The Financial Statements of Israel - Q2 2015

Transcription

1 Advanced Vision Technology Ltd. 6 Months Report 2015 January 1 st June 30 th 1

2 Dear Shareholder, In the first half of 2015, total order bookings were $27.3 million, compared with $26.7 million in the same period last year. Total revenues for the first half of 2015 amounted to $26.1 million, compared with $27.1 million in the same period last year. The first half of 2015 proved to be a challenging period for the Company. Both order bookings and revenues were impacted by the exchange rate effects of the Euro against the US Dollar. The assumption that the current Euro to U.S. Dollar exchange rate will prevail was the main reason for the updated projections for 2015 calendar year we announced during Q In the second quarter of 2015, order bookings totaled $14.4 million compared with $13.6 million in the same period last year. This growth is mainly due to a strong quarter in Asia Pacific product order booking and in worldwide services order booking, as well as good performance in the packaging segment. GAAP operating income in the first half of 2014 was $2.3 million, compared with $3.1 million in the same period last year. During the second quarter, we introduced the Offline Setup solution for label printers, designed to help customers create quality standardization across their production operations, and to maintain quality standards between different jobs and runs. We view this move as a first milestone in our cross-site workflow strategy, aimed to help converters set their quality standards. In the first half of the year, we introduced a new offline proofing product line, based on our alliance with Global Vision, and saw a good ramp up and commercial success. In the Digital area we continued to enhance our presence as we introduced and installed our first digital solution for Folding Cartons, with the HP Indigo press. In the second quarter, AVT presented at the Cantech international Metal conference in China and showcased for the first time, the CoatScan, our new metal sheet coating solution, based on the Alliance with Quality by Vision, Israel, to further strengthen our offering to metal sheet printers. As mentioned, results of our first half of 2015 were not as good as we had initially expected. But at the same time we see a good business atmosphere in most of the relevant geographies we are active in and a good pipeline for the balance of the year. We are focusing our efforts on the strategic initiatives we have embarked on our alliance with Erhardt and Leimer, our new growth engines and other exciting partnerships and initiatives that are in the pipeline, and we remain optimistic about AVT's prospects. Sincerely, Jaron Lotan, President & Chief Executive Officer AVT 2

3 Financial Results For the first six months of 2015 The following table sets forth consolidated income statements data for each of the three month and six month periods ended June 30, 2015 and June 30, 2014 and for the year ended December 31, 2014 )in thousands U.S. dollars, except share and per share amounts): Six months ended Three months ended Year ended Revenues 26,099 27,073 13,135 13,677 54,110 Cost of revenues 12,125 12,771 6,050 6,124 25,819 Gross profit 13,974 14,302 7,085 7,553 28,291 Gross margin in % 53.54% 52.83% 53.94% 55.22% 52.28% Operating expenses: Research and development 4,038 3,709 2,118 1,913 7,655 Selling and marketing 4,849 4,868 2,501 2,556 9,605 General and administrative 2,814 2,578 1,579 1,304 5,083 Total operating expenses 11,701 11,155 6,198 5,773 22,343 Operating income 2,273 3, ,780 5,948 Financial income (expense), net (226) 70 (28) Income before taxes on income 2,047 3, ,865 5,976 Taxes on income ,351 Net income 1,524 2, ,321 4,625 3

4 The following table sets forth selected consolidated income statement data for each of the three month and six month periods ended June 30, 2015 and June 30, 2014 and for the year ended December 31, 2014, expressed as a percentage of total revenues: Six months ended Three months ended Year ended Revenues 100% 100% 100% 100% 100% Cost of revenues Gross profit Operating expenses: Research and development Selling and marketing General and administrative Total operating expenses Operating income Financial income (expense), net (0.87) 0.26 (0.21) Income before taxes on income Taxes on income Net income

