advanced vision technology (a.v.t.) ltd

1

Advanced Vision Technology (A.V.T.) Ltd.

9 Month Report 2016 January 1st - September 30th

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Dear Shareholder,

In the third quarter of 2016, total revenues were $14.2 million, 15.1% higher than the revenues recorded in the

third quarter of 2015. In the first nine month period of 2016, revenues totaled $42.1 million, reflecting an

increase of 9.5% compared to the same period last year.

New order booking in the third quarter of 2016 totaled $14.5 million, a 4% increase compared to $13.9 million

booked in the third quarter of 2015. In the first nine month period of 2016, total order bookings were $46.6

million, compared with $41.2 million in the same period last year, representing a 13.2% increase. In the third

quarter of 2016 we saw good order booking performance in Asia Pacific, strong performance in the label

segment worldwide, and we booked some important new orders of our metal sheet inspection product.

AVT’s operating income in the third quarter of 2016 totaled $1.3 million, compared to the $0.8 million in the third quarter of 2015. Operating income in the third quarter of 2016 included a $0.6 million income adjustment

to a provision in our balance sheet for earn-out associated with the acquisition of certain inspection systems

from Erhardt & Leimer in 2015.

In the Labelexpo Americas exhibition held in Chicago during September, we showcased for the North

American marketplace some of the groundbreaking technologies we unveiled back in June in Europe at drupa,

including high definition inspection with the new Helios Turbo HD, and our new cloud-based quality standards

and automation platform. We also presented our latest inline color management solutions.

In that same Labelexpo, AVT continued to lead the digital press inspection and control front, while we

demonstrated in collaboration with HP, the AVT Helios S Turbo inspection system, integrated within the HP

Indigo 8000 Digital Press. This new inspection solution connects with the press, and for the first time can

automatically pause printing when detecting a suspected repeating problem. Moreover, we launched our new

Helios D inspection solution, specifically designed to support inkjet users in finding print defects.

In the third quarter of 2016, we were chosen by two additional major digital press manufacturers to support

their next generation inkjet presses with our Jet-IQ solution.

We are pleased with our financial results that reflect both our leadership and the loyalty of our existing

customers and the beginning of positive results from the investments we are making in new growth engines.

We remain focused on providing quality solutions and excellent support to our customers while investing in

new directions and solutions for future growth.

Sincerely yours,

Jaron Lotan, President & CEO

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Financial Results

For the first nine months of 2016

The following table sets forth consolidated income statement data for each of the three month and nine month

periods ended September 30, 2016 and September 30, 2015 and for the year ended December 31, 2015 )in

thousands of U.S. dollars):

Nine months ended Three months ended Year ended

30.9.2016 30.9.2015 30.9.2016 30.9.2015 31.12.2015

Revenues 42,081 38,440 14,210 12,341 51,489

Cost of revenues 20,435 18,071 6,886 5,946 24,394

Gross profit 21,646 20,369 7,324 6,395 27,095

Gross margin in % 51.44% 52.99% 51.54% 51.82% 52.62%

Operating expenses:

Research and development 6,615 5,966 2,196 1,928 8,057

Selling and marketing 8,149 7,159 2,910 2,310 9,547

General and administrative 4,291 4,158 1,461 1,344 5,430

Adjustment to earn-out liability (641) - (557) - -

Total operating expenses 18,414 17,283 6,010 5,582 23,034

Operating income 3,232 3,086 1,314 813 4,061

Financial expense, net (590) (288) (82) (62) (546)

Income before taxes on income 2,642 2,798 1,232 751 3,515

Taxes on income 224 699 246 176 737

Net income 2,418 2,099 986 575 2,778

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The following table sets forth selected consolidated income statement data for each of the three month and

nine month periods ended September 30, 2016 and September 30, 2015 and for the year ended December 31,

2015, expressed as a percentage of total revenues:

Nine months ended Three months ended Year ended

30.9.2016 30.9.2015 30.9.2016 30.9.2015 31.12.2015

Revenues 100% 100% 100% 100% 100%

Cost of revenues 48.56 47.01 48.46 48.18 47.38

Gross profit 51.44 52.99 51.54 51.82 52.62

Operating expenses:

