As filed with the Securities and Exchange Commission on April 30, 2012
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
or

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2011
 
or

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
or
 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report .................
 
Commission file number: 001-14184
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
 (Exact name of Registrant as specified in its charter)

ISRAEL
(Jurisdiction of incorporation or organization)
 
20 Freiman Street, Rishon LeZion, 75100, Israel
(Address of principal executive offices)
 
Eyal Cohen, 972-3-9542070, eyalc@boscom.com , 20 Freiman Street, Rishon LeZion, 75100, Israel
 (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class
Ordinary shares, nominal value NIS 20.00 per share
Name of each exchange on which registered
     NASDAQ Capital Market
 
 
 
 
 
Securities registered or to be registered pursuant of Section 12(g) of the Act: None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:   None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock at the close of the period covered by the annual report:

 
4,467,924 ordinary shares, nominal value NIS 20.00 per share, as of December 31, 2011 and 4,471,637 ordinary shares, nominal value NIS 20.00 per share, as of March 31, 2012.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes o     No x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o     No x
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes x     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x

 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

x U.S. GAAP
 
o International Financial Reporting Standards as issued
by the International Accounting Standards Board
o Other
 
 
 
2
 
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o     Item 18 o
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No x
 
This report on Form 20-F is being incorporated by reference into all effective Registration Statements filed by us under the Securities Act of 1933, to the extent not superseded by documents or reports subsequently filed or furnished.
 
Forward Looking Statements
 
This Annual Report on Form 20-F contains forward-looking statements that are intended to be, and are hereby identified as, forward looking statements for the purposes of the safe harbor provisions of the Private Securities Reform Act of 1995. These statements address, among other things: our strategy; the anticipated development of our products; the results of completed acquisitions and our ability to make future acquisitions; our projected capital expenditures and liquidity; our development of additional revenue sources; our development and expansion of relationships; the market acceptance of our products; and our technological advancement. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed below and elsewhere in this report.
 
We urge you to consider that statements that use the terms “believe”, “do not believe”, “expect”, “plan”, “intend”, “estimate”, “anticipate”, “projections”, “forecast” and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events. These statements are based on assumptions and are subject to risks and uncertainties. These risk factors and uncertainties include, amongst others, the dependency of sales being generated from one or few major customers, the uncertainty of BOS being able to maintain current gross profit margins, inability to keep up or ahead of technology and to succeed in a highly competitive industry, inability to maintain marketing and distribution arrangements and to expand our overseas markets, uncertainty with respect  to the prospects of legal claims against BOS, the effect of exchange rate fluctuations, general worldwide economic conditions and continued availability of financing for working capital purposes and to refinance outstanding indebtedness; and additional risks and uncertainties set forth in this Annual Report, including under the heading “Risk Factors.”  Except as required by applicable law, including the federal securities laws of the United States, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
Market data and forecasts used in this report have been obtained from independent industry sources. We have not independently verified the data obtained from these sources and we cannot assure you of the accuracy or completeness of the data. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and additional uncertainties accompanying any estimates of future market size.
 
 
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5
 
 
PART  I
 
Item 1:   Identity of Directors, Senior Management and Advisors
 
Not applicable.
 
Item 2:   Offer Statistics and Expected Timetable
 
Not applicable.                         .
 
Item 3:   Key Information Regarding BOS
 
Unless the context in which such terms are used would require a different meaning, all references to “BOS”, “we”, “our” or the “Company” refer to B.O.S. Better Online Solutions Ltd. and its subsidiaries.
 
3A.         Selected Consolidated Financial Data
 
The selected consolidated statement of operations data for B.O.S. Better Online Solutions Ltd. set forth below with respect to the years ended December 31, 2011, 2010 and 2009, and the selected consolidated balance sheet data as of December 31, 2011 and 2010, have been derived from our audited Consolidated Financial Statements listed in Item 18, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The selected consolidated statement of operations data set forth below with respect to the years ended December 31, 2008 and 2007, and the consolidated balance sheet data as of December 31, 2009, 2008 and 2007, are derived from other consolidated financial statements not included herein and have been prepared in accordance with U.S. GAAP. The financial statements for the years ended December 31, 2011, 2010, 2009, 2008 and 2007 were audited by Kost Forer Gabbay & Kasierer, an independent registered public accounting firm and a member of Ernst & Young Global. The financial statements of BOS - Supply Chain Solutions (Lynk) Inc. (("Lynk", formerly, Lynk, USA Inc.) and its subsidiaries for the years ended December 31, 2009, 2008 and 2007 were audited by Arik Eshel, CPA & Assoc., PC an independent registered public accounting firm. The selected consolidated financial data presented below should be read in conjunction with and is qualified entirely by reference to Item 5: “Operating and Financial Review and Prospects” and the Notes to the Financial Statements included in this Annual Report on Form 20-F.
 
The Company has accounted for discontinued operations, in accordance with ASC 205-20, Discontinued operations of the Financial Accounting Standards Board. As such, the results of discontinued operations, including revenues, cost of revenues, operating expenses, and other income and expenses, related to the prior periods of the discontinued operation have been reclassified in the accompanying statements of operations (see Note 1e to the Consolidated Financial Statements for the year ended December 31, 2011).
 
On January 12, 2010, the Company effected a reverse share split which was approved in a general shareholders’ meeting on December 23, 2009. Pursuant to the reverse split, each 5 ordinary shares, NIS 4.00 nominal value per share, were converted into one ordinary share, NIS 20.00 nominal value per share. No fractional shares were issued as a result of the reverse split. Instead, all fractional shares were rounded up to the nearest whole number of shares. As of January 11, 2010, there were 13,090,346 ordinary shares outstanding and after the reverse split, there were 2,622,533 ordinary shares outstanding. Unless explicitly stated otherwise, all share prices and amounts are adjusted to account for the reverse share split.
 
 
- 1 -
 
 
Statement of Operations Data: (In U.S. thousands of dollars with the exception of per share data)
 
   
Year Ended December 31,
 
   
2007
   
2008
   
2009
   
2010
   
2011
 
                               
Revenues
    22,090       34,066       25,467       30,187       33,434  
Cost of revenues
    17,450       26,893       19,741       22,668       26,481  
Inventory write off s
    258       339       2,235       36       443  
Gross profit
    4,382       6,834       3,491       7,483       6,510  
Operating expenses :
                                       
  Research and development, net
    636       844       360       372       403  
 In process Research and development
    170       -       -       -       -  
 Sales and marketing
    3,448       6,408       5,426       4,068       4,273  
 General and administrative
    1,980       2,029       2,004       1,786       2,252  
Impairment of goodwill and other intangible assets
    -       568       383       -       555  
Total operating expenses
    6,234       9,849       8,173       6,226       7,483  
Operating income (loss):
    (1,852 )     (3,015 )     (4,682 )     1,257       (973 )
Financial expense, net
    (463 )     (431 )     (606 )     (961 )     (2,241 )
Other expenses, net
    (6,233 )     (1,448 )     (409 )     (120 )     (172 )
                                         
Income (loss) before tax on income
    (8,548 )     (4,894 )     (5,697 )     176       (3,386 )
Tax benefit (taxes on income)
    (38 )     241       (329 )     (5 )     172  
Income (loss) from continuing operations
    (8,586 )     (4,653 )     (6,026 )     171       (3,214 )
Net income (loss) from discontinued operations
    190       (1,747 )     (3,075 )     (806 )     -  
                                         
Net loss
    (8,396 )     (6,400 )     (9,101 )     (635 )     (3,214 )
Basic and diluted net income (loss) per share from continuing operations
  $ (4.96 )   $ (1.94 )   $ (2.32 )   $ 0.07     $ (1.14 )
Basic and diluted net income  (loss) per share from discontinued operations
  $ 0.11     $ (0.73 )   $ (1.18 )   $ (0.31 )   $ -  
Basic and diluted net loss per share
  $ (4.85 )   $ (2.67 )   $ (3.50 )   $ (0.24 )   $ (1.14 )
Weighted average number of shares used in computing basic net earning (loss) per share
    1,731       2,396       2,606       2,622       2,818  
Weighted average number of shares used in computing diluted net earning (loss) per share
    2,357       2,396       2,606       2,757       2,818  
 
 
- 2 -
 
 
   
As of December 31,
 
Consolidated Balance Sheet Data:
 
2007
   
2008
   
2009
   
2010
   
2011
 
                               
Cash and Cash Equivalents
    3,627       1,247       564       703       411  
                                         
Working Capital (*)
    6,157       3,491       237       386       (76 )
                                         
Total Assets
    31,132       37,345       27,362       22,130       20,069  
Short-term banks loan and current maturities of long-term bank loans
    5,028       6,879       7,983       7,778       7,496  
Long-term liabilities
    4,450       4,564       4,274       4,073       2,713  
Share Capital
    10,628       13,159       13,225       13,959       23,065  
Additional paid in Capital
    54,758       55,830       57,042       56,805       51,093  
Shareholders’ equity
    14,438       11,244       3,643       3,713       3,598  
(*)Working capital comprises of:
                                       
Current assets
    16,409       19,644       19,682       14,730       13,682  
Less: current liabilities
    10,252       16,153       19,445       14,344       13,758  
      6,157       3,491       237       386       (76 )
 
 
- 3 -
 
 
3B.          Capitalization and Indebtedness
 
Not applicable.
 
3C.          Reasons for the Offer and Use of proceeds
 
Not applicable.
 
3D.          Risk Factors
 
The following factors, in addition to other information contained or incorporated by reference in this Form 20-F, should be considered carefully. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The risks described below are not the only risks facing our Company. Additional risks and uncertainties that we are not aware of or that we currently believe are immaterial may also adversely affect our business, financial condition, results of operation and liquidity. The trading price of our ordinary shares could decline due to any of these risks, and you may lose all or part of your investment.
 
Risks relating to our financial results and capital structure :
 
We require a significant amount of cash to satisfy our debt obligations. If we fail to generate sufficient cash flow from operations, we may need to renegotiate or refinance our debt, obtain additional financing, postpone capital expenditures or sell assets.
 
As of December 31, 2011 we had $1,046,000 in long-term debt to Dimex Systems Ltd. (includes current maturities of $299,000) and $2,190,000 in long-term bank loans (includes current maturities of $660,000). In addition, at December 31, 2011, we had $6.8 million of short term bank loans drawn under a revolving credit facility. We depend mainly on cash generated by continuing operating activities to make payments on our debt. We cannot assure that we will generate sufficient cash flow from operations to make the scheduled payments on our debt. Our ability to meet our debt obligations will depend on whether we can successfully implement our business strategy, as well as on economic, financial, competitive and technical factors (See “Item  5B.  Liquidity and Capital Resources”).
 
Some of the factors are beyond our control, such as economic conditions in the markets where we operate or intend to operate, changes in our customers’ demand for our products, and pressure from existing and new competitors. Also, because part of our loans bear interest at floating rates, we are susceptible to an increase in interest rates (See “Item 11. Quantitative and Qualitative Disclosures about Market Risk”).
 
If we cannot generate sufficient cash flow from operations to make scheduled payments on our debt obligations, we may need to renegotiate the terms of our debt, refinance our debt, obtain additional financing, delay planned capital expenditures or sell assets.
 
If our lenders decline to renegotiate the terms of our debt in these circumstances, the lenders could declare all amounts borrowed and all amounts due to them under the agreements due and payable.
 
 
- 4 -
 
 
We have had a history of losses and our future levels of sales and ability to achieve profitability are unpredictable.
 
As of December 31, 2011, we had an accumulated deficit of $70 million. In 2011, we had a net loss of $3.21 million. Our ability to maintain and improve future levels of sales and achieve profitability depends on many factors, which include:
 
 
·
developing and selling new Radio Frequency Identification ("RFID") and Mobile Solutions products to meet market needs;
 
 
·
delivering  our products in a timely manner;
 
 
·
successfully implementing our business strategy;
 
 
·
increased demand for our existing products;
 
 
·
controlling costs; and
 
 
·
having access to sufficient working capital financing to support our operations.
 
There can be no assurance that we will be able to meet our challenges and experience any growth in sales or achieve profitability in the future, that the level of historic sales will continue in the future or that our net losses will not increase in the future.
 
We may be unable to maintain our gross profit margins.
 
Our sales and profitability may vary in any given year, and from quarter to quarter. In order to increase sales or to enter into new markets with new products we may find it necessary to decrease prices in order to be competitive. Additionally, our gross profit margin tends to fluctuate mainly due to variety and mix of products. We may not be able to maintain current gross profit margins in the future, which would have a material adverse effect on our business.
 
We depend on two banks which provide our short and long term loans.
 
We rely on Bank Leumi le-Israel   Ltd. (“Bank Leumi”) and on Bank Hapoalim, to provide credit facilities to our subsidiaries. As of December 31, 2011 we had $6.8 million drawn under a Bank Leumi short term revolving credit facility and $367,000 current maturities of long term loans extended by Bank Leumi. In addition, as of December 31, 2011 we had $278,000 current maturities of long term loans and $1.44 million  of long terms bank loans with Bank HaPoalim. The Bank HaPoalim loans contain several covenants that require the Company's Israeli subsidiaries to maintain certain financial ratios and levels of profitability. As of  December 31, 2011 the Company failed to meet Bank HaPoalim’s covenants. Nonetheless, Bank HaPoalim, agreed under certain conditions, including compliance by the Company with its covenants for the year 2012, to waive this failure of the Company to meet its financial covenants in 2011. Failure to meet our bank covenants may lead to a default under the loan agreements.
 
Our assets are subject to security interests in favor of our bank lenders. Our failure to repay the bank loans, if required, could result in legal action against us, which could require the sale of all of our assets.
 
The repayment of our debt to Bank Leumi is secured by a first priority floating charge on all of our Company’s assets, present and future as they may be changing from time to time, and by a first priority fixed charge on all of the Company’s issued and unpaid-for share capital, its goodwill and its shares of our Israeli subsidiaries, BOS - Dimex Ltd. (“Dimex”) and BOS - Odem Ltd. (“Odem”). In addition, the Company and its Israeli subsidiaries entered into a series of inter company guarantees in favor of Bank Leumi.
 
 
- 5 -
 
 
The repayment of the Company's debt to Bank HaPoalim is secured by long term bank deposits in the amount of $427,000.
 
If we are unable to repay the bank loans when due, our bank lender could foreclose on our assets in order to recover the amounts due. Any such action would require us to curtail or cease operations (See “Item 5B. Liquidity and Capital Resources”).
 
Our debt obligations may hinder our growth and put us at a competitive disadvantage.
 
Our debt obligations require us to use a substantial portion of our operating cash flow to repay the principal and interest on our loans. This reduces funds available to grow and expand our business, limits our ability to pursue business opportunities and makes us more vulnerable to economic and industry downturns. The existence of debt obligations and covenants also limits our ability to obtain additional financing on favorable terms.
 
Due to restrictions in our loan agreements, we may not be able to operate our business as we desire.
 
Our loan agreements contain a number of conditions and limitations on the way in which we can operate our business, including limitations on our ability to raise debt, sell or acquire assets and pay dividends. Our loan agreements also contain various covenants, which require that we maintain certain financial ratios related to shareholder's equity , operating results and certain levels of profitability. These limitations and covenants may force us to pursue less than optimal business strategies or forgo business arrangements which could have been financially advantageous to our shareholders and us. Our failure to comply with the covenants and restrictions contained in our loan agreements could lead to a default under the terms of these agreements (See “Item 5B. Liquidity and Capital Resources”).
 
Risks related to our business:
 
We depend on key personnel for the success of our business.
 
Our success depends, to a significant extent, on the continued active participation of our executive officers and other key personnel. In addition, there is significant competition for employees with technical expertise in our industry. In order to succeed we would need to be able to:
 
 
·
retain the executive officers and key technical personnel who have been involved in the development of our two divisions;
 
 
·
attract and retain additional qualified personnel to provide technological depth and support to enhance existing products and develop new products; and
 
 
·
attract and retain highly skilled computer operating, marketing and financial personnel.
 
We cannot make assurances that we will be successful in attracting, integrating, motivating and retaining key personnel. If we are unable to retain our key personnel and attract additional qualified personnel as and when needed, our business may be adversely affected.
 
 
- 6 -
 
 
We may be unable to effectively manage our growth and expansion, and as a result, our business results may be adversely affected.
 
Our goal is to grow over the next few years. The management of our growth, if any, will require the continued expansion of our operational and financial control systems, as well as a significant increase in our financial resources and in our delivery and service capabilities. These factors could place a significant strain on our resources.
 
Our growth increases the complexity of our operations, places significant demands on our management and our operational, financial and marketing resources and involves a number of challenges, including:
 
 
·
managing geographically dispersed operations;
 
 
·
retaining and motivating key personnel of the acquired businesses;
 
 
·
assimilating different corporate cultures;
 
 
·
preserving the business relationships with existing key customers and suppliers;
 
 
·
maintaining uniform standards, controls, procedures and policies; and
 
 
·
introducing joint products and service offerings.
 
In recent years, the Company has made several acquisitions, such as the acquisition of Dimex Systems’ business in March 2008, and the acquisition of BOS Supply Chain Solutions (Summit) Inc. ("Summit"), a New Jersey based company, in October 2007 (Summit filed for Chapter 7 bankruptcy relief on November 23, 2010). There can be no assurance that we will be able to successfully integrate and manage future acquisitions, if they further occur, in order to maintain and grow the combined business and maximize the potential synergies.
 
Further, once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as were prior to the acquisitions or otherwise perform as expected. The occurrence of any of these events could harm our business, financial condition or results of operations.
 
Our inability to meet our delivery commitments in a timely manner (as a result of unexpected increases in orders, for example) could result in losses of sales, exposure to contractual penalties, costs or expenses, as well as damage to our reputation in the marketplace.
 
Our inability to manage growth effectively could have a material adverse effect on our business, financial condition and results of operations.
 
The continued growth of our RFID and Mobile Solutions segment depends on our ability to expand sales abroad.
 
In 2011, our RFID and Mobile Solutions revenues that were generated from sales outside of Israel amounted to $175,000 or 1.0% of the entire RFID and Mobile Solutions revenues, which represented a decrease of approximately $100,000 from fiscal 2010. Due to limitations in the size of the Israeli RFID and Mobile solutions markets, continued growth of this segment depends on our ability to increase our sales abroad. There can be no assurance that we will be able to maintain and increase our revenues from these markets.
 
 
- 7 -
 
 
We do not have collateral or credit insurance for all of our customers’ debt, and our allowance for bad debts may increase.
 
Our customers’ debt is derived from sales to customers located primarily in Israel and in the Far East. We do not have any collateral and we have limited credit insurance in respect of our customers' debt. The balance of allowance for bad debt as of December 31, 2011 amounted to $115,000, which was determined by the management to be sufficient. In face of a global economic slowdown or if a local or global recession reoccurs, we may be required to record additional and significant allowances for bad debts.
 
Certain customers of our Supply Chain Division may cancel purchase orders they placed before the delivery.
 
Supply chain  programs  for the sale of electronic components , including the programs offered by our Supply Chain Division, are designed to  accommodate the preference of customers to work with a limited number of suppliers that are able to provide a wide range of electronic components under one order. In the event we are not able to provide all of the components  required by a customer, they,   could elect to terminate the entire order before its delivery. In addition, certain of our individual product orders provide a right of termination prior to delivery.
 
In the event substantial orders are so cancelled, there is no assurance that we will be able to sell the pre-purchased inventory at a profit, or at all. This could result in excess and obsolete inventory and could have a material adverse effect on our results of operations.

The electronic components provided by our Supply Chain Division need to meet certain industry standards and for some customers we need to be the manufacturers’ authorized distributors.
 
The main business of our Supply chain division is the provision of electronic components to the aerospace and defense industry. These components need to be in compliance with Aviation Standard number 9120, which was adopted by the International Aerospace Quality Group. Non compliance with these standards could limit our sales.
 
In addition, in face of an increased number of refurbished or non-original components  offered in the marketplace, certain customers have begun to insist on purchasing components only directly from authorized distributors of the manufacturers. This could impair our ability to sell components of manufacturers for which we do not serve as authorized dealers and have a substantial adverse effect on our business.
 
The Supply Chain division engages in a number of business activities governed by U.S. Government Laws and Regulations, which if violated, could subject the Company to civil or criminal fines and penalties.
 
The Supply Chain division engages in a number of business activities governed by U.S. Government procurement laws and regulations which change frequently, including regulations relating to import-export control and technology transfer restrictions. If we or our sales representatives fail to comply with these laws and regulations, we could be subject to administrative, civil, or criminal liabilities that   could have a material adverse effect on our business and results of operations.
 
 
- 8 -
 
 
We rely on certain key suppliers .
 
Most of our sales rely on products of certain key suppliers, which we represent. 26% of our first quarter of 2012 Supply Chain Division segment purchases were sourced from five key suppliers and 52% of our first quarter of 2012 RFID and Mobile Solutions segment purchases were sourced from five key suppliers. In the year 2011, 24% of our Supply Chain Division segment purchases were sourced from five key suppliers and 56% of our RFID and Mobile Solutions segment purchases were sourced from five key suppliers.
 
In the event that any of our key suppliers becomes unable to fulfill our requirements in a timely manner or if we cease our business relationship with these suppliers, we may experience an interruption in delivery and a decrease in our business until an alternative source of supply can be obtained.
 
Future changes in industry standards may have an adverse effect on our business.
 
New industry standards in the aviation and defense industry could cause a portion of our Supply Chain Division segment’s inventory to become obsolete and unmarketable which would adversely affect our results of operations.
 
If revenue levels for any quarter fall below our expectations, our results of operations will be adversely affected.
 
Our revenues in any quarter are substantially dependent on orders received and delivered in that quarter. We base our decisions regarding our operating expenses on anticipated revenue trends, and our expenses levels are relatively fixed, or require some time for adjustment. As a result, revenue levels below our expectations will adversely affect our results of operations.
 
The rate of inflation in Israel may negatively impact our costs if it exceeds the rate of devaluation of the NIS against the U.S. dollar. Similarly, the U.S. dollar cost of our operations in Israel will increase to the extent increases in the rate of inflation in Israel are not offset by a devaluation of the NIS in relation to the U.S. dollar.
 
A substantial amount of our revenues is denominated in U.S. dollars  (“U.S. dollars” or “dollars") or is U.S. dollar-linked, but we incur a significant portion of our expenses, principally salaries and related personnel expenses in Israel and rent for our facilities in Israel, in NIS. As a result, we are exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the U.S. dollar or that the timing of this devaluation lags behind inflation in Israel. In that event, the U.S. dollar cost of our operations in Israel will increase and our U.S. dollar-measured results of operations will be adversely affected.
 
Similarly, we are exposed to the risk that the NIS, after adjustment for inflation in Israel, will appreciate in relation to the U.S. dollar. In that event, the dollar-measured cost of our operations in Israel will increase and our dollar-measured results of operations will be adversely affected. In 2009 and 2010, the NIS appreciated by approximately 0.7% and 6.0%, respectively, against the U.S. dollar and in 2011 the NIS devaluated by approximately 7.7% against the U.S. dollar.  In 2009, 2010 and 2011, the annual inflation rate in Israel was approximately 3.9%, 2.7% and 2.17%, respectively, and therefore the U.S. dollar cost of our Israeli operations in 2009 and 2010 has increased and in 2011 have decreased. We cannot predict whether in the future the NIS will appreciate against the U.S. dollar or vice versa. Any increase in the rate of inflation in Israel, unless the increase is offset on a timely basis by a devaluation of the NIS in relation to the U.S. dollar, will increase our labor and other costs, which will increase the U.S. dollar cost of our operations in Israel and harm our results of operations (see “Item 5A. Results of Operation - Impact of Inflation and Currency Fluctuations.”)
 
 
- 9 -
 
 
If we are unsuccessful in developing and introducing new products, we may be unable to expand our business.
 
The market for some of our products is characterized by rapidly changing technology and evolving industry standards. The introduction of products embodying new technology and the emergence of new industry standards can render existing products obsolete and unmarketable and can exert price pressures on existing products.
 
Our ability to anticipate changes in technology and industry standards and successfully develop and introduce new and enhanced products as well as additional applications for existing products, in each case on a timely basis, will be critical in our ability to grow and remain competitive. Although these products are related to, and even incorporate our existing products, there can be no assurance that we will be able to successfully develop and market any such new products. If we are unable, for technological or other reasons, to develop products that are competitive in technology and price and responsive to customer needs, our business will be materially adversely affected.
 
We have significant sales worldwide and could encounter problems if conditions change in the places where we market our products.
 
We have sold and intend to continue to sell our products in North and South America, Europe, China and Asia Pacific.
 
A number of risks are inherent in engaging in international transactions, including:
 
 
·
possible problems in collecting receivables;
 
 
·
imposition of governmental controls, or export license requirements;
 
 
·
political and economic instability in foreign companies;
 
 
·
trade restrictions or changes in tariffs being imposed; and
 
 
·
laws and legal issues concerning foreign countries.
 
If we should encounter such difficulties in conducting our international operations, it may adversely affect our business condition and results of operations.
 
We may be obligated to indemnify our directors and officers .
 
The Company has agreements with its directors and senior officers which provide, subject to Israeli law, indemnification by the Company of directors and senior officers for: (a) monetary liability imposed upon them in favor of a third party by a judgment, including a settlement or an arbitral award confirmed by the court, as a result of an act or omission of such person in its capacity as a director or officer of the Company, (b) reasonable litigation expenses, including attorney’s fees, incurred by them pursuant to an investigation or a proceeding commenced against them by a competent authority if it was terminated without an indictment and without having a monetary charge imposed on them in exchange for a criminal procedure (as such terms are defined in the Israeli Companies Law 1999 – 5759 (the “Israeli Companies Law”)), or that was terminated without an indictment but with a monetary charge imposed on them in exchange for a criminal procedure in a crime that does not require proof of criminal intent, or in connection with a financial sanction, as a result of an act or omission of such person in its capacity as a director or officer of the Company, (c) reasonable litigation expenses, including attorney’s fees, incurred by such a director or officer or imposed on him by a court, in a proceeding brought against him by or on behalf of the Company or by a third party, or in a criminal action in which he was acquitted, or in a criminal action which does not require criminal intent in which he was convicted, in each case relating to acts or omissions of such person in its capacity as a director or officer of the Company, (d) expenses, including reasonable litigation expenses and legal fees, incurred by such a director or officer as a result of a proceeding instituted against him in relation to (A) infringements that may result in imposition of financial sanction pursuant to the provisions of Chapter H'3 under the Israeli Securities Law or (B) administrative infringements pursuant to the provisions of Chapter H'4 under the Israeli Securities Law or (C) infringements pursuant to the provisions of Chapter I'1 under the Israeli Securities Law;  and (e) payments to an injured party of infringement under Section 52ND(a)(1)(a) of the Israeli Securities Law. Payment pursuant to such indemnification may materially adversely affect our financial condition.
 
 
- 10 -
 
 
The measures we take in order to protect our intellectual property may not be effective or sufficient.
 
           Our success is dependent upon our proprietary rights and technology. We currently rely on a combination of trade secrets, copyright and trademark law, together with non-disclosure and invention assignment agreements, to establish and protect the proprietary rights and technology used in our products. We generally enter into confidentiality agreements with our employees, consultants, customers and potential customers and limit the access to and the distribution of our proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization, or to develop similar technology independently. We do not believe that our products and proprietary rights infringe upon the proprietary rights of others. However, there can be no assurance that any other party will not argue otherwise. The cost of responding and adequately protecting ourselves against any such assertion may be material, whether or not the assertion is valid. Further, the laws of certain countries in which we sell our products do not protect our intellectual property rights to the same extent as do the laws of the United States. Substantial unauthorized use of our products could have a material adverse effect on our business. We cannot make assurances that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. Additionally, there are risks that arise from the use of intranet networks and the Internet. Although we utilize firewalls and protection software, we cannot be sure that our proprietary information is secured against penetration. Such penetration, if occurs, could have an adverse effect on our business.
 
There can be no assurance that we will not be classified as a passive foreign investment company (a “PFIC”).
 
Based upon our current and projected income, assets and activities, we do not believe that at this time BOS is a passive foreign investment company for U.S. federal income tax purposes, but there can be no assurance that we will not be classified as such in the future. Such classification may have grave tax consequences for U.S. shareholders. One method of avoiding such tax consequences is by making a “qualified electing fund” election for the first taxable year in which the Company is a PFIC. However, such an election is conditioned upon our furnishing U.S. shareholders annually with certain tax information. We do not presently prepare or provide such information, and such information may not be available to U.S. shareholders if we are subsequently determined to be a PFIC. You are advised to consult with your own tax advisor regarding the particular tax consequences related to the ownership and disposition of our ordinary shares under your own particular factual circumstances.
 
 
- 11 -
 
 
Risks related to our ordinary shares:
 
Our share price has been and may continue to be volatile, which could result in substantial losses for individual shareholders.
 
The market price of our ordinary shares has been and may continue to be highly volatile and subject to wide fluctuations. From January 2011 through March 2012, the daily closing price of our ordinary shares in NASDAQ has ranged from $0.68 to $3.52 per share. We believe that these fluctuations have been in response to a number of factors including the following, some of which are beyond our control:
 
 
·
variations between actual results and projections;
 
 
·
the liquidation of Summit and Lynk;
 
 
·
the limited trading volume in our stock;
 
 
·
increase in our bank debts;
 
 
·
sales of securities in private placements.
 
In addition, the stock market in general, and stocks of technology companies in particular, have from time to time experienced extreme price and volume fluctuations.  This volatility is often unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our ordinary shares, regardless of our actual operating performance.
 
The Company’s shares may be delisted from the NASDAQ Capital Market if it does not meet NASDAQ’s continued listing requirements.
 
Over the years, the Company has received several notices from the NASDAQ Stock Market advising it of non-compliance of its shares for continued listing on this market.
 
Most recently, on January 17, 2012, the Company received a notice from the Listing Qualifications Department of Nasdaq advising us that the Company has failed to comply with Nasdaq’s requirement that listed securities maintain a minimum bid price of $1.00 per share as set forth in Nasdaq Listing Rules.
 
The Company has until July 16, 2012, to regain compliance with the $1.00 minimum bid price requirement. If at any time during this 180 days' period, the closing bid price of the Company’s security is at least $1 for a minimum of ten consecutive business days, the Company will regain compliance.
 
In the event that we do not regain compliance, the Company may be eligible for additional 180 calendar days. To qualify, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of its intention to cure the deficiency during the second compliance period.
 
 
- 12 -
 
 
 There can be no assurance that the Company will continue to qualify for listing on the Nasdaq Capital Market. If the Company’s ordinary shares are delisted from the Nasdaq Capital Market, trading in its ordinary shares could be conducted on an electronic bulletin board such as the OTC Bulletin Board. In addition, if the Company’s ordinary shares were delisted from the Nasdaq Capital Market, it would be subject to the so-called penny stock rules that impose restrictive sales practice requirements on broker-dealers who sell those securities.  Consequently, de-listing, if it occurred, could affect the ability of the shareholders to sell their ordinary shares in the secondary market. The restrictions applicable to shares that are de-listed, as well as the lack of liquidity for shares that are traded on an electronic bulletin board, may adversely affect the market price of such shares.
 
Risks related to our location in Israel :
 
Political, economic, and security conditions in Israel affect our operations and may limit our ability to produce and sell our products or provide our services.
 
We are incorporated under the laws of the State of Israel, where we also maintain our headquarters and our principal research and development and sales and marketing facilities. Since the establishment of the State of Israel in 1948, a number of armed conflicts have  occurred between Israel and its Arab neighbors. During the winter of 2008, Israel was engaged in an armed conflict with Hamas, a militia group and political party operating in the Gaza Strip, and during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party. Since February 2011, Egypt has experienced political turbulence, following the resignation of Hosni Mubarak as president, including protests throughout Egypt, and the appointment of a military regime in his stead followed by the election to the Egyptian parliament of certain political parties which advocate breaking ties with Israel. This development may damage the current peaceful and diplomatic relations between Israel and Egypt.
 
Similar civil unrest and political turbulence has occurred in other countries in the region and is affecting the political stability of those countries. Syria, which borders Israel, has experienced months of violence and some have expressed concern that the unrest could spill into Israel or lead to incidents on what has been a relatively quiet border in recent years. This instability may lead to deterioration of the political and economic relationships that exist between the State of Israel and some of these countries.
 
In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza and Hezbollah in Lebanon. The environment may potentially escalate in the future to more violent events which may affect Israel and the Company. These types of situations, including conflicts which involved missile strikes against civilian targets in various parts of Israel, had in the past negatively affected business conditions in Israel. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could have a material adverse effect on our business, operating results and financial condition, and could make it more difficult for us to raise capital.
 
 
- 13 -
 
 
Ongoing and revived hostilities and the attempts to resolve the conflict between Israel and its Arab neighbors often results in political instability that affects the Israeli capital markets and can cause volatility in interest rates, exchange rates and stock market quotes. The political and security situation in Israel may result in parties with whom we have contracts claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions.  These or other Israeli political or economic factors could harm our operations and product development and cause our sales to decrease.
 
Furthermore, several countries, principally those in the Middle East, still restrict business with Israel and Israeli companies.
 
A number of our key personnel in Israel have standing obligations to perform periodic reserve duty in the Israel Defense Forces and are subject to be called for active military duty at any time. If our key personnel are absent from our business for a significant period of time, we may experience disruptions in our business that could affect the development, sales or technical support of our products. As a result, we might not be able to compete in the market and our results of operations could be harmed.
 
The anti-takeover effects of Israeli laws may delay or deter a change of control of the Company.
 
Provisions of Israeli law may delay, prevent or make undesirable a merger or an acquisition of all or a significant portion of our shares or assets. Israeli corporate law regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. These provisions may limit the price that investors may be willing to pay in the future for our ordinary shares. Furthermore, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders.
 
These laws may have the effect of delaying or deterring a change in control of the Company, thereby limiting the opportunity for shareholders to receive a premium for their shares and possibly affecting the price that some investors are willing to pay for the Company’s securities.
 
All of our directors and officers are non-U.S. residents and enforceability of civil liabilities against them is uncertain.
 
All of our directors and officers reside outside of the United States. Service of process upon them may be difficult to effect within the United States. Furthermore, because the majority of our assets are located in Israel, any judgment obtained in the United States against us or any of our directors and non-U.S. officers may not be collectible within the United States.
 
 
- 14 -
 
 
Your rights and responsibilities as our shareholder will be governed by Israeli law, which differ in some respects from the rights and responsibilities of shareholders of United States corporations.

Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in United States-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters, such as an amendment to the company’s articles of association, an increase of the company’s authorized share capital, a merger and approval of related party transactions that require shareholder approval. In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness towards the company. These provisions may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of U.S. corporations.

As a foreign private issuer whose shares are listed on The Nasdaq Capital Market, we may in the future elect to follow certain home country corporate governance practices instead of certain Nasdaq requirements.

We are a foreign private issuer as such term is defined under U.S. federal securities laws. As a foreign private issuer, we may elect to follow certain home country corporate governance practices instead of certain requirements of the Marketplace Rules of The Nasdaq Capital Market, or the Nasdaq Marketplace Rules. We may in the future elect to follow Israeli corporate governance practices with regard to, among other things, the composition of our board of directors, compensation of officers, director nomination procedures and quorum requirements at shareholders’ meetings. In addition, we may elect to follow Israeli corporate governance practices instead of the Nasdaq requirements to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, issuances that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company). Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq’s corporate governance rules. Following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on The Nasdaq Capital Market may provide less protection than is accorded to investors of domestic issuers.

In addition, as a foreign private issuer, we are exempt from the rules and regulations under the United States Securities Exchange Act of 1934, as amended, or 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 Securities and Exchange Commission as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.
 
 
- 15 -
 

If we were to lose our foreign private issuer status under U.S. federal securities laws, we would incur additional expenses associated with compliance with the U.S. securities laws applicable to U.S. domestic issuers.
 
As a foreign private issuer, we are not required to comply with all of the periodic disclosure and current reporting requirements applicable to U.S. domestic issuers, as explained above. The regulatory and compliance costs to us under U.S. securities laws, if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer, may be significantly higher than the cost we currently incur as a foreign private issuer.
 
Item 4:   Information on the Company
 
4A.          History and Development of the Company

We were incorporated in Israel in 1990 and are subject to the Israeli Companies Law. Our executive offices and engineering, development, testing, shipping and service operations are located in Israel. Our address in Israel is  20 Freiman Street, Rishon LeZion, 75100, Israel.

Our address in the United States is B.O.S Better Online Solutions Ltd. c/o Ruby-tech, Inc. 147-20 184th St., Jamaica NY 11413, USA.

Our telephone number is 972-3-954-2000 and our website address is www.boscom.com . Our subsidiaries’ websites are: Odem - www.odem.co.il ; and Dimex – www.dimex.co.il . The information contained on, or linked from, our websites is not a part of this report.

We operate our business through two segments:
 
 
·
Supply Chain Solutions – conducted through our wholly owned subsidiary, Odem. Our Supply Chain Solutions business offers a wide range of electronic components to customers in the aviation, aerospace and high technology industry that prefer to consolidate their component acquisitions through a supplier that is able to provide a comprehensive solution to their components-supply needs.
 
 
·
RFID and Mobile Solutions – conducted through our wholly owned subsidiary, Dimex. Our RFID and Mobile Solutions offerings form a comprehensive turn-key solution for Automatic Identification and Data Collection, combining mobile infrastructure of manufacturers that we represent, middleware software and a software application.
 
In March 2008, Dimex and its subsidiary Dimex Hagalil Projects (2008) Ltd. (“Dimex Hagalil 2008”), purchased the assets and activities of Dimex Systems, which was an integrator of AIDC (Automatic Identification and Data Collection) solutions based on RFID and barcode technology. The consideration was NIS 44.6 million (approximately $12.4 million). The consideration was comprised of cash, payable over a 24-month period and of 100,045 BOS shares (equal to approximately 4.4% of the then outstanding shares of BOS).
 
 
- 16 -
 
 
In March 2009, the Company entered into an amendment to the 2008 Dimex Systems Asset Purchase Agreement that revised the payment schedule of the approximately NIS 10 million payable in three semi-annual installments through June 2010. The amendment provided for a NIS 3.5 million payment in March 2009, NIS 4 million to be paid in 6 equal monthly installments each, starting on January 15, 2010, and the remaining approximately NIS 2.5 million was converted into the same type of convertible debentures subsequently issued by the Company in July 2009.

In August 2009, the Company closed a $2.4 million Convertible Loan Financing with several lenders including Catalyst Private Equity Partners (Israel) II L.P., Telegraph Hill Capital Fund I, LLC, certain existing shareholders and members of its management (the "Lenders"). The financing consisted of loans with a term of three years that bear interest at a rate equal to 8% per annum, compounded annually. The Company was to repay the loan principal amount and the accrued interest in one payment at the end of the term, unless converted earlier into ordinary shares at the discretion of the lender. The loan conversion rate is $3.25 per ordinary share. The Company granted the lenders warrants to purchase 100% of the number of ordinary shares into which the loan is convertible. The warrants are exercisable, in whole or in part, from 18 months to 36 months from grant, at an exercise price per ordinary share of $2.75. In addition, the lenders received certain registration rights. A total of $675,000 of the loan was extended to the Company by conversion into the debt financing of a payment otherwise due to Dimex Systems by April 2010, pursuant to the Asset Purchase Agreement the Company had entered into with Dimex Systems.

On February 4, 2010, the Company entered into an additional amendment to the Dimex Systems Asset Purchase Agreement, further revising the schedule of remaining payments in the amount of NIS 4 million, to Dimex Systems. The amendment provided for payment of:

(a) NIS 300,000 in February 2010 and NIS 3.1 million plus 8% interest per annum, to be paid in monthly installments commencing July 2010 through December  2013; and

(b)NIS 600,000 were converted into the same long-term convertible debentures, into which NIS 2.5 million were previously converted.

In addition, the Company issued to Dimex Systems a warrant to purchase 69,096 ordinary shares at an exercise price of $3.25 per ordinary shares during the first 18 months commencing August 3, 2011 and $4.00 per ordinary share thereafter.

In December 2011, the Company’s shareholders approved and the Company effected  amendments to the terms of the Convertible Loan Financing agreements (the "Conversion Amendments”). The Conversion Amendments provided that approximately $2.5 million of the outstanding convertible debt (consisting of $2,093,000 principal and $430,000 accrued interest) was converted into 1,681,965 ordinary shares (at a reduced conversion price of $1.5 per ordinary share, instead of the original $3.25 price). In addition, the warrants to purchase 643,984 shares that had been issued to the Lenders were extended by two years until July 2014 and February 2015, with no change to the exercise price of $2.75 per ordinary share.
 
The balance of the convertible loan of $501,000 that was extended by Dimex Systems remained outstanding, and will bear a reduced interest rate of 4%, instead of the original rate of 8%, and will no longer be convertible. This amount will be repaid to Dimex Sytstems in 24 equal monthly installments commencing January 10, 2014.
 
 
- 17 -
 

  For further details on the aforementioned loan financing. See “Item 5B. Liquidity and Capital Resources” and Note 13 to our Consolidated Financial Statements s attached to this annual report.
 
In addition, we have an interest in two companies:
 
(a)             Surf Communication Solutions Ltd. (“Surf”), in which, as of  December  31, 2011, we held 6.2% of the issued and outstanding share capital. Established in 1996, Surf is an Israeli privately held company. Surf develops a suite of hardware and software products that drives a wide variety of applications whose common goal is high-capacity distribution of voice and video. As of December 31, 2011, the Company's investment in Surf (a cost method investee) was measured at a fair value of $68,000
 
(b)        New World Brands Inc. (PINK:NWBD) (“New World” or “NWB”), a U.S. public corporation.   On February 26, 2010, the Company sold all of its holdings in NWB to P&S Spirit LLC. and recorded a capital loss of $7,000.  The Company sold 61,441,827 shares of common stock of NWB and 1,430,178 warrants to purchase common stock of NWB at an exercise price of $ 0.2098 per share expiring on December 31, 2010. The consideration for the NWB shares and warrants was $ 300,000 of which $ 150,000 was paid in March 2010 and the remaining $ 150,000 plus annual interest of 4% were to be paid in twelve monthly installments commencing March 2011. The shares and warrants were delivered to an escrow agent to be released to the buyer upon full payment of the remaining debt. In May 2011, the buyer notified the Company that it will not pay the remaining debt, and the shares and warrants were released back to the Company. As of December 31, 2011, the Company's investment in NWB was fully impaired. As a result, the Company recognized a capital loss of $156,000.

Following the Company's request, on May 12, 2009 the Company's ordinary shares were delisted from trading on the Tel Aviv Stock Exchange (the “TASE”). The delisting of the ordinary shares from the TASE did not affect the continued listing of the ordinary shares on the NASDAQ Capital Market under the symbol BOSC. As a result of the delisting of the Company’s ordinary shares from the TASE, the Company is no longer subject to reporting requirements in Israel, under the Israeli Securities Law.
 
In December 2009, Dimex and its former U.S. distributor, 10ZIG Technologies Inc., a Nevada corporation, (formerly known as BOSaNOVA Inc.) (“10ZIG”)  entered into a distribution agreement for a period of ten years ending in December 2019. Under the agreement, 10ZIG shall become an exclusive distributor of the Company’s BOSaNOVA product, on a world wide basis. 10ZIG agreed to pay to the Company a total amount of $310,000 in installments through the end of 2011 in consideration for the BOSaNOVA product licensing. Concurrently with the distribution agreement, the parties executed a Settlement & Release Agreement, pursuant to which the claims brought by Dimex, Summit and 10ZIG in the U.S. District Court of Arizona were withdrawn.
 
 
- 18 -
 

On November 23, 2010 the Company's two U.S. subsidiaries that are part of its Supply Chain division, Lynk and its subsidiary Summit, have filed with the US Bankruptcy Court a Chapter 7 petition. In March 2011, the Lynk case was closed. The proceedings in respect of Summit are continuing but they have no impact on the financial statements of the Company. The results of operations, including revenues, cost of revenues, operating expenses, and other income and expenses related to the prior periods of the discontinued operations, have been reclassified in the accompanying statements of operations as discontinued operations.
 
4B.         Business Overview
 
BOS’s vision is to be a worldwide provider of turnkey AIDC (Automatic ID Data Capture) mobility solutions, focusing on RFID technologies, and a leading distributor of electronic components for the civil aircraft industry and for the defense industry.
 
The Company’s products and services assist customers worldwide in improving the efficiency of their enterprise logistics, enhancing and automating their data collection processes, improving asset tracking, and managing real-time business data.
 
BOS manages its business in two reportable divisions: RFID and Mobile Solutions (through its subsidiary Dimex), and Supply Chain Solutions (through its subsidiary Odem).
 
The Company’s customers represent a cross-section of multinational industry leaders, from the avionics, defense, retail, government, utilities, and livestock markets around the world. Our Supply Chain division customers include, among others, Bombardier, Elbit system, Refael and Israeli Aircraft Industry. Our RFID and Mobile division customers include, among others, IKEA, Blue Square, Shufersal and Teva,.
 
In its Supply Chain division, the Company has expanded its penetration to global, top-tier aircraft manufacturers (such as Bombardier and Indra) and has begun expansion to international markets (e.g., India, and China).
 
In its RFID and Mobile division, the Company continues to invest in research and development in order to further enhance its software platform, BOS ID and is working to establish sales channels for BOS ID through partnerships with systems integrators in Europe.

In February 2012, the Company successfully completed a traceability project in Spain at Barcelonesa de Metales, S.A. (BAMESA) corporation. BAMESA is a steel service center organization for automotive, home appliances and metal engineering industries, among others. The project included tagging, tracking and managing inventory for metal pallets, inside and outside of the warehouse. The project was executed in cooperation with the Supply Chain Excellence Centre of Everis, a multi-national Spanish consulting company.