5 The following table sets forth selected proforma consolidated income statement data (adjusted to exclude noncash amortization of acquired intangible assets and stock based compensation expense) for the six month periods ended June 30, 2015 and 2014 and for the year ended December 31, 2014 in thousands US dollars: GAAP Adjustments Non GAAP Non GAAP Non GAAP Revenues 26,099 26,099 27,073 54,110 Cost of revenues 12, ,105 12,626 25,599 Gross profit 13, ,994 14,447 28,511 Gross margin in % 53.54% 53.62% 53.36% 52.69% Operating expenses: Research and development 4, ,007 3,682 7,595 Selling and marketing 4, ,795 4,803 9,503 General and administrative 2, ,730 2,509 4,959 Total operating expenses 11, ,532 10,994 22,057 Operating income 2, ,462 3,453 6,454 Financial income (expense), net (226) (226) Income before taxes on income 2, ,236 3,523 6,482 Taxes on income ,351 Net income 1, ,713 2,571 5,131 Revenues Revenues are derived primarily from the sale of our systems. Additional revenues are generated through the sale of support services, training and software updates to customers. Revenues in the first six months of 2015 totaled $26.1 million, compared with $27.1 million in the first six months of Revenues in Q totaled $13.1 million, compared with $13.7 million in Q and $13.0 million in Q The decrease in total revenues in the first six months of 2015 compared with the same period last year is due primarily to an unfavorable impact of the Euro to the US Dollar exchange rate of approximately $2.3 million, when compared to foreign currency exchange rates last year. 5

6 During the first six months of 2015 order booking totaled $27.3 million compared with order booking of $26.7 million during the same period last year. During Q order booking totaled $14.4 million compared with Q order booking of $13.6 million and compared with Q order booking of $12.9 million. The ratio of order booking to revenues in the first six months of 2015 was 105%. Order booking in H reflects the negative impact of the stronger U.S. dollar in the amount of approximately $2.1 million when compared to foreign currency exchange rates of H As of June 30, 2015 order backlog totaled $18.2 million representing a decrease of 2.0% compared with the backlog balance at June 30, 2014 and an increase of 6.9% when compared to Q We estimate that 40%-50% of this backlog will materialize into revenue during Q3 2015, while the majority of the balance will materialize into revenue over the following three quarters. The following chart sets forth a breakdown of revenues by territory for each of the six month periods ended June 30, 2015 and June 30, 2014: 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 43% 42% 41% 41% 16% 17% EMEA Americas AsPA H H During the first six months of 2015, EMEA (Europe, Middle East & Africa) generated 42% of total revenues compared with 43% in the first six months of 2014, while the Americas contributed 41% of total revenues the same as in the first six months of Revenues generated in Asia-Pacific contributed 17% of total revenues compared with 16% in the first six months of Cost of Revenues / Gross Profit Cost of revenues includes materials, labor, manufacturing overhead and an estimation of costs associated with installation, warranty and training. It is our practice to provide a one-year warranty to the end-user. A provision, based on our experience and engineering estimates, is taken to cover costs in connection with such warranty for the 12 month period commencing at the end of installation. 6

7 Gross margin in the first six months of 2015 was 53.54% compared with 52.83% in the first six months of Proforma gross margin in the first six month of 2015 excluding the impact of non-cash amortization of acquired intangible assets and stock-based compensation expense, was 53.62% compared with 53.36% for the same period in The increase in gross margin for the first six months of 2015 in comparison to the same period in 2014 is due primarily to final royalty payments made to the chief scientist office in Q1 14. The following table sets forth selected consolidated expense data for each of the five quarters ended , , , and expressed as a percentage of total revenue: 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Cost of Revenues R&D Selling & Marketing General & Administrative Q1/ % 13.4% 17.3% 9.5% Q2/ % 14.0% 18.7% 9.5% Q3/ % 14.5% 18.0% 9.5% Q4/ % 14.7% 17.0% 9.0% Q1/ % 14.8% 18.1% 9.5% Q2/ % 16.1% 19.0% 12.0% Research and Development During the first six months of 2015, research and development expenses were $4,038 thousand, compared with $3,709 thousand in the first six months of Proforma research and development expenses in the first six months of 2015 (excluding stock based compensation) increased to $4,007 thousand, compared with $3,682 thousand in the first six months of On a quarterly basis, during Q2 2015, research and development expenses were $2,118 thousand, compared with $1,913 thousand in Q and compared with $1,920 thousand in Q The increase in research and development expenses compared with the same period last year is due primarily to increase in personnel and consultants partially offset by the favorable impact of the Israeli Shekel exchange rate relative to the US Dollar. Selling and Marketing During the first six months of 2015 selling and marketing expenses were $4,849 thousand, compared with $4,868 thousand in the respective period of Proforma selling and marketing expenses during the first six months of 2015 (excluding non-cash amortization of acquired intangible assets and stock based compensation expense) were $4,795 thousand, compared with $4,803 thousand in the respective period of The decrease compared with the same period last year is 7

