Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
|
ITEM
1.
|
IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not
applicable.
|
ITEM
2.
|
OFFER
STATISTICS AND EXPECTED TIMETABLE
|
Not
applicable.
|
A.
|
Selected
Financial Data
|
The
following table summarizes certain selected consolidated financial data for the periods and as of the dates indicated. The selected
consolidated financial data set forth below should be read in conjunction with and are qualified entirely by reference to Item
5. “Operating and Financial Review and Prospects” and our consolidated financial statements and notes thereto included
elsewhere in this annual report.
We
derived the following consolidated statement of income data for the years ended December 31, 2017, 2018 and 2019 and the consolidated
balance sheet data as of December 31, 2018 and 2019 from our audited consolidated financial statements included elsewhere in this
annual report. The selected consolidated statement of income data for the year ended December 31, 2015 and 2016 and the consolidated
balance sheet data as of December 31, 2015, 2016 and 2017 are derived from our audited consolidated financial statements not included
in this annual report. Our historical consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles, or U.S. GAAP, and presented in U.S. dollars.
Statement
of Income Data:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(U.S. dollars in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
28,084
|
|
|
$
|
25,454
|
|
|
$
|
21,644
|
|
|
$
|
19,626
|
|
|
$
|
21,598
|
|
Maintenance and technical support
|
|
|
30,996
|
|
|
|
30,951
|
|
|
|
30,386
|
|
|
|
25,885
|
|
|
|
22,908
|
|
Consulting services
|
|
|
266,550
|
|
|
|
227,970
|
|
|
|
206,110
|
|
|
|
156,135
|
|
|
|
131,524
|
|
Total revenues
|
|
$
|
325,630
|
|
|
$
|
284,375
|
|
|
$
|
258,140
|
|
|
|
201,646
|
|
|
|
176,030
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
10,220
|
|
|
|
9,960
|
|
|
|
9,564
|
|
|
|
8,674
|
|
|
|
7,836
|
|
Maintenance and technical support
|
|
|
4,167
|
|
|
|
4,120
|
|
|
|
3,888
|
|
|
|
2,952
|
|
|
|
2,466
|
|
Consulting services
|
|
|
209,114
|
|
|
|
181,477
|
|
|
|
161,709
|
|
|
|
121,756
|
|
|
|
102,919
|
|
Total cost of revenues
|
|
|
223,501
|
|
|
|
195,557
|
|
|
|
175,161
|
|
|
|
133,382
|
|
|
|
113,221
|
|
Gross profit
|
|
|
102,129
|
|
|
|
88,818
|
|
|
|
82,979
|
|
|
|
68,264
|
|
|
|
62,809
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
8,239
|
|
|
|
5,696
|
|
|
|
6,942
|
|
|
|
5,839
|
|
|
|
4,888
|
|
Selling and marketing
|
|
|
30,454
|
|
|
|
27,197
|
|
|
|
27,244
|
|
|
|
23,776
|
|
|
|
23,062
|
|
General and administrative
|
|
|
29,784
|
|
|
|
24,227
|
|
|
|
22,837
|
|
|
|
17,562
|
|
|
|
13,425
|
|
Operating income
|
|
|
33,652
|
|
|
|
31,698
|
|
|
|
25,956
|
|
|
|
21,087
|
|
|
|
21,434
|
|
Financial income (expense), net
|
|
|
(1,180
|
)
|
|
|
(149
|
)
|
|
|
(1,711
|
)
|
|
|
(430
|
)
|
|
|
(685
|
)
|
Other income (expense), net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
Income before taxes on income
|
|
|
32,472
|
|
|
|
31,847
|
|
|
|
24,245
|
|
|
|
20,657
|
|
|
|
20,757
|
|
Taxes on income
|
|
|
(6,874
|
)
|
|
|
(7,071
|
)
|
|
|
(6,331
|
)
|
|
|
(3,949
|
)
|
|
|
(3,681
|
)
|
Net income
|
|
$
|
25,598
|
|
|
$
|
24,776
|
|
|
$
|
17,914
|
|
|
$
|
16,708
|
|
|
$
|
17,076
|
|
Change in redeemable non-controlling interests
|
|
|
3,111
|
|
|
|
3,383
|
|
|
|
1,536
|
|
|
|
2,258
|
|
|
|
639
|
|
Net income attributable to non-controlling interests
|
|
|
2,221
|
|
|
|
1,510
|
|
|
|
936
|
|
|
|
281
|
|
|
|
239
|
|
Net income attributable to Magic’s Shareholders
|
|
|
20,266
|
|
|
|
19,883
|
|
|
|
15,442
|
|
|
|
14,169
|
|
|
|
16,198
|
|
Basic earnings per share (1)
|
|
$
|
0.26
|
|
|
$
|
0.39
|
|
|
$
|
0.35
|
|
|
$
|
0.27
|
|
|
$
|
0.37
|
|
Diluted earnings per share
|
|
$
|
0.26
|
|
|
$
|
0.39
|
|
|
$
|
0.35
|
|
|
$
|
0.27
|
|
|
$
|
0.36
|
|
Shares used to compute basic earnings per share (2) (3)
|
|
|
48,896
|
|
|
|
46,665
|
|
|
|
44,436
|
|
|
|
44,347
|
|
|
|
44,248
|
|
Shares used to compute diluted earnings per share
|
|
|
48,994
|
|
|
|
46,797
|
|
|
|
44,597
|
|
|
|
44,516
|
|
|
|
44,452
|
|
Dividends
|
|
|
14,963
|
|
|
|
13,348
|
|
|
|
9,554
|
|
|
|
7,761
|
|
|
|
7,788
|
|
Cash dividend declared per ordinary share(1)
|
|
$
|
0.31
|
|
|
$
|
0.29
|
|
|
$
|
0.22
|
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
Balance
Sheet Data:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(U.S. dollars in thousands)
|
|
Working capital
|
|
$
|
138,167
|
|
|
$
|
158,301
|
|
|
$
|
122,403
|
|
|
$
|
113,668
|
|
|
$
|
106,945
|
|
Cash, cash equivalents, short term deposits and marketable securities
|
|
|
95,511
|
|
|
|
113,920
|
|
|
|
90,946
|
|
|
|
87,822
|
|
|
|
76,684
|
|
Total assets
|
|
|
404,606
|
|
|
|
362,285
|
|
|
|
342,539
|
|
|
|
316,399
|
|
|
|
239,846
|
|
Total equity
|
|
|
264,697
|
|
|
|
248,369
|
|
|
|
213,563
|
|
|
|
196,641
|
|
|
|
193,106
|
|
(1)
|
On
February 5, 2015, we declared a dividend distribution of $0.081 per share ($3,582 in
the aggregate) which was paid on March 11, 2015. On August 12, 2015, we declared a dividend
distribution of $0.095 per share ($ 4,204 in the aggregate) which was paid on September
10, 2015. On February 21, 2016, we declared a dividend distribution of $0.09 per share
($3,991 in the aggregate) which was paid on March 17, 2016. On August 14, 2016, we declared
a dividend distribution of $0.085 per share ($3,770 in the aggregate) which was paid
on September 22, 2016. On February 22, 2017, we declared a dividend distribution of $0.085
per share ($3,774 in the aggregate) which was paid on April 5, 2017. On August 13, 2017,
we declared a dividend distribution of $0.13 per share ($5,779 in the aggregate) which
was paid on September 13, 2017. On February 28, 2018, we declared a dividend distribution
of $0.13 per share ($5,785 in the aggregate) which was paid on March 26, 2018. On August
8, 2018, we declared a dividend distribution of $0.155 per share ($7,563 in the aggregate)
which was paid on September 5, 2018. On March 4, 2019, we declared a dividend distribution
of $0.15 per share ($7,335 in the aggregate) which was paid on March 25, 2019. On August
13, 2019, we declared a dividend distribution of $ 0.156 per share ($7,628 in the aggregate)
which was paid on September 12, 2019.
|
(2)
|
On
July 12, 2018, we completed a private placement of 3,150,559 of our Ordinary Shares to
several leading Israeli institutional investors and 1,117,734 Ordinary Shares to our
principal shareholder, Formula Systems (1985) Ltd., under the same terms based on a price
of $8.20 per share.
|
Dividend
Policy
Our
Board of Directors’ dividend policy was amended on August 9, 2017 to distribute dividends of up to 75% of our annual distributable
profits each year (previously 50% of our annual distributable profits), subject to any applicable law. We have paid dividends
since 2012. Our Board of Directors may in its discretion and at any time, whether as a result of a one-time decision or a change
in policy, change the rate of dividend distributions or decide not to distribute a dividend.
|
B.
|
Capitalization
and Indebtedness
|
Not
applicable.
|
C.
|
Reasons
for the Offer and Use of Proceeds
|
Not
applicable.
Investing
in our ordinary shares involves a high degree of risk and uncertainty. You should carefully consider the risks and uncertainties
described below before investing in our ordinary shares. Our business, prospects, financial condition and results of operations
could be adversely affected due to any of the following risks. In that case, the value of our ordinary shares could decline, and
you could lose all or part of your investment.
Risks
Related to Our Business and Our Industry
The
current novel strain of coronavirus (COVID-19) and any other pandemic, epidemic or outbreak of an infectious disease may adversely
affect our business.
If
a pandemic, epidemic or outbreak of an infectious disease occurs especially in the United States and in Israel or elsewhere, our
business may be adversely affected. In December 2019, COVID-19 was identified in Wuhan, China. This virus continues to spread
globally and as of April 2020, has spread to over 100 countries, including in the United States and Israel. The spread of COVID-19
has resulted in the World Health Organization declaring the outbreak of COVID-19 as a “pandemic” having a significant
impact on global economic activity with governments around the world having closed office spaces, public transportation and schools
and imposing quarantines and restrictions on travel and mass gatherings to slow the spread of the virus. The Government of Israel
now requires all travelers arriving in Israel to remain in home quarantine until 14 days have passed since the date of entry into
Israel. Non-Israeli residents will be required to prove they have the means to self-quarantine before being allowed entry into
Israel. In addition, gatherings of 10 or more people in one place have been restricted, schools have been closed and employees
are being asked to work remotely. Prolonged economic uncertainties or downturns could trigger a global recession that could materially
adversely affect our business.
We
currently anticipate that the COVID-19 outbreak will have a negative effect on our operations. The restrictions imposed as a result
of the outbreak are likely to cause operating difficulties, and is likely to have a negative impact on our ability to generate
revenues causing order cancellations, delays and the inability of certain of our sales and support teams to travel and/or meet
with customers or provide on-site services. Our business depends on our current and prospective customers’ ability and willingness
to invest money in IT systems and services, which in turn is dependent upon their overall economic health. Negative economic conditions
in the global economy or certain regions especially in the United States and Israel, including conditions resulting from financial
and credit market fluctuations, could cause a decrease in corporate spending on products and services that we sell. Wide-spread
viruses and epidemics like the recent novel coronavirus outbreak, could also negatively affect our customers’ spending on
our products and services. In 2019, 49% of our revenues were generated from North America, 38% of our revenues generated from
Israel, and 13% from the rest of the world. Negative economic conditions may cause customers in general to reduce their IT spending.
Customers may delay or cancel projects, choose to focus on in-house development efforts or seek to lower their costs by renegotiating
maintenance and support agreements. Additionally, customers may be more likely to make late payments in worsening economic conditions,
which could require us to increase our collection efforts and require us to incur additional associated costs to collect expected
revenues. To the extent purchases of licenses for our software are perceived by customers and potential customers to be discretionary,
our revenues may be disproportionately affected by delays or reductions in general IT spending. The extent to which COVID-19 impacts
our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information
which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.
The
implementation of our M&A growth strategy, which requires the integration of our multiple acquired companies and their respective
businesses, operations and employees with our own, involves significant risks, and the failure to integrate successfully may adversely
affect our future results.
In
the past decade we have completed more the 25 acquisitions. Most recently, in the second quarter of 2019, we acquired both NetEffects
Inc and Powwow Inc after having acquired OnTarget Group Inc in the first quarter of 2019. These acquisitions are part of our integrated
M&A growth strategy, which is centered on three key factors: growing our customer base, expanding geographically and adding
complementary solutions and services to our portfolio— all while we seek to ensure our continued high quality of services
and product delivery. Any failure to successfully integrate the business, operations and employees of our acquired companies,
or to otherwise realize the anticipated benefits of these acquisitions, could harm our results of operations. Our ability to realize
these benefits will depend on the timely integration and consolidation of organizations, operations, facilities, procedures, policies
and technologies, and the harmonization of differences in the business cultures between these companies and their personnel. Integration
of these businesses will be complex and time consuming, will involve additional expense and could disrupt our business and divert
management’s attention from ongoing business concerns. The challenges involved in integrating NetEffects, Powwow, OnTarget
Group and other former acquisitions include:
|
●
|
Preserving
customer, supplier and other important relationships
|
|
●
|
Integrating
complex, core products and services that we acquire with our existing products and services
|
|
●
|
Integrating
financial forecasting and controls, procedures and reporting cycles
|
|
●
|
Combining
and integrating information technology, or IT, systems
|
|
●
|
Integrating
employees and related HR systems and benefits, maintaining employee morale and retaining
key employees
|
|
●
|
Potential
confusion that we may have in our dealings with customers and prospective customers as
to the products we are offering to them and potential overlap among those products
|
The
benefits we expect to realize from these acquisitions are, necessarily, based on projections and assumptions about the combined
businesses of our company, and assume, among other things, the successful integration of these acquired entities into our business
and operations. Our projections and assumptions concerning our acquisitions may be inaccurate, however, and we may not successfully
integrate the acquired companies and our operations in a timely manner, or at all. We may also be exposed to unexpected contingencies
or liabilities of the acquired companies. If we do not realize the anticipated benefits of these transactions, our growth strategy
and future profitability could be adversely affected.
We
may encounter difficulties in realizing the potential financial or strategic benefits of recent business acquisitions. We expect
to make additional acquisitions in the future that could disrupt our operations and harm our operating results.
A
significant part of our business strategy is to pursue acquisitions and other initiatives based on strategy centered on three
key factors: growing our customer base, expanding geographically and adding complementary solutions to our portfolio— all
while we seek to ensure our continued high quality of services and product delivery. In the past five years we made numerous acquisitions,
including: (i) in 2014, Datamind, a system integrator of user-driven Business Intelligence (“BI”) solutions (mainly
QlikView and Qlik Sense) that enable customers to make better, faster and more informed business decisions, wherever they are;
(ii) in 2014, Formula Telecom Solutions Ltd., an Israeli based global proprietary software vendor that specializes in the development,
sale, service and support of business support systems, including convergent charging, billing, customer management, policy control
and payment software solutions for the telecommunications, content, Machine to Machine/Internet of Things, or M2M/IoT, payment
and other industries; (iii) in 2015, Comblack IT Ltd, an Israeli-based company specializing in software professional services
and outsource services for mainframes and complex large-scale environments; (iv) in 2015, Infinigy Solutions LLC, a U.S.-based
services company focused on expanding the development and implementation of technical solutions which delivers design-driven turnkey
solutions, combining Architecture and Engineering, or A&E design project management and general contracting competencies,
across the wireless communications industry; (v) in 2016, Roshtov Software Industries Ltd, an Israeli-based software company that
is a local Israeli market leader in patient medical record information systems; (vi) in 2016, Shavit Software (2009) Ltd., an
Israeli-based company specializing in software professional and outsource services; (vii) in late December 2017, Futurewave Systems,
Inc., a U.S.-based full-service provider of consulting and outsourcing solutions for IT personnel; and (viii) in 2019, a San Francisco
based, PowWow Inc., creator of SmartUX, a low-code development platform for mobilizing and modernizing enterprise business applications.
Mergers
and acquisitions of companies are inherently risky and subject to many factors outside of our control and no assurance can be
given that our future acquisitions will be successful and will not adversely affect our business, operating results, or financial
condition. In the future, we may seek to acquire or make strategic investments in complementary businesses, technologies, services
or products, or enter into strategic partnerships or alliances with third parties in order to expand our business. Failure to
manage and successfully integrate such acquisitions could materially harm our business and operating results. Prior acquisitions
have resulted in a wide range of outcomes, from successful introduction of new products technologies and professional services
to a failure to do so. Even when an acquired company has previously developed and marketed products, there can be no assurance
that new product enhancements will be made in a timely manner or that pre-acquisition due diligence will have identified all possible
issues that might arise with respect to such products. If we acquire other businesses, we may face difficulties, including:
|
●
|
Difficulties
in integrating the operations, systems, technologies, products, and personnel of the
acquired businesses or enterprises;
|
|
●
|
Diversion
of management’s attention from normal daily operations of the business and the
challenges of managing larger and more widespread operations resulting from acquisitions;
|
|
●
|
Integrating
financial forecasting and controls, procedures and reporting cycles;
|
|
●
|
Potential
difficulties in completing projects associated with in-process research and development;
|
|
●
|
Difficulties
in entering markets in which we have no or limited direct prior experience and where
competitors in such markets have stronger market positions;
|
|
●
|
Insufficient
revenue to offset increased expenses associated with acquisitions; and
|
|
●
|
The
potential loss of key employees, customers, distributors, vendors and other business
partners of the companies we acquire following and continuing after announcement of acquisition
plans.
|
We
are dependent on a limited number of core product families and services and a decrease in revenues from these products and services
would adversely affect our business, results of operations and financial condition; our future success will be largely dependent
on the acceptance of future releases of our core product families and service offerings and if we are unsuccessful with these
efforts, our business, results of operations and financial condition will be adversely affected.
We
derive a significant portion of our revenues from sales of application and integration platforms and vertical software solutions
and from related professional services, software maintenance and technical support as well as from other IT professional services,
which include IT consulting and outsourcing services. Our future growth depends heavily on our ability to effectively develop
and sell new products developed by us or acquired from third parties as well as add new features to existing products and new
software service offerings. A decrease in revenues from our principal products and services would adversely affect our business,
results of operations and financial condition.
Our
future success depends in part on the continued acceptance of our application platforms and integration products primarily under
our Magic xpa, Magic xpi, AppBuilder Magic xpc, FactoryEye and Magic SmartUX brands and our vertical packaged software solutions,
primarily Clicks, Leap™, the Hermes solution and HR Pulse. The continued acceptance of these platforms and software solutions
will be dependent in part on the continued acceptance and growth of the cloud market, including rich internet applications, or
RIAs, mobile and software as a service, or SaaS, for which certain of them are particularly useful and advantageous. We will need
to continue to enhance our products to meet evolving requirements and if new versions of such products are not accepted, our business,
results of operations and financial condition may be adversely affected.
Rapid
technological changes may adversely affect the market acceptance of our products and services, and our business, results of operations
and financial condition could be adversely affected.
We
compete in a market that is characterized by rapid technological changes. Other companies are also seeking to offer integration
solutions, low-code development solutions, enterprise mobility solutions, internet-related solutions, such as cloud computing,
and complementary services to generate growth. These companies may develop technological or business model innovations or offer
services in the markets that we seek to address that are, or are perceived to be, equivalent or superior to our software solutions
and services. In addition, our customers’ business models may change in ways that we do not anticipate and these changes
could reduce or eliminate our customers’ needs for our products and services. Our operating results depend on our ability
to adapt to market changes and develop and introduce new products and services into existing and emerging markets.
The
introduction of new technologies and devices could render existing products and services obsolete and unmarketable and could exert
price pressures on our products and services. Our future success will depend upon our ability to address the increasingly sophisticated
needs of our customers by:
|
●
|
Supporting
existing and emerging hardware, software, databases and networking platforms; and
|
|
●
|
Developing
and introducing new and enhanced software development technology and applications that
keeps pace with such technological developments, emerging new product markets and changing
customer requirements.
|
Adapting
to evolving technologies can require substantial financial investments, distract management and adversely affect the demand for
our existing products and services.
Because
our solutions are complex and require rigorous testing, development cycles can be lengthy, taking us up to two years to develop
and introduce new, enhanced or modified solutions. Moreover, development projects can be technically challenging and expensive.
The nature of these development cycles may cause us to experience delays between the time we incur expenses associated with research
and development and the time we generate revenues, if any, from such expenses. In addition, adapting to evolving technologies
may require us to invest a significant amount of resources, time and attention into the development, integration, support and
marketing of those technologies. The acceptance and growth of cloud computing and enterprise mobility are examples of rapidly
changing technologies, which we have adapted into our products, packaged software solution and software service offerings. This
required us to make a substantial financial investment to develop and implement cloud computing and enterprise mobility into our
software solution models and has required significant attention from our management to refine our business strategies to include
the delivery of these solutions. As the market continues to adopt these new technologies, we expect to continue to make substantial
investments in our software solutions, system integrations and professional services related to these changing technologies. Even
if we succeed in adapting to a new technology by developing attractive products and services and successfully bringing them to
market, there is no assurance that the new product or service will have a positive impact on our financial performance and could
even result in lower revenue, lower margins and higher costs and therefore could negatively impact our financial performance.
If release dates of any future products or enhancements are delayed our business, financial condition and results of operations
could be adversely affected.
Our
products have a lengthy sales cycle that could adversely affect our revenues.
The
typical sales cycle for our solutions and services is lengthy and unpredictable, sometimes requires pre-purchase evaluation by
a significant number of persons in our customers’ organizations, and often involves a significant operational decision by
our customers as they typically use our software solutions and services to develop and deploy as well as to integrate applications
that are critical to their businesses. Our sales efforts involve educating our customers and consultants about the use and benefits
of our solutions, including the technical capabilities of our solutions and the efficiencies achievable by organizations deploying
our solutions.. Because of the long approval process that typically accompanies strategic initiatives or capital expenditures
by companies, our sales process is often delayed, with little or no control over any delays encountered by us. Our sales cycle,
which generally ranges from three to twelve months, can be further extended for sales made through third party distributors. We
spend substantial time, effort and money in our sales efforts without any assurance that such efforts will produce any sales.
If
we fail to attract and retain highly skilled IT professionals, we may not have the necessary resources to properly staff projects
and competition for such professionals may adversely affect our business, results of operations and financial condition.
Our
success depends largely on the contributions of our employees and our ability to attract and retain qualified personnel, including
technology, consulting, engineering, marketing and management professionals and upon our ability to attract and retain qualified
computer professionals to serve as temporary IT personnel. Competition for the limited number of qualified professionals with
a working knowledge of certain sophisticated computer languages is intense. We compete for technical personnel with
other providers of technical IT consulting and outsourcing services, systems integrators, providers of outsourcing services, computer
systems consultants, customers and, to a lesser extent, temporary personnel agencies, and competition may be amplified by evolving
restrictions on immigration, travel, or availability of visas for skilled technology workers. A shortage of, and significant competition
for software professionals with the skills and experience necessary to perform the required services, may require us to forego
projects for lack of resources and may adversely affect our business, results of operations and financial condition. In addition,
our ability to maintain and renew existing engagements and obtain new business for our contract IT professional services operations
depends, in large part, on our ability to hire and retain technical personnel with the IT skills that keep pace with continuing
changes in software evolution, industry standards and technologies, and customer preferences. Demand for qualified professionals
conversant with certain technologies may exceed supply as new and additional skills are required to keep pace with evolving computer
technology or as competition for technical personnel increases. Increasing demand for qualified personnel could also result in
increased expenses to hire and retain qualified technical personnel and could adversely affect our profit margins
If
existing customers are not satisfied with our solutions and services and either do not make subsequent purchases from us or do
not continue using such solutions and services, or if our relationships with our largest customers are impaired, our revenue could
be negatively affected.
We
depend heavily on repeat software and service revenues from our base of existing customers. Two of our customers accounted for
18.2% and 15.8% of our revenues in the years ended December 31, 2018 and 2019, respectively and five of our customers accounted
for 25.9% and 23.3% of our revenues in the years ended December 31, 2018 and 2019, respectively. If our existing customers are
not satisfied with our solutions and services, they may not enter into new project contracts with us or continue using our services.
A significant decline in our revenue stream from existing customers, including due to termination of agreement(s), would have
a material adverse effect on our business, results of operations and financial condition.
If
we fail to meet our customers’ performance expectations, our reputation may be harmed, causing us to lose customers or exposing
us to legal liability.
Our
ability to attract and retain customers depends to a large extent on our relationships with our customers and our reputation for
high quality solutions, professional services and integrity. As a result, if a customer is not satisfied with our services or
solutions, including those of subcontractors we engage, our reputation may be damaged. Our failure to meet these goals or a customer’s
expectations may result in a less profitable or an unprofitable engagement. Moreover, if we fail to meet our customers’
expectations, we may lose customers and be subject to legal liability, particularly if such failure adversely affects our customers’
businesses.
In
addition, a portion of our projects may be considered critical to the operations of our customers’ businesses. Our exposure
to legal liability may be increased in the case of contracts in which we become more involved in our customers’ operations.
While we typically strive to include provisions designed to limit our exposure to legal claims relating to our services and the
solutions we develop, these provisions may not adequately protect us or may not be enforceable in all cases. The general liability
insurance coverage that we maintain, including coverage for errors and omissions, is subject to important exclusions and limitations.
We cannot be certain that this coverage will continue to be available on reasonable terms or will be available in sufficient amounts
to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. A successful assertion
of one or more large claims against us that exceeds our available insurance coverage or changes in our insurance policies, including
premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our profitability.
If
our customers terminate contracted projects or choose not to retain us for additional projects, our revenues and profitability
may be negatively affected.
Our
IT professional services customers typically retain us on a non-exclusive basis. Many of our customer contracts, including those
that are on a fixed price and timeframe basis, can be terminated by the customer with or without cause upon 90 days’ notice
or less, and generally without termination-related penalties. Additionally, our contracts with customers are typically limited
to discrete projects without any commitment to a specific volume of business or future work and may involve multiple stages. Furthermore,
the increased breadth of our service offerings may result in larger and more complex projects for our customers that require us
to devote resources to more thoroughly understand their operations. Despite these efforts, our customers may choose not to retain
us for additional stages or may cancel or delay planned or existing engagements due to any number of factors, including:
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a
customer’s financial difficulties;
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a
change in a customer’s strategic priorities;
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a
customer’s demand for price reductions; and
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a
decision by a customer to utilize its in-house IT capacity or work with our competitors.
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These
potential terminations, cancellations or delays in planned or existing engagements could make it difficult for us to use our personnel
efficiently and may negatively affect our revenues and profitability.
We
enter from time to time into fixed-price contracts that could subject us to losses in the event we fail to properly
estimate our costs.
We
enter from time to time into firm fixed-price contracts where our delivery requirements sometimes span more than one
year. If our initial cost estimates are incorrect, it may cause losses on these contracts. Because many of these contracts involve
new technologies and applications, unforeseen events, such as technological difficulties and other cost overruns, can result in
the contract pricing becoming less favorable or even unprofitable to us and have an adverse impact on our financial results.
Similarly,
delays in implementation projects (whether fixed price or not) may affect our revenue and cause our operating results to vary
widely. Payment terms are generally based on periodic payments or on the achievement of milestones. Any delays in payment or in
the achievement of milestones may have a material adverse effect on our results of operations, financial position or cash flows.
For
non-fixed price contracts, we generally provide our customers with up-front estimates regarding the duration, budget and costs
associated with the implementation of our services. However, we may not meet those upfront estimates and/or the expectations of
our customers, which could lead to a dispute with a client.
If
our technical support or professional services are not satisfactory to our customers, they may not renew their maintenance and
support agreements or buy future products, which could adversely affect our future results of operations.
Our
business relies on our customers’ satisfaction with the technical support and professional services we provide to support
our products. If we fail to provide technical support services that are responsive, satisfy our customers’ expectations
and resolve issues that they encounter with our products and services, then they may elect not to purchase or renew annual maintenance
and support contracts and they may choose not to purchase additional products and services from us. Accordingly, our failure to
provide satisfactory technical support or professional services could lead our customers not to renew their agreements with us
or renew on terms less favorable to us, and therefore have a material and adverse effect on our business and results of operations.
We
face intense competition in the markets in which we operate. This competition could adversely affect our business, results of
operations and financial condition.
We
compete with other companies in the areas of application development platforms, business integration and business process management,
or BPM, tools, and in the applications, mobile solutions, vertical solutions and professional services markets in which we operate.
The growth of the cloud computing market has increased the competition in these areas. We expect that such competition will continue
to increase in the future with respect to our technology, applications and professional services that we currently offer and applications,
and with respect to our services that we and other vendors are developing. Increased competition, direct and indirect, could adversely
affect our business, financial condition and results of operations.
As
we also compete with other companies in the technical IT consulting and outsourcing services industry, this industry is highly
competitive and fragmented and has low entry barriers. We compete for potential customers with providers of outsourcing services,
systems integrators, computer systems consultants, other providers of technical IT consulting services and, to a lesser extent,
temporary personnel agencies. We expect competition to increase, and we may not be able to remain competitive.
Some
of our existing and potential competitors are larger companies, have substantially greater resources than us, including financial,
technological, marketing, skilled human resources and distribution capabilities, and enjoy greater market recognition than us.
We may not be able to differentiate our products and services from those of our competitors, offer our products as part of integrated
systems or solutions to the same extent as our competitors, or successfully develop or introduce new products that are more cost-effective,
or offer better performance than our competitors. Failure to do so could adversely affect our business, financial condition and
results of operations.
Other
unfavorable national and global economic conditions could adversely affect our business, operating results and financial condition.
During
periods of slowing economic activity, our customers may reduce their demand for our products, technology and professional services,
which would reduce our sales, and our business, operating results and financial condition may be adversely affected. Economic
challenges may develop, including threatened sovereign defaults, credit downgrades, restricted credit for businesses and consumers
and potentially falling demand for a variety of products and services. These developments, or the perception that any of them
could occur, could result in longer sales cycles, slower adoption of new technologies and increased price competition for our
products and services. We could also be exposed to credit risk and payment delinquencies on our accounts receivable, which are
not covered by collateral. In particular, there is currently significant uncertainty about
the future relationship between the U.S. and various other countries, with respect to trade policies, treaties, government regulations,
and tariffs. For example, the recent imposition of tariffs and/or changes in tariffs on various products by the U.S. and other
countries, including China and Canada, have introduced greater uncertainty with respect to trade policies and government regulations
affecting trade between the U.S. and other countries, and new and/or increased tariffs have subjected, and may in the future subject,
us to additional costs and expenditure of resources. Major developments in trade relations, including the imposition of new or
increased tariffs by the U.S. and/or other countries, and any emerging nationalist trends in specific countries could alter the
trade environment and consumer purchasing behavior which, in turn, could have a material effect on our financial condition and
results of operations. While the U.S. and China recently signed a “phase one” trade deal on January 15, 2020
to reduce planned increases to tariffs, concerns over the stability of bilateral trade relations remain. In addition, the
UK’s exit from the European Union on January 31, 2020, known as Brexit, and the ongoing negotiations of the future
trading relationship between the UK and the European Union during the transition period set to end December 31, 2020 have yet
to provide clarity on what the outcome will be for the UK or Europe. Changes related to Brexit could subject us to heightened
risks in that region, including disruptions to trade and free movement of goods, services and people to and from the UK, disruptions
to the workforce of our business partners, increased foreign exchange volatility with respect to the British pound and additional
legal, political and economic uncertainty. If these actions impacting our international distribution and sales channels result
in increased costs for us or our international partners, such changes could result in higher costs to us, adversely affecting
our operations, particularly as we expand our international presence.
If
global economic and market conditions, or economic conditions in the United States, Europe or Asia or other key markets, remain
uncertain or weaken, our business, operating results and financial condition may be adversely affected.
We
are exposed to economic and market conditions that impact the communications industry.
We
provide packaged software and software services to service providers in the telecom industry, and our business may therefore be
highly dependent upon conditions in that industry. Developments in the telecom industry, such as the impact of global economic
conditions, industry consolidation, emergence of new competitors, commoditization of voice, video and data services and changes
in the regulatory environment, at times have had, and could continue to have, a material adverse effect on our existing or potential
customers. In the past, these conditions reduced the high growth rates that the communications industry had previously experienced
and caused the market value, financial results and prospects and capital spending levels of many telecom companies to decline
or degrade. Industry consolidation involving our customers may place us at risk of losing business to the incumbent provider to
one of the parties to the consolidation or to new competitors. During previous economic downturns, the telecom industry experienced
significant financial pressures that caused many in the industry to cut expenses and limit investment in capital intensive projects
and, in some cases, led to restructurings and bankruptcies. Continuing uncertainty as to economic recovery in recent years may
have adverse consequences for our customers and our business.
Downturns
in the business climate for telecom companies have previously resulted in slower customer buying decisions and price pressures
that adversely affected our ability to generate revenue. Adverse market conditions may have a negative impact on our business
by decreasing our new customer engagements and the size of initial spending commitments under those engagements, as well as decreasing
the level of discretionary spending by existing customers. In addition, a slowdown in buying decisions may extend our sales cycle
period and may limit our ability to forecast our flow of new contracts. If such adverse business conditions arise in the future,
our business may be harmed.
As
some of our revenues are derived from the Israeli government sector, a reduction of government spending in Israel on IT services
may reduce our revenues and profitability; and any delay in the annual budget approval process may negatively impact our cash
flows.
We
perform work for a wide range of Israeli governmental agencies and related subcontractors. Any reduction in total Israeli government
spending for political or economic reasons (such as in the case of COVID-19) may reduce our revenues and profitability. In addition,
the government of Israel has experienced significant delays in the approval of its annual budget in recent years. Such delays
in the future could negatively affect our cash flows by delaying the receipt of payments from the government of Israel for services
performed.
The
increasing amount of identifiable intangible assets and goodwill recorded on our balance sheet may lead to significant impairment
charges in the future.
The
amount of goodwill and identifiable intangible assets on our consolidated balance sheet has increased significantly from approximately
$88 million as of December 31, 2014 to $169 million as of December 31, 2019 because of our acquisitions and may increase further
following future acquisitions. We regularly review our long-lived assets, including identifiable intangible assets and goodwill,
for impairment. Goodwill and indefinite life intangible assets are subject to impairment review at least annually. Other long-lived
assets are reviewed when there is an indication that impairment may have occurred. Impairment testing under U.S. GAAP, subject
to downturns in our operating results and financial condition, may lead to impairment charges in the future. Any significant impairment
charges could have a material adverse effect on our results of operations.
If
we fail to manage our growth, our business could be disrupted and our profitability will likely decline.
We
have experienced rapid growth during recent years, through both acquisitions and organically. The number of our employees over
the last five years increased from 1,181 as of December 31, 2014 to 2,642 as of December
31, 2019 and may increase further as we aim to enhance our businesses. This increase may significantly strain our management and
other operational and financial resources. In particular, continued headcount growth increases the integration challenges involved
in:
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Recruiting,
training and retaining skilled technical, marketing and management personnel;
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Maintaining
high quality standards;
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Preserving
our corporate culture, values and entrepreneurial environment;
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Developing
and improving our internal administrative infrastructure, particularly our financial,
operational, communications and other internal controls; and
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Maintaining
high levels of customer satisfaction;
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The
rapid execution necessary to exploit the market for our business model requires an effective planning and management process.
Our systems, procedures or controls may not be adequate to support the growth in our operations, and our management may not be
able to achieve the rapid execution necessary to exploit the market for our business model. Our future operating results will
also depend on our ability to expand our development, sales and marketing organizations. If we are unable to manage growth effectively,
our profitability will likely decline.
We
have a history of quarterly fluctuations in our results of operations and expect these fluctuations to continue.
We
have experienced, and in the future may continue to experience, significant fluctuations in our quarterly results of operations.
Factors that may contribute to fluctuations in our quarterly results of operations include:
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The
size and timing of orders;
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The
high level of competition that we encounter;
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The
timing of our products introductions or enhancements or those of our competitors or of
providers of complementary products;
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Market
acceptance of our new products, applications and services;
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The
purchasing patterns and budget cycles of our customers and end-users;
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The
mix of product sales;
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Fluctuations
in currency exchange rates;
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General
economic conditions; and
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The
integration of newly acquired businesses.
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Our
customers ordinarily require the delivery of our license software solutions promptly after we accept their orders. With the exception
of contracts for services and packaged software solution projects, which normally would extend between nine to eighteen months,
we usually do not have a backlog of orders for our products. Consequently, revenues from our products in any quarter depend on
orders received and products provided by us and accepted by the customers in that quarter. A deferral in the placement and acceptance
of any large order from one quarter to another or from one year to another could adversely affect our results of operations for
the respective quarter or year. Our customers sometimes require an acceptance test for services and packaged software solutions
projects we provide and as a result, we may have a significant backlog of orders arising from those services and projects. Our
revenues from services depend on orders received and services provided by us and accepted by our customers in that quarter. If
sales in any quarter or year do not increase correspondingly or if we do not reduce our expenses in response to level or declining
revenues in a timely fashion, our financial results for that period may be adversely affected. For these reasons, quarter-to-quarter
comparisons of our results of operations are not necessarily meaningful and you should not rely on the results of our operations
in any particular quarter as an indication of future performance.
We
derive a significant portion of our revenues from independent distributors who are under no obligation to purchase our products
and the loss of such independent distributors could adversely affect our business, results of operations and financial condition.
We
sell our products and packaged software solutions through our own direct sales representatives and offices, as well as through
third parties that in the case of our development platforms (Magic xpa, AppBuilder and Magic SmartUX) use our technology to develop
and sell solutions to their customers (ISVs) and through system integrators. The ISVs then sell the applications they develop
on the Magic xpa, AppBuilder or Magic SmartUX application platforms to end-users. In some regions, especially in Asia and Asia-Pacific,
Central and Eastern Europe, Spain, Italy, South America, Africa and a few countries in the Mediterranean area, we also sell our
products and packaged software solutions through a broad distribution and sales network, including independent regional distributers.
We are dependent upon the acceptance of our products by our ISVs and independent distributors and their active marketing and sales
efforts. Typically, our arrangements with our independent distributors do not require them to purchase specified amounts of products
or prevent them from selling competitive products. Our ISVs may stop using our technology to develop and sell solutions to end-users.
Similarly, our independent distributors may not continue, or may not give a high priority to, marketing and supporting our products.
Our results of operations could be adversely affected by a decline in the number of ISVs utilizing our technology and by changes
in the financial condition, business, marketing strategies, local and global economic conditions, or results of our independent
distributors. If any of our distribution relationships are terminated, we may not be successful in replacing them on a timely
basis, or at all. In addition, we will need to develop new sales channels for new products, and we may not succeed in doing so.
