreements on terms acceptable to us, or at all.
Third parties
may also assert infringement claims against our customers. We sometimes undertake to indemnify our customers and resellers for
infringement by our products of the proprietary rights of third parties, which, in some cases, may not be limited to a specified
maximum amount and for which we may not have sufficient insurance coverage or adequate indemnification in the case of intellectual
property licensed from a third party. If any of these claims succeed, we may be forced to pay damages, be subject to injunction
with respect to the use or sale of certain products and solutions, be required to obtain licenses for the products our customers
or partners use, which may not be available on reasonable terms, or incur significant expenses in developing non-infringing alternatives.
We face risks relating to our use
of certain “open source” software tools.
Certain of the products
and solutions we sell may contain a limited amount of open source code. Open source code is code that is covered by a license agreement
that permits the user to liberally use, copy, modify and distribute the software without cost, provided that users and modifiers
abide by certain licensing requirements. The original developers of the open source code provide no warranties on such code. As
a result, we could be subject to suits by parties claiming ownership of what we believe to be open source code and we may incur
expenses in defending claims that we did not abide by the open source code license. In addition, third party licensors do not provide
intellectual property protection with respect to the open source components of their products, and therefore we may not be indemnified
by such third party licensors in the event that we or our customers are held liable in respect of the open source software contained
in such third party software. If we are not successful in defending against any such claims that may arise, we may be subject to
injunctions and/or monetary damages or the open source code would need to be removed from the products and solutions we sell. Such
events could disrupt our operations and the sales of such products and solutions, which would negatively impact our revenues and
cash flow.
Moreover, under certain
conditions, the use of open source code to create derivative code may obligate us to make the resulting derivative code available
to others at no cost. The circumstances under which the use of open source code would compel the offer of derivative code at no
cost are subject to varying interpretations. If we are required to publicly disclose the source code for such derivative products
or to license our derivative products that use an open source license, our previously proprietary software products may be available
to others without charge. If this happens, our customers and our competitors may have access to our products without cost to them,
which could harm our business. The use of such open source code, however, may ultimately subject some of our products to unintended
conditions so that we are required to take remedial action that may divert resources away from our development efforts.
We may be subject to information
technology system failures or disruptions that could harm our operations, financial condition or reputation.
We rely extensively
on information technology systems to operate and manage our business and to process, maintain and safeguard information, including
information belonging to our customers, partners, and personnel.
These systems may be
subject to failures or disruptions as a result of, among other things, natural disasters, accidents, power disruptions, telecommunications
failures, new system implementations, acts of terrorism or war, physical security breaches, computer viruses, or other cyber-attacks.
Cyber-attacks are becoming increasingly sophisticated and in many cases may not be identified until a security breach actually
occurs. We have experienced cyber-attacks in the past and may experience them in the future, potentially with greater frequency.
While we are continually working to maintain secure and reliable systems, our security, redundancy, and business continuity efforts
may be ineffective or inadequate. We must continuously improve our design and coordination of security controls. Despite our efforts,
it is possible that our security controls and other procedures that we follow may not prevent systems failures or disruptions.
Such system failures or disruptions could subject us to delays in our ability to process orders, delays in our ability to provide
products, solutions and services to customers, delays or errors in financial reporting, compromise, disclosure, or loss of sensitive
or confidential information or intellectual property, destruction or corruption of data, financial losses from remedial actions,
theft, liabilities to customers or other third parties, or damage to our reputation. Information system failures at one of our
suppliers or partners may also result in similar adverse consequences.
Any of the foregoing
could harm our competitive position, result in a loss of customer confidence and materially and adversely affect our results of
operations or financial condition.
Risks Related to our Operations in
Israel
Conditions in Israel affect our operations
and may limit our ability to produce and sell our products.
Our
headquarters are located in Israel. In addition, all of our senior management 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 August 13, 2018, we had 17
employees based in Israel, certain of whom may be called upon to perform 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.
Additionally, several
countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries
and groups have imposed or may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel
or political instability in the region continues or increases. These restrictions may limit our ability to obtain manufactured
components and raw materials from these countries or sell our products to companies in these countries. Furthermore, the Boycott,
Divestment and Sanctions Movement, a global campaign attempting to increase economic and political pressure on Israel to comply
with the stated goals of the movement, may gain increased traction and result in a boycott of Israeli products and services. Any
hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant
downturn in the economic or financial condition of Israel, could adversely affect our business, results of operations and financial
condition.
We are subject to stringent export
control regulations.
The Israeli government
has adopted and amended laws and regulations regarding military and defense export controls, as well as the export of “dual
use” items, and many of our suppliers are subject to national export regimes. Some of the solutions we offer incorporate
decryption technology, which is subject to Israeli export control and may also be subject to non-Israeli export control when supplied
from non-Israeli suppliers. If the required government approvals are not obtained, our ability to market, sell and export the products
could be negatively impacted, which would result in a reduction in our revenues.
Certain of our activities
are exempt from Israeli export control under the current export control regime as these activities do not involve the export of
Israeli-controlled items from Israel, but rather the sale by us of items of non-Israeli origin to non-Israeli entities, which items
are not exported from Israel (these activities are referred to as “Brokerage” under the Israeli Defense Export Control
Law, 2007, or the 2007 Law. This exemption is due to the fact that the chapter of the 2007 Law relating to Brokerage transactions
has not entered into force to date. If such chapter were to enter into force and apply to Brokerage transactions (even if such
Brokerage does not involve the export of controlled goods from Israel), we may be required to obtain additional licenses or modify
our method of doing business in the future. If we are unable to obtain such licenses or modify our method of doing business, our
business, results of operations and financial condition could be adversely affected.
The tax benefits that are available
to Ability under Israeli law require it to meet various conditions and may be terminated or reduced in the future, which could
increase its Israeli tax liability.
Ability is eligible
for certain tax benefits provided to “Preferred Enterprises” under the Israeli Law for the Encouragement of Capital
Investments, 1959, or the Investment Law. The standard corporate tax rate for Israeli companies was 26.5% for 2015 and was reduced
to 25% for 2016, 24% for 2017 and 23% for 2018 and thereafter. Due to Ability’s “Preferred Enterprise” status,
Ability expects to benefit from a reduced tax rate of 14.6% in 2015 and 2016 (based on a blended tax rate) and a reduced tax rate,
not yet determined (but up to 16%), in 2017 and thereafter with respect to taxable income generated by the Preferred Enterprise,
and all other taxable income will be subject to the standard corporate tax rate. If these tax benefits are reduced, cancelled or
discontinued, for whatever reason, including lack of compliance with the requirements of the Investment Law, Ability’s Israeli
taxable income would be subject to standard Israeli corporate tax rates and it may be required to pay incremental taxes over the
reduced tax rates under the Preferred Enterprise, plus indexation, interest and possibly penalties thereon. Additionally, if Ability
increases its activities outside of Israel through acquisitions, for example, Ability’s expanded activities outside of Israel
might not be eligible for inclusion in future Israeli tax benefit programs. The Israeli government may furthermore independently
determine to reduce, phase out or eliminate entirely the benefits available under the Investment Law, which could also adversely
affect Ability’s global tax rate and the results of its operations.
Exchange rate fluctuations between
the U.S. dollar and the New Israeli Shekel currencies may negatively affect our earnings.
Our functional currency
is the U.S. dollar. We incur expenses in U.S. dollars and New Israeli Shekels. As a result, we are exposed to the risks that the
NIS may appreciate relative to the U.S. dollar, or, if the NIS devalues relative to the U.S. dollar, that the inflation rate in
Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag behind inflation in Israel.
In any such event, the U.S. dollar cost of our operations in Israel would increase and our U.S. dollar-denominated results of operations
would be adversely affected. The average exchange rate for the year ended December 31, 2017 was $1.00 = NIS 3.467. We cannot predict
any future trends in fluctuation of the exchange rate, if any, of the NIS against the U.S. dollar.
Risks Relating to Incorporation in
the Cayman Islands
As we are a Cayman Islands exempted
company, it could be difficult for investors to effect service of process on and recover against us or our directors and officers,
and our shareholders may face difficulties in protecting their interest and rights through the U.S. federal courts.
We are a Cayman Islands
exempted company, and our officers and directors are residents of various jurisdictions outside the United States. A substantial
portion of our assets and the assets of our officers and directors, at any one time, are and may be located in jurisdictions outside
the United States. Further, except with respect to an offering under our Registration Statement on Form F-3 (333-226288), we have
no agent for service of process within the United States, which would make it difficult for investors to effect service of process
in the United States on us or our directors and officers who reside outside the United States, or to recover against us or our
directors and officers on judgments of U.S. courts, including judgments predicated upon the civil liability provisions of U.S.
federal securities laws.