In 2011, the Company was recognized with the Entrepreneurial Company of the Year Award in the field of Automatic Identification Data Capture (AIDC) for the Europe, Middle East and Africa region, by Frost & Sullivan, a leading global research organization.
 
 
- 19 -
 
 
BOS continues to execute a growth strategy in order to strengthen its product offerings and distribution channels worldwide.
 
BOS Product Offerings
 
RFID and Mobile Solutions
 
RFID (Radio Frequency Identification) refers to the use of an automatic identification method to remotely retrieve data using devices called RFID tags. An RFID tag is an object such as a pendant, bead, nail, label, micro wire or fiber, which can be applied to or incorporated into a product, animal, or person for the purpose of identification using radio waves.

BOS' RFID and Mobile Solutions division offers turnkey solutions as well as stand-alone products, including best-of-breed RFID and Automatic Identification Data Capture (AIDC) hardware and communications equipment, software platform, and industry-specific software applications. Customers can opt for a full solution comprised of hardware, middleware and software, or for any item as a stand-alone product or service.
 
 
Our RFID and mobile division represents leading global manufacturers of AIDC equipment based on RFID and barcode technology. Among the manufacturers we represent are Motorola Inc., Intermec Technologies and Corporation, Zebra Technologies Corp., Texas Instruments, Alien Technology, Cisco Systems Inc., M3, DLog GmbH, Microscan Systems Inc., Seagull Scientific Inc., Feig and HID Global.
 
 
- 20 -
 
 
Specifically, our RFID and Mobile Solutions division offers the following products and services:
 
 
·
Hardware , including:
 
 
o
Thermal and barcode printers
 
 
o
RFID and barcode scanners and readers
 
 
o
Wireless, mobile and forklift terminals
 
 
o
Wireless infrastructure
 
 
o
Active and passive RFID tags (HF & UHF)
 
 
o
Consumables (ribbons, labels, tags)
 
 
·
BOS ID Software Platform :
 
 
o
BOS ID   is a software platform for systems integrators to assemble applications, without programming, for transfer to any AIDC client such as a handheld rugged terminal, barcode reader or mobile PC.
 
 
·
Applications :
 
Using its proprietary BOS ID, BOS has developed the following set of vertical applications:
 
 
o
BOS LIVESTOCK is a software application that enables livestock operations to manage, track, support and plan all day-to- day tasks.
 
 
o
BOS CarID is a turnkey solution to identify and track vehicles for a variety of transportation-related settings, such as auto vehicle testing centers, public and company parking lots, industrial factories, and automobile dealers, importers, or distributors. By using RFID tags on the vehicles, BOS CarID enables companies, government transportation agencies, and law enforcement officials in the transportation field to effectively manage, track, support and plan all day-to- day vehicle-related activities.
 
 
o
BOS STOCK is an optimized data collection solution for logistics management in stores and warehouses. The solution may be based on RFID tags or bar codes, and is intended to provide customers with greater visibility into a retailer’s stock management and warehouse/logistics operations. BOS Stock enables storeroom managers to receive advanced delivery notifications and system alerts for delivery discrepancies, and gives them the ability to locate inventory in the stockroom. BOS Stock provides inventory managers with a direct communication link to the sales floor, and assists in minimizing inventory loss or theft. BOS Stock also enables sales floor representatives to instantly check on the availability of a product, offer alternatives if the product is out of stock, and provide the customer with up-to-date product information.
 
 
o
BOS Mfgr . is a production line tracking solution whereby manufacturing companies can track the progress and status of items on a production line. The solution may be based on RFID tags or bar codes, and is intended to provide greater visibility into a customer’s manufacturing process, as well as traceability for critical parts. With BOS Mfgr., items entering the manufacturing plant are labeled with RFID tags or bar codes, and fixed readers that are located along the production line, record the product’s progress through the production line stations. Mobile readers may also be used to collect data from the parts labeled with RFID tags or bar codes.
 
 
- 21 -
 
 
BOS' RFID and Mobile Solutions division provides also complementary services such as:
 
 
·
Integration Services , that include site surveys, business requirements analyses, system design and configuration, and implementation, testing and deployment.
 
 
·
Service lab, that   lab offers maintenance and repair services to data collection equipment, as well as warehouse and on-site service plans.
 
In 2011, 39% of our revenues were attributed to sales generated from our RFID and Mobile Solutions division.
 
Supply Chain Solutions
 
Our Supply Chain Solutions division provides electronic components, networking and telecommunications equipment, and components consolidation services to the aerospace, defense, medical and telecommunications industries and enterprise customers worldwide.
 
These services include:

 
o
Representation of global manufacturers and distribution of their electronics components, communications and networking products (see below);
 
o
Kitting (electronics components consolidation) services for aerospace, defense, medical, and telecommunications industries and enterprise customers;
 
o
Inventory and quality control management of components entering production lines; and
 
o
Warehouse management for ongoing projects, including all warehouse functions such as storage, operations and inventory management.
 
Our Supply Chain division represents on a non-exclusive basis, among others, Honeywell International Inc., Holtek Semiconductor Inc., Sensata Technologies Inc., Inova,  IPD, Adam Technologies Inc., Wintek Corporation, Positronic Industries, Tyco Electronics, , Bluegiga Technologies, Switchcraft Inc., Silicon Sensor, API Group Inc., Winchester, Wintek,  Fema, SGC, Stroco and Jamicon Corporation USA. The electronic components from these suppliers fall into four main categories:
 
1) Active Components - semiconductors, transistors, detectors, diodes, integrated circuits, hybrid modems, cellular components, communication ICs, memories, displays and LEDS;
 
2) Passive Components - capacitors, thermistors, varistors, oscillators, crystals, resistors, C-DC converters, and power supplies;
 
3) Electro-Mechanical Components - relays, connectors, circuit breakers, filters, transformers, plugs, thermostats and switches; and
 
4) Microwave components such as repeaters and filters.
 
 
- 22 -
 
 
In 2011, 61% of our revenues were attributed to sales of the Supply Chain Solutions segment.
 
Marketing, Distribution and Sales
 
We market our RFID and Mobile Solutions primarily to medium and large sized corporations through a combination of direct sales, sales agents and integrators.
 
RFID and Mobile Solutions

We market our solutions directly to customers or through distributors and system integrators. We intend to increase our international sales force with new distributors, system integrators, sales representatives and direct salespersons who specialize in the RFID and Mobile Solutions sector.

In Europe, we are targeting system’s integrators as the main channel through which to sell our software products. As a secondary effort, we will focus on hardware vendors that may be seeking to enhance their product offerings by adding complementary products such as BOS ID.

Supply Chain Solutions

We market our Supply Chain Solutions directly to customers or through distributors. Our sales force is comprised of direct sales teams.
 
Seasonality
 
Our sales fluctuate seasonally, with the third quarter sales typically reduced by summer vacations in Europe and new years’ holidays in Israel, and the December and January sales typically reduced by the Christmas season.
 
The following tables set forth our revenues (in thousands of $), by major geographic areas and by divisions, for the periods indicated below:
 
Sales by major geographic areas:
 
   
2011
   
%
   
2010
   
%
   
2009
   
%
 
America
    1,514       5       2,596       9       1,548       6  
Far East
    3,943       12       2,228       7       998       4  
Europe
    976       3       811       3       566       2  
Israel and others
    27,001       80       24,552       81       22,355       88  
Total Revenues
    33,434       100       30,187       100       25,467       100  
 
 
- 23 -
 
 
Sales by divisions:
 
   
2011
   
%
   
2010
   
%
   
2009
   
%
 
RFID and Mobile Solutions
    13,128       39       12,463       41       10,729       42  
Supply Chain Solutions
    21,332       64       17,724       59       14,738       58  
Intercompany
    (1,026 )     (3 )     -       -       -       -  
Total Revenues
    33,434       100       30,187       100       25,467       100  
 
Intellectual Property
 
We currently rely on a combination of trade secrets, copyright and trademark law, together with non-disclosure agreements and technical measures, to establish and protect proprietary rights in our products.
 
We believe that the improvement of existing products and solutions, reliance upon trade secrets and proprietary know-how and the development of new products are generally as important as patent protection in establishing and maintaining a competitive advantage. We believe that the value of our products is dependent upon our proprietary software and hardware remaining “trade secrets” or subject to copyright protection.
 
Generally, we enter into non-disclosure and invention assignment agreements with our employees, partners and subcontractors. However, there can be no assurance that our proprietary technology will remain a trade secret, or that others will not develop similar technology or use such technology in products competitive with those offered by us.
 
While our competitive position may be affected by our inability to protect our proprietary information, we believe that because of the rapid pace of technological change in the industry, factors such as the technical expertise and the knowledge and innovative skill of our management and technical personnel, name recognition, the timeliness and quality of our support services and our ability to rapidly develop, produce, enhance and market software products may be more significant in maintaining our competitive position.
 
As the number of software products in the industry increases and the functionality of these products further overlaps, we believe that software programs will increasingly become subject to infringement claims. The cost of responding to any such assertion may be material, whether or not the assertion is valid.
 
 
- 24 -
 
 
Competition
 
RFID and Mobile Solutions

The RFID and Mobile Solutions market is subject to rapidly changing technology and evolving standards incorporated into mobile equipment, Enterprise Resource Planning  systems, computer networks and host computers. As the market grows, so does the number of competitors. Some of the competitors have substantially greater financial, marketing and technological resources as well as stronger name recognition than BOS.
 
In Israel, our main competitors in the RFID and Mobile Solutions market are Soft Solutions Ltd., eWave Ltd., Dangot Computers Ltd., Dannet Advanced Technologies Ltd., Micronet Ltd., LogiTag Systems Ltd. and Galbital RFID Solutions Ltd. In the global market, competition to our platform products such as BOS ID primarily stems from existing modules in ERP systems, and system integrators that provide turnkey solutions that include both hardware and software such as   GlobeRanger Corp., Mobile Frame LLC, Decision Point systems Inc. OATSystems, a division of Checkpoint Systems, Inc., RF-iT Solutions GmbH and InSync Software, Inc.
 
The RFID market is highly fragmented and no one player has taken a significant share of the software platform market. We believe that we will be able to attract systems integrators, RFID hardware vendors and thus end-customers to our core offering BOS ID, due to the following factors:

 
•
BOS ID enables code-free creation and implementation of data collection applications and processes;

 
•
Our software can be used in a wide range of vertical markets;
 
 
•
BOS’ software products enable rapid implementation and centralized deployment for every RFID and AIDC project; and
 
 
•
Our software is flexible, hardware-independent and can function with any communication and networking protocol.

Supply Chain Solutions

We hold several representation agreements with major suppliers and manufacturers, such as Honeywell International Inc., Holtek Semiconductor Inc., Sensata Technologies, Inc., Inova,  IPD, Adam Technologies, Inc., Wintek Corporation, Positronic Industries, Tyco Electronics, ,Bluegiga Technologies,  Switchcraft Inc., Silicon Sensor, API Group, Inc., Jamicon Corporation USA. Most of our representation agreements are not on an exclusive basis.
 
Our Israeli competitors in distribution to the electronic industry include the publicly traded Telsys Ltd., Nisco Projects Ltd. and STG International Electronics (1981) Ltd., as well as Eastronics Ltd., Chayon Group Ltd. and C.M.S. Compucenter Ltd.
 
In the international market, our competitors are mainly Arrow Electronics International Inc., Avnet Electronics Marketing, TTI Inc., PEI-Genesis Inc., Marine Air Supply Co. Inc., Airtechnics Inc., Flame Enterprise Inc., Norstan Electronics Inc., Peerless Electronics Inc., Hansair Logistic Inc., Aviall, API Delevan, Cooper and Avio Innovative Propulsion.
 
 
- 25 -
 
 
Strategy
 
The Company's vision is to become   a   worldwide provider in the field of RFID and Mobile Solutions and Supply Chain Solutions for enterprise logistics and organizational processes.
 
The key elements of our strategy are as follows:
 
 
·
Continue to develop our range of RFID and  Mobile Solutions to include platform software products, as well as a  suite of business line applications, based on the BOS ID platform;
 
 
·
Increase our international sales force by new partnerships with distributors, system integrators, and hardware vendors specialized in RFID and Mobile Solutions in the United States and select European countries;
 
 
·
Secure several reference-able customers in Europe, potentially leveraging our position as a trusted supplier in the aerospace Supply Chain Solutions market;
 
 
·
Increase partnerships with manufacturers for our Supply Chain Solutions division.
 
Exchange Controls
 
See “Item 10D. Exchange Controls”.
 
For other government regulations affecting the Company’s business, see “Item 5A. Results of Operations - Grants and Participation”.
 
4C.         Organizational Structure
 
The Company’s wholly owned subsidiaries include:
 
In Israel:
 
 
(1)
BOS-Dimex representing  the RFID and Mobile Solutions division;
 
 
(2)
BOS-Odem, representing the Supply Chain Solutions division;
 
 
(3)
Dimex Hagalil Projects (2008), a wholly owned subsidiary of BOS-Dimex which has been inactive since 2009 and is in the process of liquidation; and
 
 
(4)
Quasar Telecom (2004) Ltd., which is liquidated as of February 29, 2012.

In the United States:

 
(1)
Ruby-Tech, a New York corporation, is a wholly owned subsidiary of Odem and a part of the Supply Chain Solutions division.

 
(2)
BOS Delaware Inc., a Delaware corporation, is a wholly owned subsidiary of Dimex, which ceased operation in 2002.

 
(3)
On November 23, 2010 the Company's two U.S. subsidiaries that are part of its Supply Chain division, Lynk and its subsidiary Summit, have filed with the US Bankruptcy Court a Chapter 7 petition. In March 2011, the Lynk case was closed.
 
 
- 26 -
 
 
In Europe:

Better On-Line Solutions Ltd., a U.K. subsidiary of Dimex, and its subsidiary, Better On-Line Solutions S.A.S incorporated in France. Since 2002, these subsidiaries are no longer active.
 
4D.          Property, Plants and Equipment
 
Our executive offices and engineering, development, testing, shipping and service operations are located in the following facilities in Israel:
 
Location
Size  (square meters)
End of lease period
Extension Option
Rishon Lezion*
2,170
May 31, 2012 through  –
January 31, 2016
 May 31, 2012 - July 7, 2016
Kibutz Dafna
578
On a month-to-month basis
 
 
*Includes 302 square meters in the same building rented by Odem.
 
Our average monthly rental fee in 2012 (up until February 29, 2012), for the year 2011 and for the year 2010 amounted to $9,000, $13,000 and $14,000, respectively.
 
Item 4A:  Unresolved Staff Comments
 
Not Applicable.
 
Item 5:   Operating and Financial Review and Prospects
 
The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and notes thereto. Certain matters discussed below and throughout this Annual Report are forward-looking statements that are based on our beliefs and assumptions as well as information currently available to us. Such forward-looking statements may be identified by the use of the words “anticipate”, “believe”, “estimate”, “expect”, “plan” and similar expressions. Such statements reflect our current views with respect to future events and are subject to certain risks and uncertainties. While we believe such forward-looking statements are based on reasonable assumptions, should one or more of the underlying assumptions prove incorrect, or these risks or uncertainties materialize, our actual results may differ materially from those described herein.
 
 
- 27 -
 
 
Critical accounting policies
 
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements in conformity with generally accepted accounting principles in the United States requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These amounts and disclosures could potentially be materially different under other assumptions and conditions. These are our management’s best estimates based on experience and historical data, however, actual results could differ materially from these estimates. Our significant accounting principles are presented within Note 2 to our Consolidated Financial Statements attached to this annual report. While all the accounting policies impact the financial statements, certain policies may be viewed to be critical. Management believes that the following policies are those that are most important to the portrayal of our financial condition and results of operations and for fully understanding and evaluating our reported results:
 
 
·
financial statements in U.S. dollars
 
·
inventories
 
·
investment in other companies
 
·
impairment of long-lived assets and goodwill
 
·
revenue recognition
 
·
income taxes
 
·
accounting for share-based compensation

a.
Financial statements in U.S. dollars:

A substantial portion of the Company's revenues is generated in U.S. dollars. In addition, most of the Company's costs are incurred in dollars. The Company's management believes that the dollar is the primary currency of the economic environment in which the Company operates. Thus, the functional and reporting currency of the Company is the dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with ASC 830, Foreign Currency Matters . All transactions gains and losses from the remeasurement of monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate.

The financial statements of our subsidiary Dimex, whose functional currency is other than the dollar, have been translated into U.S. dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statement of operations amounts have been translated using the average exchange rate for the period. The resulting translation adjustments are reported as a component of shareholders' equity in accumulated other comprehensive loss.

b.
Inventories:
 
Inventories are valued at the lower of cost or market value. Cost is determined using the moving average cost method.

Inventory write-offs and write-downs are provided to cover risks arising from slow-moving items or technological obsolescence. During 2011, 2010 and 2009, inventory write-offs of $ 443,000, $ 36,000 and $ 2.23 million respectively, have been recorded and presented in the consolidated statements of operations.
 
 
- 28 -
 

c.
Investment in other companies:
 
 
1. 
Investment in NWB and QMX:

The Company accounts for its holdings in NWB shares as available for sale in accordance with ASC 320, Investments - Debt And Equity Securities ("ASC 320"). Unrealized gains and losses, net of the related tax effect are included in other comprehensive loss. In January 2009, Qualmax was merged with and into NWB, and holdings in  Qualmax were converted into shares of NWB.

Prior to this merger, the investment in Qualmax, which was traded on the Pink Sheets, was presented at cost according to ASC 325-20, Cost Method Investments ("ASC 325-20") due to no trading volume in the Qualmax shares.
 
Management evaluates investments in other companies for evidence of other-than- temporary declines in value. The Company recognizes an impairment charge when a decline in the fair value of its marketable securities below the cost basis is presumed to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the Company's intent and ability to hold the marketable securities for a period of time sufficient to allow for any anticipated recovery in market value, the length of time and extent to which the fair value has been less than the cost basis and the financial condition and near-term prospects of the issuers. If, after consideration of all available evidence to evaluate the realizable value of its marketable securities, impairment is determined to be other than- temporary, then an impairment loss equal to the difference between the marketable securities' carrying amount and its fair value is recognized. Accordingly, during 2011, 2010 and 2009, an impairment loss, due to other-than-temporary decline in fair value, of $ 156,000 $0 and $ 304,000 respectively, has been recorded and presented in other expenses, net in the consolidated statements of operations.

On February 26, 2010, the Company sold all of its holdings in NWB to P&S Spirit LLC and recorded a capital loss of $7. The Company sold 61,441,827 shares of common stock of NWB and 1,430,178 warrants to purchase common stock of NWB at an exercise price of $ 0.2098 per share expiring on December 31, 2010. The consideration for the shares and warrants was $ 300,000 of which $ 150,000 was paid in March 2010 and the remaining $ 150,000 plus annual interest of 4% were to be paid in twelve monthly installments commencing March 2011. The shares and warrants were delivered to an escrow agent, to be released to P&S Spirit LLC upon full payment of the remaining debt. In May 2011, the buyer notified the Company that it will not pay the remaining debt, and the shares and warrants were released back to the Company. As of December 31, 2011, the Company recognized other-than-temporary loss of $156,000 reflecting that the investment in NWB was fully impaired.
 
 
- 29 -
 

 
2.
  Investment in Surf:

The Company's holding in Surf as of December 31, 2011 is 6.2% of Surf's issued and outstanding shares. The Company's investment in Surf is accounted for based on the cost accounting method. During 2011, 2010 and 2009, an impairment loss, due to other-than- temporary decline in fair value, of $ 39,000 $ 111,000 and $ 53,000 respectively, has been recorded and presented in other expenses, net in the consolidated statements of operations.

The Company's investment in Surf is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable, in accordance with ASC 325-20.

d.
Impairment of Long-Lived Assets and Goodwill

Impairment of long-lived assets:

The Company's long-lived assets are reviewed for impairment in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Asset, whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset (or asset group) to the future undiscounted cash flows expected to be generated by the assets (or asset group). If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value of the assets. During 2011, the Company recognized an impairment loss of $555,000 related to a brand name and customer list, of which $470,000 was attributed to the Supply Chain segment and $85,000 was attributed to the RFID and Mobile solutions segment. The fair value of the brand name and customer list related intangibles was determined by the income approach method. Assumptions in the fair value assessment included: the impact of changes in economic conditions, revenue and cash flow forecasts for the remaining lives of the intangibles and the Company's weighted average cost of capital ("WACC").
 
During 2010 and 2009, no impairment losses were recorded.

Goodwill:

Goodwill represents excess of the costs over the net assets of businesses acquired. Under ASC 350, Intangibles - Goodwill and Other ("ASC 350"), goodwill is not amortized but instead is tested for impairment at least annually or between annual tests in certain circumstances, and written-down when impaired.
 
 
- 30 -
 

Testing Methodology:

The Company performs its annual impairment analysis of goodwill as of December 31 st   of each year, or more often if there are indicators of impairment present. The provisions of ASC 350 require that a two-step impairment test be performed on goodwill at the level of the reporting units. In the first step, or Step 1, the Company compares the fair value of each reporting unit to its carrying value. If the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired, and the Company is not required to perform further testing. If the carrying value of the net assets exceeds the fair value, then the Company must perform the second step, or Step 2, of the impairment test in order to determine the implied fair value of goodwill. To determine the fair value used in Step 1, the Company uses discounted cash flows. If and when the Company is required to perform a Step 2 analysis, determining the fair value of its net assets and its off-balance sheet intangibles would require it to make judgments that involve the use of significant estimates and assumptions.

The reporting units of the Company for purposes of the impairment test are: the Company's RFID and Mobile operating segments, and the Supply Chain segment, as these are the components of the business for which discrete financial information is available and the segment management regularly reviews the operating results of those components.

In order to determine the fair value used in Step 1, the Company uses discounted cash flows. If and when the Company is required to perform a Step 2 analysis, determining the fair value of its net assets and its off-balance sheet intangibles would require it to make judgments that involve the use of significant estimates and assumptions. The Company determined the fair value of each reporting unit using the Income Approach, which utilizes a discounted cash flow model, as it believes that this approach best approximates the reporting unit’s fair value at this time. Judgments and assumptions related to revenue, operating income, future short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures, cash flows, and market conditions are inherent in developing the discounted cash flow model. The material assumptions used for the Income Approach for 2011 were five years of projected net cash flows, WACC of 15% and a long-term growth rate of 3%. The Company considered historical rates and current market conditions when determining the discount and growth rates to use in its analyses. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for its goodwill.

The Company corroborates the fair values using the Market Approach. The Company evaluates the reasonableness of the estimated fair value of its reporting units by reconciling to its market capitalization. This reconciliation allows the Company to consider market expectations in corroborating the reasonableness of the fair value of its reporting units. In addition, the Company compares its market capitalization, including an estimated control premium that an investor would need to pay for a controlling interest in the Company, to the fair value of the Company based on a third-party valuation study. The determination of a control premium requires the use of judgment and is based primarily on comparable industry and deal-size transactions, related synergies and other benefits. The Company’s reconciliation of the gap between its market capitalization and the aggregate fair value of the Company depends on various factors, some of which are qualitative and involve management judgment, including stable relatively high backlog coverage and experience in meeting operating cash flow targets.

Testing Results:

During 2011 and 2010, no impairment losses were recorded.
 
During 2009, impairment losses in the amount of $ 383,000 were recorded and attributed to the Supply Chain solutions reporting unit.
 
 
- 31 -
 

e.
Revenue recognition:

The Company derives its revenues from the sale of products, license fees for its products, commissions, support and services.

Revenues from product sales, related to both the Supply Chain and RFID and Mobile segments, are recognized in accordance with SAB 104, Revenue Recognition ("ASC 605") when delivery has occurred, persuasive evidence of an arrangement exists, the vendor's fee is fixed or determinable, no further obligation exists, and collectability is reasonably assured.

Most of the Company's revenues are generated from sales of its products directly to end-users. Other than pricing terms which may differ due to the volume of purchases between end-users, there are no material differences in the terms and arrangements among end-users.

Revenue from license fees, related to the RFID and Mobile solutions segment, is recognized in accordance with ASC No. 985-605, Software Revenue Recognition, when persuasive evidence of an agreement exists, delivery has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable, and collectability is probable. The Company generally does not grant a right of return to its customers. When a right of return exists, the Company defers revenue until the right of return expires, at which time revenue is recognized provided that all other revenue recognition criteria have been met.

Revenues from maintenance and support services related to the license are recognized ratably over the period of the support contract.

Starting January 1, 2011. the Company adopted the guidance of ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605, Revenue Recognition) ("ASU 2009-13"). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendment eliminates the residual method of revenue allocation and requires revenue to be allocated using the relative selling price method. As such, the Company prospectively applied these provisions to all revenue arrangements entered into or materially modified after January 1, 2011.  This guidance does not generally change the units of accounting for the Company’s revenue transactions. Most products and services qualify as separate units of accounting and the revenue is recognized when the applicable revenue recognition criteria are met.

The Company's revenue recognition policies provide that, when a sales arrangement contains multiple elements, the Company allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence ("VSOE"), if available, third party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available.

Because the Company has neither VSOE nor TPE for its deliverables, the allocation of revenue has been based on the Company’s BESP. Amounts allocated to the deliverables are recognized at the time of sale provided the other conditions for revenue recognition have been met.

The Company’s process for determining its BESP considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. A key factor considered by the Company in developing the BESP for its products is the gross margins acceptable in the industry in which the Company operates. The Company may also consider additional factors as appropriate.
 
 
- 32 -
 

The adoption of the amendment to ASC 605-25 did not have a material effect on the Company's consolidated financial position or results of operations.

In addition, in cases that product arrangement is bundled with a separately priced extended warranty that fall under the scope of  ASC 605- 20-25-1 through 25-6, revenues from the extended warranty are deferred and recognized ratably over the extended warranty period.

In the case of arrangements which require significant customization of the Company's RFID software to customer-specific specifications, the Company follows the guidance in ASC 605-35, ("ASC 605-35"), whereby the Company applies the completed contract method, since the Company is unable to obtain reasonable dependable estimates of the total effort required for completion. Under the completed contract method, all revenue and related costs of revenue are deferred and recognized upon completion. Provisions for estimated losses on contracts in process are recognized in the period such losses are determined.

f. 
Income taxes:

The Company and its subsidiaries account for income taxes in accordance with ASC 740, Income Taxes ("ASC 740"). ASC 740 prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to the amounts that are more likely-than-not to be realized.

The Company implements a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more -likely-than-not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. During the year ended December 31, 2011, the Company recorded a tax benefit of $ 261,000 relating to a decrease in uncertain tax position. During the years ended December 31, 2010, and 2009 the Company recorded $ 67,000 and $ 421,000, respectively in regard to uncertain tax position.

g.
Accounting for share-based compensation:

The Company accounts for equity-based compensation in accordance with ASC 718, Stock Compensation ("ASC 718") which requires the recognition of compensation expenses based on estimated fair values for all equity-based awards made to employees and nonemployees and directors.

ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated statements of operations.
 
 
- 33 -
 

The Company recognizes compensation expenses for the value of its awards granted based on the straight line method over the requisite service period of each of the awards, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures. The Company considers many factors when estimating forfeitures, including employee class and historical experience.

The Company estimates the fair value of stock options granted using the Black-Scholes options pricing model. The option-pricing model requires a number of assumptions, of which the most significant are expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements over the most recent periods ending on the date of grant, equal to the expected option term. The expected option term represents the period that the Company's stock options are expected to be outstanding and was determined based on the simplified method permitted by SAB 107 and extended by SAB 110, as the average of the vesting period and the contractual term. The Company currently uses the simplified method as adequate historical experience is not available to provide a reasonable estimate. The Company adopted SAB 110 effective January 1, 2008 and will continue to apply the simplified method until enough historical experience is available to provide a reasonable estimate of the expected term for stock option grants. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.

The fair value for options granted in 2011 and 2009 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
 
   
Year ended December 31,
 
   
2011
   
2009
 
             
Risk-free interest
    1.17 %     1.45 %
Dividend yields
    0 %     0 %
Volatility
    96 %     77 %
Expected option term
 
3.83 years
   
3.46 years
 
Forfeiture rate
    24 %     15 %

No options were granted during 2010.

During 2011, 2010 and 2009, the Company recognized stock-based compensation expense related to employee and director stock options as follows (in $ thousands):

   
Year ended December 31,
 
   
2011
   
2010
   
2009
 
                   
Selling and marketing
  $ 8     $ 39     $ 377  
General and administrative
    161       178       252  
                         
Total stock-based compensation expense
  $ 169     $ 217     $ 629  

The Company applies ASC 718 and ASC 505-50 for equity instruments that are issued to other than employees for acquiring, or in conjunction with selling, goods or services.
 
 
- 34 -
 

Recently Issued Accounting Pronouncements
 
See Note 2t to the Consolidated Financial Statements for the year ended December 31, 2011.
 
Legal Contingencies
 
The Company has been a party to various legal proceedings in the normal course of its business. The results of legal proceedings are difficult to predict and an unfavorable resolution of a lawsuit or proceeding may occur. Management believes that the prospects of these proceedings to prevail and recover a significant amount, seem remote, and a corresponding provision was recorded in this respect. For additional information, see “Item 8A. Consolidated Statements and Other Financial Information - Legal Proceedings”. As additional information becomes available, management will reassess the potential liability related to these legal proceedings and may revise its estimate of the probable cost of these proceedings. Such revisions in the estimates of the probable cost could have a material adverse effect on the Company’s future results of operations and financial position.
 
5A.          Operating Results
 
On January 12, 2010, we effected a 5:1 reverse share split. All share and per share data for periods prior to that date have been retroactively adjusted to reflect this reverse share split.
 
Comparison of 2011 and 2010

Revenues for 2011 were $33.4 million, compared to $30.2 million in 2010. The growth in revenues was in both our Mobile and RFID and Supply Chain divisions. See note 18a to the Consolidated Financial Statements for the year ended December 31.

Gross profit for 2011 was $6.5 million (gross margin of 19.5%), compared to $7.5 million (gross margin of 24.8%) for 2010. The decrease in the gross profit in 2011 was due mainly to: (a) an inventory write-off in 2011 in the amount of $443,000, compared to a $36,000 inventory write-off in 2010 (inventory write-offs are executed in view of slow-moving items or as a result of technological obsolescence); (b) a gross loss in the software product line (related to the RFID division) in the amount of $37,000 in 2011, compared to a gross profit of $470,000 in 2010; and (c) a decrease in gross margins due to increased competition.
 
 
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During the fourth quarter of 2011, we have successfully completed a restructuring of our software activity which yielded a positive gross profit in the fourth quarter of 2011.
 
Research and development expenses for 2011 increased to $403,000, compared to $372,000 in 2010. The increase reflects our continuing efforts to enhance our products offering. See “Item 5B.  Liquidity and Capital Resources”.
 
Selling and marketing expenses for 2011 increased to $4.3 million from $4.1 million in 2010, mainly due to: (a) a 10.7% growth in 2011 revenues as compared to 2010 revenues , and (b) marketing expenses related to the acquisition of new international customers in both divisions.

General and administrative expenses for 2011 increased to $2.3 million, compared to $1.8 million in 2010. The increase was mainly due to: (a) expenses related to allowance for doubtful accounts which amounted to $82,000 in 2011, compared to income of $89,000 in 2010 resulting from a reverse of allowance for doubtful accounts and (b)  an increase of approximately $185,000  in management salary and directors fees. See Note 19 to the Consolidated Financial Statements for the year ended December 31, 2011.

During 2011, the Company recognized an impairment loss of $555,000 related to customer list and a brand name, of which $470,000 related to the Supply Chain segment and $85,000 related to the RFID and Mobile solutions segment. The fair value of the brand name and customer list related intangibles was determined by the income approach method. Assumptions in the fair value assessment included: the impact of changes in revenues from major customers, economic conditions, revenue and cash flow forecasts for the remaining lives of the intangibles and the Company's weighted average cost of capital. During 2010, no impairment losses were identified.
 
As a result of the above, operating loss in 2011 amounted to $973,000, compared to an operating profit of $1.26 million in 2010.

Financial expenses for 2011 were $ 2.24 million, compared to $961,000 in 2010. The increase in the financial expenses in 2011 was due mainly to: (a) expenses of $860,000 related to the conversion of convertible loans pursuant to amended agreements (see Note 13 to the Consolidated Financial Statements for the year ended December 31, 2011); and (b) expenses related to changes in fair value of forward contracts in the amount of $44,000 in 2011, compared to income of $141,000 in 2010 (See Notes 2o and 17 to the Consolidated Financial Statements for the year ended December 31, 2011).

Other expenses in 2011 and 2010, which amounted to $172,000 and $120,000, respectively, were mainly due to the decrease in the value of the Company investments in NWB and Surf.
 
Tax benefit in 2011 amounted to $172,000, compared to a tax on income of $5,000 in 2010. Tax benefit in 2011 is mainly related to uncertain tax positions accounted for in accordance with ASC 740 (see Notes 2m and 16i to the Consolidated Financial Statements for the year ended December 31, 2011).

Loss from continuing operations in 2011 amounted to $3.2 million compared to income of $171,000 million in 2010. On a per share basis, the basic and diluted net loss per share from continuing operations in 2011 was $1.14, compared to net earnings per share of $0.07 in 2010.
 
 
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Loss from discontinuing operations in 2010 of $806,000 was due to the closing of the operation of Lynk and its subsidiary Summit in November, 2010. Both companies belong to the Supply Chain division. There was no similar loss in 2011.On a per share basis, the basic and diluted net loss per share from discontinuing operations in 2010 was $0.31.

Comparison of 2010 and 2009
 
Revenues for 2010 were $30.2 million, compared to $25.5 million in 2009. The growth in revenues was in both our Mobile and RFID and Supply Chain divisions.

Gross profit for 2010 was $7.5 million (gross margin of 24.8%), compared to $3.5 million (gross margin of 13.7%) for 2009. The improvement in the gross profit in 2010 is attributed mainly to a minor inventory write-off in the amount of $36,000 compared to a $2.2 million inventory write-off in 2009, which was attributed to the global economic slowdown in 2009.

Research and development expenses for 2010 were $372,000, compared to $360,000 in 2009.

Selling and marketing expenses for 2010 decreased to $4.1 million from $5.4 million in 2009. The decrease is attributed to cost reduction, mainly in workforce, during 2010.

General and administrative expenses for 2010 decreased to $1.8 million, compared to $2.0 million in the 2009. The decrease is attributed to cost reduction that was implemented in 2010.

Impairment of goodwill in 2009 amounted to $383,000. There was no impairment of goodwill in 2010. The goodwill impairment of the Supply Chain Solutions segment was due to the global economic slowdown, which affected the future revenues and cash flows of this segment.

As a result of the above, operating profit in 2010 amounted to $1.26 million, compared to an operating loss of $4.7 million in 2009.

Financial expenses for 2010 were $961,000, compared to $606,000 in 2009. The increase is related to the convertible notes in the aggregate amount of $2.4 million, which were issued in August 2009 (see “Item 5B.  Liquidity and Capital Resources”).

Other expenses in 2010 and 2009, which amounted to $120,000 and $409,000, respectively, are mainly attributed to the decrease in the value of the Company investments in NWB and Surf.
 
Tax on income in 2010 amounted to $5,000, compared to a tax on income of $329,000 in 2009. Tax expenses in 2009 related to uncertain tax positions accounted for in accordance with ASC 740, see Notes 2m and 16i to the Consolidated Financial Statements for the year ended December 31, 2011.
 
 
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Income from continuing operations in 2010 amounted to $171,000 compared to a loss of $6 million in 2009. On a per share basis, the basic and diluted net earning  per share from continuing operations in 2010 was $0.07, compared to net loss per share of $2.32 in 2009.

Loss from discontinuing operations is attributed to the closing of the operation of Lynk and its subsidiary Summit in November, 2010. Both companies belong to the Supply chain division. Loss from discontinued operation amounted to $806,000 in 2010 compared to a loss of $3.1 million in 2009. On a per share basis, the basic and diluted net loss per share from discontinuing operations in 2010 was $0.31, compared to net loss per share of $1.18 in 2009.
 
The U.S. dollar cost of our NIS expenses increased in year 2010 as compared to year 2009 because of the differential between the rate of inflation in Israel and change in the value of the NIS relative to the U.S. dollar. In year 2010, the inflation rate in Israel, as adjusted for the appreciation of the NIS against the U.S. dollar, was 8.6 % compared to 4.6% in year 2009.
 
Variability of Quarterly Operating Results
 
Our revenues and profitability may vary in any given year, and from quarter to quarter, depending on the mix of products sold. In addition, due to potential competition, uncertain market acceptance and other factors, we may be required to reduce prices for our products in the future.
 
Our future results will be affected by a number of factors including our ability to:
 
·             establish effective distribution channels and manage them;
 
·             develop, introduce and deliver new products on a timely basis;
 
·             anticipate accurately customer demand patterns; and
 
·             manage future inventory levels in line with anticipated demand.
 
These results may also be affected by currency exchange rate fluctuations and interest rate and economic conditions in the geographical areas in which we operate. There can be no assurance that our historical trends will continue, or that revenues, gross profit and net income in any particular quarter will not be lower than those of the preceding quarters, including comparable quarters.
 
Impact of Inflation and Currency Fluctuations
 
The U.S. dollar cost of our operations in Israel is influenced by the differential between the rate of inflation in Israel and any change in the value of the NIS relative to the U.S. dollar.
 
A devaluation of the NIS in relation to the U.S. dollar will have the effect of decreasing the U.S. dollar costs in any of our NIS expenses and a converse effect in case of devaluation of the U.S. dollar in relation to the NIS.
 
 
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A devaluation of the NIS in relation to the U.S. dollar will also have the effect of decreasing the U.S. dollar value of any of our NIS assets (unless such asset is linked to the U.S. dollar). Such a devaluation would further have the effect of reducing the U.S. dollar amount of any of our liabilities and expenses which are payable in NIS (unless such payables are linked to the U.S. dollar). Conversely, any increase in the value of the NIS in relation to the U.S. dollar will have the effect of increasing the U.S. dollar value of our NIS assets (unless such asset is linked to the U.S. dollar).  Such an increase would also have the effect of increasing the U.S. dollar amount of any of our liabilities and expenses which are payable in NIS (unless such payables are linked to the U.S. dollar).
 
In the years ended December 31, 2011, 2010, 2009, 2008, 2007 the inflation rate in Israel, as adjusted for the depreciation or appreciation of the NIS against the U.S. dollar, was (5.49) , 8.6 %, 4.6%,   4.9% and 12.4%, respectively. The closing representative exchange rate of the U.S. dollar at the end of each such period, as reported by the Bank of Israel, was NIS 3.821, 3.549, NIS 3.775 , NIS 3.802 and NIS 3.846, respectively.
 
Effective Corporate Tax Rate
 
The Israeli corporate tax rate was 26% in 2009, 25% in 2010 and 24% in 2011.
 
A company is taxable on its real (non-inflationary) capital gains at the corporate tax rate in the year of sale. A temporary provision for 2006-2009 stipulated that the sale of an asset other than a quoted security (excluding goodwill that was not acquired) that had been purchased prior to January 1, 2003, and sold by December 31, 2009, is subject to corporate tax as follows: the part of the real capital gain   that is linearly attributed to the period prior to December 31, 2002 is subject to the corporate tax rate in the year of sale as set forth in the Israeli Income Tax Ordinance ; and the part of the real capital gain that is linearly   attributed to   the period from January 1, 2003, through December 31, 2009, is subject to tax at a rate of 25%.
 
On December 5, 2011, the Israeli Parliament (the Knesset) enacted the Law for Tax Burden Reform (Legislative Amendments), 2011  which, among other things, cancels, effective from 2012, the scheduled progressive reduction in the corporate tax rate. The law also increases the corporate tax rate to 25% in 2012. In parallel with this increase in the corporate tax rate, a corresponding increase was applied to the real capital gains tax rate and the real betterment tax rate as well. The law did not have a material effect on the Company's consolidated financial position or results of operations.

The Company and its Israeli subsidiaries have accumulated losses for Israeli income tax purposes as of December 31, 2011, in the amount of approximately $ 31.1 million. These losses may be carried forward and be offset against taxable income in the future for an indefinite period. In addition, the Company and its Israeli subsidiaries have accumulated capital losses, which may be carried forward under certain limitations.
 
Grants and Participation
 
Under the Law for the Encouragement of Industrial Research and Development, 1984 (the “Research Law”), research and development programs approved by a research committee of the Office of the Chief Scientist of Israel’s Ministry of Industry, Trade and Labor, are eligible for grants in exchange for payment to the Government of royalties from the sale of products developed in accordance with the program. In order to be eligible, the applicant must be an Israeli company that proposes to invest in the development of industrial know-how, the development of new products, the development of new processing or manufacturing procedures or the development of significant improvements to an existing process or product. A committee of the OCS reviews the applications, evaluates the feasibility of the proposal, determines whether or not to approve a grant, and also determines the extent of Chief Scientist funding (within a range specified by the law) for approved projects. Depending on the nature of the project, the OCS grants generally amount to up to 50% of the approved research expenses.
 
 
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Under the Company's research and development agreements with the OCS and pursuant to applicable laws, the Company is required to pay royalties at the rate of 3.5% of sales of products developed with funds provided by the OCS, up to an amount equal to 100% of the research and development grants (U.S. dollar-linked) received from the OCS. The obligation to pay these royalties is contingent upon actual sales of the products. Royalties payable with respect to grants received under programs approved by the OCS after January 1, 1999, are subject to interest on the U.S. dollar-linked value of the total grants received at the annual rate of LIBOR applicable to U.S. dollar deposits at the time the grants were received.
 
The Research Law requires that the manufacture of any product developed as a result of research and development funded by the Israeli Government take place in Israel. If any of the manufacturing is performed outside of Israel, the Company would ordinarily be required to pay royalties at an increased rate and to increase the aggregate repayment amount to between 120% and 300% of the grant amount, depending on the manufacturing volume that is performed outside Israel, except in special cases that receive the prior approval of the research committee, and subject to certain payments to be made to the Israeli Government (generally an amount no less that the aggregate grants plus interest less royalties paid).
 
The Research Law also provides that know-how from the research may not be transferred to third parties in Israel without prior approval of the research committee. This approval, however, is not required for the sale or export of any products resulting from such research and development. Approval of such transfer of know-how may be granted in specific circumstances, only if the recipient abides by the provisions of the Research Law and related regulations, including the restrictions on the transfer of know-how and the obligation to pay royalties in an amount that may be increased. The Research Law further provides that the know-how developed under an approved research and development program may not be transferred to any third parties outside Israel, except with the approval of the OCS and subject to particular payments.
 
The Research Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The law requires the grant recipient and its controlling shareholders and interested parties to notify the Office of the Chief Scientist of any change in control of the recipient or a change in the holdings of the significant shareholders of the recipient that results in a non-Israeli becoming an interested party directly in the recipient, and requires the new interested party to undertake to the Office of the Chief Scientist to comply with the Research Law. In addition, the rules of the Office of the Chief Scientist may require prior approval of the Office of the Chief Scientist or additional information or representations in respect of certain of such events.
 
The funds available for Office of the Chief Scientist grants out of the annual budget of the State of Israel have been reduced, and the Israeli authorities have indicated that the government may further reduce or abolish Office of the Chief Scientist grants in the future.
 
 
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Since 2006, we have not participated in research and development programs supported by the OCS.
 
As of December 31, 2011, the Company has an outstanding contingent obligation to pay royalties to the OCS, including interest, in the amount of approximately $ 3.3 million, in respect of previous grants. Commencing in year 2012, there are no sales of products that were developed using funds provided by the OCS.
 
We are also committed to paying royalties to the Fund for the Encouragement of Exports for its participation, by way of grants, in our marketing expenses outside of Israel. Royalties payable are 3% of the growth in exports, from the year we received the grant, up to 100% of the U.S. dollar-linked amount of the grant received at the date the grants received.
 
Since 1996, we have not participated in Fund for the Encouragement of Exports programs. As of December 31, 2011, the Company has an outstanding contingent obligation to pay royalties including interest of $ 101,000 with respect to export grants. No expenses were incurred on account of such royalties during 2011, 2010 and 2009.
 
Conditions in Israel
 
We are incorporated under the laws of the State of Israel, where we also maintain our headquarters and our research and development and manufacturing facilities. See Item 3D. “Risk Factors – Risks Relating to Our Location in Israel” for a description of governmental, economic, fiscal, monetary or political polices or factors that have materially affected or could materially affect our operations.
 
5B.          Liquidity and Capital Resources
 
As of December 31, 2011, we had $1.0 million in long-term debt to Dimex Systems Ltd. (including current maturities of $299,000) and $2.2 million in long-term bank loans (including current maturities of $660,000). In addition, at December 31, 2011, we had $6.8 million of short term bank loans drawn under a revolving credit facility.

In August 2009, the Company closed a $2.4 million Convertible Loan Financing with several lenders including Catalyst Private Equity Partners (Israel) II L.P., Telegraph Hill Capital Fund I, LLC, certain existing shareholders and members of its management (the "Lenders"). The financing consisted of loans with a term of three years that bear interest at a rate equal to 8% per annum, compounded annually. The Company was to repay the loan principal amount and the accrued interest in one payment at the end of the term, unless converted earlier into ordinary shares at the discretion of the lender. The loan conversion rate is $3.25 per ordinary share. The Company granted the lenders warrants to purchase 100% of the number of ordinary shares into which the loan is convertible. The warrants are exercisable, in whole or in part, from 18 months to 36 months from grant, at an exercise price per ordinary share of $2.75. In addition, the lenders received certain registration rights. A total of $675,000 of the loan was extended to the Company by conversion into the debt financing of a payment otherwise due to Dimex Systems by April 2010, pursuant to the Asset Purchase Agreement the Company had entered into with Dimex Systems.
 