Any changes in our distribution and sales channels, or our inability to establish effective distribution and sales channels for
new markets, could adversely impact our ability to sell our products and result in a loss of revenues and profits.
Changes
in the ratio of our revenues generated from different revenue elements may adversely affect our gross profit margins.
We
derive our revenues from the sale of software licenses, related professional services, maintenance and technical support as well
as from other IT professional services. In recent years the decline in our gross margin was affected by the change in proportion
of our revenues generated from the sale of each of those elements of our revenues. Our revenues from the sale of our software
licenses, related professional services, maintenance and technical support have higher gross margins than our revenues from IT
professional and outsourcing services. Our software licenses revenues also include the sale of third-party software licenses,
which have a lower gross margin than sales of our proprietary software products. Any increase in the portion of third-party software
license sales out of total license sales will decrease our gross profit margin. If the relative proportion of our revenues from
the sale of IT professional services continues to increase as a percentage of our total revenues, our gross profit margins may
continue to decline in the future.
Our
success depends in part upon the senior members of our management and research and development teams, and our inability to attract
and retain them or attract suitable replacements could have a negative effect on our ability to operate our business.
We
are dependent on the senior members of our management and research and development teams. We do not maintain key man life insurance
for any of the senior members of our management and research and development teams. Competition for senior management in our industry
is intense, and we may not be able to retain our senior management personnel or attract and retain new senior management personnel
in the future. The loss of one or more members of our senior management and research and development teams could have a negative
effect on our ability to attract and retain customers, execute our business strategy and otherwise operate our business, which
could reduce our revenues, increase our expenses and reduce our profitability.
We
may encounter difficulties with our international operations and sales that could adversely affect our business, results of operations
and financial condition.
While
our principal executive offices are located in Israel, 64%, 63% and 62% of our sales in the years ended December 31, 2017, 2018
and 2019, respectively, were generated in other regions and countries including, but not limited to the Americas, Europe, Japan,
Asia-Pacific, India, and Africa. Our success in becoming a stronger competitor in the sale of development application platforms,
integration solutions, packaged software solutions and professional services is dependent upon our ability to increase our sales
in all our markets. Our efforts to increase our penetration into these markets are subject to risks inherent to such markets,
including the high cost of doing business in such locations. Our efforts may be costly and they may not result in profits, which
could adversely affect our business, results of operations and financial condition.
Our
current international operation and our plans to further expand our international operations subjects us to many risks inherent
to international business activities, including:
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Limitations
and disruptions resulting from the imposition of government controls;
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Compliance
with a wide variety of foreign regulatory standards;
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Compliance
with the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, particularly
in emerging market countries;
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Import
and export license requirements, tariffs, taxes and other trade barriers;
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Political,
social and economic instability abroad, terrorist attacks and security concerns in general.
For example, our operations in India may be adversely affected by future political and
other events in the region;
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Increased
exposure to fluctuations in foreign currency exchange rates;
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Complexity
in our tax planning, and increased exposure to changes in tax regulations in various
jurisdictions in which we operate, which could adversely affect our operating results
and limit our ability to conduct effective tax planning;
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Increased
financial accounting and reporting requirements and complexities;
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Weaker
protection of intellectual property rights in some countries;
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Greater
difficulty in safeguarding intellectual property;
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Increased
management, travel, infrastructure and legal compliance costs associated with having
multiple international operations;
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Longer
payment cycles and difficulties in enforcing contracts and collecting accounts receivable;
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The
need to localize our products and licensing programs for international customers;
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Lack
of familiarity with and unexpected changes in foreign regulatory requirements;
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The
burden of complying with a wide variety of foreign laws and legal standards;
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The
potential worsening of the coronavirus outbreak on a global scale, which may cause customers
to cancel projects with us, prevent potential future opportunities for our business and
harm our ability to maintain a healthy workforce that can implement our services and
solutions offerings; and
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Multiple
and possibly overlapping tax regimes.
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As
we continue to expand our business globally, our success will depend, largely, on our ability to anticipate and effectively manage
these and other risks associated with our international operations. Any of these risks could harm our international operations
and reduce our international sales, adversely affecting our business, results of operations, financial condition and growth prospects.
Our
international operations expose us to risks associated with fluctuations in currency exchange rates that could adversely affect
our business.
Our
financial statements are stated in U.S. dollars, our functional currency. However, in the years ended December 31, 2017, 2018
and 2019, approximately 52%, 52% and 51% of our revenues, respectively, were derived from sales outside the United States, particularly,
Israel, Europe, Japan and Asia-Pacific, and Africa. We also maintain substantial non-U.S. dollar balances of assets, including
cash and accounts receivable, and liabilities, including accounts payable and debts to banks and financial institutions. Similarly,
a significant portion of our expenses, primarily salaries, related personnel expenses, subcontractors expenses, interest expenses
and the leases of our offices and related administrative expenses, were incurred outside the United States. Therefore, fluctuations
in the value of the currencies in which we do business relative to the U.S. dollar, primarily NIS, euros and Japanese yen, may
adversely affect our business, results of operations and financial condition, by decreasing the U.S. dollar value of assets held
in other currencies and increasing the U.S. dollar amount of liabilities payable in other currencies, or by decreasing the U.S.
dollar value of our revenues in other currencies and increasing the U.S. dollar amount of our expenses in other currencies. Even
if we use derivatives or engage in any currency-hedging transactions intended to reduce the effect of fluctuations of foreign
currency exchange rates on our financial position and results of operations, there can be no assurance that any such hedging transactions
will materially reduce the effect of fluctuation in foreign currency exchange rates on such results. In addition, if for any reason
exchange or price controls or other restrictions on the conversion of foreign currencies were imposed, our financial position
and results of operations could be adversely affected.
Breaches
of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
Cyber-attacks
or other breaches of network or IT security, natural disasters, terrorist acts or acts of war may cause equipment failures or
disrupt our systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure
through cyber-attack, malware, computer viruses and other means of unauthorized access. While we maintain insurance coverage for
some of these events, the potential liabilities associated with these events could exceed the insurance coverage we maintain.
Our inability to operate our facilities because of such events, even for a limited period, may result in significant expenses
or loss of market share to other competitors for our application platforms as well as in the process and business integration
technologies and IT services market. In addition, a failure to protect the privacy of customer and employee confidential data
against breaches of network or IT security could result in damage to our reputation. To date, we have not been subject to cyber-attacks
or other cyber incidents, which, individually or in the aggregate, resulted in a material impact to our operations or financial
condition.
Maintaining
the security of our products, computers and networks is a critical issue for our customers and us. Security researchers, criminal
hackers and other third parties regularly develop new techniques to penetrate computer and network security measures. In addition,
hackers also develop and deploy viruses, worms and other malicious software programs, some of which may be specifically designed
to attack our products, systems, computers or networks. Additionally, outside parties may attempt to fraudulently induce our employees
or users of our products to disclose sensitive information in order to gain access to our data or our customers’ data. These
potential breaches of our security measures and the accidental loss, inadvertent disclosure or unauthorized dissemination of proprietary
information or sensitive, personal or confidential data about us, our employees or our customers, including the potential loss
or disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us,
our employees, our customers or the individuals affected to a risk of loss or misuse of this information, result in litigation
and potential liability or fines for us, damage our brand and reputation or otherwise harm our business. These risks are persistent
and likely will increase as we continue to grow our cloud offerings and services and store and process increasingly large amounts
of our customers’ confidential information and data. We also may acquire companies, products, services and technologies and inherit
such risks when we integrate these acquisitions within our company. Further, as regulatory focus on privacy issues continues to
increase and become more complex, these potential risks to our business will intensify. Changes in laws or regulations associated
with the enhanced protection of certain types of sensitive data could greatly increase our cost of providing our products and
services
Regulation
of the internet and telecommunications, privacy and data security may adversely affect sales of our products and result in increased
compliance costs.
As
internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies and industry groups becomes
more likely. For example, we believe increased regulation is likely with respect to the solicitation, collection, processing or
use of personal, financial and consumer information as regulatory authorities around the world are considering a number of legislative
and regulatory proposals concerning data protection, privacy and data security. In addition, the interpretation and application
of consumer and data protection laws and industry standards in the United States, Europe and elsewhere are often uncertain and
in flux.
Many
jurisdictions continue to consider the need for greater regulation or reform to the existing regulatory framework. In the U.S.,
all 50 states have now passed laws to regulate the actions that a business must take in the event of a data breach, such as prompt
disclosure and notification to affected users and regulatory authorities. In addition to the data breach notification laws, some
states have also enacted statutes and rules requiring businesses to reasonably protect certain types of personal information they
hold or to otherwise comply with certain specified data security requirements for personal information. The U.S. federal and state
governments will likely continue to consider the need for greater regulation aimed at restricting certain uses of personal data
for targeted advertising. Additionally, California recently enacted the California Consumer Privacy Act, or CCPA, it creates new
individual privacy rights for consumers (as that word is broadly defined in the law) and places increased privacy and security
obligations on entities handling personal data of consumers or households. The CCPA, which went into effect on January 1, 2020,
requires covered companies to provide new disclosures to California consumers, and provides such consumers new ways to opt-out
of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of
action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential
liability. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation
in the U.S., which could increase our potential liability and adversely affect our business.
In
particular, our European activities are subject to the European Union General Data Protection Regulation, or GDPR, which create
additional compliance requirements for us. GDPR broadens the scope of personal privacy laws to protect the rights of European
Union citizens and requires organizations to report on data breaches within 72 hours and be bound by more stringent rules for
obtaining the consent of individuals on how their data can be used. GDPR took effect on May 25, 2018 and non-compliance may expose
entities such as our company to significant fines or other regulatory claims. While we have invested in, and intend to continue
to invest in, reasonably necessary resources to comply with these new standards, to the extent that we fail to adequately comply,
that failure could have an adverse effect on our business, financial conditions, results of operations and cash flows.
In
China, the PRC Cybersecurity Law, which became effective in June 2017, leaves substantial uncertainty as to the circumstances
and standard under which the law would apply and violations would be found.
The
application of existing laws to cloud-based solutions is particularly uncertain and cloud-based solutions may be subject to further
regulation, the impact of which cannot be fully understood at this time. Moreover, these laws may be interpreted and applied in
a manner that is inconsistent with our data and privacy practices. If so, in addition to the possibility of fines, this could
result in an order requiring that we change our data and privacy practices, which could have an adverse effect on our business
and results of operations. Complying with these various laws could cause us to incur substantial costs or require us to change
our business practices in a manner adverse to our business. In addition, any new regulation, or interpretation of existing regulation,
imposing greater fees or taxes on internet-based services, or restricting information exchange over the Web, could result in a
decline in the use and adversely affect sales of our products and our results of operations.
Errors
or defects in our software solutions could inevitably arise and would harm our profitability and our reputation with customers,
and could even give rise to claims against us.
The
quality of our solutions, including new, modified or enhanced versions thereof, is critical to our success. Since our software
solutions are complex, they may contain errors that cannot be detected at any point in their testing phase. While we continually
test our solutions for errors or defects and work with customers to identify and correct them, errors in our technology may be
found in the future. Testing for errors or defects is complicated because it is difficult to simulate the breadth of operating
systems, user applications and computing environments that our customers use, and our solutions themselves are increasingly complex.
Errors or defects in our technology have resulted in terminated work orders and could result in delayed or lost revenue, diversion
of development resources and increased services, termination of work orders, damage to our brand and warranty and insurance costs
in the future. In addition, time-consuming implementations may also increase the number of services personnel we must allocate
to each customer, thereby increasing our costs and adversely affecting our business, results of operations and financial condition.
In
addition, since our customers rely on our solutions to operate, monitor and improve the performance of their business processes,
they are sensitive to potential disruptions that may be caused by the use of, or any defects in, our software. As a result, we
may be subject to claims for damages related to software errors in the future. Liability claims could require us to spend significant
time and money in litigation or to pay significant damages. Regardless of whether we prevail, diversion of key employees’
time and attention from our business, the incurrence of substantial expenses and potential damage to our reputation might result.
While the terms of our sales contracts typically limit our exposure to potential liability claims and we carry errors and omissions
insurance against such claims, there can be no assurance that such insurance will continue to be available on acceptable terms,
if at all, or that such insurance will provide us with adequate protection against any such claims. A significant liability claim
against us could have a material adverse effect on our business, results of operations and financial position. Our standard license
agreement with our customers contains provisions designed to limit our exposure to potential product liability claims that may
not be effective or enforceable under the laws of some jurisdictions. In addition, the professional liability insurance that we
maintain may not be sufficient against potential claims. Accordingly, we could fail to realize revenues and suffer damage to our
reputation as a result of, or in defense of, a substantial claim.
Third
parties have in the past, and may in the future, claim that we infringe upon their intellectual property rights and such claims
could harm our business.
The
software industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding
patents and other intellectual property rights. In particular, leading companies in the software industry own large numbers of
patents, copyrights, trademarks and trade secrets, which they may use to assert claims against us. From time to time, third parties,
including certain of these leading companies, may assert patent, copyright, trademark or other intellectual property claims against
us, our customers and partners, and those from whom we license technology and intellectual property.
Although
we believe that our products and services do not infringe upon the intellectual property rights of third parties, we cannot assure
you that third parties will not assert infringement or misappropriation claims against us with respect to current or future products
or services, or that any such assertions will not require us to enter into royalty arrangements or result in costly litigation,
or result in us being unable to use certain intellectual property. We cannot assure you that we are not infringing or otherwise
violating any third-party intellectual property rights. Infringement assertions from third parties may involve patent holding
companies or other patent owners who have no relevant product revenues, and therefore our own issued and pending patents may provide
little or no deterrence to these patent owners in bringing intellectual property rights claims against us.
Any
intellectual property infringement or misappropriation claim or assertion against us, our customers or partners, and those from
whom we license technology and intellectual property could have a material adverse effect on our business, financial condition,
reputation and competitive position regardless of the validity or outcome. If we are forced to defend against any infringement
or misappropriation claims, whether they are with or without merit, are settled out of court, or are determined in our favor,
we may be required to expend significant time and financial resources on the defense of such claims. Furthermore, an adverse outcome
of a dispute may require us to pay damages, potentially including treble damages and attorneys’ fees, if we are found to
have willfully infringed on a party’s intellectual property; cease making, licensing or using our products or services that
are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to redesign
our products or services; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use
necessary technologies or works; and to indemnify our partners, customers, and other third parties. Royalty or licensing agreements,
if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments
and other expenditures. Any of these events could seriously harm our business, results of operations and financial condition.
In addition, any lawsuits regarding intellectual property rights, regardless of their success, could be expensive to resolve and
divert the time and attention of our management and technical personnel.
Although
we apply measures to protect our intellectual property rights and our source code, there can be no assurance that the measures
that we employ to do so will be successful.
In
accordance with industry practice, since we have no registered patents on our software solution technologies, we rely on a combination
of contractual provisions and intellectual property law to protect our proprietary technology. We believe that due to the dynamic
nature of the computer and software industries, copyright protection is less significant than factors such as the knowledge and
experience of our management and personnel, the frequency of product enhancements and the timeliness and quality of our support
services. We seek to protect the source code of our products as trade secret information and as unpublished copyright works. We
also rely on security and copy protection features in our proprietary software. We distribute our products under software license
agreements that grant customers a personal, non-transferable license to use our products and contain terms and conditions prohibiting
the unauthorized reproduction or transfer of our products. In addition, while we attempt to protect trade secrets and other proprietary
information through non-disclosure agreements with employees, consultants and distributors, not all of our employees have signed
invention assignment agreements. Although we intend to protect our rights vigorously, there can be no assurance that these measures
will be successful. Our failure to protect our rights, or the improper use of our products by others without licensing them from
us could have a material adverse effect on our results of operations and financial condition.
Our
customers and we rely on technology and intellectual property of third-parties, the loss of which could limit the functionality
of our products and disrupt our business.
We
use technology and intellectual property licensed from unaffiliated third-parties in certain of our products, and we may license
additional third-party technology and intellectual property in the future. Any errors or defects in this third-party technology
and intellectual property could result in errors that could harm our brand and business. In addition, licensed technology and
intellectual property may not continue to be available on commercially reasonable terms, or at all. The loss of the right to license
and distribute this third-party technology could limit the functionality of our products and might require us to redesign our
products.
Further,
although we believe that there are currently adequate replacements for the third-party technology and intellectual property we
presently use and distribute, the loss of our right to use any of this technology and intellectual property could result in delays
in producing or delivering affected products until equivalent technology or intellectual property is identified, licensed or otherwise
procured, and integrated. Our business would be disrupted if any technology and intellectual property we license from others or
functional equivalents of this software were either no longer available to us or no longer offered to us on commercially reasonable
terms. In either case, we would be required either to attempt to redesign our products to function with technology and intellectual
property available from other parties or to develop these components ourselves, which would result in increased costs and could
result in delays in product sales and the release of new product offerings. Alternatively, we might be forced to limit the features
available in affected products. Any of these results could harm our business and impact our results of operations.
We
could be required to provide the source code of our products to our customers.
Some
of our customers have the right to require the source code of our products to be deposited into a source code escrow. Under certain
circumstances, our source code could be released to our customers. The conditions triggering the release of our source code vary
by customer. A release of our source code would give our customers access to our trade secrets and other proprietary and confidential
information that could harm our business, results of operations and financial condition. A few of our customers have the right
to use the source code of some of our products based on the license agreements signed with such clients (mostly with respect to
older versions of our solutions), although such use is limited for specific matters and cases, these clients are exposed to some
of our trade secrets and other proprietary and confidential information which could harm us.
Some
of our services and technologies may use “open source” software, which may restrict how we use or distribute our services
or require that we release the source code of certain products subject to those licenses.
Some
of our services and technologies may incorporate software licensed under so-called “open source” licenses, including,
but not limited to, the GNU General Public License and the GNU Lesser General Public License. In addition to risks related to
license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as
open source licensors generally do not provide warranties or controls on origin of the software. Additionally, open source licenses
typically require that source code subject to the license be made available to the public and that any modifications or derivative
works to open source software continue to be licensed under open source licenses. These open source licenses typically mandate
that proprietary software, when combined in specific ways with open source software, become subject to the open source license.
If we combine our proprietary software with open source software, we could be required to release the source code of our proprietary
software.
We
take steps to ensure that our proprietary software is not combined with, and does not incorporate, open source software in ways
that would require our proprietary software to be subject to an open source license. However, few courts have interpreted open
source licenses, and the manner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty.
Additionally, we rely on multiple software programmers to design our proprietary technologies, and although we take steps to prevent
our programmers from including open source software in the technologies and software code that they design, write and modify,
we do not exercise complete control over the development efforts of our programmers and we cannot be certain that our programmers
have not incorporated open source software into our proprietary products and technologies or that they will not do so in the future.
In the event that portions of our proprietary technology are determined to be subject to an open source license, we could be required
to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies, or otherwise be
limited in the licensing of our technologies, each of which could reduce or eliminate the value of our services and technologies
and materially and adversely affect our business, results of operations and prospects.
Any
unauthorized, and potentially improper, actions of our personnel could adversely affect our business, operating results and financial
condition.
The
recognition of our revenue depends on, among other things, the terms negotiated in our contracts with our customers. Our personnel
may act outside of their authority and negotiate additional terms without our knowledge. We have implemented policies to help
prevent and discourage such conduct, but there can be no assurance that such policies will be followed. For instance, in the event
that our sales personnel negotiate terms that do not appear in the contract and of which we are unaware, whether such additional
terms are written or verbal, we could be prevented from recognizing revenue in accordance with our plans. Furthermore, depending
on when we learn of unauthorized actions and the size of the transactions involved, we may have to restate revenue for a previously
reported period, which would seriously harm our business, operating results and financial condition.
Under
applicable employment laws, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our
competitors from benefiting from the expertise of some of our former employees.
We
generally enter into non-competition agreements with our employees. These agreements prohibit our employees from competing directly
with us or working for our competitors or clients for a limited period after they cease working for us. We may be unable to enforce
these agreements under the laws of the jurisdictions in which our employees work and it may be difficult for us to restrict our
competitors from benefiting from the expertise that our former employees or consultants developed while working for us. For example,
Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the
competitive activities of the former employee will harm one of a limited number of material interests of the employer that have
been recognized by the courts, such as the secrecy of a company’s confidential commercial information or the protection
of its intellectual property. If we cannot demonstrate that such interests will be harmed, we may be unable to prevent our competitors
from benefiting from the expertise of our former employees or consultants and our ability to remain competitive may be diminished.
Our
business may be materially affected by changes to fiscal and tax policies. Potentially negative or unexpected tax consequences
of these policies, or the uncertainty surrounding their potential effects, could adversely affect our results of operations and
share price.
As
a multinational corporation, we are subject to income taxes, withholding taxes and indirect taxes in numerous jurisdictions worldwide.
Significant judgment and management attention and resources are required in evaluating our tax positions and our worldwide provision
for taxes. In the ordinary course of business, there are many activities and transactions for which the ultimate tax determination
is uncertain. In addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant
tax, accounting, and other laws, regulations, principles and interpretations. This may include recognizing tax losses or lower
than anticipated earnings in jurisdictions where we have lower statutory rates and higher than anticipated earnings in jurisdictions
where we have higher statutory rates, changes in foreign currency exchange rates, or changes in the valuation of our deferred
tax assets and liabilities.
We
may be audited in various jurisdictions, and such jurisdictions may assess additional taxes against us. If we experience unfavorable
results from one or more such tax audits, there could be an adverse effect on our tax rate and therefore on our net income. Although
we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different
from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows
in the period or periods for which a determination is made. Additionally, we are subject to transfer pricing rules and regulations,
including those relating to the flow of funds between us and our affiliates, which are designed to ensure that appropriate levels
of income are reported in each jurisdiction in which we operate.
Certain
of our credit facility agreements with banks and other financial institutions are subject to a number of restrictive covenants
that, if breached, could result in acceleration of our obligation to repay our debt.
In
the context of our engagements with banks and other financial institutions for receiving various credit facilities, we have undertaken
to maintain a number of conditions and limitations on the manner in which we can operate our business, including a negative pledge
and limitations on our ability to distribute dividends. These credit facilities agreements also contain various financial covenants
that require us to maintain certain financial ratios related to shareholders’ equity, total rate of financial liabilities
and minimum outstanding balance of total cash and short-term investments. These limitations and covenants may force us to pursue
less than optimal business strategies or forego business arrangements that could have been financially advantageous to us and,
by extension, to our shareholders. A breach of the restrictive covenants could result in the acceleration of our obligations to
repay our debt. As of December 31, 2019, we were in compliance with all of our financial covenants to banks and other financial
institutions. See Note 12 to our consolidated financial statements for additional information on liabilities to banks and other
financial institutions.
If
we are unable to maintain effective internal control over financial reporting in accordance with Sections 302 and 404(a) of the
Sarbanes-Oxley Act of 2002, the reliability of our financial statements may be questioned and our share price may suffer.
The
Sarbanes-Oxley Act of 2002 imposes certain duties on us and on our executives and directors. To comply with this statute, we are
required to document and test our internal control over financial reporting, and our independent registered public accounting
firm must issue an attestation report on our internal control procedures, and our management is required to assess and issue a
report concerning our internal control over financial reporting. Our efforts to comply with these requirements have resulted in
increased general and administrative expenses and a diversion of management time and attention, and we expect these efforts to
require the continued commitment of significant resources. We may identify material weaknesses or significant deficiencies in
our assessments of our internal controls over financial reporting. Failure to maintain effective internal control over financial
reporting could result in investigation or sanctions by regulatory authorities, and could adversely affect our operating results,
investor confidence in our reported financial information and the market price of our Ordinary Shares.
Risks
Related to Our Ordinary Shares
Our
Ordinary Shares are traded on more than one market and this may result in price variations.
Our
Ordinary Shares are traded primarily on the NASDAQ Global Select Market and on the TASE. Trading of our Ordinary Shares on these
markets is made in different currencies (U.S. dollars on the NASDAQ Global Select Market and NIS on the TASE) and at different
times (resulting from different time zones, different trading days and different public holidays in the United States and Israel).
Consequently, the trading prices of our Ordinary Shares on these two markets may differ. Any decrease in the trading price of
our Ordinary Shares on one of these markets could cause a decrease in the trading price of our Ordinary Shares on the other market.
There
is relatively limited trading volume for our shares, which reduces liquidity for our shareholders, and may cause the share price
to be volatile, all of which may lead to losses by investors.
There
has historically been limited trading volume in our Ordinary Shares, both on the NASDAQ Global Select Market and the TASE, which
results in reduced liquidity for our shareholders. As a further result of the limited volume, our Ordinary Shares have experienced
significant market price volatility in the past and may experience significant market price and volume fluctuations in the future,
in response to factors such as announcements of developments related to our business, announcements by competitors, quarterly
fluctuations in our financial results and general conditions in the industry in which we compete.
We
are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a number of rules under
the Exchange Act and are permitted to file less information with the SEC than a domestic U.S. reporting company, which reduces
the level and amount of disclosure that you receive.
As
a foreign private issuer under the Exchange Act, we are exempt from certain rules under the Exchange Act, including the proxy
rules, which impose certain disclosure and procedural requirements for proxy solicitations. Moreover, we are not required to file
periodic reports and financial statements with the SEC as frequently or as promptly as domestic U.S. companies with securities
registered under the Exchange Act; and are not required to comply with Regulation FD, which imposes certain restrictions on the
selective disclosure of material information. In addition, our officers, directors and principal shareholders are exempt from
the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the
Exchange Act with respect to their purchases and sales of our Ordinary Shares. Accordingly, you receive less information about
our company than you would receive about a domestic U.S. company, and are afforded less protection under the U.S. federal securities
laws than you would be afforded in holding securities of a domestic U.S. company.
As
a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we are permitted to follow certain home country
corporate governance practices instead of certain requirements of the NASDAQ Stock Market Rules. Among other things, as a foreign
private issuer we may also follow home country practice with regard to, the composition of the board of directors, director nomination
procedure, compensation of officers and quorum at shareholders’ meetings. In addition, we may follow our home country law,
instead of the NASDAQ Stock Market Rules, which require that we obtain shareholder approval for certain dilutive events, such
as for the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of
control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the
company and certain acquisitions of the stock or assets of another company. Accordingly, our shareholders may not be afforded
the same protection as provided under NASDAQ’s corporate governance rules. In addition, as foreign private issuer, we are
not required to file quarterly reviewed financial statements. A foreign private issuer that elects to follow a home country practice
instead of such requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s
home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a
foreign private issuer must disclose in its annual reports filed with the SEC each such requirement that it does not follow and
describe the home country practice followed by the issuer instead of any such requirement.
Our
controlling shareholder, Formula Systems (1985) Ltd., beneficially owns approximately 45.34% of our outstanding Ordinary Shares
and therefore has a controlling influence over matters requiring shareholder approval, which could delay or prevent a change of
control that may benefit our public shareholders.
Formula
Systems (1985) Ltd., or Formula Systems (symbol: FORTY), an Israeli company whose shares trade on the NASDAQ Global Select Market
and the TASE, directly owned 22,187,977 or 45.34%, of our outstanding Ordinary Shares as of December 31, 2019. Asseco Poland S.A.,
or Asseco, a Polish company listed on Warsaw Stock Exchange, owns 25.35% of the outstanding shares of Formula Systems as of December
31, 2019. Guy Bernstein, our Chief Executive Officer who is also the Chief Executive Officer of Formula Systems, owns 12.89% of
the outstanding shares of Formula Systems, as of December 31, 2019. In addition, on October 4, 2017 Asseco entered into a shareholders
agreement with Mr. Bernstein, under which agreement Asseco has been granted an irrecoverable proxy to vote an additional 1,971,973
Ordinary Shares of Formula, thereby effectively giving Asseco beneficial ownership (voting power) over an aggregate of 38.50%
of Formula’s outstanding ordinary share. Therefore, based on the foregoing beneficial ownership by each of Formula and Asseco,
each of Formula and Asseco may be deemed to directly or indirectly (as appropriate) control us.
Although
transactions between us and our controlling shareholders are subject to special approvals under Israeli law, Formula and Asseco
may exercise their controlling influence over our operations and business strategy and use their sufficient voting power to control
the outcome of various matters requiring shareholder approval. These matters may include:
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The
composition of our board of directors, which has the authority to direct our business
and to appoint and remove our officers;
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Approving
or rejecting a merger, consolidation or other business combination;
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Raising
future capital; and
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Amending
our Articles, which govern the rights attached to our Ordinary Shares.
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This
concentration of ownership of our Ordinary Shares could delay or prevent proxy contests, mergers, tender offers, open-market purchase
programs or other purchases of our Ordinary Shares that might otherwise give one the opportunity to realize a premium over the
then-prevailing market price of our Ordinary Shares. This concentration of ownership may also adversely affect our share price.
Our
U.S. shareholders may suffer adverse tax consequences if we are classified as a passive foreign investment company or as a “controlled
foreign corporation.”
Generally,
if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our
assets (which may be measured in part by the market value of our Ordinary Shares, which is subject to change) are held for the
production of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S.
federal income tax purposes under the Code. Based on our gross income and gross assets, and the nature of our business, we believe
that we were not classified as a PFIC for the taxable year ended December 31, 2019. Because PFIC status is determined annually
based on our income, assets and activities for the entire taxable year, it is not possible to determine whether we will be characterized
as a PFIC for the taxable year ending December 31, 2020, or for any subsequent year, until we finalize our financial statements
for that year. Furthermore, because the value of our gross assets is likely to be determined in large part by reference to our
market capitalization, a decline in the value of our Ordinary Shares may result in our becoming a PFIC. Accordingly, there can
be no assurance that we will not be considered a PFIC for any taxable year. Our characterization as a PFIC could result in material
adverse tax consequences for you if you are a U.S. investor, including having gains realized on the sale of our Ordinary Shares
treated as ordinary income, rather than a capital gain, the loss of the preferential rate applicable to dividends received on
our Ordinary Shares by individuals who are U.S. holders, and having interest charges apply to distributions by us and the proceeds
of share sales. Certain elections exist that may alleviate some of the adverse consequences of PFIC status and would result in
an alternative treatment (such as mark-to-market treatment) of our Ordinary Shares. Prospective U.S. investors should consult
their own tax advisers regarding the potential application of the PFIC rules to them. Prospective U.S. investors should refer
to “Item 10.E. Taxation—U.S. Federal Income Tax Considerations” for discussion of additional U.S. income tax
considerations applicable to them based on our treatment as a PFIC.
Certain
U.S. holders of our Ordinary Shares may suffer adverse tax consequences if we or any of our non-U.S. subsidiaries are characterized
as a “controlled foreign corporation”, or a CFC, under Section 957(a) of the Code. Certain changes to the CFC constructive
ownership rules under Section 958(b) of the Code introduced by the TCJA may cause one or more of our non-U.S. subsidiaries to
be treated as CFCs, may also impact our CFC status, and may affect holders of our Ordinary Shares that are United States shareholders.
Generally, for U.S. shareholders that own 10% or more of the combined vote or combined value of our Ordinary Shares, this may
result in negative U.S. federal income tax consequences and these shareholders may be subject to certain reporting requirements
with the U.S. Internal Revenue Service. Any such 10% U.S. shareholder should consult its own tax advisors regarding the U.S. tax
consequences of acquiring, owning, or disposing our Ordinary Shares and the impact of the TCJA, especially the changes to the
rules relating to CFCs.
Risks
Related to Our Location in Israel
Political,
economic and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our
results of operations and adversely affect our share price.
We
are organized under the laws of the State of Israel, and our principal executive offices and manufacturing and research and development
facilities are located in Israel. As a result, political, economic and military conditions affecting Israel directly influence
us. Any major hostilities involving Israel, a full or partial mobilization of the reserve forces of the Israeli army, the interruption
or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial
condition of Israel could adversely affect our business, financial condition and results of operations.
Conflicts
in North Africa and the Middle East, including in Egypt and Syria that border Israel, have resulted in continued political
uncertainty and violence in the region. Efforts to improve Israel’s relationship with the Palestinian Authority have failed
to result in a permanent solution, and there have been numerous periods of hostility in recent years. In addition, relations between Israel and
Iran continue to be seriously strained, especially with regard to Iran’s nuclear program. Such
instability may affect the economy, could negatively affect business conditions and, therefore, could adversely affect our operations.
To date, these matters have not had any material effect on our business and results of operations; however, the regional security
situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively
affect our business, financial condition and results of operations in the future.
Furthermore,
there are a number of countries, primarily in the Middle East, as well as Malaysia and Indonesia, that restrict business with
Israel or Israeli companies, and we are precluded from marketing our products to these countries. Restrictive laws or policies
directed towards Israel or Israeli businesses may have an adverse impact on our operations, our financial results or the expansion
of our business.
Our
results of operations may be adversely affected by the obligation of our personnel to perform military service.
Many
of our executive officers and employees in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and
may be called for active duty under emergency circumstances at any time. If a military conflict or war arises, these individuals
could be required to serve in the military for extended periods of time. Our operations could be disrupted by the absence for
a significant period of one or more of our executive officers or key employees or a significant number of other employees due
to military service. Any disruption in our operations could adversely affect our business.
We
currently have the ability to benefit from certain government tax benefits, which may be cancelled or reduced in the future.
We
are currently eligible to receive certain tax benefits under programs of the Government of Israel. In order to maintain our eligibility
for these tax benefits, we must continue to meet specific requirements. If we fail to comply with these requirements in the future,
such tax benefits may be cancelled.
Service
and enforcement of legal process on us and our directors and officers may be difficult to obtain.
We
are organized in Israel and some of our directors and executive officers reside outside the United States. Service of process
upon them may be difficult to effect within the United States. Furthermore, most of our assets and the assets of some of our executive
officers are located outside the United States. Therefore, a judgment obtained against us or any of them in the United States,
including one based on the civil liability provisions of the U.S. federal securities laws may not be collectible in the United
States and may not be enforced by an Israeli court. It also may be difficult for you to assert U.S. securities law claims in original
actions instituted in Israel.
Provisions
of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and therefore
depress the price of our shares.
Israeli
corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special
approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant
to these types of transactions. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to
some of our shareholders. These provisions of Israeli corporate and tax law may have the effect of delaying, preventing or complicating
a merger with, or other acquisition of, us. This could cause our Ordinary Shares to trade at prices below the price for which
third parties might be willing to pay to gain control of us. Third parties who are otherwise willing to pay a premium over prevailing
market prices to gain control of us may be unable or unwilling to do so because of these provisions of Israeli law.
The
rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities
of shareholders under U.S. law.
We
are organized under Israeli law. The rights and responsibilities of holders of our Ordinary Shares are governed by our memorandum
of association, articles of association and by Israeli law. These rights and responsibilities differ in some respects from the
rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has
a duty to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other
shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting
of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder votes at the general
meeting with respect to, among other things, amendments to a company’s articles of association, compensation policy, increases
in a company’s authorized share capital, mergers and actions and transactions involving interests of officers, directors
or other interested parties which require the shareholders’ general meeting’s approval. In addition, a controlling
shareholder of an Israeli company or a shareholder who knows that he or she possesses the power to determine the outcome of a
vote at a meeting of our shareholders, or who has, by virtue of the company’s articles of association, the power to appoint
or prevent the appointment of an office holder in the company, or any other power with respect to the company, has a duty of fairness
toward the company. The Israeli Companies Law does not establish criteria for determining whether or not a shareholder has acted
in good faith.
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ITEM
4.
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INFORMATION
ON THE COMPANY
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A.
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History
and Development of the Company
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Corporate
details
Our
legal and commercial name is Magic Software Enterprises Ltd. We were organized and registered in Israel on February 10, 1983 and
began operations in 1986. We are a public limited liability company and operate under the provisions of the state of Israel. Our
Ordinary Shares have been listed on the NASDAQ Global Stock Market (symbol: MGIC) since our initial public offering in the United
States on August 16, 1991. On January 3, 2011, our shares were transferred to the NASDAQ Global Select Market. Since November
16, 2000, our Ordinary Shares have also traded on the Tel Aviv Stock Exchange, or the TASE, and since December 15, 2011, our shares
have been included in the TASE’s TA-125 Index.
Capital Expenditures and Divestitures
since January 1, 2017
In
late December 2017, we acquired a 100% equity interest in Futurewave Systems, Inc., a U.S. based full-service provider of consulting
and outsourcing solutions for IT personnel, for a total consideration of $3.0 million.
On
July 12, 2018, we issued 4,268,293 ordinary shares at a price of $8.20 per share for a total of $34.6 million net of issuance
expenses. 3,150,559 of the shares were issued to Israeli institutional investors and 1,117,734 shares were issued to our controlling
shareholder, Formula Systems (1985) Ltd.
On
February 28, 2019, we acquired a 100% equity interest in OnTarget Group Inc. (“OnTarget”), a U.S. based full-services
provider of software development services, for a total consideration of $ 12,456 of which $ 6,000 was paid upon closing and
the remaining amount constitutes a contingent payment depending on the future operating results achieved by OnTarget between 2019
and 2022.
On
April 1, 2019 we acquired a 100% equity interest in PowWow Inc (“PowWow”), creator of SmartUX™, a leading Low-Code
development platform for mobilizing and modernizing enterprise business applications, for a total consideration of $8.4 million,
out of which $2 million constitutes a contingent payment depending on the future revenues achieved by PowWow between 2020 and
2023.
On
June 30, 2019, we acquired a 100% equity interest in NetEffects Inc (“NetEffects”), a U.S. based full-services company,
specializes in IT staffing and recruiting, for a total consideration of $ 12,500, of which $ 9,400 was paid upon closing
and the remaining $ 3,100 will be paid in three installments following the first, second and third year anniversary.
Our
fixed assets capital expenditures for the years ended December 31, 2017, 2018 and 2019 were approximately $1.4 million, $0.9 million
and $1.4 million, respectively. These expenditures were principally for network equipment and computer hardware, as well as for
vehicles, furniture, office equipment and leasehold improvements.
We
are a global provider of: (i) proprietary application development and business process integration platforms, (ii) selected packaged
vertical software solutions, as well as (iii) a vendor of software services and IT outsourcing software services. We report our
results on the basis of two reportable business segments: software solutions (which include proprietary and non-proprietary software
technology, maintenance and support and complementary services) and IT professional services.
Our
software solutions are used by customers to develop, deploy and integrate on-premise, mobile and cloud-based business applications
quickly and cost effectively. In addition, our technology enables enterprises to accelerate the process of delivering business
solutions that meet current and future needs and allow customers to dramatically improve their business performance and return
on investment. We also provide selected verticals with a complete software solution.