Our corporate affairs
are governed by our charter documents, consisting of our amended and restated memorandum and articles of association, by the Companies
Law (2018 Revision) of the Cayman Islands (as supplemented or amended from time to time), or the Companies Law and the common law
of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors are governed by Cayman
Islands law and are different as under statutes or judicial precedent in jurisdictions such as the United States. The common law
of the Cayman Islands is derived, in part, from relatively limited judicial precedent in the Cayman Islands as well as from English
common law, the decisions of whose courts are of persuasive authority, but are not binding in the Cayman Islands. In particular,
the Cayman Islands has a different body of securities laws compared to the United States, and certain states, such as Delaware,
may have more fully developed and judicially interpreted bodies of corporate law. While there is some case law in the Cayman Islands
on these matters, it is not as developed as, for example, in the United States. In addition, the laws of the Cayman Islands relating
to the protection of the interests of minority shareholders differ in some respects from those established under statutes or judicial
precedent in the United States. Such differences may mean that our minority shareholders may have less protection than they would
have had under the laws of the United States. The less protective nature of such laws in the Cayman Islands may make it more difficult
for our shareholders to protect their interests in the face of actions by our management or directors than shareholders of a corporation
incorporated in other jurisdictions. In addition, Cayman Islands companies may not have standing to initiate a shareholders derivative
action in a federal court of the United States.
We have been advised
by our Cayman Islands legal counsel that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against us judgments
of courts of the United States predicated upon the civil liability provisions of the federal securities laws of the United States
or any state; and (ii) in original actions brought in the Cayman Islands, to impose liabilities against us predicated upon the
civil liability provisions of the federal securities laws of the United States or any state, so far as the liabilities imposed
by those provisions are penal in nature. In those circumstances, although there is no statutory enforcement in the Cayman Islands
of judgments obtained in the United States, the courts of the Cayman Islands will recognize and enforce a foreign money judgment
of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent
foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain
conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and
for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in
respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and or be of a kind the enforcement of
which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well
be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are
being brought elsewhere.
As a result of all
of the above, our shareholders may have more difficulty in protecting their interests in the face of actions taken by management,
members of the board of directors or controlling shareholders than they would as shareholders of a U.S. company.
If we are deemed or become a passive
foreign investment company, or PFIC, for U.S. federal income tax purposes in 2017 or in any prior or subsequent years, there
may be negative tax consequences for U.S. taxpayers that are holders of our shares.
We will be treated
as a PFIC for U.S. federal income tax purposes in any taxable year in which either (i) at least 75% of our gross income is “passive
income” or (ii) on average at least 50% of our assets by value produce passive income or are held for the production of passive
income. Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties, rents and
gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income.
Passive income also includes amounts derived by reason of the temporary investment of funds, including those raised in a public
offering. In determining whether a non-U.S. corporation is a PFIC, a proportionate share of the income and assets of each
corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account.
We believe we were
not a PFIC for 2017. Because the PFIC determination is highly fact intensive, there can be no assurance that we will not be a PFIC
for 2018 or for any other taxable year. If we were to be characterized as a PFIC in any taxable year during which a U.S.
shareholder owns our ordinary shares, and such U.S. shareholder does not make an election to treat us as a “qualified electing
fund,” or QEF, or make a “mark-to-market” election, then “excess distributions” to such U.S. shareholder
and any gain realized on the sale or other disposition of our shares will be subject to special rules. Under these rules: (i) the
excess distribution or gain would be allocated ratably over the U.S. shareholder’s holding period for shares; (ii) the amount
allocated to the current taxable year and any period prior to the first day of the first taxable year in which we were a PFIC would
be taxed as ordinary income; and (iii) the amount allocated to each of the other taxable years would be subject to tax at the highest
rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit
would be imposed with respect to the resulting tax attributable to each such other taxable year. In addition, if the U.S. Internal
Revenue Service determines that we are a PFIC for a year with respect to which we have determined that we were not a PFIC,
it may be too late for a U.S. shareholder to make a timely QEF or mark-to-market election. U.S. shareholders who hold our shares
during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC in
subsequent years, subject to exceptions for U.S. shareholders who made a timely QEF or mark-to-market election. A U.S. shareholder
can make a QEF election by completing the relevant portions of and filing IRS Form 8621 in accordance with the instructions thereto.
A QEF election generally may not be revoked without the consent of the IRS. If an investor provides reasonable notice to us that
it has determined to make a QEF election, we shall endeavor to timely provide annual financial information to such investor as
may be reasonably required for purposes of filing United States federal income tax returns in connection with such QEF election.
Certain provisions of our amended
and restated memorandum and articles of association may make it difficult for shareholders to change the composition of our board
of directors and may discourage, delay or prevent a merger or acquisition that some shareholders may consider beneficial.
Certain provisions
of our amended and restated memorandum and articles of association may have the effect of delaying or preventing changes in control
if our board of directors determines that such changes in control are not in the best interests of us and our shareholders. The
provisions in our amended and restated memorandum and articles of association include, among other things, those that:
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authorize
our board of directors to issue preference shares and to determine the price and other terms, including preferences and voting
rights, of those shares without shareholder approval;
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establish
advance notice procedures for nominating directors or presenting matters at shareholder meetings; and
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limit
the persons who may call extraordinary general meetings of shareholders.
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While these provisions
have the effect of encouraging persons seeking to acquire control of us to negotiate with our board of directors, they could enable
the board of directors to hinder or frustrate a transaction that some, or a majority, of the shareholders may believe to be in
their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors.
These provisions may
frustrate or prevent any attempts by our shareholders to replace or remove our current management members by making it more difficult
for shareholders to replace members of our board of directors, which is responsible for appointing the members of our management.
We are a foreign private issuer and,
as a result, we are not subject to U.S. proxy rules and are subject to the Securities Exchange Act of 1934 reporting obligations
that, to some extent, are more lenient and less frequent than those applicable to a U.S. issuer
.
We report under the
Securities Exchange Act of 1934, or the Exchange Act, as a foreign private issuer. Because we qualify as a foreign private issuer
under the Exchange Act, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies,
including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of
a security registered under the Exchange Act; (ii) the sections of the Exchange Act requiring insiders to file public reports of
their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time;
and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited
financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events.
We intend to furnish quarterly reports to the SEC on Form 6-K for so long as we are subject to the reporting requirements of Section
13(g) or 15(d) of the Exchange Act, although the information we furnish may not be the same as the information that is required
in quarterly reports on Form 10-Q for U.S. domestic issuers. In addition, while U.S. domestic issuers that are not large accelerated
filers or accelerated filers are required to file their Annual Reports on Form 10-K within 90 days after the end of each fiscal
year, foreign private issuers are not required to file their Annual Report on Form 20-F until 120 days after the end of each fiscal
year. Foreign private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective
disclosures of material information. Accordingly, you may not have the same protections afforded to shareholders of companies that
are not foreign private issuers.
As a foreign private issuer, we are
permitted to follow certain home country corporate governance practices instead of otherwise applicable Nasdaq requirements, which
may result in less protection than under rules applicable to domestic U.S. issuers
.
As a foreign private
issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under
the Listing Rules of the Nasdaq Stock Market for domestic U.S. issuers. For instance, we have elected to follow home country practice
in the Cayman Islands with regard to quorum requirements at general meetings of our shareholders. In addition, we have elected
to follow our home country law instead of the Listing Rules of the Nasdaq Stock Market that require us to obtain shareholder approval
for certain dilutive events, such as the establishment or amendment of certain equity based compensation plans, an issuance that
will result in a change of control of the Company, certain transactions other than a public offering involving issuances of a 20%
or greater interest in the company, and certain acquisitions of the stock or assets of another company. We may also elect in the
future to follow home country practice in the Cayman Islands with regard to the number of independent directors appointed to our
board of directors and maintaining compensation and nominating committees of the board of directors. 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 to you than what is accorded to investors under the Listing Rules of the Nasdaq Stock Market applicable
to domestic U.S. issuers.
Risks Related to this Offering and
our Ordinary Shares and Warrants
Issuance of additional
equity securities may adversely affect the market price of our ordinary shares.
We are currently authorized
to issue 20,000,000 ordinary shares. As of August 13, 2018, we had 2,576,415 ordinary shares outstanding and we had no preferred
shares outstanding. As of August 13, 2018, we also had warrants to purchase 855,744 ordinary shares outstanding, and 206,113 ordinary
shares reserved for issuance under our 2015 Long-Term Equity Incentive Plan. To date, we have not issued any equity awards under
our 2015 Long-Term Equity Incentive Plan however we intend in the future to issue equity awards to officers, directors and certain
employees and service providers. Additionally, on April 11, 2018, we obtained a six-month line of credit from an Israeli commercial
bank in the amount of NIS 11 million ($3.1 million), of which NIS 5.5 million ($1.5 million) has been drawn down to date. The line
of credit is secured by Messrs. Hurgin and Aurovsky who may in the future convert the security into equity in the Company. To the
extent that we issue any equity awards or ordinary shares, holders of our securities will experience dilution, which could cause
our share price to fall. In addition, in order to raise additional capital, we may in the future offer additional ordinary shares
or other securities convertible into or exchangeable for our ordinary shares at prices that may not be the same as the price per
share in this offering. We may sell shares or other securities in any other offering at a price per share that is less than the
price per share paid by investors in this offering, and investors purchasing shares or other securities in the future could have
rights superior to existing shareholders, including investors who purchase ordinary shares in this offering. The price per share
at which we sell additional ordinary shares or securities convertible into ordinary shares in future transactions may be higher
or lower than the price per share in this offering.