 
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In November 2009, as part of a separation agreement between the Company and its former CEO, Shalom Daskal, the Company repaid to Mr. Daskal $50,000 of convertible loan he had previously extended to it as part of the August 2009 Convertible Loan Financing.

In March 2009, the Company entered into an amendment to the 2008 Dimex Systems Asset Purchase Agreement that revised the payment schedule of the approximately NIS 10 million payable in three semi-annual installments through June 2010. The amendment provided for a NIS 3.5 million payment in March 2009, NIS 4 million to be paid in 6 equal monthly installments each, starting on January 15, 2010, and the remaining approximately NIS 2.5 million was converted into the same type of convertible debentures subsequently issued by the Company in July 2009.

On February 4, 2010, the Company entered into an additional amendment to the Dimex Systems Asset Purchase Agreement, further revising the schedule of remaining payments in the amount of NIS 4 million, to Dimex Systems. The amendment provided for payment of:

(a) NIS 300,000 in February 2010 and NIS 3.1 million plus 8% interest per annum, to be paid in monthly installments commencing July 2010 through December  2013; and

(b) NIS 600,000 were converted into the same long-term convertible debentures, into which NIS 2.5 million were previously converted.

In addition, the Company issued to Dimex Systems a warrant to purchase 69,096 ordinary shares at an exercise price of $3.25 per ordinary shares during the first 18 months commencing August 3, 2011 and $4.00 per ordinary share thereafter.

In December 2011, Company’s shareholders approved and the Company effected amendments to the terms of the Convertible Loan Financing agreements (the "Conversion Amendments”). The Conversion Amendments provided that approximately $2.5 million of the outstanding convertible debt (consisting of $2,093,000 principal and $430,000 accrued interest) shall be converted into 1,681,965 ordinary shares (at a reduced conversion price of $1.5 per ordinary share, instead of the original $3.25 price). In addition, the warrants to purchase 643,984 shares that had been issued to the Lenders were extended by two years until July 2014 and February 2015, with no change to the exercise price of $2.75 per ordinary share.
 
The balance of the convertible loan of $501,000 that was extended by Dimex Systems remained outstanding, and will bear a reduced interest rate of 4%, instead of the original rate of 8%, and will no longer be convertible. This amount will be repaid to Dimex Sytstems in 24 equal monthly installments commencing January 10,  2014.
 
 
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The Company’s loans from Bank Leumi are secured by:

 
·
first ranking fixed charges on the goodwill of the Company and its Israeli subsidiaries, on our shareholdings in the  Israeli subsidiaries and on certain Bank Leumi accounts of Odem; and

 
·
floating charges on all of the assets of the Company and its Israeli subsidiaries, owned now or in the future; and

The Company also guarantees the liabilities of its Israeli subsidiaries to Bank Leumi and each of its Israeli subsidiaries guarantee the Company’s liabilities to Bank Leumi.

The Bank Leumi loan agreements signed by the Company and its Israeli subsidiaries contain various financial covenants, which require that the Company and the Israeli subsidiaries maintain certain financial ratios related to shareholders' equity, EBITDA and operating results. On February 8, 2010, the Company and its Israeli subsidiaries executed revised loan documents governing their credit line from Bank Leumi, in which they undertook revised covenants for year 2010. There were no Bank Leumi covenants applicable for the fiscal year 2011.
 
The Company’s loan from Bank HaPoalim is secured by long term bank deposits in the amount of $427,000. Bank HaPoalim’s loan agreements contain various financial covenants which require that the Company's Israeli subsidiaries maintain certain financial ratios and levels of profitability.
 
As of  December 31, 2011, the Company failed to meet Bank HaPoalim’s covenants. Nonetheless, Bank HaPoalim agreed, under certain conditions, including compliance by the Company with its warrants for the year 2012, to waive this failure of the Company to meet its financial covenants in 2011.
 
We finance our activities by different means, including equity financings, short and long-term loans, and income from operating activities.
 
Working capital requirements will vary from time-to-time and will depend on numerous factors, including but not limited to, the operating results, scope of sales, supplier and customer credit terms, the level of resources devoted to research and development, new product introductions, and marketing and acquisition activities.
 
We have in-balance sheet financial instruments and off-balance sheet contingent commitments. Our in-balance sheet financial instruments consist of our assets and liabilities. Our cash is invested in short-term (less than 3 months) U.S. dollars and NIS interest bearing deposits with banks. As of December 31, 2011, our trade receivables’ and trade payables’ aging days were 93 and 57 days, respectively. The fair value of our financial instruments is similar to their book value. Our off-balance sheet contingent commitments consist of: (a) royalty commitments that are directly related to our future revenues, (b) lease commitments of our premises and vehicles, (c) directors and officers’ indemnities, in excess of the proceeds received from liability insurance which we obtain, and (d) legal proceedings.
 
 
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In the year ended December 31, 2011, the Company incurred a loss of $3.2 million and generated negative cash flow from current operations amounting to $365,000. Due to the above, the Company's cash and cash equivalent decreased from $703,000 as of December 31, 2010 to $411,000 as of December 31, 2011. In addition, long-term bank loans increased by $1.1 million during fiscal year 2011.In view of the above, the Company has implemented an overall efficiency plan, including: a conversion of the convertible note (see Note 13 to the Consolidated Financial Statements for the year ended December 31, 2011) and a reduction in workforce. The Company expects to meet its bank covenants through December 31, 2012 and believes that its cash resources are sufficient to meet its operating needs for at least the next 12 months.
 
The Company expects to meet its bank covenants through December 31, 2012 and believes that its cash resources are sufficient to meet its operating needs for at least the next 12 months.
 
Cash Flows
 
Net cash used in   operating activities from continuing operations in 2011 was $365,000, compared to net cash provided by   operating activities of $1.46 million in 2010. The difference in cash flows was due to the increase of net loss from continued operations from $171,000 net profit in year 2010 to $3.2 million net loss in year 2011.
 
Net cash used in investing activities from continuing operations in 2011 increased to $1.04 million, compared to $105,000 in 2010. The increase was due to: (a) Increase in investment in fixed assets  from $108,000 in  2010 to $357,000 in  2011 reflecting a purchase of cars instead of the lease of cars, and leasehold improvements as a result of facilities consolidation, (b) a long term deposit of $427,000 which is a security for the long term loan from Bank Hapoalim, and (c) proceeds from the sale of investment in other company amounting to $150,000 in 2010 compared to no proceeds received in 2011.
 
Net cash provided by financing activities from continuing operations   in 2011 amounted to $1.1 million, compared to net cash used by financing activities of $604,000 in 2010.
 
2009 Private Placements
 
In August 2009, the Company closed a $2.4 million Convertible Loan Financing  with several lenders including Catalyst Private Equity Partners (Israel) II L.P., Telegraph Hill Capital Fund I, LLC, certain existing shareholders and members of its management.
 
2010 Private Placements
 
On February 4, 2010, the Company entered into an additional amendment to the Dimex Systems Asset Purchase Agreement, whereby among others, NIS 600,000 was converted into long-term convertible debentures on terms similar to those of the debentures the Company issued in August 2009. In addition, the Company issued to Dimex Systems a warrant to purchase 69,096 ordinary shares at an exercise price of $3.25 per ordinary shares during the first 18 months commencing August 3, 2011 and $4.00 per ordinary share thereafter.
 
 
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On October 5, 2010 the Company entered into a Share Purchase Agreement with Telegraph Hill Capital Fund I, LLC for the issuance of an aggregate of 96,362 Ordinary Shares at a price per share of $3.11, or approximately $300,000 in total.
 
2011 Amendments to Convertible Loan Agreements
 
In December 2011, the Company consummated amendments to its agreements with its convertible debt lenders, including Dimex Systems, for the conversion of most of the convertible debt into the Company’s ordinary shares. See discussion above for further details.
 
5C.          Research and Development
 
We believe that our future growth will depend upon our ability to enhance our existing products and introduce new products on a timely basis. Our current research and development efforts focus on our RFID and Mobile solutions for enterprise logistics and organizational processes and on our software products offering (see “Item 4B. Business Overview” for the detailed list of our software products).
 
We intend to finance our research and development activities with our own resources and by raising equity and debt financings.
 
5D.          Trend Information
 
BOS’ vision is to become a worldwide provider in the field of RFID and Mobile solutions for enterprise logistics and organizational processes. Committed to this vision, we plan to expand our suite of solutions and anticipate that the portion of the RFID and Mobile Solutions segment revenues will increase gradually going forward.
 
Growth of the RFID and Mobile division depend on sales of BOS ID software product outside of Israel. We anticipate that the revenues of BOS ID will increase gradually going forward.
 
In addition, we are working towards an increase of our Supply Chain Solution to the international markets.
 
Interest rate on our short term loan that quoted in NIS was 7.25% on December 31, 2011, compared to 5.95% on December 31, 2010. Interest NIS rate on our U.S. short term loan that quoted in US$ was 5.49% on December 31, 2011,  compared to 3.37% on December 31, 2010.  The increase in interest rate  resulted in a corresponding increase in the U.S. dollar cost of our financial expenses. Further significant increase in interest rate could have an adverse effect on our results of operation and financial condition. We cannot predict any future trends in the rate of interest.
 
5E.           Off-Balance Sheet Arrangements
 
Not applicable.
 
 
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5F.          Tabular Disclosure of Contractual Obligations
 
The following table of our material contractual obligations as of December 31, 2011, summarizes the aggregate effect that these obligations are expected to have on our cash flow in the periods indicated:
 
   
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
   
More than 5 years
 
Long-term loans (1)
  $ 2,189,964     $ 660,324     $ 1,219,605     $ 310,035       -  
Accrued severance pay (2)
    162,663       -                       162,663  
Liability to Dimex system
    1,068,625       299,517       769,108               -  
Uncertain tax position
    273,406       -       -       -       273,406  
Operating lease - cars
    508,718       290,395       218,323               -  
Purchase obligation for service and inventory
    1,752,520       1,752,520       -               -  
Facilities lease
    372,211       105,027       216,400       50,784       -  
Total
  $ 6,305,535     $ 3,107,783     $ 2,400,864     $ 360,819     $ 436,069  
 
(1)
Does not include interest. For information on interest rate on long terms loans. See Note 12 to the Consolidated Financial Statements for the year ended December 31, 2011.
 
(2)
The time for payment of the severance cannot be predicted.
 
The above table does not include: (i) contingent obligations to pay royalties to the Office of the Chief Scientist and to the Fund for the Encouragement of Export, since the total amount to be paid under the terms of those agreements is a function of future sales, and (ii) contingent legal claims (see “Item 8A. Consolidated Statements and Other Financial Information - Legal Proceedings”).
 
 
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Item 6:   Directors, Senior Management and Employees
 
6A.         Directors and Senior Management
 
Set forth below is information regarding our directors and senior management.
 
Name
Age
Position
Mr. Edouard Cukierman 1
47
Chairman of the Board of Directors
Mr. Yuval Viner
49
Chief Executive Officer
Mr. Avidan Zelicovsky 1
42
President
Mr. Eyal Cohen
43
Chief Financial Officer
Mr. Guillaume Binder
57
Director
Mr. Joel Adler
58
Director
Mr. Ronen Zavlik (*)
51
Director
Mr. Luis Gutierrez Roy
41
Director
Ms. Orit Nir Schwartz (*)
40
External Director
Mr. David Golan (*)
71
External Director
 
(*) Member of our Audit Committee.

Mr. Edouard Cukierman has been a director of the Company since May 2003 and Chairman of the Company since June 2003. He is the founder of Cukierman & Co. Investment House Ltd. (CIH) and Catalyst Fund. Since its establishment in 1993, CIH realized more than € 3.5 billion of corporate finance transactions. Prior to managing Catalyst in 2000, he was the President and CEO of the Astra Technological Investments, a Venture Capital Fund established in 1993, which was the first Israeli company to go public in Continental Europe. He is the Founder of the Go4Europe yearly conference. He is a board member of Lamina Technologies in Switzerland, Dorimedia and Harmon.ie in Israel. Edouard Cukierman is the Chairman of the European Committee of the High Tech Industry Association (HTIA) since May 2011. He is as well the President of the Israeli desk of the Foundation France Israel. Mr. Cukierman is a board member of “Alliance Israelite Universelle en Israel” and a board member of Sar-El Association.  In the past, Mr. Cukierman was the President of the Supervisory Board of Citec Environment SA and Services in Paris. He was a Board member of Orex, MTI Wireless and other portfolio companies of Catalyst and served as a Board member of Otto Capital, a Singapore based VC fund. Mr. Cukierman serves as reserve officer in the Crisis & Hostage Negotiation Team and he is an officer (reserve) of the Spokesman Unit. Mr. He holds an MBA from INSEAD, Fontainebleau, France and a B.Sc. from the Technion - Israel Institute of Technology.

Mr. Yuval Viner was appointed as the Company acting CEO on October 20, 2009 and as CEO on March 17, 2010. From March 2008, following the acquisition of Dimex System’s assets, he served as the Head of RFID and Mobile Solutions Division. Mr. Viner joined Dimex Systems (1988) Ltd. in 1993 and was appointed as Dimex System’s CEO in 2000. Mr. Viner joined the Company as part of the acquisition of Dimex Systems assets. Mr. Viner is a graduate of the Practical Engineering Academy of Tel Aviv.

Mr. Avidan Zelicovsky was appointed as the Company acting president in October 20, 2009 and as president on March 17, 2010. From November 2004, following the acquisition of Odem by BOS, Mr. Zelicovsky served as the Head of Supply Chain Solutions Division. Mr. Zelicovsky first joined the Company’s subsidiary Odem in 1996. Mr. Zelicovsky holds a B.A. in Business Administration from the Tel Aviv College of Management and an LL.M. from the Bar-Ilan University.
 
 
1 Mr. Cukierman and Mr. Zelicovsky are first cousins. There are no other family relationships among the officers and directors.
 
 
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Mr. Eyal Cohen was appointed as the Company’s Chief Financial Officer in January 2007. From 2004 through 2006, Mr. Cohen served as the Company’s controller, and prior to that held the position of Chief Financial Officer at Cellact Ltd. From 1998 to 2001, Mr. Cohen was the controller of e-SIM Ltd. (NASDAQ:ESIMF) and in the years 1995-1997 held an audit manager position in PricewaterhouseCoopers. Mr. Cohen holds a B.A. in Accounting and Business Administration from the College of Management in Tel-Aviv and is a certified public accountant in Israel and in the United States, in the state of Maine.

Mr. Joel Adler has been a director of the Company since June 2005. Mr. Adler is a partner in Mishcon de Reya a leading law firm in London. He specializes in mergers & acquisitions and corporate finance work, in particular international corporate transactions. Mr. Adler advises a number of major Israel based companies on their business activities in the UK and Europe and on IPO of foreign companies on the London Stock Exchange (AIM).  Mr. Adler joined Mishcon de Reya as a partner in 2006, from the London law firm of Speechly Bircham, where he was a partner from 1999. Previously, Mr. Adler was head of the corporate department of Rakisons (now part of U.S. law firm Steptoe & Johnson). He gained his experience with other leading law firms in London Herbert Oppenheimer Nathan & Vandyck (now Denton Wilde Sapte) and DJ Freeman. He is a member of the Israeli Bar and worked for the well-known Israeli law firm Caspi & Co. for two years. Mr. Adler holds a Law degree from Bar Ilan University in Israel, and an LLM from London University. He was born and educated in Vienna.

Mr. Ronen Zavlik has been a director of the Company since May 2003. He is a partner in the CPA firm of Grinberg-Zavlik, which he founded in 1987. His firm provides a wide range of audit, tax consultancy and CFO services to a wide variety of companies. Mr. Zavlik provides internal auditing services to a number of large companies whose shares are traded on the Tel-Aviv Stock Exchange, Mr.   Zavlik holds a B.A. in Accountancy and Business Management from the College of Management in Tel-Aviv. Mr. Zavlik holds an accounting license in Israel, is a certified internal auditor in the United States and a member of the Institute of Certified Public Accountants in Israel.

Mr. Guillaume Binder has been a director of the Company since July 2008. Mr. Binder is a licensed lawyer in France and holds a Masters in Law from Paris University, a certificate of specalization in Corporate and Tax Law and a degree of superior accounting study (DECS). Mr. Binder serves as a director in several seed and startup companies, including First Care products and Neuronix.

Mr. Luis Gutierrez Roy has been a director of the Company since October 2010. Mr. Gutierrez Roy has been a managing partner at Telegraph Hill Capital Fund I, LLC since 2008. He was a managing director of Corporate Finance and co-head of the Technology, Media and Telecom Group at Ernst & Young (E&Y) in Spain from 2001 to 2008. Prior to E&Y, he led the Corporate Value Consulting practice at PricewaterhouseCoopers (PwC) in its Barcelona office from 1999 to 2001. Prior to joining PwC Spain, he worked for PwC and Houlihan Valuation Advisors in San Francisco from 1996 to 1999, and the Barcelona Stock Exchange, where he started his professional career in 1993. Mr. Gutierrez Roy has advised companies in cross-border transactions in Europe, the United States, Asia and Latin America. Mr. Gutierrez Roy holds a B.Sc. in Business Administration from the University of Barcelona, and an MBA from the University of San Francisco.
 
 
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Mr. David Golan has been an external director of the Company since February 2009. Mr. Golan provides private investment banking, managerial and consulting services. He currently serves as a director in several companies, both public and private. Previously, until 2002, he served as an Executive Director of a group of companies in the Rad-Bynet group. In the years 1998-2000 he served as President of the Zeevi Investments group. Between 1997-1998, Mr. Golan served as President of Clal Trading Ltd. and between 1992-1997 he served as Vice President in Clal Trading Ltd. Between the years 1988-1992 Mr. Golan served as managing director of Gal Industries Ltd. Mr. Golan holds a bachelor's degree in Economics and Statistics from the Hebrew University, an MBA from New York University and took part in a senior management course in IMD Lausaunne.

Ms. Orit Nir Schwartz   has been an external director of the Company since December 2011. Ms. Schwartz is the current Marketing Manager of the Imaging and Printing Group of Hewlett-Packard (HP) in Israel. Between 2004 and 2011, Ms. Schwartz worked as the Marketing Manager of Miller Jewellers, and previously, as Managing Manager of Siemens Mobile Phones from 2002 to 2003, and as Product Marketing Manager in the Marketing Division of Cellcom from 2000 to 2002. Ms. Schwartz holds a bachelor's degree in Economics and Management from the Technion - Israel Institute of Technology and an MBA from Tel Aviv University with concentrations in Marketing, Technology & Operational Systems Management.
 
6B.         Compensation
 
In accordance with the approval of our shareholders, directors who are not employees (excluding the Company’s current Chairman of the Board and excluding external directors) are entitled to receive annual compensation of NIS 26,240, and an additional NIS 1,358 for each board meeting attended.  The above amounts are subject to adjustment for changes in the Israeli consumer price index after March 2012.

The Company’s Chairman of the Board, Mr. Edouard Cukierman receives compensation pursuant to an Active Chairman Agreement. See Item 7B: Related Party Transactions, for further details.

The compensation of the Company's external directors is regulated by the Israeli Companies Regulations (Rules Regarding Compensation and Expenses to External Directors) - 2000, as amended, or the Regulations, and the Companies Regulations (Alleviation for Public Companies whose Shares are Traded on a Stock Exchange Outside of Israel) - 2000, as amended.
 
The compensation for our external directors, as approved by our shareholders, consists of an annual fee and a per meeting attendance fee equal to the “fixed” statutory amount applicable to companies of the Company’s size, as set forth from time to time, in the applicable Regulations, subject to increase in accordance with the Israeli consumer price index.
 
 
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The current compensation rates for our external directors are an annual fee of approximately NIS 28,395 and a participation fee in meetings of approximately NIS 1,806. These amounts are subject to adjustment for changes in the Israeli consumer price index and to changes in the amounts payable pursuant to Israeli law from time to time.

Board members are compensated for telephone participation in board and committee meetings in an amount of 60% of what would be received for physical attendance and 50% of such fee for a meeting held without convening.
 
Each of our current directors (including the external directors but excluding the current Chairman of the Board) was also granted options to purchase 1,500 ordinary shares upon commencement of his or her term as director and at an exercise price equal to the average closing prices of the shares on the Nasdaq Capital Market on the 20 trading days preceding the appointment of the director. The Options will vest and become exercisable annually over a period of three years, in three equal parts. The maximum option term is five years from grant.

If applicable, a director shall receive an additional amount of 1,500 options to purchase the Company’s Ordinary Shares on the third anniversary of his or her service as a director of the Company.
 
The Company does not have any contracts with any of its non-employee/consultant directors that would provide for benefits upon termination of service.

The following table presents the total compensation paid to or accrued on behalf of all of our directors and officers as a group for the year ended December 31, 2011:

   
Salaries, Directors' fees, Service fees, Commissions and Bonus 1
   
Pension, Retirement and Similar benefits
 
All directors and officers as a group (then 12 persons)
  $ 987,000     $ 109,777  
 
1        Includes consulting and other fees paid to Cukierman & Co., of which Mr. Edouard Cukierman, the Company’s Chairman, is (indirectly) a controlling shareholder, and stock based compensation in the amount of $223,000. Such remuneration does not include amounts expended by the Company for expenses, including business association dues and expenses reimbursed to said officers, and other fringe benefits commonly reimbursed or paid by companies in the location in which the particular executive officer of the Company is located, as the case may be.
 
 
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6C.         Board Practices
 
Directors:

Our Board of Directors is currently comprised of seven directors, including two external directors. The directors (except for the external directors) are elected by simple majority at the annual shareholders’ meeting, to serve until the next annual meeting of our shareholders and until their respective successors are elected and qualified. External directors, by rule of the Israeli Companies Law, are elected for a three-year term. Our Articles of Association provide that the number of directors in the Company (including external directors) shall be determined from time to time by the annual general meeting of shareholders, provided that it shall not be less than four nor more than eleven. Our Articles of Association provide that the directors may appoint additional directors (whether to fill a vacancy or to expand the Board) so long as the number of directors so appointed does not exceed the number of directors authorized by shareholders at the annual general meeting, and such appointees shall serve until the next annual general meeting.

NASDAQ Marketplace Rules require that the board of directors of a NASDAQ-listed company have a majority of independent directors, within the meaning of NASDAQ rules.  Our board of directors has determined that Messrs. Adler, Binder, Gutierrez Roy, Golan, Zavlik and Ms. Nir Schwartz, who constitute a majority of the Board of Directors, are independent directors under the applicable Nasdaq Stock Market requirements.

Our Articles of Association provide that a director may appoint, by written notice to us, any individual to serve as an alternate director, up to a maximum period of one month, if the alternate is not then a member of the Board. Any alternate director shall have all of the rights and obligations of the director appointing him or her and shall be subject to all of the provisions of the Articles of Association and the Israeli Companies Law. Unless the time period or scope of any such appointment is limited by the appointing director, such appointment is effective for all purposes for a period of one month, but in any event will expire upon the expiration of the appointing director's term, removal of the alternate at an annual general meeting, the bankruptcy of the alternate, the conviction of the alternate for an offense in accordance with the Israeli Companies Law, the legal incapacitation of the alternate, the removal of the alternate by court order or the resignation of the alternate. Currently, no alternate directors have been appointed. A director may appoint an alternate to serve in his place as a member of a committee of the Board of Directors, even if the alternate currently serves as a director, as long as he does not already serve as a member of that committee.

Officers serve at the discretion of the Board or until their successors are appointed.

According to the provisions of our Articles of Association and the Israeli Companies Law, the Board of Directors convenes in accordance with the Company’s requirements, and at least once every three months. In practice, our Board of Directors convenes more often. Furthermore, our Articles of Association provide that the Board of Directors may also pass resolutions without actually convening, provided that all the directors entitled to participate in the discussion and vote on a matter that is brought for resolution agree not to convene for discussion of the matter. Resolutions passed without convening, shall be passed by an ordinary majority (just as in the case of convened meetings) and shall have the same effect as resolutions passed at a duly convened meeting.

In accordance with the requirements of the Nasdaq Stock Market, nominees for directors are recommended for selection by a majority of the independent directors.
 
 
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External Directors:
 
Under the Israeli Companies Law, public companies are required to elect two external directors who must meet specified standards of independence.  External directors may not have during the two years preceding their appointment, directly or indirectly through a relative, partner, employer or controlled entity, any affiliation with (i) the public company, (ii) those of its shareholders who are controlling shareholders at the time of appointment, or (iii) any entity controlled by the company or by its controlling shareholders.
 
The term “affiliation” includes an employment relationship, a business or professional relationship maintained on a regular basis, control and services as an office holder. The term “controlling shareholder” is defined as a shareholder who has the ability to direct the activities of a company, other than if this power derives solely from the shareholder’s position on the board of directors or any other position with the company. The definition also includes shareholders that hold 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company.
 
In addition, an individual may not be appointed as an External Director in a company that does not have a controlling shareholder, in the event that he has affiliation, at the time of his appointment, to the chairman, chief executive officer, a 5% shareholder or the chief financial officer. An individual may not be appointed as an External Director if his relative, partner, employer, supervisor, or an entity he controls, has other than negligible business or professional relations with any of the persons with which the External Director himself may not be affiliated.
 
No person can serve as an external director if the person’s other positions or business creates or may create conflicts of interest with the person’s responsibilities as an external director. Until the lapse of two years from termination of office, a company may not engage an external director as an employee or otherwise.  If, at the time an external director is to be appointed, all current members of the board of directors are of the same gender, then at least one external director must be of the other gender.
 
A person is qualified to serve as an external director only if he or she has “accounting and financial expertise” or “professional qualifications,” as such terms are defined under regulations promulgated under the Israeli Companies Law.  At least one external director must have “accounting and financial expertise.”  David Golan, a member of our Audit Committee, is an external director who has accounting and financial expertise.
 
External directors serve for an initial three-year term, The initial three-year term of service can be extended, at the election of a company subject to certain conditions, by two additional three-year terms. External Directors will be elected by a majority vote at a shareholders’ meeting, provided that either the majority of shares voted at the meeting, including at least one-half of the shares held by non-controlling shareholders voted at the meeting, vote in favor; or the total number of shares held by non-controlling shareholders voted against does not exceed two percent of the aggregate voting rights in the company.
 
External Directors may be re-elected for additional terms by means of one of the following mechanisms: (i) the board of directors proposed the nominee and his appointment was approved by the shareholders in the manner required to appoint external directors for their initial term, or (ii) a shareholder holding 1% or more of the voting rights proposed the nominee, and the nominee is approved by a majority of the votes cast by the shareholders of the company, excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relations with the controlling shareholders, provided that, the aggregate votes cast by shareholders who are not controlling shareholders and do not have a personal interest in the matter as a result of their relations with the controlling shareholders in favor of the nominee constitute more than 2% of the voting rights in the company.
 
 
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External directors can be removed from office only by the court or by the same special percentage of shareholders that can elect them, and then only if the external directors cease to meet the statutory qualifications with respect to their appointment or if they violate their fiduciary duty to the company. The court may additionally remove external directors from office if they were convicted of certain offenses by a non-Israeli court or are permanently unable to fulfill their position.
 
If delegated any authority of the board of directors, any committee of the board of directors must include at least one external director. An external director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with such service.
 
The Companies Law requires external directors to submit to the company, prior to the date of the notice of the general meeting convened to elect the external directors, a declaration stating their compliance with the requirements imposed by Companies Law for the office of external director.
 
Our board of directors currently has two external directors under Israeli law: (i) Mr. David Golan, who has serviced as an external director in the Company since February 2009, and was reelected for an additional three-year period at our annual general meeting of shareholders held on December 20, 2011; and (ii) Ms. Orit Nir Schwartz who was elected to serve as an external director at our annual general meeting of shareholders held on December 20, 2011
 
Fiduciary Duties of Office Holders :
 
The Israeli Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company.  An “office holder” is defined in the Israeli Companies Law as a director, general manager, chief business manager, deputy general manager, vice general manager, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions without regard to such person’s title.  An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty.  The duty of care requires an office holder to act at a level of care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to utilize reasonable means to obtain (i) information regarding the business feasibility of a given action brought for his approval or performed by him by virtue of his position and (ii) all other information of importance pertaining to the foregoing actions. The duty of loyalty requires that an office holder act in good faith and for the benefit of the company, including (i) avoiding any conflict of interest between the office holder’s position in the company and any other position he holds or his personal affairs, (ii) avoiding any competition with the company’s business, (iii) avoiding exploiting any business opportunity of the company in order to receive personal gain for the office holder or others, and (iv) disclosing to the company any information or documents relating to the company’s affairs that the office holder has received by virtue of his position as an office holder.
 
 
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Disclosure of Personal Interests of an Office Holder; Approval of Transactions with Office Holders:
 
The Israeli Companies Law requires that an office holder promptly, and no later than the first board meeting at which such transaction is considered, disclose any personal interest that he or she may have and all related material information known to him or her and any documents in their possession, in connection with any existing or proposed transaction relating to our company. In addition, if the transaction is an extraordinary transaction, that is, a transaction other than in the ordinary course of business, other than on market terms, or likely to have a material impact on the company’s profitability, assets or liabilities, the office holder must also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of the foregoing (“relatives”), or by any corporation in which the office holder or a relative  is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager.

Under the Israeli Companies Law, all arrangements as to compensation of office holders who are not directors require approval by the board of directors, and exculpation, insurance and indemnification of, or an undertaking to, indemnify an office holder who is not a director requires both board of directors and audit committee approval.  The compensation of office holders who are directors must be approved by our Audit Committee, Board of Directors and shareholders, in that order.

Some other transactions, actions and arrangements involving an office holder (or a third party in which an office holder has an interest) must be approved by the board of directors or as otherwise provided for in a company’s articles of association, however, a transaction that is adverse to the company’s interest may not be approved. In some cases, such a transaction must be approved by the audit committee and by the board of directors itself, and under certain circumstances shareholder approval may be required. Generally, in all matters in which a director has a personal interest he or she shall not be permitted to vote on the matter or be present in the meeting in which the matter is considered, except in case of a transaction that is not extraordinary or the purpose of presenting the proposed transaction, if the chairman of the audit committee or board of directors (as applicable) determines it necessary. Should a majority of the audit committee or of the board of directors have a personal interest in the matter, then: (a) all of the directors are permitted to vote on the matter and attend the meeting at which the matter is considered; and (b) the matter requires approval of the shareholders at a general meeting.

Committees

Each committee of a company’s Board of Directors that has the authority to exercise powers of the Board of Directors is required to include at least one external director and its audit committee must include all external directors.
 
 
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Audit Committee:

Our Audit Committee currently consists of David Golan, Ronen Zavlik and Orit Nir Schwartz. Under the Israeli Companies Law, public companies must establish an audit committee. The audit committee must consist of at least three members, and must include all of the company's external directors. A majority of an audit committee must be comprised of “independent directors” (as such term is defined in the Companies Law). The chairman of the board of directors, any director employed by the company or providing services to the company on a regular basis, any controlling shareholder and any relative of a controlling shareholder may not be a member of the audit committee. An audit committee may not approve an action or a transaction with an officer or director, a transaction in which an officer or director has a personal interest, a transaction with a controlling shareholder  and certain other transactions specified in the Companies Law, unless at the time of approval two external directors are serving as members of the audit committee and at least one of the external directors was present at the meeting in which an approval was granted.

Our Audit Committee assists our Board of Directors in overseeing the accounting and financial reporting processes of our company and audits of our financial statements, including the integrity of our financial statements, compliance with legal and regulatory requirements, compensation of our executive officers, our independent registered public accountants’ qualifications, independence and compensation (including for non-audit services), the performance of our internal audit function, finding  defects in the business management of our company and proposing to our Board of Directors ways to correct such defects, determine whether certain related party actions and transactions are "material" or "extraordinary" in connection with their approval procedures,  approve related-party transactions as required by Israeli law, establish whistle blower procedures (including in respect of the protections afforded to whistle blowers) and such other duties as may be directed by our Board of Directors.  The Audit Committee may consult from time to time with our independent auditors and internal auditor with respect to matters involving financial reporting and internal accounting controls.

The Company has adopted an Audit Committee Charter which sets forth the responsibilities of the committee. A copy of this charter is available upon written request to the Company at its address in Israel.

Under the Sarbanes-Oxley Act of 2002, the Audit Committee is responsible for the appointment, compensation, retention and oversight of the work of the Company’s external auditors. However, under Israeli law, the appointment of external auditors requires the approval of the shareholders of the Company. Accordingly, the appointment of the external auditors is approved and recommended to the shareholders by the Audit Committee and ratified by the shareholders. Furthermore, pursuant to the Company’s Articles of Association, the Board of Directors is the organ that has the authority to determine the compensation of the external auditors; however, the Board of Directors delegated its authority to the audit committee, so that a second discussion by the Board of Directors shall not be necessary.

The Company has determined that all the members of its Audit Committee meet the applicable Nasdaq Stock Market and SEC independence standards.
 
Compensation Committee :

The role of the Compensation Committee is to provide assistance and make recommendations to the Board of Directors regarding matters related to the compensation of employees of the Company. The Compensation Committee of the Company is formed and meets on an ad hoc basis. Under the Israeli Companies Law, in respect of the grant of options, the Compensation Committee may only make recommendations to the Board of Directors (and in some cases, such grants may need approval of the audit committee, the Board of Directors and the shareholders as well).
 
 
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In accordance with Nasdaq rules, the compensation of the Company’s Chief Executive Officer and other executive officers is recommended to the Board of Directors by a majority of the Company’s independent directors.

Israeli Securities Authority Administrative Enforcement:
 
Under the Israeli Securities Law- 1968, the Israeli Securities Authority, or ISA, may take certain administrative enforcement actions against a company or a person, including a director, officer or shareholder of a company, if performing certain transgressions designated in the Securities Law.

The ISA is also authorized to impose fines on any person or company breaching certain provisions designated under the Companies Law.
 
6D.          Employees
 
As of December 31, 2011, we employed 85 employees. As of March 31,   2012, we employed 77 employees, all of them in Israel. Of these 77 employees: 13 employees are in general and administrative positions, 22 employees are in marketing and sales, 3 employees are in research and development, 3 employees are in project implementation, 13 employees are employed as technicians and 23 employees are in operating activities. We believe that our relations with our employees are satisfactory. We have not experienced a collective labor dispute or a strike.
 
Israeli labor laws are applicable to all of our employees in Israel. The laws principally concern the length of the work day, minimum daily wages for professional workers, contributions to a pension fund, insurance for work-related accidents, allotment of vacation and sickness days, procedures for dismissing employees, determination of severance pay and other conditions of employment.

All Israeli employers are required to provide a certain escalation of wages in relation to the increase in the Israeli Consumer Price Index. The specific formula of such escalation varies according to agreements reached between the Government of Israel, the Manufacturers' Association and the Histadrut, the general labor union in Israel. All of our Israeli employees are covered by pension insurance policies. Israeli employees and employers are required to pay predetermined sums to the Israel National Insurance Institute which amounts also include, since January 1, 1995, payments for national health insurance.

In December 2008 and in May 2009, we effected a progressive reduction in the salaries of the employees of the Company and its subsidiaries of up to 15%, depending on the level of salary. In connection with such reduction, in May 2009, the Company granted its employees a total of 107,751 options to purchase ordinary shares of the Company with exercise price of $0.00 per ordinary share. The options vested on a quarterly basis starting from January 2009 over a period of four quarters, in four equal parts and are now fully vested. The exercise period of the options is 5 years from January 1, 2009.
 
 
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In addition, in May 2009, the Company’s employees were granted a total of 109,034 options to purchase the Company’s ordinary shares, as a prospective incentive. The exercise price of these options is $5.00 per ordinary share. These options vest on a yearly basis starting from January 2009 over a period of four years, in four equal parts. The exercise period of the options is 5 years from January 1, 2009.
 
6E.            Share Ownership
 
As of March 31, 2012, shares and options held by our officers and directors, then consisting of 10 persons, are as follows:
 
Name
 
Position
 
Shares
   
Options
   
Warrants
 
Mr. Edouard Cukierman 1
 
Chairman of the Board of Directors
    8,139       185,032       -  
Mr. Joel Adler 2
 
Director
    28,185       4,300       -  
Mr. Avidan Zelicovsky
 
President
    17,355       70,874       1,077  
Mr. Yuval Viner
 
Chief Executive Officer
    11,352       43,442       1,077  
Mr. Eyal Cohen
 
Chief Financial Officer
    743       29,846       308  
Mr. Luis Gutierrez Roy 3
 
Director
    257,362       14,400       61,539  
Other directors and officers
        -       11,600       -  

Share Option Plans

The purpose of the Share Option Plans is to enable us to attract and retain qualified persons as employees, officers, directors, consultants and advisors and to motivate such persons by providing them with an equity participation in the Company. The Share Option Plans will expire 10 years after their adoption, unless terminated earlier by the Board of Directors.

The Share Option Plans are administered by the Board of Directors, which has broad discretion, subject to certain limitations, to determine the persons entitled to receive options.
 
 
1   Mr. Edouard Cukierman held 4,334 ordinary shares directly, 1,285 ordinary shares through a wholly owned company, E.D.I  European Development and Investments Ltd. and an additional 2,520 ordinary shares through Cukierman & Co. Investment House that is indirectly controlled by Mr. Cukierman.  Does not include shares as to which Mr. Cukierman may be deemed to share beneficial ownership. See “Item 7A: Major Shareholders”.
2 Brada Investments Limited is a discretionary trust of which Mr. Joel Adler, a director of the Company, is one of the beneficiaries. Brada Investments Limited holds 28,185 ordinary shares. Mr. Joel Adler holds 4,300 options, which he received as a director.
3 Securities are held by Telegraph Hill Capital Fund I, LLC. Mr. Gutierrez Roy may be deemed to have shared voting and dispositive power with respect to the holdings by Telegraph Hill Capital Fund I, LLC.
 
 
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Under the Share Option Plans, the terms and conditions under which options are granted and the number of shares subject thereto shall be determined by the Board of Directors. The Board of Directors also has discretion to determine the nature of the consideration to be paid upon the exercise of an option under the Share Option Plans. Such consideration generally may consist of cash, or, at the discretion of the Board of Directors, cash and a recourse promissory note.

The ordinary shares acquired upon exercise of an option are subject to certain restrictions on transfer, sale or hypothecation. Options are exercisable and restrictions on disposition of shares lapse pursuant to the terms of the individual agreements under which such options were granted or shares issued.

The Section 102 Share Options Plans are designed to afford qualified optionees certain tax benefits under the Israel Income Tax Ordinance.

2003 Plan

In May 2003 the Company’s shareholders approved the adoption of the 2003 Israeli Stock Option Plan, pursuant to which 125,000 ordinary shares were reserved for purchase by the employees, directors, consultants and service providers of the Company and its subsidiaries. Subsequently, the shareholders approved increases of the shares reserved for issuance under the 2003 Plan, initially to 200,000, and thereafter to 300,000, to 520,000, to 830,000 and in December 21, 2011 to 1,100,000. The Board of Directors has resolved that no further grants shall be made under previous plans. The Company has elected to designate the 2003 Plan as providing benefits available under the “capital gains” alternative. Pursuant to the election made by the Company, capital gains derived by optionees arising from the sale of shares derived from the exercise of options granted to them under Section 102, will be subject to a flat capital gains tax rate of 25% (instead of the gains being taxed as salary income at the employee’s marginal tax rate). However, as a result of this election, the Company is not allowed to claim as an expense for tax purposes the amounts credited to such employees as a benefit when the related capital gains tax is payable by them. The Company may change its election from time to time, as permitted by the Tax Ordinance. There are various conditions that must be met in order to qualify for these benefits, including registration of the options in the name of a trustee (the “Trustee”) for each of the employees who is granted options. Each option, and any ordinary shares acquired upon the exercise of the option, must be held by the Trustee for a period commencing on the date of grant and ending no earlier than 24 months from the date of grant.
 
 
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As of March 31, 2012 we had 464,261 options outstanding under this plan (of which 393,036 are exercisable) with the exercise prices as set forth below:
 
Exercise Price Per Share $
   
Outstanding
 
Less than $0.9
      51,751  
$ 0.95       89,440  
$ 2.00       36,794  
$ 2.10       1,500  
$ 2.478       1,500  
$ 2.50       20,000  
$ 2.75       14,400  
$ 3.05       6,000  
$ 5.0       54,930  
$ 7.33       1,500  
$ 7.495       1,500  
$ 8.40       15,000  
$ 11.925       80,000  
$ 12.60       60,280  
$ 13.40       28,066  
$ 15.00       1,600  
Total
      464,261  
 
Item 7:   Major Shareholders and Related Party Transactions
 
7A.         Major Shareholders
 
We are not directly or indirectly owned or controlled by another corporation or by any foreign government.
 
The following table sets forth, as of March 31, 2012, to the best of the Company’s knowledge, information as to each person known to the Company to be the beneficial owner of more than five percent (5%) of the Company’s outstanding ordinary shares. Except where indicated, to the best of the Company’s knowledge based on information provided by the owners, the beneficial owners of the ordinary shares listed below have sole investment and voting power with respect to those shares. Applicable percentage ownership in the following table is based on 4,471,636 shares outstanding as of March 31, 2012.
 
The shareholders’ holdings reflect their voting rights. The Company’s major shareholders do not have different voting rights than other shareholders, with respect to their shares.
 
 
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Shares Beneficially Owned
 
Name and Address
 
Outstanding Shares
   
Warrant Shares (2)
   
Total Shares
   
Percent
 
Catalyst Funds (1)
3 Daniel Frisch Street,
    850,103       163,077       1,013,180       21.86 %
                                 
SITA S.A. (3)
27, RTE DE GY  1252 Meinier, Geneva, Switzerland
    627,984       172,862       800,846       17. 24 %
                                 
Bellite Pty Limited (4)
7 Beresford Road, Rose Bay 2029, NSW, Australia
    465,142       115,385       580,527       12.66 %
                                 
Dimex Systems (1988) Ltd. (5)
3 Tvuot Ha’aretz Street, Tel Aviv 69546, Israel
    425,385       326,414       751,799       15.67 %
                                 
Telegraph Hill Capital Fund I, LLC (6)
    257,362       75,939       333,301       7.33 %
 
 
(1)
Represents shares held by Catalyst Investments L.P. and by Catalyst Private Equity Partners (Israel) II L.P. Catalyst Investments L.P. is the general partner of Catalyst Fund L.P., Catalyst Fund II L.P. and Catalyst Fund III, L.P., all of which are limited partnerships organized and existing under the laws of the State of Israel. Recently, the partnerships listed above were dissolved and the Company’s shares are held by Catalyst Investments on behalf of the limited partners of the funds. Catalyst Investments is in the process of distributing these shares to its limited partners. Catalyst Private Equity Partners (Israel) II L.P. is continuing its operations and the number includes 426,651 shares held by it.
 
Mr. Edouard Cukierman may be deemed to have sole voting and dispositive power with respect to shares held by Catalyst Investments. Mr. Cukierman disclaims beneficial ownership in such shares, except to the extent of his proportionate interest in them as an indirect shareholder in Catalyst Investments.
 
 
Mr. Edouard Cukierman may be deemed to have sole voting and dispositive power with respect to shares held by Catalyst Private Equity Partners (Israel) II L.P. Mr. Cukierman disclaims beneficial ownership in such shares except to the extent of his proportionate interest in them as an indirect shareholder in the general partner of Catalyst Private Equity Partners (Israel) II L.P.
 
 
(2)
Represents shares issuable upon exercise of warrants that may be exercised within 60 days following the date of this report.
 
 
(3)
Mr. Gérard Limat may be deemed to have sole voting and dispositive power with respect to the shares held by SITA SA.
 
 
(4)
Mr. Les Szekely may be deemed to have sole voting and dispositive power with respect to the shares held by Bellite Pty Limited.
 
 
(5)
Ms. Gabriela Jacobs may be deemed to have sole voting and dispositive power with respect to the shares held by Dimex Systems.
 
 
(6)
Messrs. Luis Gutierrez Roy and Clarence Wesley may be deemed to have shared voting and dispositive power with respect to the shares held by Telegraph Hill Capital Fund I, LLC.
 
 
 
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The changes in holdings (excluding warrants) of the major shareholders over the last three years are detailed, to the best of our knowledge, in the table below:
 
Holdings as of:
 
December 31, 2009
   
December 31, 2010
   
December 31, 2011
   
March 31, 2012
 
Catalyst Funds (1)
    423,451       423,451       850,103       850,103  
D.S. Apex Holdings Ltd.
    270,994       -       -       -  
SITA
    175,734       175,734       627,984       627,984  
Bellite Pty Limited
    163,266       163,266       465,142       465,142  
Telegraph Hill Capital Fund I, LLC
    -       96,362       257,362       257,362  
 
(1)  
Represents shares held by Catalyst Investments L.P. and by Catalyst Private Equity Partners (Israel) II L.P.
   
As of March 31, 2012, there were 48 record holders of ordinary shares, of which 9 were registered with addresses in the United States, representing approximately 32% of the outstanding ordinary shares. However, the number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of the ordinary shares are held of record by brokers and other nominees.
 
7B.         Related Party Transactions
 
Grant of Shares and Options to Mr. Cukierman
 
On November 7, 2007 the Company’s shareholders approved an Active Chairman Agreement with Mr. Edouard Cukierman. Pursuant to this Agreement, in consideration for Mr. Cukierman’s services as the Company’s Active Chairman in the years 2007-2010, he was granted 80,000 options in four equal annual tranches (pro-rated for any part of the Calendar year). The options were in lieu of any compensation, fees or options otherwise payable by the Company to Mr. Cukierman as a director.

