Registration statement pursuant to section 12(b) or (g) of the securities exchange act of 1934


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NameRegistration statement pursuant to section 12(b) or (g) of the securities exchange act of 1934
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Impact of Currency Fluctuations and of Inflation

 

In 2010 and 2011, foreign currency fluctuations and the rate of inflation in Israel did not have a material impact on our financial results.    For additional details, see Item 11 "Qualitative and Quantitative Disclosures about Market Risk" below.

 

Impact of Recently Issued Accounting Standards

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued a guidance that changed the requirement for presenting “Comprehensive Income” in the consolidated financial statements. The guidance requires an entity to present the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate, but consecutive, statements. According to the guidance, the currently available option to disclose the components of other comprehensive income within the statement of stockholders’ equity will no longer be available. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. The adoption of the standard will have no impact on our financial position or results of operations, but will result in a change in the presentation of the basic consolidated financial statements. We are still evaluating whether to present other comprehensive income in a single continuous statement of comprehensive income or in two separate but consecutive statements.
In September 2011, the FASB also amended the guidance on the annual testing of goodwill for impairment. The amended guidance will allow companies to assess qualitative factors to determine if it is more likely than not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on our financial statements.

 

B.

LIQUIDITY AND CAPITAL RESOURCES

 

In the past few years, we financed our operations through cash generated by operations, private equity investments, short-term loans and borrowings under loans from Plenus and the Convertible Notes.

 

Principal Financing Activities

 

In the past year, we have engaged in several financing activities designed to improve our cash position, including restructuring of our borrowings, as follows:

 

Convertible Notes. Between  December 2010 through February 2011, we entered into an extension agreement, or the Third Extension Agreement, with certain holders of the Convertible Notes in the aggregate principal amount of approximately $1.5 million (out of $1.8 million that were outstanding at the time), such that, among other things, the maturity date of the Notes was extended and the aggregate outstanding principal amount will become due and payable in four equal installments of $377,334 on each of the following dates: (1) April 1, 2012; (2) June 30, 2012; (3) September 30, 2012; and (4) December 31, 2012.   As part of the Third Extension Agreement, the annual interest rate was changed from a fixed annual rate of 9.0% to a fixed annual rate of 11%. The holders of Convertible Notes in the principal amount of approximately $0.3 million, who did not enter into the Third Extension Agreement, received payments in accordance with the previous terms and schedule of the Notes, such that they were fully paid in February 2012.

 

 

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As a result of the acquisition of RepliWeb and in accordance with the antidilution provisions of the Convertible Notes, the conversion price of the Convertible Notes was adjusted in September 2011 to $0.62 per share (from $1.25).
Between December 31, 2011 and January 31, 2012, the holders, in the aggregate, of approximately $1.2 million of principal amount of the Convertible Notes, or approximately 76% of the total outstanding principal amount of the Notes, including Shimon Alon, our Chairman and CEO, and Ron Zuckerman, a member of our Board of Directors, converted their Convertible Notes into a total of approximately 2.4 million ordinary shares pursuant to an offer we made to all holders of the Convertible Notes, or the Prepayment Offer, the key terms of which were as follows:


 

·

the conversion ratio of that portion of the Notes being converted was increased, reflecting a reduction of the conversion price of the Notes from $0.62 to $0.50 per share;

 

 

·

each Note holder was entitled to payment, in cash or in additional ordinary shares (based on the new conversion ratio), of the interest payment due in 2012 (in a total amount of approximately $0.1 million for all Notes) plus accrued and unpaid interest for 2011 (in a total amount of approximately $0.2 million for all Notes); and

 

 

·

the Prepayment Offer expired on January 31, 2012.

 

As of March 1, 2012, as a result of the conversion of a substantial portion of the Convertible Notes described above, the outstanding principal amount of the Convertible Notes was reduced to approximately $0.3 million, which is scheduled to be paid in full (in installments) through December 31, 2012. For additional details, see Item 10.C “Material Contracts –Convertible Notes.”
Bridge Loan. In September 2011, in connection with the acquisition of RepliWeb, we secured a short-term loan in the principal amount of $3.0 million from an Israeli bank, or the Bridge Loan. The Bridge Loan, which was initially repayable in January 2012, bore interest at an annual rate of LIBOR plus 6%. To secure the Bridge Loan, Mr. Shimon Alon, our Chairman and CEO, provided the bank with a personal guarantee and deposited $1.2 million with the bank, or the Personal Guarantee. The Bridge Loan (together with interest payments of approximately $35,000) was fully repaid during September 2011.

 

Plenus Loan – 2011 Amendment. In September 2011, in connection with the acquisition of RepliWeb, we and Plenus also entered into an amendment to the Plenus Loan, whereby, among other things, (1) Plenus provided its consent to the Bridge Loan, (2) the period during which Plenus is entitled to compensation (in general, 15% of the proceeds payable in a Fundamental Transaction) upon consummation of a Fundamental Transaction was extended until December 31, 2017, (3) during such extended period, Plenus may elect to receive $300,000 in cash in lieu of such compensation, and (4) Plenus’ right to compensation (in general, 15% of the Company's consolidated revenues in 2012) in the event that our consolidated revenues in 2012 exceed $18 million was canceled. For additional details, see Item 10.C “Additional Information – Material Contracts – Plenus Loan.”

 

 

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Working Capital and Cash Flows

 

As of December 31, 2011, we had $1.8 million in cash, cash equivalents and restricted cash, compared to $1.1 million in cash, cash equivalents and restricted cash as of December 31, 2010.