We
and our subsidiaries employ approximately 2,642 persons and operate through a network of over 3,000 independent software vendors,
who we refer to as Magic Software Providers, or MSP’s, and hundreds of system integrators, distributors, resellers, and
consulting and OEM partners. Thousands of enterprises in approximately 50 countries use our products and services.
Our
software technology platforms
Throughout
our history, we have traditionally maintained two major lines of products, one is our application development platform, which
today is known as Magic xpa Application Platform, an evolution of our original metadata-based development platform; and the second
is our application integration platform, Magic xpi Integration Platform, originally introduced in 2003 under the name iBOLT. In
December 2011, we acquired the AppBuilder development platform of BluePhoenix Solutions Ltd., a leading provider of value-driven
legacy IT modernization solutions. AppBuilder is a comprehensive application development infrastructure used by many Fortune 1000
enterprises around the world. This enterprise application development environment is a powerful, model-driven tool that enables
development teams to build, deploy, and maintain large-scale, custom-built business applications. On April 2019, we acquired the
SmartUX development platform of PowWow Inc., a leading Low-Code enterprise mobile development application platform for citizen
to professional developers to rapidly design, build, analyze, and run cross-platform mobile business applications.
Our
software technology platforms consist of:
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Magic
xpa Application Platform - a proprietary application platform for developing and deploying
Client Server/Mobile/Web business applications.
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AppBuilder
Application Platform - a proprietary application platform for building, deploying, and
maintaining high-end, mainframe-grade business applications.
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Magic
xpi Integration Platform - a proprietary platform for application integration
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Magic
xpc Integration Platform - hybrid integration platform as a service (iPaaS).
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Magic
SmartUX - a proprietary low-code enterprise mobile development application platform for
citizen to professional developers to rapidly design, build, analyze, and run cross-platform
mobile business applications.
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FactoryEye
- a proprietary high performance, low-code, flexible, hybrid platform for manufacturers
based on existing infrastructure enabling real-time virtualizations of all production
data and advanced analytics (based on machine learning) for improved productivity and
competitive advantage.
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Our
vertical software packages
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Clicks™
– offered by our Roshtov subsidiary, is a proprietary comprehensive core software
solution for medical record information management systems, used in the design and management
of patient-file for managed care and large-scale healthcare providers. The platform is
connected to each provider clinical, administrative and financial data base system, residing
at the provider’s central computer, and allows immediate analysis of complex data
with potentially real-time feedback to meet the specific needs of physicians, nurses,
laboratory technicians, pharmacists, front- and back-office professionals and consumers.
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Leap™
– offered by our FTS subsidiary, is a proprietary comprehensive core software
solution for BSS, including convergent charging, billing, customer management, policy
control, mobile money and payment software solutions for the telecommunications, content,
Machine to Machine/Internet of Things or M2M/IoT, payment and other industries.
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Hermes
Solution – offered by our Hermes Logistics Technologies Ltd. subsidiary, the
Hermes Air Cargo Management System is a proprietary, state-of-the-art, packaged software
solution for managing air cargo ground handling. Our Hermes Solution covers all aspects
of cargo handling, from physical handling and cargo documentation through customs, seamless
EDI communications, dangerous goods and special handling, tracking and tracing, security
and billing. Customers benefit through faster processing and more accurate billing, reporting
and ultimately enhanced revenue. The Hermes Solution is delivered on a licensed or fully
hosted basis. Hermes recently supplemented its offering with the Hermes Business Intelligence
(HBI) solution, adding unprecedented data analysis capabilities and management-decision
support tools.
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HR
Pulse – Offered by our Pilat NAI, Inc. and Pilat Europe Ltd. subsidiaries,
Pulse (now in its 10th release) is a proprietary tool for the creation of
customizable HCM solutions quickly and affordably. It has been used by Pilat to create
products, such as Pilat Frist and Pilat Professional, that provide “out of the box”
SaaS solutions for organizations that implement Continuous Performance and/or Talent
Management.
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MBS
Solution – offered by our Complete Business Solutions Ltd. subsidiary, is a
proprietary comprehensive core system for managing TV broadcast channels.
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Our
professional software and IT services
Our
software professional services offerings include a vast portfolio of professional services in the areas of infrastructure design
and delivery, application development, technology consulting planning and implementation services, support services, DevOps (Development
& Operations), Mobile, Big Data and Analytical BI, M/F, cloud computing for deployment of highly available and massively-scalable
applications and APIs and supplemental IT outsourcing services to a wide variety of companies, including Fortune 1000 companies.
The technical personnel we provide generally supplement in-house capabilities of our customers. We have extensive and proven experience
with virtually all types of telecom infrastructure technologies in wireless and wire-line as well as in the areas of infrastructure
design and delivery, application development, project management, technology planning and implementation services.
We have
substantial experience in end-to-end development of high-end software solutions, beginning with collection and analysis of system
requirements, continuing with architecture specifications and setup, to software implementation, component integration and testing.
From concept to implementation, from application of the ideas of startups requiring the early development of an application or
a device, to somewhat larger, more established enterprises, vendors or system houses who need our team of experts to take full
responsibility for the development of their systems and products. With our ability to draw on our pool of resources, comprised
of hundreds of highly trained, skilled, educated and flexible engineers, we adhere to timelines and budget and work in full transparency
with our customers every step of the way to create a tailor-made and cost-effective solution to answer all of our customers’
unique needs.
Our
IT services subsidiaries consist of:
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Coretech
Consulting Group LLC
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AllStates
Consulting Services LLC
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Futurewave
Systems, Inc.
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Partnerships
and Alliances:
We
continue to build on our existing strategic partnerships that include Oracle, JD Edwards, SAP, Salesforce.com, Microsoft, IBM
and SugarCRM to enhance our mobile, integration and cloud offerings.
In
September 2013, we initiated a technology partnership with GigaSpaces Technologies, a pioneer provider of In-Memory Computing
technology for deployment, management and scaling of mission-critical applications. By combining our technologies, we assist our
customers in becoming cloud-ready and enjoying the benefits of high performance, scalability and availability that can be achieved
with in-memory computing technology, all with a seamless migration effort and virtually no learning curve. Since the announcement,
we have implemented IMDG architecture in our Magic xpi Integration Platform.
In
October 2013, we partnered with Sugar CRM, a growing cloud and on-premise CRM ecosystem, and Sage, a popular provider of ERP and
other business systems to small and medium business, enabling us to provide pre-built connectors for quick and reliable integration
with these applications.
In
July 2015, we were recognized as “Salesforce Ecosystem Champion of the Year for France” for the Magic xpi Integration
Platform with its pre-built and certified Salesforce adapter. In giving this award, Salesforce said their “growth is possible
through the commitment to exceptional solutions and customer satisfaction provided by Salesforce partners like Magic Software.”
Also
in July 2015, our Valinor subsidiary was recognized as the 2015 Microsoft Country Partner of the Year for Israel. The Microsoft
Country Partner of the Year Awards honor partners at the country level that have demonstrated business excellence in delivering
Microsoft solutions to multiple customers over the past year. This award recognizes Valinor as succeeding in effective engagement
with its local Microsoft office while showcasing innovation and business impact, driving customer satisfaction, and winning new
customers.
In
2016, we received the SugarCRM’s global ISV Partner Award for best engagement and teaming with fellow partners across
the SugarCRM partner ecosystem.
In
March 2017, we became a certified technology partner in the Technology Alliance Program for ServiceMax, a GE Digital company,
the leader in cloud-based field service management solutions. As a result of this partnership, we launched a prebuilt, certified
ServiceMax connector for our Magic xpi integration platform. This dedicated connector enables real-time business process integration
between ServiceMax and other enterprise software, such as ERP systems, enabling ServiceMax customers to streamline field service
processes, eliminate duplicate data entry, and increase productivity.
In
March 2018, following an extension of our partnership with Salesforce, we included new features in our Magic xpi 4.7
to make the integration between Salesforce and other systems even easier. By collaborating with Salesforce, we are significantly
expanding our partners’ network and maximizing our service offering to customers around the world, enabling them to better serve
their customers via all channels by connecting to back-office ERP and finance applications, and streamlining business processes
across numerous applications. We have reached the status of Salesforce Premier ISV partner, showing our high competence expert
level, ensuring that all of our customers enterprise software is faultlessly integrated.
We
are an Oracle Platinum Partner holding an Oracle Validated Integration status, a SAP Channel Gold Partner holding SAP Certified
Integration status, an IBM Server Proven, and a SYSPRO business partner, among others. We appear on the Salesforce AppExchange
and are a featured partner on SugarCRM’s Sugar Exchange, marketplaces for apps provided by partners. We continue to update
and strengthen our relationships with these major IT partners by attending partner events and by updating and certifying our Magic
xpi connectors for each specific ecosystem.
In
December 2018 we achieved Microsoft Gold Competency and have maintained this elite status since then. Gold Competency is Microsoft’s
highest level of partner certification reserved for the top one percent of Microsoft elite partners worldwide who have demonstrated
expertise and proven skills with a particular Microsoft technology or service. In addition to that, we earned the Co-Sell Ready
Status as a member in the Microsoft One Commercial Partner (OCP) Program, Magic xpi, which maps data, automates business processes
and connects apps, databases, APIs with built-in Microsoft connectors, and Magic xpc, a 100% cloud-native, microservices-based
integration platform are available on the Microsoft AppSource app store and are listed on the Microsoft Azure Marketplace.
In
May 2020, our CommIT Group, achieved AmazonAWS SaaS Competency status. AWS SaaS Competency is designated to help customers find
top AWS consulting partners with deep specialization and experience in designing and building software-as-a-service solutions
on AWS. Organizations are interested in software that is easy to use, implement, and operate. They are looking to reduce time-to-value
and obtain access to innovative product features and flexible software procurement on a consumption or contractual basis. AWS
SaaS Competency Partners follow Amazon Web Services (AWS) best practices for designing and building SaaS solutions through their
professional services practices. To qualify for the AWS SaaS Competency designation, organizations have undergone rigorous technical
validation by AWS Partner Solutions Architects and demonstrated proven customer success. In recent years, Comm-IT has successfully
led, developed and produced many SaaS solutions on AWS for companies across many business sectors, including high-tech and startups,
industrial and retail, and insurance and finance. Comm-IT’s unique, flexible R&D model, which provides complete flexibility
in determining the mix of experts, allows for full control of budgets and schedules throughout the development project. In this
framework, We accompany our clients in their digital journey and in their entry into the SaaS world, providing design and build
services for application environments or migration services for applications from existing models to cloud SaaS models. These
processes require software architecture, construction, and software development from both Digital and SaaS, all of which take
into account performance aspects, information security, scalability, infrastructure monitoring, customer experience and billing.
Achieving AWS SaaS Competency status allows us to expand our business offering and even accompany the organizational change for
customers who are in the process of transitioning to SaaS.
Industry
Overview
In
recent years, the number of available enterprise applications has grown significantly which has led information system complexity
within many organizations to a level that has obstructed business progress and evolution, reduced business agility and led to
significantly higher costs. We believe this complexity will continue to increase in the future. Although it is not unusual for
organizations to operate multiple applications, systems and platforms that were created utilizing disparate programming languages,
the complexity of these environments typically reduces an organization’s operating flexibility, hinders decision-making
processes and leads to costly inefficiencies and redundancies. When organizations seek to swiftly change, update and upgrade IT
assets to support new business processes or to cope with changes in business and regulatory environments, they often find that
the introduction and integration of new or upgraded business applications is more complex than expected, requires significant
implementation resources, takes a long time to implement and is costly. The proliferation of smartphones and mobile platforms
necessitates device-independent and future-proof business solutions for fast, simple, and cost-effective mobile deployment. In
addition, new cloud computing technologies present enterprises with an opportunity to realize greater agility and meaningful cost
savings to businesses, creating a growing need for further changes to enterprises’ IT applications and systems.
The
pace of digital transformation is also accelerating at companies all around the world. Customers are increasingly demanding an
all-digital experience from the companies they do business with. They seek instant gratification through real-time updates or
instant customer service without having to talk to or wait for other human beings. Employees are also pushing for a more digital
experience in their workplaces. The confluence of these internal and external forces is causing companies of all sizes to put
digital transformation goals at the top of the agenda. It is becoming clearer that companies will need to embrace and prioritize
the creation of a digital operating environment to gain a competitive edge and be able to recruit and maintain a talented employee
base.
Manual
coding and application development is a complex and time-consuming process with an end result that is not guaranteed. The process
requires constant iteration as bugs are discovered and new features are integrated. In addition, the communication gap and general
disconnect between developers and end-users are critical shortcomings of manual coding that results in business applications that
are less than ideally designed. Many of these problems can be addressed by low-code and no-code development platforms. The enterprise
application development software market consists of several application development sub-segments and includes large dominant players
such as IBM, Microsoft, Oracle, Salesforce, HP, CA Technologies and Compuware as well as a large number of highly specialized
vendors, with focused capabilities for specific vertical markets. Huge backlogs of enterprise app development work and growing
demand for apps coupled with shortage and expense of skilled programmers, is increasingly leading enterprises to turn to low-code/no-code
application development platforms that democratize the development process and give business users the ability to develop applications
themselves with minimal or no assistance from IT. Through the adoption of business applications, these business users are increasingly
looking for ways to automate manual workflows and become more efficient and effective by reallocating their time to solving more
complex business problems. Even IT resources and developers are using low-code development tools to increase their development
speed and reduce backlog. a growing market for low-code/no-code development platforms.
Although
the market for low-code development platforms is not new by any means, it has certainly started to gain more traction over the
past couple of years and is expected to continue its strong growth due to continued demand for applications and a shortage of
skilled developers. Low-code development is a natural evolution of rising abstraction levels in application development, which
will eventually lead to viable cross-enterprise, highly scalable citizen development and composition of applications. According
to the Low-Code Development Platform Market Research Report published by Prescient & Strategic Intelligence in August 2019,
the market for low-code development platforms was valued at $5.6 billion in 2018 and is expected to grow at a 45% compound annual
growth rate to $52.3 billion in 2024. Based on Gartner’s, Magic Quadrant for Enterprise Low Code Application Platforms,
8 August 2019, by 2024 low-code application platforms will be responsible for more than 65 percent of all application development
activity and three-quarters of large enterprises will be using at least four low-code development tools for both IT application
development and citizen development initiatives. Forester, in their Q1 2019 report on low-code platforms expects low-code market
to represent $21 billion in spending by 2022. The increasing need of digitalization and maturity of agile DevOps practices are
expected to enhance the use of low-code development platform market across the globe. Web application is considered as a face
of an organization and by using the low-code development platform organizations can roll out user-defined web-based applications
quickly. Instead of writing the programming language for the development of web-based applications, employees with less development
experience can also create sophisticated applications. For those who has relevant experience, this platform can ease out the daily
work chores and can even help them create more custom web-based applications by integrating already existing digital ecosystems.
North America has the presence of several prominent market players delivering low-code development platform and services to all
end users in the region. The US and Canada both have strong economic conditions and are expected to be major contributors to the
growth of the low-code development platform market. The geographical presence, significant research and development (R&D)
activities, partnerships, and acquisitions and mergers are the major factors for the deployment of low-code development platform
and services.
The
IT services segment of the market is comprised of a broad array of specific segments such as infrastructure design and delivery,
application development, technology consulting planning and implementation services, support services and supplemental outsourcing
services. In addition, IT professional services include quality assurance, product engineering services and process consulting.
The IT services segment is also undergoing a profound transition, with some key trends that have accelerated recently. Growing
demand for mobile and cloud-based applications as well as Big Data solutions also entails more complex IT development and integration
projects which management and implementation require a higher level of expertise, In addition, the typical software-based projects
of IT consulting have been gradually shifting towards software and technology-driven solutions that can be embedded into clients’
systems, providing ongoing engagement services. This transition has been accentuated by an underlying change in IT services sourcing
processes: the need for a faster go-to-market process as well as constrained resources in IT departments is resulting in greater
influence by specific business units on the purchasing decision as opposed to the traditional sourcing process. The traditional
outsourcing business model of capacity on demand is also transitioning towards a model of capability on demand. Information technology
service buyers are increasingly looking at outcome-driven managed services with a tighter integration between software, service
and infrastructure.
We
have identified the following trends that are relevant to the markets we operate in:
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Increasingly
complex business integration: In recent years, enterprises operate multiple applications
and platforms, using various programming languages, resulting in complex enterprise information
systems. Such systems and the ability to swiftly change, update, and upgrade them to
support new business processes are crucial to the enterprise’s ability to cope
with changes in the business, economic and regulatory environment. However, the introduction
and integration of new business applications is complex, requires significant time and
human resources and entails significant and often unpredicted costs. Therefore, enterprises
are in need of solutions that will facilitate the rapid and seamless deployment of business
applications.
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Reusing
IT assets/enterprise applications: In an increasingly dynamic technology, business
and economic environment, organizations face mounting pressure to continue to leverage
their large IT investments in enterprise applications, such as ERP and CRM, while increasing
their ability to change business processes and support new ones. Tools to support lightweight
yet rapid, iterative and modular development methodologies, reusable architectures and
application life-cycle management are primary drivers for spending on application development
worldwide.
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Enterprise
mobility: With the proliferation of smartphones and mobile platforms that support
enterprise mobility, enterprise users now expect instant access to real-time information,
a rich user experience, seamless integration with various enterprise systems and support
to multiple mobile devices. As such, enterprises need to be able to develop device-independent
and robust business solutions for fast and cost-effective mobile deployment.
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Cloud,
Platform-as-a-Service and Software-as-a-Service: Cloud, Platform-as-a-Service (PaaS)
and Software-as-a-Service (SaaS) are each becoming a well-established phenomenon in some
areas of enterprise IT. Cloud-hosted applications continue to grow as alternatives to
internally managed systems as they deliver greater agility and meaningful cost savings
to businesses. In addition, fast time-to-deployment, low cost-of-entry, and adoption
of pay-as-you-go models drive growing adoption of SaaS applications. In turn, SaaS applications
enable the rapid construction, deployment and management of some custom-built applications
accessed as a service in the cloud. With more SaaS deployments, the need for integration
tools that bridge the cloud apps with on-premise application increases.
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Big
Data: The amount of digital information that is being generated by enterprises each
year, across a number of diverse data sources and formats, is growing rapidly. Enterprises
are required to retain, process and analyze data to attain meaningful insights and gain
competitive advantages, and therefore require versatile and flexible tools in order to
quickly and reliably process these increasingly large amounts of data.
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IT
Consulting: The typical software-based projects of IT consulting have been gradually
shifting towards software and technology-driven solutions that can be embedded into clients’
systems, providing ongoing engagement services.
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Sourcing
processes: The need for a faster go-to-market process as well as constrained resources
in IT departments is resulting in greater influence by specific business units on the
purchasing decision as opposed to the traditional sourcing process. The traditional outsourcing
business model of capacity on demand is also transitioning towards a model of capability
on demand. Information technology service buyers are increasingly looking at outcome-driven
managed services with a tighter integration between software, service and infrastructure.
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Mobility
& IT skills shortage: Growth in mobility skills demand is outpacing organizations’
ability to keep up, resulting in mobile strategists facing a skills shortage across the
entire mobility ecosystem, with mobile application development skills in greatest demand.
Poor availability of skilled staff is driving mobile strategists to outsource many functions
across the mobility ecosystem, including application development and testing services.
The increasing mobility skills gap will force mobile strategists to use a multifaceted
application development and delivery approach.
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Magic’s
Software Solutions
Our
software solutions enable enterprises to accelerate the planning, development, deployment and integration of on-premise, mobile
and cloud business applications that can be rapidly customized to meet current and future needs. Our software solutions and complementary
professional services empower customers to dramatically improve their business performance and return on investment by enabling
the cost-effective and rapid delivery, integration and mobilization of business applications, systems and databases. Our technology
and solutions are especially in demand when time-to-market considerations are critical, budgets are tight, and integration is
required with multiple platforms or applications, databases or existing systems and business processes, as well as for RIA and
SaaS applications. Our technology also provides the option to deploy our software capabilities in the cloud, hosted in a web services
cloud computing environment. We believe these capabilities provide organizations with a faster deployment path and lower total
cost of ownership. Our technology also allows developers to stage multiple applications before going live in production.
Development
communities are facing high complexity, cost and extended pay-back periods in order to deliver cloud, RIAs, mobile and SaaS applications.
Magic xpa, AppBuilder, Magic SmartUX, Magic xpi and Magic xpc provide MSPs with the ability to rapidly build integrated applications
in a more productive manner, deploy them in multiple modes and architectures as needed, lower IT maintenance costs and speed time-to-market.
Our solutions are comprehensive and industry proven. These technologies can be applied to the entire software development market,
from the implementation of micro-vertical solutions, through tactical application modernization and process automation solutions,
to enterprise spanning service-oriented architecture, or SOA, migrations and composite applications initiatives. Unlike most competing
platforms, we offer a coherent and unified toolset based on the same proven metadata driven and rules-based declarative technology.
Our low-code, metadata platforms consist of pre-compiled and pre-written technical and administrative functions, which are essentially
ready-made business application coding that enables developers to bypass the intensive technical code-writing stage of application
development and integration, concentrate on building the correct logic for their apps and move quickly and efficiently to deployment.
Through the use of metadata-driven platforms such as Magic xpa, AppBuilder, Magic SmartUX, Magic xpi and Magic xpc, software vendors
and enterprise customers can experience unprecedented cost savings through fast and easy implementation and reduced project risk.
Our
software technology solutions include application platforms for developing and deploying specialized and high-end large-scale
business applications and integration platforms that allow the integration and interoperability of diverse solutions, applications
and systems in a quick and efficient manner. These solutions enable our customers to improve their business performance and return
on investment by supporting the affordable and rapid delivery and integration of business applications, systems and databases.
Using our software solutions, enterprises and ISVs can accelerate time-to-market by rapidly building integrated solutions, deploying
them in multiple environments while leveraging existing IT resources. In addition, our solutions are scalable and platform-agnostic,
enabling our customers to build solutions by specifying their business logic requirements in a commonly used language rather than
in computer code, and to benefit from seamless platform upgrades and cross-platform functionality without the need to re-write
applications. Our technology also enables future-proof protection and supports current market trends such as the development of
mobile applications that can be deployed on a variety of smartphones and tablets, and cloud environments. In addition, we also
offer a variety of vertical-targeted products that are focused on the needs and requirements of specific growing markets. Certain
of these products were developed utilizing our application development platform.
We
sell our solutions globally through our own direct sales representatives and offices and through a broad sales distribution network,
including independent country distributors, independent service vendors that use our technology to develop and sell solutions
to their customers, and system integrators. We also offer software maintenance, support, training, and consulting services in
connection with our products, thus aiding the successful implementation of projects and assuring successful operation of the platforms
once installed. We sell our integration solutions to customers using specific popular software applications, such as SAP, Salesforce.com,
IBM i (AS/400), Oracle JD Edwards, Microsoft SharePoint, Microsoft Dynamics, SugarCRM and other eco-systems. As such, we enjoy
a well-diversified client base across geographies and industries including oil & gas companies, telecommunications groups,
financial institutions, healthcare providers, industrial companies, public institutions and international agencies.
The
underlying principles and purpose of our technology are to provide:
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Simplicity
– the use of code-free/low code development tools instead of hard coding and
multiple programming languages to solve critical and complex challenges;
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Business
focus – the use of pre-compiled business logic and components eliminates repetitive,
low level technical and coding tasks;
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Comprehensiveness
– the use of a comprehensive development and deployment platform offers a full
end-to-end development, deployment and integration capability;
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Automation
of mundane tasks – to accelerate development and maintenance and reduce risk;
and
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Interoperability
– to support business logic across multiple hardware and software platforms,
operating systems and geographies.
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We
offer three complementary application platforms that address the wide spectrum of composite applications, Magic xpa, Magic SmartUX
and AppBuilder. Our Magic xpi integration platform and Magic xpc iPaaS solution delivers fast and simple integration and orchestration
of business processes and applications. We gained over 350 new customers in 2019 operating in a wide variety of industries, including
financial services, life sciences, government, telecommunications, energy and manufacturing.
Magic
xpa Application Platform
Magic
xpa Application Platform, our metadata driven application platform, provides a simple, low code and cost-effective development
and deployment environment that lets organizations and MSPs quickly create user-friendly, enterprise-grade, multi-channel mobile
and desktop business app that employ the latest advanced functionalities and technologies. The Magic xpa Application Platform,
formerly named uniPaaS, was first released in 2008 and is an evolution of our original eDeveloper product, a graphical, rules-based
and event-driven framework that offered a pre-compiled engine for database business tasks and a wide variety of generic runtime
services and functions which was released in 2001.
We
have continually enhanced our Magic xpa application platform to respond to major market trends such as the growing demand for
cloud-based offerings including Rich Internet Applications (RIA), mobile applications and SaaS. Accordingly, we have added new
functionalities and extensions to our application platform, with the objective of enabling the development of RIA, SaaS, mobile
and cloud-enabled applications. SaaS is a business and technical model for delivering software applications, similar to a phone
or cable TV model, in which the software applications are installed and hosted in dedicated data centers and users subscribe to
these centers and use the applications over an internet connection. This model requires the ability to deliver RIA. Magic xpa
is a comprehensive RIA platform. It uses a single development paradigm that handles all ends of the application development and
deployment process including client and server partitioning and the inter-communicating layers.
Magic
xpa offers customers the power to choose how they deploy their applications, whether full client or web; on-premise or on-demand;
in the cloud or behind the corporate firewall; software or mobile or SaaS; global or local. Our Magic xpa Application Platform
complies with event driven and service oriented architectural principles. By offering technology transparency, this product allows
customers to focus on their business requirements rather than technological means. The Magic xpa single development paradigm significantly
reduces the time and costs associated with the development and deployment of cloud-based applications, including RIAs, mobile
and SaaS. In addition, application owners can leverage their initial investment when moving from full client mode to cloud mode,
and modify these choices as the situation requires. Enterprises can use cloud-based Magic xpa applications in a SaaS model and
still maintain their databases in the privacy of their own data centers. It also supports most hardware and operating system environments
such as Windows, Unix, Linux and AS/400, as well as multiple databases and is interoperable with .NET and Java technologies.
Magic
xpa can be applied to the full range of software development, from the implementation of micro-vertical solutions, through tactical
application modernization and process automation solutions, to enterprise spanning SOA migrations and composite applications initiatives.
Unlike most competing platforms, we offer a coherent and unified toolset based on the same proven metadata driven and rules based
declarative technology, resulting in increased cost savings through fast and easy implementation and reduced project risk.
Magic
xpa enables organizations to differentiate themselves from their competition through software-enabled digital transformation.
With our platform, organizations can rapidly and easily design, build and implement powerful, enterprise-grade custom applications
through our intuitive, visual interface, with little or no coding required. Our Solution ensures that applications developed on
our platform can be immediately and natively deployed across a full range of mobile and desktop devices with no additional customization,
including desktop web browsers, tablets and mobile phones. We also enable organizations to easily modify and enhance applications
and automatically disseminate these updates across device types to ensure that all users benefit from the most up-to-date functionality.
Key
benefits of our platform include:
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Powerful
applications to solve critical and complex challenges. At the core of our platform
is an advanced engine that enables the modeling, modification and management of complex
processes and business rules. Our heritage provides us with this differentiated understanding
of complex processes, and we have incorporated that expertise into our platform to enable
the development of powerful applications. Organizations have used our platform to launch
new business lines, build large procurement systems, manage retail store layouts, conduct
predictive maintenance on field equipment and manage trading platforms, among a range
of other use cases.
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Rapid
and simple innovation through our powerful platform. Our platform employs a low-code,
intuitive, visual interface and pre-built development modules that reduce the time required
to build powerful and unique applications. Our platform automates the creation of forms,
data flows, records, reports and other software elements that would otherwise need to
be manually coded or configured. This functionality greatly reduces the iterative development
process, allowing for real-time application optimization and ultimately shortening the
time from idea to deployment. In turn, organizations can better leverage scarce and costly
developer talent to accomplish more digital transformation objectives.
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Build
once, deploy everywhere. Our technology allows developers to build an application
once and use it everywhere with the consistency of experience and optimal performance
levels that users expect. Applications developed on our platform can be immediately and
natively deployed across a full range of mobile and desktop devices with no additional
customization, including desktop web browsers, tablets and mobile phones.
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Deployment
flexibility to serve customer needs. Our platform can be installed in any cloud or
on-premises, with organizations able to access the same functionality and data sources
in all cases. Our flexible deployment model also preserves a seamless path to future
cloud deployments for organizations initially choosing on-premises for their most sensitive
workloads.
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Our
approach to digital transformation goes beyond simply enabling organizations to build custom applications fast. We empower decision
makers to reimagine their products, services, processes and customer interactions with software by removing much of the complexity
and many of the challenges associated with traditional approaches to software development. Because we make application development
easy, organizations can build specific and competitively differentiated functionality into applications to deliver enhanced user
experiences and streamlined business operations.
In
February 2018, we released Magic xpa 3.3 with a more seamless and easier integration with Java, similar to the already existing
integration with .NET, making the Magic xpa platform even more robust. Along with that, we provided a new WS provider mechanism,
built on Apache Axis2, enhancing our current WCF based capabilities.
In
April 2018 and for the third consecutive year, Magic Software’s Magic xpa application development platform gained top market
share in license sales in the Japanese market. According to the “Market Research for Next Generation Extra-Rapid Development
Tools in 2018” published by MIC Research Institute Ltd., the Magic xpa Application Platform grew 2% achieving a 41% share
of the Japanese market.
In
August 2018, we released Magic xpa 4.0 with its new Angular-based Web application framework that provides developers and Angular
developers with the power to develop device-agnostic and feature-packed Web applications. Magic xpa 4.0 decouples the business
logic from the presentation of the apps providing developers with the flexibility to use the Angular open-source platform with
industry-standard state-of-the-art technologies, including HTML5, CSS, and JavaScript for designer-quality screens, while benefiting
from the productivity, security, and scalability capabilities provided by our low-code development platform.
In
addition, we further modernized our Integrated Development Environment (IDE) by moving toward a full-fledged Visual Studio-based
studio, offering our users an even more intuitive and user-friendly experience.
Our
2019 roadmap includes the release of a 64-bit edition of Magic xpa, featuring a full 64-bit runtime engine for Windows and Linux.
During
2018, Magic xpa was listed in Gartner’s Market Guide for Application Platforms report. In addition, Magic xpa was listed
in the Forrester Wave™ for Mobile Low-Code Development Platforms.
AppBuilder
Application Platform
AppBuilder,
a platform we acquired in December 2011, is a proprietary development environment used for managing, maintaining and reusing complicated
applications needed by large businesses. It provides the infrastructure for enterprises worldwide, across several industries,
with applications running millions of transactions daily on legacy systems. Enterprises using AppBuilder can build, deploy and
maintain large-scale custom-built business applications for years without being dependent on any particular technology. The AppBuilder
deployment environments include IBM mainframe, Unix, Linux and Windows. AppBuilder is intended to increase productivity and agility
in the creation and deployment of enterprise class computing.
AppBuilder
follows the 4GL development paradigm to help enterprises focus on the business needs and definition and overlook technical hurdles.
AppBuilder developers define the business roles and prior to deployment the code is generated from the development environment
to the required run time environment. Several large MSPs have utilized AppBuilder to build state of the art applications that
are deployed through many large customers.
AppBuilder
implements a model driven architecture approach to application development. It provides the ability to design an application at
the business modeling level and generate forward to an application. AppBuilder has a platform-independent, business-rules language
that enables generation to multiple platforms. It is possible to generate the client part of an application as Java and the server
part as COBOL. As businesses change, the server part can be generated as Java without changing the application logic. Only a simple
configuration option needs to be changed.
AppBuilder
contains everything a development environment needs to create any type of simple or complex business application with platform-independent
functionality, including:
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System
administration security controls for scope and permissions;
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Migration,
testing, and deployment functions;
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Architecture-independent
development;
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An
integrated toolset for designing, developing, and deploying applications;
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Object-based
components managed from host, server, or client repositories;
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Support
for Java/J2EE, COBOL, C#, and C programming languages;
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An
efficient, cross-platform code generation facility;
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Ready-to-use
business logic and libraries;
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A
remote prepare facility for mainframe development;
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Multiple
language user interface support; and
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In
April 2016, AppBuilder launched a next-generation HTML5 development tool. AppBuilderHTML5 enables AppBuilder enterprise customers
to easily turn their large-scale client/server business applications into fully functional browser-based apps.
During
2016, AppBuilder launched the next generation of its group repository tool, the Versioned Group Repository (VGRE). AppBuilder
VGRE is aimed at mid-size development projects, runs on Microsoft Windows Server platform and enables AppBuilder enterprise customers
to parallel support for multiple application releases, called branches, and access to the full history of individual objects.
This includes comparisons as well as version manipulation features like merge. VGRE is an extension to the existing repository
portfolio with full backward compatibility including well known features like impact analysis, security, upload/download, migrations,
rebuilds, remote preparation and others.
Magic
xpi Integration Platform
Our
Magic xpi integration platform (an evolution of our original and formerly branded iBOLT platform, launched in 2003) is a graphical,
wizard-based code-free solution delivering fast and simple integration and orchestration of business processes and applications.
Magic xpi allows businesses to more easily view, access, and leverage their mission-critical information, delivering true enterprise
application integration, or EAI, business process management, or BPM, and SOA infrastructure. Increasing the usability and life
span of existing legacy and other IT systems, Magic xpi allows fast EAI, development
and customization of diverse applications, systems and databases, assuring rapid return on invested capital and time-to-market,
increased profitability and customer satisfaction.
Magic
xpi allows the integration and interoperability of diverse solutions, including legacy applications, in a quick and efficient
manner. In January 2010, we released Magic xpi 3.2 and since then we have continued to develop the Magic xpi channel. We entered
into agreements with additional system integrators, consultancies and service providers, who acquired Magic xpi skills and offer
Magic xpi licenses and related services to their customers. We also offer special editions of Magic xpi with optimized and certified
connectors for specific enterprise application vendor ecosystems, such as SAP, Oracle JD Edwards, Microsoft SharePoint and Salesforce.com.
These special editions contain specific features and pricing tailored for these market sectors.
Our
heritage as a veteran player in the integration market provides us with a differentiated understanding and ability to automate
complex processes, and we have incorporated that expertise into our platform to enable the development of powerful business software.
Magic xpi can leverage a complete stack of automation technologies, applying the right automation approach for each specific use
case.
Key
benefits of our platform include:
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Business
Process Management. At the core of our platform is an advanced engine that enables
the modeling, modification and management of complex processes. This engine enables orchestration
of any business workflow.
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Decision
Rules. Appian includes a declarative environment for defining and executing business
logic or rules. These rules can be highly complex and can be applied within the Appian
platform to many use cases, ranging from automated decision making to user experience
personalization.
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Seamless
integration with existing systems and data. In contrast to typical enterprise software,
our platform does not require that data reside within it in order to enable robust data
analysis and cross-department and cross-application insight. Our platform seamlessly
integrates with many of the most popular enterprise software applications and data repositories
and can be used within many legacy environments. For example, organizations frequently
use our platform to extend the life and enhance the functionality of legacy systems of
record, such as those used for enterprise resource planning, human capital management
and customer relationship management, by building new applications that enhance the functionality
of those systems and by leveraging the data within those systems to further optimize
and automate operations.
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Deployment
flexibility to serve customer needs. Our platform can be installed in any cloud or
on-premises, with organizations able to access the same functionality and data sources
in all cases. Our flexible deployment model also preserves a seamless path to future
cloud deployments for organizations initially choosing on-premises for their most sensitive
workloads.
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In
the aggregate, these core capabilities enable Magic to automate and govern end-to-end processes. Magic complements these automation
technologies with related features like process reporting, analytics and management, which make it simple for organizations to
quickly improve and upgrade their automations as business needs change.
In
March 2017, we released Magic xpi version 4.6 with enhancements including a New ServiceMax connector for quick and easy connectivity
with ServiceMax, a New OData client connector for easy connectivity to ecosystems exposing services via this open standardized
protocol, a SAP Business One connector verified for SAP Business One HANA and support for additional services and new and
improved functionalities to our existing MS Dynamics CRM connector.
In
August 2017, our Magic xpi integration platform was recognized by the analyst firm Ovum as a well-positioned integration platform
that is a good option for small-and medium-size enterprises. In addition, Magic xpi was listed in 2017 in 10 Gartner reports including
three Market Guides for Application Integration Platforms, HIP-Enabling Technologies and IoT Integration.
In
March 2018, we released Magic xpi version 4.7 with a new OData Provider connector, Active Directory Federation Services (ADFS)
support for the SharePoint Online (MOSS) connector, ability to write new connectors based on Magic xpa Application Platform’s
runtime technology and multiple features to improve programming productivity, such as visual indicators of data flow status and
an enhanced monitor to provide an even more accurate bird’s eye view of all running projects.
In
October 2018, we announced that Magic xpi Integration Platform 4 achieved SAP-certified integration with SAP S/4HANA, enabling
our customers to optimize business processes through automation across leading ERP, CRM, finance, and other enterprise systems
using a single platform.
In
February 2019, we released Magic xpi version 4.9 with a new REST client connector, ODATA connector enhancements, inherent UPSERT
support in the data mapper, and built-in cloud support.
In
August 2019, we released Magic xpi version 4.11, enabling access to remote connectors residing at another site, without the need
for a VPN (aka ‘Local Agent’ capability). In addition, in the beginning of 2020 we released the major released Magic
xpi 4.12, which includes 64-bit support for our Run-Time engine as-well as integration with one of the industry’s API management
solutions suites. During 2019, we also released additional features pursuant to customer requests.
In
2020, we plan to enhance the above Local Agent capability with more functionality, add additional connectors (e.g., OPC for manufacturing)
and invest more resources in the overall product stability. In addition, we plan to continue to expand our product offering with
additional features, per customer requests.
Powerful
applications to solve critical and complex challenges. At the core of our platform is an advanced engine
that enables the modeling, modification and management of complex processes and business rules. Our heritage as a business process
management, or BPM, company provides us with this differentiated understanding of complex processes, and we have incorporated
that expertise into our platform to enable the development of powerful applications. Organizations have used our platform to launch
new business lines and build large procurement systems.