A substantial number of ordinary
shares may be sold in this offering, which could cause the price of our ordinary shares to decline.
In this offering we
will sell 728,262 ordinary shares which represent approximately 22% of our outstanding ordinary shares as of August 13, 2018 after
giving effect to the sale of the ordinary shares. In addition, for each ordinary share purchased in this offering, the placement
agent will receive unregistered warrants to purchase up to 7.5% of the aggregate number of ordinary shares sold in this offering
(or warrants to purchase up to 54,620 of our ordinary shares). This sale and any future sales of a substantial number of ordinary
shares in the public market, or the perception that such sales may occur, could adversely affect the price of our ordinary shares
on the Nasdaq Capital Market. We cannot predict the effect, if any, that market sales of those ordinary shares or the availability
of those ordinary shares for sale will have on the market price of our ordinary shares.
If you purchase our ordinary shares
sold in this offering you will experience immediate dilution in your investment as a result of this offering.
Because the effective
price per ordinary share being offered may be substantially higher than the net tangible book value per share of our ordinary
shares, you may experience substantial dilution to the extent of the difference between the effective offering price per ordinary
share you pay in this offering and the net tangible book value per share of our ordinary share immediately after this offering.
Our net tangible book value as of March 31, 2018, was approximately negative ($2.4) million, or approximately negative ($0.93)
per ordinary share. Net tangible book value per ordinary share represents the amount of our total tangible assets less total liabilities
divided by the total number of our ordinary shares outstanding as of March 31, 2018. See “Dilution” for a more detailed
illustration of the dilution you may incur if you participate in this offering. In the event that the placement agent warrants
issued to the placement agent in connection with this offering are exercised, you will experience additional dilution to the extent
that the exercise price of those warrants is higher than the net tangible book value of our ordinary shares at the time of exercise.
Our management team will have immediate
and broad discretion over the use of the net proceeds from this offering and may not use them effectively.
We currently intend
to use the net proceeds of this offering for working capital and general corporate purposes. See “Use of Proceeds.”
However, our management will have broad discretion in the application of the net proceeds. Our shareholders may not agree with
the manner in which our management chooses to allocate the net proceeds from this offering. The failure by our management to apply
these funds effectively could have a material adverse effect on our business, financial condition and results of operation. Pending
their use, we may invest the net proceeds from this offering in a manner that does not produce income. The decisions made by our
management may not result in positive returns on your investment and you will not have an opportunity to evaluate the economic,
financial or other information upon which our management bases its decisions.
The investors in this offering may
be diluted by exercises of outstanding warrants.
As of August
13, 2018, we had 855,744 ordinary shares issuable upon exercise of warrants at an exercise price of $115.00 per share. We
will be issuing to the placement agent warrants to purchase an additional 54,620 ordinary shares with an exercise price of
$5.75 per share. The exercise of such outstanding warrants will result in dilution of our existing
shareholders’ proportionate ownership interest.
The recent consolidation of our ordinary
shares may decrease the liquidity of our ordinary shares.
The liquidity of our
ordinary shares may be affected adversely by the recent 1 for 10 consolidation of our ordinary shares given the reduced number
of shares that were outstanding following the ordinary shares. In addition, the consolidation increased the number of shareholders
who own odd lots (less than 100 shares) of our ordinary shares, creating the potential for such shareholders to experience an increase
in the cost of selling their shares and greater difficulty effecting such sales.
We are a “controlled company”
within the meaning of Nasdaq listing standards and, as a result, qualify for exemptions from certain corporate governance requirements.
As a result of the
number of shares jointly owned by Messrs. Hurgin and Aurovsky, we are a “controlled company” under the Nasdaq corporate
governance rules. A “controlled company” is a company of which more than 50% of the voting power for the
election of director is held by an individual, group or another company. Pursuant to the “controlled company”
exemption, we may elect not to comply with the requirements that a majority of our board of directors consists of independent directors
and that we have a compensation committee and a nominating committee, in each case, composed entirely of independent directors
with a written charter addressing each committee’s purpose and authorities. Although we qualified for the “controlled
company” exemption, we have not relied on such exemption. However, we may in the future rely on such exemption. Relying on
the “controlled company” exemption, as opposed to the requirements that would otherwise apply, may provide less protection
to our investors than what is accorded to investors under the Listing Rules of the Nasdaq Stock Market applicable to issuers which
do not qualify as “controlled companies”.
A limited public market exists for
our securities and we cannot assure you that our securities will continue to be listed on the Nasdaq Capital Market or any other
securities exchange or that an active trading market will ever develop for any of our securities.
Our ordinary shares
were approved for listing and began trading on the Nasdaq Capital Market under the symbol “ABIL” upon the closing of
the Business Combination. An active trading market for our shares has not developed and, even if it does, it may not be sustained. In
addition, we cannot assure you that we will be successful in meeting the continuing listing standards of the Nasdaq Capital Market
and cannot assure you that our ordinary shares will be listed on a national securities exchange. If an active market for our stock
does not develop or is not sustained, it may be difficult for investors to sell their shares without depressing the market price
for the shares or at all. Further, an inactive market may also impair our ability to raise capital and may impair our ability to
enter into strategic partnerships or acquire companies or products by using our ordinary shares or ordinary shares as consideration.
We have received various requests
for advancement and indemnification from present and former officers, directors and service providers.
We have received various
requests for advancement and indemnification from present and former officers, directors and service providers of ours in connection
with the various ongoing investigations and legal proceedings to which such officers, directors and service providers were either
named as defendants or were requested to take actions. See “Prospectus Summary—Legal Proceedings” for further
details. If found to be indemnifiable pursuant to our engagements with such officers, directors and service providers, these claims
may be significant.
We are an “emerging growth
company” and we intend to take advantage of reduced disclosure and governance requirements applicable to emerging growth
companies, which could result in our ordinary shares being less attractive to investors.
We are an “emerging
growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and we intend to continue to take
advantage of certain exemptions from various reporting and governance requirements that are applicable to other public companies
that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Investors may find our ordinary shares less attractive
because we rely on such exemptions. We may take advantage of these reporting and governance exemptions until we are no longer an
emerging growth company.
In addition, Section 107
of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in
Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an emerging
growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
However, we have chosen to “opt out” of such extended transition period, and, as a result, we will comply with new
or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not
“emerging growth companies.” Section 107 of the JOBS Act provides that our decision to opt out of the extended transition
period for complying with new or revised accounting standards is irrevocable.
We have identified
material
weaknesses
in our internal controls over financial reporting and if we fail to establish and maintain an effective
system of internal control over financial reporting, we may not be able to accurately report our financial condition, results of
operations or cash flows, which may adversely affect investor confidence in us.
The Sarbanes-Oxley Act
of 2002 requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls
and procedures. In particular, we are required, under Section 404 of the Sarbanes-Oxley Act of 2002, to perform
system and process evaluations and testing of our internal control over financial reporting to allow management to report on the
effectiveness of our internal control over financial reporting. This assessment must include disclosure of any material weaknesses in
our internal control over financial reporting identified by our management. A material weakness is a control deficiency, or combination
of control deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a
material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Section 404 of the Sarbanes-Oxley of 2002 Act also generally requires an attestation from our independent registered
public accounting firm on the effectiveness of our internal control over financial reporting. However, for as long as we remain
an emerging growth company as defined in the JOBS Act, we intend to take advantage of the exemption permitting us not to comply
with the independent registered public accounting firm attestation requirement. See risk factor “We are an “emerging
growth company” and we intend to take advantage of reduced disclosure and governance requirements applicable to emerging
growth companies, which could result in our ordinary shares being less attractive to investors.” At the time when we are
no longer an emerging growth company, our independent registered public accounting firm may issue a report that is adverse in the
event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may
not enable us to avoid a material weakness in the future.
We identified material
weaknesses in our internal control over financial reporting, and concluded that our internal control over financial reporting
was not effective as of December 31, 2017, as in the prior years 2016 and 2015. See “Controls and Procedures.”
Due to lack of resources, during 2017 and through the date of this prospectus supplement, we were unable to implement our remediation
plans and expect to have material weaknesses in our internal control over financial reporting for the foreseeable future. Any failure
to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition,
results of operations or cash flows. If we are unable to remedy the material weaknesses and conclude that our internal
control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material
weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy
and completeness of our financial reports, the market price of our ordinary shares could decline, and we could be subject to sanctions
or investigations by the Nasdaq Stock Market, the SEC or other regulatory authorities. Failure to remedy any material weakness
in our internal control over financial reporting, or to implement or maintain other effective control systems required of public
companies, could also restrict our future access to the capital markets.
Our management has concluded that
our disclosure controls and procedures were ineffective, and due to inherent limitations, there can be no assurance that our system
of disclosure and internal controls and procedures will be successful in preventing all errors or fraud or in informing management
of all material information in a timely manner in the future.