8 attributable primarily to the favorable impact of the Israeli Shekel exchange rate relative to the US Dollar partially offset by increased marketing activities and an increase in personnel costs. On a quarterly basis, during Q2 2015, selling and marketing expenses were $2,501 thousand, compared with $2,556 thousand in Q and compared with $2,348 thousand in Q General and Administrative During the first six months of 2015 general and administrative expenses were $2,814 thousand, compared with $2,578 thousand in the first six months of Proforma general and administrative expenses in the first six months of 2015 (excluding stock based compensation expense) were $2,730 thousand, compared with $2,509 thousand in the first six months of The increase compared with same period last year is mainly attributable to legal costs related to the agreement with Erhardt + Leimer GmbH ( E+L ) which was signed on July 2, 2015, which was partially offset by the favorable impact of the Israeli Shekel exchange rate relative to the US Dollar. On a quarterly basis, during Q2 2015, research and development expenses were $1,579 thousand, compared with $1,304 thousand in Q and compared with $1,235 in Q The increase in general and administrative expenses compared with Q is due primarily to legal costs related to the E+L transaction. Stock-Based Compensation Starting in January 1, 2006 we record based on ASC 718 share-based payments as expenses based on their fair value at the grant date. The compensation is recorded over the requisite service period. The measurement of the benefit is based on the Monte Carlo simulation. Total stock-based compensation expense recorded during the first six months of 2015 was $165 thousand compared with $147 thousand in the first six months of Operating and Net Income Net income for the six months ended June 30, 2015 was $1,524 thousand or diluted earnings of $0.25 per share compared with net income of $2,265 thousand or diluted earnings of $0.37 per share for the same period in Proforma net income for the six months ended June 30, 2015 (excluding non-cash amortization of acquired intangible assets, stock-based compensation expense), was $1,713 thousand compared with $2,571 thousand for the same period in Proforma operating income during the first six months of 2015 excluding all expense items cited above was $2,462 thousand compared with $3,453 thousand in the first six months of The decrease in proforma operating income is primarily due to lower revenue in H which was highly impacted by the unfavorable Euro to US Dollar exchange rate and higher operating expenses. Consolidated operating expenses were 44.8% of revenues in the first six months of 2015 compared with 41.2% in the first six months of