Magic
xpc Integration Platform
In
November 2017, we announced the expansion of our integration offering with the launch of Magic xpc, a hybrid integration platform
as a service (IPaaS), which enable customers to accelerate digital transformation on the cloud, on-premises or on both.
Magic
xpc is powered by its out-of-the-box integration connectors for mainstream business applications, databases, protocols and tools
for building custom integrations. Magic’s iPaaS platform was built using node.JS and docker technology. Magic xpc users
can monitor their integration flows and create and manage alerts from a single interface. Built on top of open-source components
with no cloud vendor lock-in, Magic xpc is available on both public and private cloud platforms including, Amazon Web Services,
Azure, and Google Cloud.
Magic
SmartUX
Magic
SmartUX, a platform we acquired in April 2019, is a low-code development platform for mobilizing and modernizing enterprise business
application designed for citizen to professional developers to rapidly design, build, analyze, and run cross-platform mobile business
applications.
The
Magic SmartUX platform addresses the three biggest challenges enterprises are facing in the road to Digital Transformation:
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Multi-platform:
end client devices are abundant and diverse, we provide an omni-channel solution.
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Many
Systems of Record: over the years enterprise adopted (home grown and third party) solutions
that scattered the business flow over many different system, Magic SmartUX enable the
enterprise to expose complex business flows to modern technology with now changes and
overhead to the existing working applications.
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Talent
Gap: Mobile and integration are the hardest skillsets for IT orgs to find, with the Magic
SmartUX platform addressing Citizens Developers, we allow any intern tech savvy individual
to deliver complex and robust Mobile business application.
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FactoryEye
On
May 2019 we launched the releases of FactoryEye, a proprietary high performance, low-code, flexible, hybrid platform built specially
for manufacturers based on existing infrastructure enabling real-time virtualizations of all production data and advanced analytics
(based on machine learning) for improved productivity and competitive advantage. We have hundreds of manufacturing customers,
and drew on over 35 years of manufacturing experience to develop FactoryEye. The product’s intuitive and user friendly dashboards
empowers manufacturers by providing all the analysis they need in order to make faster and smarter decisions based on real time
data and analytics. This translates into improved productivity, faster delivery times, and better control over the manufacturing
processes, leading to increased customer satisfaction and higher profit margins. FactoryEye offers dozens of prebuilt connectors
to a range of enterprise applications and MRP systems, such as SAP, JD Edwards, and Infor, as well as MES, CRM, and PLM systems.
The
addition of FactoryEye to our software portfolio allows us to provide our new and existing manufacturing clients, with a comprehensive
Industry 4.0 solution and aligns with our strategy of enhancing our portfolio with enterprise grade technologies. It also complements
our recent acquisition of the low code platform SmartUX for cross platform application. Combining acquisitions with ongoing enhancements
to core products enables us to further accelerate our growth by becoming a strong player in the digital transformation and Industry
4.0 revolutions.
Since
its launch, we made a targeted effort to reach mid-sized manufacturers who are looking to improve the efficiency of their factories.
Our goal is to position FactoryEye as a solution that offers more than mere factory floor visibility through IIoT connectivity,
while remaining more cost effective and customizable than offerings from “Tier 1” companies. To that end, We have created
a new website for FactoryEye which will launch by the end of the first half of 2020, as well as blogs, whitepapers, e-books and
email campaigns to spread awareness of this new offering and benefits for mid-sized manufacturers.
In
addition, we continue to market our application and integration products. These products continue to provide value and convenience
for our customers as low code options to integrate their disparate systems.
Vertical
software solutions
Clicks™
Our
Roshtov subsidiary has approximately three decades of proven experience based on its proprietary comprehensive core software solution
for medical record information management systems, using in the design and management of patient-file for managed care and large-scale
healthcare providers. The platform, which can be tailor-made to the specific needs of the healthcare provider, is connected to
the clinical, administrative and financial data base system, residing at the provider’s central computer, and allows immediate
analysis of complex data with potentially real-time feedback to meet the specific needs of physicians, nurses, laboratory technicians,
pharmacists, front- and back-office professionals and consumers.
All
of our clients that buy or subscribe to our Clicks software solution also enter into software support agreements with us for maintenance
and support of their medical record management systems. In addition to immediate software support in the event of problems, these
agreements allow clients to access new releases covered by support agreements. In addition, each client has 12-hour access, six
days a week (6 hours on Friday) to the applicable call-center support teams.
We
employ a team of 30 research and development specialists that together with our clients create a future where the health care
system works to improve the well-being of individuals and communities. Roshtov’s proven ability to innovate has led to what we
believe to be an industry leading architectures and a breadth and depth of solutions and services.
There
are four healthcare service providers in Israel, of which, Maccabi Healthcare Services and Clalit, which are the two largest healthcare
providers in Israel accounting for 77% of the Israeli market, have been our customers since the early 1990’s.
Leap™
Our
FTS subsidiary has over 20 years of BSS experience, based on dozens of projects delivered to customers worldwide. We implement
revenue management and monetization solutions in mobile, wireline, broadband, MVNO/E, payments, e-commerce, M2M / Internet of
Things, mobile money, cable, cloud and content markets under the brand name of Leap™. Our Leap™ solutions lower the
total cost of ownership (TCO) for telecom, content and payment service providers.
FTS
works with telecommunications, content and payment service providers globally to help them manage complex transactions and relationships
with greater flexibility and independence. Analyzing transactions from a business standpoint, FTS offers end-to-end and add-on
telecom billing, charging, policy control and payments solutions to customers worldwide, and services both growing and major providers.
FTS
targets mid to lower level tier service providers, supporting their BSS needs with end-to-end, turnkey billing and other BSS projects.
In addition, FTS offers upper-tiers of service providers with BSS and monetization solutions for specific needs, including policy
control and charging solutions, M2M billing, billing for content services, MVNE/MVNO billing, mobile money software solutions,
payment and mobile financial services solutions and others.
Our
Leap™ offering is comprised of:
Leap™
BCCF (Business Control and Charging Function) – a proprietary packaged software solution which serves as the underlying
foundation of our Leap™ products and solutions. Leap BCCF enables service providers to handle the aspects of event processing,
from defining the system’s business logic, through importing events and formatting, to charging and executing business rules.
With Leap BCCF, new services are deployed on the fly, and strategic business rules are formulated more easily, ensuring real-time
responses to both service and customer-related events and providing a baseline for policy control.
Leap™
Billing 6.3 – a convergent charging, billing and customer care solution that realizes substantial reductions in OPEX and
CAPEX while increasing customer satisfaction and retention. Leap Billing software’s flexibility and ease of use enables
the service providers’ billing platform to work more at the speed of marketing by offering new marketing plans or services
in a rapid time-to-market.
Leap™
Policy Control - Leap Policy Control is an integrated charging and policy control solution (a full PCC solution based on
PCRF & online/offline charging). Compliant with the 3GPP’s Diameter policy control standard, Leap Policy Control provides
traffic and subscriber management strategies. Leap Policy Control gives operators the power to monitor usage in real time and,
using fully configurable business rules, define how they manage network resources, applications, and subscribers – in real
time – while generating revenue from personalized mobile applications, content and services. Leap Policy Control can be
implemented as a stand-alone solution or as part of a larger BSS project implementation.
FTS
Express™ - FTS express™ is an all-in-one software appliance for online charging, billing, AAA, balance management,
customer care, policy control and interconnect, designed for entry-level operations of MVNOs, LTE, VoIP, ISP, broadband, IPTV
and more.
The
following is a sample of the monetization solutions offered by FTS:
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End-to-end,
turnkey billing and customer care solutions;
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Convergent,
online charging and billing;
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Policy
control and charging;
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Broadband
and multi-play billing;
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Mobile
money solutions;
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E-commerce
and M-commerce solutions;
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Payments
and mobile payments solutions;
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Smart
revenue sharing and partner management solutions; and
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Billing
service bureau.
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FTS’s
solutions are delivered via cloud, on-premises or in a fully managed-services mode and are backed by our Israel and Bulgaria-based
experienced professional services support team.
HR
Pulse
Now
in its 10th release, HR Pulse is a proprietary platform that creates and customizes software applications for HCM,
with the goal to combine technology with effective processes, to facilitate the collection, analysis and interpretation of quality
data about people, their jobs and their performance, to enhance HCM decision making, resulting in increased organizational efficiency
and effectiveness. HR Pulse addresses four distinct functional areas with the ability to also work as one consolidated system:
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Performance
and goal management:
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Development
management;
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Talent
management and succession planning; and
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Compensation
and merit review.
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Our
offering includes customizable “out of the box” HCM SaaS Solutions, such as Pilat Frist and Pilat Professional, that
provides a menu of templates that can be used to affordably and expeditiously create customized HCM solutions for companies.
The HR Pulse platform promotes the building and implementation of solutions that address broader business challenges as well.
Such offerings include 360-degree feedback, employee surveys, leadership and management development, coaching and job evaluation.
Hermes
Hermes
has been developing and evolving cargo management systems for the air cargo industry since 2002. Hermes Air Cargo Management System
is a proprietary, state-of-the-art, packaged software solution for managing air cargo ground handling. Our Hermes Solution covers
all aspects of cargo handling, from physical handling and cargo documentation through customs, seamless EDI communications, dangerous
goods and special handling, tracking and tracing, security and billing. Over the last 10 years Hermes systems have been
implemented in over 70 terminals on five continents, providing efficient and accurate handling of more than 5 million tons of
freight annually. Customers benefit through faster processing and more accurate billing, reporting and ultimately enhanced revenue.
Customers include independent ground handlers, airlines with a cargo arm, hubs belonging to an individual airline or those catering
to a number of airlines transiting cargo to additional destinations. The Hermes Solution is delivered on a licensed or fully
hosted basis.
Our
Value Proposition
Hermes
systems are built with the specific needs of air cargo handlers and airlines in mind and are amongst the most versatile and sophisticated
around. Hermes Solutions are focused on maximizing customer profits by streamlining ground handling processes and employing built-in
best practices to reduce handling errors. Hermes team of cargo experts carry out a full business analysis, listen to our customers’
requirements, suggest additional functionality and work with them to deliver an air cargo management solution that is streamlined
around their processes and customized to their needs. Hermes works with everyone from smaller cargo handlers to large airlines
all over the world and counts Menzies Aviation, WFS (FRA), Luxair, Etihad Airport Services and Frankfurt Cargo Services among
their customers.
Strategy
Our
goal is to continue our profitable and cash generative growth within our software solutions and professional services markets.
We plan to achieve this goal by focusing on the following principles:
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Expand
sales to existing customers. We intend to capitalize on the opportunity to more
effectively cross-sell solutions and services across our existing customer base. In addition
to selling complementary software solutions to customers that already use our development
application solutions or packaged software solutions, we believe our strong customer,
MSP and partner relationships and execution track record position us to successfully
grow our revenues by delivering complementary development and integration tools from
our product offering to our existing IT services customers and by delivering IT services
to our existing application development customer base.
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Capitalize
on opportunities created by new technological trends. We believe that emerging industry
trends such as mobile applications, cloud applications, SaaS and big data will require
our enterprise customers and partners to continue and upgrade existing systems and to
integrate their current infrastructure with new mobile and cloud applications or with
new big data management solutions. We intend to market the capabilities of our software
solutions and professional services offerings to customers that are currently impacted
or will potentially be impacted by the increased complexity resulting from these trends.
For instance, we intend to promote Magic xpa through Rich Internet Applications (RIAs).
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Grow
our customer base through new offerings. We plan to grow our business by attracting
new ISV enterprise customers with new technology offerings and new professional services
through our already established expertise in the areas of mobile technologies and projects,
cloud applications, SaaS and Big Data solutions, and integration solutions. Due to our
track record in these industry segments, we believe we are well positioned to develop
and offer new application development and integration solutions that will enable us to
attract new customers. In addition, we believe our familiarity with these verticals will
allow us to differentiate our IT services offering and grow our market share in this
vertical as well.
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Provide
new solutions to new ecosystems. We expect the same industry trends of mobile, cloud,
SaaS and big data to lead to the creation of additional enterprise applications ecosystems.
We intend to continue to develop new solutions that will allow us to form new partnerships,
which in turn will grow our revenues. We also intend to focus on recruiting OEM partners
that will incorporate our Magic xpi integration technology into their product offerings.
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Acquire
complementary businesses. As part of our growth strategy,
we will continue to seek and evaluate opportunities to grow through acquisitions of companies
and operations with complementary software solutions, technologies and related intellectual
property, packaged software solutions, augmenting integration and services capabilities,
additional distribution channels or market share. We have a strict acquisition policy
pursuant to which we only pursue acquisitions in cases we identify as having a clear
business opportunity and a clear path to revenue growth. In addition, we only pursue
acquisitions which we believe entail low integration and operational risk as a result
of our internal familiarity with the target or the industry in which it operates, through
our network of MSPs, system integrators, distributors, resellers, and consulting and
OEM partners. We intend to balance any investments in such acquisitions with investments
in our existing business and our policy of returning value to shareholders in the form
of dividends.
|
Product
Development
We
place considerable emphasis on research and development in order to improve and expand the functionality of our technologies and
to develop new applications. We believe that our future success depends upon our ability to maintain our technological leadership,
to enhance our existing products and to introduce new commercially viable products addressing the needs of our customers on a
timely basis. We also intend to support emerging technologies as they are introduced in the same way we have supported new technologies
in the past. We will continue to devote a significant portion of our resources to research and development. We believe that internal
development of our technology is the most effective means of achieving our strategic objective of providing an extensive, integrated
and feature-rich development technology. For significant version release see “Magic’s Software Solutions” discussed
above.
Product
Related Services
Professional
Services. We offer fee-based consulting services in connection with installation assurance, application audits and performance
enhancement, application migration and application prototyping and design. Consulting services are aimed at generating both additional
revenues and ensuring successful implementation of Magic xpa, Appbuilder, Magic xpi Magic xpc, SmartUX and FactoryEye projects
through knowledge transfer. As part of management efforts to focus on license sales, our goal is to provide such activities as
a complementary service to our customers and partners. We believe that the availability of effective consulting services is an
important factor in achieving widespread market acceptance.
Services
are offered as separately purchased add-on packages or as part of an overall software development and deployment technology framework.
Over the last several years, we have built upon our established global presence to form business alliances with our MSPs that
use our technology to develop solutions for their customers, and distributors to deliver successful solutions in focused market
sectors.
Maintenance.
We offer our customers annual maintenance contracts providing for unspecified upgrades and new versions and enhancements for
our products on a when-and-if-available basis for an annual fee.
Customer
Support. We believe that a high level of customer support is important to the successful marketing and sale of
our products. Our in-house technical support group provides training and post-sale support. We believe that effective technical
support during product evaluation as well as after the sale has substantially contributed to product acceptance and customer satisfaction
and will continue to do so in the future.
We
offer online support systems for our MSPs and end users, providing them with the ability to instantaneously enter, confirm and
track support requests through the Internet. These systems support MSPs and end-users worldwide. As part of this online support,
we offer Support Knowledge Base tools providing the full range of technical notes and other documentation including technical
papers, product information, and answers to most common customer queries and known issues that have already been reported.
Training.
We conduct formal and organized training on our development tools and packaged software solutions. We develop courses, pertaining
to our principal products and provide trainer and student guidebooks. Course materials are available both in traditional, classroom
courses and as web-based training modules, which can be downloaded and studied at the student’s own pace and location. The
courses and course materials are designed to accelerate the learning process, using an intensive technical curriculum in an atmosphere
conducive to productive training.
IT
Services
Background
Our
IT services offerings consist of a variety of professional services that can be grouped into integration and other IT services.
Our integration services include:
|
●
|
Infrastructure
analysis, design and delivery - management of complex, tailor-made projects and telecom
infrastructure projects in wireless and wire-line as well as IT consulting services,
mainly for the defense and public sectors.
|
|
●
|
Technology
consulting and implementation services - planning and execution of end-to-end, large-scale,
complex solutions in networking, cyber security, command & control and high performance
transaction systems.
|
|
●
|
Application
development - We specialize in end-to-end projects that feature an array of technologies,
from development and implementation of concepts for startups to overall responsibility
for the development of systems for large enterprises. Our development services include
development of on-premise, mobile and cloud applications as well as Embedded and real
time software development.
|
With
more than 1,700 experts and hundreds of projects gone live in a variety of advanced technologies in the U.S., Europe and Israel,
we have developed significant expertise and accumulated vast experience in integration projects. Such projects are typically more
complex and require a high level of industry knowledge and highly skilled professionals. Our integration expertise, as well as
our global reach allows us to deliver comprehensive, value added services to our customers. Our IT services customers include
major global telecoms, OEMs and engineering, furnish and installation service companies.
Strategic
Consulting and Outsourcing Services
We
provide a broad range of IT consulting services in the areas of infrastructure design and delivery, application development, technology
planning and implementation services, cloud computing, as well as supplemental outsourcing services. Our wholly-owned subsidiaries,
Fusion Solutions LLC, Xsell Resources Inc., Allstates Consulting Services LLC, Futurewave Systems, Inc., NetEffects, Inc, OnTarget
Group, Inc, the Comm-IT Group, Infinigy Solutions LLC., Comblack Ltd. and Shavit Software (2009) Ltd. provide advanced IT consulting
and outsourcing services to a wide variety of companies including Fortune 1000 companies. Our technical personnel generally supplement
the in-house capabilities of our customers. Our approach is to make available a broad range of technical personnel to meet the
requirements of our customers rather than focusing on specific specialized areas. We have extensive knowledge of and have worked
with virtually all types of wireless and wireline telecom infrastructure technologies as well as in the areas of infrastructure
design and delivery, application development, project management, technology planning and implementation services. Our consulting
partners come from a wide range of industries, including finance, insurance, government, health care, logistics, manufacturing,
media, retail and telecommunications. With an experienced team of recruiters in the telecom and IT areas and with a substantial
and a growing database of telecom talent, we can rapidly respond to a wide range of requirements with well qualified candidates.
Our customer list includes major global telecoms, OEMs and engineering, furnish and installation service companies. We have built
long-term relationships with our customers by providing expert telecom talent. We provide individual consultants for contract
and contract-to-hire assignments as well as candidates for full time placement. In addition, we configure teams of technical consultants
for assigned projects at our customers’ sites.
Customers,
End-Users and Markets
We
market and sell our products and services in more than 50 countries worldwide. The following tables present our revenues by revenue
type and geographical market for the periods indicated:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Software sales
|
|
$
|
28,084
|
|
|
$
|
25,454
|
|
|
$
|
21,644
|
|
Maintenance and technical support
|
|
|
30,996
|
|
|
|
30,951
|
|
|
|
30,386
|
|
Consulting services
|
|
|
266,550
|
|
|
|
227,970
|
|
|
|
206,110
|
|
Total revenues
|
|
$
|
325,630
|
|
|
$
|
284,375
|
|
|
$
|
258,140
|
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Israel
|
|
$
|
124,523
|
|
|
$
|
103,850
|
|
|
$
|
91,917
|
|
Europe
|
|
|
25,788
|
|
|
|
28,257
|
|
|
|
26,635
|
|
United States.
|
|
|
158,095
|
|
|
|
137,066
|
|
|
|
123,113
|
|
Japan
|
|
|
12,499
|
|
|
|
9,797
|
|
|
|
9,253
|
|
Other
|
|
|
4,725
|
|
|
|
5,405
|
|
|
|
7,222
|
|
Total revenues
|
|
$
|
325,630
|
|
|
$
|
284,375
|
|
|
$
|
258,140
|
|
Our
Magic xpa, Magic xpi, Magic xpc, Magic SmartUX, FactoryEye, and AppBuilder technologies are used by a wide variety of developers,
integrators and solution providers, that can generally be divided into two sectors (i) those performing in-house development (corporate
IT departments), and (ii) MSPs, including large system integrators and smaller independent developers, and VARs that use our technology
to develop or provide solutions to their customers. MSPs who are packaged software publishers use our technology to write standard
packaged software products that are sold to multiple customers, typically within a vertical industry sector or a horizontal business
function.
Among
the thousands of customers running their business systems with our technology are the following:
ABB Group
Able B.V.
ADD
Adidas Canada
Adecco Nederland
Agricultural Bank of China
Allstate Life Insurance
ATLAS Grupo Financiero
Seguros y Fianzas
Auchan
AutoScout24
Axesor Powers
Bank Leumi
BNP Paribas
Boston Medical Center
CBIA
Çelebi Ground Handling Inc.
Centric
Christie Digital
Club Med
Coca Cola
Crane & Co.
Datenlotsen
Eco-Emballages
Electra
Export-Import Bank of Thailand
Ekro
Euroclear
Farm Mutual Reinsurance Plan
Finanz Informatik
Fiskars
Franken Brunnen
Fujitsu Marketing
Fujitsu-Ten
|
Fukushima Bank
Gakken
GE Capital
GGD Amsterdam
Grange Company
Groupe Flo
Grupo Inversionistas en
Autotransportes Mexicanos
Guardian Life Insurance
Hebrew University of Jerusalem
Hitachi Systems
IDF
ING Commercial Finance BV
ISS
Japan Chamber of Commerce
Korea Development Bank (KDB)
Lekkerland Nederland BV
Lloyds Bank
L’Occitane
Loxam
MatrixCare
Mahindra & Mahindra
Moose Toys
Morgan Advanced Materials
Mundipharma
Nagarjuna Fertilizers & Chemicals Ltd.
Nespresso
NextiraOne
NHS Trust
Nihon UNISYS
Nintendo
Orangina Schweppes
Pacific Steel & Recycling
Parrot
|
Petzl
PGG Wrightson
PTT
QboCel Mexico
Rosenbauer
Segafredo France
Sennheiser
Sony DADC
Staff Development Management Systems (SDMS
Ltd)
SECOM Trust Systems
Sodiaal
Stallergenes
State of Washington Courts
Sterling Crane
Sun Life Insurance
Synbra Holding BV
Telenet Belgium
TelOne Zimbabwe
The Himalaya Drug Company
TOA
TOTO
UPS
Valeo services
Veolia Waters
Viparis
Vishay Intertechnology
Vodafone Iceland
Volvo Brazil
WellMark
Worldwide Flight Services (WFS)
ZF Lemforder
|
Sales,
Marketing and Distribution
We
market, sell and support our products through our own global offices and marketing department, as well as through a broad global
channel-network of MSPs, system integrators, value-added distributors and resellers, and OEM and consulting partners. Our sales
force is based in our regional offices in the United States, Japan, Germany, United Kingdom, Netherlands, France, Hungary, South
Africa, India and Israel, and through regional distributors elsewhere. Our sales network is present in about 50 countries worldwide.
Direct
Sales. For Magic xpa and AppBuilder, our direct sales force pursues software solution providers and enterprise
accounts. Our sales personnel carry out strategic sales with a direct approach to decision makers, managing a constantly monitored
consultative type of sales cycle. Magic xpi, FacrotyEye and Magic xpc are mostly sold through indirect channels and through our
ecosystem business relationships, but we have some direct customers with integration needs.
As
of December 31, 2019, we employed approximately 158 sales and marketing personnel including, a team of sales engineers who provide
pre-sale technical support, presentations and demonstrations in order to support our sales force.
Indirect
Sales. We maintain an indirect sales channel, through our ecosystem business relationships, as well as through
system integrators, value added distributors and resellers, OEM partners, as well as consultancies and service providers. We maintain
an indirect sales channel for Magic xpa through MSPs and system integrators, who use our application and integration platforms
to develop and deploy different applications for sale to their end-user customers.
Distributors.
In general, we distribute our products through regional non-exclusive distributors in those countries where we do not have
a sales office. A regional distributor is typically a software marketing organization with the capability to add value with consulting,
training and support. Distributors that are also MSPs are generally responsible for the implementation of both our application
platform and business and process integration suite and localization into their native languages. The distributors also translate
our marketing literature and technical documentation. Distributors must undergo our program of sales and technical training. Marketing,
sales, training, consulting, product and customer support are provided by the local distributor. We are available for backup support
for the distributor and for end-users. In coordination with the local subsidiaries and distributors, we also provide sales support
for large and multinational accounts. We have 44 distributors in Europe, Latin America and Asia, many of whom are also MSPs.
VARs.
In general, we resell our products through VARs that extend their capabilities with our offerings. These include SAP VARs.
Global
Marketing Activities. We carry out a wide range of marketing activities aimed at generating awareness of our solutions
offerings and to promote sales. Among our activities, we focus both on both outbound and inbound marketing, including a content-rich
website available in eight foreign languages, social networks communication, search engine optimization, on-line advertising,
lead generation campaigns, public relations, case studies, blogs, industry analyst relations, attendance at conferences and trade
shows and lead generation campaigns around key professional white papers and webinars. We conduct distributor and user conferences
to update our worldwide affiliates and user base on our new product offerings, marketing and promotional activities, pricing,
best practices, technical information and other information.
In
light of the increased impact of cloud and enterprise mobility technologies on the IT landscape, in 2011 we commenced a strategic
marketing repositioning initiative that led to a complete rebranding of certain of our products’ look, feel and naming (to
emphasize that our products belong to the same technology stack), messaging, as well as a refined definition of our market positioning,
value proposition and corporate values. In June 2012, we launched the new branding after we completed the strategic repositioning
and designed a fresh and dynamic new logo, a new corporate tagline as well as fully re-written web site in English and seven other
languages. To expand our community of developers and reach out to new audiences around the world, we run an ongoing introductory
campaign, which offers Magic xpa Single User Edition as a freely downloadable product. Magic xpa Single User Edition is an ideal
gateway for new developers who want to join Magic Software’s global community and take advantage of new opportunities as
their businesses grow. Thousands of developers around the world have downloaded, learned and used Magic xpa Single User Edition,
and we are confident that this campaign will increase their understanding, awareness and adoption of our application platform.
We
use the Salesforce.com CRM platform and the Hubsopt marketing automation tool globally to connect all our lead generation campaigns
with our sales pipeline management. We have aligned all our local offices to work according to the same global sales and marketing
processes. We have also used our own Magic xpi Integration Platform to automate processes between our Salesforce and SAP systems
to increase efficiency.
Competition
The
markets for our Enterprise Mobility Solution, and Magic xpa and Magic xpi platforms are characterized by rapidly changing technology,
evolving industry standards, frequent new product introductions, mergers and acquisitions, and rapidly changing customer requirements.
These markets are therefore highly competitive, and we expect competition to continue to intensify. The growth of the cloud adoption
and mobile markets increases the competition in these areas. We constantly follow and analyze the market trends and our competitors
in order to effectively compete in these markets and avoid losing market share to our direct competitors and other players.
With
Magic xpa, we compete in the low-code application platform, SOA architecture and enterprise mobility markets. Among our
current competitors are OutSystems, Appien, Mendix, Kony, Microsoft, and Pegasystems. With Magic xpi, we compete in the integration
platform market. Among our current competitors are IBM, Informatica, TIBCO, MuleSoft, Jitterbit, Talend, Dell–Boomi, Scribe
and Software AG.
More
and more enterprises prefer to integrate their applications using integration platform as a service (iPaaS) technology and for
this purpose we launched our new Magic xpc, a hybrid iPaaS solution.
There
are several similar products in the market utilizing the model driven architecture, or MDA, approach utilized by AppBuilder. The
market for this type of platform is highly competitive. Companies such as CA and IBM have tools that compete directly with AppBuilder.
Furthermore, new development paradigms have become very popular in IT software development and developers today have many alternatives.
As
our market grows, we expect that it will attract more highly specialized vendors as well as larger vendors that may continue to
acquire or bundle their products more effectively. The principal competitive factors in our market include:
|
●
|
platform
features, reliability, performance and effectiveness;
|
|
●
|
platform
extensibility and ability to integrate with other technology infrastructures;
|
|
●
|
deployment
flexibility;
|
|
●
|
robustness
of professional services and customer support;
|
|
●
|
price
and total cost of ownership;
|
|
●
|
strength
of platform security and adherence to industry standards and certifications; and
|
|
●
|
strength
of sales and marketing efforts.
|
We
believe we generally compete favorably with our competitors with respect to the features, security and performance of our platform,
the ease of integration of our applications and the relatively low total cost of ownership of our applications. However, many
of our competitors have substantially greater financial, technical and other resources, greater name recognition, larger sales
and marketing budgets, broader distribution, more diversified product lines and larger and more mature intellectual property portfolios.
The
telecom BSS domain in which we operate through our FTS subsidiary is a highly competitive market in which we compete based on
product quality, service quality, timeliness in delivery and pricing. Within the global billing, charging and policy control market,
FTS principally competes against global IT providers and the in-house IT departments of telecommunications operators. Among the
competitors focused on this market are Amdocs, Ericsson, Comverse, NetCracker Technology, CSG Systems, Redknee Solutions and Oracle
Communications.
There
are also a number of smaller or regional telecom BSS competitors who compete on a regional or domestic market level. These tend
to be smaller players, and may include companies such as Comarch, Mind CTI, Tecnotree, Cerillion, Openet and Elitcore, among others.
Additional
competitors may enter each of our markets at any time. Moreover, our customers may choose to develop internally the functionality
and capabilities our current product line offers them and therefore they may also compete with us.
Our
goal is to maintain our technological advantages, time to market and worldwide sales and distribution network. We believe that
the principal competitive factors affecting the market for our products include developer productivity, rapid results, product
functionality, performance, reliability, scalability, portability, interoperability, ease-of-use, demonstrable economic benefits
for developers and users relative to cost, quality of customer support and documentation, ease of installation, vendor reputation
and experience, financial stability as well as intuitive and out-of-the-box solutions to extend the capabilities of ERP, CRM and
other application vendors for enterprise integration.
Intellectual
Property
In
accordance with industry practice, since we have no registered patents on our software solution technologies, we rely upon a combination
of copyright, trademark, trade secret laws and contractual restrictions to protect our rights in our software products. Our policy
has been to pursue copyright protection for our software and related documentation and trademark registration of our product names.
In addition, our key employees and independent contractors and distributors are required to sign non-disclosure and secrecy agreements.
We
provide our products to customers under a non-exclusive, non-transferable license. Usually, we have not required end-users of
our products to sign license agreements. Generally, a “shrink wrap” license agreement is included in the product packaging,
which explains that by opening the package seal, the user is agreeing to the terms contained therein. It is uncertain whether
license agreements of this type are legally enforceable in all of the countries in which the software is marketed.
We
do not believe that patent laws are a significant source of protection for our products since the software industry is characterized
by rapid technological changes, the policing of unauthorized use of software is a difficult task and software piracy is expected
to continue to be a persistent problem for the packaged software industry. As there can be no assurance that the above-mentioned
means of legal protection will be effective against piracy of our products, and since policing unauthorized use of software is
difficult, software piracy can be expected to be a persistent potential problem.
We
believe that because of the rapid pace of technological change in the software industry, the legal protections for our products
are less significant factors in our success than the knowledge, ability and experience of our employees, the frequency of product
enhancements and the timeliness and quality of our support services.
Our
trademark rights include rights associated with our use of our trademarks and rights obtained by registration of our trademarks.
We have obtained trademark registrations in South Africa, Canada, China, Israel, the Netherlands (Benelux), Switzerland, Thailand,
Japan, the United Kingdom and the United States. The initial terms of the registration of our trademarks range from 10 to 20 years
and are renewable thereafter. Our use and registration of our trademarks do not ensure that we have superior rights to others
that may have registered or used identical or related marks on related goods or services. We have registered a copyright for our
software in the United States and Japan. In addition, we have registered copyrights for some of our manuals in the United States
and have acquired an International Standard Book Number (ISBN) for some of our manuals. Our copyrights expire 70 years from date
of first publication.
|
C.
|
Organizational
Structure
|
The
following table sets forth the legal name, location and country or state of incorporation and percentage ownership of our subsidiaries
as of December 31, 2019:
Subsidiary Name
|
|
Country of
Incorporation
|
|
Ownership
Percentage
|
|
Magic Software Japan K.K
|
|
Japan
|
|
|
100
|
%
|
Magic Software Enterprises Inc.
|
|
Delaware
|
|
|
100
|
%
|
Magic Software Enterprises (UK) Ltd
|
|
United Kingdom
|
|
|
100
|
%
|
Hermes Logistics Technologies Limited
|
|
United Kingdom
|
|
|
100
|
%
|
Magic Software Enterprises Spain Ltd
|
|
Spain
|
|
|
100
|
%
|
Coretech Consulting Group, Inc.
|
|
Pennsylvania
|
|
|
100
|
%
|
Coretech Consulting Group LLC
|
|
Delaware
|
|
|
100
|
%
|
Fusion Solutions LLC.
|
|
Delaware
|
|
|
100
|
%
|
Fusion Technical Solutions LLC.
|
|
Delaware
|
|
|
49
|
%
|
Xsell Resources Inc.
|
|
Pennsylvania
|
|
|
100
|
%
|
Magic Software Enterprises (Israel) Ltd
|
|
Israel
|
|
|
100
|
%
|
Magic Software Enterprises Netherlands B.V.
|
|
Netherlands
|
|
|
100
|
%
|
Magic Software Enterprises France
|
|
France
|
|
|
100
|
%
|
Magic Beheer B.V.
|
|
Netherlands
|
|
|
100
|
%
|
Magic Benelux B.V.
|
|
Netherlands
|
|
|
100
|
%
|
Subsidiary Name
|
|
Country of
Incorporation
|
|
Ownership
Percentage
|
|
Magic Software Enterprises GMBH
|
|
Germany
|
|
|
100
|
%
|
Magic Software Enterprises India Pvt. Ltd
|
|
India
|
|
|
100
|
%
|
Onyx Magyarorszag Szsoftverhaz
|
|
Hungary
|
|
|
100
|
%
|
Magix Integration (Proprietary) Ltd
|
|
South Africa
|
|
|
100
|
%
|
AppBuilder Solutions Ltd
|
|
United Kingdom
|
|
|
100
|
%
|
Complete Business Solutions Ltd
|
|
Israel
|
|
|
100
|
%
|
Datamind Technologies Ltd
|
|
Israel
|
|
|
80
|
%
|
CommIT Technology Solutions Ltd
|
|
Israel
|
|
|
77.8
|
%
|
CommIT Software Ltd (shares held by Comm-IT Technology Solutions Ltd.)
|
|
Israel
|
|
|
100
|
%
|
CommIT Embedded Ltd (shares held by Comm-IT Technology Solutions Ltd.)
|
|
Israel
|
|
|
75
|
%
|
Valinor Ltd. (shares held by Comm-IT Technology Solutions Ltd.)
|
|
Israel
|
|
|
100
|
%
|
Dario Solutions IT Ltd (shares held by Comm-IT Technology Solutions Ltd.)
|
|
Israel
|
|
|
100
|
%
|
Quickode Ltd (shares held by Comm-IT Technology Solutions Ltd.)
|
|
Israel
|
|
|
100
|
%
|
Twingo Ltd (shares held by Comm-IT Technology Solutions Ltd.)
|
|
Israel
|
|
|
60
|
%
|
Pilat Europe Ltd.
|
|
United Kingdom
|
|
|
100
|
%
|
Pilat (North America), Inc.
|
|
New Jersey
|
|
|
100
|
%
|
Roshtov Software Industries Ltd
|
|
Israel
|
|
|
60
|
%
|
BridgeQuest Labs, Inc..
|
|
North Carolina
|
|
|
100
|
%
|
BridgeQuest, Inc.
|
|
North Carolina
|
|
|
100
|
%
|
Allstates Consulting Services LLC
|
|
Delaware
|
|
|
100
|
%
|
F.T.S. - Formula Telecom Solutions Ltd.
|
|
Israel
|
|
|
100
|
%
|
FTS Bulgaria Ltd. (FTS Global Ltd.)
|
|
Bulgaria
|
|
|
100
|
%
|
Comblack IT Ltd
|
|
Israel
|
|
|
70
|
%
|
Yes-IT Ltd. (shares held by Comblack IT Ltd)
|
|
Israel
|
|
|
100
|
%
|
Shavit Software (2009) Ltd. (shares held by Comblack Ltd)
|
|
Israel
|
|
|
100
|
%
|
Infinigy (UK) Holdings Limited
|
|
United Kingdom
|
|
|
100
|
%
|
Infinigy (US) Holding Inc
|
|
Georgia
|
|
|
100
|
%
|
Infinigy Solutions LLC.
|
|
Georgia
|
|
|
70
|
%
|
Infinigy Engineering LLP (shares held by Infinigy Solutions LLC.).
|
|
Georgia
|
|
|
99.9
|
%
|
Skysoft Solutions Ltd.
|
|
Israel
|
|
|
75
|
%
|
Futurewave Systems, Inc.
|
|
Georgia
|
|
|
100
|
%
|
OnTarget Group, Inc
|
|
North Carolina
|
|
|
100
|
%
|
NetEffects, Inc.
|
|
Missouri
|
|
|
100
|
%
|
PowWow Inc.
|
|
California
|
|
|
100
|
%
|
BA Microwaves Ltd.
|
|
Israel
|
|
|
56.67
|
%
|
|
D.
|
Property,
Plants and Equipment
|
Our
headquarters and principal administrative, finance, sales, marketing and research and development office is located in a 23,841
square foot office facility that we lease in Or Yehuda, Israel, a suburb of Tel Aviv. We paid $0.4 million in annual rent for
the Or Yehuda facilities under a lease agreement expiring in April 2020.
Our
subsidiaries lease office space in Laguna Hills, California; King of Prussia, Pennsylvania; Dallas, Texas; Houston, Texas; New
Jersey; Atlanta, Georgia; Paris, France; Munich, Germany; Pune, India; Bangalore, India; Tokyo, Japan; Budapest, Hungary; Houten,
the Netherlands; Johannesburg, South Africa; Bracknell, the United Kingdom; Saint Petersburg, Russia and various locations in
Israel. The aggregate annual cost for such facilities was $3.0 million in the year ended December 31, 2019.
|
ITEM
4A.
|
UNRESOLVED
STAFF COMMENTS
|
Not
applicable.
|
ITEM
5.
|
OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
|
The
following discussion of our results of operations should be read together with our consolidated financial statements and the related
notes, which appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect
our current plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ materially from those
discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed
below and elsewhere in this annual report.
Background
We
were organized under the laws of Israel on February 10, 1983 and began operations in 1986. Our Ordinary Shares have been listed
on the NASDAQ Stock Market (symbol: MGIC) since our initial public offering in the United States on August 16, 1991. On January
3, 2011, our shares were transferred to the NASDAQ Global Select Market. Since November 16, 2000, our Ordinary Shares have also
traded on the Tel Aviv Stock Exchange, or the TASE, and since December 15, 2011, our shares have been included in the TASE’s
TA-125 Index.