Our management has
concluded that our disclosure controls and procedures for the fiscal year ended December 31, 2017, were ineffective, as in the
prior years 2016 and 2015. Our disclosure controls and internal controls and procedures may not prevent all errors and all fraud.
A control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives
of the control system are met. Further, the design of a control system reflects that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all our control issues and instances of fraud, if any, have been
or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and
that breakdowns can occur simply because of error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by circumvention of the internal control procedures. The design
of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control
may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not
be detected.
The price of our ordinary shares
has been and may continue to be volatile, which could result in substantial losses by our investors or class action litigation.
The market price of
our ordinary shares has been and may continue to be highly volatile. During the second quarter of 2018, for example, our stock
has traded in a range with a low of $2.16 and a high of $12.02. In the past, shareholders have initiated class action lawsuits
against companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted
against us, could cause us to incur substantial costs and divert management’s attention and resources from our business.
The price of our ordinary
shares may fluctuate due to a variety of factors, including:
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actual
or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry;
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any
adverse outcome in any litigation against us or in the SEC investigation;
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initiation
or settlement of litigation by or against us or the threat of potential litigation;
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any
delisting or threat of delisting from the Nasdaq Capital Market;
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mergers
and strategic alliances in the intelligence gathering and cyber security industries;
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market
prices and conditions in the intelligence gathering and cyber security markets;
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changes
in government regulation;
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potential or actual military conflicts or acts of terrorism;
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the
failure of securities analysts to publish research about us, or shortfalls in our operating results compared to levels forecast
by securities analysts;
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announcements
concerning us or our competitors; and
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the
general state of the securities markets.
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These market and industry
factors may materially reduce the market price of our ordinary shares, regardless of our operating performance.
Our international operations subject
us to currency exchange risk.
We earn revenues, pay
expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar, including (among others) the
NIS and Euro. Because our functional currency is the U.S. dollar, we must translate revenues, expenses, assets and liabilities
denominated in non-U.S. dollar functional currencies into U.S. dollars using currency exchange rates in effect during or at the
end of each reporting period. Therefore, changes in currency exchange rates affect our consolidated operating income. In addition,
our net income is further impacted by the revaluation and settlement of monetary assets and liabilities denominated in currencies
other than the functional currency, gains or losses on which are recorded within income (expense), net.
Our income tax rate is complex and subject to uncertainty.
Computations of our
taxes on income and withholding obligations are complex because they are based on the laws of numerous tax jurisdictions. These
computations require significant judgment on the application of complicated rules governing accounting for tax provisions under
GAAP. The international nature of our structure and operations creates uncertainties. Taxes on income for interim periods are based
on a forecast of Ability’s reduced tax rate of 14.6% in 2015 and 2016 and a reduced tax rate of up to 16% in 2017 and thereafter
with respect to its income generated by its Preferred Enterprise, which includes forward looking financial projections. Such financial
projections are based on numerous assumptions, including the expectations of profit and loss. We may not accurately forecast the
various items that comprise the projections.
From time to time,
we may be subject to income and other tax audits (including in Israel), the timing of which are unpredictable. While we believe
we comply with applicable tax laws, there can be no assurance that a governing tax authority will not have a different interpretation
of the law and assess us with additional taxes. Any additional taxes could have a material adverse effect on our results of operations
and financial condition.
In recent years, we
have seen changes in tax laws resulting in an increase in applicable tax rates, in part stemming from public pressure to increase
tax liabilities of corporations and to limit the ability to gain from strategic tax planning, with a focus on international corporations.
Such legislative changes in one or more jurisdictions in which we operate may have implications on our tax liability and have a
material adverse effect on our results of operations and financial condition. In 2014 and 2015, the Israeli corporate tax rate
increased until its reduction in 2016 and thereafter. Furthermore, the Israeli government may determine to reduce, phase out or
eliminate entirely tax benefits currently available under certain government programs. If corporate tax rates increase or the tax
benefits under such government programs were to be reduced or eliminated, our effective tax rate may increase, which could have
a negative impact on our results of operations.
Our shareholder composition may make
it difficult for shareholders to significantly influence the decisions of the general meeting.
As of August 13, 2018,
more than 64% of our ordinary shares are beneficially held by our controlling shareholders, Anatoly Hurgin, our Chief Executive
Officer, and Alexander Aurovsky, our Chief Technology Officer, both of whom are directors. After giving effect to the sale of 728,262
ordinary shares in this offering, Messrs. Hurgin and Aurovksy will beneficially hold approximately 50% of our ordinary shares.
Consequently, Messrs. Hurgin and Aurovsky may have the ability, either acting alone or jointly, to significantly influence or determine
the outcome of specific matters submitted to the general meeting for approval, including amendments to our articles of association
and election of members to our board of directors, and may make it difficult for other shareholders to significantly influence
the outcome of a general meeting.
On April 9, 2017, we
received letters from each of Amnon Dick, Efraim Halevy, Amos Malka, Meir Moshe and Shalom Singer, representing all our former
independent directors, tendering their resignation as a member of our board of directors and committees thereof, effective immediately.
At the time of their resignations, Mr. Dick was Chairman of our board of directors and a member of the audit and compensation committees;
Mr. Halevy was a member of the nominating committee; Mr. Malka was a member of the compensation committee; Mr. Moshe was Chairman
of the audit committee and Chairman of the nominating committee; and Mr. Singer was Chairman of the compensation committee and
a member of the audit and nominating committees. Each of Messrs. Dick, Malka, Moshe and Singer stated in their respective resignation
letter that their resignation was due to his approach to risk assessment and management of our affairs not being aligned with that
of our founding directors and controlling shareholders, which made them unable to contribute to us in a productive way. Each noted
that, in view of the various challenges that we are currently facing, a shared vision and broad cooperation among our controlling
shareholders and directors is required and that in view of the foregoing, and especially as they served as a director for only
a few months, they do not believe it would be appropriate to continue to serve as a director. Mr. Halevy did not state any reason
for his resignation in his resignation letter. Following the resignation of the former independent directors, on May 15, 2017 we
appointed Levi Ilsar, Brigadier General (Ret.) Eli Polak and Nimrod Schwartz to serve as independent directors on our board of
directors and the audit, compensation and nominating committees thereof, in each case effective as of May 17, 2017. However, on
June 29, 2017, Levi Ilsar, Eli Polak and Nimrod Schwartz, representing all of our independent directors, tendered their written
resignations with immediate effect. Each of Messrs. Ilsar, Polak and Schwartz stated in his respective resignation notice that
his resignation was due, among other things, to the lack of cooperation by management which prevented him from fulfilling his duties
as an independent director. On July 5, 2017, our board appointed three new independent directors, Avraham Dan, Naftali Granot and
Limor Beladev, effective immediately. On July 24, 2017 and October 15, 2017, our board appointed additional independent directors,
Brigadier General (Ret.) Yair Cohen and Joseph Tenne, respectively, effective immediately.
The interests of our
major shareholders may not always be aligned with those of our other shareholders. In addition, conflict of interests may exist
or occur between our major shareholders. Any material conflicts of interests between our major shareholders and other stakeholders
may have a material adverse effect on our future performance, results of operations, cash flows and financial position.
We incur additional increased costs as a result of the
listing of our ordinary shares for trading on the Nasdaq, and our management is required to devote substantial time to new compliance
initiatives and reporting requirements.
As a public company
in the United States, we incur significant accounting, legal and other expenses as a result of the listing of our ordinary shares
on the Nasdaq. These include costs associated with corporate governance requirements of the SEC and the Marketplace Rules
of the Nasdaq Stock Market, as well as requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, or
the Sarbanes-Oxley Act. These rules and regulations will increase our legal and financial compliance costs, introduced new costs
such as investor relations, stock exchange listing fees and shareholder reporting, and made some activities more time
consuming and costly. Any future changes in the laws and regulations affecting public companies in the United States and Israel,
including Section 404 and other provisions of the Sarbanes-Oxley Act, the rules and regulations adopted by the SEC and the rules
of the Nasdaq Stock Market, as well as compliance with the applicable full Israeli reporting requirements which currently apply
to us as a company listed on the TASE (for so long as they apply to us, pending shareholder approval by special majority of a change
to our TASE reporting requirements to allow us to report to the TASE in the same manner in which we report to the SEC), will result
in increased costs to us as we respond to such changes. These laws, rules and regulations could make it more difficult or more
costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to
accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact
of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of
directors, our board committees or as executive officers.
As a foreign
private issuer, we are permitted to follow certain home country corporate governance practices instead of applicable
SEC and Nasdaq requirements, which may result in less protection than is accorded to investors under rules applicable to domestic
issuers.