Research and development 15.72 15.52 15.45 15.62 15.65

Selling and marketing 19.36 18.62 20.48 18.72 18.54

General and administrative 10.20 10.82 10.28 10.89 10.54

Adjustment to earn-out liability (1.52) - (3.92) - -

Total operating expenses 43.76 44.96 42.29 45.23 44.73

Operating income 7.68 8.03 9.25 6.59 7.89

Financial expense, net (1.40) (0.75) (0.58) (0.50) (1.06)

Income before taxes on income 6.28 7.28 8.67 6.09 6.83

Taxes on income 0.53 1.82 1.73 1.43 1.43

Net income 5.75 5.46 6.94 4.66 5.40

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The following table sets forth selected non-GAAP consolidated income data adjusted to exclude non-cash

amortization of acquired intangible assets, non-cash finance and General and administrative expense related to

future earn-out payments as part of the agreement with Erhardt + Leimer GmbH ("E+L") and stock based

compensation expense )“Non-GAAP”), for each of the nine month periods ended September 30, 2016 and

2015 and for the year ended December 31, 2015 (in thousands of US dollars):

30.09.2016 30.09.2015 2015

GAAP Adjustments Non GAAP Non GAAP Non GAAP

Revenues 42,081 42,081 38,440 51,489

Cost of revenues 20,435 276 20,159 17,965 24,147

Gross profit 21,646 276 21,922 20,475 27,342

Gross margin in % 51.44% 52.09% 53.26% 53.10%

Operating expenses:

Research and development 6,615 58 6,557 5,919 7,994

Selling and marketing 8,149 103 8,046 7,062 9,416

General and administrative 4,291 127 4,164 4,025 5,249

Adjustment to earn-out liability (641) (641) -

Total operating expenses 18,414 (353) 18,767 17,006 22,659

Operating income 3,232 (77) 3,155 3,469 4,683

Financial expense, net (590) 70 (520) (288) (402)

Income before taxes on income 2,642 (7) 2,635 3,181 4,281

Taxes on income 224 224 699 737

Net income 2,418 (7) 2,411 2,482 3,544

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 nine months of 2016 totaled $42.1 million, compared with $38.4 million in the first nine

months of 2015.

Revenues in Q3 2016 totaled $14.2 million, compared with $12.3 million in Q3 2015 and $15.5 million in Q2

2016.

The increase in total revenues in the first nine months of 2016 compared with the same period last year is

driven, among others by our new growth engines.

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During the first nine months of 2016 order booking totaled $46.6 million compared with order booking of

$41.2 million during the same period last year, an increase of 13%.

During Q3 2016 order booking totaled $14.5 million, compared with Q3 2015 order booking of $13.9 million

and compared with Q2 2016 order booking of $17.3 million. The ratio of order booking to revenues in the first

nine months of 2016 was 111%.

As of September 30, 2016 order backlog totaled $ 25.8 million representing an increase of 34% compared with

the backlog balance at September 30, 2015.

We estimate that 30%-40% of this backlog will materialize into revenue during Q4 2016, while the majority

of the balance will materialize into revenue over the following three to four quarters.

Regional development

The following chart sets forth a breakdown of revenues by territory for each of the nine month periods ended

September 30, 2016 and September 30, 2015:

During the first nine months of 2016, Europe generated 35% of total revenues compared with 41% in the first

nine months of 2015, while the Americas contributed 47% of total revenues compared with 43% in the first

nine months of 2015. Revenues generated in Asia-Pacific contributed 18% of total revenues compared with

16% in the first nine months of 2015.

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

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for the 12 month period commencing at the end of installation.

Gross margin in the first nine months of 2016 was 51.44% compared with 52.99% in the first nine months of

2015. Non-GAAP gross margin in the nine months of 2016 was 52.09 % compared with 53.26% for the same

period in 2015.

The decrease in gross margin for the first nine months of 2016 in comparison to the same period in 2015 is

due primarily to product mix impact and some price erosion primarily in the Asian and Latin American

markets.