Overview
We
develop market, sell and support application platforms, business and process integration and selected vertical comprehensive software
solutions packages. We have 40 active wholly-owned subsidiaries in the United States, Israel Europe, Asia and South Africa. Of
such subsidiaries, 21 are engaged in developing, marketing and supporting vertical applications, as well as in selling and supporting
our products, and 19 subsidiaries specialize in providing broad range of IT consulting and outsourcing services in the areas of
infrastructure design and delivery, application development, technology planning and implementation services, as well as supplemental
outsourcing services.
As
an IT technology innovator, we have many years of experience in assisting software companies and enterprises worldwide to produce
and integrate their business applications. Our application platforms, Magic xpa and AppBuilder, are used by thousands of enterprises
and MSPs to develop solutions for their users and customers in approximately 50 countries. We also provide maintenance and technical
support as well as professional services to our enterprise customers and to MSPs. In addition, we sell our Magic xpi and magic
xpc technologies for business integration to enterprises using specific popular software applications, such as SAP, Salesforce.com,
IBM i (AS/400) or Oracle JD Edwards and other business applications. We refer to these vendor-centered market sectors as ecosystems.
Vision
and Focus Areas
Our
vision of how the industry will evolve is being driven by the change in enterprise mobility, cloud computing and Big Data. We
believe that our technology and vast services will allow us to expand our offerings into the cloud and mobile enterprise markets
with speed, scale and flexibility. We intend to remain focused on both the technology and business architectures that will enable
our customers to take advantage of the cost efficiencies and competitive advantages conveyed by these technologies. We intend
to continue to prudently take advantage of opportunities to capture market transitions and to put our assets to use in existing
and new markets as the recovery continues. We believe that our strategy and our ability to innovate and execute may enable us
to improve our competitive position in difficult business conditions and may continue to provide us with long-term growth opportunities.
Key
Factors Affecting our Business
Our
operations and the operating metrics discussed below have been and will likely continue to be affected by certain key factors
as well as certain historical events and actions. The key factors affecting our business and results of operations include among
others, dependence on a limited number of core product families, selected vertical software solutions and services, competition,
ability to realize benefits from business acquisitions, dependence on a key customer for a significant percentage of our revenues
and changes in the mix of revenues generated by different revenue elements affect our gross margins and profitability. For further
discussion of the factors affecting our results of operations, see “Risk Factors.”
Dependence
on a limited number of core product families and services
We
derive a significant portion of our revenues from sales of application and integration platforms primarily under our Magic xpa,
Magic xpi, Magic xpc, Magic SmartUX and AppBuilder brands and from related professional services, software maintenance and technical
support as well as from packaged software solutions in several business verticals (mainly human recourses, cargo handling, patient
medical records and billing), and from other IT professional services, which include IT consulting and outsourcing services. Our
future growth depends heavily on our ability to effectively develop and sell new products developed by us or acquired from third
parties as well as add new features to existing products. A decrease in revenues from our principal products and services would
adversely affect our business, results of operations and financial condition.
Competition
We
compete with other companies in the areas of application platforms, business integration and business process management, and
in the applications and services markets in which we operate. The growth of the SaaS and Enterprise Mobility market has increased
the competition in these areas. We expect that such competition will continue to increase in the future, both with respect to
our technology, applications and services which we currently offer and applications and services which we and other vendors are
developing. Increased competition, direct and indirect, could adversely affect our business, financial condition and results of
operations.
We
also compete with other companies in the technical IT consulting and outsourcing services industry. This industry is highly competitive
and fragmented and has low entry barriers. We, through five of our subsidiaries in the United States and five of our subsidiaries
in Israel, compete for potential customers with providers of outsourcing services, systems integrators, computer systems consultants,
other providers of technical IT consulting services and, to a lesser extent, temporary personnel agencies. We expect competition
to increase, and we may not be able to remain competitive.
Some
of our existing and potential competitors are larger companies, have substantially greater resources than us, including financial,
technological, marketing, skilled human resources and distribution capabilities, and enjoy greater market recognition than us.
We may not be able to differentiate our products and services from those of our competitors, offer our products as part of integrated
systems or solutions to the same extent as our competitors, or successfully develop or introduce new products that are more cost-effective,
or offer better performance than our competitors. Failure to do so could adversely affect our business, financial condition and
results of operations.
Dependence
on key customers
We
depend on repeat product and professional services revenues from a certain base of existing customers. Our two largest customers
accounted for 18.2% and 15.8% of our revenues in the years ended December 31, 2018 and 2019, respectively and our five largest
customers accounted for 25.9% and 23.3% of our revenues in the years ended December 31, 2018 and 2019, respectively. If these
existing customers decide not to continue utilizing our professional services, not to renew their existing engagements, not to
continue using our products, or decide to significantly decrease their total expenditures with us, it may adversely affect our
business, results of operations and financial condition. While one of these five customers is under a contract until December
31, 2027, under their master services agreements, the other customers may terminate their agreements with us upon only a 30-days’
notice and without any penalty.
Revenue
Mix
We
derive our revenues from the sale of proprietary and third-party software licenses, related professional services, maintenance
and technical support as well as from other IT professional services. In recent years the decline in our gross margin was primarily
affected by the change in proportion of our revenues generated from the sale of each of those elements of our revenues. Our revenues
from the sale of our proprietary software licenses, related professional services, maintenance and technical support have higher
gross margins than our revenues from third party software licenses and IT professional and outsourcing services. Any increase
in the portion of third-party software license sales out of total license sales will decrease our gross profit margin. If the
relative proportion of our revenues from the sale of IT professional services continues to increase as a percentage of our total
revenues, our gross profit margins may continue to decline in the future.
We
may encounter difficulties in realizing the potential financial or strategic benefits of recent and future business acquisitions.
A
significant part of our business strategy is to pursue acquisitions and other initiatives based on strategy centered on three
key factors: growing our customer base, expanding geographically and adding complementary solutions to our portfolio— all
while we seek to ensure our continued high quality of services and product delivery. As such, in recent years we made numerous
of acquisitions. Mergers and acquisitions of companies are inherently risky and subject to many factors outside of our control
and no assurance can be given that our future acquisitions will be successful and will not adversely affect our business, operating
results, or financial condition. In the future, we may seek to acquire or make strategic investments in complementary businesses,
technologies, services or products, or enter into strategic partnerships or alliances with third parties in the future in order
to expand our business. Failure to manage and successfully integrate acquisitions could materially harm our business and operating
results. Prior acquisitions have resulted in a wide range of outcomes, from successful introduction of new products and technologies
to a failure to do so. Even when an acquired company has previously developed and marketed products, there can be no assurance
that new product enhancements will be made in a timely manner or that pre-acquisition due diligence will have identified all possible
issues that might arise with respect to such products.
If
we acquire another business, we may face difficulties, including:
|
●
|
Difficulties
in integrating the operations, systems, technologies, products, and personnel of the
acquired businesses or enterprises;
|
|
●
|
Diversion
of management’s attention from normal daily operations of the business and the
challenges of managing larger and more widespread operations resulting from acquisitions;
|
|
●
|
Potential
difficulties in completing projects associated with in-process research and development;
|
|
●
|
Difficulties
in entering markets in which we have no or limited direct prior experience and where
competitors in such markets have stronger market positions;
|
|
●
|
Insufficient
revenue to offset increased expenses associated with acquisitions; and
|
|
●
|
The
potential loss of key employees, customers, distributors, vendors and other business
partners of the companies we acquire following and continuing after announcement of acquisition
plans.
|
Impact
of Currency Fluctuations and of Inflation
Our
financial statements are stated in U.S. dollars, our functional currency. However, a substantial portion of our revenues and costs
are incurred in other currencies, particularly NIS, Euros, Japanese yen, and the British pound. We also maintain substantial non-U.S.
dollar balances of assets, including cash, accounts receivable, and liabilities, including accounts payable and debts to banks
and financial institutions. Therefore, fluctuations in the value of the currencies in which we do business relative to the U.S.
dollar may adversely affect our business, results of operations and financial condition. The depreciation of such other currencies
in relation to the U.S. dollar has the effect of reducing the U.S. dollar value of any of our liabilities which are payable in
those other currencies (unless such costs or payables are linked to the U.S. dollar). Such depreciation also has the effect of
decreasing the U.S. dollar value of any asset that is denominated in such other currencies or receivables payable in such other
currencies (unless such receivables are linked to the U.S. dollar). In addition, the U.S. dollar value of revenues and expenses
denominated in such other currencies would decrease. Conversely, the appreciation of any currency in relation to the U.S. dollar
has the effect of increasing the U.S. dollar value of any unlinked assets and the U.S. dollar amounts of any unlinked liabilities
and increasing the U.S. dollar value of revenues and expenses denominated in other currencies.
In
addition, while we incur a portion of our costs in NIS, the U.S. dollar cost of our operations in Israel is influenced by the
extent to which any increase in the rate of inflation in Israel is (or is not) offset, or is offset on a lagging basis, by a devaluation
of the NIS in relation to the U.S. dollar.
Because
exchange rates between the NIS, euro, Japanese Yen and the British pound and the U.S. dollar fluctuate continuously, exchange
rate fluctuations and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons
of our results. We cannot assure you that in the future our results of operations may not be adversely affected by currency fluctuations.
The
following table sets forth for the periods indicated, (depreciation) or appreciation of the U.S. dollar against the most important
currencies for our business and the Israeli consumer price index:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
New Israeli Shekel
|
|
|
(7.8
|
)%
|
|
|
8.1
|
%
|
|
|
(9.8
|
)%
|
|
|
(1.5
|
)%
|
|
|
(0.3
|
)%
|
Euro
|
|
|
2.0
|
%
|
|
|
4.6
|
%
|
|
|
(12.2
|
)%
|
|
|
3.5
|
%
|
|
|
(10.4
|
)%
|
Japanese Yen
|
|
|
(1.2
|
)%
|
|
|
(2.4
|
)%
|
|
|
(3.8
|
)%
|
|
|
(2.8
|
)%
|
|
|
(0.8
|
)%
|
British Pound
|
|
|
(3.1
|
)%
|
|
|
5.6
|
%
|
|
|
(9
|
)%
|
|
|
20.6
|
%
|
|
|
(4.9
|
)%
|
Israeli Consumer Price Index
|
|
|
0.6
|
%
|
|
|
0.8
|
%
|
|
|
0.4
|
%
|
|
|
(0.2
|
)%
|
|
|
(1.0
|
)%
|
Segments
We
report our results on the basis of two reportable business segments: software services (which include proprietary and non-proprietary
software technology and complementary services) and IT professional services. Set forth below is segment information for the years
ended December 31, 2017, 2018 and 2019.
|
|
Software
services
|
|
|
IT professional
services
|
|
|
Unallocated
expense
|
|
|
Total
|
|
|
|
(U.S. dollars in thousands)
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
77,100
|
|
|
$
|
181,040
|
|
|
$
|
-
|
|
|
$
|
258,140
|
|
Expenses
|
|
|
63,649
|
|
|
|
164,558
|
|
|
|
3,977
|
|
|
|
232,184
|
|
Operating income (loss)
|
|
$
|
13,451
|
|
|
$
|
16,482
|
|
|
$
|
(3,977
|
)
|
|
$
|
25,956
|
|
Depreciation, amortization and stock-based compensation expenses
|
|
|
9,242
|
|
|
|
4,100
|
|
|
|
347
|
|
|
|
13,689
|
|
Capitalized software development costs
|
|
|
(3,771
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,771
|
)
|
EBITDA
|
|
$
|
18,922
|
|
|
$
|
20,582
|
|
|
$
|
(3,630
|
)
|
|
$
|
35,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
81,332
|
|
|
$
|
203,043
|
|
|
$
|
-
|
|
|
$
|
284,375
|
|
Expenses
|
|
|
63,902
|
|
|
|
183,985
|
|
|
|
4,790
|
|
|
|
252,677
|
|
Operating income (loss)
|
|
$
|
17,430
|
|
|
$
|
19,058
|
|
|
$
|
(4,790
|
)
|
|
$
|
31,698
|
|
Depreciation, amortization and stock-based compensation expenses
|
|
|
8,727
|
|
|
|
3,611
|
|
|
|
420
|
|
|
|
12,758
|
|
Capitalized software development costs
|
|
|
(3,666
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,666
|
)
|
EBITDA
|
|
$
|
22,491
|
|
|
$
|
22,669
|
|
|
$
|
(4,370
|
)
|
|
$
|
40,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
86,140
|
|
|
$
|
239,490
|
|
|
$
|
-
|
|
|
$
|
325,630
|
|
Expenses
|
|
|
71,825
|
|
|
|
216,842
|
|
|
|
3,311
|
|
|
|
291,978
|
|
Operating income (loss)
|
|
$
|
14,315
|
|
|
$
|
22,648
|
|
|
$
|
(3,311
|
)
|
|
$
|
33,652
|
|
Depreciation, amortization and stock-based compensation expenses
|
|
|
8,799
|
|
|
|
5,059
|
|
|
|
241
|
|
|
|
14,099
|
|
Capitalized software development costs
|
|
|
(4,143
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,143
|
)
|
EBITDA
|
|
$
|
19,383
|
|
|
$
|
28,330
|
|
|
$
|
(2,903
|
)
|
|
$
|
44,823
|
|
Explanation
of Key Income Statement Items
Revenues.
Revenues are derived from sales of software licenses (proprietary and non-proprietary), related professional services, maintenance
and technical support and other IT professional services, which include, cloud computing and IT consulting and outsourcing services.
Revenues may continue to be affected by factors including market uncertainty, which can result in cautious spending in our global
markets; changes in the geopolitical environment; sales cycles; fluctuation of exchange rates; changes in the mix of direct sales
and indirect sales and variations in sales channels.
Cost
of Revenues. Cost of revenues for software sales consist primarily of software production costs, royalties and licenses
payable to third parties, as well as amortization of capitalized and acquired software costs. Cost of revenues for maintenance
and technical support and professional services consists primarily of personnel expenses, subcontracting and other related costs.
Cost of revenues for software sales is affected by changes in the mix of products sold; price competition; sales discounts; fluctuation
of exchange rates; and increases in labor costs. Service gross margin may be impacted by various factors such as the change in
mix between technical support services and advanced IT professional services, the timing of technical support service contract
initiations and renewals and the timing of our strategic investments in headcount and resources to support this business.
Research
and Development Expenses, Net. Research and development costs consist primarily of personnel expenses of employees engaged
in on-going research and development activities, subcontracting, development tools and other related expenses. The capitalization
of software development costs is applied as reductions to gross research and development costs to calculate net research and development
expenses.
The
following table sets forth the gross research and development costs, capitalized software development costs, and the net research
and development expenses for the periods indicated:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(U.S. dollars in thousands)
|
|
Gross research and development costs
|
|
$
|
12,382
|
|
|
$
|
9,362
|
|
|
$
|
10,713
|
|
Less capitalized software development costs
|
|
|
(4,143
|
)
|
|
|
(3,666
|
)
|
|
|
(3,771
|
)
|
Research and development expenses, net
|
|
$
|
8,239
|
|
|
$
|
5,696
|
|
|
$
|
6,942
|
|
Selling
and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related expenses for sales
and marketing personnel, sales commissions, third party royalties, marketing programs and campaigns, website related expenses,
public relations, on-line advertising, industry analyst relations, promotional materials, travel expenses and conferences and
trade shows exhibit expenses, as well as amortization of acquired customer relationships recorded as a result of business combinations.
General
and Administrative Expenses. General and administrative expenses consist primarily of salaries and related expenses
for executive, accounting, human resources and administrative personnel, professional fees, legal expenses, provisions for doubtful
accounts, and other general and administrative corporate expenses.
Financial
income (expenses), net. Net financial income (expenses) consists primarily of interest earned on cash equivalents
deposits and marketable securities, bank fees and interest paid on loans received, interest expenses related to liabilities in
connection with acquisitions and impact of foreign currency exchange rates fluctuations.
Results
of Operations
The
following table presents selected consolidated statement of operations data for the periods indicated as a percentage of total
revenues:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
8.6
|
%
|
|
|
9.0
|
%
|
|
|
8.4
|
%
|
Maintenance and technical support
|
|
|
9.5
|
|
|
|
10.8
|
|
|
|
11.8
|
|
Consulting services
|
|
|
81.9
|
|
|
|
80.2
|
|
|
|
79.8
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
3.1
|
|
|
|
3.5
|
|
|
|
3.7
|
|
Maintenance and technical support
|
|
|
1.3
|
|
|
|
1.4
|
|
|
|
1.5
|
|
Consulting services
|
|
|
64.2
|
|
|
|
63.9
|
|
|
|
62.7
|
|
Total cost of revenues
|
|
|
68.6
|
|
|
|
68.8
|
|
|
|
67.9
|
|
Gross profit
|
|
|
31.4
|
|
|
|
31.2
|
|
|
|
32.1
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
2.5
|
|
|
|
2.0
|
|
|
|
2.7
|
|
Selling and marketing,
|
|
|
9.4
|
|
|
|
9.6
|
|
|
|
10.6
|
|
General and administrative
|
|
|
9.2
|
|
|
|
8.5
|
|
|
|
8.8
|
|
Total operating expenses, net
|
|
|
21.1
|
|
|
|
20.1
|
|
|
|
22.1
|
|
Operating income
|
|
|
10.3
|
|
|
|
11.1
|
|
|
|
10.1
|
|
Financial income (expenses), net
|
|
|
(0.3
|
)
|
|
|
0.1
|
|
|
|
(0.7
|
)
|
Income before taxes on income
|
|
|
10.0
|
|
|
|
11.2
|
|
|
|
9.4
|
|
Tax on income
|
|
|
(2.1
|
)
|
|
|
(2.5
|
)
|
|
|
(2.5
|
)
|
Net income attributable to redeemable non-controlling interests
|
|
|
(1.0
|
)
|
|
|
(1.2
|
)
|
|
|
(0.6
|
)
|
Net income attributable to non-controlling interests
|
|
|
(0.7
|
)
|
|
|
(0.5
|
)
|
|
|
(0.4
|
)
|
Net income attributable to Magic’s shareholders
|
|
|
6.2
|
|
|
|
7.0
|
|
|
|
6.0
|
|
Year
Ended December 31, 2019 Compared with Year Ended December 31, 2018
Revenues.
Revenues in 2019 increased by 15% from $284.4 million in 2018 to $325.6 million in 2019.
Revenues
from the software services business segment increased by 6%, from $81.3 million in 2018 to $86.1 million in 2019.
Revenues
from the IT professional services business segment increased by 18% from $203.0 million in 2018 to $239.5 million in 2019, primarily
attributable to the inclusion of OnTarget and NetEffects revenues after their acquisition.
Revenues
from sales of proprietary technology software licenses decreased by 3% from $17.0 million in 2018 to $16.4 million in 2019.
Revenues
from sales of proprietary packaged and third party software solutions increased by 37% from $8.5 million in 2018 to $11.6 million
in 2019, primarily attributable to strong demand for our Hermes Air Cargo Management System and for our Magic xpi and FactoryEye
integration platforms.
Revenues
from maintenance and technical support remained stagnant at $31.0 million in 2019 compared to 2018.
Revenues
from IT consulting services increased by 17% from $228.0 million in 2018 to $266.6 million in 2019. The increase was primarily
attributable to the inclusion of OnTarget and NetEffects revenues after their acquisition.
The
following table summarizes our revenues by geographical market for the years ended December 31, 2018 and 2019:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(U.S. dollars in thousands)
|
|
United States
|
|
$
|
158,095
|
|
|
$
|
137,066
|
|
Israel
|
|
|
124,523
|
|
|
|
103,850
|
|
Europe
|
|
|
25,788
|
|
|
|
28,257
|
|
Japan
|
|
|
12,499
|
|
|
|
9,797
|
|
Other
|
|
|
4,725
|
|
|
|
5,405
|
|
Total revenues
|
|
$
|
325,630
|
|
|
$
|
284,375
|
|
Cost
of Revenues. Cost of revenues increased by 14% from $195.6
million in 2018 to $223.5 million in 2019.
Cost
of revenues for software increased by 3% from $10.0
million in 2018 to $10.2 million in 2019.
Cost
of revenues for maintenance and technical support increased by 1% from $4.1 million
in 2018 to $4.2 million in 2019.
Cost
of revenues for IT consulting services increased by 15% from $181.5 million in 2018 to $209.1 million in 2019. The increase in
cost of revenues for IT consulting services is consistent with the increase in revenues from the same segment. Cost of revenues
for the years ended December 31, 2018 and 2019 include $2,000 and $0, respectively, of stock-based compensation recorded under
ASC 718.
Gross
Margin. Gross margin remained stagnant at 31% in 2019 compared to 2018.
Research
and Development Expenses, Net. Gross research and development costs increased by 32% from $9.4 million in 2018 to $12.3
million in 2019. Net research and development costs increased by 45% from $5.7 million in 2018 to $8.2 million in 2019. In 2019,
we capitalized $4.1 million of software development costs compared to $3.7 million in 2018. Net research and development costs
as a percentage of revenues was 2.5% in 2019 compared to 2.0% in 2018. Gross (net) research and development costs as a percentage
of revenues of our software services business segment was approximately 14% (10%) in 2019 compared to approximately 12% (7%) in
2018. The increase in our absolute gross and net research and development costs in 2019 is primarily due to our investments in
Magic SmartUX, Magic xpi and FactoryEye. Research and development costs for the years ended December 31, 2018 and 2019 include
$4,000 and $0, respectively, of stock-based compensation recorded under ASC 718.
Selling
and Marketing Expenses. Selling and marketing expenses increased by 12% from $27.2 million in 2018 to $30.5 million
in 2019. Selling and marketing expenses as a percentage of revenues remained relatively stable at 9.6% in 2018 versus 9.4% in
2019. Selling and marketing expenses for the years ended December 31, 2018 and 2019 include $4,000 and $74,000, respectively,
of stock-based compensation recorded under ASC 718.
General
and Administrative Expenses. General and administrative expenses increased by 23%
from $24.2 million in 2018 to $29.8 million
in 2019. General and administrative expenses as a percentage of revenues increased from 8.5% in 2018 to 9.1% in 2019. The increase
in general and administrative expenses is primarily attributable to the inclusion of OnTarget and NetEffects result of operation
commencing on their acquisition date. General and administrative expenses for the year ended December 31, 2018 includes $184,000
of stock-based compensation recorded under ASC 718.
Financial
Expenses, Net. We recorded net financial income of $0.1 million in 2018 and net financial expenses of $1.2 million in
2019. The change in net financial expenses (income) between 2018 and 2019 was primarily attributable to the revaluation of the
NIS in relation to the U.S. dollar on our NIS denominated debt to financial institution.
Taxes
on Income. We recorded taxes on income of $7.1 million in 2018 compared to $6.9 million in 2019.
Net
Income Attributable to Our Shareholders. Our net income increased from $19.9 million in 2018 to $20.3 million in
2019, primarily attributable to (i) an increase in gross profit of $13.3 million, (ii) a decrease in net income attributable to
redeemable non-controlling interests of $0.3 million, and (iii) a decrease in taxes on income of $0.2 million, which was offset
by (i) an increase in operating costs of $11.4 million, (ii) an increase in financial expenses, net of $1.3 million, and (iii)
an increase in net income attributable to non-controlling interests of $0.7 million.
Year
Ended December 31, 2018 Compared with Year Ended December 31, 2017
Please
see Item 5A of our Form 20-F for the Year ended December 31, 2018 filed on April 30, 2019 for this comparison.
|
B.
|
LIQUIDITY
AND CAPITAL RESOURCES
|
To
date, we have financed our operations through income generated by operations, proceeds from our public offerings in 1991 (approximately
$8.5 million), 1996 (approximately $5.0 million), 2000 (approximately $79.6 million) and 2014 (approximately $54.7 million), private
equity investments in 1998 (approximately $12.2 million), 2010 (approximately $20.3 million) and 2018 (approximately $34.6 million),
loans and research and development and marketing grants primarily from the Government of Israel. In addition, we have also financed
our operations through short-term loans, long-term loans and borrowings under available credit facilities.
In
November 2016, we obtained a NIS 120 million loan linked to the New Israel Shekel from an Israeli financial institution. We intended
to use the proceeds from this loan for our general corporate purposes, which may include the funding of our working capital needs
and the funding of potential acquisitions. The principal amount of the loan is payable in seven equal annual payments with the
final payment due on November 2, 2023 and bears a fixed interest rate of 2.60% per annum, payable in two semi-annually payments.
The loan, which may be prepaid under certain circumstances (in any event for not less than NIS 5.0 million and thereon for amounts
which are a multiple of NIS 5.0 million), is subject to various financial covenants which mainly consist of the following:
|
a.
|
Our
equity will not be lower than $100 million (one hundred million U.S. Dollars) at all
times;.
|
|
b.
|
Our
cash and cash equivalent and marketable securities available for sales will not be less
than $10 million (ten million U.S. Dollars);
|
|
c.
|
The
ratio of our total financial debts to total assets will not exceed 50%;
|
|
d.
|
The
ratio of our total financial debts less cash, short-term deposits and short-term marketable
securities to the annual EBITDA will not exceed 3.25 to 1;
|
|
e.
|
Cross
default, including following an immediate repayment initiated in relation to other financial
indebtedness in an amount that exceeds $5 million;
|
|
f.
|
Suspension
of trading of the debentures on the TASE over a period of 60 days, or the delisting of
the debentures from the TASE;
|
|
g.
|
If
there is a change in control without consent of the lender (a change of control is deemed
to occur if Formula ceases to be the controlling shareholder of our company, whether
directly or indirectly. Formula will be considered a controlling shareholder for so long
as it continues to hold at least 30% of the means of control of our company (within the
meaning of the Israeli Securities Law) and there is no other person or entity holding
a higher percentage. To the extent that Formula holds such controlling interest jointly
with others, it will be deemed to remain our controlling shareholder if it maintains
the highest percentage ownership among such other shareholders);
|
|
h.
|
The
existence and continuation of a bankruptcy event involving our company, or the liquidation
of our company or writing off of our assets;
|
|
i.
|
There
has been a material adverse change in the business of our company compared to the position
of our company shortly before the issuance of the loan and there is a material concern
that we will not be able to pay our obligations under the loan agreement on time; and
|
|
j.
|
Failure
to comply with the negative pledge covenant.
|
To
date, we are in full compliance with the financial covenants of the loan.
On
July 12, 2018, we issued 4,268,293 ordinary shares at a price of $8.20 per share for a total of $34.6 million net of issuance
expenses. The shares were issued to Israeli institutional investors and to our controlling shareholder, Formula Systems (1985)
Ltd.
As
of December 31, 2019, we had $95.5 million in cash and cash equivalents and available-for-sale
marketable securities, with net working capital of approximately $138.2 million and
long term debts to banks and others of approximately $15.5 million compared to $113.9
million in cash and cash equivalents and available-for-sale marketable securities, with net working capital of $158.3
million and long term debts to banks and others of $19.4 million, as of December 31, 2018.
As
of December 31, 2018 and 2019, our long-term and short-term debt amounted to $28.0 million and $22.6 million, respectively and
our redeemable non-controlling interests as of December 31, 2018 and 2019 amounted to $27.2 million and $21.9 million, respectively.
Based
on our current operating forecast, we believe that our cash and cash equivalents (including available-for-sale marketable securities
and existing working capital), will be sufficient to meet our cash requirements for working capital and capital expenditures for
at least the next 12 months. We assume that our cash provided by operating activities may fluctuate in future periods as a result
of a number of factors, including fluctuations in our operating results, accounts receivable collections, payments of loans and
the timing and amount of tax and other payments.
We
believe the overall credit quality of our portfolio is strong, with our cash equivalents and fixed income portfolio invested in
securities with a weighted-average credit rating exceeding A. Our fixed income and publicly traded equity securities are classified
as Level 2 investments, as measured under ASC 820, “Fair Value Measurements and Disclosures,” as these vendors either
provide a quoted market price in an active market or use observable inputs.
Cash
Flows
The
following table summarizes our cash flows for the periods presented:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(U.S. dollars in thousands)
|
|
Net income from operations
|
|
$
|
25,598
|
|
|
$
|
24,776
|
|
|
$
|
17,914
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
20,350
|
|
|
|
(726
|
)
|
|
|
7,594
|
|
Net cash provided by operating activities
|
|
|
45,948
|
|
|
|
24,050
|
|
|
|
25,508
|
|
Net cash used in investing activities
|
|
|
(15,440
|
)
|
|
|
(19,554
|
)
|
|
|
(7,316
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(36,980
|
)
|
|
|
8,426
|
|
|
|
(19,414
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,261
|
|
|
|
(1,872
|
)
|
|
|
1,984
|
|
Increase (decrease) in cash and cash equivalents from operations
|
|
|
(5,211
|
)
|
|
|
11,050
|
|
|
|
762
|
|
Net
cash provided by operating activities was $45.9 million for the year ended December 31, 2019, compared to $24.1 million and $25.5
million for the years ended December 31, 2018 and 2017, respectively.
Net
cash provided by operations in 2019 consisted primarily of $25.6 million of net income adjusted for non-cash activities, including
$14.0 million of depreciation and amortization expenses, $0.1 million of stock compensation expenses, a $6.5 million decrease
in trade receivables, net, a $9.6 million decrease in other long term and short term accounts receivable and prepaid expenses,
a $0.1 million of amortization of marketable securities premium, a $2.9 million increase in deferred revenues, and a $1.9 million
increase in value of loans which are denominated in NIS as a result of the appreciation of the NIS in relation to the U.S. dollar,
offset by a $1.9 million change in deferred taxes, net, a $5.3 million decrease in trade payables, and a $7.7 million decrease
in accrued expenses and other accounts payable.
Net
cash provided by operations in 2018 consisted primarily of $24.8 million of net income adjusted for non-cash activities, including
$12.6 million of depreciation and amortization expenses, $0.2 million of stock compensation expenses, a $2.2 million increase
in trade payables, a $0.2 million of amortization of marketable securities premium, a $1.8 million increase in accrued expenses
and other accounts payable, a $0.4 million decrease in deferred revenues, and a $2.1 million decrease in value of loans which
are denominated in NIS as a result of the devaluation of the NIS in relation to the U.S. dollar, offset by a $0.5 million change
in deferred taxes, net, a $4.4 million increase in in other long term and short term accounts receivable and prepaid expenses,
and a $11.4 million increase in trade receivables, net.
Net
cash provided by operations in 2017 consisted primarily of $17.9 million of net income adjusted for non-cash activities, including
$13.6 million of depreciation and amortization expenses, a $0.1 million of stock compensation expenses, a $3.6 million increase
in trade payables, a $0.2 million of amortization of marketable securities premium, a $4.4 million increase in accrued expenses
and other accounts payable, a $1.2 million increase in deferred revenues, and a $3.2 million increase in value of loans which
are denominated in NIS as a result of the appreciation of the NIS in relation to the U.S. dollar, offset by a $1.1 million change
in deferred taxes, net, a $1.8 million increase in in other long term and short term accounts receivable and prepaid expenses,
and a $15.8 million increase in trade receivables, net.
Net
cash used in investing activities was approximately $15.4 million for the year ended
December 31, 2019, compared to net cash used in investing activities of approximately $19.6
million for the year ended December 31, 2018 and net cash used in investing activities of approximately $7.3
million for the year ended December 31, 2017.
Net
cash used in investing activities in 2019 is primarily attributable to $10.0 million investment in short-term bank deposits, $0.7
investment in long-term bank deposits, $22.6 million used in business combinations, $1.4 million used to purchase property and
equipment and $4.1 million of capitalized software development costs, offset by $3.4 million provided by proceeds from maturity
of marketable securities.
Net
cash used in investing activities in 2018 is primarily attributable to $16.9 million investment in short-term bank deposits, $0.9
investment in long-term bank deposits, $1.2 million used in business combinations, $0.9 million used to purchase property and
equipment and $3.7 million of capitalized software development costs, offset by $4 million provided by proceeds from maturity
of marketable securities.
Net
cash used in investing activities in 2017 is primarily attributable to $5.8 million
investment in marketable securities, $1.8 million paid in connection with business
combinations, $1.4 million used primarily to purchase network equipment and computer
hardware, as well as for furniture, office equipment and leasehold improvements, and $3.8
million of capitalized software development costs, offset by, $1.2 million
repayment of short-term loan by a related-party, and $4.2 million provided by proceeds
from maturity of marketable securities.
Net
cash used in financing activities was approximately $37.0 million for the year ended
December 31, 2019, primarily attributable to dividend distributions of $15.0 million, dividends paid to non-controlling interests
of $0.5 million, dividends paid to redeemable non-controlling interests of $3.4
million, purchase of redeemable non-controlling interests of $5.6 million,
and repayment of short-term and long-term loans of $13.6 million, which were offset
by issuance of $0.1 million of ordinary shares, $0.1 million received from the exercise
of employee options, and short-term and long-term loans received of $0.9 million.
Net
cash provided by financing activities was approximately $8.4 million for the year
ended December 31, 2018, primarily attributable to the issuance of $34.6 million
of ordinary shares and $0.3 million received from the exercise of employee options, which were offset by $3.1 million used in
business combinations, dividend distributions of $13.5 million, dividends paid to redeemable non-controlling interests of $2.7
million, decrease in short-term credit of $0.4 million and repayment of long-term loans of $6.6
million.
Net
cash used in financing activities was approximately $19.4 million for the year ended
December 31, 2017, primarily attributable to dividend distributions of $9.4 million, dividend paid to non-controlling and redeemable
non-controlling interests of $5.9 million, repayment of long-term loans of $8.2
million and $5.1 million used in business combinations, offset by a $8.5 million
long-term loan received and $0.6 million received from the exercise of employee options.
Dividends
We
have paid dividends since September 2012 consistent with our Board of Directors’ dividend policy. On August 2017, our Board
of Directors amended our dividend distribution policy, whereas, each year we distribute a dividend of up to 75% of our annual
distributable profits (previously 50%), subject to applicable law. Our Board of Directors may at its discretion and at any time,
change, whether as a result of a one-time decision or a change in policy, the rate of dividend distributions or decide not to
distribute a dividend.
For
information about our dividend policy and distributions, see Item 8A. “Financial Information - Consolidated Statements and
Other Financial Information.”
General
Our
consolidated financial statements appearing in this annual report have been prepared in U.S. dollars and in accordance with U.S.
GAAP.
Transactions
and balances originally denominated in dollars are presented at their original amounts. Transactions and balances in currencies
other than the U.S. dollar are converted into dollars in accordance with the Financial Accounting Standards Board, or FASB, Accounting
Standards Codification, or ASC, 830 “Foreign Currency Matters.” The majority of our sales are made outside of Israel
and a substantial part of them is in dollars. In addition, a substantial portion of our costs is incurred in dollars. Since the
dollar is the primary currency of the economic environment in which we and certain of our subsidiaries operate, the dollar is
our functional and reporting currency and accordingly, monetary accounts maintained in currencies other than the dollar are remeasured
into dollars using the foreign exchange rate in effect at each balance sheet date. Operational accounts and non-monetary balance
sheet accounts are measured and recorded at the exchange rate in effect at the date of the transaction. For certain foreign subsidiaries
whose functional currency is other than the U.S. dollar, all balance sheet accounts have been translated using the exchange rates
in effect at each balance sheet date. Operational accounts have been translated using the average exchange rate prevailing during
each year. The resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss)
in equity.
Critical
Accounting Policies and Estimations
We
have identified the policies below as critical to the understanding of our financial statements. The preparation of our consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in certain circumstances
that affect the amounts reported in the accompanying financial statements and the related footnotes. Actual results may differ
from these estimates. To facilitate the understanding of our business activities, certain of our accounting policies that we believe
are the most important to the portrayal of our financial condition and results of operations and that require management’s
subjective judgments are described below. We base our judgments on our experience and various assumptions that we believe are
reasonable.
Revenue
Recognition
We
implemented the provisions of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with
Customers (“ASC 606”). See Note 19 to our financial statements included
in this annual report for further disclosures required under ASC 606.
Revenues
are recognized when control of the promised goods or services are transferred to the customers, in an amount that reflects the
consideration that we expect to receive in exchange for those goods or services.
We
determine revenue recognition through the following steps:
|
●
|
identification
of the contract with a customer;
|
|
●
|
identification
of the performance obligations in the contract;
|
|
●
|
determination
of the transaction price;
|
|
●
|
allocation
of the transaction price to the performance obligations in the contract; and
|
|
●
|
recognition
of revenue when, or as, we satisfy a performance obligation.
|
Certain
of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance
obligations separately if they are distinct.
We
derive our revenues from licensing the rights to use our software (proprietary and non-proprietary), provision of related professional
services, maintenance and technical support as well as from other software and IT professional services (either fixed price or
based on time and materials). We sell our products primarily through direct sales force and indirectly through distributors and
value added resellers.
Under
ASC 606, an entity recognizes revenue when or as it satisfies a performance obligation by transferring software license or software
services to the customer, either at a point in time or over time. We recognize our revenues from software sales at a point in
time upon delivery of a software license. The
software license is considered a distinct performance obligation, as the customer can benefit from the software on its own. Revenues
from contracts that involve significant customization to customer-specific specifications are performance obligations the we generally
account for as performance obligations satisfied over time. The underlying deliverable is owned and controlled by the customer
and does not create an asset with an alternative use to us. We recognize revenue of such contracts over time using cost inputs,
which recognize revenue and gross profit as work is performed based on a ratio between actual costs incurred compared to the total
estimated costs for the contract, to measure progress toward completion of its performance obligations, which is similar to the
method prior to the adoption of ASC 606. Provisions for estimated losses on uncompleted contracts are made in the period in which
such losses are first determined, in the amount of the estimated loss for the entire contract. During the years ended December
31, 2017, 2018 and 2019, no material estimated losses were identified. In addition, we provide professional services that do not
involve significant customization to customer-specific specifications. For contracts that do not involve significant customization
to customer-specific specifications (typically staffing or consulting services) revenue is recognized as the services are performed,
either on a straight-line basis or based on the hours of services that were provided to the customer, in accordance with the terms
of the contracts.