As a foreign private
issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under
the rules of the Nasdaq Stock Market for domestic issuers. For instance, we may follow home country practice in Israel with regard
to: distribution of annual and quarterly reports to shareholders, director independence requirements, director nomination
procedures, approval of compensation of officers, approval of related party transactions, shareholder approval requirements, equity
compensation plans and quorum requirements at shareholders’ meetings. In addition, we follow our home country law, instead
of the rules of the Nasdaq Stock Market, which require that we obtain shareholder approval for certain dilutive events, such as
for the establishment or amendment of certain equity based compensation plans, an issuance 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. Following our home country governance practices as opposed
to the requirements that would otherwise apply to a U.S. company listed on the Nasdaq Stock Market, may provide less protection
than is accorded to investors under the rules of the Nasdaq Stock Market applicable to domestic issuers.
In addition, as a foreign
private issuer, we are 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 are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly
and current reports and financial statements with the SEC as frequently or as promptly as domestic companies whose securities are
registered under the Exchange Act.
If we are unable to develop and implement
adequate required accounting practices and policies, we may be unable to provide the financial information required of a U.S. publicly
traded company in a timely and reliable manner.
As a U.S. publicly
traded company, the implementation of all required accounting practices and policies and the hiring of additional financial staff
will increase our operating costs and could require significant time and resources from our management and employees. If we are
unable to develop and maintain effective internal controls and procedures and disclosure procedures and controls, we may be unable
to provide financial information and required SEC reports that a U.S. publicly traded company is required to provide in a timely
and reliable fashion. Any such delays or deficiencies could penalize us, including by limiting our ability to obtain financing,
either in the public capital markets or from private sources and hurt our reputation and could thereby impede our ability to implement
our growth strategy. In addition, any such delays or deficiencies could result in our failure to meet the requirements for continued
listing of our ordinary shares on the Nasdaq Capital Market.
Reports published by analysts, including
projections in those reports that differ from our actual results, could adversely affect the price and trading volume of our ordinary
shares.
Securities research
analysts may establish and publish their own periodic projections for our business. These projections may vary widely and may not
accurately predict the results we actually achieve. Our share price may decline if our actual results do not match the projections
of these securities research analysts. Similarly, if one or more of the analysts who write reports on us downgrades our stock or
publishes inaccurate or unfavorable research about our business, our share price could decline. If one or more of these analysts
ceases coverage of us or fails to publish reports on us regularly, our share price or trading volume could decline. While we do
expect research analyst coverage, if no analysts choose to cover us, the trading price and volume for our ordinary shares could
be adversely affected.
We may issue additional ordinary
shares or other equity securities without shareholder approval, which would dilute your ownership interests and may depress the
market price of our ordinary shares.
We may issue additional
ordinary shares or other equity securities of equal or senior rank in the future in connection with, among other things, our equity
incentive plan or future vessel acquisitions or repayment of outstanding indebtedness, without shareholder approval, in a number
of circumstances.
Issuance of additional
ordinary shares or other equity securities of equal or senior rank would have the following effects:
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dilution
of our existing shareholders’ proportionate ownership interest;
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the
amount of cash available per share, including for payment of dividends, may decrease;
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the
relative voting strength of each previously outstanding ordinary share may be diminished; and
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the
market price of our ordinary shares may decline.
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We currently do not intend to declare
or pay cash dividends in the near future. Any return on investment may be limited to the value of our securities.
We currently do not
anticipate declaring or paying cash dividends on our ordinary shares in the near future. Our board of directors has discretion
to declare and pay dividends on our ordinary shares and will make any determination to do so based on a number of factors, such
as our operating results, financial condition, current and anticipated cash needs and other business and economic factors that
our board of directors may deem relevant. In accordance with the laws of the Cayman Islands, no dividend or other distribution
shall be paid except out of our realized or unrealized profits, out of the share premium account or as otherwise permitted by law.
If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will only occur if the
trading price of our securities appreciates. You should not rely on an investment in us if you require dividend income from your
investments.
Future resales of our ordinary shares
issued to our controlling shareholders may cause the market price of our securities to drop significantly, even if our business
is performing well.
Under the Business
Combination agreement, Messrs. Hurgin and Aurovsky received, among other things, an aggregate of: (i) 1,621,327 of our ordinary
shares; (ii) $18,150,000 in cash; and (iii) an additional number of ordinary shares to be issued upon and subject to Ability achieving
certain net income targets. The ordinary shares held by Messrs. Hurgin and Aurovsky are “restricted securities” as
defined under Rule 144 promulgated under the Securities Act and may only be sold pursuant to an effective registration statement
or an exemption from registration, if available. Messrs. Hurgin and Aurovsky may rely on the exemption from registration provided
by Rule 144, if available, in which case, resales must meet the criteria and conform to the requirements of the rule, including
compliance with the applicable holding period, volume limitations and availability of current public information. Thus, upon satisfaction
of the requirements of Rule 144, Messrs. Hurgin and Aurovsky may sell large amounts of our shares in the open market or in privately
negotiated transactions, which could have the effect of increasing volatility in our share price or putting significant downward
pressure on the price of our shares.
DESCRIPTION OF ORDINARY SHARES
The following description
of our share capital is a summary of the material terms of our amended and restated memorandum and articles of associations and
Cayman Islands corporate law regarding our ordinary shares and the holders thereof. This description contains all material information
concerning our ordinary shares but does not purport to be complete.
General
We are currently authorized
to issue 20,000,000 ordinary shares, par value $0.001, and 5,000,000 preferred shares, par value $0.001.
Ordinary Shares
Our shareholders of
record are entitled to one vote for each share held on all matters to be voted on by shareholders.
At least five days’
notice must be given for each general meeting (although we will provide whatever minimum number of days are required under Federal
securities laws). Shareholders may vote at meetings in person or by proxy.
Our shareholders have
no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the
ordinary shares.
Register of Members
Under Cayman Islands
law, we must keep a register of members and there shall be entered therein:
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the names and addresses of the members, a statement of the shares held by each member, and of the amount paid or agreed to be considered as paid, on the shares of each member;
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(b)
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the date on which the name of any person was entered on the register as a member; and
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(c)
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the date on which any person ceased to be a member.
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Under Cayman Islands
law, the register of members of our company is prima facie evidence of the matters set out therein (i.e. the register of members
will raise a presumption of fact on the matters referred to above unless rebutted) and a member registered in the register of members
shall be deemed as a matter of Cayman Islands law to have legal title to the shares as set against its name in the register of
members. Upon the closing of this public offering, the register of members shall be immediately updated to reflect the issue of
shares by us. Once our register of members has been updated, the shareholders recorded in the register of members shall be deemed
to have legal title to the shares set against their name.
However, there are
certain limited circumstances where an application may be made to a Cayman Islands court for a determination on whether the register
of members reflects the correct legal position. Further, the Cayman Islands court has the power to order that the register of members
maintained by a company should be rectified where it considers that the register of members does not reflect the correct legal
position. If an application for an order for rectification of the register of members were made in respect of our ordinary shares,
then the validity of such shares may be subject to re-examination by a Cayman Islands court.
Preferred Shares
Our amended and restated
memorandum and articles of association authorizes the issuance of preferred shares with such designation, rights and preferences
as may be determined from time to time by our board of directors. No preferred shares are being issued or registered in this offering.
Accordingly, our board of directors is empowered, without shareholder approval, to issue preferred shares with dividend, liquidation,
redemption, voting or other rights which could adversely affect the voting power or other rights of the holders of ordinary shares.
However, the underwriting agreement prohibits us, prior to a business combination, from issuing preferred shares which participate
in any manner in the proceeds of the trust account, or which votes as a class with the ordinary shares on a business combination.
We may issue some or all of the preferred shares to effect a business combination. In addition, the preferred shares could be utilized
as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently intend to issue any
preferred shares, we cannot assure you that we will not do so in the future.
Dividends
We have not paid any
cash dividends on our ordinary shares to date and do not intend to pay cash dividends prior to the completion of a business combination.
The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and
general financial condition subsequent to completion of a business combination. The payment of any dividends subsequent to a business
combination will be within the discretion of our then board of directors. It is the present intention of our board of directors
to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any
dividends in the foreseeable future.
Certain Differences in Corporate Law
Cayman Islands companies
are governed by the Companies Law. The Companies Law is modeled on English Law but does not follow recent English Law statutory
enactments, and differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary
of the material differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated
in the United States and their shareholders.
Mergers and Similar
Arrangements
. In certain circumstances, the Companies Law allows for mergers or consolidations between two Cayman Islands companies,
or between a Cayman Islands company and a company incorporated in another jurisdiction (provided that is facilitated by the laws
of that other jurisdiction).
Where the merger or
consolidation is between two Cayman Islands companies, the directors of each company must approve a written plan of merger or consolidation
containing certain prescribed information. That plan or merger or consolidation must then be authorized by either (a) a special
resolution (usually a majority of 66.6% in value) of the shareholders of each company; or (b) such other authorization, if any,
as may be specified in such constituent company’s articles of association. No shareholder resolution is required for a merger
between a parent company (i.e., a company that owns at least 90% of the issued shares of each class in a subsidiary company) and
its subsidiary company. The consent of each holder of a fixed or floating security interest of a constituent company must be obtained,
unless the court waives such requirement. If the Cayman Islands Registrar of Companies is satisfied that the requirements of the
Companies Law (which includes certain other formalities) have been complied with, the Registrar of Companies will register the
plan of merger or consolidation.