The following table sets forth selected consolidated expense data for each of the five quarters ended

30.09.2016, 30.06.2016, 31.03.2016, 31.12.2015 and 30.09.2015 expressed as a percentage of total revenue:

Research and Development

During the first nine months of 2016, research and development expenses were $6,615 thousand, compared with

$5,966 thousand in the first nine months of 2015.

Non-GAAP research and development expenses in the first nine months of 2016 increased to $6,557 thousand,

compared with $5,919 thousand in the first nine months of 2015. The increase compared with the same period

last year is due primarily to an increase in personnel and consultants as part of our investments in new growth

engines.

On a quarterly basis, during Q3 2016, research and development expenses were $2,196 thousand, compared with

$1,928 thousand in Q3 2015 and compared with $2,178 thousand in Q2 2016.

Selling and Marketing

During the first nine months of 2016 selling and marketing expenses were $8,149 thousand, compared with $7,159 thousand in the respective period of 2015. Non-GAAP selling and marketing expenses during the first nine months of 2016 were $8,046 thousand, compared with $7,062 thousand in the respective period of 2015. The increase compared with the same period last year is attributable primarily to expenses related to the 2016

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Drupa exhibition and increased agent commissions in the Asian and Latin American markets. On a quarterly basis, during Q3 2016, selling and marketing expenses were $2,910 thousand, compared with

$2,310 thousand in Q3 2015 and compared with $2,814 thousand in Q2 2016.

General and Administrative

During the first nine months of 2016 general and administrative expenses were $4,291 thousand, compared

with $4,158 thousand in the first nine months of 2015.

Non-GAAP general and administrative expenses in the first nine months of 2016 were $4,164 thousand, compared with $4,025 thousand in the first nine months of 2015.

On a quarterly basis, during Q3 2016, general and administrative expenses were $1,536 thousand, compared

with $1,344 thousand in Q3 2015 and compared with $1,452 in Q2 2016.

The increase in general and administrative expenses is attributable primarily to expenses related to legal fees

associated with a lawsuit in the United States.

Adjustment to Earn-out Liability

As indicated in Note 3 to our Financial Statements for the year ended December 31, 2015, the consideration

for the acquisition of the inspection activity of E+L included an initial cash payment upon closing and

additional variable earn-out payments (contingent consideration) over 4 years was recorded under short -term

and long-term liabilities. During the reporting period and as a result of new estimation, the Company reduced

the earn-out liability in an amount of $641 thousands.

Stock-Based Compensation

As of 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 nine months of 2016 was $258 thousand

compared with $256 thousand in the first nine months of 2015.

Operating and Net Income

Net income for the nine months ended September 30, 2016 was $2,418 thousand or diluted earnings of $0.39

per share compared with net income of $2,099 thousand or diluted earnings of $0.34 per share for the same

period in 2015.

Non-GAAP net income for the nine months ended September 30, 2016, was $2,411 thousand compared with

$2,482 thousand for the same period in 2015.

Non-GAAP operating income during the first nine months of 2016 was $3,155 thousand compared with $3,469 thousand in the first nine months of 2015.

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Consolidated operating expenses were 43.8% of revenues in the first nine months of 2016, compared with

45.0% in the first nine months of 2015.

Consolidated Non-GAAP operating margin was 7.5% of revenues in the first nine months of 2016 compared

with 9.0% in the first nine months of 2015.

EBITDA, excluding stock-based compensation expenses and adjustment to earn-out liability, in the first nine

months of 2016 was $3,509 thousand as compared with $3,780 thousand in the nine months of 2015.

The decrease in both GAAP and Non-GAAP operating income in the first nine months of 2016, compared with the same period last year is due primarily to higher operating expenses offset by a higher gross profit.

On a quarterly basis, operating income during Q3 2016 was $1,314 thousand compared with $813 thousand in Q3 2015 and with $1,681 thousand in Q2 2016.

Financial Expense, net

Financial expense is comprised of expenses from exchange rate differences and bank fees less income from

bank deposits.

Net financial expense during the first nine months of 2016 was $590 thousand compared with $288 thousand

during the first nine months of 2015.

Financial expenses for the first nine months of 2016 were $720 thousand compared to $371 thousand for the

first nine months of 2015. Income of $130 thousand was generated from interest on bank deposits during the

first nine months of 2016, compared with $83 thousand for the same period in 2015.