The options vested on a quarterly basis. The exercise price of the options was $11.925, which was equal to the weighted average of the closing prices of the Company’s ordinary shares on the Nasdaq Global Market during the thirty-day period preceding the shareholders approval. Unexercised options expire after five years from their respective grant date.
 
 
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In December 2011, the Company’s shareholders approved a new Active Chairman Agreement with Mr. Cukierman. Pursuant to this agreement, in consideration for Mr. Cukierman’s services as the Company’s Active Chairman in the years 2011-2014, he shall be granted options to purchase 89,440 ordinary shares, and be paid a monthly cash payment of $5,000, plus VAT at the prevailing rate. Payment of the cash fee shall be made each month in respect of the previous month of service. Following approval by the shareholders in December, 2011, the cash fees for 2011 were paid retroactively for the entire year. The exercise price of the options is $0.95 and they vest and become exercisable in 16 equal quarterly installments of 5,590 options each. The first three installments vested immediately following the shareholders' approval, and the fourth installment vested on December 31, 2011. Additional installments vest at the end of each subsequent calendar quarter, provided that Mr. Cukierman shall hold his position as Chairman of the Board at the applicable vesting date.  Pursuant to the agreement, if Mr. Cukierman’s service to the Company is terminated by the Company for no cause then: (a) any unvested options shall be accelerated, so that they become immediately vested in full as of the date of the termination and (b) the accelerated options and any previously vested options shall be exercisable for twenty four (24) months following the termination. Except for in the events of acceleration or termination for cause, the options are exercisable for five years from the grant date.

The options and the cash fee are in lieu of any compensation, fees or options otherwise payable by the Company to Mr. Cukierman as a director.

In 2003, the Company's audit committee and Board approved the engagement of Cukierman & Co., to provide non-exclusive investment-banking services and business development services to the Company, effective April 15, 2003 (the “Services Agreement”). Cukierman & Co. is a company indirectly controlled by Mr. Edouard Cukierman. Since June 26, 2003, he serves as Chairman of the Company's Board, and he may also be deemed to have sole voting and dispositive power with respect to shares held by Catalyst Investments and by Catalyst Private Equity Partners (Israel) II L.P. For its services, Cukierman & Co. is paid a monthly sum of $10,000 plus VAT (from February 9, 2009 until December 31, 2010, Cukierman & Co.  agreed to temporarily reduce such fee to $8,500), in addition to a success fee of 4%-6% for a consummated private placements. The Services Agreement, as supplemented, provides for success fees in connection with securing M&A transactions of 3.5% of the proceeds exchanged in such a transaction and also for a success fee of 6% of the revenues actually received by the Company in respect of a sale of the Company's products to a new customer which was introduced by Cukierman & Co. According to its terms, the Company may terminate the Service Agreement at any time, by giving a one-month prior written notice.

For payments the Company paid and accrued pursuant to the Services Agreement in year 2011 see Note 19 to the Consolidated Financial Statements for the year ended December 31, 2011.
 
 
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Agreements with Telegraph Hill Capital I, LLC (“Telegraph Hill Capital”)

Mr. Luis Gutierrez Roy, a director of the Company since October 2010, is the managing partner of Telegraph Hill Capital and may be deemed to have shared voting and dispositive power with respect to company shares held by Telegraph Hill Capital.

In September 2009, the Company entered into a service agreement with Telegraph Hill Capital, pursuant to which Telegraph Hill Capital was to provide the Company with non-exclusive private financing and business consulting services. In consideration, the Company issued to Telegraph Hill Capital warrants to purchase 14,400 ordinary shares at an exercise price of $2.75 per share. The warrants were exercisable as of February 28, 2011, and can be exercised until August 31, 2012.
 
In November 2009, the Company entered into an amendment to the service agreement with Telegraph Hill Capital, pursuant to which Telegraph Hill Capital shall be paid a success fee of 5% of the revenues generated to the Company from the sale of the Company products to business partners introduced by Telegraph Hill Capital. For payments the Company paid and accrued pursuant to the Services Agreement in year 2011 see Note 19c to the Consolidated Financial Statements for the year ended December 31, 2011.
 
On October 5, 2010, the Company entered into a share purchase agreement with Telegraph Hill Capital for the issuance of an aggregate of 96,362 Ordinary Shares at a price per share of $3.11, or approximately $300,000 in total.  Pursuant to this agreement, Mr. Luis Gutierrez Roy was appointed to the Board of Directors.
 
In March 2012, the Company’s Audit Committee and Board of Directors approved an additional grant of warrants to Telegraph Hill Capital to purchase 14,400 ordinary shares. The grant is subject to the Company's shareholder approval. The warrants' exercise price, if approved, will be equal to the weighted average of the closing prices of the Company’s ordinary shares on the Nasdaq Capital Market, during the twenty-day period preceding the date of the shareholders' approval. The warrants will be exercisable for 3 years from their date.
 
Management Agreement with Shalom Daskal and N-D-P Consulting Ltd.
 
Starting from November 2008 until October 2009, Mr. Shalom Daskal provided the Company with CEO services through a management agreement by and among the Company, Shalom Daskal and N-D-P Consulting Ltd. In addition, Mr. Daskal received 80,000 options to purchase the Company’s ordinary shares, in connection with his service as a director in the Company’s subsidiaries. The terms of the options are as follows: (1) options to purchase 30,000 ordinary shares, which have an exercise price of NIS 0.05 per ordinary Share and vest and become exercisable in 3 equal semi-annual installments of 10,000 options each, with the first installment vesting upon the lapse of 6 months from November 19, 2008. (2) Options to purchase up to 50,000 ordinary shares, which have an exercise price equal to NIS 20.00. These options vest and become exercisable in 10 equal quarterly installments of 5,000 options each, with the first installment vesting in March 30, 2009 and thereafter upon the lapse of every 4 months.
 
In May 2009, Mr. Daskal was granted an additional 38,967 options to purchase the Company's ordinary shares. The terms of the options are as follows: (a) 12,567 options to purchase ordinary shares, with an exercise price of $0.00 per ordinary share. The options vest on a quarterly basis starting from January 2009 over a period of four quarters, in four equal parts. The exercise period of these options is 5 years from the commencement of vesting; (b) 26,400 options to purchase ordinary shares, with an exercise price of $5.00 per ordinary share. These options vest on a yearly basis starting from January 2009 over a period of four years, in four equal parts. The exercise period of these options is 5 years from the commencement of the vesting.
 
 
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On October 20, 2009, Shalom Daskal has ceased to serve as the Chief Executive Officer of the Company. In November 2009, as part of a separation agreement between the Company and Shalom Daskal, the Company repaid to Mr. Daskal $50,000 of convertible loan he had previously extended to it. As of April 30, 2011, Mr. Daskal holds 50,000 options to purchase the Company’s ordinary shares.
 
August 2009 Private Placement
 
In August 2009, the Company closed a $2.4 million Convertible Loan Financing with several lenders including Catalyst Private Equity Partners (Israel) II L.P (For more details on the aforementioned loan financing see “Item 5B. Liquidity and Capital Resources”). In connection with certain lenders participating in this transaction, BOS paid $40,000 to Cukierman & Co., equaling 6% of the investment amount, as placement fees. Placement fees in respect of Catalyst and SITA, in amount of $61,800 were credited to the accounts of these lenders.
 
Indemnity Undertakings by the Company to its Directors and Officers
 
On February 18, 2003, the Company’s shareholders approved indemnity undertakings to its directors and officers (including future directors and officers as may be appointed from time to time), in excess of any insurance proceeds, not to exceed, in the aggregate over the years, a total amount of $2,500,000. On May 18, 2006, at the recommendation of the Audit Committee and the Board of Directors, the shareholders approved amendments to the indemnity undertakings, in light of changes to the Israeli Companies Law. On December 20, 2011, following a recent amendment to the Israeli Securities Law and a corresponding amendment to the Companies Law, which had authorized the Israeli Securities Authority to impose administrative sanctions against companies and their office holders for certain violations of the Israeli Securities Law or the Companies Law, the Company’s shareholders approved a modified form of such indemnification agreement to ensure that the Company’s directors were afforded protection to the fullest extent permitted by law.   In addition, under the new indemnification agreements, the Company exempts and releases each director from any and all liability to the Company related to any breach by each director of his duty of care to the Company, to the maximum extent permitted by law.
 
7C.          Interests of Experts and Counsel
 
Not applicable.
 
Item 8:   Financial Information
 
8A.         Consolidated Statements and Other Financial Information
 
Consolidated Financial Statements
 
See “Item 18. Financial Statements”.
 
 
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Sales Outside of Israel
 
The total amount of revenues of the Company and its subsidiaries continued operations from sales out of Israel has been as follows:
 
Year
 
Export revenues
 
% of all revenues
2011
 
$6,433,000
 
19%
2010
 
$5,635,000
 
19%
2009
 
$3,112,000
 
12%
 
Legal Proceedings
 
On November 2008, Blockshtil Ltd. filed a claim in the Petach-Tikva Magistrate Court alleging breach of contract by  the Company and seeking damages in the amount of NIS 149,000 (approximately $42,000). The Company has filed its statement of  defense, and the final hearing in this case is expected to take place on September 12, 2012.
 
The Company's financial statements include a provision in this respect.
 
Dividend Policy
 
The Company does not currently have a dividend policy. The declaration and payment of any cash dividends in the future will be determined by the Board of Directors in light of the conditions existing at that time. This will include our earnings and financial condition. We may only pay cash dividends in any fiscal year, out of “profits”, as defined under Israeli law. Any cash dividend in the future out of an approved enterprise will be subject to an additional tax. Currently we have no profits from an approved enterprise; hence no provision has been made for tax on future dividends.
 
8B.         Significant Changes
 
Not applicable.
 
Item 9:   The Offer and Listing
 
9A.         Offer and Listing Details
 
Commencing April 1996, our ordinary shares were traded, and our warrants, until they expired on April 2, 2000, were traded in the over-the-counter market in the United States, and quoted on what is now called the NASDAQ Capital Market under the symbol “BOSC” and “BOSCW,” respectively. In September 2000, our shares started to be traded on what is now called the NASDAQ Global Market. In January 2002, our shares began trading also on the TASE, under the symbol “BOSC”, pursuant to the dual-listing regulations of the Israeli Securities Authority. On May 12, 2009, we delisted our ordinary shares from trade on the TASE. The delisting of the ordinary shares from the TASE did not affect the continued listing of the ordinary shares on the NASDAQ Global Market under the symbol BOSC. After the delisting of the Company’s ordinary shares from the TASE, we are no longer subject to reporting requirements in Israel. On October 16, 2009, the Company’s ordinary shares were transferred to the NASDAQ Capital Market and are traded on such market under the symbol “BOSC”.
 
 
- 65 -
 
 
Prices set forth below are high and low reported closing prices for our ordinary shares as reported by NASDAQ for the periods indicated. All share prices have been retroactively adjusted to reflect the 1:5 reverse share split effected on January 12, 2010.
 
Period
   
High ($)
   
Low ($)
 
               
Annual Information
 
2007
Annual
    14.50       9.50  
2008
Annual
    10.25       1.15  
2009
Annual
    3.30       1.10  
2010
Annual
    3.30       0.77  
2011
Annual
    3.52       0.68  
                   
Quarterly Information (2010)
 
 
First Quarter
    1.45       1.12  
 
Second Quarter
    1.43       0.93  
 
Third Quarter
    3.30       0.77  
 
Fourth Quarter
    3.10       1.35  
 
December
    1.77       1.35  
                   
Quarterly Information (2011)
 
 
First Quarter
    2.68       1.36  
 
Second Quarter
    3.52       1.9  
 
Third Quarter
    2.73       1.1  
 
Fourth Quarter
    1.27       0.68  
 
December
    1.00       0.68  
                   
Monthly Information (2012)
 
 
January
    0.94       0.72  
 
February
    0.90       0.71  
 
March
    1.19       0.85  
 
April (until April 29)
 
1.05
   
0.80
 
 
9B.         Plan of Distribution

Not applicable.
 
9C.         Markets
 
Our securities are traded on the NASDAQ Capital Market under the symbol “BOSC”.
 
 
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9D.         Selling Shareholders
 
Not applicable.
 
9E.          Dilution
 
Not applicable.
 
9F.          Expenses of Issue
 
Not applicable.
 
Item 10:   Additional Information
 
10A.       Share Capital
 
Not applicable.
 
10B.       Memorandum and Articles of Association
 
The Company’s registration number at the Israeli Registrar of Companies is 52-0042565.
 
In March 2002 the Company adopted new Articles of Association, in view of the Israeli Companies Law. Since then, certain articles of the Article of Association have been amended.
 
Set forth below is a summary of certain provisions of our Memorandum and Articles of Association. This summary is not complete and should be read together with our Memorandum and Articles of Association, filed as exhibits hereto.
 
1.            Objects of the Company:
 
The Company’s Memorandum of Association (Article 2(p)) and  Articles of Association (Article 2) provide that the  Company may engage in any legal business.
 
2.            Provisions related to the directors of the Company:
 
The Board of Directors may issue shares and other securities, which are convertible or exercisable into shares, up to the limit of the Company’s authorized share capital.
 
(a) Approval of Certain Transactions under the Israeli Companies Law:
 
We are subject to the provisions of the Israeli Companies Law, which became effective on February 1, 2000, as amended. See Item 6C: Board Practices above.
 
(b) Borrowing powers exercisable by the Directors are not specifically outlined in the Company’s Articles of Association, however, according to Article 15: “Any power of the Company which has not been vested in another organ pursuant to the Israeli Companies Law or the articles may be exercised by the Board of Directors”.
 
 
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(c) The Company’s Articles of Association do not contain provisions regarding the retirement of directors under an age limit requirement, nor do they contain a provision requiring a Director to hold any Company shares in order to qualify as a Director.
 
3.            With regard to the rights, preferences and restrictions attaching to the shares, the Company’s Articles of Association provide the following:
 
(a) Dividends, Rights to Share in the Company’s Profits and Rights to Share in any Surplus upon Liquidation
 
All holders of paid-up ordinary shares of the Company have an equal right to participate in the distribution of (i) dividends, whether by cash or by bonus shares; (ii) Company assets; and (iii) the Company’s surplus assets upon winding up, all pro rata to the nominal value of the shares held by them (Articles 4.2.2, 4.2.3 and 7.3).
 
The Board of Directors is the organ authorized to decide upon the distribution of dividends and bonus shares (Article 26). The shareholders who are entitled to a dividend are the shareholders on the date of the resolution for the dividend or on a later date if another date is specified in the resolution on the dividend’s distribution. If the Board of Directors does not otherwise determine, any dividend may be paid by way of a cheque or payment order that shall be sent by mail in accordance with the registered address of the shareholder or person entitled thereto, or in the case of registered joint shareholders to the shareholder whose name appears first in the shareholders’ register in relation to the joint shareholding. Every such cheque shall be drawn up to the order of the person to whom it is being sent. The receipt of a person who on the date of the dividend’s declaration is listed in the shareholders’ register as the holder of any share or, in the case of joint shareholders, of one of the joint shareholders shall serve as confirmation of all the payments made in connection with such share. For the purpose of implementing any resolution pursuant to the provisions of this paragraph, the Board of Directors may settle, as it deems fit, any difficulty arising in relation to the distribution of the dividend and/or bonus shares, including determine the value for the purpose of the said distribution of certain assets and resolve that payments in cash shall be made to members in reliance upon the value thus determined, determine regulations in relation to fractions of shares or in relation to non-payment of amounts less than NIS 200.
 
(b) Voting Rights
 
All holders of paid-up ordinary shares of the Company have an equal right to participate in and vote at the Company’s general meetings, whether ordinary or special, and each of the shares in the Company shall entitle its holder, present at the meeting and participating in the vote, himself, by proxy or through a voting instrument, to one vote (Article 4.2.1). Such voting rights may be affected in the future by the grant of any special voting rights to the holders of a class of shares with preferential rights.  Shareholders may vote either in person or through a proxy or voting instrument, unless the Board of Directors prohibited voting through a voting instrument on a certain matter and stated so in the notice of the meeting (Articles 14.1 and 14.6). A resolution at the general meeting shall be passed by an ordinary majority unless another majority is specified in the Israeli Companies Law or the Company’s Articles of Association (Article 14.3). For applicable provisions of the Israel Companies Law, see Item 6C: Board Practices.
 
 
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(c) Election of Directors.
 
The Company’s directors are elected by the shareholders at a shareholders’ meeting. The ordinary shares do not have cumulative voting rights in the election of directors. The holders of ordinary shares conferring more than 50% of the voting power present by person or by proxy at the shareholders’ meeting, have the power to elect the directors. The directors elected shall hold office until the next annual meeting, or sooner if they cease to hold office pursuant to the provisions of the Company’s Articles. In addition, the Board of Directors may appoint a director (to fill a vacancy or otherwise) between shareholder meetings, and such appointment shall be valid until the next annual meeting or until such appointee ceases to hold office pursuant to the provisions of the Company’s Articles. In compliance with the Israeli Companies Law, the Company has two external directors. The external directors are also appointed by the shareholders, subject to special majority requirements. Directors of the Company stand for reelection at every annual meeting (Article 16.2) and not at staggered intervals, with the exception of the External directors who are appointed for a term of 3 years under the Israeli Companies Law.
 
(d) Redemption
 
The Company may, subject to any applicable law, issue redeemable securities on such terms as determined by the Board of Directors, provided that the general meeting of shareholders approves the Board of Director’s recommendation and the terms determined (Article 27).
 
(e) Capital Calls by the Company
 
The Board of Directors may only make calls for payment upon shareholders in respect of monies not yet paid for shares held by them (Article 7.2).
 
 (f) Discrimination
 
No provision in the Company’s Articles of Association discriminates against an existing or prospective holder of securities, as a result of such shareholder owning a substantial amount of shares.
 
4.             Modification of Rights of Holders of Stock:
 
The general meeting of shareholders may resolve to create new shares of an existing class or of a new class with special rights and/or restrictions (Article 9.1).
 
So long as not otherwise provided in the shares’ issue terms and subject to the provisions of any law, the rights attached to a particular class of shares may be altered, after a resolution is passed by the Company and with the approval of a resolution passed at a general meeting of the holders of the shares of such class or the written agreement of all the class holders. The provisions of the Company’s Articles of Association regarding general meetings shall apply, mutatis mutandis, to a general meeting of the holders of a particular class of shares (Article 10.1). The rights vested in the holders of shares of a particular class that were issued with special rights shall not be deemed to have been altered by the creation or issue of further shares ranking equally with them, unless otherwise provided in such shares’ issue terms (Article 10.2).
 
 
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The above mentioned conditions are not more onerous than is required by law.
 
5.            Annual General Meetings and Extraordinary General Meetings:
 
General meetings shall be convened at least once a year at such place and time as determined by the Board of Directors but no later than 15 months from the last general meeting. Such general meetings shall be called “annual meetings”. The Company’s other meetings shall be called “special meetings” (Article 12.1). The annual meeting’s agenda shall include a discussion of the Board of Directors’ reports and the financial statements as required at law. The annual meeting shall appoint an auditor, appoint the directors and discuss all the other matters which must be discussed at the Company’s annual general meeting, pursuant to Company’s Articles or the Companies Law, as well as any other matter determined by the Board of Directors (Article 12.2).
 
The Board of Directors may convene a special meeting pursuant to its resolution and it must convene a general meeting if it receives a written requisition from any one of the following (hereinafter referred to as “requisition”) (i) two directors or one quarter of the directors holding office; and/or (ii) one or more shareholders holding at least 5% of the issued capital and at least 1% of the voting rights in the Company; and/or (iii) one or more shareholders holding at least 5% of the voting rights in the Company (Article 12.3). A requisition must detail the objects for which the meeting must be convened and shall be signed by the persons requisitioning it and sent to the Company’s registered office. The requisition may be made up of a number of documents in an identical form of wording, each of which shall be signed by one or more of the persons requisitioning the meeting (Article 12.4). Where the Board of Directors is required to convene a special meeting, it shall do so within 21 days of the requisition being submitted to it, for a date that shall be specified in the invitation and subject to the law (Article 12.5).
 
Notice to the Company’s members regarding the convening of a general meeting shall be sent to all the shareholders listed in the Company’s shareholders’ register at least 21 days prior to the meeting and shall be published in other ways insofar as required by the law. The notice shall include the agenda, proposed resolutions and arrangements with regard to a written vote. The accidental omission to give notice of a meeting to any member, or the non-receipt of notice sent to such member, shall not invalidate the proceedings at such meeting (Article 12.6).
 
The shareholders entitled to participate in and vote at the general meeting are the shareholders on the date specified by the Board of Directors in the resolution to convene the meeting, and subject to the law (Article 14.1).
 
No discussions may be commenced at the general meeting unless a quorum is present at the time of the discussion’s commencement. A quorum is the presence of at least two shareholders holding at least 33⅓% of the voting rights (including presence through a proxy or a voting instrument), within half an hour of the time fixed for the meeting’s commencement (Article 13.1). If no quorum is present at a general meeting within half an hour of the time fixed for the commencement thereof, the meeting shall be adjourned for one week, to the same day, time and place, or to a later time if stated in the invitation to the meeting or in the notice of the meeting (hereinafter referred to as the “adjourned meeting”) (Article 13.2). The quorum for the commencement of the adjourned meeting shall be any number of participants.
 
 
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The Articles of Association provide that all shareholder resolutions shall be passed by an ordinary (simple) majority of the votes cast, unless another majority is specified in the Israeli Companies Law or in the Articles (Article 14.3).
 
6. 
Limitations on the rights to own securities:
 
There are no limitations on the rights to own the Company’s securities, including the rights of non-residents or foreign shareholders to do so.
 
7. 
Change of Control:
 
Under the Israeli Companies Law, a merger is generally required to be approved by the shareholders and Board of Directors of each of the merging companies. Shareholder approval isn’t required if the company that will not survive is controlled by the surviving company. Additionally, the law provides some exceptions to the shareholder approval requirement in the surviving company. If the share capital of the company that will not be the surviving company is divided into different classes of shares, the approval of each class is also required, unless determined otherwise by the court. A majority of votes approving the merger shall suffice, unless the company (like ours) was incorporated in Israel prior to the Israeli Companies Law, in which case a majority of 75% of the voting power is needed in order to approve the merger. Additionally, unless the court determines differently, a merger will not be approved if it is objected to by a majority of the shareholders present at the meeting, after excluding the shares held by the other party to the merger, by any person who holds 25% or more of the other party to the merger and by the relatives of and corporations controlled by these persons. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties of the merger. Also, a merger can be completed only after all approvals have been submitted to the Israeli Registrar of Companies and provided that 30 days have elapsed since shareholder approval was received and 50 days have elapsed from the time that a proposal for approval of the merger was filed with the Registrar by each merging company.
 
The Israeli Companies Law also provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a holder of 25% or more of the voting power at general meetings. This rule does not apply if there is already another holder of 25% or more of the voting power at general meetings. Similarly, the Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a holder of more than 45% of the voting power of the company. This rule does not apply if someone else already holds 45% of the voting power of the company. An acquisition from a 25% or 45% holder, which turns the purchaser into a 25% or 45% holder respectively, does not require a tender offer. An exception to the tender offer requirement may also apply when the additional voting power is obtained by means of a private placement approved by the general meeting of shareholders.
 
 
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Under the Israeli Companies Law, a person may not acquire shares in a public company if, after the acquisition, he will hold more than 90% of the shares or more than 90% of any class of shares of that company, unless a tender offer is made to purchase all of the shares or all of the shares of the particular class. The Israeli Companies Law also provides that as long as a shareholder in a public company holds more than 90% of the company’s shares or of a class of shares, that shareholder shall be precluded from purchasing any additional shares. If a tender offer is accepted and less than 5% of the shares of the company are not tendered, and a majority of the offeree shareholders not having a personal interest accepted the offer, all of the shares will transfer to the ownership of the purchaser. The Companies Law provides for appraisal rights if any shareholder files a request in court within six months following the consummation of a full tender offer. However, the acquirer may stipulate in the tender offer that any shareholder tendering his shares will not be entitled to appraisal rights. If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding shares.
 
8. 
Disclosing Share Ownership:
 
The Company has no bylaw provisions governing the ownership threshold, above which shareholder ownership must be disclosed.
 
10C.       Material Contracts
 
All material contracts have been described in detail throughout this form, wherever applicable.
 
10D.       Exchange Controls
 
There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions. However, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.
 
10E.        Taxation
 
The following is a summary of the material Israeli tax consequences, Israeli foreign exchange regulations and certain Israeli government programs affecting the Company.
 
To the extent that the discussion is based on new tax or other legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax or other authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
 
ISRAELI TAX CONSIDERATIONS
 
The following is a description of material tax consequences regarding the ownership and disposition of our ordinary shares under Israeli tax laws to which our shareholders may be subject. The information below does not apply to specific persons or cover specific situations.  Therefore, you are advised to consult your own tax advisor as to particular tax consequences unique to you related to an investment in our ordinary shares including the effects of applicable Israeli or foreign or other tax laws and possible changes in the tax laws.
 
 
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To the extent that the discussion is based on legislation yet to be judicially or administratively interpreted, we cannot assure you that the views we express herein will accord with any such interpretation in the future.
 
Tax Consequences Regarding Disposition of Our Ordinary Shares
 
Israeli law generally imposes a capital gains tax on the sale of publicly traded securities.  Pursuant to changes made to the Israeli Income Tax Ordinance in January 2006, capital gains on the sale of our ordinary shares will be subject to Israeli capital gains tax, generally at a rate of 20% unless the holder holds 10% or more of our voting power during the 12 months preceding the sale, in which case it will be subject to a 25% capital gains tax.  However, as of January 1, 2003, nonresidents of Israel are exempt from capital gains tax in relation to the sale of our   shares for so long as     (i ) the capital gains are not accrued or derived by the nonresident shareholder’s permanent enterprise in Israel,(ii) the shares were not acquired from the seller's relative and the provisions of Part Five "B" (Restructuring and Merger ) or the provisions of section 70 of the Real Estate Taxation Law did not apply on the shares, (iii) the shares are not tradable in the Israeli stock exchange on the day of the sale.
 
Taxes Applicable to Dividends distributed
 
Non-residents of Israel are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 20%, which tax will be withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. However, if the individual shareholder is a “Controlling Shareholder” such dividend will be taxed at the rate of 25%.
 
Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (within the meaning of the U.S.-Israel Tax Treaty) is 25%. Furthermore, the maximum rate of withholding tax on dividends, that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital during the part of the tax year that precedes the date of the payment of the dividend and during the whole of its prior tax year, is 12.5%. This reduced rate will not apply if more than 25% of our gross income consists of interest or dividends, other than dividends or interest received from a subsidiary corporation 50% or more of the outstanding shares of the voting shares of which are owned by the company. In order to obtain such a reduced tax rate, it is necessary to submit an application to the tax assessing officer.   Israeli resident individuals are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares, other than bonus shares (share dividends) or stock dividends, at the rate of 20%. However, if the individual shareholder is a “Controlling Shareholder” such dividend will be taxed at the rate of 25%.  Dividends paid on our ordinary shares to Israeli companies are exempt from such tax, except for dividends distributed from income derived outside of Israel, which are subject to the 25% tax rate.
 
An Israeli resident company whose shares are listed in a stock exchange is obligated to withhold tax, upon the distribution of a dividend. The following withholding tax rates will apply: (i) Israeli resident corporation – 0%, (ii) Israeli resident individual – 20% (iii) non-Israeli resident – 20%, subject to a reduced tax rate under an applicable double tax treaty.
 
 
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General Corporate Tax Structure in Israel
 
Taxable income of Israeli companies is subject to tax at the rate of 26% in 2009, 25% in 2010 and 24% in 2011, and was scheduled to gradually decline to 18% by 2016. However, this scheduled decline in corporate tax rates was repealed with the enactment of the Law for Tax Burden Reform (Legislative Amendments), 2011 in Israel in late 2011 and instead the corporate tax rate will revert to 25% in 2012 and thereafter.

Our effective corporate tax rate may substantially exceed the Israeli tax rate.  Our US subsidiary will generally be subject to applicable federal, state and local taxation.  Because of the complexity of these local tax provisions, it is not possible to anticipate the actual combined effective corporate tax rate that will apply to us.
 
Tax Benefits and Grants for Research and Development
 
Israeli tax law allows, under certain conditions, a tax deduction in the year incurred for expenditures (including capital expenditures) in scientific research and development projects, if the expenditures are approved by the relevant Israeli government ministry, determined by the field of research, the research and development is for the promotion of the enterprise and is carried out by or on behalf of the company seeking such deduction.
 
In case the tax deduction, in the year research and development expenditures are incurred, is not approved by the relevant Israeli government ministry, the Company will be entitled for the tax deduction over a period of three years.
 
Special Provisions Relating to Taxation under Inflationary Conditions
 
The Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the Inflationary Adjustments Law, represents an attempt to overcome the problems presented to a traditional tax system by an economy undergoing rapid inflation.
 
According to the Inflationary Adjustments Law, until 2007, the results for tax purposes were adjusted for the changes in the Israeli CPI. In February 2008, the “Knesset,” the Israeli parliament, passed an amendment to the Inflationary Adjustments Law, which limits the scope of the law. Starting 2008, the results for tax purposes are measured in nominal values, excluding certain adjustments for changes in the Israeli CPI carried out in the period up to December 31, 2007. The amendment to the Inflationary Adjustments Law includes, inter alia, the elimination of the inflationary additions and deductions and the additional deduction for depreciation starting 2008.
 
 
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
 
Subject to the limitations described herein, the following is a discussion of the material U.S. federal income tax consequences of the purchase, ownership and disposition of our ordinary shares to a U.S. holder. A U.S. holder is a beneficial owner of our ordinary shares who is:
 
·
an individual who is a citizen or resident of the United States for U.S. federal income tax purposes;
 
·
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States or any political subdivision thereof or the District of Columbia;
 
·
an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or
 
·
a trust: (i) if a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions; or (ii) that has in effect a valid election under applicable U.S. Treasury Regulations to be treated as a U.S. person.
 
A non-U.S. holder is a beneficial owner of our ordinary shares that is not a U.S. holder. Unless otherwise specifically indicated, this discussion does not consider the U.S. federal income tax consequences to a person that is a non-U.S. holder of our ordinary shares and considers only U.S. holders that will own the ordinary shares as capital assets (generally for investment).
 
If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds our ordinary shares, the tax treatment of the partnership and a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its tax advisor as to its tax consequences.
 
This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), current and proposed Treasury Regulations promulgated under the Code and administrative and judicial interpretations of the Code, all as currently in effect and all of which are subject to change, possibly with retroactive effect. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. holder based on the U.S. holder’s particular circumstances. In particular, this discussion does not address the U.S. federal income tax consequences to U.S. holders who are broker-dealers or who own, directly, indirectly or constructively, 10% or more (by voting power) of our company, real estate investment trusts, regulated investment companies, grantor trusts, U.S. holders holding the ordinary shares as part of a hedging, straddle or conversion transaction, U.S. holders whose functional currency is not the U.S. dollar, insurance companies, tax-exempt organizations, financial institutions, persons that receive ordinary shares as compensation for the performance of services, certain former citizens or long-term residents of the United States and persons subject to the alternative minimum tax, who may be subject to special rules not discussed below. Additionally, this discussion does not address the possible application of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S. tax laws.
 
 
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Each holder of our ordinary shares is advised to consult his or her tax advisor with respect to the specific U.S. federal, state, local and foreign income tax consequences to him or her of purchasing, holding or disposing of our ordinary shares.
 
U.S. Holders of Ordinary Shares
 
Taxation of distributions on ordinary shares
 
Subject to the discussion below under “Tax consequences if we are a passive foreign investment company,” a distribution paid by us with respect to our ordinary shares, including the amount of any non- U.S. taxes withheld, to a U.S. holder will be treated as dividend income to the extent that the distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. Dividends that are received with respect to ordinary shares by U.S. holders that are individuals, estates or trusts generally will be taxed at the rate applicable to long-term capital gains (currently a maximum rate of 15% for the taxable years beginning on or before December 31, 2012), provided that such dividends meet the requirements of “qualified dividend income.” Dividends that fail to meet such requirements, and dividends received by corporate U.S. holders, are taxed at ordinary income rates. No dividend received by a U.S. holder will be a qualified dividend (1) if the U.S. holder held the ordinary share with respect to which the dividend was paid for less than 61 days during the 121-day period beginning on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding for this purpose, under the rules of Code section 246(c), any period during which the U.S. holder has an option to sell, is under a contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such ordinary share (or substantially identical securities); or (2) to the extent that the U.S. holder is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in property substantially similar or related to the ordinary share with respect to which the dividend is paid. If we were to be a “passive foreign investment company” (as such term is defined in the Code) for any taxable year, dividends paid on our ordinary shares in such year or in the following taxable year would not be qualified dividends. In addition, a non-corporate U.S. holder will be able to take a qualified dividend into account in determining its deductible investment interest (which is generally limited to its net investment income) only if it elects to do so; in such case the dividend will be taxed at ordinary income rates.
 
The amount of any distribution which exceeds the amount treated as a dividend will be treated first as a non-taxable return of capital, reducing the U.S. holder’s tax basis in its ordinary shares to the extent thereof, and then as capital gain from the deemed disposition of the ordinary shares. Corporate holders will not be allowed a deduction for dividends received in respect of the ordinary shares.
 
Dividends paid by us in NIS will be included in the gross income of U.S. holders at the U.S. dollar amount of the dividend (including any non-U.S. taxes withheld therefrom), based upon the spot rate of exchange in effect on the date the distribution is included in income. U.S. holders will have a tax basis in the NIS for U.S. federal income tax purposes equal to that dollar value. Any subsequent gain or loss in respect of the NIS arising from exchange rate fluctuations will generally be taxable as U.S. source ordinary income or loss.
 
 
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Subject to the limitations set forth in the Code and the Treasury Regulations thereunder, U.S. holders may elect to claim as a foreign tax credit against their U.S. federal income tax liability the non-U.S. income tax withheld from dividends received in respect of the ordinary shares. The limitations on claiming a foreign tax credit include, among others, computation rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income. In this regard, dividends paid by us generally will be foreign source “passive income” for U.S. foreign tax credit purposes. U.S. holders that do not elect to claim a foreign tax credit may instead claim a deduction for the non-U.S. income tax withheld if they itemize deductions. The rules relating to foreign tax credits are complex, and you should consult your tax advisor to determine whether and to what extent you would be entitled to this credit. A U.S. holder will be denied a foreign tax credit for non-U.S. income taxes withheld from a dividend received on the ordinary shares (i) if the U.S. holder has not held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date with respect to such dividend or (ii) to the extent the U.S. holder is under an obligation to make related payments with respect to positions in substantially similar or related property. Any days during which a U.S. holder has substantially diminished its risk of loss on the ordinary shares are not counted toward meeting the required 16-day holding period. Distributions of current or accumulated earnings and profits generally will be foreign source passive income for U.S. foreign tax credit purposes.
 
Taxation of the disposition of ordinary shares
 
Subject to the discussion below under “Tax consequences if we are a passive foreign investment company” upon the sale, exchange or other disposition of our ordinary shares, a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the amount realized on the disposition and the U.S. holder’s tax basis in the ordinary shares. The gain or loss recognized on the disposition of the ordinary shares will be long-term capital gain or loss if the U.S. holder held the ordinary shares for more than one year at the time of the disposition (long-term capital gains are currently taxable at a maximum rate of 15% for taxable years beginning on or before December 31, 2012). Capital gain from the sale, exchange or other disposition of ordinary shares held for one year or less is short-term capital gain. Gain or loss recognized by a U.S. holder on a sale, exchange or other disposition of ordinary shares generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes.
 
A U.S. holder that uses the cash method of accounting calculates the U.S. dollar value of the proceeds received on the sale as of the date that the sale settles. However, a U.S. holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the trade date and may therefore realize foreign currency gain or loss. A U.S. holder may avoid realizing foreign currency gain or loss by electing to use the settlement date to determine the proceeds of sale for purposes of calculating the foreign currency gain or loss. In addition, a U.S. holder that receives foreign currency upon disposition of ordinary shares and converts the foreign currency into U.S. dollars after the settlement date or trade date (whichever date the U.S. holder is required to use to calculate the value of the proceeds of sale) will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income of loss.
 
 
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Tax consequences if we are a passive foreign investment company
 
We will be a passive foreign investment company, or PFIC, for a taxable year if either (1) 75% or more of our gross income in a taxable year is passive income or (2) 50% or more of the value, determined on the basis of a quarterly average, of our assets in the taxable year produce, or are held for the production of, passive income. If we own (directly or indirectly) at least 25% by value of the stock of another corporation, we will be treated for purposes of the foregoing tests as owning our proportionate share of the other corporation’s assets and as directly earning our proportionate share of the other corporation’s income. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions.
 
We believe that we were not a PFIC for our 2011 taxable year. Our status in the current and future taxable years will depend on our assets and income in those years. We have no reason to believe that our assets or income will change in a manner that would cause us to be classified as a PFIC. However, since the determination of whether we are a PFIC is based upon such factual matters as the valuation of our assets (which may depend upon our market capitalization, which is subject to fluctuation) and, in certain cases, the assets of companies held by us, there can be no assurance that we will not become a PFIC. If we were a PFIC, and you are a U.S. holder, you generally would be subject to imputed interest charges and other disadvantageous tax treatment with respect to any gain from the sale or exchange of, and certain distributions with respect to, your ordinary shares (including the denial of the taxation of such distributions and gains at the lower rates applicable to long-term capital gains as discussed above under “Taxation of distributions on ordinary shares” and “Taxation of the disposition of ordinary shares”).
 
If we were a PFIC, you could make certain elections that may alleviate certain tax consequences referred to above, and one of these elections may be made retroactively if certain conditions are satisfied. It is expected that the conditions necessary for making certain of such elections will apply in the case of our ordinary shares. Neither the Company nor its advisors have the duty to or will undertake to inform U.S. Shareholders of changes in circumstances that would cause the Company to become a PFIC.  The Company does not currently intend to take the action necessary for a U.S. Shareholder to make a “qualified electing fund” election in the event the Company is determined to be a PFIC.
 
U.S. holders are urged to consult their tax advisors regarding the application of the PFIC rules, including eligibility for and the manner and advisability of making certain elections with respect to our PFIC status.
 
Information reporting and backup withholding
 
A U.S. holder generally is subject to information reporting and may be subject to backup withholding at a rate of 28% with respect to dividend payments made with respect to, and proceeds from the disposition of, the ordinary shares. Backup withholding will not apply with respect to payments made to exempt recipients, including corporations, or if a U.S. holder provides a correct taxpayer identification number, certifies that such holder is not subject to backup withholding or otherwise establishes an exemption. Backup withholding is not an additional tax. It may be claimed as a credit against the U.S. federal income tax liability of a U.S. holder or the U.S. holder may be eligible for a refund of any excess amounts withheld under the backup withholding rules provided, in either case, that the required information is furnished to the Internal Revenue Service.
 
 
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Non-U.S. Holders of Ordinary Shares
 
Except as provided below, a non-U.S. holder of ordinary shares will not be subject to U.S. federal income or withholding tax on the receipt of dividends on, and the proceeds from the disposition of, an ordinary share, unless that item is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States and, in the case of a resident of a country which has an income tax treaty with the United States, that item is attributable to a permanent establishment in the United States or, in the case of an individual, a fixed place of business in the United States. In addition, gain recognized by an individual non-U.S. holder on the disposition of the ordinary shares will be subject to tax in the United States if such non-U.S. holder is present in the United States for 183 days or more in the taxable year of the sale and other conditions are met.
 
Non-U.S. holders are generally not subject to information reporting or backup withholding with respect to the payment of dividends on, or proceeds from the disposition of, ordinary shares, provided that the non-U.S. holder provides its taxpayer identification number, certifies to its foreign status or otherwise establishes an exemption.
 
10F.        Dividends and Paying Agents
 
Not applicable.
 
10G.       Statement by Experts
 
Not applicable.
 
10H.       Documents on Display
 
The documents concerning the Company that are referred to in the form may be inspected at the Company’s office in Israel.
 
10I.         Subsidiary Information
 
For information relating to the Company’s subsidiaries, see “Item 4C. Organizational Structure” as well as the Company’s Consolidated Financial Statements (Items 8 and 18 of this form).
 
Item 11:   Quantitative and Qualitative Disclosure about Market Risk
 
Market risk represents the risk of changes in the value of our financial instruments caused by fluctuations in interest rates, foreign exchange rates and equity prices. We do not engage in trading market-risk instruments or purchase hedging or “other than trading” instruments that are likely to expose us to market risk, whether interest rate, commodity price or equity price risk. We have purchased forward contracts but do not use derivative financial instruments for speculative trading purposes.
 
Foreign currency exchange rate risk:

The results of operation and financial position of Dimex, whose functional currency is NIS, have been translated into U.S. dollars at the applicable exchange rate for inclusion in our consolidated financial statements, exposing us to currency translation risk.

In addition, we are exposed to currency transaction risk because some of our expenses are incurred in a different currency from the currency in which our revenues are received. Our most significant currency exposures are to the NIS. In periods when the U.S. dollar devaluate against this currency, our reported results of operations may adversely affected. The Company enters into foreign currency contracts, with financial institutions to reduce the risk of exchange rate fluctuations. Such contracts are not designated as hedging instruments. From time to time, the Company recognizes derivative instruments as either assets or liabilities on the balance sheet at fair value. As of December 31, 2011, the notional principal of foreign exchange contracts to purchase U.S. dollars with foreign currencies and to sell Euros for foreign currencies was $1.6 million, and €280,000. Although from time to time we enter into foreign currency contracts to reduce currency transaction risk, these transactions will not eliminate translation risk or all currency risk.
 
 
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Credit Risk Management

The Company sells its products and purchases products from vendors on credit terms.

The trade receivables of the Company are derived from sales to customers located primarily in Israel and in the Far East. The Company generally does not require collateral, however most of the Company's customers outside of Israel are insured against customer nonpayment, through the Israeli Credit Insurance Company Ltd., and in certain circumstances, the Company may require letters of credit, guarantees, advanced payments, or other collateral.
 
Provisions are made for doubtful debts on a specific basis and, in management’s opinion, appropriately reflect the loss inherent in collection of the debts. Management bases this provision on its assessment of the risk of the debt.
 
The table below presents the account receivables balance by geographical market as of December 31, 2011 and December 31, 2010:
 
   
December 31
 
   
2011
   
2010
 
Americas
  $ 136,000     $ 490,000  
Europe
    152,000       56,000  
Far East
    724,000       166,000  
Israel and others
    7,495,000       7,007,000  
                 
    $ 8,507,000     $ 7,719,000  
 
 
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Interest Rate Risk
 
The Company's exposure to market risk for changes in interest rates, is due to loans that carry variable interest.
 
A material change in interest pay on our loans may have an effect on the Company’s financial results and cash flow.
 
Bank Risk
 
The Company manages its loans mainly in Bank Leumi and Bank Hapoalim, which provides credit to the Company and its Israeli subsidiaries. In case of the termination or expiration of our credit lines, a deterioration in our relations with our bank or adverse changes in the financial position of the bank, our liquidity could be materially adversely affected.
 
Item 12:   Description of Securities Other than Equity Securities
 
Not applicable.
 
PART II
 
Item 13:   Defaults, Dividend Arrearages and Delinquencies
 
Not applicable.
 
Item 14:   Material Modifications to the Rights of Security Holders and Use of Proceeds
 
Not applicable.
 
Item 15:   Controls and Procedures
 
(a) Disclosure controls and procedures.
 
The Company’s principal executive officer and its principal financial officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report at the reasonable level of assurance (see paragraph (d) below). Based on that evaluation, such principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. This Annual Report does not include an attestation report of our registered public accounting firm regarding the effectiveness of the Company ' s internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management's report in this Annual Repor t.
 
(b)  Management's Annual Report on Internal Control Over Financial Reporting.
 
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, they used the criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2011, our internal control over financial reporting is effective based on those criteria. Notwithstanding the foregoing, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
 
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This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
 
(c)  Change in Internal Control over Financial Reporting.
 
There were no changes in the Company’s internal controls over financial reporting that occurred during the fiscal year ended December 31, 2011, that have materially affected or are reasonably likely to materially affect these controls.
 
(d)  Other.
 
The Company believes that a control system, no matter how well designed and operated, can not provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with the Company have been determined.  Therefore, 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. Our disclosure controls and procedures are designed to provide such reasonable assurances of achieving our desired control objectives, and our Chief Executive Officer and Chief Financial Officer have concluded, as of December 31, 2011, that our disclosure controls and procedures were effective in achieving that level of reasonable assurance.
 
Item 16:   [Reserved]
 
Item 16A: Audit Committee Financial Expert
 
The Company’s Board of Directors has determined that Mr. David Golan and Mr. Ronen Zavlik, members of the audit committee, are “audit committee financial experts”, as defined by the applicable SEC regulations.
 
 
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All the members of the Audit Committee are “independent” under the applicable SEC and Nasdaq regulations. The experience of each member is listed under Item 6A.
 
Item 16B: Code of Ethics
 
The Company has adopted a Code of Ethics applicable to its executive officers, directors and all other employees. A copy of the code is posted on our website and may also be obtained, without charge, upon a written request addressed to the Company’s investor relations department.
 
Item 16C: Principal Accountant Fees and Services
 
The Company’s principal accountants for the years 2010 and 2011 were Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.
 