 

As of December 31, 2011, the outstanding principal amount under (1) the Plenus Loan was $0.1 million (which was fully repaid in early January 2012); and (2) the Convertible Notes was $0.8 million, such that our outstanding debt as of December 31, 2011 was $0.95 million. As of March 1, 2012, following the conversion of additional Notes during January 2012 and a last payment to one of the Convertible Notes holders, the outstanding debt has been reduced to $0.3 million.

 

As of December 31, 2011, we had a deficit of $7.9 million in working capital, compared to a deficit of $2.6 million as of December 31, 2010.

 

Net cash provided by operating activities was $4.2 million in 2011, compared to $0.5 million in 2010. The increase is primarily because of payments in the aggregate amount of $3.85 million we received from Microsoft during 2011.

 

Net cash used in investing activities was $2.7 million in 2011, compared to $58,000 million in 2010. The increase is mainly attributable to the acquisition of RepliWeb.

 

Net cash used in financing activities was $1.0 million in both 2011 and 2010.

 

As of December 31, 2011, our principal commitments consisted of long-term liability for the contingent payment obligation due to RepliWeb former shareholders in the amount of $2.0 million (presented in the consolidated financial statements at present value of approximately $1.7 million), short term debt resulting from the outstanding Convertible Notes in the  principle amount of $0.8 million (which as of March 1, 2012, following the partial conversion of the Notes, was reduced to $0.3 million) and the Plenus Loan in the principle amount of $0.1 million (which was fully repaid in January 2012), as well as obligations outstanding under operating leases.   See also Item 5.F "Tabular Disclosure of Contractual Obligations."

 

Principal Capital Expenditure and Divestitures
During 2011, our capital expenditures totaled approximately $161,000 (compared to $58,000 during 2010 and $19,000 during 2009), most of which was used for the purchase of computers and license of software.  Other than future capital expenditures of the types and consistent with the amounts described above, we have no significant capital expenditures in progress. We did not effect any principal divestitures in the past three years.

 

Outlook

 

In the past several years, we performed several restructuring and financing activities in order to improve our financial condition. These activities, which included the aforesaid Prepayment Offer, resulted in (1) a decrease of our operating expenses from approximately $18.0 million in 2007 to approximately $15.1  million in 2011 (including the operating expenses of RepliWeb commencing on September 19,2011), while our revenues increased from approximately $12.1 million in 2007 to $15.2 million in 2011, and (2) reduction of our outstanding debt from approximately $4.0 million in 2007 to $0.95 million in 2011 (and to $0.3 million as of March 1, 2012), leading to an improvement in our cash balance. In light of the aforesaid, as well as other factors, including our ability to generate cash, we anticipate that our existing capital resources will be adequate to satisfy our working capital and capital expenditure requirements until at least March 2013. See also Item 5.F "Tabular Disclosure of Contractual Obligations."

 

 

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C.

RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

 

The software industry is characterized by rapid product change resulting from new technological developments, performance improvements and lower hardware costs and is highly competitive with respect to timely product innovation.  We, through our research and development and support personnel, work closely with our customers and prospective customers to determine their requirements, to design enhancements and new releases to meet their needs and to adapt our products to new platforms, operating systems and databases.  Research and development activities for all products principally take place in our research and development facilities in Israel. As of December 31, 2011, we employed 66 persons in research and development.

 

We have committed substantial financial resources to our research and development efforts. During 2011, 2010 and 2009, our research and development expenditures before capitalization were $5.0 million, $2.5 million and $2.3 million, respectively.  We capitalized computer software development costs of $0, $0 and $0.4 million in the years ended December 31, 2011, 2010 and 2009, respectively.

 

As described in Item 4.B “Information on the Company - Business Overview - Government Regulations,” we participated in programs sponsored by the Office of the Chief Scientist.

 

D.

TREND INFORMATION

 

See Item 5.A “Operating Results – Executive Summary”.

 

E.

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet arrangements, as such term is defined under Item 5.E of the instructions to Form 20-F, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

F.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

 

The following table summarizes our contractual obligations and commercial commitments, as of December 31, 2011:

 

Contractual Obligations

 

Payments due by Period

(U.S. dollars in thousands)

 

 

 

Total

 

 

Less than 1 year

 

 

1-3 Years

 

 

3-5 Years

 

More than 5 Years

 

Long-term convertible debt obligations (*)

 

$

835

 

 

$

835

 

 

$

-

 

 

 

- -

 

--

 

Long-term debt obligations

 

 

83

 

 

 

83

 

 

 

-

 

 

 

- -

 

- -

 

Severance pay obligation

 

 

783

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease obligations

 

 

1,025

 

 

 

773

 

 

 

252

 

 

 

--

 

--

 

RepliWeb contingent payment (**)

 

 

1,669

 

 

 

--

 

 

 

1,669

 

 

 

--

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total (***)

 

$

4,359

 

 

$

1,691

 

 

$

1,921

 

 

 

--

 

--

 

 

(*) During January 2012 approximately $0.5 million of the Notes were converted into shares. The balance following the conversion is approximately $0.3 million.

 

(**) Represents the present value of a contingent payment of $2.0 million payable in April 2013 to former RepliWeb shareholders.

 

(***) Excludes $222,000 for an accrual for uncertain income tax position under ASC 740 “Income Taxes,” which is paid upon settlement because we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 2j of our consolidated financial statements included elsewhere in this annual report.

 
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