Where the merger or
consolidation involves a foreign company, the procedure is similar, save that with respect to the foreign company, the director
of the Cayman Islands company is required to make a declaration to the effect that, having made due enquiry, he is of the opinion
that the requirements set out below have been met: (i) that the merger or consolidation is permitted or not prohibited by the constitutional
documents of the foreign company and by the laws of the jurisdiction in which the foreign company is incorporated, and that those
laws and any requirements of those constitutional documents have been or will be complied with; (ii) that no petition or other
similar proceeding has been filed and remains outstanding or order made or resolution adopted to wind up or liquidate the foreign
company in any jurisdictions; (iii) that no receiver, trustee, administrator or other similar person has been appointed in any
jurisdiction and is acting in respect of the foreign company, its affairs or its property or any part thereof; (iv) that no scheme,
order, compromise or other similar arrangement has been entered into or made in any jurisdiction whereby the rights of creditors
of the foreign company are and continue to be suspended or restricted.
Where the surviving
company is the Cayman Islands company, the director of the Cayman Islands company is further required to make a declaration to
the effect that, having made due enquiry, he is of the opinion that the requirements set out below have been met: (i) that the
foreign company is able to pay its debts as they fall due and that the merger or consolidated is bona fide and not intended to
defraud unsecured creditors of the foreign company; (ii) that in respect of the transfer of any security interest granted by the
foreign company to the surviving or consolidated company (a) consent or approval to the transfer has been obtained, released or
waived; (b) the transfer is permitted by and has been approved in accordance with the constitutional documents of the foreign company;
and (c) the laws of the jurisdiction of the foreign company with respect to the transfer have been or will be complied with; (iii)
that the foreign company will, upon the merger or consolidation becoming effective, cease to be incorporated, registered or exist
under the laws of the relevant foreign jurisdiction; and (iv) that there is no other reason why it would be against the public
interest to permit the merger or consolidation.
Where the above procedures
are adopted, the Companies Law provides for a right of dissenting shareholders to be paid a payment of the fair value of his shares
upon their dissenting to the merger or consolidation if they follow a prescribed procedure. In essence, that procedure is as follows
(a) the shareholder must give his written objection to the merger or consolidation to the constituent company before the vote on
the merger or consolidation, including a statement that the shareholder proposes to demand payment for his shares if the merger
or consolidation is authorized by the vote; (b) within 20 days following the date on which the merger or consolidation is approved
by the shareholders, the constituent company must give written notice to each shareholder who made a written objection; (c) a shareholder
must within 20 days following receipt of such notice from the constituent company, give the constituent company a written notice
of his intention to dissent including, among other details, a demand for payment of the fair value of his shares; (d) within seven
days following the date of the expiration of the period set out in paragraph (b) above or seven days following the date on which
the plan of merger or consolidation is filed, whichever is later, the constituent company, the surviving company or the consolidated
company must make a written offer to each dissenting shareholder to purchase his shares at a price that the company determines
is the fair value and if the company and the shareholder agree the price within 30 days following the date on which the offer was
made, the company must pay the shareholder such amount; (e) if the company and the shareholder fail to agree a price within such
30 day period, within 20 days following the date on which such 30 day period expires, the company (and any dissenting shareholder)
must file a petition with the Cayman Islands Grand Court to determine the fair value and such petition must be accompanied by a
list of the names and addresses of the dissenting shareholders with whom agreements as to the fair value of their shares have not
been reached by the company. At the hearing of that petition, the court has the power to determine the fair value of the shares
together with a fair rate of interest, if any, to be paid by the company upon the amount determined to be the fair value. Any dissenting
shareholder whose name appears on the list filed by the company may participate fully in all proceedings until the determination
of fair value is reached. These rights of a dissenting shareholder are not be available in certain circumstances, for example,
to dissenters holding shares of any class in respect of which an open market exists on a recognized stock exchange or recognized
interdealer quotation system at the relevant date or where the consideration for such shares to be contributed are shares of any
company listed on a national securities exchange or shares of the surviving or consolidated company.
Moreover, Cayman Islands
law also has separate statutory provisions that facilitate the reconstruction or amalgamation of companies in certain circumstances,
schemes of arrangement will generally be more suited for complex mergers or other transactions involving widely held companies,
commonly referred to in the Cayman Islands as a “scheme of arrangement” which may be tantamount to a merger. In the
event that a merger was sought pursuant to a scheme of arrangement (the procedure of which are more rigorous and take longer to
complete than the procedures typically required to consummate a merger in the United States), the arrangement in question must
be approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made and who
must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are
present and voting either in person or by proxy at a meeting, or meeting summoned for that purpose. The convening of the meetings
and subsequently the terms of the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder
would have the right to express to the court the view that the transaction should not be approved, the court can be expected to
approve the arrangement if it satisfies itself that:
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(a)
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we are not proposing to act illegally or beyond the scope of our corporate authority and the statutory provisions as to majority vote have been complied with;
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(b)
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the shareholders have been fairly represented at the meeting in question;
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(c)
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the arrangement is such as a businessman would reasonably approve; and
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(d)
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the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law or that would amount to a “fraud on the minority.”
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If a scheme of arrangement
or takeover offer (as described below) is approved, any dissenting shareholder would have no rights comparable to appraisal rights,
which would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to receive
payment in cash for the judicially determined value of the shares.
Squeeze-out Provisions
. When
a takeover offer is made and accepted by holders of 90% of the shares to whom the offer relates within four months, the offeror
may, within a two-month period, require the holders of the remaining shares to transfer such shares on the terms of the offer.
An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed unless there is evidence of fraud,
bad faith, collusion or inequitable treatment of the shareholders.
Further, transactions
similar to a merger, reconstruction and/or an amalgamation may in some circumstances be achieved through other means to these statutory
provisions, such as a share capital exchange, asset acquisition or control, through contractual arrangements, of an operating business.
Shareholders’
Suits
. Our Cayman Islands counsel is not aware of any reported class action having been brought in a Cayman Islands court.
Derivative actions have been brought in the Cayman Islands courts, and the Cayman Islands courts have confirmed the availability
for such actions. In most cases, we will be the proper plaintiff in any claim based on a breach of duty owed to us, and a claim
against (for example) our officers or directors usually may not be brought by a shareholder. However, based both on Cayman Islands
authorities and on English authorities, which would in all likelihood be of persuasive authority and be applied by a court in the
Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:
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(a)
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a company is acting, or proposing to act, illegally or beyond the scope of its authority;
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(b)
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the act complained of, although not beyond the scope of the authority, could be effected if duly authorized by more than the number of votes which have actually been obtained; or
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(c)
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those who control the company are perpetrating a “fraud on the minority.”
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A shareholder may have
a direct right of action against us where the individual rights of that shareholder have been infringed or are about to be infringed.
Enforcement of civil
liabilities
. The Cayman Islands has a different body of securities laws as compared to the United States and may provide
less protection to investors. Additionally, Cayman Islands companies may not have standing to sue before the Federal courts of
the United States.
We have been advised
by our Cayman Islands legal counsel that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against us judgments
of courts of the United States predicated upon the civil liability provisions of the federal securities laws of the United States
or any state; and (ii) in original actions brought in the Cayman Islands, to impose liabilities against us predicated upon the
civil liability provisions of the federal securities laws of the United States or any state, so far as the liabilities imposed
by those provisions are penal in nature. In those circumstances, although there is no statutory enforcement in the Cayman Islands
of judgments obtained in the United States, the courts of the Cayman Islands will recognize and enforce a foreign money judgment
of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent
foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain
conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and
for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in
respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and or be of a kind the enforcement of
which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well
be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are
being brought elsewhere.
Special Considerations
for Exempted Companies
. We are an exempted company with limited liability under the Companies Law. The Companies Law distinguishes
between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business
mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company
are essentially the same as for an ordinary company except for the exemptions and privileges listed below:
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(a)
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annual reporting requirements are minimal and consist mainly of a statement that the company has conducted its operations mainly outside of the Cayman Islands and has complied with the provisions of the Companies Law;
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(b)
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an exempted company’s register of members is not open to inspection;
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(c)
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an exempted company does not have to hold an annual general meeting;
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(d)
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an exempted company may issue negotiable or bearer shares or shares with no par value;
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(e)
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an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance);
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(f)
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an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
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(g)
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an exempted company may register as a limited duration company; and
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(h)
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an exempted company may register as a segregated portfolio company.
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Amended and Restated Memorandum and
Articles of Association
Our amended and restated
memorandum and articles of association filed under the laws of the Cayman Islands contain provisions designed to provide certain
rights and protections to our shareholders.
The Companies Law permits
a company incorporated in the Cayman Islands to amend its memorandum and articles of association with the approval of the holders
of at least two-thirds of such company’s issued and outstanding ordinary shares who attend and vote at a general meeting.