The table below summarizes the audit and other fees paid and accrued by the Company and its consolidated subsidiaries to Kost Forer Gabbay & Kasierer during each of 2010 and 2011:
 
   
Year Ended December 31, 2011
   
Year Ended December 31, 2010
 
   
Amount
   
Percentage
   
Amount
   
Percentage
 
Audit Fees
  $ 73,000       88 %   $ 91,000       90 %
Tax Fees (1)
  $ 10,000       12 %   $ 10,000       10 %
Total
  $ 83,000       100 %   $ 101,000       100 %
 
(1)
“Tax Fees” are fees for professional services rendered by the Company’s auditors with respect to annual tax reports.
 
Audit Committee’s pre-approval policies and procedures:
 
The Audit Committee is responsible for the oversight of the independent auditors’ work, including the approval of services provided by the independent auditors. These services may include audit, audit-related, tax or other services, as described above. On an annual basis the audit committee pre-approves audit and non-audit services to be provided to the Company by its auditors, listing the particular services or categories of services, and sets forth a specific budget for such services. Additional services not covered by the annual pre-approval may be approved by the Audit Committee on a case-by-case basis as the need for such services arises. Furthermore, the Audit Committee has authorized the Committee Chairman to pre-approve engagements of the Company’s auditors so long as the fee for each such engagement does not exceed $5,000 and so long as the engagement is notified to the Committee at its next subsequent meeting. Any services pre-approved by the Audit Committee (or by the Chairman) must be permitted by applicable law. Once services have been pre-approved, the audit committee receives a report on a periodic basis regarding the extent of the services actually provided and the fees paid.
 
Item 16D: Exemptions from the Listing Standards for Audit Committees
 
Not applicable.
 
 
- 83 -
 
 
Item 16E: Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
The Company (or anyone acting on its behalf) did not purchase any of the Company’s securities in 2011.
 
Item 16F:   Change in Registrant’s Certifying Accountant
 
Not applicable.
 
Item 16G:   Corporate Governance
 
Not applicable.
 
Item 16H:   Mine Safety Disclosures .
 
Not applicable.
 
PART III
 
Item 17:   Financial Statements
 
Not applicable.
 
Item 18:   Financial Statements
 
The following financial statements are filed as part of this Annual Report:
 
  Page
   
Reports of Independent Registered Public Accounting Firms
F-2 – F-3
Consolidated Balance Sheets
F-4 – F-5
Consolidated Statements of Operations
F-6
Statement of Changes in Shareholders' Equity
F-7
Consolidated Statements of Cash Flows
F-8 – F-9
Notes to Consolidated Financial Statements
F-10 – F-47
 
The audited financial statements filed as part of this Form 20-F are identical to the audited financial statements that were furnished under Form 6-K on March 31, 2012.
 
Item 19:   Exhibits
 
The following exhibits are filed as part of this Annual Report:
 
1.1
Memorandum of Association, as amended (incorporated by reference to the Company’s Annual Report on Form 20-F filed on June 30, 2010).
 
1.2
Articles of Association, as amended (incorporated by reference to Exhibit 4.1 to the Company’s Form S-8 filed on January 31, 2011).
 
4.1
Form of Indemnification Agreement between the Company and its officers and directors, as amended (incorporated by reference to Annex A of the Company’s Proxy Statement on Form 6- K, filed  on November 9, 2011).
 
 
- 84 -
 
 
4.2
Services Agreement, dated as of April 15, 2003, between Cukierman & Co. Investment House Ltd., Dimex Solutions Ltd. and the Company (incorporated by reference to the Company’s Annual Report on Form 20-F filed on June 17, 2004).
 
4.3
M&A Addendum to the Services Agreement, as of August 22, 2004, by and among Cukierman & Co. Investment House Ltd., Dimex Solutions Ltd. and the Company (incorporated by reference to the Company’s Annual Report on Form 20-F filed on June 27, 2005).
 
4.4
Business Development Addendum to the Services Agreement, as of May 24, 2010, by and among Cukierman & Co. Investment House Ltd., BOS-Dimex Ltd., BOS-Odem Ltd. and the Company. (incorporated by reference to the Company’s Annual Report on Form 20-F filed on June 30, 2010).
 
4.5
The Company’s Israeli 2003 Share Option Plan (incorporated by reference to the Company’s Registration Statement on Form S-8 No. 333-11650).
 
4.6
Asset Purchase Agreement dated as of the January 29, 2008 by and between Dimex Systems (1988) Ltd., Dimex Hagalil Ltd., and the Company (incorporated by reference to the Company’s Annual Report on Form 20-F filed on June 30, 2008).
 
4.7
Amendment No. 1 to Asset Purchase Agreement by and among the Company, Dimex Systems (1988) Ltd. and Dimex Hagalil Ltd., dated Mar 23, 2009  (incorporated by reference to the Company’s Amendment No. 2 to Registration Statement on Form F-3 No. 333-152020).
 
4.8
Amendment No. 2 to Asset Purchase Agreement by and among the Company, Dimex Systems (1988) Ltd. and Dimex Hagalil Ltd., dated February 3, 2010 and Warrant dated as of February 3, 2010 issued by the Company to Dimex Systems (1988) Ltd. (incorporated by reference to the Company’s Annual Report on Form 20-F filed on June 30, 2010).
 
4.9
Loan Agreement by and between the Company and Dimex Systems (1988) Ltd., dated February 3, 2010; Registration Rights Agreement dated as of the February 3, 2010 by and between the Company and Dimex Systems (1988) Ltd.; Warrant dated as of February 3, 2010 issued by the Company to Dimex Systems (1988) Ltd. (incorporated by reference to the Company’s Annual Report on Form 20-F filed on June 30, 2010).
 
4.10*
Agreement by and between the Company and Dimex Systems dated November 9, 2011; Amendments to Warrants issued by the Company to Dimex Systems.
 
4.11
Form of 2009 Loan Agreement and Registration Rights Agreement by and among certain lenders and the Company. Form of Warrant issued by the Company to certain lenders. (incorporated by reference to the Company’s Annual Report on Form 20-F filed on June 30, 2010).
 
4.12* 
Form of Agreement by and among certain lenders and the Company (Conversion Amendments); Form of Amendment to Warrant issued by the Company to certain lenders.
 
 
- 85 -
 
 
4.13*
Bank Leumi Le-Israel Ltd. Agreements: Summary of Economic Terms; Form of Request to Allocate a Credit in Israeli Currency (unlinked); Form of Request to Allocate a Credit Framework in Debitory Account (unlinked); Form of Subordination Letters of BOS-Dimex Ltd. and of BOS-Odem Ltd.; and B.O.S Better Online Solutions Ltd. Subordination Letter.
 
4.14*
Bank Hapoalim Ltd. Agreements: Summary of Economic Terms; Irrevocable Undertakings by BOS-Dimex Ltd., BOS-Odem Ltd. and the Company.
 
4.15
Share Purchase Agreement dated as of October 4, 2010 between the Company and Telegraph Hill Capital Fund I, LLC (incorporated by reference to the Company’s Annual Report on Form 20-F filed on June 30, 2011).
 
8.1
List of subsidiaries (incorporated by reference to Item 4C of this Annual Report on Form 20-F).
 
11* 
Statement of Computation of Earnings Per Share.
 
12.1 *
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
 
12.2 *
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
 
13.1 *
Certification by Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934.
 
23.1 *
Consent of Kost Forer Gabbay & Kasierer, a member of Ernst &Young Global.
 
23.2 *
Consent of Arik Eshel, CPA & Assoc., PC
 
101*
The following financial information from the Company’s Annual Report on Form 20-F for the year ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009; (ii) Consolidated Balance Sheets at December 31, 2011 and 2010; (iii) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2011, 2010 and 2009; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text. Users of this data are advised, in accordance with Rule 406T of Regulation S-T promulgated by the SEC, that this Interactive Data File is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.
 
*
Filed herewith.
 
 
- 86 -
 
 
Signatures
 
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
 
B.O.S. Better Online Solutions Ltd.
 
   
/s/ Yuval Viner /s/ Eyal Cohen  
Yuval Viner 
Chief Executive Officer
Eyal Cohen
Chief Financial Officer
 
                                                                                                              
Date: April 30, 2012
 
 
- 87 -
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
 
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2011

IN U.S. DOLLARS

INDEX
 
 
Page
   
F-2 - F3
   
F-4 - F-5
   
F-6
   
F-7
   
F-8 - F-9
   
F-10 - F-47
 
 
 
 

  Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel

Tel:   972 (3)6232525
Fax: 972 (3)5622555
www.ey.com



To the Board of Directors and Shareholders of

B.O.S. BETTER ONLINE SOLUTIONS LTD.
 
We have audited the accompanying consolidated balance sheets of B.O.S Better Online Solutions Ltd. ("the Company") and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 2009 financial statements of BOS - Supply Chain Solutions (Lynk) Inc., a wholly-owned U.S. subsidiary, which statements reflected total assets constituting 19% of the consolidated totals as of December 31, 2009 and total revenues constituting 0% of the related consolidated totals for 2009. These statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for BOS - Supply Chain Solutions (Lynk) Inc., is based solely on the report of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors (for the year ended December 31, 2009), provide a reasonable basis for our opinion.
 
In our opinion, based on our audits and the report of other auditors (for the year ended December 31, 2009),, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and subsidiaries at December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
 
Tel-Aviv, Israel
KOST FORER GABBAY & KASIERER
March 29 , 2012
A Member of Ernst & Young Global

 
F-2
 
 
ARIK ESHEL, CPA & ASSOC., PC
Certified Public Accountants and Consultants

Report of Independent Registered Public Accounting Firm

To the Board of Directors and
Stockholders of BOS - Supply Chain Solutions (Lynk) Inc.

We have audited the consolidated statements of income, stockholders' equity (deficit), and cash flows of BOS - Supply Chain Solutions (Lynk) Inc. ("the Company") and subsidiaries for the year ended December 31, 2009. The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations of BOS- Supply Chain Solutions (Lynk) Inc. and subsidiaries for the year in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
 
ARIK ESHEL, CPA & ASSOC., PC
   
New York, NY
   
March 29, 2012
 

 
F-3
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES

U.S. dollars in thousands
 
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 411     $ 703  
Trade receivables (net of allowance for doubtful accounts of $ 115 and $ 44 at December 31, 2011 and 2010, respectively)
    8,507       7,884  
                 
Other accounts receivable and prepaid expenses (Note 3)
    744       1,183  
Inventories (Note 5)
    4,020       5,125  
                 
Total current assets
    13,682       14,895  
                 
LONG-TERM ASSETS:
               
Severance pay fund
    41       47  
Bank deposits
    427       -  
Investment in other company (Note 6)
    68       107  
Other assets
    23       161  
                 
Total long-term assets
    559       315  
                 
PROPERTY, PLANT AND EQUIPMENT, NET (Note 7)
    1,166       1,135  
                 
OTHER INTANGIBLE ASSETS, NET (Note 8)
    540       1,512  
                 
GOODWILL (Note 9)
    4,122       4,438  
                 
    $ 20,069     $ 22,295  

The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-4
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands, except share and per share data
 
   
December 31,
 
   
2011
   
2010
 
             
LIABILITIES AND SHAREHOLDERS' EQUITY
           
             
CURRENT LIABILITIES:
           
Short-term bank loans and current maturities (Note 10)
  $ 7,496     $ 7,778  
Trade payables
    4,165       4,317  
Employees and payroll accruals
    553       735  
Deferred revenues
    550       639  
Accrued expenses and other liabilities (Note 11)
    994       1,040  
                 
Total current liabilities
    13,758       14,509  
                 
LONG-TERM LIABILITIES:
               
Long-term bank loans, net of current maturities (Note 12)
    1,530       394  
Income tax accruals (Note 16)
    273       488  
Accrued severance pay
    163       167  
Convertible note (Note 13)
    -       2,460  
 Liability to Dimex Systems  (Note 13)
    747       564  
                 
Total long-term liabilities
    2,713       4,073  
                 
COMMITMENTS AND CONTINGENT LIABILITIES (Note 14)
               
                 
SHAREHOLDERS' EQUITY (Note 15) (*):
               
Share capital:
               
Ordinary shares of NIS 20.00 nominal value: Authorized; 10,000,000 and 7,000,000 shares at December 31, 2011 and 2010; Issued and outstanding: 4,467,924 and 2,752,517 shares at December 31, 2011 and 2010, respectively
    23,065       13,959  
Additional paid-in capital
    51,093       56,805  
Accumulated other comprehensive profit (loss)
    (243 )     52  
Accumulated deficit
    (70,317 )     (67,103 )
                 
Total shareholders' equity
    3,598       3,713  
                 
Total liabilities and shareholders' equity
  $ 20,069     $ 22,295  
 
/s/ Yuval Viner
/s/ Eyal Cohen
Yuval Viner
Chief Executive Officer
Eyal Cohen
Chief Financial Officer
 
(*)
All share data are reported after the effect of the 1 for 5 reverse split that occurred on January 12, 2010.

The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-5
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
U.S. dollars in thousands, except per share data
 
   
Year ended December 31,
 
   
2011
   
2010
   
2009
 
                   
Revenues
  $ 33,434     $ 30,187     $ 25,467  
Cost of revenues
    26,481       22,668       19,741  
Inventory write offs
    443       36       2,235  
                         
Gross profit
    6,510       7,483       3,491  
                         
Operating costs and expenses:
                       
Research and development, net
    403       372       360  
Sales and marketing
    4,273       4,068       5,426  
General and administrative
    2,252       1,786       2,004  
Impairment of goodwill and other intangible assets (Notes 8, 9)
    555       -       383  
                         
Total operating costs and expenses
    7,483       6,226       8,173  
                         
Operating Profit (loss)
    (973 )     1,257       (4,682 )
Financial expenses, net (Note 17a)
    (2,241 )     (961 )     (606 )
Other expenses, net (Note 2g)
    (172 )     (120 )     (409 )
                         
Income (loss) before taxes on income
    (3,386 )     176       (5,697 )
Tax benefit (taxes on income) (Note 16)
    172       (5 )     (329 )
                         
Income (loss) from continuing operations
    (3,214 )     171       (6,026 )
Loss from discontinued operations (Note 1e)
    -       (806 )     (3,075 )
                         
Net loss
  $ (3,214 )   $ (635 )   $ (9,101 )
                         
Basic and diluted net earnings (loss) per share from continuing operations (Note 17b) (*)
  $ (1.14 )   $ 0.07     $ (2.32 )
                         
Basic and diluted net loss per share from discontinued operations (Note 17b) (*)
  $ -     $ (0.31 )   $ (1.18 )
                         
Basic and diluted net loss per share (Note 17b) (*)
  $ (1.14 )   $ (0.24 )   $ (3.50 )
 
(*)
All earnings (loss) per share data are reported after the effect of the 1 for 5 reverse split that occurred on January 12, 2010.

The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-6
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
U.S. dollars in thousands, except share data
 
     
Ordinary
shares (*)
     
Share capital
     
Additional paid-in capital
     
Accumulated other comprehensive income (loss) (**)
     
Accumulated deficit
     
Total comprehensive loss
     
Total shareholders' equity
 
Balance at January 1, 2009
    2,605,592     $ 13,159     $ 55,830     $ (378 )   $ (57,367 )         $ 11,244  
Issuance of Ordinary shares for options exercised
    12,567       66       (66 )     -       -             -  
Issuance expenses
    -       -       (17 )     -       -             (17 )
Issuance of warrants related to convertible note
    -       -       646       -       -             646  
Share-based compensation expense
    -       -       649       -       -             649  
Other comprehensive loss:
                                                     
Foreign currency translation adjustments
    -       -       -       168       -     $ 168       168  
Unrealized gain related to available for sale securities
                            54       -       54       54  
Net loss
    -       -       -       -       (9,101 )     (9,101 )     (9,101 )
Total comprehensive loss
                                          $ (8,879 )        
Balance at December 31, 2009
    2,618,159       13,225       57,042       (156 )     (66,468 )             3,643  
                                                         
Issuance of Ordinary shares for options exercised
    37,996       201       (201 )     -       -               -  
Issuance of shares related to the private placement (net of $35 issuance expenses)
    96,362       533       (268 )     -       -               265  
Issuance of warrants related to convertible note
    -       -       15       -       -               15  
Share-based compensation expense
    -       -       217       -       -               217  
Other comprehensive loss:
                                                       
Foreign currency translation adjustments
    -       -       -       262       -     $ 262       262  
Realized gain related to available for sale securities
                            (54 )     -       (54 )     (54 )
Net loss
    -       -       -       -       (635 )     (635 )     (635 )
Total comprehensive loss
                                          $ (427 )        
                                                         
Balance at December 31, 2010
    2,752,517       13,959       56,805       52       (67,103 )     -       3,713  
Issuance of Ordinary shares for options exercised
    33,442       195       (195 )     -       -       -       -  
Issuance of Ordinary shares related to an inducement of a convertible note
    1,681,965       8,911       (5,772 )     -       -       -       3,139  
Extension of warrants related to convertible note
    -       -       86       -       -       -       86  
Share-based compensation expense
    -       -       169       -       -       -       169  
Other comprehensive loss:
                                                       
Foreign currency translation adjustments
    -       -       -       (295 )     -     $ (295 )     (295 )
Net loss
    -       -       -       -       (3,214 )     (3,214 )     (3,214 )
Total comprehensive loss
    -       -       -               -     $ (3,509 )        
                                                         
Balance at December 31, 2011
    4,467,924     $ 23,065     $ 51,093     $ (243 )   $ (70,317 )           $ 3,598  

(*) 
All share data are reported after the effect of the 1 for 5 reverse split that occurred on January 12, 2010.
(**)
December 31, 2009 balance includes both foreign currency translation adjustments and unrealized gains related to available for sale securities. December 31, 2010 and December 31, 2011 balance includes only foreign currency translation adjustments.
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-7
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
 
   
Year ended December 31,
 
   
2011
   
2010
   
2009
 
Cash flows from operating activities:
                 
Net loss
  $ (3,214 )   $ (635 )   $ (9,101 )
Loss  from discontinued operations
    -       806       3,075  
                         
Net profit (loss) from continuing operations
    (3,214 )     171       (6,026 )
                         
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
                       
Depreciation and amortization
    656       611       596  
Inventory write off
    443       36       2,235  
Impairment of goodwill and intangible assets
    555       -       383  
Capital loss from sale of investment in other company
    -       7       -  
Impairment of available for sale securities
    156       -       304  
Impairment of investment in other company
    39       111       53  
Severance pay, net
    5       -       (160 )
Share-based compensation expenses related to employees, directors and service providers
    169       217       649  
Amortization of discount on convertible note
    202       225       108  
Accrued interest on long-term convertible notes
    230       196       104  
Inducement expenses of convertible note
    760       -       -  
Revaluation of fair value related to extension of warrants as part of an Inducement of a convertible note
    86                  
Decrease (increase) in trade receivables, net
    (1,045 )     (417 )     2,897  
Change in income tax accruals
    (199 )     52       343  
Decrease (increase) in other accounts receivable and other assets
    363       (114 )     (155 )
Decrease (increase) in inventories
    506       138       (66 )
Increase (decrease) in trade payables
    (46 )     332       (818 )
Decrease in employees and payroll accruals, deferred revenues, accrued expenses and other liabilities
    (31 )     (105 )     (426 )
                         
Net cash provided by (used in) operating activities from continuing operations
    (365 )     1,460       21  
Net cash used in operating activities from discontinued operations
    -       (176 )     (1,291 )
                         
Net cash provided by (used in) operating activities
    (365 )     1,284       (1,270 )
                         
Cash flows from investing activities:
                       
Purchase of property, plant and equipment
    (357 )     (108 )     (320 )
Change in long term bank deposits
    (427 )     -       -  
Proceeds from sale of investment in other company
    -       150       -  
Repayment of deferred consideration for the acquisition of  Dimex Systems Ltd activity
    (256 )     (147 )     (967 )
                         
Net cash used in investing activities from continuing operations
    (1,040 )     (105 )     (1,287 )
Net cash used in investing activities from discontinued operations
    -       -       (74 )
                         
Net cash used in investing activities
    (1,040 )     (105 )     (1,361 )
                         
Cash flows from financing activities :
                       
Proceeds from issuance of shares, net
    -       265       (17 )
Proceeds from (repayment of) short and long-term bank loans
    1,113       (841 )     (363 )
Proceeds from (repayment of) long-term convertible note and warrants, net of issuance expenses
    -       (28 )     1,584  
                         
Net cash provided by (used in) financing activities from continuing operations
    1,113       (604 )     1,204  
Net cash provided by (used in) financing activities from discontinued operations
    -       (308 )     385  
                         
Net cash provided by (used in) financing activities
    1,113       (912 )     1,589  
                         
Increase (decrease) in cash and cash equivalents
    (292 )     267       (1,042 )
Increase (decrease) in cash and cash equivalents from discontinued operations
    -       (128 )     359  
Cash and cash equivalents at the beginning of the year
    703       564       1,247  
                         
Cash and cash equivalents at the end of the year
  $ 411     $ 703     $ 564  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-8
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
 
     
Year ended December 31,
 
     
2011
   
2010
   
2009
 
                     
 
Supplemental disclosure of cash flow activities :
                 
                     
(i)
Net cash paid during the year for:
                 
 
Interest
  $ 572     $ 463     $ 538  
 
Income tax
  $ 2     $ 2     $ 1  
                           
(ii)
Non-cash activities:
                       
                           
 
Conversion of payable into long-term convertible debentures
  $ -     $ 161     $ 675  
 
Deferred charges related to convertible note
  $ -     $ -     $ 62  
 
Sale of investment in other company
  $ -     $ 150     $ -  
 
Purchase of property and equipment
  $ -     $ -     $ 47  
 
Inducement of a convertible note  into share capital
  $ 2,523     $ -     $ -  

The accompanying notes are an integral part of the consolidated financial statements.

 
F-9
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
U.S. dollars in thousands, except share and per share data

NOTE 1:-
GENERAL

 
a.
B.O.S. Better Online Solutions Ltd. ("BOS" or "the Company") is an Israeli corporation.

The Company's shares are listed on NASDAQ under the ticker BOSC. Effective as of May 12, 2009, the Company's ordinary shares were delisted from trade on the Tel-Aviv Stock Exchange ("TASE"). Following the delisting of the Company's shares from the TASE, the Company is not subject to reporting requirements in Israel, under the Israeli Securities Law.
 
On  January 17,  2012,  the Company  received a notice from the Listing Qualifications Department of The Nasdaq Stock Market (“Nasdaq”) advising the Company that it has failed to comply with Nasdaq’s requirement that listed securities maintain a minimum bid price of $1.00 per share as set forth in Nasdaq Listing Rules (see Note 20a)
 
 
b.
In the year ended December 31, 2011, the Company incurred a loss of $3,214 and generated negative cash flow from current operations amounting to $365. Due to the above, the Company's cash and cash equivalent decreased from $703 as of December 31, 2010 to $411 as of December 31, 2011. In addition, long-term bank loans increased by $1,136 during fiscal year 2011.In view of the above, the Company has implemented an overall efficiency plan, including: a conversion of the convertible note as described in note 13 and a reduction in workforce. The Company expects to meet its bank covenants through December 31, 2012 and believes that its cash resources are sufficient to meet its operating needs for at least the next 12 months.

 
c.
All share and per share data in this report is reported after giving effect to the 1 for 5 reverse split that occurred on January 12, 2010 (see Note 15).

 
d.
The Company has two operating segments: the RFID and Mobile Solutions segment and the Supply Chain Solutions segment (see Note 18).
 
The Company's wholly-owned subsidiaries include:

In Israel:

 
(1)
BOS-Dimex Ltd. (previously "Dimex Solutions Ltd"), an Israeli company that provides comprehensive turn-key solutions for Automatic Identification and Data Collection.
 
 
BOS-Dimex Ltd. purchased in March 2008 all of the assets and activities of Dimex Systems Ltd.; and its wholly-owned subsidiary, Dimex Hagalil Projects (2008) Ltd., which was incorporated in January 2008 , purchased all of the assets and activities of Dimex Hagalil Ltd. ; and

 
(2)
BOS-Odem Ltd. ("BOS-Odem"), an Israeli company, is a distributor of electronics components and advance technologies worldwide. BOS-Odem is a part of the Supply Chain Solutions segments; and

 
(3)
Quasar Telecom (2004) Ltd. ("Quasar Telecom"), which is inactive.
 
 
F-10
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 1:-
GENERAL

In the United States:

 
(1)
Ruby-Tech Inc., a New York corporation, a wholly-owned subsidiary of BOS-Odem  and a part of the Supply Chain Solutions segments;

 
(2)
BOS - Supply Chain Solutions (Lynk) Inc., a Delaware Corporation ("Lynk"), and its subsidiaries BOS-Supply Chain Solutions Inc. (Summit) Ltd. ("Summit"), Pacific Information Systems, Inc. ("PacInfo"), a Delaware corporation and PacInfo's subsidiary Dean Tech Technologies Associates, LLC., a Texan corporation ("Dean Tech"). Both of Pacinfo and Dean Tech are no longer active. On November 23, 2010 the Company announced that its two U.S. subsidiaries that are part of its Supply Chain division, Lynk and its subsidiary Summit, have filed with the US Bankruptcy Court a Chapter 7 petition. Lynk's case was closed on March 4, 2011.
 
 
 
(3)
BOS Delaware Inc., a Delaware corporation, which ceased operations in 2002.

In Europe:

BOS-Dimex has a UK subsidiary, Better On-Line Solutions Ltd. Since 2002, this company and its subsidiary, Better On-Line Solutions S.A.S that is incorporated in France, are not active.

In addition, the Company holds shares in two other companies:

 
(1)
Surf Communication Systems Ltd. ("Surf") that is a developer and global supplier of universal access and network convergence software solutions to the wire line and wireless telecommunications and data communications industries. As of December 31, 2011, the Company holds 6.2% of the outstanding shares of Surf (see Note 2f).
 
 
(2)
New World Brands Inc. (OTCQB: NWBD) ("NWB"), a U.S. public corporation. The Company's holdings in NWB were received as the consideration for the sale of the Company's communication segment. As of September 30, 2010 (the last time NWB filled a financial report), the Company holds 12.8% of the outstanding shares of NWB (see Note 2f).

 
e.
Discontinued operations:

The results of operations, including revenues, cost of revenues, operating expenses, and other income and expenses related to the prior periods of the discontinued operations, have been reclassified in the accompanying statements of operations as discontinued operations.

 
1.
In February 2009, the Company sold its OptimizeIT product and related Intellectual Property (following the Company's decision in December 2008 to cease  the operation of this product line) in consideration for $ 70 plus contingent royalties amounting to 7.5% of future revenues until the earlier of: (i) payment of $ 1,500 or (ii) the lapse of forty-two months from February 2009. As of December 31, 2011, no income from royalties was recorded.

 
F-11
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 1:-
GENERAL (Cont.)
 
 
2.
On November 23, 2010 the Company announced that its two U.S. subsidiaries that are part of its Supply Chain division, Lynk and its subsidiary Summit, have filed with the US Bankruptcy Court a Chapter 7 petition.

Summarized selected financial information of the discontinued operations are as follows:
 
   
Year ended
December 31,
 
   
2011
   
2010
   
2009
 
                   
Revenues
  $ -     $ 8,338     $ 8,615  
Cost of revenues
    -       6,990       7,704  
                         
Gross profit
    -       1,348       911  
                         
Impairment of goodwill
            -       835  
Total operating costs and expenses
    -       1,487       2,705  
                         
Operating loss
    -       (139 )     (2,629 )
Financial expenses, net
    -       (213 )     (232 )
Other expenses, net (*)
    -       (496 )     -  
                         
Loss before taxes on income
    -       (848 )     (2,861 )
Tax benefit (taxes on income)
    -       42       (214 )
                         
Net loss
  $ -     $ (806 )   $ (3,075 )

 
(*)
Other expenses include $ 554 related to the write off of net assets and liabilities related to discontinued operations.

 
F-12
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data

NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements are prepared according to United States generally accepted accounting principles ("U.S. GAAP").

 
a.
Use of estimates:

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant assumptions are employed in estimates used in determining values of goodwill and identifiable intangible assets, provision for inventory, revenue recognition, tax assets and tax positions, legal contingencies, stock-based compensation costs, and assumptions utilized in troubled debt restructuring. Actual results could differ from those estimates.
 
 
b.
Financial statements in U.S. dollars:

A substantial portion of the Company's revenues is generated in U.S. dollar ("dollars"). In addition, most of the Company's costs are incurred in dollars. Company's management believes that the dollar is the primary currency of the economic environment in which the Company operates. Thus, the functional and reporting currency of the Company is the dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with ASC 830, Foreign Currency Matters . All transactions gains and losses from the remeasurement of monetary balance sheet items are reflected in the statement of operations as financial income or expenses as appropriate.

The financial statements of a certain subsidiary, whose functional currency is other than the dollar, have been translated into U.S. dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statement of operations amounts have been translated using the average exchange rate for the period. The resulting translation adjustments are reported as a component of shareholders' equity in accumulated other comprehensive loss.
 
 
c.
Principles of consolidation:

The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and balances including profits from intercompany sales not yet realized outside the Company have been eliminated upon consolidation.
 
 
d.
Cash equivalents:

Cash equivalents are short-term highly liquid investments that are readily convertible to cash purchased with original maturities of less than three months.

 
F-13
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
e.
Inventories:

Inventories are valued at the lower of cost or market value. Cost is determined using the moving average cost method.

Inventory write-offs and write-downs are provided to cover risks arising from slow-moving items or technological obsolescence.  During 2011, 2010 and 2009, inventory write-offs of $ 443, $ 36 and $ 2,235, respectively, have been recorded and presented in the consolidated statements of operations.
 
 
f.
Investment in other companies:

 
1.
Investment in NWB and QMX:

The Company accounts for its holdings in NWB shares as available for sale in accordance with ASC 320, Investments - Debt And Equity Securities ("ASC 320"). Unrealized gains and losses, net of the related tax effect are included in other comprehensive loss. In January 2009, Qualmax was merger with and into NWB , and holdings in  Qualmax were converted into shares of NWB.

Prior to this merger, the investment in Qualmax, which was traded on the Pink Sheets, was presented at cost according to ASC 325-20, Cost Method Investments ("ASC 325-20") due to no trading volume in the Qualmax shares.
 
Management evaluates investments in other companies for evidence of other-than- temporary declines in value. The Company recognizes an impairment charge when a decline in the fair value of its marketable securities below the cost basis is presumed to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the Company's intent and ability to hold the marketable securities for a period of time sufficient to allow for any anticipated recovery in market value, the length of time and extent to which the fair value has been less than the cost basis and the financial condition and near-term prospects of the issuers. If, after consideration of all available evidence to evaluate the realizable value of its marketable securities, impairment is determined to be other than- temporary, then an impairment loss equal to the difference between the marketable securities' carrying amount and its fair value is recognized. Accordingly, during 2011, 2010 and 2009, an impairment loss, due to other-than-temporary decline in fair value, of $ 156, $ 0 and $ 304, respectively, has been recorded and presented in other expenses, net in the consolidated statements of operations.

 
F-14
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

On February 26, 2010, the Company sold all of its holdings in NWB to P&S Spirit LLC. and recorded a capital loss of $7. The Company sold 61,441,827 shares of common stock of NWB (the "Shares") and 1,430,178 warrants to purchase common stock of NWB at an exercise price of $ 0.2098 per share expiring on December 31, 2010 (the "Warrants"). The consideration for the Shares and Warrants was $ 300 of which $ 150 was paid in March 2010 and the remaining $ 150 plus annual interest of 4% were to be paid in twelve monthly installments commencing March 2011. The Shares and Warrants were delivered to an escrow agent, to be released to the Buyer upon full payment of the Remaining Debt. In May 2011, the buyer notified the Company that it will not pay the remaining debt, and the shares and warrants were released back to the Company. As of December 31, 2011 the Company recognized other-than-temporary loss of $156, reflecting that the investment in NWB was fully impaired.

 
2.
Investment in Surf:

The Company's holding in Surf (a private company) as of December 31, 2011 is 6.2% of Surf's issued and outstanding shares. The Company's investment in Surf is accounted for based on the cost accounting method. During 2011, 2010 and 2009, an impairment loss, due to other-than- temporary decline in fair value, of $ 39, $ 111 and $ 53, respectively, has been recorded and presented in other expenses, net in the consolidated statements of operations.

The Company's investment in Surf is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable, in accordance with ASC 325-20.

 
g.
Property, plant and equipment:

Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by using the straight line method over the estimated useful lives of the assets, at the following annual rates:

   
%
   
         
Computers and software
    20 - 33  
(mainly 33%)
Office furniture and equipment
    6 - 15  
(mainly 10%)
Leasehold improvements
    10  
(over the shorter of the period of the lease or the life of the assets)
Motor vehicles
    15    
Real estate
    4    

 
F-15
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
h.
Impairment of long-lived assets:

The Company's long-lived assets are reviewed for impairment in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Asset , whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset (or asset group) to the future undiscounted cash flows expected to be generated by the assets (or asset group). If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value of the assets. During 2011 the Company recognized an impairment loss of $555 related to a brand name and customer list.  of which  $470 were attributed to the Supply Chain segment and $85 were attributed to the RFID and Mobile solutions segment. The fair value of the brand name and customer list related intangibles was determined by the income approach method. Assumptions in the fair value assessment included: the impact of changes in economic conditions, revenue and cash flow forecasts for the remaining lives of the intangibles and the Company's weighted average cost of capital ("WACC").
During 2010 and 2009, no impairment losses have been identified.

 
i.
Goodwill:

Goodwill represents excess of the costs over the net assets of businesses acquired. Under ASC 350, Intangibles - Goodwill and Other ("ASC 350"), goodwill is not amortized but instead is tested for impairment at least annually or between annual tests in certain circumstances, and written-down when impaired.
 
Testing Methodology:

The Company performs its annual impairment analysis of goodwill as of December 31 of each year, or more often if there are indicators of impairment present. The provisions of ASC 350 require that a two-step impairment test be performed on goodwill at the level of the reporting units. In the first step, or Step 1, the Company compares the fair value of each reporting unit to its carrying value. If the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired, and the Company is not required to perform further testing. If the carrying value of the net assets exceeds the fair value, then the Company must perform the second step, or Step 2, of the impairment test in order to determine the implied fair value of goodwill. To determine the fair value used in Step 1, the Company uses discounted cash flows. If and when the Company is required to perform a Step 2 analysis, determining the fair value of its net assets and its off-balance sheet intangibles would require it to make judgments that involve the use of significant estimates and assumptions.

The reporting units of the Company for purposes of the impairment test are: the Company's RFID and Mobile solutions segment, and the Supply Chain segment, as these are the components of the business for which discrete financial information is available and the segment management regularly reviews the operating results of those components.

 
F-16
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

In order to determine the fair value used in Step 1, the Company uses discounted cash flows. If and when the Company is required to perform a Step 2 analysis, determining the fair value of its net assets and its off-balance sheet intangibles would require it to make judgments that involve the use of significant estimates and assumptions. The Company determined the fair value of each reporting unit using the Income Approach, which utilizes a discounted cash flow model, as it believes that this approach best approximates the reporting unit’s fair value at this time. Judgments and assumptions related to revenue, operating income, future short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures, cash flows, and market conditions are inherent in developing the discounted cash flow model. The material assumptions used for the Income Approach for 2011 were five years of projected net cash flows, WACC of 15% and a long-term growth rate of 3%. The Company considered historical rates and current market conditions when determining the discount and growth rates to use in its analyses. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for its goodwill.

The Company corroborates the fair values using the Market Approach. The Company evaluates the reasonableness of the estimated fair value of its reporting units by reconciling to its market capitalization. This reconciliation allows the Company to consider market expectations in corroborating the reasonableness of the fair value of its reporting units. In addition, the Company compares its market capitalization, including an estimated control premium that an investor would need to pay for a controlling interest in the Company, to the fair value of the Company based on a third-party valuation study. The determination of a control premium requires the use of judgment and is based primarily on comparable industry and deal-size transactions, related synergies and other benefits. The Company's reconciliation of the gap between its market capitalization and the aggregate fair value of the Company depends on various factors, some of which are qualitative and involve management judgment, including stable relatively high backlog coverage and experience in meeting operating cash flow targets.

Testing Results:
 
During 2011 and 2010, no impairment losses have been identified.
 
During 2009 impairment losses in the amount of $ 383 were recorded and attributed to the Supply Chain solutions reporting unit.
 
 
j.
Research and development costs:

ASC 985, Software , requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a working model. Research and development costs incurred in the process of developing product improvements or new products, are generally charged to expenses as incurred. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general releases are insignificant.

 
F-17
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
k.
Severance pay:

The Company's liability for severance pay for some of the Israeli employees is calculated pursuant to the Israeli Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date. Employees are entitled to one month's salary for each year of employment or a portion thereof. The Company's liability for its Israeli employees is covered by insurance policies designed solely for distributing severance pay. The value of these policies is not under the Company's control, thus neither an asset nor a liability were recorded regarding these policies.

The Company has one general deposit fund. The value of the deposited funds includes profits, and is recorded as an asset in the Company's balance sheet.

The Company's payroll includes employees regarding whom its liability for severance pay is calculated pursuant to article 14 of Israel's Severance Pay Law. The Company currently deposits the corresponding amounts required in accordance with article 14 to the relevant pension funds. These amounts will be released to the applicable employees upon termination of employment and this substitutes the obligation described above, to pay severance based on the most recent salary of the employee multiplied by the number of years of employment. The aforementioned deposited amounts are not reflected on the financial statements due to the fact that they are not under the Company's control.

Severance expenses for 2011, 2010 and 2009 amounted to $ 242, $ 137 and $ 263, respectively.

 
l.
Revenue recognition:
 
The Company derives its revenues from the sale of products, license fees for its products, commissions, support and services.

Revenues from product sales, related to both the Supply Chain and RFID and Mobile segments, are recognized in accordance with SAB 104, Revenue Recognition ("ASC 605") when delivery has occurred, persuasive evidence of an arrangement exists, the vendor's fee is fixed or determinable, no further obligation exists, and collectability is reasonably assured.

Most of the Company's revenues are generated from sales of its products directly to end-users. Other than pricing terms which may differ due to the volume of purchases between end-users, there are no material differences in the terms and arrangements among end-users.

 
F-18
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Revenue from license fees, related to the RFID and Mobile solutions segment, is recognized in accordance with ASC No. 985-605, Software Revenue Recognition , when persuasive evidence of an agreement exists, delivery has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable, and collectability is probable. The Company generally does not grant a right of return to its customers. When a right of return exists, the Company defers revenue until the right of return expires, at which time revenue is recognized provided that all other revenue recognition criteria have been met.

Revenues from maintenance and support services related to the license are recognized ratably over the period of the support contract.
 
Starting January 1, 2011 the Company adopted the guidance of ASU 2009-13, Multiple-Deliverable Revenue Arrangements , (amendments to FASB ASC Topic 605, Revenue Recognition ) ("ASU 2009-13"). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendment eliminates the residual method of revenue allocation and requires revenue to be allocated using the relative selling price method. As such, the Company prospectively applied these provisions to all revenue arrangements entered into or materially modified after January 1, 2011.  This guidance does not generally change the units of accounting for the Company’s revenue transactions. Most products and services qualify as separate units of accounting and the revenue is recognized when the applicable revenue recognition criteria are met.
 
The Company's revenue recognition policies provide that, when a sales arrangement contains multiple elements, the Company allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence ("VSOE"), if available, third party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available.

Because the Company has neither VSOE nor TPE for its deliverables, the allocation of revenue has been based on the Company’s BESP. Amounts allocated to the deliverables are recognized at the time of sale provided the other conditions for revenue recognition have been met.
 
The Company’s process for determining its BESP considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. A key factor considered by the Company in developing the BESP for its products is the gross margins acceptable in the industry in which the Company operates. The Company may also consider additional factors as appropriate.

The adoption of the amendment to ASC 605-25 did not have a material effect on the Company's consolidated financial position or results of operations.

In addition, in cases that product arrangement is bundled with a separately priced extended warranty that fall under the scope of  ASC 605- 20-25-1 through 25-6, revenues from the extended warranty are deferred and recognized ratably over the extended warranty period.

 
F-19
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

In the case of arrangements which require significant customization of the Company's RFID software to customer-specific specifications, the Company follows the guidance in ASC 605-35, ("ASC 605-35"), whereby the Company applies the completed contract method, since the Company is unable to obtain reasonable dependable estimates of the total effort required for completion. Under the completed contract method, all revenue and related costs of revenue are deferred and recognized upon completion. Provisions for estimated losses on contracts in process are recognized in the period such losses are determined.

 
m.
Income taxes:

The Company and its subsidiaries account for income taxes in accordance with ASC 740, Income Taxes ("ASC 740"). ASC 740 prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to the amounts that are more likely-than-not to be realized.

The Company implements a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is- more- likely- than- not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.. During the year ended December 31, 2011, the Company recorded tax income of $261 in regard to a decrease of uncertain tax position. During the years ended December 31, 2010 and 2009  the Company recorded tax expenses of $ 67 and $421, respectively in regard to uncertain tax positions.

 
n.
Concentrations of credit risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, trade receivables and other accounts receivable.

The trade receivables of the Company are derived from sales to customers located primarily in Israel, America, the Far East and Europe. The Company generally does not require collateral; however most of the Company's customer outside of Israel are insured against customer nonpayment, through the Israeli Credit Insurance Company Ltd. In certain circumstances, the Company may require letters of credit, other collateral, additional guarantees or advanced payments. An allowance for doubtful accounts is determined with respect to specific debts that are doubtful of collection.

 
F-20
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 
o.
Derivative financial instruments:

The Company's Derivatives are not designated as hedging accounting instruments under ASC 815, Derivatives and Hedging (originally issued as SFAS 133 and SFAS161).
 
Those derivatives consist primarily of forward contracts the Company uses to hedge the Company's exposure to currencies other than the U.S. dollar. The Company recognized derivative instruments as either assets or liabilities and measures those instruments at fair value. The derivative instruments that the Company holds do not meet the definition of hedging instruments under ASC 815, Derivatives and Hedging (originally issued as SFAS 133 and SFAS161). Therefore, the Company recognizes changes in the fair values of the derivatives in its statement of income in financial income, net, at the same period as the remeasurement of gain and loss of the related foreign currency denominated assets and liabilities.

As of December 31, 2011, the notional principal of foreign exchange contracts to purchase U.S. dollars with foreign currencies and to sell Euros for foreign currencies was $ 1,600 and €280. The Company recorded the fair value of derivative liability in the amount of $ 67 in accrued expenses and other liabilities.
 
 
p.
Basic and diluted net earnings (loss) per share:

Basic net earnings (loss) per share are calculated based on the weighted average number of ordinary shares outstanding during each year. Diluted net earnings (loss) per share are calculated based on the weighted average number of ordinary shares outstanding during each year, plus the potential dilution to ordinary shares considered outstanding during the year, in accordance with ASC 260, Earning per Share .

The total number of ordinary shares related to outstanding options and warrants that was excluded from the calculations of diluted net earnings (loss) per share, since they would have an anti-dilutive effect, was 1,524,610 , 1,442,339 and 1,333,370 for the years ended December 31, 2011 , 2010 and 2009, respectively.
 
 
q.
Accounting for share-based compensation:

The Company accounts for equity-based compensation in accordance with ASC 718, Stock Compensation ("ASC 718") which requires the recognition of compensation expenses based on estimated fair values for all equity-based awards made to employees and nonemployees and directors.

ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated statements of operations.

 
F-21
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company recognizes compensation expenses for the value of its awards granted based on the straight line method over the requisite service period of each of the awards, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures. The Company considers many factors when estimating forfeitures, including employee class and historical experience.

The Company estimates the fair value of stock options granted using the Black-Scholes options pricing model. The option-pricing model requires a number of assumptions, of which the most significant are expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements over the most recent periods ending on the date of grant, equal to the expected option terms. The expected option term represents the period that the Company's stock options are expected to be outstanding and was determined based on the simplified method permitted by SAB 107 and extended by SAB 110 as the average of the vesting period and the contractual term. The Company currently uses the simplified method as adequate historical experience is not available to provide a reasonable estimate. The Company adopted SAB 110 effective January 1, 2008 and will continue to apply the simplified method until enough historical experience is available to provide a reasonable estimate of the expected term for stock option grants. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.

The fair value for options granted in 2011 and 2009 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

   
Year ended
December 31,
 
   
2011
   
2009
 
             
Risk-free interest
    1.17%       1.45%  
Dividend yields
    0%       0%  
Volatility
    96%       77%  
Expected option term
 
3.83 years
   
3.46 years
 
Forfeiture rate
    24%       15%  

No options were granted during 2010.

 
F-22
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

During 2011, 2010 and 2009, the Company recognized stock-based compensation expense related to employee and director stock options as follows:

   
Year ended December 31,
 
   
2011
   
2010
   
2009
 
                   
Selling and marketing
  $ 8     $ 39     $ 377  
General and administrative
    161       178       252  
                         
Total stock-based compensation expense
  $ 169     $ 217     $ 629  

The Company applies ASC 718 and ASC 505-50 for equity instruments that are issued to other than employees for acquiring, or in conjunction with, selling, goods or services.
 
 
r.
Fair value of financial instruments:

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

The carrying amounts of cash and cash equivalents, trade receivables, other accounts receivable, short term loans and trade payables approximate their fair value due to the short-term maturities of such instruments. The carrying amounts of long-term loans approximate their fair value.

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 are comprised of foreign currency forward contracts (See Note 4).
 