Our
revenues from post contract support are derived from annual maintenance contracts providing for unspecified upgrades for new versions
and enhancements on a when-and-if-available basis for an annual fee. The right for an unspecified upgrade for new versions and
enhancements on a when-and-if-available basis do not specify the features, functionality and release date of future product enhancements
for the customer to know what will be made available and the general timeframe in which it will be delivered. We consider the
post contract support performance obligation as a distinct performance obligation that is satisfied over time, and recognized
on a straight-line basis over the contractual period.
Revenue
from professional services both related to software and IT professional services businesses consists of either fixed price or
Time and Materials (T&M), and are considered performance obligations that are satisfied over time, and
revenues are recognized as the services are provided.
The
transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone
selling prices of software license are estimated using the residual approach, due to the lack of selling software licenses on
a standalone basis, or the fact Company sells the license to different customers for a broad range of amounts. Standalone selling
prices of services are determined by considering several external and internal factors including, but not limited to, transactions
where the specific performance obligation is sold separately.
We
generally do not grant a right of return to our customers. When a right of return exists, we defer revenue until the right of
return expires, at which time revenue is recognized provided that all other revenue recognition criteria are met.
Deferred
revenues include unearned amounts received under maintenance and support (mainly) and amounts received from customers for which
revenues have not yet been recognized.
Revenue
from third-party sales is recorded at a gross or net amount according to certain indicators. The application of these indicators
for gross and net reporting of revenue depends on the relative facts and circumstances of each sale and requires significant judgment.
We
pay commissions to sales and marketing and certain management personnel based on their attainment of certain predetermined sales
or profit goals. Sales commissions are considered incremental costs of obtaining a contract with a customer and are deferred and
amortized. We capitalize and amortize incremental costs of obtaining a contract, such as certain sales commission costs, on a
systematic basis that is consistent with the transfer to the customer of the performance obligations to which the asset relates.
We generally expense sales commissions as they are incurred when the amortization period would have been less than one year. In
addition, generally, sales commission which are paid upon contract renewal are commensurate with the initial commissions as the
renewal amounts are substantially identical to the initial commission costs. During the year ended December 31, 2019, no costs
were capitalized.
We
do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the
period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or
less.
Research
and development costs
Research
and development costs incurred in the process of software development before establishment of technological feasibility are charged
to expenses as incurred. Costs incurred subsequent to the establishment of technological feasibility are capitalized according
to the principles set forth in ASC 985-20, “Costs of Software to be Sold, Leased or Marketed.”
We
establish technological feasibility upon completion of a detailed program design or working model.
Research
and development costs incurred in the process of developing product enhancements are generally charged to expenses as incurred.
ASC
985-20-35 requires that a product be amortized when the product is available for general release to customers. We consider a product
to be available for general release to customers when we complete the internal validation of the product that is necessary to
establish that the product meets its design specifications including functions, features, and technical performance requirements.
Internal validation includes the completion of coding, documentation and testing that ensure bugs are reduced to a minimum. The
internal validation of the product takes place a few weeks before the product is made available to the market. In certain instances,
we enter into a short pre-release stage, during which the product is made available to a selected number of customers as a beta
program for their own review and familiarization. Subsequently, the release is made generally available to customers from our
download area. Once a product is considered available for general release to customers, the capitalization of costs ceases and
amortization of such costs to “cost of sales” begins.
Capitalized
software costs are amortized on a product by product basis by the straight-line method over the estimated useful life of the software
product (approximately 5 years, due to their high rates of acceptance, the continued reliance on these products by existing customers,
and the demand for such products from prospective customers, all of which validate our expectations) which provides greater amortization
expense compared to the revenue-curve method.
We
assess the recoverability of these intangible assets on a regular basis by assessing the net realizable value of these intangible
assets based on the estimated future gross revenues from each product reduced by the estimated future costs of completing and
disposing of it, including the estimated costs of performing maintenance and customer support over its remaining economical useful
life using internally generated projections of future revenues generated by the products, cost of completion of products and cost
of delivery to customers over its remaining economical useful life. During the years ended December 31, 2017, 2018 and 2019, no
such unrecoverable amounts were identified.
Research
and development costs incurred in the process of developing product enhancements are generally charged to expenses as incurred.
Business
Combinations
We
account for business combinations under ASC 805 “Business Combinations,” which requires that we allocate the purchase
price of acquired businesses to assets acquired, liabilities assumed, non-controlling interest and redeemable non-controlling
interest in the acquiree at the acquisition date, measured at their fair values as of that date. We expense any excess of the
fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies as they are incurred.
In addition, changes in valuation allowance related to acquired deferred tax assets and in acquired income tax position are to
be recognized in earnings. We engage third-party appraisal firms to assist management in determining the fair values of certain
assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially
with respect to intangible assets.
We
make estimates of fair value based upon assumptions and judgments a marketplace participant would consider and which we believe
to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired
businesses and relevant market and industry data and are, inherently, uncertain. Critical estimates made in valuing certain of
the intangible assets include, among other things, the following: (i) future expected cash flows from license sales, maintenance
agreements, customer contracts and acquired developed technologies and patents; (ii) expected costs to develop the in-process
research and development into commercially viable products and estimated cash flows from the projects when completed; (iii) the
acquired company’s brand and market position as well as assumptions about the period of time the acquired brand will continue
to be used in the combined company’s product portfolio; and (iv) discount rates. Unanticipated events and circumstances
may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Changes to these estimates,
relating to circumstances that existed at the acquisition date, are recorded as an adjustment to goodwill during the purchase
price allocation period (generally within one year of the acquisition date) and as operating expenses, if otherwise.
In
connection with purchase price allocations, we estimate the fair value of the support obligations assumed in connection with acquisitions.
The estimated fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-up approach
determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The sum of the
costs and operating profit approximates, in theory, the amount that we would be required to pay a third party to assume the support
obligation. See Note 3 to our consolidated financial statements for additional information on accounting for our recent acquisitions.
During
the years ended December 31, 2017, 2018 and 2019 we recorded $0.3 million, $(0.1) million and $0.3 million, with respect to changes
in the fair value of contingent consideration liability, respectively.
Goodwill
As
a result of our acquisitions, our goodwill represents the excess of the consideration paid or transferred plus the fair value
of contingent consideration and any non-controlling interest in the acquiree at the acquisition date over the fair values of the
identifiable net assets acquired. Under ASC 350, “Intangibles - Goodwill and Other”, goodwill is subject to an annual
impairment test or more frequently if impairment indicators are present. Goodwill impairment is deemed to exist if the net book
value of a reporting unit exceeds its estimated fair value. As of December 31, 2019, we operate in four reporting units within
its operating segments.
ASC
350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no
further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment
test is performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed
directly to performing the first step of the goodwill impairment test.
The
provisions of ASC 350 require that the quantitative two-step impairment test will be performed on goodwill at the level of the
reporting units. In the first step, or “Step one”, we compare the fair value of each reporting unit to its
carrying value. If the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired, and we are
not required to perform further testing. If the carrying value of the net assets exceeds the fair value, then we must perform
the second step, or “Step two”, of the impairment test in order to determine the implied fair value of goodwill.
To determine the fair value used in Step one, we use discounted cash flows. If and when we are required to perform a Step two
analysis, determining the fair value of its net assets and its off-balance sheet intangibles, then we would be required to make
judgments that involve the use of significant estimates and assumptions.
We
determine the fair value of each reporting unit by using the income approach, which utilizes a discounted cash flow model, as
it believes that this approach best approximates the reporting unit’s fair value. Judgments and assumptions related to revenue,
operating income, future short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures,
cash flows, and market conditions are inherent in developing the discounted cash flow model. We consider historical rates and
current market conditions when determining the discount and growth rates to use in its analyses. If these estimates or their related
assumptions change in the future, we may be required to record impairment charges for its goodwill.
We
performed annual impairment tests during the fourth quarter in each of the years ended December 31, 2017, 2018 and 2019 and did
not identify any impairment losses. See Note 9 to our financial statements included in this annual report for further disclosures
required under ASC 350.
Impairment
of long-lived assets, right of use assets and intangible assets subject to amortization
We
review our long-lived assets to be held or used, including right of use assets and intangible assets that are subject to amortization
long-lived assets for impairment in accordance with ASC 360, “Property, Plant and Equipment,” or ASC 360, whenever
events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected
to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying value of the assets exceeds the fair value of the assets.
As
required by ASC 820, “Fair Value Measurements and disclosures” we apply assumptions, judgments and estimates that marketplace
participants would consider in determining the fair value of long-lived assets (or asset groups).
Intangible
assets with finite lives are comprised of distribution rights, acquired technology, customer relationships, backlog and non-compete
agreements and are amortized over their economic useful life using a method of amortization that reflects the pattern in which
the economic benefits of the intangible assets are consumed or otherwise used up. Distribution rights, acquired technology and
non-compete agreements were amortized on a straight line basis and customer relationships and backlog were amortized on an accelerated
method basis over a period between 1 and 15 years based on the customer relationships identified.
During
the years ended December 31, 2017, 2018 and 2019, no impairment indicators were identified.
Marketable
Securities
We
account for all our investments in marketable securities in accordance with ASC 320 “Investments – Debt and Equity
Securities,” or ASC 320. Our marketable securities consist solely of debt securities which are designated as available-for-sale
and are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate
component of shareholders’ equity. Realized gains and losses on sales of investments, as determined on a specific identification
basis, are included in financial income, net, together with accretion (amortization) of discount (premium), and interest or dividends.
Other debt securities are held as trading securities and are measured at fair value through profit or loss.
We
recognize an impairment charge when a decline in the fair value of an investment that falls below its cost basis is determined
to be other-than-temporary.
Declines
in fair value of available-for-sale equity securities that are considered other-than-temporary, based on criteria described in
SAB Topic 5M, “Other Than Temporary Impairment of Certain Investments in Equity Securities,” are charged to earnings
(based on the entire difference between fair value and amortized cost). Factors considered in making such a determination include
the duration and severity of the impairment, the financial condition and near-term prospects of the issuer, and the intent and
ability of the company to retain its investment for a period of time sufficient to allow for any anticipated recovery in market
value.
For
declines in value of debt securities we apply an amendment to ASC 320. Under the amended impairment model, an other-than-temporary
impairment loss is deemed to exist and recognized in earnings if management intends to sell or if it is more likely than not that
it will be required to sell, a debt security, before recovery of its amortized cost basis. If the criteria mentioned above, does
not exist, we evaluate the collectability of the security in order to determine if the security is other than temporary impaired.
For
debt securities that are deemed other-than-temporary impaired, the amount of impairment recognized in the statement of operations
is limited to the amount related to “credit losses” (the difference between the amortized cost of the security and
the present value of the cash flows expected to be collected), while impairment related to other factors is recognized in other
comprehensive income.
We
did not record any impairment in the value of marketable securities during the years ended December 31, 2017, 2018 and 2019.
Stock-based
Compensation
We
account for stock-based compensation in accordance with ASC 718 “Compensation – Stock Compensation,” or ASC
718 which requires registrants to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing
model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite
service periods in our consolidated statement of income. We recognize compensation expenses for the value of our awards, which
have graded vesting based on the accelerated method over the requisite service period of each of the awards, net of estimated
forfeitures. To measure and recognize compensation expense for share-based awards we use the Binomial option-pricing model. The
Binomial model for option pricing requires a number of assumptions such as volatility, dividend yield rate, and risk-free interest
rate and also allows for the use of dynamic assumptions and considers the contractual term of the option, the probability that
the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the
option holder in computing the value of the option.
The
fair value of each option granted using the Binomial model, was estimated on the date of grant with the following assumptions:
expected volatility was based upon actual historical stock price movements and was calculated as of the grant dates for different
periods, since the Binomial model can be used for different expected volatilities for different periods. The risk-free interest
rate was based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term to the contractual term of the options.
The expected term of options granted was derived from the output of the option valuation model and represented the period of time
that options granted were expected to be outstanding. Estimated forfeitures were based on actual historical pre-vesting forfeitures.
Since dividend payments are applied to reduce the exercise price of the option, the effect of the dividend protection was reflected
by using an expected dividend assumption of zero.
For
awards with performance conditions, compensation cost is recognized over the requisite service period if it is ‘probable’
that the performance conditions will be satisfied.
During
the years ended December 31, 2017, 2018 and 2019, we recognized stock-based compensation expense related to employee stock options
in the amount of $0.1 million, $0.2 million, and $0.1 million, respectively
No
grants were made to employees or directors in 2017 or in 2019.
Contingencies
From
time to time, we are subject to legal, administrative and regulatory proceedings, claims, demands and investigations in the ordinary
course of business, including claims with respect to intellectual property, contracts, employment and other matters. We accrue
a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably
estimable. These accruals are reviewed and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal
counsel and other information and events pertaining to a particular matter.
Principles of Consolidation
The consolidated financial
statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions, including profit from
intercompany sales not yet realized outside the Group, have been eliminated upon consolidation.
Changes in the parent’s
ownership interest in a subsidiary with no change of control are treated as equity transactions, with any difference between the
amount of consideration paid and the change in the carrying amount of the non-controlling interest, recognized in equity.
Non-controlling interests
of subsidiaries represent the non-controlling share of the total comprehensive income (loss) of the subsidiaries and fair value
of the net assets upon the acquisition of the subsidiaries. The non-controlling interests are presented in equity separately from
the equity attributable to the equity holders of the Company. Redeemable non-controlling interests are classified as mezzanine
equity, separate from permanent equity, on the consolidated balance sheets and measured at each reporting period at the higher
of their redemption amount or the non-controlling interest book value, in accordance with the requirements of ASC 810 “Consolidation”
and ASC 480-10-S99-3A, “Distinguishing Liabilities from Equity.”
Fair Value Measurements
We account for certain
assets and liabilities at fair value under ASC 820. Fair value is an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is
a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset
or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes
the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Observable inputs that reflect
quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Significant other observable
inputs based on market data obtained from sources independent of the reporting entity.
Level 3 - Unobservable inputs which
are supported by little or no market activity (for example cash flow modeling inputs based on assumptions).
Assets and liabilities
measured at fair value on a recurring basis are comprised of marketable securities, foreign currency forward contracts and contingent
consideration of acquisitions (See Note 5 to the consolidated financial statements).
The carrying amounts
reported in the balance sheet for cash and cash equivalents, short term bank deposits, trade receivables, other accounts receivable,
short-term bank credit, trade payables and other accounts payable approximate their fair values due to the short-term maturities
of such instruments.
Income Tax
We account for income
taxes in accordance with ASC 740, “Income Taxes,” or ASC 740. ASC 740 prescribes the use of the “asset and liability”
method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable
value. Deferred tax assets and liabilities are classified as non-current.
Taxes that would apply
in the event of disposal of investments in subsidiaries have not been taken into account in computing deferred taxes, as it is
our intention to hold these investments, rather than realize them. We do not expect our non-Israeli subsidiaries to distribute
taxable dividends in the foreseeable future, as their earnings are needed to fund their growth while we expect to have sufficient
resources in the Israeli companies to fund our cash needs in Israel.
Our non-Israeli subsidiaries are taxed according
to the tax laws in their respective domiciles of residence. If earnings are distributed to Israel in the form of dividends or otherwise,
the Company may be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign withholding
tax rates.
Neither Israeli income
taxes, foreign withholding taxes nor deferred income taxes were provided in relation to undistributed earnings of the non-Israeli
subsidiaries. This is because we intend to permanently reinvest undistributed earnings in the foreign subsidiaries in which those
earnings arose. If these earnings were distributed in the form of dividends or otherwise, we would be subject to additional Israeli
income taxes (subject to an adjustment for foreign tax credits) and non-Israeli withholding taxes.
The amount of cash and
cash equivalents that are currently held outside of Israel that would be subject to income taxes if distributed as dividends is
$12.4 million. However, a determination of the amount of the unrecognized deferred tax liability for temporary difference related
to those undistributed earnings of foreign subsidiaries is not practicable due to the complexity of the structure of our group
of subsidiaries for tax purposes and the difficulty of projecting the amount of future tax liability.
We utilize a two-step
approach in recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. Under the first step we
evaluate a tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates
that it is more likely than not that, based on technical merits, the tax position will be sustained on audit, including resolution
of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more
than 50% likely to be realized upon ultimate settlement with the tax authorities. We have accrued interest and penalties related
to unrecognized tax benefits in our provisions for income taxes.
Recently Issued Accounting Standards
For a description of
recently issued and recently adopted accounting standards, see Note 2 to our consolidated financial statements appearing elsewhere
in this annual report.
|
C.
|
Research and
Development
|
Our research and development
and support personnel work closely with our customers, our prospective customers and relevant market analysts to determine our
requirements and to design enhancements and new releases to meet market needs. We periodically release enhancements and upgrades
to our core products. In the years ended December 31, 2019, 2018 and 2017, we invested $12.3 million, $9.4 million and $10.7 million
in research and development, respectively. Research and development activities take place in our facilities in Israel, India, Russia
and Japan.
As of December 31, 2019,
we employed 212 employees in research and development activities, of which 80 persons were located in Israel, 111 persons in India,
15 persons in Russia, 5 persons in Japan (when measured on a full time basis) and 1 person in the US. Our product development team
includes technical writers who prepare user documentation for our products. In addition, we have also entered into arrangements
with subcontractors for the preparation of product user documentation and certain product development work.
For additional information
regarding product development see Item 4. “Information on the Company - Business Overview - Product Development.”
For information see discussion
in Item 4. “Information on the Company-Business Overview-Industry Background and Trends” and Item 5. “Operating
and Financial Review and Prospects - Results of Operations.”
|
E.
|
Off-Balance Sheet Arrangements
|
We are not a party to
any off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that
are likely to create material contingent obligations.
|
F.
|
Tabular Disclosure of Contractual
Obligations
|
The following table summarizes
our minimum contractual obligations as of December 31, 2019 and the effect we expect them to have on our liquidity and cash flow
in future periods.
Contractual Obligations
|
|
Payments due by period
|
|
|
|
Total
|
|
|
less than
1 year
|
|
|
1-3 years
|
|
|
over
3 years
|
|
Operating lease obligations
|
|
$
|
18,464,000
|
|
|
$
|
3,198,000
|
|
|
$
|
4,744,000
|
|
|
$
|
10,522,000
|
|
Liabilities due to acquisition activities
|
|
|
14,677,000
|
|
|
|
3,638,000
|
|
|
|
11,039,000
|
|
|
|
-
|
|
Severance payments, net*
|
|
|
4,770,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Uncertainties in income taxes (ASC 740) **
|
|
|
2,175,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short and Long term debt
|
|
|
22,619,000
|
|
|
|
7,077,000
|
|
|
|
10,582,000
|
|
|
|
4,960,000
|
|
Total contractual obligations
|
|
$
|
62,705,000
|
|
|
$
|
13,913,000
|
|
|
$
|
26,365,000
|
|
|
$
|
15,482,000
|
|
|
*
|
Severance payments relate to accrued severance obligations
and notice obligations mainly to our Israeli employees as required under Israeli labor law or personal employment agreements.
We are legally required to pay severance upon certain circumstances, primarily upon termination of employment by our company,
retirement or death of the respective employee. Our liability for all of our Israeli employees is fully provided for by monthly
deposits with insurance policies and by an accrual.
|
|
**
|
Payment of uncertain tax benefits would result from settlements
with taxing authorities. Due to the difficulty in determining the timing of settlements, this information is not included in the
above table. We do not expect to make any significant payments for these uncertain tax positions within the next 12 months.
|
|
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
Directors
and Senior Management
|
Set forth below are the name, age, principal
position and a biographical description of each of our directors and executive officers:
|
|
Age
|
|
Position
|
Guy Bernstein
|
|
52
|
|
Chief Executive Officer and Director
|
Sagi Schliesser (1)
|
|
48
|
|
External Director
|
Ron Ettlinger (1)
|
|
53
|
|
External Director
|
Naamit Salomon
|
|
55
|
|
Director
|
Avi Zakay(1)
|
|
41
|
|
Director
|
Asaf Berenstin
|
|
42
|
|
Chief Financial Officer
|
Amit Birk
|
|
49
|
|
Vice President, Mergers and Acquisitions, General Counsel and Corporate Secretary
|
Arik Kilman
|
|
67
|
|
Chairman, Software Solutions division
|
Yakov Tsaroya
|
|
50
|
|
Chief Executive Officer of Coretech Consulting Services and Fusion Solutions
|
Uzi Yaari
|
|
46
|
|
Chief Executivee Officer of Complete Business Solutions
|
Arik Faingold
|
|
43
|
|
President, Integration Solutions division
|
Yuval Baruch
|
|
53
|
|
Chief Executive Officer of Hermes Logistics
|
Hanan Shahaf
|
|
68
|
|
Chief Executive Officer of Roshtov Software Industries Ltd
|
Yuval Lavi
|
|
51
|
|
Vice President Technology and innovation of Software Solutions division
|
|
(1)
|
Member of our Audit and Compensation Committees
|
Messrs. Guy Bernstein,
Avi Zakay and Ms. Naamit Salomon were re-elected as directors at our 2019 annual general meeting of shareholders to serve as directors
until our 2020 annual general meeting of shareholders.
Messrs. Sagi Schliesser
and Ron Ettlinger are serving as external directors pursuant to the provisions of the Israeli Companies Law for their second three-year
terms.
On October 2019, Mr.
Udi Ertel, our former President of the Software Solutions division, ceased to serve in such capacity.
Mr. Guy Bernstein and
Mr. Asaf Berenstin are first cousins. Mr. Arik Faingold is the brother of Mr. Idan Faingold who is an executive officer of the
Comm-IT Group and the two brothers are the owners of the 13.6% minority interest in that company. Other than such relationships,
there are no family relationships among our directors and senior executives.
Guy Bernstein
has served as our chief executive officer since April 2010 and has served as a director of our company since January 2007 and served
as the chairman of our board of directors from April 2008 to April 2010. Mr. Bernstein has served as the chief executive officer
of Formula Systems, our parent company, since January 2008. From December 2006 to November 2010, Mr. Bernstein served as a director
and the chief executive officer of Emblaze Ltd. or Emblaze, our former controlling shareholder. Mr. Bernstein also serves as the
chairman of the board of directors of Sapiens International Corporation N.V., or Sapiens, and is the chairman of the board of directors
of Matrix IT Ltd., both of which are subsidiaries of Formula Systems. From April 2004 to December 2006, Mr. Bernstein served as
the chief financial officer of Emblaze and he has served as a director of Emblaze since April 2004. Prior to that and from 1999,
Mr. Bernstein served as our chief financial and operations officer. Prior to joining our company, Mr. Bernstein was senior manager
at Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, from 1994 to 1997. Mr. Bernstein holds a B.A. degree
in accounting and economics from Tel Aviv University and is a certified public accountant (CPA) in Israel.
Sagi Schliesser
has served as an external director of our company since November 2015 and is a member of our audit committee. Mr. Schliesser has
been the co-founder and chief executive officer of TabTale, a creator of innovative games, interactive books and educational apps
since 2010. Prior to founding TabTale, Mr. Schliesser was the CTO of Sapiens International Corporation (NASDAQ and TASE: SPNS),
managing Sapiens Technologies. Previously Mr. Schliesser served for seven years as VP of R&D and CTO of IDIT Technologies Ltd.,
a global provider of insurance software solutions. Before that Mr. Schliesser was one of the founders of WWCOM, a B2B enablement
software startup. Mr. Schliesser holds a B.Sc. degree with honors in Computer Science and Psychology from Tel Aviv University,
as well as a Master’s degree in Computer Science from the Interdisciplinary Center in Herzliya and an M.B.A. degree with honors
in Business Psychology from Hamaslool Ha’akademi Shel Hamichlala Leminhal.
Ron Ettlinger has
served as a director of our company since December 2014 and is a member of our audit committee. Mr. Ettlinger is the founder and
has been the chief executive officer of “Nippon Europe Israel Ltd.,” a leading provider of car multimedia advanced
systems, since October 2000. Prior to that, Mr. Ettlinger was the owner and general manager of Universal Ltd., a car service. Mr.
Ettlinger is the founder and since July 2014 has served as chief executive officer of Nippon Lights Ltd., a leading provider of
LED lights and panels. Mr. Ettlinger holds a B.A. degree in Business, with a major in finance and marketing from Tel-Aviv College
of Management.
Naamit Salomon
has served as director of our company since March 2003. Since January 2010, Ms. Salomon has served as a partner in an investment
company. Ms. Salomon also serves as a director of Sapiens, which is part of the Formula group. Ms. Salomon served as the chief
financial officer of Formula Systems from August 1997 until December 2009. From 1990 through August 1997, Ms. Salomon served as
the controller of two large privately held companies in the Formula group. Ms. Salomon holds a B.A. degree in Economics and Business
administration from Ben Gurion University and an LL.M. degree from Bar-Ilan University.
Avi Zakay
has served as director of our company since February 2018. Mr. Zakay has been the sales manager of the Volkswagen dealership and
showroom in Rishon Letzion (Champion Motors) since 2014. In 2013, he served as the sales manager of the showroom of Mitsubishi Motors
in Netanya, and from 2007 to 2013, he served as a sales manager of BMW and Mercedes-Benz in Tel Aviv. Mr. Zakay holds a B.A. degree
in Business Administration and studied for an M.B.A. degree, both from Michlala Le-minhal College in Tel-Aviv.
Asaf Berenstin
has served as our chief financial officer since April 2010. In November 2011, Mr. Berenstin was appointed as Chief Financial
Officer of our parent company Formula Systems (1985) Ltd. in addition to his position as chief financial officer of our company.
Prior to that and from August 2008, Mr. Berenstin served as our corporate controller. Mr. Berenstin also serves as a director of
Michpal Micro Computers (1983) Ltd., a director at TSG IT Advanced Systems Ltd., and is a director at InSync staffing, all of them
are subsidiaries of Formula Systems. Prior to joining our company and from July 2007, Mr. Berenstin served as a controller at Gilat
Satellite Networks Ltd. (NASDAQ: GILT). From October 2003 to July 2008, Mr. Berenstin was a certified public accountant at Kesselman
& Kesselman, a member of PriceWaterhouseCoopers. Mr. Berenstin holds a B.A. degree in Accounting and Economics and an M.B.A.
degree, both from Tel Aviv University, and is a certified public accountant (CPA) in Israel.
Yuval Lavi
has served as Vice President Technology and Innovation since 2017. Prior to that and from April 2013, Mr. Lavi served as vice president,
Corporate Professional Services & Support,. Mr. Lavi joined our company in 2013,. Before joining our company, Mr.
Lavi served for 18 years as the Chief Technology Officer and joint founder of Kopel Reem Ltd.
Amit Birk
has served as our vice president, mergers and acquisitions, general counsel and corporate secretary since May 1999. Since November
2019, Mr Birk also serves as Chief Executive Officer of Unique Software Industries Ltd (a subsidiary of Formula Systems). From
1997 to 1998, Mr. Birk was an associate at Avital Dromi & Co., a leading law firm in Tel Aviv, Israel. Since November 2007,
Mr. Birk serves as an external director of BGI Investment (1961) Ltd., an Israeli public company. Mr. Birk holds an LL.B. degree
from the University of Sheffield, an M.B.A. degree from Bar-Ilan University and a Practical Engineer degree from ORT College. Mr.
Birk is also a certified mediator.
Arik Kilman
has served as chairman of our Software Solutions division since January 2017 and president of AppBuilder Software Solutions division
since January 2012, following our acquisition of AppBuilder Solutions Ltd. at which time he was named Chief Executive Officer of
AppBuilder. Prior to joining our company, Mr. Kilman served as Chief Executive Officer of BluePhoenix Solutions Ltd., the former
parent of AppBuilder from May 2003 to January 2009 and from April 2010 to December 2011. Mr. Kilman holds a B.A. degree in Economics
and Computer Science from New York City College of Technology.
Yakov Tsaroya
has served as chief executive officer of our subsidiary, CoreTech Consulting Group LLC, since 2006. Mr. Tsaroya has also served
as Chief Executive Officer of Fusion Solution LLC and Xsell Resources Inc. since our acquisition of these companies in 2010. Mr.
Tsaroya holds a B.A. degree in Accounting and Finance from the College of Administration in Israel and is a certified public accountant
(CPA) in Israel.
Uzi Yaari joined
Complete Business Solutions as CEO in 2015 after spending seven years as CEO at leading ERP implementer, Intentia Advanced Solutions.
Having served in various positions during his 15 years at Intentia, Uzi brings a rich history of ERP experience and expertise in
various ERP ecosystems and in various countries having lead many ERP projects both in the country and abroad. Uzi is an industrial
engineer.
Arik Faingold
has served as president of our Integration Solutions division since July 2012. Mr. Faingold has served as chairman of Comm-IT Group
since 2009. Mr. Faingold was General Manager of Open TV Israel, part of OpenTV Global, from 2003 to 2009. Mr. Faingold served as
Co-founder and CTO of Betting Corp from 1999 to 2003. Mr. Faingold holds a B.A. degree in Computer Science from the Interdisciplinary
Center in Herzliya and an M.B.A. from Tel Aviv University.
Yuval Baruch
has served as an officer of our company since his appointment in September 2012 as the chief executive officer of Hermes Logistics
Technologies (HLT). Mr. Baruch has also served as the chief executive officer of Pilat HR solutions since April 2013. Mr. Baruch
was chief executive officer of J.R. Holdings & Development from November 2007 to January 2012. Mr. Baruch has served as an
external director of Matrix IT, a publicly traded company in Israel, since 2011. Between 2004 and 2008 Mr. Baruch launched, managed
and divested a chain of fitness centers in Israel. Mr. Baruch holds a B.A. degree in Marketing and Finance from The College of
Management in Israel and an M.B.A. degree from the Stanford Graduate School of Business.
Hanan Shahaf became
an officer of our company in July 2016, as part of the Roshtov Software Industries Ltd. acquisition. Mr. Shahaf was one of Roshtov’s
founders in 1989 and has served as its Chief Executive Officer and a director since its inception. He also served as a director
and chairman on several private companies’ boards. Mr. Shahaf holds a B.sc in Industrial engineering and Management and an M.B.A.
from Northwestern University (Kellogg School of Management) and Tel Aviv university (Recanati Graduate School of BA).
The following table sets
forth all compensation we paid with respect to all of our directors and executive officers as a group for the year ended December
31, 2019.
|
|
Salaries,
fees,
commissions and bonuses
|
|
|
Pension, retirement and similar benefits
|
|
All directors and executive officers as a group (15 persons)
|
|
$
|
4,316,218
|
|
|
$
|
74,804
|
|
For
so long as we qualify as a foreign private issuer, we are not required to comply with the proxy rules applicable to U.S. domestic
companies, including the requirement to disclose information concerning the amount and type of compensation paid to our chief executive
officer, chief financial officer and the three other most highly compensated executive officers, rather than on an aggregate basis.
Nevertheless, a recent amendment to the regulations promulgated under the Israeli Companies Law requires us to disclose the annual
compensation of our five most highly compensated officers on an individual basis, rather than on an aggregate basis, as was previously
permitted for Israeli public companies listed overseas. Under the Companies Law regulations, this disclosure is required to be
included in the annual proxy statement for our annual meeting of shareholders each year, which we furnish to the SEC under cover
of a Report of Foreign Private Issuer on Form 6-K. Because of that disclosure requirement under Israeli law, we are also including
such information in this annual report, pursuant to the disclosure requirements of Form 20-F.
The
table below reflects the compensation granted to our five most highly compensated officers during or with respect to the year ended
December 31, 2019. All amounts reported in the table reflect the cost to our company, as recognized in our financial statements
for the year ended December 31, 2019.
2019
Summary Compensation Table
Name and Position
|
|
Salary
|
|
|
Bonus (1)
|
|
|
Equity Based Compensation(2)
|
|
|
All Other Compensation(3)
|
|
|
Total
|
|
Arik Kilman, Chairman, Software Group
|
|
|
403,984
|
|
|
|
320,000
|
|
|
|
262,508
|
|
|
|
-
|
|
|
|
986,492
|
|
Yakov Tsaroya, President, Coretech Consulting Group LLC
|
|
|
275,000
|
|
|
|
535,000
|
|
|
|
-
|
|
|
|
9,000
|
|
|
|
819,000
|
|
Arik Faingold, President, Integration Solutions division
|
|
|
345,709
|
|
|
|
181,672
|
|
|
|
-
|
|
|
|
-
|
|
|
|
527,381
|
|
Udi Ertel, President, Software Division
|
|
|
353,486
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
353,486
|
|
Hanan Shahaf, Chief Executive Officer of Roshtov Software Industries Ltd
|
|
|
287,738
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,340
|
|
|
|
301,078
|
|
|
(1)
|
Amounts reported
in this column represent annual incentive bonuses granted to the covered executives based on performance-metric based formulas
set forth in their respective employment agreements.
|
|
(2)
|
Amounts reported
in this column represent the grant date fair value computed in accordance with accounting guidance for share-based compensation.
|
|
(3)
|
Amounts reported
in this column include personal benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites
may include, to the extent applicable to the respective covered executive, payments, contributions and/or allocations for savings
funds (e.g., Managers Life Insurance Policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension,
severance, vacation, car or car allowance, medical insurances and benefits, risk insurance (e.g., life insurance or work disability
insurance), telephone expense reimbursement, convalescence or recreation pay, relocation reimbursement, payments for social security,
and other personal benefits and perquisites consistent with our company’s guidelines. All amounts reported in the table
represent incremental cost to our company.
|
During the year ended
December 31, 2019, we paid to each of our outside and independent directors an annual fee of $20,005
and a per-meeting attendance fee of $750. Such fees are paid based on the fees detailed in a schedule published semi-annually by
the Committee for Public Directors under the Israeli Securities Law. The above compensation excludes stock- based compensation
costs in accordance with ASC 718.
As of December 31, 2019,
our directors and executive officers as a group, then consisting of 14 persons, held options to purchase an aggregate of 100,000
ordinary shares, at exercise prices ranging from $1.28 to $3.02 per share. Of such options, options to purchase 40,000 ordinary
shares expire in 2020 and options to purchase 60,000 ordinary shares expire in 2021. All such options were granted under our 2007
Incentive Compensation Plan. See Item 6E “Directors, Senior Management and Employees - Share Ownership - Stock-Based Compensation
Plans.”
Introduction
According to the Israeli
Companies Law and our Articles of Association, the management of our business is vested in our board of directors. The board of
directors may exercise all powers and may take all actions that are not specifically granted to our shareholders. Our executive
officers are responsible for our day-to-day management. The executive officers have individual responsibilities established by
our board of directors. Executive officers are appointed by and serve at the discretion of the board of directors, subject to any
applicable agreements.
Election of Directors
Our articles of association
provide for a board of directors consisting of no less than three and no more than eleven members or such other number as may be
determined from time to time at a general meeting of shareholders. Our board of directors is currently composed of five directors.
Pursuant to our articles
of association, all of our directors are elected at our annual general meeting of shareholders, which are required to be held at
least once during every calendar year and not more than 15 months after the last preceding meeting. Except for our external directors
(as described below), our directors are elected by a vote of the holders of a majority of the voting power represented and voting
at such meeting and hold office until the next annual meeting of shareholders following the annual meeting at which they were appointed.
Directors (other than external directors) may be removed earlier from office by resolution passed at a general meeting of our shareholders.
Our board of directors may temporarily fill vacancies in the board until the next annual meeting of shareholders, provided that
the total number of directors will not exceed the maximum number permitted under our articles of association.
Under the Israeli Companies
Law, our board of directors is required to determine the minimum number of directors who must have “accounting and financial
expertise” (as such term is defined in regulations promulgated under the Israeli Companies Law). In determining such number,
the board of directors must consider, among other things, the type and size of the company and the scope of and complexity of its
operations. Our board of directors has determined that at least one director must have “accounting and financial expertise,”
within the meaning of the regulations promulgated under the Israeli Companies Law.
External and Independent Directors
External Directors.
The Israeli Companies Law requires companies organized under the laws of the State of Israel with shares that have been offered
to the public in or outside of Israel to appoint at least two external directors. No person may be appointed as an external director
if the person is a relative of the controlling shareholder of the company or if the person or the person’s relative, partner,
employer or any entity under the person’s control has or had, on or within the two years preceding the date of the person’s
appointment to serve as an external director, any affiliation with the company or the controlling shareholder of the company or
the controlling shareholder’s relative or any entity controlled by the company or by the controlling shareholder of the company.
If the company does not have a controlling shareholder or a person or entity which holds 25% of the total voting rights of the
company, an external director may also not have an affiliation with chairman of the board, the chief executive officer, beneficial
owner of 5% or more of the issued shares or the voting power of the company and the most senior executive officer of the company
in the finance field. The term “affiliation” includes an employment relationship, a business or professional relationship
maintained on a regular basis (other than negligible relationships), control and service as an “office holder” as defined
in the Israeli Companies Law, however, “affiliation” does not include service as a director of a private company prior
to its first public offering if the director was appointed to such office for the purpose of serving as an external director following
the company’s first public offering. In addition, no person may serve as an external director if the person’s position
or other activities create or may create a conflict of interest with the person’s responsibilities as an external director
or may otherwise interfere with the person’s ability to serve as an external director. In addition, a director in a company
may not be appointed as an external director in another company if at that time, a director of the other company serves as an external
director in the first company. Moreover, a person may not be appointed as an external director, if he or she is employed by the
Israeli Securities Authority or by Tel-Aviv Stock Exchange. If, at the time external directors are to be appointed, all current
members of the board of directors which are not the controlling shareholders of the company or their relatives are of the same
gender, then at least one external director must be of the other gender.
At least one of the external directors must
have “accounting and financial expertise” and the other external directors must have “professional expertise,”
as such terms are defined by regulations promulgated under the Israeli Companies Law.
The election of the nominee
for external director requires the affirmative vote of (i) the majority of the votes actually cast with respect to such proposal
including at least a majority of the voting power of the non-controlling shareholders (as such term is defined in the Israel Securities
Law, 1968) or those shareholders who do not have a personal interest in approval of the nomination except for a personal interest
that is not as a result of the shareholder’s connections with the controlling shareholder, who are present in person or by
proxy and vote on such proposal, or (ii) the majority of the votes cast on such proposal at the meeting, provided that the total
votes cast in opposition to such proposal by the non-controlling shareholders or those shareholders who do not have a personal
interest in approval of the nomination except for a personal interest that is not as a result of the shareholder’s connections
with the controlling shareholder (as such term is defined in the Israel Securities Law, 1968) does not exceed 2% of all the voting
power in the Company.
