NOTE

INCOME TAXES

The Company:

The Company is taxed in accordance with U.S. tax laws.

As of

December

31,

2016,

the Company had net operating loss carry-forward for federal, state and foreign tax purposes of approximately

$30,577,

$35,792

and

$1,686,

respectively. If not utilized, these carryforwards will expire starting in

2027,

2019

and indefinitely for federal, state and foreign tax purposes, respectively. Included in the net operating loss carryforwards are

$20,974

and

$15,602

of federal and state net operating loss carryforwards, respectively, associated with a windfall tax benefit that will be recorded as additional paid in capital when realized. In addition, as of

December

31,

2016,

the Company had federal research credit, retention credit and foreign tax credit carryforwards of approximately

$2,565,

$24

and

$177,

respectively. If not utilized, the federal tax carryforwards will begin to expire in

2032,

2031

and

2021,

respectively. The Company also has credits in Israel totaling

$264.

These credits have no expiration date. Utilization of U.S. net operating losses and credits

may

be subject to substantial annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of

1986,

as amended, and similar state provisions. The annual limitation

may

result in the expiration of net operating losses before utilization and, in the event we have a change of ownership, utilization of the carryforwards could be restricted.

Loss before taxes on income is comprised as follows:

	Year ended December 31,
	2016			2015			2014
Domestic	$	(16,898	)	$	(20,098	)	$	(15,606	)
Foreign		319			(499	)		(3,416	)
	$	(16,579	)	$	(20,597	)	$	(19,022	)

Taxes on income (loss) are comprised as follows:

	Year ended December 31,
	2016		2015		2014
Domestic:
Federal	$	92	$	—	$	—
State		109		85		16
Foreign		930		601		360
	$	1,131	$	686	$	376

Deferred income taxes:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s deferred tax assets are derived from its U.S. net operating loss carry forwards and other temporary differences.

In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. Based on the Company’s history of losses in the US and Israel, the Company established a valuation allowance on its US and Israeli deferred tax assets.

	December 31,
	2016			2015
Carry forward losses and credits	$	6,294		$	9,220
Deferred revenues		16,774			12,223
Accrued payroll, commissions, vacation		2,078			1,247
Allowance for doubtful accounts		43			88
Accrued severance pay		372			328
Other		2,939			2,393
Net deferred tax assets before valuation allowance		28,500			25,499
Valuation allowance		(28,500	)		(25,499	)
Net deferred tax assets	$	—		$	—

Reconciliation of the theoretical tax expenses:

A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company, and the actual tax expense (benefit) as reported in the consolidated statements of operations is as follows:

	Year ended December 31,
	2016			2015			2014
Loss before taxes, as reported in the consolidated statements of operations	$	(16,579	)	$	(20,597	)	$	(19,022	)
Statutory tax rate		34	%		34	%		34	%
Theoretical tax benefits on the above amount at the US statutory tax rate	$	(5,637	)	$	(7,003	)	$	(6,468	)
Income tax at rate other than the U.S. statutory tax rate		68			333			993
Tax advances and non-deductible expenses including equity based compensation expenses		4,298			1,061			1,296
Operating losses and other temporary differences for which valuation allowance was provided		3,001			6,558			4,596
Research and Development Tax Credit		(1,182	)		-			-
State tax		(536	)		(477	)		(409	)
Impact of rate change		(360	)		(82	)		49
Change in tax reserve for uncertain tax positions		1,209			320			308
Other individually immaterial income tax items		270			(24	)		11
Actual tax expense	$	1,131		$	686		$	376

A reconciliation of the beginning and ending amounts of unrecognized tax benefits in the years ended

December

31,

2016

and

2015

are as follows:

Gross unrecognized tax benefits as of January 1, 2015	$	577
Increase/decrease in tax position for prior years		460
Decrease for lapse of statute of limitations		(140	)
Gross unrecognized tax benefits as of December 31, 2015		897
Increase/decrease in tax position for current year		992
Increase/decrease in tax position for prior years		217
Gross unrecognized tax benefits as of December 31, 2016	$	2,106

There was

$2,106

of unrecognized income tax benefits that, if recognized, approximately

$1,593

would impact the effective tax rate in the period in which each of the benefits is recognized. The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statements of operations. The total amount of penalties and interest is approximately

$33

as of

December

31,

2016.

Foreign taxation:

Israeli tax benefits under the Law for the Encouragement of Capital Investments,

1959

(the “Investment Law”):

Conditions for entitlement to the benefits:

The benefits available to a Beneficiary Enterprise relate only to taxable income attributable to the specific investment program and are conditioned upon terms stipulated in the Investment Law and the related regulations and the criteria set forth in the applicable certificate of approval (for a Beneficiary Enterprise). If VSL does not fulfill these conditions, in whole or in part, the benefits can be cancelled, and VSL

may

be required to refund the benefits, in an amount linked to the Israeli consumer price index plus interest.

The Office of the Chief Scientist at Israel’s Ministry of Industry, Trade and Labor approved the Israeli subsidiary as an R&D-incentive enterprise for a foreign resident company in accordance with the Encouragement of Capital Investments (Consolidated Version) Law.

If cash dividends are distributed out of tax exempt profits in a manner other than upon complete liquidation, VSL will then become liable for tax at the rate of

10%

25%

(depending on the level of foreign investments in VSL) in respect of the amount distributed.

Undistributed earnings of foreign subsidiaries:

As of

December

31,

2016,

approximately

$2,492

of undistributed earnings from non-U.S. operations held by the Company’s foreign subsidiaries and the Beneficiary Enterprise of VSL are designated as indefinitely reinvested outside the U.S. Accordingly, no additional U.S. income taxes or additional foreign withholding taxes have been provided thereon. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.

Tax assessments:

We have not been audited by the Internal Revenue Service but are under current audit in various states for tax years

2009

through

2012.

As of

December

31,

2016,

our federal returns for the years ended

2010

through the current period and most state returns for the years ended

2009

through the current period are still open to examination. In addition, all of the net operating losses and research and development credit carryforwards that

may

be used in future years are still subject to adjustment.

January

2017,

the Israeli Tax Authorities initiated a tax assessment audit on VSL for the years

2013

2015.

The Company believes it has valid arguments to support its positions and intends to defend against any tax assessment. The Company has recorded a provision with respect to its uncertain tax positions in accordance with ASC

740.

The Company has final tax assessments for VSL in Israel through

2012,

VSUK in UK through

2012

and VSF in France through

2012.

VSG in Germany and VSC in Canada do not have final tax assessments since their respective inceptions.