Assets measured at fair value on a non-recurring basis as of December 31, 2011 are Investment in shares of a cost method investee and intangible assets that were written down to their fair value as a result of an impairment loss.

ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

 
Level 1 -
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 
Level 2 -
Include other inputs that are directly or indirectly observable in the marketplace.

 
Level 3 -
Unobservable inputs which are supported by little or no market activity.
 
 
F-23
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 
s.
Reclassification:

Certain 2010 figures have been reclassified to conform to the 2011 presentation. The reclassification had no effect on previously reported net income or shareholders' equity.
 
 
t.
Impact of recently issued accounting pronouncements :

In May 2011, the FASB issued ASU 2011-04 to amend ASC 820, “Fair Value Measurement.” The amendment requires companies to disclose the valuation techniques and inputs used to develop the measurements for assets and liabilities that are measured at fair value on a recurring or nonrecurring basis in the statement of financial position after initial recognition.  For recurring fair value measurements using significant unobservable inputs (Level 3), companies are required to disclose the effect of the measurements on earnings (or changes in net assets) or other comprehensive income for the period. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05 (an amendment to ASC  220—"Presentation of Comprehensive Income"), which requires an entity to present total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements and eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This guidance is effective for fiscal years and interim periods, beginning after December 15, 2011. The Company’s adoption of ASU 2011-05 will not have an impact on its financial statements.

In September 2011, the FASB issued ASU 2011-08, (an amendment to ASC 350, "Intangibles—Goodwill and Other"), which amends Topic 350 to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based the qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This guidance is effective for annual and interim goodwill tests performed for years beginning after December 15, 2011. Early adoption is permitted. The Company’s adoption of ASU 2011-08 is not expected to have an impact on its financial statements.
 
In December 2011, the FASB issued ASU. 2011-12 (another amendment to ASC 220), which indefinitely deferred certain provisions of ASU 2011-05, including the requirement to present reclassification adjustments out of accumulated other comprehensive income

 
F-24
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
By component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. This amendment is effective for both annual and interim financial statements beginning after December 15, 2011. The Company’s adoption of ASU 2011-12 will not have an impact on its financial statements.

NOTE 3:-
OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

   
December 31,
 
   
2011
   
2010
 
             
Government authorities
  $ 92     $ 213  
Advances to suppliers
    411       536  
Prepaid expenses
    172       57  
Deferred expenses attributed to software projects
    52       146  
Receivable in respect of investment sale
    -       127  
Derivative asset
    -       63  
Other
    17       41  
                 
    $ 744     $ 1,183  
 
NOTE 4:-
FAIR VALUE MEASUREMENTS

In accordance with ASC 820, derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.

The Company's financial liabilities and assets measured at fair value on a recurring basis, consisted of derivatives which were classified within Level 2 and amounted to a ($ 67) liability and a $ 63 asset as of December 31, 2011 and 2010, respectively.

As of December 31, 2011, the Company's investment in Surf (a cost method investee) was measured at fair value of $ 68, on a nonrecurring basis, due to other–than-temporary impairment of $ 39. The fair value was determined based on the price set at a new equity financing round raised by the investee in 2010 and was classified as Level 2 in the ASC 820 hierarchy (i.e., quoted price of identical asset in a non-active market).
 
NOTE 5:-
INVENTORIES

   
December 31,
 
   
2011
   
2010
 
             
Raw materials
  $ 189     $ 135  
Finished goods
    3,831       4,990  
                 
    $ 4,020     $ 5,125  
 
 
F-25
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 6:-
INVESTMENT IN OTHER COMPANIES

The Company's investments in companies comprise of an investment in Surf Communication Systems Ltd.:

   
December 31,
 
   
2011
   
2010
 
             
 Cost net of cumulative impairment losses
  $ 68     $ 107  
 
NOTE 7:-
PROPERTY, PLANT AND EQUIPMENT

   
December 31,
 
   
2011
   
2010
 
             
Cost:
           
             
Computers and software
  $ 2,107     $ 2,197  
Office furniture and equipment
    1,037       1,027  
Leasehold improvements and real estate
    1,408       1,417  
Motor Vehicles
    365       205  
      4,917       4,846  
                 
Accumulated depreciation:
               
                 
Computers and software
    2,002       2,024  
Office furniture and equipment
    615       594  
Leasehold improvements and real estate
    942       930  
Motor vehicles
    192       163  
                 
      3,751       3,711  
                 
Depreciated cost
  $ 1,166     $ 1,135  
 
Depreciation expenses amounted to $ 280, $ 241 and $ 199 for the years ended December 31, 2011, 2010 and 2009, respectively.

 
F-26
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 8:-
OTHER INTANGIBLE ASSETS, NET
 
   
December 31, 2011
   
Weighted average amortization period
   
December 31, 2010
   
Weighted average amortization period
 
                         
Cost:
                       
                         
Backlog
  $ 27       -     $ 29       -  
Technology
    226       -       226       -  
Brand name
    670       4.1       722       5.1  
Customer list
    2,450       2.5       2,483       3.5  
                                 
      3,373               3,460          
                                 
Accumulated amortization and depreciation:
                               
                                 
Backlog
    27               29          
Technology
    226               226          
Brand name
    411               259          
Customer list
    2,169               1,434          
                                 
      2,833               1,948          
                                 
Amortized cost
  $ 540             $ 1,512          
 
Intangible assets are amortized based on the straight line method for their remaining useful life.

Amortization expenses amounted to $ 931 (including impairment of $ 555 regarding the customer list and brand name), $ 369 and $ 397 for the years ended December 31, 2011, 2010 and 2009, respectively.

Estimated amortization expenses for the years ended:

December 31,
     
       
2012
  $ 180  
2013
    180  
2014
    110  
2015
    63  
2016
    47  
         
    $ 540  
 
 
F-27
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 9:-
GOODWILL

Goodwill attributed to operating reporting units for the years ended December 31, 2011 and 2010 is as follows:

   
RFID and Mobile Solutions
   
Supply
Chain Solutions
   
Total
 
                   
Balance as of January 1, 2010
  $ 4,172     $ -     $ 4,172  
                         
Foreign currency translation adjustments
    266       -       266  
                         
Balance as of December 31, 2010
    4,438       -       4,438  
                         
Foreign currency translation adjustments
    (316 )     -       (316 )
                         
Balance as of December 31, 2011
  $ 4,122     $ -     $ 4,122  

In accordance with ASC 320, Goodwill and Other Intangible Assets , goodwill is not amortized, but instead is reviewed and tested for impairment at least annually and whenever events or circumstances occur which indicate that goodwill might be impaired (see Note 2i). Impairment of goodwill is tested at the Company's reporting unit level by comparing the carrying amount, including goodwill, to the fair value. In performing the analysis, the Company uses the best information available, including reasonable and supportable assumptions and projections and expert opinion. If the carrying amount of the Company exceeds its implied fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any.

The Company performed an annual impairment test on December 31, 2011 and no impairment loses were recorded.
 
During the second quarter of 2009, the Company performed an impairment test as a result of the overall global economic conditions and determined that goodwill related to the Supply Chain Solutions reporting unit, in the amount of $383, was fully impaired.

The annual goodwill impairment tests for the RFID and Mobile solutions segment performed on December 31, 2009 and December 31, 2010 did not result in any impairment charges.

 
F-28
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 10:-
SHORT-TERM BANK LOANS AND CURRENT MATURITIES

   
Weighted interest
rate as of December 31, 2011
   
December 31,
 
Loan currency
 
%
   
2011
   
2010
 
                   
NIS
    7.25     $ 3,904     $ 5,473  
$     5.49       2,932       1,804  
                         
              6,836       7,277  
Current maturities
    5.8       660       501  
                         
            $ 7,496     $ 7,778  

The repayment of the Company's bank debt (to Bank Leumi) is secured by a first priority floating charge on all of the Company's assets, and by a first priority fixed charge on all of the Company's issued and unpaid share capital, its goodwill and its shares of its Israeli subsidiaries. The loan terms restrict substantial asset sales, cash dividends, and certain inter-company and shareholders payments. In addition, the Company and its Israeli subsidiaries entered into a series of inter-company guarantees in favor of the bank.

The Bank Leumi loan agreements contained various financial covenants which required that the Company maintain certain financial ratios related to shareholders' equity, EBITDA and operating results. On February 8, 2010, the Company and its Israeli subsidiaries executed revised loan documents governing their credit line from Bank Leumi, in which they undertook revised covenants for year 2010. There were no Bank Leumi covenants related to short term loans applicable for the fiscal year 2011.
 
NOTE 11:-
ACCRUED EXPENSES AND OTHER LIABILITIES

   
December 31,
 
   
2011
   
2010
 
             
Government authorities
  $ 275     $ 514  
Professional services
    196       145  
Derivative liability
    67       -  
Liability to Dimex Systems (see Note 13)
    301       301  
Other
    155       80  
                 
    $ 994     $ 1,040  

 
F-29
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 12:-
LONG-TERM BANK LOANS, NET OF CURRENT MATURITIES
 
 
a.
Classified by linkage terms and interest rates, the total amount of the loans is as follows:
 
   
Weighted interest
rate as of December 31, 2011
   
December 31,
 
Loan currency
 
%
   
2011
   
2010
 
                   
NIS
 
5.8 (Prime plus 0 - 2.2)
    $ 2,190     $ 895  
                       
            2,190       895  
Less - current maturities
    5.8       660       501  
                         
            $ 1,530     $ 394  

Bank Leumi debt amounted to $367 and $870 in December 31, 2011 and December 31, 2010, respectively.The repayment of the Company's bank debt to Bank Leumi is secured by a first priority floating charge on all of the Company's assets, and by a first priority fixed charge on all of the Company's issued and unpaid share capital, its goodwill and its shares of its Israeli subsidiaries. The loan terms restrict substantial asset sales, cash dividends, and certain inter-company and shareholders payments. In addition, the Company and its Israeli subsidiaries entered into a series of inter-company guarantees in favor of the bank.
 
The Bank Leumi loan agreements contained various financial covenants which require that the Company maintain certain financial ratios related to shareholders' equity, EBITDA and operating results. On February 8, 2010, the Company and its Israeli subsidiaries executed revised loan documents governing their credit line from Bank Leumi, in which they undertook revised covenants for year 2010. There were no Bank Leumi covenants applicable for the fiscal year 2011.
Bank HaPoalim debt amounted to $1,714 and $25 in December 31, 2011 and December 31, 2010, respectively.
 
The repayment of the Company's bank debt to Bank HaPoalim is not secured, except by long term bank deposits in the amount of $427. The Bank HaPoalim loan agreements contain various financial covenants which require that the Company's Israeli subsidiaries maintain certain financial ratios and level of profitability. As of December 31, 2011 the Company did not meet the bank HaPoalim covenants of financial ratios and profitability. However, the Company received a written waiver from Bank HaPoalim, under which, the Bank agreed, under certain conditions, to waive the failure of the Company to meet these financial covenants in 2011.
 
 
b.
The Company loans (from both Bank Leumi and Bank HaPoalim) mature in the following years subsequent to the balance sheet dates:

2012 (Current maturities)
  $ 660  
2013
    397  
2014
    437  
2015
    385  
2016
    311  
         
    $ 2,190  
 
 
F-30
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 13:-
LONG-TERM CONVERTIBLE NOTE

On August 20, 2009, the Company entered into a $ 2,400 convertible loan financing ("Convertible Loan Financing") with several lenders including Catalyst Private Equity Partners (Israel) II L.P., Telegraph Hill Capital Fund I, LLC, certain existing shareholders and members of its management. The financing proceeds were to be used mainly for working capital. The financing consisted of loans with a term of three years that bear interest at a rate equal to 8% per annum, compounded annually. The Company was to repay the loan principal amount and the accrued interest in one payment at the end of the term, unless converted earlier into ordinary shares at the discretion of the lender. Each lender was entitled to demand the immediate repayment in cash of its respective portion of the convertible loan amount, upon the occurrence of Events of Default, as stipulated in the Convertible Loans Agreement. In case of a Default, the Company undertook to pay the lenders the entire convertible loans amount due to them and any accrued interest. The loan conversion rate was $ 3.25 per ordinary share. The Company granted the lenders warrants to purchase 100% of the number of ordinary shares into which the loan was convertible. The warrants were exercisable, in whole or in part, from 18 months to 36 months from grant, at an exercise price per ordinary share of $ 2.75. The fair values of the warrants were calculated based on the Black-Scholes option pricing model, amounted to approximately $ 646 and are recorded as a component of shareholders' equity (as the warrants were exercisable into a fixed number of shares at a fixed exercise price and the Company has a sufficient amount of authorized shares as required by ASC 815-40).  In addition, the lenders received certain registration rights (on the Company's best effort). In November 2009, as part of a separation agreement between the Company and Shalom Daskal, the Company repaid to Mr. Daskal $50 of convertible loan he had previously extended to it.

In connection with the Convertible Loan Financing, the Company accumulated in 2009 and 2010 deferred costs in the amount of $150 and $ 172, respectively, which were recorded in long-term assets and which will be amortized over the period of the convertible note.

In March 2009, the Company entered into an amendment to the Dimex Systems Asset Purchase Agreement ("the 2009 restructuring"), whereby it has revised the schedule of remaining payments of NIS 10 then still owed by the Company to Dimex Systems. The amendment to the agreement provided for a NIS 3.5 million payment in March 2009, NIS 4 million to be paid in 6 equal monthly installments each, starting on January 15, 2010, and the remaining approximately NIS 2.5 million (equivalent to $675) was converted into a convertible note as part of the aforementioned ConvertibleLoan Financing.

On February 4, 2010, the Company entered into an additional amendment to the Dimex Systems Asset Purchase Agreement of January 2008 ("the 2010 restructuring"), whereby it has revised the schedule of remaining payments of NIS 4 million then still owed by the Company to Dimex Systems. The amendment to the agreement provided for: (1) payment of NIS 300 in February 2010 (2) NIS 3.1 million to be paid in equal monthly installments commencing July 2010 through December 2013 (including a five months grace period) which bears 8% interest per annum (3) Warrants to purchase 69,096 of the Company's ordinary shares which are exercisable, in whole or in  part, through December 2013 at an exercise price per ordinary share of $ 3.25 on or before August 3, 2011 and thereafter at an increased exercise price of  $ 4.00 per ordinary share, and (4) NIS 600 (equivalent to $ 161) were converted into a long-term convertible note with identical terms to the aforementioned convertible note issued in August 2009.

 
F-31
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 13:-
LONG-TERM CONVERTIBLE NOTE (Cont.)
 
The Company has accounted for the restructured debts to Dimex Systems under the criteria of ASC 470-60, "Troubled Debt Restructurings by Debtors".

The new effective borrowing rate of the 2010 restructured debt was lower than the effective borrowing rate of the old debt immediately prior to the 2010 restructuring and immediately prior to the 2009 restructuring.

Therefore, the Company concluded that the creditor has granted a concession and the restructuring of the debt is within the scope of ASC 470-60. As of the dates of the 2009 and 2010 restructuring, the Company calculated the effective borrowing rate on the debt (the new effective borrowing rate is the discounted rate that equates the present value of the future cash payments specified by the new terms of the restructured debt, with the carrying amount of the payable and includes the fair value of the warrants granted in conjunction with the aforementioned restructurings). The new effective interest rate as of the 2010 restructuring date and as of December 31, 2010 was an annual rate of 11%.

On December 21, 2011, the Company amended the terms of the convertible loan conversion agreements (the "Conversion Agreements”) with its convertible debt lenders (the "Lenders"). According to the amended Conversion Agreements, $2,523 of the former Convertible Loan Financing ($2,093 principal and $430 accrued interest) was converted into 1,681,965 ordinary shares (reflecting a reduced conversion price of $1.5 per ordinary share, instead of the $3.25 conversion price under the original agreement). In addition, warrants to purchase 643,984 shares that had been issued to the Lenders were extended by two years until July 2014 and February 2015, with no change to the exercise prices.

The remaining convertible loan of $501 (the "Deferred Loan" or the "2011 restructuring") shall remain outstanding, and will bear reduced interest rate of 4% (instead of 8% according to the original agreement with Dimex Systems). The Deferred Loan will no longer be convertible. The Deferred Loan will be repaid in 24 equal monthly installments commencing January 10, 2014 (instead of in two payments – in July 2012 and February 2013, according to the original agreement with Dimex Systems).

The Company accounted for the outstanding amount of $2,523 that was converted by the holders in accordance with ASC 470-20 "Debt with Conversion and Other Options". In accordance with ASC 470- 20, an expense is recognized if and to the extent that “additional consideration is paid to debt holders for the purpose of inducing prompt conversion of the debt to equity securities (sometimes referred to as a convertible debt ‘sweetener’).”

 
F-32
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 13:-
LONG-TERM CONVERTIBLE NOTE (Cont.)

As a result, the application of ASC 470-20 to the exchange of existing convertible debt for common stock resulted in the recording of a non-cash “inducement” accounting charge of $616, which was a calculation of the difference between the 776,378 ordinary shares that would have been issuable to the applicable note holder under the original conversion rights that existed in the convertible notes and the 1,681,965 ordinary shares underlying the amended note, multiplied by $0.68 which was the fair market value of the Company's share as of the date of the Conversion Agreement. This non-cash charge is deemed a financing expense to extinguish the notes and it is included in the Consolidated Statements of Operations with a corresponding increase in Additional paid-in capital. The Company also recorded an additional expense of $144 related to the unamortized remaining discount and deferred charges on the convertible note.

Following the extension of the warrants as mentioned above, the Company recorded $86 financial expenses in its statement of operations, reflecting the incremental compensation caused directly from the extension.

With respect to the remaining loan amount of $501 that was not converted, the Company has accounted for the 2011 restructuring under the criteria of ASC 470-60.

The new effective borrowing rate of the 2011 restructured debt was lower than the effective borrowing rate of the old debt immediately prior to the 2011 restructuring.

Therefore, the Company concluded that the creditor has granted a concession and the restructuring of the debt is within the scope of ASC 470-60. As of the date of the 2011 restructuring, the Company calculated the effective borrowing rate on the debt (the new effective borrowing rate is the discounted rate that equates the present value of the future cash payments specified by the new terms of the restructured debt, with the carrying amount of the payable and includes the fair value of the warrants granted in conjunction with the aforementioned restructurings). The new effective interest rate as of the 2011 restructurings date and as of December 31, 2011 was an annual rate of 5.9%.
 
NOTE 14:-
COMMITMENTS AND CONTINGENT LIABILITIES

 
a.
Commitments:

 
1.
Royalty commitments:

 
a)
Under the Company's research and development agreements with the Office of the Chief Scientist ("OCS") and pursuant to applicable laws, the Company is required to pay royalties at the rate of 3.5% of sales of products developed with funds provided by the OCS, up to an amount equal to 100% of the research and development grants (dollar-linked) received from the OCS. The obligation to pay these royalties is contingent upon actual sales of the products. Royalties payable with respect to grants received under programs approved by the OCS after January 1, 1999, are subject to interest on the U.S. dollar-linked value of the total grants received at the annual rate of LIBOR applicable to U.S. dollar deposits at the time the grants are received. No grants were received during the years 2009 through 2011.
 
 
F-33
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 14:-
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
 
As of December 31, 2011, the Company has an outstanding contingent obligation to pay royalties to the OCS, including interest, in the amount of approximately $ 3,304, in respect of these grants. Royalty expenses in the amount of $ 3 were recorded on such royalties during 2011 and 2010, respectively. No royalty expenses were recorded on such royalties during 2009. Commencing year 2012, there are no sales of products that were developed using funds provided by the OCS.

 
b)
The Israeli Government, through the Overseas Marketing Fund, awarded the Company grants for participation in expenses for overseas marketing. The Company is committed to pay royalties to the Fund for Encouragement of Marketing Activities (the "Marketing Fund") at the rate of 3% of the increase in export sales, up to the amount of the grants received by the Company linked to the dollar and bearing interest. No grants were received during the years 2009 through 2011.

 
 
As of December 31, 2011, the Company has an outstanding contingent obligation to pay royalties to the Marketing Fund including interest, in the amount of $ 101. No Marketing Fund royalty expenses were recorded during 2011, 2010 and 2009.

 
2.
The facilities of the Company are rented under operating lease agreements that expire on various dates ending in 2016. Minimum future rental payments for 2012, 2013 and 2014 are $ 105, $ 93 and $ 72, respectively.

The Company's motor vehicles are rented under various cancelable operating lease agreements. The lease agreements for the motor vehicles expire on various dates ending in 2014. The maximum breach of contract fees may amount to $ 76.

Lease expenses for the facilities occupied by the Company and the Company's motor vehicles in 2011, 2010 and 2009 amounted to $ 551, $ 563 and $ 566, respectively.

 
3.
Litigation
 
On November 2008, Blockshtil Ltd. filed a claim in the Petach-Tikva Magistrate Court alleging breach of contract by  the Company and seeking damages in the amount of NIS 149 thousand (approximately $ 42). The Company has served a statement of defense and the last hearing in this case is expected to take place on September 12, 2012.
 
The Company's financial statements include a provision in this respect.
 
 
F-34
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 15:-
SHAREHOLDERS' EQUITY

On January 12, 2010, the Company announced that the reverse share split which was approved in the general shareholders' meeting on December 23, 2009, has become effective prior to the opening of the market on January 12, 2010. Pursuant to the reverse split, each 5 ordinary shares, NIS 4.00 nominal value per share, was converted into one ordinary share, NIS 20.00 nominal value per share. No fractional shares were issued as a result of the reverse split. Instead, all fractional shares were rounded up to the next higher whole number of shares. All share and per share data in these financial statements and related notes are reported after the effect of the 1 for 5 reverse split.

On December 23, 2009, the Company's authorized  share capital increased from NIS 140,000,000, divided into 7,000,000 ordinary shares of NIS 20.00 nominal value each to NIS 200,000,000 divided into 10,000,000 ordinary shares of NIS 20.00 nominal value each.

 
a.
Private placements:

On October 5, 2010 the Company entered into a definitive private placement agreement with Telegraph Hill Capital Fund I, LLC ("THCAP") for the issuance of an aggregate of 96,362 Ordinary Shares at a price per share of $ 3.11, or approximately $ 300 in total. In addition, the Company announced that Mr. Luis Gutierrez Roy, managing partner in THCAP was appointed to its Board of Directors.

On December 21, 2011 the company announced that it has entered into agreements with its convertible debt lenders, for the amendment of their loan agreements and the subsequent conversion of their debt into the Company’s ordinary shares.
The amendments to the loan agreements provide that the amount of $2,460 of these loans was converted into the company's ordinary shares at a reduced conversion price of $1.50 per share, instead of the conversion rate of $3.25 per share set in the original loan agreements. As a result of the conversion, the company issued 1,681,965 ordinary shares.
 
In connection with the conversion, the term of warrants to purchase 643,982 shares that had been issued to the lenders, was extended by 2 years, until July 2014 and February 2015 (see Note 13). 

The Company's outstanding warrants to shareholders as of December 31, 2011 are as follows

Outstanding and exercisable warrants
   
Weighted average exercise
   
Weighted
average
 
as of
   
price of
   
remaining
 
December 31,
   
outstanding
   
contractual
 
2011
   
warrants
   
life (years)
 
               
  619,122     $ 2.75       2.6  
  24,861     $ 2.75       3.1  
  108,363     $ 13.80       -  

 
F-35
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 15:-
SHAREHOLDERS' EQUITY (Cont.)

 
b.
Stock option plans:

In May 2003, the Company's shareholders approved the adoption of the 2003 Israeli Stock Option Plan ("the Plan"), pursuant to which 125,000 ordinary shares were reserved for purchase by the employees, directors, consultants and service providers of the Company and its subsidiaries. Subsequently, the shareholders approved increases of the shares reserved for issuance under the Plan, initially to 200,000, and thereafter to 300,000, to 520,000, to 830,000 and in December 21, 2011 to 1,100,000. Any option which is canceled or forfeited before expiration will become available for future grants.

As of December 31, 2011 an aggregate of 446,701  of these options are still available for future grants. Each option granted under the Plan expires between 3-10 years from the date of the grant. The options vest gradually over a period of up to four years.

A summary of the Company's employee and director stock option activity and related information for the year ended December 31, 2011, is as follows:
 
   
Number of options
   
Weighted-average exercise price
   
Weighted- average remaining contractual term (in years)
   
Aggregate intrinsic value
 
                         
Outstanding at January 1, 2011
    474,591     $ 7.69       3.26     $ 140  
Changes during the year:
                               
Granted
    339,273     $ 1.72                  
Exercised
    (33,442 )   $ -                  
Forfeited or cancelled
    (281,596 )   $ 3.94                  
                                 
Outstanding at December 31, 2011
    498,826     $ 6.25     $ 2.91     $ 60  
                                 
Vested and expected to vest
    479,571     $ 6.25       2.88     $ 60  
Exercisable at December 31,2011
    401,716     $ 7.16     $ 2.71     $ 56  

All options exercised in 2011 were granted in 2009 and included $0 exercise price.
 
The weighted-average grant-date fair value of options granted during the years ended December 31 2011 and 2009 was $ 1.69 and $ 1.70, respectively,(no options were granted in 2010). The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the fair market value of the Company's ordinary shares on December 31, 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2011.
 
 
F-36
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 15:-
SHAREHOLDERS' EQUITY (Cont.)

Total intrinsic value of options exercised for the years ended December 31, 2011, 2010 and 2009 was $ 33, $ 62 and $ 25, respectively. As of December 31, 2011, there was $ 38 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company's stock option plans. That cost is expected to be recognized over a weighted-average period of 14 months.

No cash was received from exercise of options in the years ended December 31, 2011, 2010 and 2009.

The options granted to employees and director outstanding as of December 31, 2011 separated into ranges of exercise prices, are as follows:

                       
Weighted average
 
     
Options
   
Weighted
   
Options
   
remaining
 
     
outstanding
   
average
   
exercisable
   
contractual
 
     
as of
   
remaining
   
as of
   
life   of options
 
exercise
   
December 31,
   
contractual
   
December 31,
   
exercisable
 
price
   
2011
   
life (years)
   
2011
   
(years)
 
                           
$ 0       55,144       2.00       53,644       1.91  
$ 0.95       89,440       4.98       22,360       4.98  
$ 2.00       36,794       4.25       36,794       4.25  
$ 2.10       1,500       4.51       -       -  
$ 2.48       1,500       2.14       1,000       2.14  
$ 2.75       2,462       2.56       2,462       2.56  
$ 3.05       6,000       1.88       4,500       1.88  
$ 3.49       1,500       0.12       1,500       0.12  
$ 5.00       58,640       1.11       37,610       1.52  
$ 7.33       1,500       1.34       1,500       1.34  
$ 7.50       1,500       1.50       1,500       1.50  
$ 8.40       15,000       6.24       15,000       6.24  
$ 8.57       1,500       0.22       1,500       0.22  
$ 11.93       80,000       2.75       80,000       2.75  
$ 12.60       62,680       4.94       62,680       4.94  
$ 13.40       28,066       0.38       28,066       0.38  
$ 15.00       5,600       0.81       1,600       2.64  
$ 20.00       50,000       0.05       50,000       0.05  
                                     
          498,826       2.91       401,716       2.71  

 
F-37
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 15:-
SHAREHOLDERS' EQUITY (Cont.)

 
c.
Warrants issued to service providers and debt providers:

The Company accounts for warrants issued to service providers and debt providers in accordance with the provisions of ASC 505-50, "Equity-Based Payments to Non-Employees" . The fair value for these warrants was estimated at the date of grant using the Black-Scholes option pricing model . During the years 2009 and 2010 the Company granted warrants to several service and debt providers (see Note 13). No warrants were granted in 2011 to service and debt providers.

The Company's outstanding warrants to service and debt holders as of December 31, 2011 are as follows:

                       
Weighted average
 
     
Warrants
   
Weighted
   
Warrants
   
remaining
 
     
outstanding
   
average
   
exercisable
   
contractual
 
     
as of
   
remaining
   
as of
   
life   of warrants
 
exercise
   
December 31,
   
contractual
   
December 31,
   
exercisable
 
price
   
2011
   
life (years)
   
2011
   
(years)
 
                           
$ 0.00       1,320       2.00       1,320       2.00  
$ 2.50       20,000       4.59       20,000       4.59  
$ 2.75       140,599       1.01       140,599       1.01  
$ 3.72       69,096       2.10       69,096       2.10  
$ 5.00       13,200       2.00       13,200       2.00  
$ 20.20       19,482       0.97       19,482       0.97  
$ 26.50       9,741       1.63       9,741       1.63  
                                     
          273,438       1.61       273,438       1.61  
 
NOTE 16:-
TAXES ON INCOME

 
a.
Change in corporate tax rate:

The Israeli corporate tax rate was 26% in 2009, 25% in 2010 and 24% in 2011.

A company is taxable on its real (non-inflationary) capital gains at the corporate tax rate in the year of sale. A temporary provision for 2006-2009 stipulated that the sale of an asset other than a quoted security (excluding goodwill that was not acquired) that had been purchased prior to January 1, 2003, and sold by December 31, 2009, is subject to corporate tax as follows: the part of the real capital gain that is linearly attributed to the period prior to December 31, 2002 is subject to the corporate tax rate in the year of sale as set forth in the Israeli Income Tax Ordinance, and the part of the real capital gain that is linearly attributed to the period from January 1, 2003, through December 31, 2009, is subject to tax at a rate of 25%.

 
F-38
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 16:-
TAXES ON INCOME (Cont.)

On December 5, 2011, the Israeli Parliament (the Knesset) passed the Law for Tax Burden Reform (Legislative Amendments), 2011 ("the Law") which, among other things, cancels, effective from 2012, the scheduled progressive reduction in the corporate tax rate. The Law also increases the corporate tax rate to 25% in 2012. In parallel with this increase in the corporate tax rate, the real capital gains tax rate and the real betterment tax rate were increasedas well.
 
The Law did not have a material effect on the Company's consolidated financial position or results of operations.
 
 
b.
Loss carry forward:

The Company and its Israeli subsidiaries have accumulated losses for Israeli income tax purposes as of December 31, 2011, in the amount of approximately $ 31,111. These losses may be carried forward and offset against taxable income in the future for an indefinite period. In addition, the Company and its Israeli subsidiaries have accumulated capital loses which may be carried forward under certain limitations.

 
c.
Deferred income taxes:

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:

   
December 31,
 
   
2011
   
2010
 
Assets in respect of:
           
             
Allowances and provisions
  $ 195     $ 188  
Net operating loss carry forward (1)
    7,778       6,625  
                 
      7,973       6,813  
                 
Valuation allowance (2)
    (7,838 )     (6,461 )
                 
      135       352  
Liabilities in respect of intangible assets
    (135 )     (352 )
                 
Net deferred tax assets (liability)
  $ -     $ -  

 
(1)
See Note 16b.

 
(2)
The Company has provided valuation allowances in 2011 on deferred tax assets resulting from tax loss carry forward and other reserves and allowances due to their history of operating losses and current uncertainty concerning the ability to realize these deferred tax assets in the future.

 
F-39
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 16:-
TAXES ON INCOME (Cont.)

 
d.
Tax benefit (taxes on income) is comprised as follows:

   
Year ended December 31,
 
   
2011
   
2010
   
2009
 
                   
Current
  $ 172     $ (2 )   $ (6 )
Prior years
    -       (3 )     -  
Deferred
    -       -       (323 )
                         
    $ 172     $ (5 )   $ (329 )
                         
Domestic
    172     $ (73 )   $ (323 )
Foreign
    -       68       (6 )
                         
    $ 172     $ (5 )   $ (329 )
 
 
e.
Profit (Loss) before taxes is comprised as follows:

   
Year ended December 31,
 
   
2011
   
2010
   
2009
 
                   
Domestic
  $ (3,429 )   $ 228     $ (5,697 )
Foreign
    43       (52 )     -  
                         
    $ (3,386 )   $ 176     $ (5,697 )
 
 
f.
Reconciliation of the theoretical tax expense to the actual tax expense:

The main reconciling items between the statutory tax rate of the Company and the effective tax rate are the non-recognition of tax benefits from accumulated net operating losses carry forward among the Company and various subsidiaries due to uncertainty of the realization of such tax benefits.
 
 
g.
Tax assessments:

BOS, BOS Odem, BOS Dimex and Quasar have final assessments through 2006. Dimex Hagalil was incorporated in 2008, and therefore, does not have any final assessments.
Ruby-Tech Inc., a U.S. subsidiary, has final assessments through 2007.
 
 
h.
In accordance with the Company's accounting policy, interest expense and potential penalties related to income taxes are included in the tax expense line of the Company's consolidated statements of operations.

 
F-40
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 16:-
TAXES ON INCOME (Cont.)

The Company and its subsidiaries file income tax returns in Israel and in the United States. BOS, BOS Dimex, BOS Odem and Quasar may be subject to auditing by the Israel tax authorities for fiscal years 2007 and after. Dimex Hagalil may be subject to auditing by the Israel tax authorities for fiscal years 2008 and thereafter. Ruby-Tech Inc., a U.S. subsidiary, may be subject to auditing by the U.S. Internal Revenue Service for fiscal years 2007 and thereafter.

The Company believes that it has adequately provided for any reasonably foreseeable outcome related to tax audits and settlement. The final tax outcome of the Company's tax audits could be different from that which is reflected in the Company's income tax provisions and accruals. Such differences could have a material effect on the Company's income tax provision and net loss in the period in which such determination is made.
 
 
i.
Uncertain tax positions

   
December 31,
 
   
2011
   
2010
 
             
Uncertain tax positions, beginning of year
  $ 379     $ 333  
Decreases in tax positions for prior years
    (207 )     (12 )
Increases in tax positions for current year
    -       58  
                 
Uncertain tax positions, end of year
  $ 172     $ 379  

The Company recognizes interest accrued that is related to unrecognized tax benefits and penalties in taxes on income. During the years ended December 31, 2011 and 2010, the Company recognized approximately ($ 54) and $ 22, respectively, in interest and penalties. The Company had approximately $ 54 and $ 109 accruals for the payment of interest and penalties at December 31, 2011 and 2010, respectively.

 
F-41
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 17:-
SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS
 
  Financial expenses, net:      
         
     
Year ended December 31,
 
     
2011
   
2010
   
2009
 
a. Financial income:                  
                     
 
Interest on bank deposits
  $ 3     $ 32     $ 9  
 
Change in fair value of forward contracts
    -       141       82  
                           
        3       173       91  
 
Financial expenses:
                       
 
In respect of bank loans and convertible note
    (1,251 )     ( 1 ,039 )     ( 671 )
 
Inducement and related cost (Note 13)
    (760 )     -       -  
 
Revaluation of fair value related to extension of warrants as part of an Inducement of a convertible note
    (86 )     -       -  
 
Change in fair value of forward contracts
    (44 )                
 
Other (mainly foreign currency transaction losses)
    (103 )     (95 )     (26 )
                           
        (2,244 )     (1,134 )     (697 )
                           
      $ (2,241 )   $ ( 961 )   $ ( 606 )
b.
Net earnings (loss) per share:
                       
                                 
    1.  
Numerator:
                       
       
Numerator for basic and diluted net Earnings (loss) per share:
                       
       
Income (loss) from continuing operations
  $ (3,214 )   $ 171     $ (6,026 )
       
 Loss from discontinued operations
    -       (806 )     (3,075 )
                                 
       
Net loss available to ordinary shareholders
  $ (3,214 )   $ (635 )   $ ( 9,101 )
                                 
    2.  
Denominator (in thousands):
                       
                                 
       
Basic weighted average ordinary shares outstanding (in thousands)
    2,818       2,622       2,606  
       
Diluted weighted average ordinary shares outstanding (in thousands)
    2,818       2,757       2,606  
       
Basic and diluted net earnings (loss) per share from continuing operations
  $ (1.14 )   $ 0.07     $ (2.32 )
       
Basic and diluted net earnings (loss) per share from discontinued operations
  $ -     $ (0.31 )   $ (1.18 )
       
Basic and diluted net loss per share
  $ (1.14 )   $ (0.24 )   $ (3.50 )

 
F-42
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 18:-
SEGMENTS AND GEOGRAPHICAL INFORMATION

The Company manages its business in two reportable segments, consisting of the RFID and Mobile Solutions segment and the Supply Chain Solutions segment.

The Company's management makes financial decisions and allocates resources, based on the information it receives from its internal management system. The Company allocates resources and assesses performance for each operating segment using information about revenues and gross profit. The Company applies ASC 280, Segment Reporting .

 
a.
Revenues, gross profit and assets for the operating segments for the years 2011, 2010 and 2009 were as follows:
 
     
RFID and Mobile Solutions
     
Supply
Chain Solutions
     
Not
Allocated/ Intercompany
     
Consolidated
 
2011
                               
                                 
Revenues
  $ 13,128     $ 21,332     $ (1,026 )   $ 33,434  
                                 
Gross profit
  $ 3,105     $ 3,405     $ -     $ 6,510  
                                 
Assets related to segment
  $ 10,132     $ 9,869     $ 68     $ 20,069  
                                 
2010
                               
                                 
Revenues
  $ 12,463     $ 17,724     $ -     $ 30,187  
                                 
Gross profit
  $ 3,632     $ 3,851     $ -     $ 7,483  
                                 
Assets related to segment
  $ 12,418     $ 9,605     $ 107     $ 22,130  
                                 
2009
                               
                                 
Revenues
  $ 10,729     $ 14,738     $ -     $ 25,467  
                                 
Gross profit
  $ 3,375     $ 116     $ -     $ 3,491  
                                 
Assets related to segment
  $ 17,201     $ 4,159     $ 579     $ 21,939  

 
F-43
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 18:-
SEGMENTS AND GEOGRAPHICAL INFORMATION (Cont.)

 
b.
The following presents total revenues and long-lived assets for the years 2011, 2010 and 2009 based on the location of customers:
 
   
Year ended December 31,
 
   
2011
   
2010
   
2009
 
   
Total
   
Long-lived
   
Total
   
Long-lived
   
Total
   
Long-lived
 
   
revenues
   
assets *)
   
revenues
   
assets *)
   
revenues
   
assets *)
 
                                     
America
  $ 1,514     $ -     $ 2,596     $ -     $ 1,548     $ -  
Far East
    3,943       -       2,228       -       998       -  
Europe
    976       -       811       -       566       -  
Israel and others
    27,001       1,166       24,552       1,135       22,355       1,221  
                                                 
    $ 33,434     $ 1,166     $ 30,187     $ 1,135     $ 25,467     $ 1,221  

 
*)
Long-lived assets are comprised of property, plant and equipment (intangible assets and goodwill are not included).
 
 
c.
Major customer data as a percentage of total revenues:

   
Year ended December 31,
 
   
2011
   
2010
   
2009
 
                   
Customer A (Supply Chain Segment)
    10 %     7 %     14 %
 
NOTE 19:-
RELATED PARTIES

 
a.
Service Agreement of Cukierman & Co.:

The Company's Audit Committee and Board of Directors approved an engagement with Cukierman & Co. Investment House Ltd. ("Cukierman & Co"), to provide non-exclusive investment-banking services and business development services to the Company ("the Service Agreement"), effective April 15, 2003. Cukierman & Co. is a company indirectly controlled by Mr. Edouard Cukierman. Since June 26, 2003, Mr. Cukierman serves as Chairman of the Company's Board, and he is also a co-manager of the Catalyst Fund, the Company's largest shareholder. For its services, Cukierman & Co. is paid a monthly sum of $ 10 plus VAT, in addition to a success fee of 4%-6% for a consummated private placement. The Service Agreement provides for success fees in connection with securing M&A transactions of 3.5% of the proceeds exchanged in such a transaction and also for a success fee of 6% of the revenues actually received by the Company in respect of a sale of the Company's products to a new customer which was introduced by Cukierman & Co. According to its terms, the Company may terminate the Service Agreement at any time, by giving a one-month prior written notice.

 
F-44
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 19:-
RELATED PARTIES (Cont.)

Expenses the Company paid or accrued according to the Service Agreement with Cukierman & Co. are:

   
Year ended December 31,
 
   
2011
   
2010
   
2009
 
                   
Business development
  $ 120     $ 95     $ 147  
Success fee in respect of issuance of convertible loan
    -       -       40  
Success fee in respect of issuance of private placements
    -       18       -  
                         
Total
  $ 120     $ 113     $ 187  
 
 
b.
Active Chairman Agreement with Edouard Cukierman:

On November 7, 2007, the shareholders approved an Active Chairman Agreement with Mr. Edouard Cukierman, the Chairman of the Board, pursuant to which, Mr. Edouard Cukierman was granted options ("the Options") to purchase up to 20,000 ordinary shares of the Company per each calendar year of service as the Company's Chairman of the Board of Directors ("the Service") in the years 2007-2010. The Options were in lieu of any compensation, fees or options otherwise payable by the Company to Mr. Cukierman as a director.

The exercise price of the Options was $ 11.925, which was equal to the weighted average of the closing prices of the Company's ordinary shares on the Nasdaq Global Market during the thirty-day period preceding the shareholders approval. Unexercised Options expire after five years from their grant date.

In March 2011, the Company’s Audit Committee and Board of Directors approved a new Active Chairman Agreement with Mr. Cukierman for services in the years 2011-2014. The agreement was approved by the company's shareholder on December 20, 2011. Pursuant to this agreement in consideration for Mr. Cukierman’s services as the Company’s Active Chairman in the years 2011-2014, he shall be granted options to purchase 89,440 ordinary shares, and be paid a monthly cash payment of $5, plus VAT at the prevailing rate. Payment of the cash fee shall be made each month in respect of the previous month of service. Following approval by the shareholders, the cash fees for 2011 were paid retroactively for the entire year.
 
The exercise price of the options is $0.95 and they vest and become exercisable in 16 equal quarterly installments of 5,590 options each. The first three installments vested immediately following the shareholders approval, and the fourth installment vested on December 31, 2011. Additional installments vest at the end of each subsequent calendarquarter, provided that Mr. Cukierman shall hold his position as Chairman of the Board at the applicable vesting date.
 
Pursuant to the agreement, if Mr. Cukierman’s service to the Company is terminated by the Company for no cause then: (a) any unvested options shall be accelerated, so that they become immediately vested in full as of the date of the termination and (b) the accelerated options and  any previously vested options shall be exercisable for twenty four (24) months following the termination.

 
F-45
 

B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 19:-
RELATED PARTIES (Cont.)
 
The options and the cash fee are in lieu of any compensation, fees or options otherwise payable by the Company to Mr. Cukierman as a director.

Expenses the Company paid or accrued according to the Active Chairman Agreement with Edouard Cukierman are as follows:
 
   
Year ended December 31,
 
   
2011
   
2010
   
2009
 
                   
Chairman fees
  $ 60     $ -     $ -  
Share based compensation expenses
    43       75       147  
                         
Total
  $ 103     $ 75     $ 147  
 
 
c.
Agreements with THCAP:

In September 2009, the Company entered into a service agreement with THCAP, pursuant to which THCAP shall provide the Company with non-exclusive private financing and business consulting services. In consideration, the Company issued to THCAP warrants to purchase 14,400 ordinary shares at an exercise price of $2.75 per share. The warrants were exercisable as of February 28, 2011 and can be exercised until August 31, 2012. In March 2012,

The Company’s Audit Committee and Board of Directors approved an additional grant to THCAP of warrants to purchase 14,400 ordinary shares. The grant is subject to the Company's shareholder approval. The warrants' exercise price will be equal to the weighted average of the closing prices of the Company’s ordinary shares on the Nasdaq Capital Market, during the twenty-day period preceding the date of the shareholders' approval. The warrants will be exercisable for 3 years from the grant date.
 
In November 2009, the Company entered into an amendment to the service agreement with THCAP, pursuant to which THCAP shall be paid a success fee of 5% of the revenues generated to the Company from the sale of the Company products to business partners introduced by THCAP.

Expenses the Company paid or accrued according to the agreements with THCAP are as follows:
 
   
Year ended December 31,
 
   
2011
   
2010
   
2009
 
                   
Share based compensation expenses
  $ 1     $ 10     $ 1  

On October 5, 2010 the Company entered into a definitive private placement agreement with THCAP pursuant to which the Company issued to THCAP ordinary shares (see Note 15a), and
 
Mr. Luis Gutierrez Roy, the managing partner in THCAP was appointed to its Board of Directors.

 
F-46
 
 
B.O.S. BETTER ONLINE SOLUTIONS LTD.
AND ITS SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
 
NOTE 20:-
Subsequent events

 
a.
On January 17,  2012,  the Company received a notice from the Listing Qualifications Department of The Nasdaq Stock Market (“Nasdaq”) advising the Company that it has failed to comply with Nasdaq’s requirement that listed securities maintain a minimum bid price of $1.00 per share as set forth in Nasdaq Listing Rules. The Company has a 180 days' period, until July 16, 2012 ,   to regain compliance with the $1.00 minimum bid price requirement. If at any time during this 180 days' period, the closing bid price of the Company’s security is at least $1 for a minimum of ten consecutive business days, the Company will regain compliance. In the event the Company does not regain compliance, the Company may be eligible for additional 180 calendar days. To qualify, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of its intention to cure the deficiency during the second compliance period.
 
F-47
Exhibit 4.10
 
AGREEMENT

           THIS AGREEMENT (the “ Agreement ”) is made as of the 9 th day of November, 2011 (the “ Effective Date ”), by and between B.O.S Better Online Solutions Ltd. (the “ Company ”) and Dimex Systems (1988) Ltd. (the “ Lender ”).