External directors serve
for a three-year term. However, in accordance with the Israeli Companies Law regulations, external directors of a public company
whose shares are traded on the NASDAQ may be appointed for additional periods of three-year each provided that the audit committee
and the board of directors have approved that, given the external director’s expertise and contribution to the board and committee
meetings, such appointment is for the company’s benefit and provided further that the nomination to additional periods of three-year
terms is approved through one of the following mechanisms: (i) the board of directors proposed the nominee and his appointment
was approved by the shareholders in the manner required to appoint external directors for their initial term (described above);
or (ii) one or more shareholders holding 1% or more of the voting rights proposed the nominee, and the nominee is approved by the
majority of the votes actually cast with respect to such proposal and all of the following conditions are met: (a) the majority
of votes does not include the votes of the controlling shareholder or votes of shareholders who have a personal interest in approval
of the nomination except for a personal interest that is not as a result of the shareholder’s connections with the controlling
shareholder and (b) the total votes cast in favor of such proposal by the non-controlling shareholders or those shareholders who
do not have a personal interest in the approval of the nomination except for a personal interest that is not as a result of the
shareholder’s connections with the controlling shareholder exceed 2% of all the voting power in the company.
External directors may
be removed from office only by the same percentage of shareholders as is required for their election, or by a court, and then only
if the external directors cease to meet the statutory qualifications for their appointment, violate their duty of loyalty to the
company or are found by a court to be unable to perform his or hers duties on a full time basis. External directors may also be
removed by the court if they are found guilty of bribery, fraud, administrative offenses or use of inside information.
Each committee of the board of directors that
may exercise a responsibility of the board of directors must include at least one external director. The audit committee must be
comprised of at least three directors and include all the external directors. An external director is entitled to compensation
as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation,
directly or indirectly, in connection with such service.
Until the lapse of two years from termination
of office, we may not engage an external director, or his or her spouse or child to service as an office holder and cannot employ
or receive services from that person, either directly or indirectly, including through a corporation controlled by that person.
Independent Directors. NASDAQ
Stock Market Rules require us to establish an audit committee comprised of at least three members and only of independent directors
each of whom satisfies the respective “independence” requirements of the SEC and NASDAQ.
Pursuant to the Israeli
Companies Law, a director may be qualified as an independent director if such director is either (i) an external director; or (ii)
a director that serves as a board member less than nine years and the audit committee has approved that he or she meets the independence
requirements of an external director. A majority of the members serving on the audit committee must be independent under the Israeli
Companies Law. In addition, an Israeli company whose shares are publicly traded may elect to adopt a provision in its articles
of association pursuant to which a majority of its board of directors will constitute individuals complying with certain independence
criteria prescribed by the Israeli Companies Law. We have not included such a provision in our articles of association. Pursuant
to Israeli regulations adopted in January 2011, directors who comply with the independence requirements of NASDAQ and the SEC are
deemed to comply with the independence requirements of the Israeli Companies Law.
Our board of directors
has determined that Mr. Sagi Schliesser and Mr. Ron Ettlinger both qualify as independent directors under the SEC and NASDAQ
requirements and as external directors under the Israeli Companies Law requirements. Our board of directors has further determined
that Mr. Avi Zakay qualifies as an independent director under the SEC, NASDAQ and Israeli Companies Law requirements.
Committees of the Board of Directors
Audit Committee.
Our audit committee, established in accordance with Sections 114-117 of the Israeli Companies Law and Section 3(a)(58)(A) of the
Securities Exchange Act of 1934, assists our board of directors in overseeing the accounting and financial reporting processes
of our company and audits of our financial statements, including the integrity of our financial statements, compliance with legal
and regulatory requirements, our independent public accountants’ qualifications and independence, the performance of our
internal audit function and independent public accountants, finding any irregularities in the business management of our company
for which purpose the audit committee may consult with our independent auditors and internal auditor, proposing to the board of
directors ways to correct such irregularities and such other duties as may be directed by our board of directors. The responsibilities
of the audit committee also include approving related-party transactions as required by law. The audit committee is also required
to determine whether any action is material and whether any transaction is an extraordinary transaction or non-negligible transaction,
for the purpose of approving such action or transaction as required by the Israeli Companies Law. Under Israeli law, an audit committee
may not approve an action or a transaction with a controlling shareholder, or with an office holder, unless at the time of approval
two external directors are serving as members of the audit committee and at least one of the external directors was present at
the meeting in which an approval was granted.
Our audit committee is
currently composed of Messrs. Ettlinger, Schliesser and Zakay, each of whom satisfies the respective “independence”
requirements of the SEC and NASDAQ. We also comply with Israeli law requirements for audit committee members. Our board of directors
has determined that Mr. Ettlinger qualifies as a financial expert. The audit committee meets at least once each quarter.
Compensation Committee.
In accordance with the Israeli Companies Law, we have a compensation committee, whose role is to: (i) recommend a compensation
policy for office holders and to recommend to the board, once every three years, on the approval of the continued validity of the
compensation policy that was determined for a period exceeding three years; (ii) recommend an update the compensation policy from
time to time and to examine its implementation; (iii) determine whether to approve the terms of service and employment of office
holders that require the committee’s approval; and (iv) exempt a transaction from the requirement of shareholders’
approval in accordance with the provisions of the Israeli companies Law. The compensation committee also has oversight authority
over the actual terms of employment of directors and officers and may make recommendations to the board of directors and the shareholders
(where applicable) with respect to deviation from the compensation policy that was adopted by the company.
Under the Israeli Companies
Law, a compensation committee must consist of no less than three members, including all of the external directors (who must constitute
a majority of the members of the committee), and the remainder of the members of the compensation committee must be directors whose
terms of service and employment were determined pursuant to the applicable regulations. The same restrictions on the actions and
membership in the audit committee as discussed above under “Audit Committee,” including the requirement that an external
director serve as the chairman of the committee and the list of persons who may not serve on the committee, also apply to the compensation
committee. We have established a compensation committee that is currently composed of Messrs. Ettlinger, Schliesser and Zakay.
Internal Auditor
The Israeli Companies
Law also requires the board of directors of a public company to appoint an internal auditor proposed by the audit committee. A
person who does not satisfy the Israeli Companies Law’s independence requirements may not be appointed as an internal auditor.
The role of the internal
auditor is to examine, among other things, the compliance of the company’s conduct with applicable law and orderly business
practice. Our internal auditor complies with the requirements of the Israeli Companies Law. Alkalay Monarov currently serves as
our internal auditor.
Directors’ Service Contracts
There are no arrangements
or understandings between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand, providing
for benefits upon termination of their employment or service as directors of our company or any of our subsidiaries.
Approval of Related Party Transactions
Under Israeli Law
Fiduciary Duties of Office Holders
The Israeli Companies
Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company.
An “office holder” is defined in the Israeli Companies Law as a chief executive officer, chief business manager, deputy
general manager, vice general manager, any other person assuming the responsibilities of any of the foregoing positions without
regard to such person’s title or a director or any other manager directly subordinate to the general manager. An office holder’s
fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act at a level
of care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty
to utilize reasonable means to obtain (i) information regarding the appropriateness of a given action brought for his approval
or performed by him by virtue of his position and (ii) all other information of importance pertaining to the foregoing actions.
The duty of loyalty includes (i) avoiding any conflict of interest between the office holder’s position in the company and
any other position he holds or his personal affairs, (ii) avoiding any competition with the company’s business, (iii) avoiding
exploiting any business opportunity of the company in order to receive personal gain for the office holder or others, and (iv)
disclosing to the company any information or documents relating to the company’s affairs that the office holder has received
due to his position as an office holder.
Disclosure of Personal Interests of
an Office Holder
The Israeli Companies
Law requires that an office holder promptly, and no later than the first board meeting at which such transaction is considered,
disclose any personal interest that he or she may have and all related material information known to him or her and any documents
in their position, in connection with any existing or proposed transaction by us. In addition, if the transaction is an extraordinary
transaction, that is, a transaction other than in the ordinary course of business, other than on market terms, or likely to have
a material impact on the company’s profitability, assets or liabilities, the office holder must also disclose any personal
interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and
the spouses of any of the foregoing, or by any corporation in which the office holder or a relative is a 5% or greater shareholder,
director or general manager or in which he or she has the right to appoint at least one director or the general manager.
Approval of Transactions with Office
Holders and Controlling Shareholders
Some transactions, actions
and arrangements involving an office holder (or a third party in which an office holder has a personal interest) must be approved
by the board of directors and, in some cases, by the audit committee or the compensation committee and by the board of directors,
and under certain circumstances shareholder approval may also be required, provided, however, that such transactions are for the
benefit of the company. Subject to certain exceptions. a person who has a personal interest in the approval of a transaction by
the audit committee or the Board, may not be present and take part in the voting. An officer or a director who has a personal interest,
may be present at the meeting for the purpose of presenting the transaction if the chairman of the audit committee or the Board,
as relevant, has determined that the presence of the officer or director is required. A director may be present and vote at the
meetings of the audit committee and Board if the majority of the directors have a personal interest in the approval of the transaction.
In such case, the transaction also requires approval by the general meeting. The disclosure requirements which apply to an office
holder also apply to such transaction with respect to his or her personal interest in the transaction.
The Companies Law provides
for certain procedural constraints on a public company entering into a transaction in which a controlling shareholder and other
interested parties have a personal interest. More specifically, Section 275 of the Companies Law provides that an extraordinary
transaction (which is defined as a transaction that is either not in a company’s ordinary course of business; or a transaction
that is not undertaken in market conditions; or a transaction that is likely to substantially influence the profitability of a
company, its property or liabilities) between a public company and its controlling shareholder, or an extraordinary transaction
of a public company with a third party in which the controlling shareholder has a personal interest, including a transaction of
a public company with a controlling shareholder, directly or indirectly, for the receipt of services therefrom (and including a
transaction concerning the compensation arrangement of a controlling shareholder in its capacity as an employee or office holder
of the company) (a “Controlling Party Transaction”), requires the approval of the audit committee (and with respect to
a transaction concerning the compensation arrangement – the compensation committee), the board of directors and the general
meeting of shareholders, provided however that the majority approving the transaction shall include at least one half of the votes
of shareholders who do not have a personal interest in the transaction and are participating in the vote, or that the aggregate
number of votes against the approval of the transaction, voted by shareholders who do not have such personal interest do not exceed
2% of the entire voting rights in the company. Section 275 of the Companies Law further provides that if the term of the Controlling
Party Transaction extends beyond three years, the above approvals are required once every three years. However, if such transaction
does not relate to a compensation arrangement, then the audit committee may approve the transaction for a longer duration, provided
that the audit committee determines that such duration is reasonable under the circumstances. In accordance with the Israeli Companies
law the audit committee is responsible to determine that Controlling Party Transactions shall be subject to a competitive procedure
or other similar procedure before such transactions are approved.
During the year ended
December 31, 2019, we sold approximately $3.0 million of services to affiliated companies of Formula Systems. In 2019, we also
purchased from those affiliated companies approximately $0.2 million of hardware, software and services. We also provided Formula
Systems cash management, accounting and bookkeeping services for total consideration of $0.2 million.
Approval Process of Terms of Service
and Employment of Office Holders
Under the Israeli Companies Law, the method
of approval of Terms of Service and Employment of office holders must be approved as follows:
|
●
|
With respect to an office holder who is not the general manager, a director, a controlling shareholder or a relative of the
controlling shareholder:
|
|
o
|
In the event the transaction is in accordance with the compensation policy of the company –
approval (in the following order) of: (i) compensation committee and (ii) board of directors.
|
|
o
|
In the event the transaction is not in accordance with the compensation policy of the company –
approval, in special cases (in the following order), by the (i) compensation committee, (ii) board of directors and (iii) company’s
shareholders, by a simple majority, provided that such majority shall include (i) at least one half of the votes of shareholders
who are participating in the vote and are not controlling shareholders or do not have a personal interest regarding the approval
of the compensation policy, or (ii) the aggregate number of the opposing votes, voted by shareholders who do not have such personal
interest or are not controlling shareholders, do not exceed two percent (2%) of the entire voting rights in the company (the “Special
Majority”). Under these circumstances, the compensation committee and board of directors are required to approve the
transaction based on certain considerations and include certain instructions in connection with the compensation policy. In the
event the company’s shareholders do not approve the compensation of the office holder, the compensation committee and board
of directors may still approve the transaction, in special cases and with detailed reasons and after discussion and examining the
rejection of the company’s shareholders.
|
|
●
|
With respect to a company’s general manager (generally the equivalent of a CEO):
|
|
o
|
In the event the transaction is in accordance with the compensation policy - approval (in the following
order) by the: (i) compensation committee, (ii) board of directors and (iii) company’s shareholders with the “Special
Majority” described above.
|
|
o
|
In the event the transaction is not in accordance with the compensation policy – the approval
process and requirements are the same as the approval process for such a transaction with an office holder who is not the general
manager, a controlling shareholder or a relative of the controlling shareholder.
|
|
§
|
The Israeli Companies Law includes an exception from the shareholder approval requirement in connection
with the approval of a transaction with a general manager candidate, subject to certain conditions. In addition, in the event the
company’s shareholders do not approve the compensation of the general manager, the compensation committee and board of directors
may still approve the transaction, in special cases and with detailed reasons and after discussion and examining the rejection
of the company’s shareholders.
|
|
●
|
With respect to a director who is not a controlling shareholder or a relative of the controlling
shareholder:
|
|
o
|
In the event the transaction is in accordance with the compensation policy – approval (in
the following order) by the: (i) compensation committee, (ii) board of directors and (iii) company’s shareholders with a
regular majority.
|
|
o
|
In the event the transaction is not in accordance with the compensation policy – the approval
process and requirements are the same as the approval process for such a transaction with an office holder who is not the general
manager, a controlling shareholder or a relative of the controlling shareholder (other than the possibility to approve a transaction
that was not approved by the shareholders).
|
|
●
|
With respect to a controlling shareholder or a relative of a controlling shareholder:
|
|
o
|
In the event the transaction is in accordance with the compensation policy - approval (in the following
order) by the: (i) compensation committee, (ii) board of directors and (iii) company’s shareholders with the “Special
Majority” described above.
|
|
o
|
In the event the transaction is not in accordance with the compensation policy: the approval process
and requirements are the same as the approval process for such a transaction with an office holder who is not the general manager,
a controlling shareholder or a relative of the controlling shareholder (other than the possibility to approve a transaction that
was not approved by the shareholders).
|
In accordance with the
Israeli Companies Law, the audit committee is responsible to determine that Controlling Party Transactions shall be subject to
a competitive procedure or other similar procedure before such transactions are approved.
Provisions Restricting Change in Control
of Our Company
Tender Offer.
In certain circumstances, an acquisition of shares in a public company must be made by means of a tender offer if, as a result
of the acquisition, the purchaser would hold 25% or more of the voting rights in the company (unless there is already a 25% or
greater shareholder of the company) or more than 45% of the voting rights in the company (unless there is already a shareholder
that holds more than 45% of the voting rights in the company). If, as a result of an acquisition, the acquirer would hold more
than 90% of a company’s shares or voting rights, the acquisition must be made by means of a tender offer for all of the shares.
A purchase by a tender offer is subject to additional requirements as specified in the Israeli Law and regulations promulgated
thereunder.
Merger.
The Israeli Companies Law generally requires that a merger be approved by the board of directors and by the general meeting of
the shareholders. Upon the request of any creditor of a merging company, a court may delay or prevent the merger if it concludes
that there is a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy its obligations.
In addition, a merger may generally not be completed unless at least (i) 50 days have passed since the filing of the merger proposal
with the Israeli Registrar of Companies, and (ii) 30 days have passed since the merger was approved by the shareholders of each
of the merging companies. The approval of merger by the company is also subject to additional approval requirements as specified
in the Israeli Companies Law and regulations promulgated thereunder.
Exculpation, Indemnification and Insurance
of Directors and Officers
Exculpation and Indemnification of Office
Holders
The Israeli Companies
Law and our Articles of Association authorize us, subject to the receipt of requisite corporate approvals, to indemnify and exempt
our directors and officers, subject to certain conditions and limitations. Most recently, in November 2011 our shareholders
approved a form of indemnification and exculpation letter to ensure that our directors and officers (including any director and
officer who may be deemed to be a controlling shareholder, within the meaning of the Israeli Companies Law) are afforded protection
to the fullest extent permitted by law as currently in effect. Under the approved form of indemnification and exculpation letter,
the total amount of indemnification allowed may not exceed an amount equal to 25% of our shareholders’ equity in the aggregate,
calculated with respect to each of our directors and officers.
The Israeli Companies
Law provides that an Israeli company may not exculpate an office holder from liability for a breach of the duty of loyalty of the
office holder. The company may, however, approve an office holder’s act performed in breach of the duty of loyalty, provided
that the office holder acted in good faith, the act or its approval does not harm the company and the office holder discloses the
nature of his or her personal interest in the act and all material facts and documents a reasonable time before discussion of the
approval. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for
a breach of duty of care, but only if a provision authorizing such exculpation is inserted in its articles of association. An Israeli
company may also not exculpate a director for liability arising out of a prohibited dividend or distribution to shareholders.
The Israeli Companies
Law provides that a company may, if permitted by its articles of association, indemnify an office holder for acts or omissions
performed by the office holder in such capacity for:
|
●
|
A financial liability imposed on the office holder in favor of another person by any judgment,
including a settlement or an arbitrator’s award approved by a court;
|
|
●
|
Reasonable litigation expenses, including attorney’s fees, actually incurred by the office
holder as a result of an investigation or proceeding instituted against him or her by a competent authority, provided that such
investigation or proceeding concluded without the filing of an indictment against the office holder or the imposition of any financial
liability instead of criminal proceedings, or concluded without the filing of an indictment against the office holder and a financial
liability was imposed on the officer holder instead of criminal proceedings with respect to a criminal offense that does not require
proof of criminal intent;
|
|
●
|
Reasonable litigation expenses, including attorneys’ fees, incurred by such office holder
or which were imposed on him by a court, in proceedings the company instituted against the office holder or that were instituted
on the company’s behalf or by another person, or in a criminal charge from which the office holder was acquitted, or in a
criminal proceeding in which the office holder was convicted of a crime which does not require proof of criminal intent; and
|
|
●
|
Expenses, including reasonable litigation expenses and legal fees, incurred by such office holder
as a result of a proceeding instituted against him in relation to (A) infringements that may result in imposition of financial
sanction pursuant to the provisions of Chapter H’3 under the Israeli Securities Law or (B) administrative infringements pursuant
to the provisions of Chapter H’4 under the Israeli Securities Law or (C) infringements pursuant to the provisions of Chapter I’1
under the Israeli Securities Law; and (e) payments to an injured party of infringement under Section 52ND(a)(1)(a) of
the Israeli Securities Law.
|
In accordance with the Israeli Companies Law,
a company’s articles of association may permit the company to:
|
●
|
Undertake in advance to indemnify an office holder, except that with respect to a financial liability
imposed on the office holder by any judgment, settlement or court-approved arbitration award, the undertaking must be limited to
types of occurrences, which, in the opinion of the company’s board of directors, are, at the time of the undertaking, foreseeable
due to the company’s activities and to an amount or standard that the board of directors has determined is reasonable under
the circumstances; and
|
|
●
|
Retroactively indemnify an office holder of the company.
|
Insurance for Office Holders
The Israeli Companies
Law provides that a company may, if permitted by its articles of association, insure an office holder for acts or omissions performed
by the office holder in such capacity for:
|
●
|
A breach of his or her duty of care to the company or to another person;
|
|
●
|
A breach of his or her duty of loyalty to the company, provided that the office holder acted in
good faith and had reasonable cause to assume that his act would not prejudice the company’s interests; and
|
|
●
|
A financial liability imposed upon the office holder in favor of another person.
|
Subject to the provisions
of the Israeli Companies Law and the Israeli Securities Law, a company may also enter into a contract to insure an office
holder for (A) expenses, including reasonable litigation expenses and legal fees, incurred by the office holder as a result of
a proceeding instituted against such office holder in relation to (1) infringements that may impose financial sanction pursuant
to the provisions of Chapter H’3 under the Israeli Securities Law or (2) administrative infringements pursuant to the provisions
of Chapter H’4 under the Israeli Securities Law or (3) infringements pursuant to the provisions of Chapter I’1 under
the Israeli Securities Law and (B) payments made to the injured parties of such infringement under Section 52ND(a)(1)(a) of the
Israeli Securities Law.
Limitations on Exculpation, Insurance
and Indemnification
The Israeli Companies
Law provides that neither a provision of the articles of association permitting the company to enter into a contract to insure
the liability of an office holder, nor a provision in the articles of association or a resolution of the board of directors permitting
the indemnification of an office holder, nor a provision in the articles of association exempting an office holder from duty to
the company shall be valid, where such insurance, indemnification or exemption relates to any of the following:
|
●
|
A breach by the office holder of his duty of loyalty, except with respect to insurance coverage
or indemnification if the office holder acted in good faith and had reasonable grounds to assume that the act would not prejudice
the company;
|
|
●
|
A breach by the office holder of his duty of care if such breach was committed intentionally or
recklessly, unless the breach was committed only negligently;
|
|
●
|
Any act or omission committed with intent to derive an unlawful personal gain; and
|
|
●
|
Any fine, civil fine, financial sanction or forfeiture imposed on the office holder.
|
In addition, pursuant
to the Israeli Companies Law, exemption of, procurement of insurance coverage for, an undertaking to indemnify or indemnification
of an office holder must be approved by the compensation committee and the board of directors and, if such office holder is a director
or a controlling shareholder or a relative of the controlling shareholder, also by the shareholders general meeting.
Our articles of association
allow us to insure, indemnify and exempt our office holders to the fullest extent permitted by law, subject to the provisions of
the Israeli Companies Law.
The current coverage
of our directors’ and officers’ liability insurance policy is up to a maximum of $40.0 million both per incident and
in the aggregate, plus $10.0 million of Side A DIC coverage for which we paid in 2019 an annual premium of approximately $67,000.
We expect that our annual premium in 2020 will increase to approximately $425,500 in 2020.
The following table presents the number of
our employees categorized by geographic location as of December 31, 2017, 2018 and 2019:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Israel
|
|
|
1,133
|
|
|
|
999
|
|
|
|
921
|
|
Asia
|
|
|
186
|
|
|
|
164
|
|
|
|
139
|
|
North America
|
|
|
1,194
|
|
|
|
933
|
|
|
|
861
|
|
South Africa
|
|
|
14
|
|
|
|
14
|
|
|
|
16
|
|
Europe
|
|
|
115
|
|
|
|
116
|
|
|
|
115
|
|
Total
|
|
|
2,642
|
|
|
|
2,226
|
|
|
|
2,052
|
|
The following table presents the number of
our employees categorized by activity as of December 31, 2017, 2018 and 2019:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Technical support and consulting
|
|
|
2,126
|
|
|
|
1,761
|
|
|
|
1,615
|
|
Research and development
|
|
|
212
|
|
|
|
198
|
|
|
|
181
|
|
Marketing and sales
|
|
|
158
|
|
|
|
140
|
|
|
|
117
|
|
Operations and administrations
|
|
|
146
|
|
|
|
127
|
|
|
|
139
|
|
Total
|
|
|
2,642
|
|
|
|
2,226
|
|
|
|
2,052
|
|
Our relationships with
our employees in Israel are governed by Israeli labor legislation and regulations, extension orders of the Israeli Ministry of
Labor and personal employment agreements. Israeli labor laws and regulations are applicable to all of our employees in Israel.
The laws concern various matters, including severance pay rights at termination, notice period for termination, retirement or death,
length of workday and workweek, minimum wage, overtime payments and insurance for work-related accidents. We currently fund our
ongoing legal severance pay obligations by paying monthly premiums for our employees’ insurance policies and or pension funds.
At the time of commencement of employment, our employees generally sign written employment agreements specifying basic terms and
conditions of employment as well as non-disclosure, confidentiality and non-compete provisions.
Beneficial Ownership of Executive Officers
and Directors
The following table sets forth certain information
as of March 31, 2020 regarding the beneficial ownership by each of our directors and
executive officers:
Name
|
|
Number of Ordinary Shares Beneficially Owned (1)
|
|
|
Percentage of Ownership (2)
|
|
Guy Bernstein
|
|
|
150,000
|
|
|
|
*
|
|
Asaf Berenstin (3)
|
|
|
76,450
|
|
|
|
*
|
|
Ron Ettlinger
|
|
|
--
|
|
|
|
--
|
|
Naamit Salomon
|
|
|
--
|
|
|
|
--
|
|
Sagi Schliesser
|
|
|
--
|
|
|
|
--
|
|
Avi Zakay
|
|
|
--
|
|
|
|
--
|
|
Amit Birk (4)
|
|
|
129,062
|
|
|
|
*
|
|
Arik Faingold
|
|
|
--
|
|
|
|
--
|
|
Yuval Baruch
|
|
|
--
|
|
|
|
--
|
|
Arik Kilman
|
|
|
36,360
|
|
|
|
*
|
|
Yakov Tsaroya(5)
|
|
|
20,000
|
|
|
|
*
|
|
Yuval Lavi
|
|
|
--
|
|
|
|
--
|
|
|
(1)
|
Beneficial ownership is determined in accordance with
the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary Shares relating to
options currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the
percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.
Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above
have sole voting and investment power with respect to all shares shown as beneficially owned by them.
|
|
(2)
|
The percentages shown are based on 48,977,055
Ordinary Shares issued and outstanding as of March 31, 2020.
|
|
(3)
|
Includes 40,000 currently exercisable options granted
under our 2007 Stock Option Plan, having an exercise price ranging from $1.69 to $3.02 per share that expire in 2021 at the latest
and 36,450 Ordinary Shares.
|
|
(4)
|
Includes 30,000 currently exercisable options granted
under our 2007 Stock Option Plan, having an exercise price of $3.02 per share that expire in 2021 and 99,062 Ordinary Shares.
|
|
(5)
|
Includes 20,000 Ordinary Shares.
|
Stock-Based
Compensation Plans
2007 Incentive Compensation Plan
In 2007, we adopted our
2007 Incentive Compensation Plan, or the 2007 Plan, under which we may grant options, restricted shares, restricted share units
and performance awards to employees, officers, directors and consultants of our company and its subsidiaries. The shares subject
to the 2007 Plan may be either authorized or unissued shares or previously issued shares acquired by our company or any of its
subsidiaries. The total number of shares that may be delivered pursuant to awards under the 2007 Plan shall not exceed 1,500,000
shares in the aggregate. If any award shall expire, terminate, be cancelled or forfeited without having been fully exercised or
satisfied by the issuance of shares, then the shares subject to such award shall be available again for delivery in connection
with future awards under the 2007 Plan.
In September 2013, our
shareholders approved a 1,000,000 share increase in the number of Ordinary Shares available for issuance under the 2007 Stock Option
Plan.
On December 31, 2015
our board of directors increased the amount of Ordinary Shares reserved for issuance by an additional 250,000 Ordinary Shares and
extended the plan by 10 years until August 1, 2027. As of December 31, 2019, an aggregate of 932,500 Ordinary Shares are available
for future grants under the Plan.
The 2007 Plan will terminate
upon the earliest of: (i) August 31, 2027; (ii) the termination of all outstanding awards in connection with a corporate transaction;
or (iii) in connection with, and as a result of, any other relevant event, including the 2007 Plan’s termination by the Board
of Directors.
Under the 2007 Plan,
the option committee shall have full discretionary authority to grant or, when so restricted by applicable law, recommend the Board
of Directors to grant, pursuant to the terms of the 2007 Plan, options and restricted shares and restricted share units to those
individuals who are eligible to receive awards.
The 2007 Plan provides
that each option will expire on the date stated in the award agreement, which will not be more than ten years from its date of
grant. The exercise price of an option shall be determined by the option committee of the Board of Directors and set forth in the
award agreement. Unless determined otherwise by the Board of Directors, the exercise price shall be equal to, or higher than, the
fair market value of our company’s shares on the date of grant.
Under the 2007 Plan,
restricted shares and restricted share units shall not be purchased for less than the ordinary share’s par value, unless
determined otherwise by the Board of Directors.
Under the 2007 Plan in
the event of any reclassification, recapitalization, merger or consolidation, reorganization, stock dividend, cash dividend, distribution
of subscription rights or other distribution in securities of the Company, stock split or reverse stock split, combination or exchange
of shares, repurchase of shares, or other similar change in corporate structure, that proportionally apply to all of our Ordinary
Shares, we, shall substitute or adjust, as applicable, the number, class and kind of securities which may be delivered under Section
4.1; the number, class and kind, and/or price (such as the Option Price of Options) of securities subject to outstanding awards;
and other value determinations applicable to outstanding awards, as determined by our Board of Directors, in order to prevent dilution
or enlargement of participants’ rights under the 2007 Plan; provided, however, that the number of Ordinary Shares subject to any
award shall always be a whole number. The Board of Directors shall also make appropriate adjustments and modifications, in the
terms of any outstanding awards to reflect such changes in our share capital, including modifications of performance goals and
changes in the length of performance periods, if applicable.
Our Board of Directors
may, from time to time, alter, amend, suspend or terminate the 2007 Plan, with respect to awards that have not been granted, subject
to shareholder approval, if and to the extent required by applicable law. In addition, no such amendment, alteration, suspension
or termination of the 2007 Plan or any award theretofore granted, shall be made which would materially impair the previously accrued
rights of a participant under any outstanding award without the written consent of such participant, provided, however, that the
Board of Directors may amend or alter the 2007 Plan and the option committee may amend or alter any award, including any agreement,
either retroactively or prospectively, without the consent of the applicable participant, (i) so as to preserve or come within
any exemptions from liability under any law or the rules and releases promulgated by the SEC, or (ii) if the Board of Directors
or the option committee determines in its discretion that such amendment or alteration either is (a) required or advisable for
us, the 2007 Plan or the award to satisfy, comply with or meet the requirements of any law, regulation, rule or accounting standard,
or (b) not reasonably likely to significantly diminish the benefits provided under such award, or that such diminishment has been
or will be adequately compensated.
During 2019, options
to purchase an aggregate of 78,500 Ordinary Shares were exercised under the 2007 Plan at an average exercise price of $2.47 per
share and options to purchase 119,767 Ordinary Shares remained outstanding. As of December 31, 2019, our executive officers and
directors as a group, consisting of 14 persons, held options to purchase 100,000 Ordinary Shares under the 2007 Plan, having an
exercise price ranging from $1.69 to $3.02 per share.
|
ITEM 7.
|
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
Formula Systems, an Israeli
company traded on the NASDAQ Global Select Market and the TASE, holds 22,296,354 or 45.52% of our outstanding Ordinary Shares.
Formula Systems is controlled by Asseco, a Polish company listed on the Warsaw Stock Exchange, which holds 25.60% of the Ordinary
Shares of Formula Systems. Guy Bernstein owns 12.89% of the outstanding shares of Formula Systems. In addition, on October 4, 2017
Asseco entered into a shareholders agreement with Mr. Bernstein, under which agreement Asseco has been g ranted an irrecoverable
proxy to vote an additional 1,971,973 Ordinary Shares of Formula, thereby effectively giving Asseco beneficial ownership (voting
power) over an aggregate of 38.50% of Formula’s outstanding ordinary share. Therefore, based on the foregoing beneficial
ownership by each of Formula and Asseco, each of Formula and Asseco may be deemed to directly or indirectly (as appropriate) control
us.
The following table sets forth as of March
31, 2020 certain information regarding the beneficial ownership by all shareholders known to us to own beneficially 5.0%
or more of our ordinary shares:
Name
|
|
Number of Ordinary Shares Beneficially Owned(1)
|
|
|
Percentage of Ownership (2)
|
|
Formula Systems (1985) Ltd. (3)
|
|
|
22,296,354
|
|
|
|
45.52
|
%
|
Harel Insurance (4)
|
|
|
4,564,903
|
|
|
|
9.32
|
%
|
Clal Insurance Enterprises Holdings Ltd (5)
|
|
|
4,144,717
|
|
|
|
8.47
|
%
|
Yelin Lapidot (6)
|
|
|
2,972,929
|
|
|
|
6.07
|
%
|
The Phoenix Holdings Ltd (7)
|
|
|
2,224,827
|
|
|
|
4.54
|
%
|
|
(1)
|
Beneficial ownership is determined in accordance with
the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary Shares relating to
options currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the
percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.
Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above
have sole voting and investment power with respect to all shares shown as beneficially owned by them.
|
|
(2)
|
The percentages shown are based on 48,977,055 Ordinary
Shares issued and outstanding as of March 31, 2020.
|
|
(3)
|
Asseco owns 25.60% of the outstanding shares of Formula.
As such, Asseco may be deemed to be the beneficial owner of the aggregate 22,296,354 Ordinary Shares held directly by Formula
Systems. Guy Bernstein owns 12.89% of the outstanding shares of Formula Systems. In addition, on October 4, 2017 Asseco entered
into a shareholders agreement with Mr. Bernstein, under which agreement Asseco has been granted an irrecoverable proxy to vote
an additional 1,971,973 Ordinary Shares of Formula, thereby effectively giving Asseco beneficial ownership (voting power) over
an aggregate of 38.50% of Formula’s outstanding ordinary shares. Therefore, based on the foregoing beneficial ownership
by each of Formula and Asseco, each of Formula and Asseco may be deemed to directly or indirectly (as appropriate) control us.
The address of Asseco is 35-322 Rzeszow, ul. Olchowa 14, Poland.
|
|
(4)
|
Based on written notification received from Harel Insurance
Investments & Financial Services Ltd on March 31, 2020, subsequent to Amendment No.1 to Schedule 13G filed on January 23 2020.
Such Ordinary shares are held by members of the public through, among others, provident funds and/or mutual funds and/or pension
funds and/or insurance policies and/or exchange traded funds, which are managed by subsidiaries of the Reporting Person, each
of which subsidiaries operates under independent management and makes independent voting and investment decisions. Harel Insurance
Investments & Financial Services Ltd. is an Israeli public company, with a principal business address at Harel House; 3 Aba
Hillel Street; Ramat Gan 52118, Israel.
|
|
(5)
|
Based on Amendment No.2 to Schedule 13G filed on February
10, 2020, by Clal Insurance Enterprises Holdings Ltd. Of the 4,144,717 Ordinary Shares held
as of December 31,2019 and reported by such shareholder (i) 127,788 Ordinary Shares are beneficially held for its own account;
and (ii) 4,016,929 are held for members of the public through, among others, provident funds and/or pension funds and/or insurance
policies, which are managed by subsidiaries of Clal, which subsidiaries operate under independent management and make independent
voting and investment decisions. Clal Insurance Enterprises Holdings Ltd is an Israeli public company, with a principal
business address at 36 Raul Wallenberg St., Tel Aviv 66180, Israel.
|
|
(6)
|
Based on Amendment No.3 to Schedule 13G filed on January
27, 2020. Of the 2,972,929 Ordinary Shares reported by such shareholder as of December 31, 2019, (i) 1,917,929 Ordinary Shares
beneficially owned by mutual funds managed by Yelin Lapidot Mutual Funds Management Ltd. and (ii) 1,055,000 Ordinary Shares (representing
2.16% of the total Ordinary Shares outstanding) beneficially owned by provident funds managed by Yelin Lapidot Provident Funds
Management Ltd. The Ordinary Shares beneficially owned by Yelin are held by provident funds managed by Yelin Lapidot Provident
Funds Management Ltd., or Yelin Provident, and/or mutual funds managed by Yelin Lapidot Mutual Funds Management Ltd., or Yelin
Mutual. Each of Yelin Provident and Yelin Mutual is a wholly-owned subsidiary of Yelin Holdings. Messrs. Dov Yelin and Yair Lapidot
each own 24.38% of the share capital and 25% of the voting rights of Yelin Holdings, and are responsible for the day-to-day management
of Yelin Holdings. The Ordinary Shares beneficially owned are held for the benefit of the members of the provident funds and the
mutual funds. Each of Messrs. Yelin and Lapidot, Yelin Holdings, Yelin Provident and Yelin Mutual disclaims beneficial ownership
of the subject Ordinary Shares. The address of Yalin is 50 Dizengoff Street, Dizengoff Center, Gate 3, Top Tower, 13th floor,
Tel Aviv 64332, Israel.
|
|
(7)
|
Based on Amendment No.3 to Schedule 13G filed on February
18, 2020, by The Phoenix Holdings Ltd. The filing persons are Itshak Sharon (Tshuva), Delek Group Ltd. and The Phoenix Holdings
Ltd. The securities are beneficially owned by various direct or indirect, majority or wholly-owned subsidiaries of Phoenix Holdings.
The address of Phoenix Holdings is Derech Hashalom 53, Givataim, 53454, Israel.
|
Significant Changes in the Ownership
of Major Shareholders
In July 2018, Formula
participated in our private placement (together with other institutional investors) and reported on July 30, 2018 on Schedule 13D/A
that it holds 22,080,468 Ordinary Shares reflecting ownership of 45.2%.
In
the past three years, Yelin Lapidot Holdings Management Ltd. jointly with Messrs. Dov Yelin and Yair Lapidot, filed several
Schedules 13G with the SEC reflecting their level of investment in our company. A Schedule 13G filed with the SEC on January 27,
2020, reflected an ownership of 2,972,929, or 6.08% of our Ordinary Shares.
Based on a Schedule 13G
filed on January 29, 2019, Harel Insurance Investments & Financial Services Ltd. held 2,728,908 or 5.58% of our Ordinary Shares.
Based on written notification received from Harel Insurance Investments & Financial Services Ltd on March 31, 2020, subsequent
to Amendment No.1 to Schedule 13G filed filed on January 23, 2020, Harel Insurance Investments & Financial Services Ltd. holds
4,564,903 or 9.32% of our Ordinary Shares.
In January 2018, Clal first filed a Schedule
13G with the SEC reflecting ownership of 2,276,349 or 5.2% of our Ordinary Shares. A Schedule 13G filed with the SEC on February
14, 2019, reflected an increase in ownership to 3,630,149, or 7.43% of our Ordinary Shares. A Schedule 13G filed with the SEC on
February 10, 2020, reflected an increase in ownership to 4,144,717, or 8.5% of our Ordinary Shares.
In
the past three years, Phoenix Holdings, filed several Schedules 13G with the SEC reflecting their level of investment in our company.
As indicated in a Schedule 13G filed with the SEC on February 18, 2020, Phoenix Holdings holds 2,224,827 or 4.5% of our ordinary
shares, and as such ceased to be a major shareholder of the Company.