On a quarterly basis, net financial expense during Q3 2016 was $82 thousand compared with financial expenses

of $62 thousand in Q3 2015 and compared with financial income of $179 thousand in Q2 2016.

Financial income is comprised of interest income earned from bank deposits.

We operate globally and therefore we are exposed to market risks, mainly from changes in foreign currency

exchange rates. In order to reduce the market risk, we use financial instruments and derivatives to hedge our

future cash flows in connection with payroll and related expenses and anticipated revenues which are

denominated in non-Dollar currencies.

The increase in financial expense is attributable primarily to changes in the fair value of such financial

instruments and derivatives, in addition to settlement of hedging positions, for a total loss of $271 thousand

during the first nine months of 2016 compared with expense of $1 thousand during the first nine months of

2015.

In addition to net income, comprehensive income includes gains or losses in respect of derivative instruments

designated as cash flow hedges. Total comprehensive income amounted to $151 thousand in the nine months

ended September 30, 2016 and no comprehensive income in the first nine months of 2015.

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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” )both as defined in

the Amendment(, 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 “Benefiting” 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.

During the first nine months of 2016 we have concluded regulatory arrangements with certain tax authorities

in several territories, and accordingly, we adjusted our tax provision in our financial statements.

Liquidity and Capital Resources

As of September 30, 2016 our total current assets were $38.2 million, including a cash and financial investment

balance of $14.3 million compared with cash and financial investments of $17.7 million as of September 30,

2015 and as of December 31, 2015.

During the first nine months of 2016, $1,516 thousand were provided by operating activities compared with

$168 thousand used in operating activities during the same period in 2015.

The increase in cash generated from operating activities is due primarily to the increase in our revenues during

the first nine month period of 2016.

Consequently, DSO in accounts receivable at the end of Q3 2016 were 77 days compared with 74 days at the

end of Q3 2015 and with 75 days as of December 31, 2015.

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 $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

$12 million of the Company's capital. On March 1, 2016 and March 18, 2015, the board of directors resolved

to distribute extra-ordinary gross dividends of $0.75 per share and $1.0 per share respectively, which were

paid accordingly on March 22, 2016 (in the total amount of $4.6 million) and on April 2, 2015 (in the total

amount of $6.1 million).

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Employees

Our employees are our most valuable asset, driving our commitment to technological leadership and

outstanding customer support.

As of September 30, 2016, 242 people were employed by AVT worldwide compared with 229 employees on

December 31, 2015 and 226 employees on September 30, 2015.

Following is the breakdown of the Company’s employees by their function:

Our employees are based in the following geographies:

R&D

24%

Selling &

Marketing

20%

Operations &

Manufacturing

17%

Customer

Support

27%

General &

Administrative

12%

12

ADVANCED VISION TECHNOLOGY (A.V.T.) LTD.

AND ITS SUBSIDIARIES

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2016

IN U.S. DOLLARS IN THOUSANDS

UNAUDITED

INDEX

Page

Independent Auditors' Review Report 13

Consolidated Balance Sheets 14 - 15

Consolidated Statements of Income and Other Comprehensive Income 16

Consolidated Statements of Changes in Shareholders' Equity 17

Consolidated Statements of Cash Flows 18

Notes to Interim Consolidated Financial Statements 19

- - - - - - - - - - -

- 13 -

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

September 30, 2016, and the related condensed consolidated statements of income and other comprehensive

income for the nine-month and three-month periods ended September 30, 2016 and 2015, and the condensed

consolidated statement of changes in shareholders' equity for the nine-month period ended September 30, 2016

and the condensed consolidated statements of cash flows for the nine-month periods ended September 30,

2016 and 2015.