W I T N E S S E T H:

           WHEREAS, on July 28, 2009 the Company and the Lender entered into a Loan Agreement in respect of a principal amount of $674,689 owed by the Company to the Lender (the " July Loan Agreement" , and the " July Loan ");

           WHEREAS, on February 3, 2010 the Company and the Lender entered into a Loan Agreement in respect of a principal amount of $161,594 owed by the Company to the Lender (the " February Loan Agreement " and the " February Loan ").  The February Loan together with the July Loan shall be referred to as the " Convertible Loans ";

           WHEREAS, pursuant to the February Loan Agreement, the Lender holds, as of November 2, 2011, 25 checks covering payment of NIS 2,532,859 of principal and interest (including VAT) payable to the Lender (the " Installment Debt );

           WHEREAS, pursuant to the terms thereof, the Convertible Loans are convertible at the election of the Lender, at anytime prior to their respective maturity date;

           WHEREAS, the Company wishes to have the Lender convert its Convertible Loans into the Company's Shares prior to the maturity dates, and in order to induce Lender to do so has proposed certain amendments to the terms of the Convertible Loans and an extension to certain of the Lender's warrants, as more fully described below;

           WHEREAS, the Lender agreed to convert part of its Convertible Loans on the terms on conditions described below; and

           WHEREAS, the Company intends to submit the proposed amendments to the terms of the  Convertible Loans to shareholders' approval, such approval being a condition precedent to the Company's performance of this Agreement.

    NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Lender hereby agree as follows:
 
1.
Loan Conversion .
 
1.1.            By execution of this Agreement, Lender serves notice to the Company, pursuant to Section 2.4 of the February Loan Agreement and Section 2.4 of the July Loan Agreement, of the conversion (the " Conversion ") at the Closing (as defined below), and subject to the consummation thereof, of  $500,904 (Five Hundred Thousand Nine Hundred and Four US Dollars) of the Convertible Loans (the " Converted Loans ", comprised of $418,142 of principal amount and $82,762 of accrued interest), into the Company's ordinary shares, nominal value NIS20.00 each (each, a “ Share ” and collectively, the “ Shares ”).
 
1.2.            The Conversion shall take place at the Closing (as defined below), and shall be made at a reduced conversion price of $1.50 per Share (the "Conversion Price") , yielding an issuance to the Lender of 333,936 (Three Hundred Thirty Three Thousand Nine Hundred and Thirty Six) Shares (the “ Converted Shares ”).
 
 
 
 
 
1.3.            The balance of the Convertible Loans, equal as of the Closing, to $500,904 (Five Hundred Thousand Nine Hundred and Four US Dollars), comprised of $418,142 of principal amount and $82,762 of accrued interest (the " Deferred Loan ") shall remain outstanding, will not be convertible, and shall be repaid to the Lender, together with Interest and applicable VAT, in 24 equal monthly installments commencing January 10 th , 2014.
 
1.4.            Commencing upon consummation of the Closing, the annual rate of interest on the Deferred Loan (the “ Interest ”) shall be reduced from 8% to 4%, compounded annually, calculated on the basis of a 360-day year and pro-rated with respect to any partial periods.
 
1.5.            An Amortization Table reflecting the installments as of the Closing is attached hereto as Schedule 1.5 . The Amortization Table was calculated based on a Dollar/Shekel rate of exchange equal to 3.65, and shall be updated, immediately prior to Closing, by the last known Dollar/Shekel representative rate of exchange, as published by the Bank of Israel prior to the Closing.
 
1.6.            To ensure the payments of the installments of the Deferred Loan, at the Closing, the Company shall provide Lender with 24 checks from Lender's account in Bank Leumi (the " Bank "), each payable to Lender, and each covering the full payment of each of the payments under Schedule 1.5 (as updated pursuant to the provisions of Section 1.5 above) post dated to their due dates, together with Interest and applicable VAT.  For the removal of doubt, only actual receipt of funds no later than 3 business days following presentation of each of such checks for deposit shall be considered as payment made to Lender hereunder.
 
1.7.            For the removal of doubt, the Registration Rights Agreements entered into between the Company and the Lender on July 28, 2009 and on February 3, 2010, shall remain in full force and effect.
 
2.
Extension of Warrants
 
2.1.            Subject to and conditioned upon the Conversion, the exercise period of the 50% of the following Lender's outstanding warrants to purchase Shares (i.e. 103,798 Shares out of the warrant issued on July 28, 2009 (Warrant No. BOS 09-09), and 24,861 Shares out of the warrant issued on February 3, 2010 (Warrant No. BOS 10-02), collectively, the " Warrants ")) shall be extended by two years, until July 28, 2014 and February 3, 2015, respectively. A form of an amendment to the Warrants extending their term in respect to 50% of the underlying Shares is attached as Schedule 2 hereto.
 
2.2.            The Warrant's exercise price shall remain the same, $2.75 per Share (subject to adjustment in the events set forth therein.)
 
3.
Event of Default
 
3.1.            Without derogating from any right and/or remedy available to Lender under applicable law, upon the occurrence of an "Event of Default" as defined below, without notice by Lender to, or demand by Lender of Company, all of the Deferred Loan, plus Interest and VAT, if applicable, and all of the Installment Debt, which has not yet been paid to Lender, plus interest and VAT if applicable, shall immediately become due and payable by Company to the Lender.
 
 
2
 
 
3.2.            In addition, and without derogating from the forgoing, or from any right or remedy available to a party hereunder or pursuant to applicable law, (i) any payment hereunder not paid when due shall bear an additional default interest at the rate of 5.5% per annum, compounded annually, from the date such payment has become due and until actual payment thereof; and (ii) upon a material breach of this Agreement, which continues 30 days or more following receipt by the Company of notice of same from Lender, Company shall  pay  Lender liquidated damages in an amount equal to 10% of the outstanding amount of the Installment Debt and Deferred Loan owed to Lender hereunder (including Interest) at such time.
 
3.3.            The parties agree that the aforesaid liquidated damages, without any need of proof of actual damage, were determined after careful evaluation and are considered as reasonable under the circumstances, and the Company agrees not to raise any argument to the contrary regarding the amount of liquidated damages agreed hereunder.
 
3.4.            " Event of Default " shall mean any of the following:
 
  (a)          the Company is unable to pay its debts as they come due, makes a general assignment for the benefit of its creditors, or files for voluntary liquidation;
 
  (b)          the filing against the Company of any petition in liquidation or any petition under the provisions of applicable law for the relief of creditors, or a liquidator or receiver is appointed for or over all of or a substantial part of the assets of the Company, if such petition or appointment is not dismissed or stayed within sixty (60) days;
 
  (c)          the Company defaults on any payment of the Installment Debt or the Deferred Loan, or fails to duly perform or comply with any of its covenants or other obligations under this Agreement and (if capable of remedy) such failure is not remedied within 21 Business Days, after the Lender provides written notice thereof to the Company.
 
  (d)          the Company adopts a resolution (i) for a merger with and into a third party, where the Company is not the surviving entity where such event may reasonably be deemed to have a material adverse effect on the Lender’s ability to receive the Deferred Loan and Installment Loan repayment hereunder (excluding, for the avoidance of doubt, reorganization among the Company and its subsidiaries) or (ii) for a sale of all or substantially all of the Company’s assets.
 
4.
Representations.   The Company hereby represents and warrants to the Lender that the following shall be true and correct as of the date of the Closing:
 
4.1.            Due Authorization and Valid Issuance.  The Company has the corporate power to enter into this Agreement and perform its obligations hereunder. This Agreement, and all other instruments, certificates and agreements executed and/or delivered or required to be executed and/or delivered by the Company under or pursuant to this Agreement (the " Transaction Documents ") have been duly approved by the necessary corporate bodies, executed and delivered by the Company.
 
 
3
 
 
The Shares issued hereunder will, upon issuance be duly authorized, validly issued, fully-paid and nonassessable, free of any preemptive rights and are free and clear of any liens, claims, encumbrances or third party rights of any kind.
 
4.2.            Binding Agreement. The Transaction Documents constitute a valid and legally binding obligation of the Company enforceable against the Company in accordance with their terms, except as (i) such enforceability may be limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws relating to or affecting the rights of creditors and contracting parties generally, (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefore may be brought, and (iii) rights to indemnity and contribution may be limited by Israeli or U.S. state or federal securities laws applicable to the Company or by the public policy underlying such laws.
 
4.3.            Non-Contravention.  Neither the execution and delivery of the Transaction Documents, nor the consummation of the transactions or the performance of the obligations contemplated hereby will result in any violation or breach of the Company’s articles of association, by-laws, board resolutions or shareholders resolutions.
 
4.4.            No Consent. No consent or approval of any governmental body or any other third party, including the Bank or any other financial institute to which the Company is indebted, is required to be made or obtained by the Company in connection with the execution and delivery of the Transaction Documents by the Company or the consummation by the Company of the transactions or the performance of the obligations contemplated therein by the Company.
 
4.5.            Conversion.  At the Closing, the Other Lenders' Conversion (as defined below) shall have been effected in full in accordance with its terms.
 
5.
Closing .
 
5.1.            Closing shall occur on December 21 st , 2011 at the offices of Shibolet & Co., 4 Berkovich St. (Museum Tower – 8th floor), Tel-Aviv, at 11:00 (the “Closing Date”) or such other time and place, as shall be agreed between the parties in advance and in writing. Lender agrees that the Company may, by written notice, defer the Closing to no later than December 25 th (the “ Deferred Closing Date ”) in which case Closing shall occur on the basis of an updated Schedule 1.5 (taking into account Interest at a rate of 8% until the actual date of Closing).  In the event that the Closing does not occur and is not consummated in full by the Deferred Closing Date, Lender shall be entitled to terminate this Agreement by immediate written notice. The consummation of the Closing shall be subject to the satisfaction of the following closing Conditions:
 
(a)          The Company’s Shareholders approved the amendments to the Convertible Loans and the extension of the Warrants contemplated above.
 
(b)          All of the other Lenders whose convertible loans are due in July 2012, as detailed in Schedule 5.1(b)(1) hereto attached (the " Other Lenders "), will have converted their respective loans in their entirety (including any and all interest thereon) into Shares at the Conversion Price, in accordance with written agreements substantially in the form attached as Exhibit 5.1(b)(2) hereto (the " Other Lenders' Conversion ").
 
 
4
 
 
5.2.            At the Closing, the following actions will be taken and shall be considered as taken simultaneously, and unless the occurrence or completion of any such transaction or action, was waived, in writing, by the applicable party, no transaction hereunder shall be deemed to have been completed and no action shall be deemed as taken or document delivered unless and until all have been taken, delivered and completed at the Closing:
 
 
 5.2.1.
Company shall provide to Lender:
 
(a)          Written confirmation by Buyer's CEO and CFO in the form hereto attached as Schedule 5.2.1 , that: (i) the execution, delivery and performance of this Agreement  has been dully approved by all required corporate approvals and that no other action, consent or approval (including, without limitation, of the Company's Bank or any other financial institute to which the Company is indebted) is required for the Company to sign, deliver and perform this Agreement and any and all of the transactions contemplated hereunder, and (ii) the Other Lenders' Conversion has been consummated in full with respect to each of the Other Lenders.

(b)          All of the post-dated checks detailed in Section 1.6 above, dully signed by an authorized signatory of the Company.

(c)          A copy of a share certificate representing 333,936 Shares, issued in the name of the Lender, with an original share certificate to follow promptly.

(d)          Duly Executed amendments to the Warrants.

(e)          Payment in cash of VAT calculated on the interest portion of the Converted Loans, in accordance with the invoice referred to in section 5.2.2 below.
 
 
    5.2.2.
Lender shall provide Company with an invoice (including VAT) and a tax withholding exemption in respect of the Interest in the form hereto attached as Schedule 5.2.2 . Lender undertakes to hold harmless and fully indemnify the Company, at its first demand, from and against any and all liabilities, costs, penalties and expenses suffered or incurred by the Company in connection with any tax withholding obligation relating to the payments to Lender hereunder, all to the extent Lender has not timely provided the Company with a valid exemption from withholding, covering the periods for which such withholding was required. The Company shall give Lender written notice promptly after it becomes aware of an event which may serve as a basis for an indemnification claim hereunder and shall allow Lender to assume defense of such a claim or demand for payment of withholding, at Lender's sole cost and expense.  
 
 
5
 
 
 
    5.2.3.
The Conversion of the Converted Loans shall be effected, the Converted Loans shall be deemed fully paid, and the Converted Shares dully issued.
 
6.
Miscellaneous
 
6.1              Amendments . This Agreement may be modified, supplemented or amended only by a written instrument executed by the Company and the Lender solely with respect to the Lenders rights and obligations.
 
6.2              Notices .  Any notice that is required or provided to be given under this Agreement shall be in writing and shall be deemed to have been sufficiently given and received for all purposes,  (i) when delivered in writing by hand, upon delivery; (ii) if sent via facsimile or email, upon transmission and electronic confirmation of receipt (and if transmitted and received on a non-business day, on the first Business Day following transmission and electronic confirmation of receipt), (iii) three (3) Business Days (and ten (10) Business Days for international mail) after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or (iv) three (3) Business Days after being sent by internationally overnight delivery providing receipt of delivery, to the following addresses:
 
if to the Company, B.O.S Better Online Solutions Ltd., 20 Freiman Street, Rishon Lezion, 75101 Israel Attn: Mr. Eyal Cohen, CFO, facsimile: (972) 3 954-1003, with a copy to Amit, Pollak Matalon & Co., Nitzba Tower, 17 Yitzhak Sadeh St., Tel-Aviv 67775 Israel  attn: Shlomo Landress, Adv.  Fax: (972) 3 568-9001; or at any other address designated by the Company to the Lender in writing;
 
if to the Lender, c/o Gabi Jacobs, Uriel Ofek 3, Hertzliya 46470, facsimile: (972) 9 9573658, with a copy to Ofer Manor, Adv, Shibolet & Co, 4 Berkovitz St, Tel-Aviv 64238, facsimile: (972) 3 7778444 or at any other address designated by the Lender to the Company in writing.
 
6.3              Delays or Omissions; Waiver . Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any party under this Agreement shall impair any such right, power or remedy of such party nor shall it be construed to be a waiver of any breach or default, or an acquiescence thereto, or of a similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party hereto of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing.
 
6.4              Other Remedies . Any and all remedies herein expressly conferred upon a party shall be deemed cumulative with, and not exclusive of, any other remedy conferred hereby or by law on such party, and the exercise of any one remedy shall not preclude the exercise of any other.
 
 
6
 
 
6.5              Entire Agreement . This Agreement and the exhibits and schedules hereto, constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and thereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect hereto and thereto, including, without limitation, the July Loan Agreement and the February Loan Agreement.
 
6.6              Headings .  All section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Agreement.
 
6.7              Severability . Should any one or more of the provisions of this Agreement (including its exhibits and schedules) or of any agreement entered into pursuant to this Agreement be determined to be illegal or unenforceable, all other provisions of this Agreement and of each other agreement entered into pursuant to this Agreement, shall be given effect separately from the provision or provisions determined to be illegal or unenforceable and shall not be affected thereby. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision, which will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provision.
 
6.8              Assignment . This Agreement may not be assigned in whole or in part by the Lender without the prior written consent of the Company. For the avoidance of doubt, Lender may endorse and transfer the Company checks to a reputable third party for collection (factoring).
 
6.9              Governing Law and Venue . This Agreement shall be construed in accordance with and governed by the internal laws of the State of Israel, without regard to conflict of laws provisions. Any dispute arising under or in relation to this Agreement shall be adjudicated in the competent court of Tel Aviv-Jaffa district only, and each of the parties hereby submits irrevocably to the exclusive jurisdiction of such court.
 
6.10            Counterparts . This Agreement may be executed concurrently in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
 
6.11            Further Actions .  At any time and from time to time, each party agrees, without further consideration, to take such actions and to execute and deliver such documents as may be reasonably necessary to effectuate the purposes of this Agreement.
 
 
7
 
 
IN WITNESS WHEREOF the parties have signed this Agreement in one or more counterparts as of the date first appearing above.
 
B.O.S BETTER ONLINE SOLUTIONS LTD.
 
By:
 
_________________________
Yuval Viner
Chief Executive Officer
 
_________________________
Eyal Cohen
Chief Financial Officer
DIMEX SYSTEMS (1988) LTD.
 
By:____________________________
Name:__________________________
Title:___________________________
 
 
8
 
 
AMENDMENT TO
ORDINARY SHARES PURCHASE WARRANT
 
NO. BOS09-09
 
THIS AMENDMENT TO ORDINARY SHARES PURCHASE WARRANT   (the “ Amendment ” ) is made as of December ____, 2011 by and among B.O.S Better Online Solutions Ltd. (the “ Company ”) and Dimex Systems (1988) Ltd. (the “ Holder ” ).

Recitals
 
WHEREAS , the Company has granted to the Holder a warrant to purchase up to 207,596 shares of the Company, nominal value NIS 20.00 each (the " Ordinary Shares ") pursuant to an Ordinary Shares Purchase Warrant No. BOS09-09, dated July 28, 2009 (the " Warrant "); and
 
WHEREAS, the parties wish to amend the Warrant as specified below;
 
NOW THEREFORE , in consideration of the mutual promises and covenants set forth herein, the parties hereby agree as follows:
 
1.
Capitalized terms used herein, which are not defined in this Amendment, shall have the meaning assigned to them in the Warrant.
 
2.
The parties agree that the Expiration Date of the Warrant, as it relates to 103,798 Ordinary Shares shall be extended by two years, until July 28, 2014. The Expiration Date in respect of 103,798 Ordinary Shares shall remain the same (i.e., July 28, 2012).
 
3.
Except   as otherwise amended hereby, all terms and provisions of the Original Warrant shall continue in full force and effect.
 
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above, which may be executed and delivered by facsimile in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

B.O.S Better Online Solutions Ltd.
 
By: ______________
Name: ___________
Title:  __________
Dimex Systems (1988) Ltd.
 
By: ______________
Name: ___________
Title: __________
 
 
9
 
 
AMENDMENT TO
ORDINARY SHARES PURCHASE WARRANT
 
NO. BOS10-02
 
THIS AMENDMENT TO ORDINARY SHARES PURCHASE WARRANT   (the “ Amendment ” ) is made as of December ____, 2011 by and among B.O.S Better Online Solutions Ltd. (the “ Company ”) and Dimex Systems (1988) Ltd. (the “ Holder ” ).

Recitals
 
WHEREAS , the Company has granted to the Holder a warrant to purchase up to 49,721 shares of the Company, nominal value NIS 20.00 each (the " Ordinary Shares ") pursuant to an Ordinary Shares Purchase Warrant No. BOS10-02, dated February 3, 2010 (the " Warrant "); and
 
WHEREAS, the parties wish to amend the Warrant as specified below;
 
NOW THEREFORE , in consideration of the mutual promises and covenants set forth herein, the parties hereby agree as follows:
 
4.
Capitalized terms used herein, which are not defined in this Amendment, shall have the meaning assigned to them in the Warrant.
 
5.
The parties agree that the Expiration Date of the Warrant, as it relates to 24,861   Ordinary Shares, shall be   extended by two years, until February 3, 2015. The Expiration Date in respect of 24,860 Ordinary Shares shall remain the same (i.e., February 3, 2013).
 
6.
Except as otherwise amended hereby, all terms and provisions of the Original Warrant shall continue in full force and effect.
 
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above, which may be executed and delivered by facsimile in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
 
B.O.S Better Online Solutions Ltd.
 
By: ______________
Name: ___________
Title:  __________
Dimex Systems (1988) Ltd.
 
By: ______________
Name: ___________
Title: __________
 
10
Exhibit 4.12
 
AGREEMENT

THIS AGREEMENT (the “ Agreement ”) is made as of the _____day of November, 2011 (the “ Effective Date ”), by and between B.O.S Better Online Solutions Ltd. (the “ Company ”) and [Lender] (the “ Lender ”).

W I T N E S S E T H:

WHEREAS, in July 2009, the Company and the Lender entered into a Loan Agreement in respect of a principal loan amount of $[       ] (the " Loan Agreement" , and the “Convertible Loan ");

WHEREAS, pursuant to the terms thereof, the Convertible Loan is convertible at the election of the Lender, at anytime prior to its maturity date;

WHEREAS, the Company wishes to have the Lender convert its Convertible Loan into the Company's Shares prior to the maturity date, and in order to induce Lender to do so has proposed certain amendments to the terms of the Convertible Loan and an extension to the Lender's warrant, as more fully described below;

WHEREAS, the Lender agreed to convert its Convertible Loan on the terms on conditions described below; and

WHEREAS, the Company intends to submit the proposed amendment to the terms of the Convertible Loan to shareholders' approval, such approval being a condition precedent to the Company's performance of this Agreement.
 
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Lender hereby agrees as follows:
 
1.
Loan Conversion
 
1.1.            By execution of this Agreement, Lender serves notice to the Company, pursuant to Section 2.4 of the  Loan Agreement, of the conversion (the " Conversion "), as of Closing, of  $[  ]  of  Convertible Loan (the " Converted Loan ", comprised of $ [    ] of principal amount and $[  ] of accrued interest), into the Company's ordinary shares, nominal value NIS 20.00 each (each, a “ Share ” and collectively, the “ Shares ”).
 
1.2.            The Conversion shall take place at the Closing (as defined below), and shall be made at a reduced conversion price of $1.50 per Share, yielding an issuance to the Lender, at Closing, of [  ] Shares (the “ Converted Shares ”).
 
2.
Extension of Warrants
 
2.1.            Subject to and conditioned upon the Conversion, the exercise period of the Lender's outstanding warrant to purchase [     ] Shares issued on [     ] 2009 (the " Warrant ") shall be extended by two years, until July [     ] , 2014. A form of amendment to the Warrant is attached as Schedule 2.1 hereto.
 
2.2.            The Warrant's exercise price shall remain the same, $2.75 per Share (subject to adjustment in the event of share splits or consolidations, issuance of bonus shares, and similar recapitalization events).
 
3.
Closing
 
3.1.            Closing shall occur on December 21, 2011, subject to the prior approval by the Company’s Shareholders of the amendments to the Convertible Loan and the extension of the Warrant contemplated above; and provided that out of the approximately $3 million of principal and interest of convertible loans due in 2012, approximately $2.5 million (including the loan of the Lender) shall be converted into Shares at Closing. A table reflecting the total loans conversion to occur at Closing is attached as Schedule 3.1 hereto.
 
 
 
 
 
3.2.            At the Closing, the Conversion of the Converted Loan shall be effected automatically, the Converted Loan shall be deemed fully paid and the Converted Shares dully issued. Promptly following the Closing, the Company shall provide the Lender with a share certificate in respect of the Converted Shares.
 
4.
Miscellaneous
 
4.1      Amendments . This Agreement may be modified, supplemented or amended only by a written instrument executed by the Company and the Lender solely with respect to the Lenders rights and obligations.
 
4.2      Notices .  Any notice that is required or provided to be given under this Agreement shall be deemed to have been sufficiently given and received for all purposes, (i) when delivered in writing by hand, upon delivery; (ii) if sent via facsimile or email, upon transmission and electronic confirmation of receipt (and if transmitted and received on a non-business day, on the first Business Day following transmission and electronic confirmation of receipt), (iii) three (3) Business Days (and ten (10) Business Days for international mail) after being set by certified or registered mail, postage and charges prepaid, return receipt requested, or (iv) three (3) Business Days after being sent by internationally overnight delivery providing receipt of delivery, to the following addresses:
 
if to the Company, B.O.S Better Online Solutions Ltd., 20 Freiman Street, Rishon Lezion, 75101 Israel Attn: Mr. Eyal Cohen, CFO, facsimile: (972) 3 954-1003, with a copy to Amit, Pollak Matalon & Co., Nitzba Tower, 17 Yitzhak Sadeh St., Tel-Aviv 67775 Israel  attn: Shlomo Landress, Adv.  Fax: (972) 3 568-9001; or at any other address designated by the Company to the Lender in writing;
 
if to the Lender, c/o _____________
 
4.3     Delays or Omissions; Waiver . Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any party under this Agreement shall impair any such right, power or remedy of such party nor shall it be construed to be a waiver of any breach or default, or an acquiescence thereto, or of a similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party hereto of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing.
 
4.4     Other Remedies . Any and all remedies herein expressly conferred upon a party shall be deemed cumulative with, and not exclusive of, any other remedy conferred hereby or by law on such party, and the exercise of any one remedy shall not preclude the exercise of any other.
 
4.5        Entire Agreement . This Agreement and the exhibits and schedules hereto, constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and thereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect hereto and thereto.
 
4.6     Headings .  All section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Agreement.
 
4.7     Severability . Should any one or more of the provisions of this Agreement (including its exhibits and schedules) or of any agreement entered into pursuant to this Agreement be determined to be illegal or unenforceable, all other provisions of this Agreement and of each other agreement entered into pursuant to this Agreement, shall be given effect separately from the provision or provisions determined to be illegal or unenforceable and shall not be affected thereby. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision, which will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provision.
 
4.8     Assignment . This Agreement may not be assigned in whole or in part by the Lender without the prior written consent of the Company.
 
 
2
 
 
4.9     Governing Law and Venue . This Agreement shall be construed in accordance with and governed by the internal laws of the State of Israel, without regard to conflict of laws provisions. Any dispute arising under or in relation to this Agreement shall be adjudicated in the competent court of Tel Aviv-Jaffa district only, and each of the parties hereby submits irrevocably to the exclusive jurisdiction of such court.
 
4.10          Counterparts . This Agreement may be executed concurrently in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
 
4.11           Further Actions .  At any time and from time to time, each party agrees, without further consideration, to take such actions and to execute and deliver such documents as may be reasonably necessary to effectuate the purposes of this Agreement.
 
IN WITNESS WHEREOF the parties have signed this Agreement in one or more counterparts as of the date first appearing above.
 
B.O.S Better Online Solutions Ltd.
 
By:___________________________
Name:_________________________
Title:__________________________
[      ]
 
By:____________________________
Name:__________________________
Title:___________________________
 
 
3
 
 
AMENDMENT TO
ORDINARY SHARES PURCHASE WARRANT
 
NO. [     ]
 
THIS AMENDMENT TO ORDINARY SHARES PURCHASE WARRANT   (the “ Amendment ” ) is made as of November ____, 2011 by and among B.O.S Better Online Solutions Ltd. (the “ Company ”) and [     ] (the “ Holder ” ).

Recitals
 
WHEREAS , the Company has granted to the Holder a warrant to purchase up to [    ] shares of the Company, nominal value NIS 20.00 each (the " Ordinary Shares ") pursuant to an Ordinary Shares Purchase Warrant No. [    ], dated [    ], 2009 (the " Warrant "); and
 
WHEREAS, the parties wish to amend the Warrant as specified below;
 
NOW THEREFORE , in consideration of the mutual promises and covenants set forth herein, the parties hereby agree as follows:
 
1.
Capitalized terms used herein, which are not defined in this Amendment, shall have the meaning assigned to them in the Warrant.
 
2.
The parties agree that the Expiration Date of the Warrant shall be extended by two years, until [   ], 2014.
 
3.
Except   as otherwise amended hereby, all terms and provisions of the Original Warrant shall continue in full force and effect.
 
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above, which may be executed and delivered by facsimile in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
 
B.O.S Better Online Solutions Ltd.
 
By: ______________
Name: ___________
Title: __________
 
[    ]
 
By: ______________
Name: ___________
Title: __________
 
4

Exhibit 4.13
 
Summary of economic terms as of December 31, 2011
 
Lender: Bank Leumi le-Israel   Ltd
 
Borrower: BOS Odem Ltd.
 
Principal
$ 1,491,727
$ 2,330,000
$ 367,352
Loan Currency
NIS
US $
NIS
Term
Revolving
Revolving
Long term – Until October 16, 2012
Interest payment
Monthly
Monthly
Monthly
Principal payment
Monthly
Monthly
Monthly
Interest rate
Prime plus 3%
Libor plus 4.12% - 5.12%
Prime plus 2.2%

Borrower: BOS Dimex Ltd.
 
Principal
$ 600,000
$ 2,411,800
Loan Currency
US $
NIS
Term
Revolving
Revolving
Interest payment
Monthly
Monthly
Principal payment
Monthly
Monthly
Interest rate
Libor plus 4.32% - 5.12%
Prime plus 3%
 
 
 
 
 
Form of Request to Allocate a Credit in Israeli Currency (unlinked)
 
 
To:
Bank Leumi le-Israel B.M.
 
_________________ Branch
Date: _________________
 
Re:  Request to allocate Credit in Israeli Currency (Unlinked)
 
1. 
Advance and amount of the Credit

Please allocate to us a credit, /we confirm receipt of a credit* in the sum of NIS ______ (hereinafter: “the Credit”) in our account number ___________ maintained with yourselves (hereinafter: “the Credit Account”) and, if no such account as above presently exists with yourselves, please open for us an account in our name and allocate the Credit therein. The General Conditions for Opening an Account for Receiving Credits signed by us in your favor (hereinafter: “the Terms of Operation”), in addition to the additional conditions hereinafter contained, will apply to the Credit Account and to the Credit. Please credit our Account with yourselves, Account No. __________ (the “the Master Account”) with the amount of the Credit.
 
2. 
Term of the Credit
 
 The Credit will be for a term of ___________ (the “Term of the Credit”). The date of advancing the Credit will be ____________ (the “Date of Allocation of Credit”).
 
3. 
Interest
 
 
(a) 
The unpaid balance of the Credit will bear interest based upon the Bank’s preference, on the daily balance or will bear interest on a different period, as will be customary in the Bank, commencing from the date the Credit is advanced until the full and actual payment thereof to the Bank. The interest will be calculated according to the number of days which have actually elapsed divided by 365 or 366, depending on the number of years in that relevant period.
 
 
(b) 
Fixed interest
 
If this request, is a request to allocate credit with a fixed interest, then the rate of interest on the unpaid balance of the Credit will be _____% a (the “Interest Rate)” and the adjusted interest will be _________% (the “Adjusted Interest”). Notwithstanding the mentioned in section 3(a), if it is agreed that the repayment shall be made in the Spitzer method, the interest shall be calculated, from the date the credit is advanced until the full and actual payment thereof to the Bank based upon 360 days in a year and 30 days in a month.
 
 
(c) 
Variable interest
 
 
1. 
If this request, is a request to allocate credit with a variable interest, then the rate of interest mentioned in paragraph (a) above will be an interest rate in an amount that is higher/lower than ______ % (the “Interest Spread”) which is higher/lower than ______% above the prime rate of interest as defined below.
 
For the purposes hereof “the prime rate of interest” means interest at the basic rate customary in the Bank from time to time in overdraft accounts in Israeli currency.
 
 
2. 
We have taken note that a change in the prime rate of interest in the Bank will lead to a change in the interest on the Credit, by a percentage identical to such change in the basic interest, or at the Bank’s option, by the same ratio whereby the basic rate of interest has been changed against the basic rate as it existed prior to such change. In the event of repayment (credit with variable interest) using the Spitzer method, then the interest shall be calculated as detailed in Section 3(a) and if any change occurs in the prime rate of interest on a day not being an interest payment day, the new interest rate will apply as from the immediately succeeding interest payment date following the date of the change, or on the date of the change of interest, at the option of the Bank.
 
 
 
 
 
 
3. 
We are aware that the interest of _________% (the “Initial Interest Rate”) shall be the interest that shall commence on the date of grant of the Credit until the change of the prime rate of the interest, as aforementioned.
 
 
4. 
For the avoidance of doubt, it is hereby stated that the Bank will be entitled, from time to time, to change the interest rate as aforesaid even with respect to amounts of the Credit which have already been allocated to us in the Credit Account.
 
4. 
Repayment of Principal and Interest
 
 
(a) 
We hereby undertake to repay the Bank the principal of the Credit together with the interest thereon in______ consecutive equal monthly installments in the sum of approximately _________________ each, on each ______ of every calendar month, commencing on _______________ and terminating on ____________(the “Repayment of Principal”).
 
 
(b) 
We hereby commit to repay the interest of the unpaid balance of Credit in _________ consecutive installments in the sum of approximately _________________ each, on each ______ of every calendar month, commencing on _______________ and terminating on ___________(the “Repayment of Interest”).
 
In case that the Interest shall be repaid in one installment, the Interest shall be added to the principal and shall compound interest from commencing on _______________ and terminating on _______ (the “Accumulation Period”), from the date of allocation of the Credit.
 
 
(c) 
If the credit shall be paid under the Spitzer method, then instead of the detailed in sections (a) and (b) above, we hereby commit to the Bank to repay the Bank, the principal together with the interest with respect to the unpaid balance of the Credit in equal monthly sequential installments, in ______ consecutive equal monthly installments in the sum of approximately _________________ each, on each ______ of every calendar month, commencing on _______________ and terminating on ____________(the “Repayment using Spitzer Method (Principal and Interest)”). Notwithstanding the stated in this section, the monthly payments may be unequal due to the calculation method, based upon the number of days as detailed in section 3(a).
 
 
(d) 
We are aware that the total repayment schedule which includes the exact amount of each payment will be provided to us soon after the allocation of the Credit and we that the amount that shall bind us is the one set forth the in the repayment schedule or if amended, as detailed in the amended repayment schedule.
 
In the event of a change in the interest rates as provided by paragraph 3(c) above, the amount of the unpaid balance of the Credit will be adjusted and the amounts of the installments changed accordingly so that the amounts of the installments will be equal from the date of the change until the next succeeding date of change. An amended repayment schedule will be given to us promptly after the date of the change.
 
5. 
Mode of repaying the Credit
 
On the date of payment of each amount on account of the principal of the Credit, principal, interest or other charges, please debit our Master Account as mentioned above for the purpose of discharging such amounts.
 
If the credit balance in the Master Account shall be insufficient to cover the amount, in whole or in part, please grant us a credit in the amount required to discharge such sum, either through the Master Account or through any other account, thereby debiting the Master Account or such other account.
 
We are aware and agree that if, at the time the Master Account or the other account is debited with the credit as aforesaid, the balance in such account will be a debit balance or become overdrawn as a result of such debiting, the credit will bear interest at the Customary Rate at such time according to the Terms of Operation of such account. We are aware that if the credit advanced to us as above exceeds the Credit facility previously authorized, then such credit will bear Interest at the Maximum Rate according to the Terms of Operation of such account.
 
 
 
 
 
We are aware that the interest that shall be debited to us in the Master Account or any other account, might be higher than one or more of the options as to Interest specified in the Terms of Operation. If it transpires, either before or after such debiting, that the state of the Account does not or did not enable a debit in such amount to be effected, and you decide that you do not wish for any reason to advance us a credit, or any legal impediment will exist to the debiting of the Account, you will be entitled to debit a special account to be opened in our name with such amount, and such special account will bear interest as provided by Clause 5 or Clause 13.5, titled “Deficiency Interest” of the Terms of Operation.
 
6.
We shall not be entitled to repay the Credit (principal and interest) before the agreed upon Repayment Date, except if we have a legal right to do so, that may not be conditioned, or that the Bank agrees to do so in advance, in writing. The Bank shall be entitled to condition any such early repayment, with certain terms, including an early repayment commission, in the maximum amount legally allowed. It is hereby agreed that section 13(b) to the Israeli Pledge Law 1967, and any section that shall replace it, shall not apply to the early repayment of credit.
 
7.
We approve that we have received a copy of this document.
 
Customers' signatures: ____________________ ____________________
 
 
 
 
 
Form of Request to Allocate a Credit Framework in Debitory Account (unlinked)
 
Bank Leumi le-Israel B.M.
Branch_____________________________________
Account No_____________
Date:______________
 
 
Request to Allocate a Credit Framework In Israeli Currency Account No _________ 

(hereinafter referred to as “the Account”)
 
1. 
The Request
 
We hereby request from Bank Leumi le-Israel B.M. (the “Bank”) the allocation of a credit framework in account no. _______ ( the “Credit Framework”) in an amount of _______ (the “Credit Framework Amount”) in accordance with the detailed in this Request and in the terms and conditions for operation of the Account, as modified or as will be modified in the future (the “Terms and Conditions of Operation”).
 
2. 
Term of the Credit
 
 
2.1 
The date of advancing the Credit will be _______________ (“Date of Credit Advancement”). If the Date of the Credit Advancement will not be stated, the date shall be the date stated on the Bank notice regarding the advancement of the Credit. The end of the term of the Credit shall be __________________ (the “Credit Expiration Date”).
 
 
2.2 
We request that at each Credit Expiration Date, the Credit Framework shall be renewed for an additional year (or another time period), at the terms that shall be in force at such renewal date, including without limitation with respect to the interest rate, rate of Allocation of Credit Commission and additional commissions, which shall be in force at the renewal date. Each renewal of the Credit Framework shall be subject to the receipt from the Bank, at least 10 days prior to the end of the existing term of the Credit, a written notice stating the Bank’s approval for such renewal, which shall include the new terms of the Credit framework.
 
For the avoidance of doubt, it is hereby clarified that nothing in this Request derogates the Bank’s right to not renew the Credit Framework in whole or in part, or to renew it for a period of less than a year and/or to decrease or annul, at any time, any Credit Framework, as described in the Terms and Conditions of Operation.
 
3. 
Interest
 
We have noted that subject to the Terms and Conditions of Operation and for so long as you do not notify us otherwise-
 
 
3.1 
Interest Rate for Debit Balances in the Credit Framework
 
The rate of interest on debit balances in the Credit Framework will be a changing rate, equal to the interest at the basic rate customary in the Bank from time to time in overdraft accounts in Israeli currency (the “Prime Rate”), as shall be from time to time, with a margin of ________________ (the “Interest Rate for Debit Balances in the Credit Framework”).
 
 
3.2 
Maximum Interest Rate on Debit Balances
 
The maximum interest rate of debit balances shall be a changing rate, based upon the highest interest rate ____________ (the “Interest Rate for Debit Balances”), in addition to the interest rate of _________ (the “Maximum Interest Rate for Debit Balances”).
 
 
3.3 
Term of Interest Calculation and Repayment Dates
 
 
3.3.1. 
The interest mentioned in paragraphs 3.1 and 3.2 above shall be computed based upon the number of days that there was been a debit balance in the Account; and it will be paid by us or will be credited as debt in our Account, on the last business day of March, June, September and December each year.
 
 
 
 
 
4. 
Credit Allocation Commission
 
The credit allocation commission in respect of the Credit Framework, for each quarter, will be in the amount of or at the rate of ______% (the “Quarterly Credit Allocation Commission”) and will be paid by us or it shall be credited to the Account in advance at the time of the determination or increase of any Credit Framework and thereafter it will be paid by us or it shall be credited to the Account on the first business day of every January, April, July and October each year .
 
In cases that the Credit Allocation Commission shall be stated in percentages, the calculation of the commission shall be made by multiplication of the amount of the of the Credit Framework by the stated percentage and the number of days until the end of the term or the end of the quarter (the earlier of the two), divided by the number of days in the quarter.
 
Notwithstanding the above, the Bank may determine a minimum or maximum Credit Allocation Commission.
 
5. 
Unilateral Credit Framework
 
 
5.1 
We agree that the Bank may, but will not be obliged, at its sole discretion, to provide us with a unilateral credit framework, in the Account, with out our request. If the bank provides us with such unilateral credit framework, it shall not be interpreted as the Bank’s agreement, to repeat this in the future or to renew all or part of the unilateral credit framework it has provided.
 
In any case that the Bank shall provide us with a unilateral credit framework, it shall be deemed part of the Credit Framework and the terms of this document and the Terms and Conditions of Operation shall apply.
 
 
5.2 
The debit balances in the unilateral credit framework, if the Bank shall agree to it, shall bear a changing interest rate equal to the Maximum Interest Rate for Debit Balances, in the highest rate stated under the most recent agreed upon Credit scale.
 
 
5.3 
The time period of the unilateral credit framework may be different than the one set for the Credit Framework herein.
 
 
5.4 
The unilateral credit framework shall not bear a Credit Allocation Commission.
 
 
5.5 
The Bank will provide us a notice with respect to the unilateral credit framework, close to the time of its bestowal.
 
6. 
Amendments
 
 
6.1 
We are aware that the Bank may, from time to time, amend the interest rates mentioned herein or any component of them (including the margin rate or the Maximum Interest Rate for Debit Balances), the Credit Allocation Commission rate (including the minimum and maximum rates), the term of Credit and their way of calculation.
 
Notwithstanding the abovementioned, as the interest in based upon the Prime Rate, any change in the Prime Rate shall cause a similar change in the interest. All such changes shall also be applicable to the unilateral credit framework mentioned in paragraph 5, if such credit framework shall be provided.
 
 
 6.2 
Such amendment shall apply to all debit balances existing at the time of the amendment and to all debit balances existing thereafter.
 
 
 6.3 
The notice with respect to any amendment shall be provided as required under applicable law.
 
 
 6.4 
Notwithstanding the aforementioned, we are aware that there may be a change in a certain component of the interest before the Bank provides the Credit Framework, and in such case the interest rate shall apply to the debit balances shall be at the new rate at that time and not in the rates detailed herein, that is given only for information purposes.
  
 
 
 
 
Form of Subordination Letters of BOS-DIMEX Ltd. and of BOS-ODEM Ltd.
 
[Translated from Hebrew]
 
"A"

Letter of Subordination and Additional Obligations for the Signature of Shareholders and Holders of Controlling Interest

Date:  February 7, 2010
 
To
 
Bank Leumi Le-Israel Ltd.
 
Whereas Bank Leumi Le-Israel Ltd. (the   " Bank ") has granted or agrees to allocate to ______________ (the " Company ") periodically as the Bank deems fit, credits and/or other banking services in amounts and under the terms agreed upon or that will be agreed upon between the Bank and the Company;
 
And whereas the Bank received and/or will receive from the Company various obligations and guarantees towards the Bank or on its behalf;
 
And whereas as one of the conditions for providing the aforementioned credits and/or other banking services the Bank demanded that we should sign on this letter and we have assented to this;
 
Therefore, we the undersigned, shareholders in the Company and/or holders of controlling interest in the Company, all of us together and each one of us separately, declare and obligate ourselves towards you, on our behalf and on behalf of the companies under our and our Family Members' control, as follows:
 
For the purpose of the aforesaid in this Letter the following meanings will be attached to the terms below:
 
" Corporations Under Our Control "- any company and any other corporation under our control or under the control of any of us.
 
" Control " ,  " Family Member " - as defined in the Securities Law 5728 - 1968 as will be valid from time to time.
 
1. 
We, Corporations Under Our Control, as well as our Family Members, will not demand, will not receive, will not collect, will not expend, directly or indirectly or in any form or manner whatsoever, any amount whatsoever from or on account of capital notes that the Company has issued and/or will issue on our behalf and/or on behalf of any of us and/or from or on account of loans that were given and/or will be given the Company, including payments of principal, interest, commissions and expenses (all the aforementioned amounts shall be hereinafter referred to as   the   " Loans ").
 
Likewise, we obligate ourselves that we, the Corporations Under Our Control, as well as our Family Members, will not demand, will not receive, will not collect, will not expend from the Company (from its profits, from its capital or from any source whatsoever) either directly or indirectly, in any form or manner whatsoever, dividends (as per their definition in the Companies Law 5759-1999 as may be amended from time to time) or interest or management fees or indemnification fees or compensation fees or consultancy fees or amounts of money or monetary equivalents (these amounts shall be hereinafter referred to as " Dividends ") and we shall not demand and shall not request from the company an obligation to distribute the aforesaid Dividends.
 
Likewise we will not transfer to another/others either directly or indirectly, all or any part of our rights, existing and future, to the company for the dividends and/or the loans, without the prior written consent of the Bank.
 
 
 
 
 
Likewise it is clarified that there is nothing in the aforesaid and/or below, as long as no event has occurred awarding the Bank the right to put up our obligations towards the Bank for immediate repayment, to prevent the transfer of monies between the Company and the B.O.S. Better Online Solutions Ltd. (hereinafter - " B.O.S. ") for the Company's share in the expenses of B.O.S. up to a total amount that will not exceed $175,000 (one hundred an seventy five thousand USD) for a period of six months ending on June 30, 2010, and this exclusively on the basis of expenses detailed in the list attached as Appendix C that constitutes an integral part of this Letter, and this on condition that there is nothing in the aforementioned transfer of funds that constitutes a violation of any other obligation whatsoever of the Company under any document whatsoever that it signs including and without detracting from the generality of the aforesaid, the document of conditions that it signed on ____ in favor of the Bank, and subject to the directives of the Companies Law and the law.
 
It is hereby clarified that meeting the budget for six months of 2010, as presented to the Bank in Appendix D attached hereto – signed by you, will enable transfer of monies between the Company and B.O.S. on account of the Company's participation in the expenses of B.O.S. up to a total amount that will not exceed $175,000 (one hundred and seventy five thousand USD) for a period of six months ending on December 31, 2010, and this exclusively on the basis of the expenses detailed in the list attached as Appendix C which constitutes an integral part of this Letter. The aforementioned is subject to the monies not constituting a violation of any other obligation whatsoever of the Company under any document that it has executed including without limitation, the covenants document that it signed on ____ in favor of the Bank, and subject to the provisions of the Companies Law and the law.
 
2. 
Without derogating from the aforesaid, in the event that any of us, and/or the Corporations Under Our Control and/or Family Members and/or others as aforesaid, shall receive from the Company any amount whatsoever on account or with relation to the Loans or the Dividends, then we will transfer to the Bank any such amount immediately once it has been received by any of us as aforesaid. The Bank will be entitled to credit, as it sees fit any amount that it should receive as aforesaid, for repayment on account of the amounts that are due and/or will be due to the Bank from the company in any manner whatsoever.
 
3. 
We obligate ourselves to provide you an obligation by the company to act in accordance with our obligations towards you as detailed in this Letter, in the wording enclosed and marked "B".
 