9 Consolidated proforma operating margin was 9.4% of revenues in the first six months of 2015 compared with 12.8% in the first six months of Proforma EBITDA in the first six months of 2015 (excluding stock-based compensation expense) was $2,668 thousand as compared with income of $3,639 thousand in the first six months of On a quarterly basis, operating income during Q was $887 thousand compared with $1,780 thousand in Q and with $1,386 thousand in Q The decrease in operating income is primarily due to lower revenue in Q which was highly impacted by the unfavorable Euro to US Dollar exchange rate and higher operating expenses which included the E+L transaction s legal costs. Financial Income (Expense), net Financial income is comprised of interest income from bank deposits less bank fees and exchange rate differences. Net financial expense during the first six months of 2015 was $226 thousand compared with net financial income of $70 thousand in the first six months of Financial income for the first six months of 2015 was $52 thousand compared to $64 thousand for the first six months of An additional net expense of $278 thousand was generated from exchange rate differences and bank charges, compared with income of $6 thousand for the same period in On a quarterly basis, Net financial expense during Q was $28 thousand compared with net financial income of $85 thousand in Q and compared with net expenses of $ 198 thousand in Q The decrease in net financial expenses in Q compared with Q is due to higher exchange rate differences recorded in Q Taxes We operate within multiple taxing jurisdictions and are subject to audit in those jurisdictions. In our opinion, an adequate asset and provision for income taxes has been made in the financial statements. This asset and provision takes into consideration potential tax liability in Israel and other jurisdictions. The Company has in the past benefitted from and continues to benefit from certain Israeli government programs and tax legislation, particularly as a result of the status of a significant portion of the Company s existing production facilities in Israel under the Law for the Encouragement of Capital Investments, 1959 (the Investment Law ). According to an amendment to the Investment Law, effective as of August 5, 2013, (the Amendment ), income derived by Preferred Companies from Preferred Enterprises, referred to as Preferred Income, is subject to a uniform tax rate of 16% in 2014 and thereafter (or 9%, in areas designated as Development Zone A). Pursuant to the Amendment, the Company has irrevocably elected to implement the Amendment with respect to its previous Approved and Privileged Enterprises so that income derived therefrom is now treated as Preferred Income. As of January 1, 2014, dividends distributed from Preferred Income would subject the recipient to a 20% tax (or lower, if so provided under an applicable tax treaty), which would generally be withheld by the distributing company. 9

10 Liquidity and Capital Resources As of June 30, 2015 our total current assets were $40.6 million, including a cash and financial investment balance of $19.4 million compared with cash and financial investments of $24.6 million as of June 30, 2014 and compared with $26.2 million as of December 31, During the first six months of 2015, $634 thousand were used-in operating activities compared with $3,243 thousand provided in operating activities during the same period in The decrease in cash generated from operating activities is due partially to the increase in the trade receivable balance from $7,955 thousand as of June 30, 2014 to $11,017 thousand on June 30, The increase in the trade receivable is attributed to transactions with certain large customers with longer payment terms during the first six months of 2015 which are expected to be collected during H Consequently DSO in accounts receivable at the end of Q were 77 days compared with 55 days at the end of Q and as of December 31, Our net capital expenditures on fixed assets were $301 thousand in the first six months of 2015, compared with $119 thousand in the respective period of Effective October, 2014, the District Court in Tel Aviv, Israel, approved the company's request to allow the reduction of its capital by up to US$12 million, after the Israeli Tax Authority informed the District Court that it does not object to the ruling. Therefore, per applicable Israeli law, the board of directors of the company may opt to declare dividends and/or adopt a share buy-back program, which will consume up to an aggregate of US$12 million of the company's capital. On March 18, 2015, the board of directors resolved to distribute an extra-ordinary gross dividend of $1.0 per share which was paid on April 2, 2015, in the total amount of $6.1 million. On July 2, 2015, AVT and E+L signed an asset purchase agreement and a cooperation agreement regarding a strategic alliance for the printing and converting industries. E+L is a leader in web guiding, web viewing and web tension control. This agreement will broaden the product portfolios and strengthen services for customers of AVT and E+L, through solutions based on the two companies combined experience and technological skills. Employees Our employees are our most valuable asset, driving our commitment to technological leadership and outstanding customer support. Our team repeatedly demonstrates our vision, and has the motivation, innovation and commitment to customer satisfaction that are the key ingredients for growth. As of June 30, 2015, 224 people were employed by AVT worldwide compared with 217 employees on December 31, 2014 and 216 employees on June 30,

11 The breakdown of employees by function is as follows: General & Administrative 14% R&D 24% Customer Support 26% Selling & Marketing 19% Operations & Manufacturing 17% Our employees are based in the following geographies: AsPac 3% America 30% Israel 53% Europe 14% 11

12 ADVANCED VISION TECHNOLOGY (A.V.T.) LTD. AND ITS SUBSIDIARIES INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2015 IN U.S. DOLLARS UNAUDITED INDEX Page Independent Auditors' Review Report 13 Consolidated Balance Sheets Consolidated Statements of Income 16 Consolidated Statements of Comprehensive Income 17 Consolidated Statements of Changes in Shareholders' Equity 18 Consolidated Statements of Cash Flows 19 Notes to Consolidated Financial Statements

