EFTA00588742.pdf

SUMMARY OF PROPOSED TERMS SERIES A PREFERRED SHARES Reporty Homeland Security Ltd. January 2015 We are happy to confirm our interest, subject to all terms and conditions herein, to explore the possibility of an investment in Reporty Homeland Security Ltd. This letter summarizes the principal terms of a proposed investment for Preferred A Shares. Except as specifically provided herein, this letter is not intended to be a legally binding agreement but is a statement of intent. It is presented solely for the purpose of discussion. Company Reporty Homeland Security Ltd., an Israeli company (the "Company"). Founders Amir Elichai, Alexander Dizengoff, Yoni Yitzon & Lital Leshem Investor An entity under the control of Mr. Ehud Barak (the "Investor"). Structure of The Investor shall invest in the Company up to an aggregate amount of US$ Financing 1,500,000 (the "Investment Amount"), against issuance by the Company of Preferred Shares at the Closing (as such terms are defined below) for the entire Investment Amount at a price per share of [pending an updated cap table] ("PPS") (representing a pre-money valuation of US$ 3,338,710, on a Fully Diluted Basis (as defined below)) so that immediately following the Closing, Investor will hold not less than 31.0% of the Company's share capital, on a Fully Diluted Basis. The Investment Amount shall be provided to Company in two subsequent equal installments as follows: (i) an amount of US$ [1,000,000] out of the Investment Amount will be provided at the Closing; and (ii) Subject to the following, the remaining amount of US$ [500,000] out of the Investment Amount will be provided within months as of the Closing, conditioned upon achievement by the Company of the milestone(s) set forth under Annex I of this letter at or prior to such time, to Investor's satisfactions. Fully Diluted Basis In this letter, "Fully Diluted Basis" includes, without limitation, all issued and outstanding share capital of the Company, all securities issuable upon the conversion of any existing convertible securities, notes or loans, the exercise of all outstanding warrants, options, adjustments of numbers of shares triggered by this financing (if any), any shares or options to acquire shares issued to any person as a finder's fee or similar arrangement in connection with the Investment and an unallocated option pool for future allotment to employees, consultants and directors of the Company, representing 12% of the issued and outstanding share capital of the Company immediately following the Closing ("Option Pool") (assuming the Warrant(s) (as defined below) were not exercised by the Investor). Capitalization Table The detailed pre-Closing and post-Closing capitalization of the Company is set forth in the Capitalization Table attached hereto as Exhibit A. EFTA00588742 Conditions to Close Closing of the transaction contemplated hereunder is subject to (i) satisfaction of the parties due diligence requirements, including financial and legal diligence, and (ii) the signing of mutually acceptable Definitive Agreements (as defined below). Estimated Closing [Closing Date] (the "Closing"). Date Type of Security Series A Convertible Preferred Shares (the "Preferred Shares"), initially convertible on a one to one basis into Ordinary Shares of the Company (the "Ordinary Shares"), subject to adjustment as provided below. Warrant(s) At the Closing, the Company will issue: (i) a first warrant to the Investor that will allow it (or any of its assignees) to purchase additional Preferred Shares by investing an additional amount of up to US$ 1,000,000, at an exercise price of 150% of the PPS (subject to anti-dilutive adjustment and standard recapitalization adjustment); and, in addition (ii) a second warrant to the Investor that will allow it (or any of its assignees) to purchase additional Preferred Shares by investing an additional amount of up to US$ 2,500,000, at an exercise price of 175% of the PPS (subject to anti-dilutive adjustment and standard recapitalization adjustment ), conditioned upon the exercising of the aforesaid first warrant (collectively the "Warrant(s)"). The Warrant(s) will be valid for a period of 48 months after the Closing. Exercise of such Warrant(s) may be cashless at the discretion of the Warrant(s) holder. Use of Proceeds The Investment Amount shall be used by the Company to continue the development of the Company's technology, know-how, sales and marketing programs and provide general working capital, pursuant to a budget prepared by the Company, agreed by the Investor and attached to the Definitive Agreements. Liquidation / In the event of any liquidation event, Deemed Liquidation (as defined below) Dividend Preference and/or distribution of dividends, the holders of the Preferred Shares will be entitled to receive prior and in preference to any distribution of any of the Company's assets or funds to all other equity securities of the Company (in cash, cash equivalents, or, if applicable, securities), for each Preferred Share, an amount equal to: (i) 100% of the PPS, plus (ii) 8% annual interest on that amount, compounded annually, from the Closing (together, the "Preference A Amount"). Any surplus of assets or funds remaining (if any) after the payment in full of the Preference A Amount less any amounts paid as preferential dividends prior to that date will then be distributed pro rata among all the shareholders of the Company, including the holders of Preferred Shares, on an as-converted basis. A "Deemed Liquidation" shall mean any of the following transactions: an acquisition of the Company or a merger between the Company and another non- affiliated entity in which the shareholders of the Company do not own a majority of the shares of the surviving entity, the sale of all or substantially all of the Company's assets, or of the shares of the Company, an exclusive, irrevocable license of all or substantially all of the Company's intellectual property to a third party, or any other transaction in which control of the Company (at least 50%) is transferred (other than a IPO or other bona fide financing transaction). Conversion Each holder of Preferred Shares shall have the right to convert its shares