Management's Responsibility for the Financial Information

Management is responsible for the preparation and fair presentation of the condensed consolidated 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

consolidated 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, 2015 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, 2015, and the related consolidated

statements of income and other comprehensive income, changes in shareholders' equity, and cash flows for the

year then ended; and we expressed an unmodified audit opinion on those audited consolidated financial

statements in our report dated March 1, 2016. In our opinion, the accompanying condensed consolidated

financial statements of the Company as of December 31, 2015, 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 KOST FORER GABBAY & KASIERER

November 13, 2016 A Member of Ernst & Young Global

Kost Forer Gabbay & Kasierer 3 Aminadav St. Tel-Aviv 6706703, Israel

Tel: +972-3-6232525

Fax: +972-3-5622555

ey.com



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CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

September 30, December 31,

2016 2015

Unaudited

ASSETS CURRENT ASSETS:

Cash and cash equivalents $ 4,225 $ 7,665 Short-term deposits 10,064 10,025 Trade receivables 11,935 10,657

Inventories 7,288 7,136 Other accounts receivable and prepaid expenses 4,674 4,452

Total current assets 38,186 39,935

LONG-TERM ASSETS: Deferred income taxes 1,742 1,899 Severance pay fund 2,501 2,488

Total long-term assets 4,243 4,387

PROPERTY AND EQUIPMENT, NET 1,534 1,466

INTANGIBLE ASSETS, NET 2,522 2,829

GOODWILL 793 793

Total assets $ 47,278 $ 49,410

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



- 15 -

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands (except share and per share data)

September 30, December 31,

2016 2015

Unaudited

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES: Trade payables $ 3,035 $ 2,873 Employees and payroll accruals 2,973 3,123

Customer advances and deferred revenues 2,520 2,148 Accrued expenses and other liabilities 5,362 5,991

Total current liabilities 13,890 14,135

LONG-TERM LIABILITIES: Accrued severance pay 3,899 3,832 Other long-term liability 928 1,208

4,827 5,040

SHAREHOLDERS' EQUITY:

Share capital: Ordinary shares of New Israeli Shekels (NIS) 2 par value: 15,000,000

shares authorized at September 30, 2016 and December 31, 2015;

6,927,864 and 6,913,627 shares issued at September 30, 2016 and December 31, 2015, respectively; 6,108,742 and 6,094,505 shares outstanding at September 30, 2016 and December 31, 2015,

respectively 3,750 3,743 Additional paid-in capital 66,075 65,748 Treasury shares at cost - 819,122 shares at September 30, 2016 and

December 31, 2015 (6,902) (6,902) Accumulated other comprehensive income (loss) 123 (28) Accumulated deficit (34,485) (32,326)

Total shareholders' equity 28,561 30,235

Total liabilities and shareholders' equity $ 47,278 $ 49,410


November 13, 2016

Date of approval of the

financial statements

Jaron Lotan

President & CEO

Udi Bar Sela

CFO



- 16 -

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

U.S. dollars in thousands (except share and per share data)

Nine months ended

September 30, Three months ended

September 30,

Year ended

December 31,

2016 2015 2016 2015 2015

Unaudited

Revenues $ 42,081 $ 38,440 $ 14,210 $ 12,341 $ 51,489 Cost of revenues 20,435 18,071 6,886 5,946 24,394

Gross profit 21,646 20,369 7,324 6,395 27,095

Operating expenses: Research and development 6,615 5,966 2,196 1,928 8,057

Selling and marketing 8,149 7,159 2,910 2,310 9,547 General and administrative 4,291 4,158 1,461 1,344 5,430 Adjustment to earn-out liability (641) - (557) - -

Total operating expenses 18,414 17,283 6,010 5,582 23,034

Operating income 3,232 3,086 1,314 813 4,061 Financial expense, net (590) (288) (82) (62) (546)

Income before taxes on income 2,642 2,798 1,232 751 3,515

Taxes on income 224 699 246 176 737

Net income 2,418 2,099 986 575 2,778

Other comprehensive income (loss):

Reclassification to statement of income - - - (39) - Unrealized gain (loss) on foreign currency

cash flow hedge, net of tax 151 - 14

(101) (28)

Total comprehensive income $ 2,569 $ 2,099 $ 1,000 $ 435 $ 2,750

Basic earnings per Ordinary share $ 0.40 $ 0.35 $ 0.16 $ 0.09 $ 0.46

Diluted earnings per Ordinary share $ 0.39 $ 0.34 $ 0.16 $ 0.09 $ 0.45




- 17 -

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


Share

capital

Additional

paid-in

capital

Treasury

shares at

cost

Accumulated

other

comprehensive

income (loss)