13 Kost Forer Gabbay & Kasierer 3 Aminadav St. Tel-Aviv , Israel Tel: Fax: ey.com Independent Auditors' Review Report The Board of Directors Advanced Vision Technology (A.V.T.) Ltd. We have reviewed the condensed consolidated financial information of Advanced Vision Technology (A.V.T.) Ltd. and its subsidiaries, (the "Company") which comprise the condensed consolidated balance sheet as of June 30, 2015, and the related condensed consolidated statements of income and consolidated statements of comprehensive income for the six-month and three-month periods ended June 30, 2015 and 2014, and the condensed consolidated statement of changes in shareholders' equity for the six months period ended June 30, 2015 and the condensed consolidated statements of cash flows for the six month periods ended June 30, 2015 and Management s Responsibility for the Financial Information Management is responsible for the preparation and fair presentation of the condensed financial information in conformity with U.S. generally accepted accounting principles; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in conformity with U.S. generally accepted accounting principles. Auditors' Responsibility Our responsibility is to conduct our reviews in accordance with auditing standards generally accepted in the United States applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion. Conclusion Based on our reviews, we are not aware of any material modifications that should be made to the condensed financial information referred to above for it to be in conformity with U.S. generally accepted accounting principles. Report on Condensed Consolidated Financial Statements as of December 31, 2014 and for the year then ended We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of the Company as of December 31, 2014, and the related consolidated statements of comprehensive income, changes in shareholders equity, and cash flows for the year then ended; and we expressed an unmodified audit opinion on those consolidated financial statements in our report dated March 18, In our opinion, the accompanying condensed consolidated financial statements of the Company as of December 31, 2014, and for the year then ended are consistent, in all material respects, with the consolidated financial statements from which they have been derived. Tel-Aviv, Israel August 11,2015 KOST FORER GABBAY & KASIERER A Member of Ernst & Young Global 13

14 ADVANCED VISION TECHNOLOGY (A.V.T.) LTD. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS U.S. dollars in thousands ASSETS June 30, December 31, Unaudited CURRENT ASSETS: Cash and cash equivalents $ 8,371 $ 15,048 Short-term deposits 11,061 11,168 Trade receivables 11,017 8,170 Inventories 6,123 6,077 Other accounts receivable and prepaid expenses 3,992 3,740 Total current assets 40,564 44,203 LONG-TERM ASSETS: Deferred income taxes 2,111 2,233 Severance pay fund 2,821 2,811 Total long-term assets 4,932 5,044 PROPERTY AND EQUIPMENT, NET 1,364 1,269 INTANGIBLE ASSETS, NET Total assets $ 46,949 $ 50,629 The accompanying notes are an integral part of the interim consolidated financial statements. 14

15 CONSOLIDATED BALANCE SHEETS U.S. dollars in thousands (except share and per share data) ADVANCED VISION TECHNOLOGY (A.V.T.) LTD. AND ITS SUBSIDIARIES LIABILITIES AND SHAREHOLDERS' EQUITY June 30, December 31, Unaudited CURRENT LIABILITIES: Trade payables $ 2,531 $ 3,110 Employees and payroll accruals 2,668 2,696 Customer advances and deferred revenues 2,288 2,690 Accrued expenses and other liabilities 6,365 5,029 Total current liabilities 13,852 13,525 ACCRUED SEVERANCE PAY 4,232 4,186 SHAREHOLDERS' EQUITY: Share capital: Ordinary shares of New Israeli Shekels (NIS) 2 par value: 15,000,000 shares authorized at June 30, 2015 and December 31, 2014; 6,895,599 and 6,857,480 shares issued at June 30, 2015 and December 31, 2014 respectively; 6,076,477 and 6,038,358 shares outstanding at June 30, 2015 and December 31, 2014, respectively 3,733 3,714 Additional paid-in capital 65,474 65,150 Treasury shares at cost - 819,122 shares as of June 30, 2015 and December 31, 2014 (6,902) (6,902) Accumulated other comprehensive income Accumulated deficit (33,580) (29,044) Total shareholders' equity 28,865 32,918 Total liabilities and shareholders' equity $ 46,949 $ 50,629 The accompanying notes are an integral part of the interim consolidated financial statements. August 11,2015 Date of approval of the financial statements Jaron Lotan CEO Udi Bar Sela CFO 15