A company’s articles of association may specify that the approval of a higher majority is required but, provided the approval
of the required majority is obtained, any Cayman Islands company may amend its memorandum and articles of association regardless
of whether its memorandum and articles of association provides otherwise. Accordingly, although we could amend any of the provisions
relating to our proposed offering, structure and business plan which are contained in our amended and restated memorandum and articles
of association, we view all of these provisions as binding obligations to our shareholders and neither we, nor our officers or
directors, will take any action to amend or waive any of these provisions unless we provide public shareholders with the opportunity
to convert their public shares in connection with any such vote. The foregoing is set forth in our amended and restated memorandum
and articles of association and cannot be amended.
Anti-Money Laundering — Cayman
Islands
In order to comply
with legislation or regulations aimed at the prevention of money laundering we are required to adopt and maintain anti-money laundering
procedures, and may require subscribers to provide evidence to verify their identity, the identity of their beneficial owners/controllers
(where applicable), and source of funds. Where permitted, and subject to certain conditions, we may also delegate the maintenance
of its anti-money laundering procedures (including the acquisition of due diligence information) to a suitable person.
We reserve the right
to request such information as is necessary to verify the identity of a subscriber. In some cases the directors may be satisfied
that no further information is required since an exemption applies under the Anti-Money Laundering Regulations (2018 Revision)
of the Cayman Islands, as amended and revised from time to time (the “Regulations”) or any other applicable law. Depending
on the circumstances of each application, a detailed verification of identity might not be required where:
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(a)
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the subscriber makes the payment for their investment from an account held in the subscriber’s name at a recognized financial institution; or
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(b)
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the subscriber is regulated by a recognized regulatory authority and is based or incorporated in, or formed under the law of, a recognized jurisdiction; or
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(c)
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the application is made through an intermediary which is regulated by a recognized regulatory authority and is based in or incorporated in, or formed under the law of a recognized jurisdiction and an assurance is provided in relation to the procedures undertaken on the underlying investors.
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For the purposes of
these exceptions, recognition of a financial institution, regulatory authority or jurisdiction will be determined in accordance
with the Regulations by reference to those jurisdictions recognized by the Cayman Islands Monetary Authority as having equivalent
anti-money laundering regulations.
In the event of delay
or failure on the part of the subscriber in producing any information required for verification purposes, we may refuse to accept
the application, in which case any funds received will be returned without interest to the account from which they were originally
debited.
We also reserve the
right to refuse to make any payment to a shareholder if our directors or officers suspect or are advised that the payment to such
shareholder might result in a breach of applicable anti-money laundering or other laws or regulations by any person in any relevant
jurisdiction, or if such refusal is considered necessary or appropriate to ensure our compliance with any such laws or regulations
in any applicable jurisdiction.
If
any person in the Cayman Islands knows or suspects or has reasonable grounds for knowing or suspecting that another person is engaged
in criminal conduct or money laundering or is involved with terrorism or terrorist financing and property and the information for
that knowledge or suspicion came to their attention in the course of business in the regulated sector, or other trade, profession,
business or employment, the person will be required to report such knowledge or suspicion to (i) the Financial Reporting Authority,
or FRA, of the Cayman Islands, pursuant to the Proceeds of Crime Law (2018 Revision) of the Cayman Islands if the disclosure relates
to criminal conduct or money laundering, or (ii) a police officer of the rank of constable or higher, or the FRA, pursuant to the
Terrorism Law (2018 Revision) of the Cayman Islands, if the disclosure relates to involvement with terrorism or terrorist financing
and property. Such a report shall not be treated as a breach of confidence or of any restriction upon the disclosure of information
imposed by any enactment or otherwise.
PLAN OF DISTRIBUTION
The securities being
offered by this prospectus may be sold:
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to or through one or more underwriters on a firm commitment or agency basis;
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through put or call option transactions relating to the securities;
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to or through dealers, who may act as agents or principals, including a block trade (which may involve crosses) in which a broker or dealer so engaged will attempt to sell as agent but may position and resell a portion of the block as principal to facilitate the transaction;
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through privately negotiated transactions;
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purchases by a broker or dealer as principal and resale by such broker or dealer for its own account pursuant to this prospectus;
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directly to purchasers, including our affiliates , through a specific bidding or auction process, on a negotiated basis or otherwise; to or through one or more underwriters on a firm commitment or best efforts basis;
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exchange distributions and/or secondary distributions;
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ordinary brokerage transactions and transactions in which the broker solicits purchasers;
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in an “at the market offering”, within the meaning of Rule 415(a)(4) of the Securities into an existing trading market, on an exchange or otherwise;
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transactions not involving market makers or established trading markets, including direct sales or privately negotiated transactions;
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transactions in options, swaps or other derivatives that may or may not be listed on an exchange;
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through any other method permitted pursuant to applicable law; or
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through a combination of any such methods of sale.
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At any time a particular
offer of the securities covered by this prospectus is made, a revised prospectus or prospectus supplement, if required, will be
distributed which will set forth the aggregate amount of securities covered by this prospectus being offered and the terms of the
offering, including the name or names of any underwriters, dealers, brokers or agents, any discounts, commissions, concessions
and other items constituting compensation from us and any discounts, commissions or concessions allowed or re-allowed or paid to
dealers. Such prospectus supplement, and, if necessary, a post-effective amendment to the registration statement of which this
prospectus is a part, will be filed with the SEC to reflect the disclosure of additional information with respect to the distribution
of the securities covered by this prospectus. In order to comply with the securities laws of certain states, if applicable, the
securities sold under this prospectus may only be sold through registered or licensed broker-dealers. In addition, in some states
the securities may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from
registration or qualification requirements is available and is complied with.
The distribution of
securities may be effected from time to time in one or more transactions, including block transactions and transactions on the
Nasdaq Capital Market or any other organized market where the securities may be traded. The securities may be sold at a fixed price
or prices, which may be changed, or at market prices prevailing at the time of sale, at prices relating to the prevailing market
prices or at negotiated prices. The consideration may be cash or another form negotiated by the parties. Agents, underwriters or
broker-dealers may be paid compensation for offering and selling the securities. That compensation may be in the form of discounts,
concessions or commissions to be received from us or from the purchasers of the securities. Any dealers and agents participating
in the distribution of the securities may be deemed to be underwriters, and compensation received by them on resale of the securities
may be deemed to be underwriting discounts. If any such dealers or agents were deemed to be underwriters, they may be subject to
statutory liabilities under the Securities Act.
Agents may from time
to time solicit offers to purchase the securities. If required, we will name in the applicable prospectus supplement any agent
involved in the offer or sale of the securities and set forth any compensation payable to the agent. Unless otherwise indicated
in the prospectus supplement, any agent will be acting on a best efforts basis for the period of its appointment. Any agent selling
the securities covered by this prospectus may be deemed to be an underwriter, as that term is defined in the Securities Act, of
the securities.
To the extent that
we make sales to or through one or more underwriters or agents in at-the-market offerings, we will do so pursuant to the terms
of a distribution agreement between us and the underwriters or agents. If we engage in at-the-market sales pursuant to a distribution
agreement, we will sell any of our listed securities to or through one or more underwriters or agents, which may act on an agency
basis or on a principal basis. During the term of any such agreement, we may sell any of our listed securities on a daily basis
in exchange transactions or otherwise as we agree with the underwriters or agents. The distribution agreement will provide that
any of our listed securities which are sold will be sold at prices related to the then prevailing market prices for our listed
securities. Therefore, exact figures regarding proceeds that will be raised or commissions to be paid cannot be determined at this
time and will be described in a prospectus supplement. Pursuant to the terms of the distribution agreement, we also may agree to
sell, and the relevant underwriters or agents may agree to solicit offers to purchase, blocks of our listed securities. The terms
of each such distribution agreement will be set forth in more detail in a prospectus supplement to this prospectus.
If underwriters are
used in a sale, securities will be acquired by the underwriters for their own account and may be resold from time to time in one
or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the
time of sale, or under delayed delivery contracts or other contractual commitments. Securities may be offered to the public either
through underwriting syndicates represented by one or more managing underwriters or directly by one or more firms acting as underwriters.
If an underwriter or underwriters are used in the sale of securities, an underwriting agreement will be executed with the underwriter
or underwriters, as well as any other underwriter or underwriters, with respect to a particular underwritten offering of securities,
and will set forth the terms of the transactions, including compensation of the underwriters and dealers and the public offering
price, if applicable. The prospectus and prospectus supplement will be used by the underwriters to resell the securities.
If a dealer is used
in the sale of the securities, we or an underwriter will sell the securities to the dealer, as principal. The dealer may then resell
the securities to the public at varying prices to be determined by the dealer at the time of resale. To the extent required, we
will set forth in the prospectus supplement the name of the dealer and the terms of the transactions.
We may directly solicit
offers to purchase the securities and may make sales of securities directly to institutional investors or others. These persons
may be deemed to be underwriters within the meaning of the Securities Act with respect to any resale of the securities. To the
extent required, the prospectus supplement will describe the terms of any such sales, including the terms of any bidding or auction
process, if used.