4. 
The Bank's ledgers and accounts will serve as ostensive proof with regards to the Company's liabilities to the Bank.
 
5. 
The aforesaid in this Letter will obligate all the undersigned, even if some of the shareholders in the Company or holders of controlling interests have not signed on it.
 
Our aforesaid obligations will be in force as long as the Bank receives or will receive from the Company, amounts whatsoever on account of the Loans, credits and/or other banking services, that exist today and/or will exist the future, and/or as long as the various obligations and guarantees of the company towards the Bank or on its behalf will remain in force.
 
 
 
 
 
B.O.S Better Online Solutions Ltd. Subordination Letter
 
[Translated from Hebrew]
 
Letter of Subordination and Additional Obligations for the Company’s Signature
 
Date: March 9, 2008
 
To:
 
Bank Leumi Le-Israel Ltd.
 
Whereas periodically, as per our request, if the matter should meet with your approval, you consent to provide or allocate to us, the undersigned corporation (“ the company ”), credits and/or other banking services, under conditions and in amounts as agreed or will be agreed periodically between us;
 
And whereas you have received and/or will receive from us various obligations and guarantees towards you or on your behalf;
 
And whereas as one of the conditions for the aforementioned grant of credits and/or the banking services and for the receipt of the various obligations and guarantees, you have demanded that we sign on this letter and we have assented to this;
 
We therefore declare and obligate ourselves hereby as follows:
 
For the purpose of what is stated in this letter the following meanings will be attached to the terms below:
 
“Corporations under the control of the shareholders ” – any company or other corporation that is at the time of the signing of this letter or that in the future will be under the control of any of the shareholders or any of the holders of controlling interests in the Company.
 
“Subsidiary company”, “control” “family member” “stakeholder ” – as per their definition in the Securities Law 5728- 1968 as will be valid from time to time.
 
“ The shares of the company ” includes also securities that can be converted into company shares as well as securities that can be realized via shares in the company.
 
1. 
We shall not pay in any form or manner whatsoever, either directly or indirectly, to any of our stockholders or any of the holders of controlling interest among us who obligated themselves towards you as aforesaid, and/or to a family member of any of them and/or to corporations under the control of any of them and/or to another third party who will supplant them or act on their behalf, any amount whatsoever from or on account of the capital notes that the company issued and/or will issue to your benefit and/or from any other loan account that was placed and/or will be placed at our disposal by any of the aforementioned, or in connection with them, including, but without detracting from the generality of the aforesaid, payment of principal, interest, commissions and expenses (all the aforementioned amounts will be termed below “ the loans ”); all this unless we have received your prior agreement in writing.
 
Likewise we will not pay and we will not obligate to pay in any form or manner whatsoever either directly or indirectly, from the company (from its profit or its capital or from any source whatsoever) dividends (as defined in the Companies Law 5759-1999 as may be amended from time to time) or interest or management fees or indemnification fees or compensation fees or consultancy fees or amounts of money or monetary equivalents (these amounts will be called below “ dividends ”) to our shareholders or to the holders of controlling interest among us, irrespective of whether they obligated themselves towards you according to the wording marked “A” and/or they did not obligate towards you in the wording marked “A”, and/or to a family member of any of them, and/or to companies or corporations where one of our shareholders is a stakeholder in them and/or to any third party whatsoever who shall replace any of the aforesaid or act on his behalf.
 
 
 
 
 
2. 
Should any demand whatsoever be made for any payment whatsoever on account of the amounts of the loans or dividends or with reference to them, on the part of our shareholders and/or on the part of any other party from the aforesaid, we will inform you of this immediately and upon your request we will coordinate with you actions to cancel the demand for payment.
 
3. 
The company obligates itself not to purchase, not to provide financing for the purchase and not to obligate itself to purchase or to provide financing for the purchase of company securities, in any form or manner whatsoever including and without detracting from the generality of the aforesaid by providing guarantees, either directly or indirectly, by the company or by its subsidiary company or by an another corporation under its control, without receiving the prior written consent of the bank.
 
4. 
Purely for the sake of removing doubt, let it be clear that if for any reason whatsoever, we should violate the obligations under this letter, all or some of them, then in addition to any other relief that you will be entitled to under any law or as a result of any other obligation towards you included or that will be included in another document-you will be entitled to call for the immediate payment of all or part of the amounts that are due to you or will be due to you from us, directly and/or indirectly at that time, whether their payment date has arrived by that time or not, and collect them from us with the addition of any amount that in your opinion will suffice to cover the losses and/or the expenses that you will incur as a result of a call for immediate payment as aforesaid.
 
5. 
It is hereby clarified, that the aforementioned will not prevent the Company from making: (a) payments to Cukierman & Co. Investment House Ltd. (“ Cukierman ”) derived from the agreement dated April 15, 2003, attached hereto and which constitutes a part of this document and/or (b) payments to shareholders or to corporations in their control with respect to commissions due to raising of funds for the Company through debentures or shares, upto a threshold of 10% of the funds raised.
 
Our aforesaid obligations shall remain in force as long as the bank receives or will receive from the company, any amounts whatsoever on account of the loans, credits and/or other banking services, that exist today or will exist the future, and/or as long as the various obligations and guarantees of the company towards the bank or on its behalf will remain valid.
 
B.O.S Better Online Solutions Ltd.
 
 

 

 
 
Exhibit 4.14
 
Summary of economic terms as of December 31, 2011
 
Lender: Bank Hapoalim Ltd
 
Borrower: BOS Odem Ltd.
 
Principal
$ 1,049,649
Loan Currency
NIS
Term
Long term loan - until October 15, 2016
Interest payment
Monthly
Principal payment
Monthly, commencing May 15 2012
Interest rate
Prime plus 1.5%

Borrower: BOS Dimex Ltd.
 
Principal
$ 656,031
Loan Currency
NIS
Term
Long term loan until October 15, 2016
Interest payment
Monthly
Principal payment
Monthly, commencing May 15 2012
Interest rate
Prime plus 1.5%
 
 
 
 

[Translated from Hebrew]
 
Date: 6 October 2011

To
Bank Hapoalim Ltd.
Rishon-lezion Business Branch (391)

Re: Letter of Irrevocable Undertaking

WHERAS ,
we, BOS-Dimex Ltd. Corporation Reg. No. 512236431 (the “Company” hereinafter) had received and/or may receive from Bank Hapoalim Ltd. (the “Bank” hereinafter) a loan as part of a loan program administered by the Israeli government for Israeli medium-sized businesses, per the amounts and conditions as agreed and/or as shall be agreed upon between us and the Bank, and subject to the approval and conditions as determined by the Joint Bank and Governmental Credit Commission (the “Loan” hereinafter); and
 
WHERAS,
as part of the conditions for receiving the Loan from the Bank, we are required to provide the Bank with a Letter of Undertaking using the format and per the conditions specified below;

NOW, THEREFORE, we hereby declare and undertake, in respect to the Bank, that so long as we maintain any Bank debt due and in connection to the Loan, all of the following provisions shall apply:

 
1.
We hereby undertake that there shall be no withdrawal of capital of any sort by Company stakeholders, their family members, Company shareholders or anyone representing either ( “Stakeholder” and “ Family Member” shall be interpreted above and below in this Letter of Undertaking per their definition in the Securities Law, 5728-1968), whether collectively or partially, and whether directly or indirectly.
 
 
2.
Without prejudice to the aforementioned, we hereby undertake not to loan money to Company Stakeholders, their Family Members or anyone representing either, as well as not repay or pay any amounts using existing loans provided to us by Company Stakeholders, their Family Members, Company shareholders or anyone representing either ( “Shareholders’ Loans” , hereinafter), including – payments against funds, interest, linkage, indemnification, compensation, commissions, expenses and all other accessory payments borrowed by or derived from Shareholders’ Loans, so long as we have not provided the Bank with the loan payments due in full.
 
We hereby undertake to provide the Bank with the consent and undertaking of Company Stakeholders and/or Shareholders, so that the bank shall approve to them in writing that we had repaid the bank all loan payments arriving from us to the Bank in full, and Stakeholders and/or Shareholders will not demand or claim the repayment of Shareholders’ Loans.
 
We hereby declare that the sum of Shareholders’ Loans received by us until the date of signing this Letter amounts to a total of: __________________
 
 
3.
We hereby undertake not to divide and/or pay, using any method whatsoever, a dividend to Company Shareholders. The term “Dividend” shall be interpreted as it is defined in the Companies’ Law, 5759-1999, and includes, inter alia , any asset provided by the company to a shareholder by virtue of their privileges as shareholder, whether in cash or by way of any other form of reimbursement, including management fees, consultation fees, participation fees, commissions, sums of money, assets and rights of any kind, paid using Company profits or any other source or any other payment in cash or cash equivalent to Company Shareholders.
 
 
 
 
 
 
4.
We hereby undertake that we shall not pay any Company Stakeholder, their Family Members, Company Shareholders or any of their representatives, a salary 5 times greater than the average wage (in accordance with the average wage applicable upon the payment of any such salaries).
 
 
5.
The provisions of the above Sections 1,2 and 3 of the Letter of Undertaking notwithstanding, the elapse of two years following loan provision shall entitle us to pay Company Shareholders, annually, up to 50% of the Company’s divisible net profit, by way of dividend or by way of Shareholders’ Loan repayment, subject to the compliance with the following stipulations:
 
 
5.1.
Distributable profits are in existence;
 
 
5.2.
Following withdrawal, tangible equity shall not equal less than 25% of the Company’s balance;
 
 
5.3.
When concerning repayment of Shareholders’ Loans, the date of repayment for the Shareholders’ Loan is determined in the Agreement entered into between the Shareholders and the Company;
 
 
5.4.
The Joint Bank and Governmental Credit Commission had provided its approval, in advance and in writing, for any such withdrawal.
 
For this purpose, “Tangible Equity” – the sum total of share capital issued and paid, to the inclusion of capital reserves, undesignated profit balance, inferior Shareholders’ Loans and capital notes, when deducting intangible assets (such as: reputation, copyrights, patents, trademarks, brand names, etc.), Company Loans to Shareholders and affiliated companies.
 
 
6.
To dispel any doubt, it is hereby stressed that our undertaking as provided for in this Letter of Undertaking is irrevocable, as Bank rights are dependent upon it, and that we shall not be eligible to revoke or modify it without the Bank’s written and advance consent.
 
 
7.
In any case of our violating or not fulfilling any of our obligations towards the Bank as provided for in this Letter of Undertaking, the Bank shall be eligible to order the immediate repayment of all sums borrowed by us, or any portion thereof, and to undertake any measures deemed necessary for their collection, in addition to any other remedies to which the Bank is lawfully entitled and in accordance with any other documents of any kind and type signed and to be signed to the Bank’s benefit.
 
 
8.
A waiver of the bank concerning a previous violation or non-fulfillment of one or more of our obligations towards the Bank, whether that obligation is specified in this Letter, or whether it shall be mandated by a different document, shall not constitute as justification for any additional violations or non-fulfillments of any such conditions or obligations, and the Bank’s non-exercise of any rights provided to it in accordance with this Letter of Undertaking or any other document or applicable law, shall not constitute as waiver of said rights.
 
 
9.
The contents of this Letter adds, as opposed to diminishes or replaces, to any other of our undertakings in respect or to the benefit of the Bank, as provided for in any other document, whether in effect prior or after the execution of this Letter.

In witness thereof, we, the Parties, have signed this Undertaking:

Upon the 6 th day of October, 2011, at _______________________

_______________(-)_________
BOS-Dimex Ltd.
 
 
 
 
 
[Translated from Hebrew]
 
Date: 6 October 2011

To
Bank Hapoalim Ltd.
Rishon-lezion Business Branch (391)

Re: Letter of Irrevocable Undertaking

As shareholders in BOS-Dimex Ltd. , Corporate Reg. No. 512236431 ( “Company” hereinafter), we, the undersigned, individually and collectively, hereby agree and declare and follows:

So long as you do not provide us and/or the Company, in writing, with a confirmation that all loans provided to the Company, as part of the loan program administered by the Israeli government for Israeli medium-sized businesses (“Loan” hereinafter), were repaid in full, as well as any other sum owed and to be owed by the Company to you in relation to the Loan, the following stipulations shall apply:
 
 
1.
We hereby undertake that there shall be no withdrawal of capital of any sort by Company stakeholders, their family members, Company shareholders or anyone representing either ( “Stakeholder” and “ Family Member” shall be interpreted above and below in this Letter of Undertaking per their definition in the Securities Law, 5728-1968), whether collectively or partially, and whether directly or indirectly.
 
 
2.
Without prejudice to the aforementioned, we hereby undertake not to loan money to the Company to our benefit or to the benefit of our representatives, and undertake not to claim or require the Company to repay or pay any sums pertaining to existing loans provided to the Company by us or by our representatives ( “Shareholders’ Loans” , hereinafter), including – payments against funds, interest, linkage, indemnification, compensation, commissions, expenses and all other accessory payments borrowed by or derived from Shareholders’ Loans, so long as the company has not provided the Bank with the loan payments due in full.
 
We hereby declare that the sum of Shareholders’ Loans received by us until the date of signing this Letter amounts to a total of: __________________
 
 
3.
We hereby undertake not to demand or require the Company to pay us or our representatives a dividend using any method whatsoever. The term “Dividend” shall be interpreted as it is defined in the Companies’ Law, 5759-1999, and includes, inter alia , any asset provided by the Company to a shareholder by virtue of their privileges as shareholder, whether in cash or by way of any other form of reimbursement, including management fees, consultation fees, participation fees, commissions, sums of money, assets and rights of any kind, paid using Company profits or any other source or any other payment in cash or cash equivalent to Company Shareholders.
 
 
4.
We hereby undertake that we shall not withdraw and/or receive in any way whatsoever from the company, to our benefit or to the benefit of any of our representatives, a salary 5 times greater than the average wage (in accordance with the average wage applicable upon the payment of any such salaries).
 
 
 
 
 
 
5.
The provisions of the above Sections 1,2 and 3 of this Letter of Undertaking notwithstanding, the elapse of two years following loan provision shall entitle us to receive from the Company, annually, up to 50% of the Company’s divisible net profit, by way of dividend or by way of Shareholders’ Loan repayment, subject to the compliance with the following stipulations:
 
 
5.1.
Distributable profits are in existence;
 
 
5.2.
Following withdrawal, tangible equity shall not equal less than 25% of the Company’s balance;
 
 
5.3.
When concerning repayment of Shareholders’ Loans, the date of repayment for the Shareholders’ Loan is determined in the Agreement entered into between the Shareholders and the Company;
 
 
5.4.
The Joint Bank and Governmental Credit Commission had provided its approval, in advance and in writing, for any such withdrawal.
 
For this purpose, “Tangible Equity” – the sum total of share capital issued and paid, to the inclusion of capital reserves, undesignated profit balance, inferior Shareholders’ Loans and capital notes, when deducting intangible assets (such as: reputation, copyrights, patents, trademarks, brand names, etc.), Company Loans to Shareholders and affiliated companies.
 
 
6.
Our obligations as mandated by this Letter are individually and collectively irrevocable, as your rights depend on their fulfillment.
 
 
7.
In this Letter – the singular shall be construed as the plural and vice versa.
 
In witness thereof, we, the Parties, have signed this Undertaking:

______________(-)________
B.O.S Better Online Solutions Ltd.
 
 
 
 
 
[Translated from Hebrew]
 
Date: 6 October 2011

To
Bank Hapoalim Ltd.
Rishon-lezion Business Branch (391)

Re: Letter of Irrevocable Undertaking

WHERAS ,
we, BOS-Odem Ltd. Corporation Reg. No. 511687402 (the “Company” hereinafter) had received and/or may receive from Bank Hapoalim Ltd. (the “Bank” hereinafter) a loan as part of a loan program administered by the Israeli government for Israeli medium-sized businesses, per the amounts and conditions as agreed and/or as shall be agreed upon between us and the Bank, and subject to the approval and conditions as determined by the Joint Bank and Governmental Credit Commission (the “Loan” hereinafter); and
 
WHERAS,
as part of the conditions for receiving the Loan from the Bank, we are required to provide the Bank with a Letter of Undertaking using the format and per the conditions specified below;

NOW, THEREFORE, we hereby declare and undertake, in respect to the Bank, that so long as we maintain any Bank debt due and in connection to the Loan, all of the following provisions shall apply:

 
1.
We hereby undertake that there shall be no withdrawal of capital of any sort by Company stakeholders, their family members, Company shareholders or anyone representing either ( “Stakeholder” and “ Family Member” shall be interpreted above and below in this Letter of Undertaking per their definition in the Securities Law, 5728-1968), whether collectively or partially, and whether directly or indirectly.
 
 
2.
Without prejudice to the aforementioned, we hereby undertake not to loan money to Company Stakeholders, their Family Members or anyone representing either, as well as not repay or pay any amounts using existing loans provided to us by Company Stakeholders, their Family Members, Company shareholders or anyone representing either ( “Shareholders’ Loans” , hereinafter), including – payments against funds, interest, linkage, indemnification, compensation, commissions, expenses and all other accessory payments borrowed by or derived from Shareholders’ Loans, so long as we have not provided the Bank with the loan payments due in full.
 
We hereby undertake to provide the Bank with the consent and undertaking of Company Stakeholders and/or Shareholders, so that the bank shall approve to them in writing that we had repaid the bank all loan payments arriving from us to the Bank in full, and Stakeholders and/or Shareholders will not demand or claim the repayment of Shareholders’ Loans.
 
We hereby declare that the sum of Shareholders’ Loans received by us until the date of signing this Letter amounts to a total of: __________________
 
 
3.
We hereby undertake not to divide and/or pay, using any method whatsoever, a dividend to Company Shareholders. The term “Dividend” shall be interpreted as it is defined in the Companies’ Law, 5759-1999, and includes, inter alia , any asset provided by the company to a shareholder by virtue of their privileges as shareholder, whether in cash or by way of any other form of reimbursement, including management fees, consultation fees, participation fees, commissions, sums of money, assets and rights of any kind, paid using Company profits or any other source or any other payment in cash or cash equivalent to Company Shareholders.
 
 
 
 
 
 
4.
We hereby undertake that we shall not pay any Company Stakeholder, their Family Members, Company Shareholders or any of their representatives, a salary 5 times greater than the average wage (in accordance with the average wage applicable upon the payment of any such salaries).
 
 
5.
The provisions of the above Sections 1,2 and 3 of the Letter of Undertaking notwithstanding, the elapse of two years following loan provision shall entitle us to pay Company Shareholders, annually, up to 50% of the Company’s divisible net profit, by way of dividend or by way of Shareholders’ Loan repayment, subject to the compliance with the following stipulations:
 
 
a.
Distributable profits are in existence;
 
 
b.
Following withdrawal, tangible equity shall not equal less than 25% of the Company’s balance;
 
 
c.
When concerning repayment of Shareholders’ Loans, the date of repayment for the Shareholders’ Loan is determined in the Agreement entered into between the Shareholders and the Company;
 
 
d.
The Joint Bank and Governmental Credit Commission had provided its approval, in advance and in writing, for any such withdrawal.
 
For this purpose, “Tangible Equity” – the sum total of share capital issued and paid, to the inclusion of capital reserves, undesignated profit balance, inferior Shareholders’ Loans and capital notes, when deducting intangible assets (such as: reputation, copyrights, patents, trademarks, brand names, etc.), Company Loans to Shareholders and affiliated companies.
 
 
6.
To dispel any doubt, it is hereby stressed that our undertaking as provided for in this Letter of Undertaking is irrevocable, as Bank rights are dependent upon it, and that we shall not be eligible to revoke or modify it without the Bank’s written and advance consent.
 
 
7.
In any case of our violating or not fulfilling any of our obligations towards the Bank as provided for in this Letter of Undertaking, the Bank shall be eligible to order the immediate repayment of all sums borrowed by us, or any portion thereof, and to undertake any measures deemed necessary for their collection, in addition to any other remedies to which the Bank is lawfully entitled and in accordance with any other documents of any kind and type signed and to be signed to the Bank’s benefit.
 
 
8.
A waiver of the bank concerning a previous violation or non-fulfillment of one or more of our obligations towards the Bank, whether that obligation is specified in this Letter, or whether it shall be mandated by a different document, shall not constitute as justification for any additional violations or non-fulfillments of any such conditions or obligations, and the Bank’s non-exercise of any rights provided to it in accordance with this Letter of Undertaking or any other document or applicable law, shall not constitute as waiver of said rights.
 
 
9.
The contents of this Letter adds, as opposed to diminishes or replaces, to any other of our undertakings in respect or to the benefit of the Bank, as provided for in any other document, whether in effect prior or after the execution of this Letter.

In witness thereof, we, the Parties, have signed this Undertaking:

Upon the 6 th day of October, 2011, at _______________________

_______________(-)_________
BOS-Odem Ltd.
 
 
 
 

[Translated from Hebrew]
 
Date: 6 October 2011

To
Bank Hapoalim Ltd.
Rishon-lezion Business Branch (391)

Re: Letter of Irrevocable Undertaking

As shareholders in BOS-Odem Ltd. , Corporate Reg. No. 511687402 ( “Company” hereinafter), we, the undersigned, individually and collectively, hereby agree and declare and follows:

So long as you do not provide us and/or the Company, in writing, with a confirmation that all loans provided to the Company, as part of the loan program administered by the Israeli government for Israeli medium-sized businesses (“Loan” hereinafter), were repaid in full, as well as any other sum owed and to be owed by the Company to you in relation to the Loan, the following stipulations shall apply:
 
 
1.
We hereby undertake that there shall be no withdrawal of capital of any sort by Company stakeholders, their family members, Company shareholders or anyone representing either ( “Stakeholder” and “ Family Member” shall be interpreted above and below in this Letter of Undertaking per their definition in the Securities Law, 5728-1968), whether collectively or partially, and whether directly or indirectly.
 
 
2.
Without prejudice to the aforementioned, we hereby undertake not to loan money to the Company to our benefit or to the benefit of our representatives, and undertake not to claim or require the Company to repay or pay any sums pertaining to existing loans provided to the Company by us or by our representatives ( “Shareholders’ Loans” , hereinafter), including – payments against funds, interest, linkage, indemnification, compensation, commissions, expenses and all other accessory payments borrowed by or derived from Shareholders’ Loans, so long as the company has not provided the Bank with the loan payments due in full.
 
We hereby declare that the sum of Shareholders’ Loans received by us until the date of signing this Letter amounts to a total of: __________________
 
 
3.
We hereby undertake not to demand or require the Company to pay us or our representatives a dividend using any method whatsoever. The term “Dividend” shall be interpreted as it is defined in the Companies’ Law, 5759-1999, and includes, inter alia , any asset provided by the Company to a shareholder by virtue of their privileges as shareholder, whether in cash or by way of any other form of reimbursement, including management fees, consultation fees, participation fees, commissions, sums of money, assets and rights of any kind, paid using Company profits or any other source or any other payment in cash or cash equivalent to Company Shareholders.
 
 
4.
We hereby undertake that we shall not withdraw and/or receive in any way whatsoever from the company, to our benefit or to the benefit of any of our representatives, a salary 5 times greater than the average wage (in accordance with the average wage applicable upon the payment of any such salaries).
 
 
 
 
 
 
5.
The provisions of the above Sections 1,2 and 3 of this Letter of Undertaking notwithstanding, the elapse of two years following loan provision shall entitle us to receive from the Company, annually, up to 50% of the Company’s divisible net profit, by way of dividend or by way of Shareholders’ Loan repayment, subject to the compliance with the following stipulations:
 
 
a.
Distributable profits are in existence;
 
 
b.
Following withdrawal, tangible equity shall not equal less than 25% of the Company’s balance;
 
 
c.
When concerning repayment of Shareholders’ Loans, the date of repayment for the Shareholders’ Loan is determined in the Agreement entered into between the Shareholders and the Company;
 
 
d.
The Joint Bank and Governmental Credit Commission had provided its approval, in advance and in writing, for any such withdrawal.
 
For this purpose, “Tangible Equity” – the sum total of share capital issued and paid, to the inclusion of capital reserves, undesignated profit balance, inferior Shareholders’ Loans and capital notes, when deducting intangible assets (such as: reputation, copyrights, patents, trademarks, brand names, etc.), Company Loans to Shareholders and affiliated companies.
 
 
6.
Our obligations as mandated by this Letter are individually and collectively irrevocable, as your rights depend on their fulfillment.
 
 
7.
In this Letter – the singular shall be construed as the plural and vice versa.
 
In witness thereof, we, the Parties, have signed this Undertaking:

______________(-)________
B.O.S Better Online Solutions Ltd.
 
 
 
 
 
[Translated from Hebrew]

October 6, 2011
 
To Bank Hapoalim Limited.

Re: Irrevocable Undertaking – BOS-Dimex Ltd. – Company Number 512236431

Whereas
we have received or may receive from time to time from Bank Hapoalim Ltd. (the "Bank")  credits, documentary credit,  various loans, overdrafts in our checking account, a debit account  or any another account,  indemnifications and guarantees for us, clearance of commercial papers, extensions and various back extensions and services (severally and jointly, the "Bank Services"); under conditions that were agreed to or shall be agreed to from time to time in respect of each such Bank Service;

We therefore declare and undertake towards the back that for as long as we shall owe the Bank any amounts in respect of the Bank Services on conditions agreed to or that shall be agreed to from time to time in respect of each such Bank Service, the following shall apply:

 
1.
Ownership, Change of Control and Restructuring

1.1          We hereby undertake that our shareholders and their holdings in our shares are as set forth in Exhibit A attached hereto.

1.2          We hereby undertake that there will be no restructuring in our company as compared to this situation on the time of our execution of this letter without the Bank's prior written consent.
In this section 2.1, "Restructuring" shall mean the merger as provided in the Companies Law of 1999, and any transfer or receipt of assets and/or obligations or commitments or obligations, not in the ordinary course of business.

1.3          Without limitation to the above, we hereby agree that in the event there will be a change of control in our company as compared to the situation on the date hereof, without the Bank's prior written consent, the Bank shall have the right to call for immediate repayment of all amounts provided within the framework of the Bank Services or any part thereof, and take all actions it deems fit for the collection of these amounts.

 
2.
Prohibition on Creation of Pledges and Grant of Guarantees

2.1          We hereby undertake not to pledge or encumber any of our assets, whether we own it today or shall own it in the future, in full or in part, in any way or form or for any purpose or reason, in favor of any third party, and we further undertake not to commit in any way to grant or create a pledge and/or an encumbrance and or give a guarantee as described above, and not to provide or commit to provide to any third party a guarantee and/or an indemnification from any third party including a related company to us and/or our subsidiary and/or pledge and/or encumbrance of any type and on any assets that belongs to a third party including a related company and a subsidiary, without the Bank's prior written consent.
 
 
 
 

2.2           In section 2.1 above:

 
2.2.1 
The term "Property" shall means to include real estate, chattels and rights of any type whatsoever, whether held or are to be held.
 
 
2.2.2 
The term "Pledge" shall have the meaning ascribed to it in the Pledge law of 1967.

 
2.2.3 
The term "Pledge" and or "Encumbrance" shall include transfer of  right by way of pledge.

2.3          In spite of the above in section 2.1, we shall be entitled to create fixed pledges on fixed assets purchased by us, in favor of the party that financed all or part of the purchase of the assets subject of such pledge, provided that:

 
2.3.1
We shall give the Bank prior written notice of at least 10 days of our intention to receive such credit together with details on the amount, type, term of the credit and the name of the lender in whose favor the fixed pledge shall be recorded and also details on the asset to be pledged as security for that credit.
 
 
2.3.2
The pledge documents shall state the amount of the credit  extended to us for the purpose of acquisition of the asset subject of the pledge.

 
2.3.3
We shall not execute any pledge document as aforementioned, unless it includes an explicit provision that the pledge shall be considered void and cancelled as soon as the credit provided for the purchase of the asset subject of the pledge is paid.
 
 
3.
Setting-up Subsidiaries

3.1          We hereby undertake not to set up or become shareholders of subsidiaries and/or related companies as defined in the Securities Law without the prior written consent of the Bank.

3.2          Notwithstanding the above, we shall be entitled to do as described in this section, provided that the newly formed company shall execute an undertaking  towards the Bank  in the form of this commitment or another form as shall be prescribed by the Bank.

 
4.
Sale and Acquisition of Assets

4.1          We commit not to sell and/or transfer and/or give out of our ownership or possession and/or lease any assets whatsoever of any type, as they are today and as they may be in the future, in whole or in part, except in the ordinary course of business and against full consideration; to others, including to subsidiaries and/or related companies as provided in section 3 above, without the Bank's prior written consent.

4.2          We commit that they will not alter the nature of our activity without the Bank's prior written consent.
 
 
 
 

 
5.
Legal Proceedings

5.1          We hereby undertake to advise the Bank in writing of any claim or material legal proceeding of any type that were filed or commenced against us in a court of law or in any legal tribunal, including arbitration, whether in Israel or abroad. "Material legal proceeding" shall mean a proceeding that has an effect on the company's activity and its management.

5.2          The timing for reports to the Bank under this section is seven days from the filing of the claim or the commencement of the  process against us.

 
6.
Provision of Reports and Information

6.1          We hereby undertake that within 120 days of December 31 st   of each year, we will provide the Bank with all our adjusted financial reports for December 31st of the previous year, all as required under Israeli generally accepted accounting principles (GAAP), audited by an independent external CPA and presented according to Israeli GAAP as may be from time to time.

6.2          In addition, and without limitation to the above,  we undertake to provide the Bank from time to time, at its request, with additional information in connection with our business and financial condition.

 
7.
Insurance Coverage

We undertake to insure at all times all of our assets and property at their full value against the commonly excepted risks that the Bank shall indicate from time to time, with insurance companies and according to terms that the bank shall agree to, and to transfer to the Bank, within the scope  of the amounts due to it in respect of the Bank Services, the rights derived from the insurance certificates pursuant to the form that Bank shall approve, to pay all insurance premiums on time and deliver to the Bank all the insurance certificates and receipts for payment of such insurance premiums.

 
8.
Reimbursement of Loans to Shareholders

8.1          We hereby undertake not to lend to our shareholders or to repay our sure holders existing loans and/or future loans at anytime, as long as we have not repaid the Bank the amounts due to it in connection with the Bank Services in, absent the Bank's prior written consent.

8.2          We hereby undertake to provide to the Bank the consent and undertaking  of our shareholders that until the Bank approved in writing that it has received in full all amounts due to it  from us in respect of the Bank Services, the shareholders will not require or demand repayment of the aforementioned loans.
 
 
 
 
 
9.      Changes in Financial Condition
 
9.1          We undertake to maintain financial ratios, as shall be reported in our quarterly and annual (consolidated) financial statements, audited or reviewed by a certified independent accountant at all times and from time to time as provided below:
 
9.1.1                  Net profit – in the year 2011, net profit (after taxes and irregular activities) and subject to write-offs due to intangible assets will be positive, and commencing the year 2012 and until 2014 our net profit will not be less than NIS 1 million.
 
9.2          The terms in section 9.1 above shall be interpreted according to Israeli GAAP, as shall be from time to time.
 
9.3          We are aware that the financial ratios are based on accounting standards and accounting rules existing that were implemented in our recent financial reports. Implementation of standards and/or accounting rules different than those on the basis of which the recent financial reports were prepared, in our financial reports, including of International Financial Reporting Standards (IFRS) or standards in Israel and/or the United States ("New Standards") may result in changes that will have an application on the financial ratios. In any time in which the Bank establishes that the changes caused or that may be caused to our financial statements due to implementation of New Standards so require, the Bank may, following consultation with us but without need for our consent, advise us what changes it requires in the financial ratios in order to adjust them to the aforementioned changes, with the intention of adapting them to the original economic purpose according to which the financial ratios were set (the "Adjusted Financial Ratios"). Once the Bank has advised us of the Adjusted Financial Ratios they  - shall commit us starting from the Bank's notice.
 
10.           Breach of Company's Undertakings
 
In the event we breach or not to comply with any of our undertakings towards the Bank pursuant to this undertaking, or if it is established that any declaration or certification included in this undertaking is not true or accurate, the Bank may call for immediate payment of the amounts that were provided pursuant to the Banking Services, or any part thereof, and take all necessary action it deems fit for their collection.
 
11.           Waivers
 
A waiver by the Bank of a prior breach or of nonperformance of any one or more of our undertakings towards the Back, whether included in this undertaking or in another document, shall not be deemed a justification or reason for an additional breach or non-performance of any condition or undertaking, and the Bank's refraining from using any particular right that it has based on this undertaking or any other document or pursuant to law, shall not be deemed a waiver of such right.
 
12.           General

12.1         This undertaking intends to supplement and not detract and/or replace any other undertaking we have taken upon ourselves towards the Bank and/or in favor of the Bank in any other document, whether made prior to this undertaking or after it.

12.2         This undertaking should not be interpreted as to obligate the Bank to provide us and/ or any third parties the Bank Services or any part thereof.
 
In witness executed on October 6, 2011
 
  BOS-Dimex Ltd.
 
 
 
 
 
[Translated from Hebrew]

To Bank Hapoalim Limited.
 
Re: Irrevocable Undertaking – BOS-Odem Ltd. – Company Number 511687402

Whereas
we have received or may receive from time to time from Bank Hapoalim Ltd. (the "Bank")  credits, documentary credit,  various loans, overdrafts in our checking account, a debit account  or any another account,  indemnifications and guarantees for us, clearance of commercial papers, extensions and various back extensions and services (severally and jointly, the "Bank Services"); under conditions that were agreed to or shall be agreed to from time to time in respect of each such Bank Service;

We therefore declare and undertake towards the back that for as long as we shall owe the Bank any amounts in respect of the Bank Services on conditions agreed to or that shall be agreed to from time to time in respect of each such Bank Service, the following shall apply:

 
1.
Ownership, Change of Control and Restructuring

1.1          We hereby undertake that our shareholders and their holdings in our shares are as set forth in Exhibit A attached hereto.

1.2          We hereby undertake that there will be no restructuring in our company as compared to this situation on the time of our execution of this letter without the Bank's prior written consent.
In this section 2.1, "Restructuring" shall mean the merger as provided in the Companies Law of 1999, and any transfer or receipt of assets and/or obligations or commitments or obligations, not in the ordinary course of business.

1.3          Without limitation to the above, we hereby agree that in the event there will be a change of control in our company as compared to the situation on the date hereof, without the Bank's prior written consent, the Bank shall have the right to call for immediate repayment of all amounts provided within the framework of the Bank Services or any part thereof, and take all actions it deems fit for the collection of these amounts.

 
2.
Prohibition on Creation of Pledges and Grant of Guarantees

2.1           We hereby undertake not to pledge or encumber any of our assets, whether we own it today or shall own it in the future, in full or in part, in any way or form or for any purpose or reason, in favor of any third party, and we further undertake not to commit in any way to grant or create a pledge and/or an encumbrance and or give a guarantee as described above, and not to provide or commit to provide to any third party a guarantee and/or an indemnification from any third party including a related company to us and/or our subsidiary and/or pledge and/or encumbrance of any type and on any assets that belongs to a third party including a related company and a subsidiary, without the Bank's prior written consent.
 
 
 
 

2.2          In section 2.1 above:

2.2.1            The term "Property" shall means to include real estate, chattels and rights of any type whatsoever, whether held or are to be held.
 
2.2.2            The term "Pledge" shall have the meaning ascribed to it in the Pledge law of 1967.

2.2.3            The term "Pledge" and or "Encumbrance" shall include transfer of  right by way of pledge.

2.3          In spite of the above in section 2.1, we shall be entitled to create fixed pledges on fixed assets purchased by us, in favor of the party that financed all or part of the purchase of the assets subject of such pledge, provided that:

 
2.3.1
We shall give the Bank prior written notice of at least 10 days of our intention to receive such credit together with details on the amount, type, term of the credit and the name of the lender in whose favor the fixed pledge shall be recorded and also details on the asset to be pledged as security for that credit.

 
2.3.2
The pledge documents shall state the amount of the credit extended to us for the purpose of acquisition of the asset subject of the pledge.

 
2.3.3
We shall not execute any pledge document as aforementioned, unless it includes an explicit provision that the pledge shall be considered void and cancelled as soon as the credit provided for the purchase of the asset subject of the pledge is paid.

 
3.
Setting-up Subsidiaries

3.1          We hereby undertake not to set up or become shareholders of subsidiaries and/or related companies as defined in the Securities Law without the prior written consent of the Bank.

3.2          Notwithstanding the above, we shall be entitled to do as described in this section, provided that the newly formed company shall execute an undertaking  towards the Bank  in the form of this commitment or another form as shall be prescribed by the Bank.

 
4.
Sale and Acquisition of Assets

4.1          We commit not to sell and/or transfer and/or give out of our ownership or possession and/or lease any assets whatsoever of any type, as they are today and as they may be in the future, in whole or in part, except in the ordinary course of business and against full consideration; to others, including to subsidiaries and/or related companies as provided in section 3 above, without the Bank's prior written consent.

4.2          We commit that they will not alter the nature of our activity without the Bank's prior written consent.

 
5.
Legal Proceedings

5.1           We hereby undertake to advise the Bank in writing of any claim or material legal proceeding of any type that were filed or commenced against us in a court of law or in any legal tribunal, including arbitration, whether in Israel or abroad. "Material legal proceeding" shall mean a proceeding that has an effect on the company's activity and its management.
 
 
 
 

5.2          The timing for reports to the Bank under this section is seven days from the filing of the claim or the commencement of the process against us.

 
6.
Provision of Reports and Information

6.1          We hereby undertake that within 120 days of December 31 st   of each year, we will provide the Bank with all our adjusted financial reports for December 31st of the previous year, all as required under Israeli generally accepted accounting principles (GAAP), audited by an independent external CPA and presented according to Israeli GAAP as may be from time to time.

6.2          In addition, and without limitation to the above,  we undertake to provide the Bank from time to time, at its request, with additional information in connection with our business and financial condition.

 
7.
Insurance Coverage

We undertake to insure at all times all of our assets and property at their full value against the commonly excepted risks that the Bank shall indicate from time to time, with insurance companies and according to terms that the bank shall agree to, and to transfer to the Bank, within the scope  of the amounts due to it in respect of the Bank Services, the rights derived from the insurance certificates pursuant to the form that Bank shall approve, to pay all insurance premiums on time and deliver to the Bank all the insurance certificates and receipts for payment of such insurance premiums.

 
8.
Reimbursement of Loans to Shareholders

8.1          We hereby undertake not to lend to our shareholders or to repay our sure holders existing loans and/or future loans at anytime, as long as we have not repaid the Bank the amounts due to it in connection with the Bank Services in, absent the Bank's prior written consent.

8.2          We hereby undertake to provide to the Bank the consent and undertaking of our shareholders that until the Bank approved in writing that it has received in full all amounts due to it  from us in respect of the Bank Services, the shareholders will not require or demand repayment of the aforementioned loans.
 
9.      Changes in Financial Condition
 
9.1.         We undertake to maintain financial ratios, as shall be reported in our quarterly and annual (consolidated) financial statements, audited or reviewed by a certified independent accountant at all times and from time to time as provided below:
 
 
9.1.1.
Equity – The value of tangible equity shall equal no less than 13% of the entire balance.
 
 
 
 
 
 
For the purposes of this letter:
 
“Tangible Equity” – as is represented in quarterly and annual financial statements, to the inclusion of share capital issued and paid, undesignated profit balance, capital reserves – as well as the remainder of Shareholders’ Loans for which signatures have been provided to the Bank by the Company and its Shareholders, Letters of Subordination; when deducting deferred expenses, intangible assets, such as: reputation, patents, trademarks, brand names, copyrights, etc. and when deducting treasury share and Company debtors  who are either stakeholders and/or subsidiaries and/or affiliates of the Company (as these terms are defined in the Securities Law, 5728-1968) and when deducting securities granted by the company so as to secure the obligations of Company stakeholders and/or subsidiaries and/or affiliates.

 
9.1.2.
Funding Ratio – The long-term credit ratio for working capital shall be less than “1”, “working capital” is defined as “inventory” plus “customers”, when deducting “customer advance payments” and “suppliers, when deducting supplier advance payments”.

 
9.1.3.
Funding Expenses Coverage Ratio – The ratio between operating profit and funding expenses shall under no circumstances equal to less than 1.3.
 
9.2          The terms in section 9.1 above shall be interpreted according to Israeli GAAP, as shall be from time to time.
 
9.3          For the avoidance of doubt, breach of our undertaking to maintain the financial ratios as stipulated in section 9.1 above (the “Financial Ratios”), shall mean the breach of all of the undertakings in sub-sections 9.1.1 through 9.1.3.
 
9.4          We are aware that the Financial Ratios are based on accounting standards and accounting rules existing that were implemented in our recent financial reports. Implementation of standards and/or accounting rules different than those on the basis of which the recent financial reports were prepared, in our financial reports, including of International Financial Reporting Standards (IFRS) or standards in Israel and/or the United States ("New Standards") may result in changes that will have an application on the financial ratios. In any time in which the Bank establishes that the changes caused or that may be caused to our financial statements due to implementation of New Standards so require, the Bank may, following consultation with us but without need for our consent, advise us what changes it requires in the financial ratios in order to adjust them to the aforementioned changes, with the intention of adapting them to the original economic purpose according to which the financial ratios were set (the "Adjusted Financial Ratios"). Once the Bank has advised us of the Adjusted Financial Ratios they  - shall commit us starting from the Bank's notice.
 
10.           Breach of Company's Undertakings
 
In the event we breach or not to comply with any of our undertakings towards the Bank pursuant to this undertaking, or if it is established that any declaration or certification included in this undertaking is not true or accurate, the Bank may call for immediate payment of the amounts that were provided pursuant to the Banking Services, or any part thereof, and take all necessary action it deems fit for their collection.
 
 
 
 
 
11.            Waivers
 
A waiver by the Bank of a prior breach or of nonperformance of any one or more of our undertakings towards the Back, whether included in this undertaking or in another document, shall not be deemed a justification or reason for an additional breach or non-performance of any condition or undertaking, and the Bank's refraining from using any particular right that it has based on this undertaking or any other document or pursuant to law, shall not be deemed a waiver of such right.
 
12.            General

12.1         This undertaking intends to supplement and not detract and/or replace any other undertaking we have taken upon ourselves towards the Bank and/or in favor of the Bank in any other document, whether made prior to this undertaking or after it.

12.2         This undertaking should not be interpreted as to obligate the Bank to provide us and/ or any third parties the Bank Services or any part thereof.
 
In witness executed on __________
 
BOS-Odem Ltd.
 
 

 

 
Exhibit 11
 
Statement of Computation of Earnings per Share (in thousands)

Following is the data relating to the weighted average number of shares used in the computation of diluted earning (loss) per share:
 
   
Year ended December 31,
   
Year ended December 31,
 
   
2011
   
2010
 
             
WWeighted average number of shares used in the computation of basic earning (loss) per share
   
2,818
     
2,622
 
                 
WWeighted average number of shares used in the computation of diluted earning (loss) per share
   
2,818
     
2,757
 
                 
Options and warrants which were not included in the computation of diluted earning (loss) per share due to anti dilutive effect
   
1,525
     
1,442
 

 
Exhibit 12.1
 
Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

I, Yuval Viner, certify that:
 
1.
I have reviewed this annual report on Form 20-F of B.O.S. Better Online Solutions Ltd. (the “registrant”);
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by the report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 Date: April 30, 2012

/s/ Yuval Viner
Yuval Viner, Chief Executive Officer
 
Exhibit 12.2
 
Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

I, Eyal Cohen, certify that:
 
1.
I have reviewed this annual report on Form 20-F of B.O.S. Better Online Solutions Ltd. (the “registrant”);

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by the report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 30, 2012

/s/ Eyal Cohen _
Eyal Cohen, Chief Financial Officer
 
Exhibit 13.1
 
Certification Pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934.
 
        In connection with the Annual Report on Form 20-F of B.O.S. Better Online Solutions Ltd., a company organized under the laws of the State of Israel (the “ Company ”), for the period ending December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “ Report ”), each of the undersigned officers of the Company certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to such officer’s knowledge, that:

1.  
the Report fully complies, in all material respects, with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.  
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Report.
 
By:  
 
/s/ Yuval Viner   
Yuval Viner          
Chief Executive Officer
By:
 
/s/ Eyal Cohen
Eyal Cohen
Chief Financial Officer
 
Date: April 30, 2012
 


Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We consent to the incorporation by reference in the Registration Statements on Form F-3 (Nos. 333-130048 and No. 333-152020) and related prospectus and in the Registration Statements on Form S-8 (Nos. 333-160414, 333-148318, 333-136957, 333-110696, 333-100971, 333-11650 and 333-179253) of B.O.S Better Online Solutions Ltd. (“BOS”) of our report dated March 29, 2012, with respect to the consolidated financial statements of BOS, included in this Annual Report on Form 20-F for the year ended December 31, 2011. 
 
 
Tel Aviv Israel 
April 30, 2012    
/s/ Kost Forer Gabbay & Kasierer
KOST, FORER GABBAY & KASIERER
A Member of Ernst &Young Global
 
 
 

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference into the Registration Statements on Form F-3 and related prospectus of B.O.S Better Online Solutions Ltd. (“BOS”) (Nos. 333-130048 and 333-152020) and into the Registration Statements of BOS on Form S-8 (Nos. 333-160414, 333-148318, 333-136957, 333-110696, 333-100971, 333-11650 and 333-179253) of our report dated March 29, 2010, with respect to the consolidated financial statements of BOS - Supply Chain Solutions (Lynk), Inc. (formally known as Lynk USA, Inc.) included in this Annual Report on Form 20-F for the year ended December 31, 2011. 
 
  /s/ ARIK ESHEL, CPA & ASSOC., PC
ARIK ESHEL, CPA & ASSOC., PC
April 29, 2012