16 CONSOLIDATED STATEMENTS OF INCOME U.S. dollars in thousands (except share and per share data) ADVANCED VISION TECHNOLOGY (A.V.T.) LTD. AND ITS SUBSIDIARIES Six months ended Three months ended Year ended June 30, June 30, December 31, Unaudited Audited Revenues $ 26,099 $ 27,073 $ 13,135 $ 13,677 $ 54,110 Cost of revenues 12,125 12,771 6,050 6,124 25,819 Gross profit 13,974 14,302 7,085 7,553 28,291 Operating expenses: Research and development 4,038 3,709 2,118 1,913 7,655 Selling and marketing 4,849 4,868 2,501 2,556 9,605 General and administrative 2,814 2,578 1,579 1,304 5,083 Total operating expenses 11,701 11,155 6,198 5,773 22,343 Operating income 2,273 3, ,780 5,948 Financial income (expense), net (226) 70 (28) Income before taxes on income 2,047 3, ,865 5,976 Taxes on income ,351 Net income $ 1,524 $ 2,265 $ 658 $ 1,321 $ 4,625 Basic earnings per ordinary share $ 0.25 $ 0.38 $ 0.11 $ 0.22 $ 0.77 Diluted earnings per ordinary share $ 0.25 $ 0.37 $ 0.11 $ 0.22 $ 0.76 The accompanying notes are an integral part of the interim consolidated financial statements. 16

17 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME U.S. dollars in thousands ADVANCED VISION TECHNOLOGY (A.V.T.) LTD. AND ITS SUBSIDIARIES Six months ended Three months ended Year ended June 30, June 30, December 31, Unaudited Audited Net income $ 1,524 $ 2,265 $ 658 $ 1,321 $ 4,625 Other comprehensive income: Unrealized gains on foreign currency cash flow hedge Total comprehensive income $ 1,664 $ 2,265 $ 798 $ 1,321 $ 4,625 The accompanying notes are an integral part of the interim consolidated financial statements. 17

18 ADVANCED VISION TECHNOLOGY (A.V.T.) LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY U.S. dollars in thousands Share capital Additional paid-in capital Treasury shares Accumulated other comprehensive income Accumulated deficit Total shareholders' equity Balance as of December 31, 2013 $ 3,602 $ 64,099 $ (6,902) $ - $ (27,696) $ 33,103 Issuance of shares upon exercise of options Stock-based compensation related to options granted to employees Dividend paid to shareholders (5,973) (5,973) Net income ,625 4,625 Balance as of December 31, ,714 65,150 (6,902) - (29,044) 32,918 Issuance of shares upon exercise of options Stock-based compensation related to options granted to employees Dividend paid to shareholders (6,060) (6,060) Net income ,524 1,524 Other comprehensive income Balance as of June 30, 2015 (unaudited) $ 3,733 $ 65,474 $ (6,902) $ 140 $ (33,580) $ 28,865 The accompanying notes are an integral part of the interim consolidated financial statements. 18