Agents, underwriters
and dealers may be entitled under agreements which may be entered into with us to indemnification by us against specified liabilities,
including liabilities incurred under the Securities Act, or to contribution by us to payments they may be required to make in respect
of such liabilities. If required, the prospectus supplement will describe the terms and conditions of the indemnification or contribution.
Some of the agents, underwriters or dealers, or their affiliates may be customers of, engage in transactions with or perform services
for us or our subsidiaries.
Any person participating
in the distribution of securities registered under the registration statement that includes this prospectus will be subject to
applicable provisions of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the applicable SEC rules and
regulations, including, among others, Regulation M, which may limit the timing of purchases and sales of any of our securities
by that person. Furthermore, Regulation M may restrict the ability of any person engaged in the distribution of our securities
to engage in market-making activities with respect to our securities. These restrictions may affect the marketability of our securities
and the ability of any person or entity to engage in market-making activities with respect to our securities.
Certain persons participating
in an offering may engage in over-allotment, stabilizing transactions, short-covering transactions, penalty bids and other transactions
that stabilize, maintain or otherwise affect the price of the offered securities. These activities may maintain the price of the
offered securities at levels above those that might otherwise prevail in the open market, including by entering stabilizing bids,
effecting syndicate covering transactions or imposing penalty bids, each of which is described below:
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a stabilizing bid means the placing of any bid, or the effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of a security.
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a syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering.
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a penalty bid means an arrangement that permits the managing underwriter to reclaim a selling concession from a syndicate member in connection with the offering when offered securities originally sold by the syndicate member are purchased in syndicate covering transactions.
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These transactions
may be effected on an exchange or automated quotation system, if the securities are listed on that exchange or admitted for trading
on that automated quotation system, or in the over-the-counter market or otherwise.
If so indicated in
the applicable prospectus supplement, we will authorize agents, underwriters or dealers to solicit offers from certain types of
institutions to purchase offered securities from us at the public offering price set forth in such prospectus supplement pursuant
to delayed delivery contracts providing for payment and delivery on a specified date in the future. Such contracts will be subject
only to those conditions set forth in the prospectus supplement and the prospectus supplement will set forth the commission payable
for solicitation of such contracts.
In addition, ordinary
shares or warrants may be issued upon conversion of or in exchange for debt securities or other securities.
Any underwriters to
whom offered securities are sold for public offering and sale may make a market in such offered securities, but such underwriters
will not be obligated to do so and may discontinue any market making at any time without notice. The offered securities may or
may not be listed on a national securities exchange. No assurance can be given that there will be a market for the offered securities.
Any securities that
qualify for sale pursuant to Rule 144 or Regulation S under the Securities Act may be sold under Rule 144 or Regulation S rather
than pursuant to this prospectus.
In connection with
offerings made through underwriters or agents, we may enter into agreements with such underwriters or agents pursuant to which
we receive our outstanding securities in consideration for the securities being offered to the public for cash. In connection with
these arrangements, the underwriters or agents may also sell securities covered by this prospectus to hedge their positions in
these outstanding securities, including in short sale transactions. If so, the underwriters or agents may use the securities received
from us under these arrangements to close out any related open borrowings of securities.
We may enter into derivative
transactions with third parties or sell securities not covered by this prospectus to third parties in privately negotiated transactions.
If the applicable prospectus supplement indicates, in connection with those derivatives, such third parties (or affiliates of such
third parties) may sell securities covered by this prospectus and the applicable prospectus supplement, including in short sale
transactions. If so, such third parties (or affiliates of such third parties) may use securities pledged by us or borrowed from
us or others to settle those sales or to close out any related open borrowings of shares, and may use securities received from
us in settlement of those derivatives to close out any related open borrowings of shares. The third parties (or affiliates of such
third parties) in such sale transactions will be underwriters and will be identified in the applicable prospectus supplement (or
a post-effective amendment).
We may loan or pledge
securities to a financial institution or other third party that in turn may sell the securities using this prospectus. Such financial
institution or third party may transfer its short position to investors in our securities or in connection with a simultaneous
offering of other securities offered by this prospectus or in connection with a simultaneous offering of other securities offered
by this prospectus.
LEGAL MATTERS
The validity
of the ordinary shares offered hereby will be passed upon for us by Maples and Calder. Certain matters of United States federal
securities law relating to the securities offered hereby under U.S. federal securities law will be passed upon for us by McDermott,
Will & Emery LLP, New York, New York and certain matters related to Israeli and Cayman Islands law will be passed on us by
Barnea Jaffa Lande & Co and Maples and Calder, respectively. Additional legal matters may be passed upon for us or any underwriters,
dealers or agents, by counsel that we will name in the applicable prospectus supplement.
EXPERTS
The consolidated financial
statements as of December 31, 2017 and 2016, and for each of the years then ended, incorporated by reference in this prospectus
and in the Registration Statement have been so incorporated in reliance on the reports (which contains an explanatory paragraph
regarding the Company’s ability to continue as a going concern) of Ziv Haft, a member firm of BDO, an independent registered public
accounting firm, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with
the SEC a registration statement on Form F-3, including amendments and relevant exhibits and schedules, under the Securities
Act covering the ordinary shares to be sold in this offering. This prospectus, which constitutes a part of the registration statement,
summarizes material provisions of contracts and other documents that we refer to in the prospectus. Since this prospectus does
not contain all of the information contained in the registration statement, you should read the registration statement and its
exhibits and schedules for further information with respect to us and our ordinary shares. You may review and copy the registration
statement, reports and other information we file at the SEC’s public reference room at 100 F Street, N.E., Washington,
D.C. 20549. You may also request copies of these documents upon payment of a duplicating fee by writing to the SEC. For further
information on the public reference facility, please call the SEC at 1-800-SEC-0330. Our SEC filings, including the registration
statement, are also available to you on the SEC’s Web site at
http://www.sec.gov
.
We are subject to the
information reporting requirements of the Exchange Act that are applicable to foreign private issuers, and under those requirements
we file reports with the SEC. Those other reports or other information may be inspected without charge at the locations described
above. As a foreign private issuer, we are exempt from the rules under the Exchange Act related to the furnishing and content of
proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual,
quarterly and current reports and financial statements with the SEC as frequently or as promptly as United States companies whose
securities are registered under the Exchange Act. However, we file with the SEC, within four months after the end of each fiscal
year, or such applicable time as required by the SEC, an annual report on Form 20-F containing financial statements audited
by an independent registered public accounting firm.
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE
We file annual and
special reports and other information with the SEC. These filings contain important information that does not appear in this prospectus.
The SEC allows us to “incorporate by reference” information into this prospectus, which means that we can disclose
important information to you by referring you to other documents which we have filed or will file with the SEC. We are incorporating
by reference in this prospectus the documents listed below and all amendments or supplements we may file to such documents, as
well as any future filings we may make with the SEC on Form 20-F under the Exchange Act before the time that all of the securities
offered by this prospectus have been sold or de-registered:
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our Annual Report on Form 20-F for the year ended December 31, 2017, filed with the SEC on April 30, 2018; and
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our Reports on Form 6-K filed with the SEC on July 6, 2018,
July 11, 2018, July 13, 2018 and August 7, 2018.
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This prospectus supplement
and accompanying prospectus are part of a registration statement on Form F-3 we have filed with the SEC under the Securities Act.
This prospectus supplement does not contain all of the information in the registration statement. We have omitted certain parts
of the registration statement, as permitted by the rules and regulations of the SEC. You may inspect and copy the registration
statement, including exhibits, at the SEC’s public reference room or website. Our statements in this prospectus supplement
about the contents of any contract or other document are not necessarily complete. You should refer to the copy of each contract
or other document we have filed as an exhibit to the registration statement for complete information.
In
addition, any reports on Form 6-K submitted to the SEC by us pursuant to the Exchange Act after the date of the initial registration
statement and prior to effectiveness of the registration statement that we specifically identify in such forms as being incorporated
by reference into the registration statement of which this prospectus forms a part and all subsequent annual reports on Form 20-F
filed after the effective date of this registration statement and prior to the termination of this offering and any reports on
Form 6-K subsequently submitted to the SEC or portions thereof that we specifically identify in such forms as being incorporated
by reference into the registration statement of which this prospectus forms a part, shall be considered to be incorporated into
this prospectus by reference and shall be considered a part of this prospectus from the date of filing or submission of such documents.
As you read the above
documents, you may find inconsistencies in information from one document to another. If you find inconsistencies between the documents
and this prospectus, you should rely on the statements made in the most recent document. All information appearing in this prospectus
is qualified in its entirety by the information and financial statements, including the notes thereto, contained in the documents
incorporated by reference herein.
We will provide, upon written or oral request,
to each person to whom a prospectus is delivered, a copy of any or all of the information that has been incorporated by reference
in the prospectus but not delivered with the prospectus. You may request a copy of these filings, at no cost, by writing us at
Ability Inc., Yad Harutzim 14, Tel Aviv, Israel, 6770007. Our telephone number is +972-72-260-2200.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.