at any time into Ordinary Shares at an initial conversion rate of 1:1, subject to proportional adjustment for share splits, dividends or recapitalizations or a similar event and any anti-dilution adjustments. The Preferred Shares shall automatically convert into Ordinary Shares if (a) the Investor consents to such EFTA00588743  conversion or (b) upon the closing of a firmly underwritten public offering of shares of the Company ("IPO") netting at least $30 million at a pre-money valuation of the Company of at least $100 million (a "QIPO"). Anti-Dilution Until a QIPO, if the Company issues new securities at a price per share lower Provisions than the then applicable conversion price of the Preferred Shares (initially, the conversion price shall be the Price Per Share), then in each such event the conversion price of the Preferred Shares shall be adjusted on a "full ratchet" anti-dilution adjustment. Protective Provisions Certain important actions of the Company shall require the consent of the Investor or the Preferred Directors (as defined below), to include, without limitation, actions to: (i) alter the rights, preferences or privileges of the Preferred Shares; (ii) issue any new securities beyond those anticipated by this investment; (iii) create any new class or series of shares; (iv) increase the number of shares reserved for issuance to employees and consultants, whether under the Option Pool or otherwise; (v) grant of options to employees and consultants, whether under the Option Pool or otherwise, on vesting terms different than the vesting terms that shall be defined in the Definitive Agreement (as defined below); (vi) redeem or sale of any shares of the Company, including Ordinary Shares, Preferred Shares or any new class or series of shares; (vii) declaring or paying any dividend or other distribution of cash, shares or other assets, other than a bonus shares issuance paid to all of the shareholders of the Company on a pro rata basis; (viii) change the number of Board members or otherwise changing its composition; (ix) take any action which results in a Deemed Liquidation event or otherwise dissolving, liquidating or winding up the Company; (x) amend the incorporation documents including Articles of Association; (xi) effect any material change to the nature of the business of the Company; (xii) subscribe or otherwise acquire, or dispose of any shares in the capital of any other company; (xiii) affect any interested party transactions with the Company; (xiv) amend the signatory rights determined under this transaction; (xv) approve the Company's annual operating plan and budget and any material deviations from it; (xvi) entering into a transaction with any related party; (xvii) the appointment of the CEO, CFO or CTO; or (xviii) create, incur, assume, or be liable for any indebtedness exceeding in the aggregate an amount of US$20,000. Voting Rights The holders of the Preferred Shares shall vote together with the holders of all other shares of the Company, and not as a separate class, in all shareholders meetings, except as to matters that by law or pursuant to this letter are subject to a class vote. Each Preferred Share shall entitle the holder thereof to such number of votes as if such shares had been converted into Ordinary Shares. Board of Directors Immediately following the Closing, the board of directors of the Company (the "Board") shall consist of a maximum of five (5) members: for so long the holders of Ordinary Shares hold together the majority of the Company share capital, they may appoint three (3) directors and the holders of Preferred Shares may appoint two directors ("Preferred Directors") and, as of the time the holders of Ordinary Shares, collectively, no longer hold the majority of the Company share capital, they may appoint two (2) directors and the holders of Preferred Shares may appoint three (3) Preferred Directors. This provision will also apply to any subsidiary of the Company. Insurance The Company will sign an indemnity agreement with each of the directors and will maintain Directors & Officers liability insurance, reasonably satisfactory EFTA00588744  to the Investor. Signatory Rights At or prior to the Initial Closing, the Company shall adopt a resolution effecting the signatory rights which is satisfactory to the Investor. Information and Until a QIPO, Investor shall have the right to receive: (i) financial statements Management rights within 60 days after the end of each fiscal year, which have been audited by one of the "Big Four" accounting finns; (ii) unaudited, but reviewed, quarterly financial statements within 45 days after the end of the first, second and third quarters of each fiscal year; (iii) a monthly report in a form agreed by the Board including the Preferred Directors, within 15 days after the end of each month, which report shall include a business update and overview, profit and loss and cash-flow statement and budget variance report and explanatory notes thereto; (iv) an annual operating plan and budget at least 30 days prior to the first day of the year covered by such plan and (v) such other information as may be reasonably required by Investor. Investor shall also be entitled to standard inspection and visitation rights. Pre-emptive Right Until a QIPO, the Investor will have the right, but not an obligation, to participate in any future sales of securities by the Company, upon the terms of such round of financing, and to purchase in such round up to 100% of the Company's securities offered in such sale. The holders of Preferred Shares may assign this right to their Permitted Transferees (as shall be defined in the Company's Articles of Association). Right of First Refusal Until a QIPO, each shareholder of the Company holding at least 2% of the issued and outstanding shares of the Company (calculated on an as converted basis) ("Eligible Shareholder") shall have a pro-rata right of first refusal with respect to any sale, transfer or disposition of share capital of the Company by any other shareholder of the Company, other than a transfer to Permitted Transferees ("Transfer"). Notwithstanding the foregoing any sale, transfer or disposition of share capital of the Company by