19 CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. dollars in thousands ADVANCED VISION TECHNOLOGY (A.V.T.) LTD. AND ITS SUBSIDIARIES Six months ended June 30, Year ended December 31, Unaudited Audited Cash flows from operating activities: Net income $ 1,524 $ 2,265 $ 4,625 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation related to options granted to employees Depreciation of property and equipment Amortization of intangible assets Revaluation of short-term deposits (33) (11) (233) Decrease (increase) in trade receivables, net (2,847) (18) 124 Decrease (increase) in inventories (46) 239 (483) Increase in other accounts receivable and prepaid expenses (112) (121) (396) Decrease in deferred income taxes, net Increase (decrease) in trade payables (579) 187 1,207 Increase (decrease) in employees and payroll accruals (28) (172) 77 Decrease in customer advances and deferred revenues (402) (342) (923) Increase in accrued expenses and other liabilities 1, Increase (decrease) in accrued severance pay, net (110) Net cash provided by (used-in) operating activities (634) 3,243 5,229 Cash flows from investing activities: Investment in short-term deposit - (4,000) (40) Proceeds from maturity of short-term deposit 140 4,000 3,000 Purchase of property and equipment (301) (119) (457) Net cash provided by (used-in) investing activities (161) (119) 2,503 Cash flows from financing activities: Dividend paid to shareholders (6,060) (5,973) (5,973) Proceeds from exercise of options granted to employees Net cash used-in financing activities (5,882) (5,175) (5,062) Increase (decrease) in cash and cash equivalents (6,677) (2,051) 2,670 Cash and cash equivalents at the beginning of the period 15,048 12,378 12,378 Cash and cash equivalents at the end of the period $ 8,371 $ 10,327 $ 15,048 Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $ 226 $ 1,422 $ 1,748 The accompanying notes are an integral part of the interim consolidated financial statements. 19

20 ADVANCED VISION TECHNOLOGY (A.V.T.) LTD. AND ITS SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands NOTE 1:- GENERAL Advanced Vision Technology (A.V.T.) Ltd. ("A.V.T.") and its wholly-owned subsidiaries ("the Company") design, develop, manufacture, market and support an advanced video-based print inspection system that automatically detects defects in various types of printing processes as well as closed loop color control (CLC) systems, color management and reporting software, and remote digital ink fountain control systems to leading commercial printers and press manufacturers worldwide. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies applied in the annual financial statements of the Company as of December 31, 2014 are applied consistently in these financial statements. Derivative Instruments Starting 2015, the Company entered into foreign currency options to hedge a portion of the exposure to the variability in expected future cash flows resulting from changes in related foreign currency exchange rates between the New Israeli Shekel ( NIS ) and the U.S. Dollar. These transactions are designated as cash flow hedges, as defined by Accounting Standards Codification ( ASC ) Topic 815, Derivatives and Hedging. ASC Topic 815 requires that the Company recognize derivative instruments as either assets or liabilities in its balance sheet at fair value. These contracts are Level 2 fair value measurements in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss), net of taxes, and reclassified into earnings (various operating expenses) in the same period or periods during which the hedged transaction affects earnings. The Company's cash flow hedging strategy is to hedge against the risk of overall changes in cash flows resulting from certain forecasted foreign currency salary and related payments during the next six months. The Company hedge portions of its forecasted expenses denominated in the NIS with a single counterparty using foreign currency options. At June 30, 2015, the Company had approximately $4,200 notional amount of foreign currency options outstanding that had a net fair value asset balance of $140. The net asset is included in other accounts receivable. In the six and three month ended June 30, 2015 the Company recorded in other comprehensive income an unrealized gain of foreign currency cash flow hedges in the amount of $140 which is expected to be recognized in the Company results of operations in the next six months. 20

21 ADVANCED VISION TECHNOLOGY (A.V.T.) LTD. AND ITS SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands NOTE 3: UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited interim consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles relating to condensed interim financial information. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report for the year ended December 31, NOTE 4: SHAREHOLDERS EQUITY On March 18, 2015, the board of directors resolved to distribute an extra-ordinary dividend of $1.0 per share which was paid on April 2, NOTE 5: SUBSEQUENT EVENT On July 2, 2015, AVT and Erhardt + Leimer GmbH ( E+L ) signed an asset purchase agreement and a cooperation agreement regarding a strategic alliance for the printing and converting industries. E+L is a leader in web guiding, web viewing and web tension control. This agreement will broaden the product portfolios and strengthen services for customers of AVT and E+L, through solutions based on the two companies combined experience and technological skills. The payment consideration for the asset purchase agreement is consisted of an initial cash payment of $2,355 (2,125 thousands Euros) upon closing and additional variable earn-out payments over the next few years which are calculated based on certain financial criteria