Accumulated

deficit

Total

shareholders'

equity

Balance as of January 1, 2015 $ 3,714 $ 65,150 $ (6,902) $ - $ (29,044) $ 32,918

Issuance of shares upon exercise of options 29 252 - - - 281 Stock-based compensation related to options granted to employees - 346 - - - 346 Dividend paid to shareholders - - - - (6,060) (6,060)

Unrealized loss on foreign currency cash flow hedge, net of tax - - - )28( - (28) Net income - - - - 2,778 2,778

Balance as of December 31, 2015 3,743 65,748 (6,902) )28( (32,326) 30,235

Issuance of shares upon exercise of options 7 69 - - - 76 Stock-based compensation related to options granted to employees 258 - - - 258 Dividend paid to shareholders - - - - (4,577) (4,577)

Unrealized gain on foreign currency cash flow hedge, net of tax - - - 151 - 151 Net income - - - - 2,418 2,418

Balance as of September 30, 2016 (unaudited) $ 3,750 $ 66,075 $ (6,902) $ 123 $ (34,485) $ 28,561




- 18 -

CONSOLIDATED STATEMENTS OF CASH FLOWS


Nine months ended

Sep 30,

Year ended

December 31,

2016 2015 2015

Unaudited

Cash flows from operating activities:

Net income $ 2,418 $ 2,099 $ 2,778

Adjustments to reconcile net income to net cash provided by operating

activities:

Stock-based compensation related to options granted to employees 258 256 346

Depreciation of property and equipment 353 311 422

Amortization of intangible assets 307 127 276

Adjustment of earn-out liability (641) - -

Valuation of earn-out 106 - 144

Increase in trade receivables, net (1,278) (1,841) (2,487)

Revaluation of short-term deposits (39) 8 3

Increase in inventories (152) (608) (1,059)

Decrease (increase) in other accounts receivable and prepaid

expenses 25 (756) (595)

Decrease in deferred income taxes, net 61 152 189

Increase (decrease) in trade payables 162 (660) (237)

Increase (decrease) in employees and payroll accruals (150) 72 427

Increase (decrease) in customer advances and deferred revenues 372 (273) (542)

Increase (decrease) in accrued expenses and other liabilities (340) 1,342 594

Increase (decrease) in accrued severance pay, net 54 (61) (31)

Net cash provided by operating activities 1,516 168 228

Cash flows from investing activities:

Proceeds from maturity of short-term deposits - 140 1,140

Purchase of property and equipment (455) (436) (619)

Acquisition of inspection activity - (2,353) (2,353)

Net cash used in investing activities (455) (2,649) (1,832)

Cash flows from financing activities:

Dividend paid to shareholders (4,577) (6,060) (6,060)

Proceeds from exercise of options granted to employees 76 205 281

Net cash used-in financing activities (4,501) (5,855) (5,779)

Decrease in cash and cash equivalents (3,440) (8,336) (7,383)

Cash and cash equivalents at the beginning of the period 7,665 15,048 15,048

Cash and cash equivalents at the end of the period $ 4,225 $ 6,712 $ 7,665

Supplemental disclosure of cash flow information:

Cash paid during the period for income taxes $ 720 $ 456 $ 701

Non cash transactions:

Earn-out payment obligations incurred as part of the acquisition of the

inspection activity $ - $ 1,404 $ 1,432




19

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS


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, 2015 are applied consistently in these financial

statements. In 2016 the Company elected to present other comprehensive income

together with net income in one statement. Comparative data for 2015 were re-presented

accordingly.

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 nine-month period ended

September 30, 2016 are not necessarily indicative of the results that may be expected

for the year ended December 31, 2016.

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, 2015.

NOTE 4:- SIGNIFICANT EVENTS DURING THE REPORTING PERIOD

As indicated in Note 3 to our annual consolidated financial statements for the year

ended December 31, 2015, the consideration for the acquisition of the inspection

activity of Erhardt + Leimer GmbH included an initial cash payment upon closing and

additional variable earn-out payments (contingent consideration) over 4 years was

recorded under short -term and long-term liabilities. During the reporting period and

as a result of new estimation, the Company reduced the earn-out liability in an amount

of $641.

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