the Investor, shall not be subject to such right of first refusal of the other shareholders. Tag Along Right Until a QIPO, the Investor shall have the right, with respect to any Transfer, to sell, up to all of its shareholdings in the Company, prior and in preference to any other shareholder in the Company; on the same general tenns and conditions proposed under such Transfer ("Preferred Tag Along Right"). Thereafter, any shares remaining under a Transfer following the exercising of the Preferred Tag Along Right, if any, shall be subject to a pro rata right of each Eligible Shareholder, to participate in such Transfer on the same general terms and conditions proposed thereunder. Registration Rights Holders of a majority of the Registrable Shares (as defined below) shall have the right, to two "demand(s)" registration of their shares in the Company, at the Company's expense. All Shareholders of the Company shall be entitled to unlimited "piggyback" registration rights and one F-3 registration per a calendar year, to be initiated by Holders of a majority of the Registrable Shares (provided the aggregate offering price in such F-3 registration is at least US$ 1,000,000) at the Company's expense. In the case of underwriter cut-backs, the shares of the Investor shall have priority over all other shares in the Company to be included in any offering in a ratio of 3:1 (1 ordinary share for every 3 Registrable Shares). All shareholders agree to a 180-day lock-up after the IPO EFTA00588745  and 90 day lock up after subsequent offerings of the Company. Registration rights will be freely assignable in connection with any transfer of Registrable Shares. For the purposes of this section, "Registrable Shares" shall mean the Preferred Shares of the Company and any Ordinary Shares issued upon conversion of the Preferred Shares. Any future registration rights granted by the Company which are superior to those granted to the holders of Preferred Shares will be subject to the approval of the majority of the holders of the Preferred Shares. Restrictions on Sale: Until the earlier of a QIPO, a Deemed Liquidation or the lapse of four (4) years as of the Closing, the Founders shall not be entitled to sell any of their shares in the Company, subject to standard exceptions for transfers to Permitted Transferees. Founders Each Founder will enter into a non-competition and non-solicitation agreement, Undertakings and an employment agreement in a form reasonably acceptable to the Investor, and shall agree to devote his entire business time and attention to the Company and to not undertake additional activities without the consent of the Investor. A breach of any of the foregoing restrictive covenants or undertakings by a Founder shall result in immediate dismissal for cause of such Founder. Employee Vesting 100% of the shares of the Founders ("Restricted Shares") will be subject to "reverse vesting" mechanism over a period of 3 years, with a one year cliff, contingent - with regard to the shares of each Founder - on that Founder's continued employment with the Company. Vesting shall be as follows: 113 of each Founder's Restricted Shares shall vest upon the first anniversary of the Closing, and the remainder 2/3 of such Founder's Restricted Shares shall vest on a quarterly basis over the remaining 2 years. Any unvested shares will immediately vest upon an event of Change of Control and the engagement of such Founder with the Company is terminated by the Company not for cause. Documentation and Detailed definitive agreements among the Investor, the Founders and the Warranties Company shall be drafted by counsel to the Investor and shall include customary covenants, negative covenants, representations and warranties of the Company and the Founders reflecting the provisions set forth herein, other provisions customary in venture capital transactions and any other provisions agreed to by the Investor, Founders and the Company ("Definitive Agreements"). Expenses The Company shall bear its own fees and expenses and shall pay at the Closing all legal fees and expenses of the Investor, incurred with respect to the transaction contemplated hereby. Exclusivity For a period of 60 business days following the execution of this letter, neither the Company or the Founders nor any agent, directly or indirectly, will solicit, consider, negotiate or otherwise discuss a possible merger, sale or other disposition of all or any part of the shares or assets of the Company or an investment in its share capital with any other party. Also, during said 60 business day period the Company will not issue any securities of the Company nor will it permit a transfer of any securities of the Company. Said period will automatically be extended by an additional 15 business days if the parties are still negotiating the definitive agreements at the conclusion of said 60 day period and may be further extended upon the agreement of the Company, the Founders and the Investor. EFTA00588746 Confidentiality The Company and Founders agree to treat this letter confidentially and will not distribute or disclose its existence or contents outside the Company without the consent of the Investor, except as required to its relevant shareholders, if any and professional advisors. Ordinary Course Until the Closing, the Company will conduct its business solely in the ordinary course of business and, among other things, will not declare or make any distribution to shareholders, enter into any related party transaction or sell its assets (other than the Company's products sold in the ordinary course of business). Non-binding Effect This letter is not intended to be legally binding, and prepared for discussion purposes only, as a statement of the Investor's present intent, with the exception of this paragraph and the paragraphs entitled `Exclusivity' and 'Confidentiality', which are binding upon the parties hereto and shall be governed and construed in accordance with the laws of the State ofIsrael. Acknowledged and agreed: 'INVESTOR" Mr. Amir Elichai By: Print Name: Date: Title: Date: Alexander Dizengoff Reporty Homeland Security Ltd. Date: By: Yoni Yitzon Print Name: Title: Date- Date: Lital Leshaem Date- EFTA00588747