Major Shareholders Voting Rights
Our major shareholders do not have different
voting rights.
Record Holders
Based on a review of
the information provided to us by our U.S. transfer agent, as of January 1, 2020, there were 55 record holders, of which 44 record
holders holding approximately 96.5% of our Ordinary Shares had registered addresses in the United States. These numbers are
not representative of the number of beneficial holders of our shares nor are they representative of where such beneficial holders
reside, since many of these Ordinary Shares were held of record by brokers or other nominees (including one U.S. nominee company,
CEDE & Co., which held approximately 96.5% of our outstanding Ordinary Shares as of such date).
|
B.
|
Related
Party Transactions
|
For information about related party transactions
see “Item 6C. Directors, Senior Management and Employees – Board Practices - Approval of Related Party Transactions
Under Israeli Law.”
|
C.
|
Interests
of Experts and Counsel
|
Not applicable.
|
ITEM 8.
|
FINANCIAL INFORMATION
|
|
A.
|
Consolidated
Statements and Other Financial Information
|
See the consolidated financial statements,
including the notes thereto, included in Item 18.
Legal Proceedings
In addition to the below
mentioned legal proceedings, we and our subsidiaries are, from time to time, subject to legal, administrative and regulatory proceedings,
claims, demands and investigations in the ordinary course of business, including claims with respect to intellectual property,
contracts, employment and other matters. Based upon the advice of counsel, we do not believe that the ultimate resolution of these
matters will materially affect our consolidated financial position, results of operations or cash flows.
In September 2016, an
Israeli software company, that was previously involved in an arbitration proceeding with us in 2015 and won damages from us for
$2.4 million, filed a lawsuit seeking damages of NIS 34,106,000 against us and one of our subsidiaries. This lawsuit was filed
as part of an arbitration proceeding. In the lawsuit, the software company claimed that warning letters that we sent to its clients
in Israel and abroad, warning those clients against the possibility that the conversion procedure offered by the software company
may amount to an infringement of our copyrights (the “Warning Letters”), as well as other alleged actions, have caused
the software company damages resulting from loss of potential business. The lawsuit is based on rulings given in the 2015 arbitration
proceeding in which it was allegedly ruled that the Warning Letters constituted a breach of a non-disclosure agreement (NDA) signed
between the parties.
We rejected the claims
by the Israeli software company and moved to dismiss the lawsuit entirely. At this point, all the relevant motions have been filed
and all witnesses deposed including submission of legal summaries. We are unable to make a reasonably reliable estimate of our
chances of successfully defending this lawsuit.
In February 2018, Comm-IT Ltd., a subsidiary
of our company, commenced an action against a customer for payment of an overdue amount in the Supreme Court of the State of New
York, New York County. This action was settled in 2019 for an immaterial amount, and in October 2019 the parties filed a stipulation
of discontinuance with the court.
Dividend Distribution
Policy
In September 2012, our
Board of Directors adopted a policy for distributing dividends, under which we will distribute a dividend of up to 50% of our annual
distributable profits each year, subject to any applicable law. On August 2019, our Board of Directors amended our dividend distribution
policy, whereas, each year we will distribute a dividend of up to 75% of our annual distributable profit. It is possible that our
Board of Directors will decide, subject to the conditions stated above, to declare additional dividend distributions. Our Board
of Directors may at its discretion and at any time, change, whether as a result of a one-time decision or a change in policy, the
rate of dividend distributions or not to distribute a dividend.
According to the Israeli
Companies Law, a registrant may distribute dividends out of its profits provided that there is no reasonable concern that such
dividend distribution will prevent the company from paying all its current and foreseeable obligations, as they become due. Notwithstanding
the foregoing, dividends may be paid with the approval of a court, provided that there is no reasonable concern that such dividend
distribution will prevent the company from satisfying its current and foreseeable obligations, as they become due. Profits, for
purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two
years, after deducting previous distributions that were not deducted from the surpluses.
Since the adoption of
our dividend policy, the following dividends have been paid:
In September 2012, we declared a cash dividend
of $0.10 per share ($3.7 million in the aggregate) that was paid on October 17, 2012.
In February 2013 we declared a cash dividend
of $0.12 per share ($4.4 million in the aggregate) that was paid on March 14, 2013.
In August 2013, we declared
a cash dividend of $0.09 per share ($3.4 million in the aggregate) that was paid on September 3, 2013.
In February 2014, we
declared a cash dividend of $0.12 per share ($4.5 million in the aggregate) that was paid on March 14, 2014.
In September 2014, we
declared a cash dividend in the amount of US $0.095 per share ($4.2 million in the aggregate) that was paid on September 4, 2014.
In February 2015, we declared a cash dividend
in the amount of US $0.081 per share ($3.6 million in the aggregate), that was paid on March 11, 2015.
In August 2015, we declared a cash dividend
in the amount of $0.095 per share ($4.2 million in the aggregate) that was paid on September 10, 2015.
In February 2016, we declared a cash dividend
in the amount of $0.09 per share ($4.0 million in the aggregate) that was paid on March 17, 2016.
In August 2016, we declared a cash dividend
in the amount of $0.085 per share ($3.8 million in the aggregate) that was paid on September 22, 2016.
In February 2017, we
declared a cash dividend in the amount of $0.085 per share ($3.8 million in the aggregate) that was paid on April 5, 2017.
In August 2017, we declared a cash dividend
in the amount of $0.13 per share ($5.8 million in the aggregate) that was paid on September 13, 2017.
In February 2018, we declared a cash dividend
in the amount of $0.13 per share ($5.8 million in the aggregate) that was paid on March 26, 2018.
In August 2018, we declared a cash dividend
in the amount of $0.155 per share ($7.6 million in the aggregate) that was paid on September 5, 2018.
In March 2019, we declared a cash dividend
in the amount of $0.15 per share ($7.3 million in the aggregate) that was paid on March 25, 2019.
In August 2019, we declared a cash dividend
in the amount of $0.156 per share ($7.6 million in the aggregate) that was paid on September 12, 2019.
On January 1,
2020, we acquired additional 20.05% of its subsidiary, Roshtov Software Industries Ltd (“Roshtov”), an Israeli-based
software company that is a market leader in Israel in patient record information systems, for a total cash consideration of approximately
$ 15,000,000, which was paid upon closing. Subsequent to the share purchase, we hold 80.05% of Roshtov.
We and Roshtov
hold mutual call and put options respectively for the remaining 19.95% interest in Roshtov.
On April 15,
2020, we acquired an additional 10.17% of our subsidiary Comblack IT Ltd. (“Comblack”), an Israeli-based company that
specializes in software professional and outsource management services for mainframes and complex large-scale environments, for
a total cash consideration of approximately $ 3,600,000, of which an amount of $ 3,000,000 was paid upon closing and the remaining
will be paid over a period of up to 18 months.
In addition to
the cash consideration, we have in place a contingent consideration mechanism according to which an additional amount may be paid
in the event of Comblack meeting certain income. If Comblack will not meet these milestones it will be required to pay back part
of the cash consideration. Subsequent to the share purchase, we hold an 80.2% stake in the Comblack. Comblack holds a put option
in respect to its remaining 19.8% holding.
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ITEM 9.
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THE OFFER AND LISTING
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A.
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Offer
and Listing Details
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Our
ordinary shares are traded on the NASDAQ Global Select Market under the ticker symbol “MGIC”.
Not applicable.
Our Ordinary Shares were
listed on the NASDAQ Global Market (symbol: MGIC) from our initial public offering in the United States on August 16, 1991 until
January 3, 2011, at which date the listing of our Ordinary Shares was transferred to the NASDAQ Global Select Market. Since November
16, 2000, our Ordinary Shares have also traded on the TASE, and on December 15, 2011 they have been included in the TASE’s
TA-125 Index.
Not applicable.
Not applicable.
Not applicable.
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ITEM 10.
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ADDITIONAL INFORMATION
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Not applicable.
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B.
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Memorandum
and Articles of Association
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Set out below is a description
of certain provisions of our Articles of Association and of the Israeli Companies Law related to such provisions. This description
is only a summary and does not purport to be complete and is qualified by reference to the full text of the Articles of Association,
which are incorporated by reference as an exhibit to this Annual Report.
Purposes and Objects of the Company
We are a public company
registered with the Israeli Companies Registry as Magic Software Enterprises Ltd., registration number 52-003674-0. Section 2 of
our memorandum of association provides that we were established for the purpose of engaging in all fields of the computer business
and in any other lawful activity permissible under Israeli law.
The Powers of the Directors
According to our articles
of association, and under the limitations described therein, our board of directors may cause the company to borrow or secure the
payment of any sum or sums of money for the purposes of the company, and set aside any amount out of our profits as a reserve for
any purpose.
Under our articles of
association, retirement of directors from office is not subject to any age limitation and our directors are not required to own
shares in our company in order to qualify to serve as directors.
Rights Attached to Shares
Annual and Extraordinary Meetings
Under the Israeli Companies
Law, a company must convene an annual meeting of shareholders at least once every calendar year and within fifteen months of the
last annual meeting. Depending on the matter to be voted upon, notice of at least 21 days or 35 days prior to the date of the meeting
is required. Our board of directors may, in its discretion, convene additional meetings as “extraordinary general meetings.”
In addition, the board must convene an extraordinary general meeting upon the demand of two of the directors or 25% of the nominated
directors, one or more shareholders holding at least 5% of the outstanding share capital and at least 1% of the voting power in
the company, or one or more shareholders holding at least 5% of the voting power in the company.
Please refer to Exhibit 2.2 for Items 10.B.3,
B.4, B.6, B.7, B.8, B.9 and B.10.
While we have numerous
contracts with customers, resellers, distributors and property owners, we do not deem any such individual contract to be material
contracts that are not in the ordinary course of our business.
Israeli law and regulations
do not impose any material foreign exchange restrictions on non-Israeli holders of our Ordinary Shares.
Non-residents of Israel
who purchase our Ordinary Shares will be able to convert dividends, if any, thereon, and any amounts payable upon our dissolution,
liquidation or winding up, as well as the proceeds of any sale in Israel of our Ordinary Shares to an Israeli resident, into freely
repatriable dollars, at the exchange rate prevailing at the time of conversion, provided that the Israeli income tax has been withheld
(or paid) with respect to such amounts or an exemption has been obtained.
The following is a discussion
of Israeli and United States tax consequences material to our shareholders. To the extent that the discussion is based on new tax
legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed
in the discussion will be accepted by the appropriate tax authorities or the courts. The discussion is not intended, and should
not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
Holders of our Ordinary
Shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership
and disposition of Ordinary Shares, including, in particular, the effect of any foreign, state or local taxes.
Israeli
Tax Considerations
Tax regulations have
a material impact on our business, particularly in Israel where we have our headquarters. The following is a summary of some of
the current tax law applicable to companies in Israel, with special reference to its effect on us. The following also contains
a discussion of specified Israeli tax consequences to our shareholders and government programs benefiting us. To the extent that
the discussion is based on tax legislation that has not been subject to judicial or administrative interpretation, there can be
no assurance that the views expressed in the discussion will be accepted by the tax authorities in question. The discussion is
not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
General Corporate Tax Structure
Generally, Israeli companies
are subject to corporate tax on their taxable income. As of 2018 the corporate tax rate is 23%. However, the effective tax rate
payable by a company that derives income from an AE, BE, PFE or a PTE, in each case, as defined and further discussed below, may
be considerably lower. See “Law for the Encouragement of Capital Investments” in this Item 5.A below. In addition,
Israeli companies are currently subject to regular corporate tax rate on their capital gains.
Besides being subject
to the general corporate tax rules in Israel, certain of our Israeli subsidiaries have also, from time to time, applied for and
received certain grants and tax benefits from, and participate in, programs sponsored by the Government of Israel, as described
below.
Law for the Encouragement of Industry
(Taxes), 1969
The Law for the Encouragement
of Industry (Taxes), 5729-1969 (the “Industry Encouragement Law”) provides several tax benefits for an “Industrial
Company.” Pursuant to the Industry Encouragement Law, a company qualifies as an Industrial Company if it is an Israeli resident
company which was incorporated in Israel and at least 90% of its income in any tax year (other than income from certain government
loans) is generated from an “Industrial Enterprise” that it owns and is located in Israel or in the “Area,”
in accordance with the definition under Section 3A of the Israeli Income Tax Ordinance (New Version) 1961, or the Ordinance. An
“Industrial Enterprise” is defined as an enterprise whose major activity, in a given tax year, is industrial production.
An Industrial Company is entitled to certain
corporate tax benefits, including:
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§
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Amortization of the cost of the purchases of patents, or the right to use a patent or know-how
used for the development or promotion of the Industrial Enterprise, over an eight-year period commencing on the year in which such
rights were first exercised;
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§
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The right to elect, under certain conditions, to file a consolidated tax return together with Israeli
Industrial Companies controlled by it; and
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§
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Expenses related to a public offering are deductible in equal amounts over three years beginning from the year of the offering.
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Eligibility for benefits under the Industry
Encouragement Law is not subject to receipt of prior approval from any governmental authority.
We believe that certain of our Israeli subsidiaries
currently qualify as Industrial Companies within the definition under the Industry Encouragement Law. We cannot assure you that
they will continue to qualify as Industrial Companies or that the benefits described above will be available in the future.
Law for the Encouragement of Capital
Investments, 5719-1959
The Law for the Encouragement
of Capital Investments, 5719-1959, or the Investment Law, provides certain incentives for capital investments in a production facility
(or other eligible assets). Generally, an investment program that is implemented in accordance with the provisions of the Investment
Law, referred to as an Approved Enterprise, or AE, a Benefitted Enterprise, or BE, or a Preferred Enterprise, or PFE, or a Preferred
Technological Enterprise, or PTE, or a Special Preferred Technological Enterprise, or SPFE is entitled to benefits as discussed
below. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the
geographic location in Israel of the facility in which the investment is made. In order to qualify for these incentives, an AE,
BE, PFE, PTE or SPFE is required to comply with the requirements of the Investment Law.
The Investment Law has
been amended several times over the recent years, with the three most significant changes effective as of April 1, 2005 (referred
to as the 2005 Amendment), as of January 1, 2011 (referred to as the 2011 Amendment) and as of January 1, 2017 (referred to
as the 2017 Amendment). Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment
Law prior to its revision by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions
of the amended Investment Law. Similarly, the 2011 Amendment introduced new benefits instead of the benefits granted in accordance
with the provisions of the Investment Law prior to the 2011 Amendment. However, companies entitled to benefits under the Investment
Law as in effect up to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions
are met, or elect instead, irrevocably, to forego such benefits and elect the benefits of the 2011 Amendment. The 2017 Amendment
introduces new benefits for Technological Enterprises, alongside the existing tax benefits.
Tax benefits under the 2011 Amendment
became effective on January 1, 2011
The 2011 Amendment canceled
the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced
new benefits for income generated by a “Preferred Company” through its PFE (as such terms are defined in the Investment
Law) as of January 1, 2011. A Preferred Company is defined as either (i) a company incorporated in Israel which is not wholly owned
by a governmental entity or (ii) a limited partnership that (a) was registered under the Israeli Partnerships Ordinance and (b)
all of its limited partners are companies incorporated in Israel, but not all of them are governmental entities; which has, among
other things, PFE status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company is entitled
to a reduced corporate tax rate of 15% with respect to its preferred income, or PFI, attributed to its PFE in 2011 and 2012, unless
the PFE is located in a certain development zone, in which case the rate will be 10%. Such corporate tax rate was reduced to 12.5%
and 7%, respectively, in 2013 and was increased to 16% and 9%, respectively, in 2014 until 2016. Pursuant to the 2017 Amendment,
in 2017 and thereafter, the corporate tax rate for a PFE that is located in a specified development zone was decreased to 7.5%,
while the reduced corporate tax rate for other development zones remains 16%. Income derived by a Preferred Company from a Special
PFE (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced
tax rates of 8%, or 5% if the Special PFE is located in a certain development zone. As of January 1, 2017, the definition for Special
PFE includes less stringent conditions.
The classification of income generated from
the provision of usage rights in know-how or software that were developed in a PFE, as well as royalty income received with respect
to such usage, is subject, as PFE income, to the issuance of a pre-ruling from the Israel Tax Authority that stipulates that such
income is associated with the productive activity of the PFE in Israel.
Dividends paid out of
PFI attributed to a PFE or to a Special PFE are generally subject to withholding tax at source at the rate of 20% or such lower
rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax
Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be
withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at
a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply). From 2017 to 2019, dividends paid
out of PFI attributed to a PFE, directly to a foreign parent company, were subject to withholding tax at source at the rate of
5% (temporary provisions).
The 2011 Amendment also
provided transitional provisions to address companies already enjoying current benefits under the Investment Law. These transitional
provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law
as amended in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate
of approval that was granted to an AE, which chose to receive grants, before the 2011 Amendment became effective, will remain subject
to the provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions; and (ii)
the terms and benefits included in any certificate of approval that was granted to an AE, that had participated in an alternative
benefits program, before the 2011 Amendment became effective, will remain subject to the provisions of the Investment Law as in
effect on the date of such approval, provided that certain conditions are met. We and one of our Israeli subsidiaries have elected
to apply the new incentives regime under the Amendment to our industrial activity under the 2011 Amendment.
New Tax benefits
under the 2017 Amendment that became effective on January 1, 2017
The 2017 Amendment was
enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and is effective as of January 1, 2017.
The 2017 Amendment provides new tax benefits for two types of Technology Enterprises, as described below, and is in addition to
the other existing tax beneficial programs under the Investment Law.
The 2017 Amendment provides
that a technology company satisfying certain conditions will qualify as a PTE, and will thereby enjoy a reduced corporate tax rate
of 12% on income that qualifies as Preferred Technology Income, or PTI, as defined in the Investment Law. The tax rate is further
reduced to 7.5% for a PTE located in development zone A. In addition, a Preferred Technology Company will enjoy a reduced corporate
tax rate of 12% on capital gain derived from the sale of certain Benefited Intangible Assets (as defined in the Investment Law)
to a related foreign company if the Benefited Intangible Assets were acquired from a foreign company on or after January 1, 2017
for at least NIS 200 million, and the sale receives prior approval from the National Authority for Technological Innovation (previously
known as the Israeli Office of the Chief Scientist) (referred to as IIA).
The 2017 Amendment further
provides that a technology company satisfying certain conditions will qualify as a Special PTE (an enterprise for which, among
others, total consolidated revenues of its parent company and all subsidiaries is at least NIS 10 billion) and will thereby enjoy
a reduced corporate tax rate of 6% on PTI regardless of the company’s geographic location within Israel. In addition, a Special
PTE will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefited Intangible
Assets” to a related foreign company if the Benefited Intangible Assets were either developed by the Special Preferred Technology
Enterprise or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from IIA. A Special
PTE that acquires Benefited Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits
for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed
by a PTE or a Special PTE, paid out of PTI, are generally subject to withholding tax at source at the rate of 20% or such lower
rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax
Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be
withheld (although, if such dividends are subsequently distributed from such Israeli company to individuals or a non-Israeli company,
withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply). If such dividends
are distributed to a foreign company that holds solely or together with other foreign companies 90% or more in the Israeli company
and other conditions are met, the withholding tax rate will be 4% (or a lower rate under a tax treaty, if applicable, subject to
the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
We examined the impact
of the 2017 Amendment and the degree to which we will qualify as a PTE or Special PTE, and the amount of PTI that we may have,
or other benefits that we may receive, from the 2017 Amendment. Beginning in 2017, part of the Company taxable income in Israel
is entitled to a preferred 12% tax rate under the 2017 Amendment.
Tax Benefits
for Research and Development
Israeli
tax law allows, under certain conditions, a tax deduction for research and development expenditures, including capital expenditures,
for the year in which they are incurred. Such expenditures must relate to scientific research and development projects, and must
be approved by the relevant Israeli government ministry, determined by the field of research. Furthermore, the research and development
must be for the promotion of the company’s business and carried out by or on behalf of the company seeking such tax deduction.
However, the amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance
of such scientific research and development projects. Expenditures not so approved by the relevant Israeli government ministry,
but otherwise qualifying for deduction, are deductible over a three-year period.
Israeli Capital Gains Tax
The following is a short
summary of the material provisions of the tax environment to which shareholders may be subject. This summary is based on the current
provisions of tax law. To the extent that the discussion is based on new tax legislation that has not been subject to judicial
or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate
tax authorities or the courts.
The summary does not
address all of the tax consequences that may be relevant to all purchasers of our Ordinary Shares in light of each purchaser’s
particular circumstances and specific tax treatment. For example, the summary below does not address the tax treatment of residents
of Israel and traders in securities who are subject to specific tax regimes. As individual circumstances may differ, holders of
our Ordinary Shares should consult their own tax adviser as to the United States, Israeli or other tax consequences of the purchase,
ownership and disposition of Ordinary Shares. The following is not intended, and should not be construed, as legal or professional
tax advice and is not exhaustive of all possible tax considerations. Each individual should consult his or her own tax or legal
adviser.
Tax Consequences Regarding Disposition
of Our Ordinary Shares
Overview
Israeli law generally
imposes a capital gain tax on the sale of capital assets by residents of Israel, as defined for Israeli tax purposes, and on the
sale of assets located in Israel, including shares of Israeli companies, by both residents and non-residents of Israel, unless
a specific exemption is available or unless a tax treaty between Israel and the seller’s country of residence provides otherwise.
The Ordinance distinguishes between “Real Capital Gain” and “Inflationary Surplus”. The Inflationary Surplus
is a portion of the total capital gain, which is equivalent to the increase of the relevant asset’s purchase price, which
is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate,
between the date of purchase and the date of sale. The Real Capital Gain is the excess of the total capital gain over the Inflationary
Surplus.
Capital gain
Israeli Resident Shareholders
As of January 1, 2012,
the tax rate applicable to Real Capital Gain derived by Israeli individuals from the sale of shares, whether or not listed on a
stock exchange, is 25%, unless such shareholder claims a deduction for interest and linkage differences expenses in connection
with the purchase and holding of such shares, in which case the gain will generally be taxed at a rate of 30%. However, if such
shareholder is considered a Substantial Shareholder (i.e., a person who holds, directly or indirectly, alone or together with another
person who collaborates with such person on a permanent basis, 10% or more of any of the company’s “means of control”
(including, among other things, the right to receive profits of the company, voting rights, the right to receive the company’s
liquidation proceeds and the right to appoint a director)) at the time of sale or at any time during the preceding 12-month period,
such gain will be taxed at the rate of 30%. Individual shareholders dealing in securities in Israel are taxed at their marginal
tax rates applicable to business income (up to 47% in 2018 and thereafter).
Under current Israeli
tax legislation, the tax rate applicable to Real Capital Gain derived by Israeli resident corporations from the sale of shares
of an Israeli company is the general corporate tax rate. As described above, the corporate tax rate as of 2018 and thereafter is
23%.
Non-Israeli Resident
Shareholders
Israeli capital gain
tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii)
shares or rights to shares in an Israeli resident company; or (iii) represent, directly or indirectly, rights to assets located
in Israel, unless a tax treaty between Israel and the seller’s country of residence provides otherwise. As mentioned above,
Real Capital Gain is generally subject to tax at the corporate tax rate (23% in 2018 and thereafter) if generated by a company,
or at the rate of 25% or 30%, if generated by an individual. Individual and corporate shareholders dealing in securities in Israel
are taxed at the tax rates applicable to business income (a corporate tax rate for a corporation and a marginal tax rate of up
to 47% for an individual in 2018 and thereafter).
Notwithstanding the foregoing,
shareholders who are non-Israeli residents (individuals and corporations) are generally exempt from Israeli capital gain tax on
any gains derived from the sale, exchange or disposition of shares publicly traded on the Tel Aviv Stock Exchange or on a recognized
stock exchange outside of Israel, provided, among other things, that (i) such gains are not generated through a permanent establishment
that the non-Israeli resident maintains in Israel, (ii) the shares were purchased after being listed on a recognized stock exchange,
and (iii) with respect to shares listed on a recognized stock exchange outside of Israel, such shareholders are not subject to
the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985. However, non-Israeli corporations will not be entitled to the
foregoing exemptions if Israeli residents (a) have a controlling interest of more than 25% in such non-Israeli corporation, or
(b) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly. Such exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares
are deemed to be business income.
In addition, a sale of
shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, under the U.S.-Israel
Tax Treaty, or the U.S-Israel Treaty, the sale, exchange or disposition of shares of an Israeli company by a shareholder who is
a U.S. resident (for purposes of the U.S.-Israel Treaty) holding the shares as a capital asset is exempt from Israeli capital gain
tax unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of the voting rights during
any part of the 12-month period preceding such sale, exchange or disposition; (ii) the shareholder, if an individual, has been
present in Israel for a period or periods of 183 days or more in the aggregate during the applicable taxable year; (iii) the capital
gain arising from such sale are attributable to a permanent establishment of the shareholder which is maintained in Israel; (iv)
the capital gain arising from such sale, exchange or disposition is attributed to real estate located in Israel; (v) the capital
gain arising from such sale, exchange or disposition is attributed to royalties; or (vi) the shareholder is a U.S. resident (for
purposes of the U.S.-Israel Treaty) and is not holding the shares as a capital asset. In each case, the sale, exchange or disposition
of such shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Treaty, a U.S. resident
would be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed with respect to the sale,
exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S-Israel Treaty does
not provide such credit against any U.S. state or local taxes.
In some instances where
our shareholders may be liable for Israeli tax on the sale of their Ordinary Shares, the payment of the consideration may be subject
to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their
capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all
of the shares of an Israeli resident company, in the form of a merger or otherwise, the Israel Tax Authority may require from shareholders
who are not liable for Israeli tax to sign declarations in forms specified by this authority or obtain a specific exemption from
the Israel Tax Authority to confirm their status as non-Israeli resident, and, in the absence of such declarations or exemptions,
may require the purchaser of the shares to withhold taxes at source.
Taxes applicable to Dividends
Israeli Resident Shareholders
Israeli residents who
are individuals are generally subject to Israeli income tax for dividends paid on our Ordinary Shares (other than bonus shares
or share dividends) at 25%, or 30% if the recipient of such dividend is a Substantial Shareholder at the time of distribution or
at any time during the preceding 12-month period. However, dividends distributed from taxable income allocated and accrued during
the benefits period of an AE are subject to withholding tax at the rate of 15% (if the dividend is distributed during the tax benefits
period under the Investment Law or within 12 years after such period, except with respect to an FIC, in which case the 12 year
limit does not apply) or 20% with respect to PFE. An average rate will be set in case the dividend is distributed from mixed types
of income (regular and Approved/Beneficiary/ Preferred income).
Israeli resident corporations
are generally exempt from Israeli corporate tax for dividends paid on shares of Israeli resident corporations (like our Ordinary
Shares). However, dividends distributed from taxable income accrued during the benefits period of an AE are subject to withholding
tax at the rate of 15%, if the dividend is distributed during the tax benefits period under the Investment Law or within 12 years
after such period.
Non-Israeli Resident Shareholders
Non-Israeli residents
(whether individuals or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on our Ordinary
Shares, at the rate of 25% or 30% (if the dividend recipient is a Substantial Shareholder at the time of distribution or at any
time during the preceding 12-month period) or 15% if the dividend is distributed from income attributed to our AE or BE, or 20%
with respect to PFE. Such dividends are generally subject to Israeli withholding tax at a rate of 25% so long as the shares are
registered with a Nominee Company (whether the recipient is a Substantial Shareholder or not), and 15% if the dividend is distributed
from income attributed to an AE or BE or 20% if the dividend is distributed from income attributed to a PFE, unless a reduced rate
is provided under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority
allowing for a reduced tax rate). For example, under the U.S-Israel Treaty, the maximum rate of tax withheld in Israel on dividends
paid to a holder of our Ordinary Shares who is a U.S. resident (for purposes of the U.S.-Israel Treaty) is 25%. However, generally,
the maximum rate of withholding tax on dividends, not generated by our AE or BE, that are paid to a U.S. corporation holding
at least 10% or more of our outstanding voting capital from the start of the tax year preceding the distribution of the dividend
through (and including) the distribution of the dividend, is 12.5%, provided that no more than 25% of our gross income for such
preceding year consists of certain types of dividends and interest. Notwithstanding the foregoing, dividends distributed from income
attributed to an AE or BE are subject to a withholding tax rate of 15% for such a U.S. corporation shareholder, provided that the
condition related to our gross income for the previous year (as set forth in the previous sentence) is met. The aforementioned
rates will not apply if the dividend income was generated through a permanent establishment of the U.S. resident which is maintained
in Israel. If the dividend is attributable partly to income derived from an AE a BE, or a PFE, and partly to other sources of income,
the withholding rate will be a blended rate reflecting the relative portions of the two types of income. U.S residents who are
subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for U.S. federal income tax purposes
in the amount of the taxes withheld, subject to detailed rules contained in United States tax legislation. A non-Israeli resident
who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel with respect
to such income, provided that (i) such income was not generated from business conducted in Israel by the taxpayer, and (ii) the
taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be filed.
Excess Tax
Individuals who are subject
to tax in Israel (whether any such individual is an Israeli resident or non-Israeli resident) are also subject to an additional
tax for income exceeding a certain level. For 2017 and onwards, the additional tax is at a rate of 3% on annual income exceeding
NIS 649,560 for 2019 (approximately $0.2 million) which amount is linked to the annual change in the Israeli consumer price index,
including, but not limited to, dividends, interest and capital gain.
Estate and Gift Tax
Israeli law presently does not impose estate
or gift taxes.
United
States Federal Income Tax Considerations
Subject to the limitations
described herein, this discussion summarizes certain U.S. federal income tax consequences of the purchase, ownership and disposition
of our Ordinary Shares to a U.S. holder. A U.S. holder is a holder of our Ordinary Shares who is:
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An individual who is a citizen or resident of the U.S. for U.S. federal income tax purposes
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A corporation (or another entity taxable as a corporation for U.S. federal income tax purposes)
created or organized under the laws of the United States, any political subdivision thereof, or the District of Columbia
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An estate, the income of which may be included in gross income for U.S. federal income tax purposes
regardless of its source
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A trust (i) if, in general, a U.S. court is able to exercise primary supervision over its administration
and one or more U.S. persons have the authority to control all of its substantial decisions or (ii) an electing trust that was
in existence on August 19, 1996 and was treated as a domestic trust on that date
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Unless otherwise specifically
indicated, this discussion does not consider the U.S. tax consequences to a person that is not a U.S. holder (which we refer to
as a non-U.S. holder) and considers only U.S. holders that will own our Ordinary Shares as capital assets (generally, for investment).
This discussion is based
on current provisions of the Internal Revenue Code of 1986, as amended, or the Code, current and proposed Treasury Regulations
promulgated under the Code and administrative and judicial interpretations of the Code, all as currently in effect and all of which
are subject to change, possibly with a retroactive effect. This discussion does not address all aspects of U.S. federal income
taxation that may be relevant to any particular U.S. holder based on the U.S. holder’s particular circumstances. In particular,
this discussion does not address the U.S. federal income tax consequences to U.S. holders who are broker-dealers, insurance companies,
real estate investment trusts, regulated investment companies, grantor trusts, individual retirement and tax-deferred accounts,
certain former citizens or long-term residents of the U.S., tax-exempt organizations, financial institutions, “financial
service entities” or who own, directly, indirectly or constructively, 10% or more of the vote or value of the our outstanding
shares, U.S. holders holding our Ordinary Shares as part of a hedging, straddle or conversion transaction, U.S. holders whose functional
currency is not the U.S. dollar, U.S. holders that acquired our Ordinary Shares upon the exercise of employee stock options or
otherwise as compensation, and U.S holders who are persons subject to the alternative minimum tax, who may be subject to special
rules not discussed below.
Additionally, the tax
treatment of persons who are, or hold our Ordinary Shares through a partnership or other pass-through entity is not considered,
nor is the possible application of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S. tax laws.
Unless otherwise specifically indicated, this
discussion does not consider the U.S. tax consequences to a person that is not a U.S. holder (which we refer to as a non-U.S. holder)
and considers only U.S. holders that will own our Ordinary Shares as capital assets (generally, for investment).
Furthermore, unless otherwise
indicated, this discussion assumes that the Company is not, and will not become, a “passive foreign investment company,”
or a PFIC, for U.S. federal income tax purposes. See “—Passive Foreign Investment Companies”
below.
You are advised to
consult your tax advisor with respect to the specific U.S. federal, state, local and foreign tax consequences of purchasing, holding
or disposing of our Ordinary Shares.
Taxation of Distributions
on Ordinary Shares
Subject to the discussion
below under “Tax Consequences if We Are a Passive Foreign Investment Company,” a distribution paid by us with respect
to our Ordinary Shares to a U.S. holder will be treated as dividend income to the extent that the distribution does not exceed
our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes.
Dividends that are received
by U.S. holders that are individuals, estates or trusts generally will be taxed at the rate applicable to long-term capital gains,
provided those dividends meet the requirements of “qualified dividend income.” The maximum long-term capital gains
rate is 20% for individuals with annual taxable income that exceeds certain thresholds. In addition, under the Patient Protection
and Affordable Care Act, higher income taxpayers must pay an additional 3.8% tax on net investment income to the extent certain
threshold amounts of income are exceeded. See “Tax on Net Investment Income” in this Item below. For this purpose,
qualified dividend income generally includes dividends paid by a foreign corporation if certain holding period and other requirements
are met and either (a) the stock of the foreign corporation with respect to which the dividends are paid is “readily tradable”
on an established securities market in the U.S. (e.g., the NASDAQ Capital Market) or (b) the foreign corporation is eligible for
benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to
be satisfactory by the U.S. Secretary of the Treasury. Dividends that fail to meet such requirements and dividends received by
corporate U.S. holders are taxed at ordinary income rates. No dividend received by a U.S. holder will be a qualified dividend (i)
if the U.S. holder held the Ordinary Share with respect to which the dividend was paid for less than 61 days during the 121-day
period beginning on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding for this purpose,
under the rules of Code Section 246(c), any period during which the U.S. holder has an option to sell, is under a contractual obligation
to sell, has made (and not closed) a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy,
or has otherwise diminished its risk of loss by holding other positions with respect to, such Common Share (or substantially identical
securities); or (ii) to the extent that the U.S. holder is under an obligation (pursuant to a short sale or otherwise) to make
related payments with respect to positions in property substantially similar or related to the Ordinary Share with respect to which
the dividend is paid. If we were to be a “passive foreign investment company” (as such term is defined in the Code),
or PFIC, for any taxable year, dividends paid on our Ordinary Shares in such year or in the following taxable year would not be
qualified dividends. See the discussion below regarding our PFIC status under “Tax Consequences if We Are a Passive Foreign
Investment Company.” In addition, a non-corporate U.S. holder will be able to take qualified dividend income into account
in determining its deductible investment interest (which is generally limited to its net investment income) only if it elects to
do so; in such case the dividend income will be taxed at ordinary income rates.
The amount of any distribution
which exceeds the amount treated as a dividend will be treated first as a non-taxable return of capital, reducing the U.S. holder’s
tax basis in our Ordinary Shares to the extent thereof, and then as capital gain from the deemed disposition of the Ordinary Shares.
Corporate holders will not be allowed a deduction for dividends received in respect of the Ordinary Shares.
Distributions of current
or accumulated earnings and profits paid in foreign currency to a U.S. holder will be includible in the income of a U.S. holder
in a U.S. dollar amount calculated by reference to the exchange rate on the day the distribution is received. A U.S. holder that
receives a foreign currency distribution and converts the foreign currency into U.S. dollars subsequent to receipt may have foreign
exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which
will generally be U.S. source ordinary income or loss.
Taxation of the Disposition of Common
Shares
Subject to the discussion
below under “Tax Consequences if We Are a Passive Foreign Investment Company,” upon the sale, exchange or other disposition
of our Ordinary Shares, a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the amount
realized on the disposition and the U.S. holder’s tax basis in our Ordinary Shares. The gain or loss recognized on the disposition
of the Ordinary Shares will be long-term capital gain or loss if the U.S. holder held the Ordinary Shares for more than one year
at the time of the disposition and would be eligible for a reduced rate of taxation for certain non-corporate U.S. holders. The
maximum long-term capital gains rate is 20% for individuals with annual taxable income that exceeds certain thresholds. In addition,
under the Patient Protection and Affordable Care Act, higher income taxpayers must pay an additional 3.8% tax on net investment
income to the extent certain threshold amounts of income are exceeded. See “Tax on Net Investment Income” in this Item
below. Capital gain from the sale, exchange or other disposition of Ordinary Shares held for one year or less is short-term capital
gain and taxed as ordinary income. Gain or loss recognized by a U.S. holder on a sale, exchange or other disposition of our Ordinary
Shares generally will be treated as U.S. source income or loss. The deductibility of capital losses is subject to certain limitations.
A U.S. holder that uses
the cash method of accounting calculates the dollar value of the proceeds received on the sale as of the date that the sale settles.
However, a U.S. holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale
as of the trade date and may therefore realize foreign currency gain or loss. A U.S. holder that uses the accrual method may avoid
realizing foreign currency gain or loss by electing to use the settlement date to determine the proceeds of sale for purposes of
calculating the foreign currency gain or loss. In addition, a U.S. holder that receives foreign currency upon disposition of its
Ordinary Shares and converts the foreign currency into dollars after the settlement date or trade date (whichever date the U.S.
holder is required to use to calculate the value of the proceeds of sale) may have foreign exchange gain or loss based on any appreciation
or depreciation in the value of the foreign currency against the dollar, which will generally be U.S. source ordinary income or
loss.
Tax Consequences
if We Are a Passive Foreign Investment Company
We would be
a passive foreign investment company, or PFIC, for a taxable year if either (1) 75% or more of our gross income in the taxable
year is passive income; or (2) the average percentage (by value determined on a quarterly basis) in a taxable year of our assets
that produce, or are held for the production of, passive income is at least 50%. Passive income for this purpose generally includes,
among other things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions and from
the sale or exchange of property that gives rise to passive income. If we own (directly or indirectly) at least 25% by value of
the stock of another corporation, we would be treated for purposes of the foregoing tests as owning our proportionate share of
the other corporation’s assets and as directly earning our proportionate share of the other corporation’s income. As
discussed below, we believe that we were not a PFIC for 2019.
If we were
a PFIC, each U.S. holder would (unless it made one of the elections discussed below on a timely basis) be taxable on gain recognized
from the disposition of our Ordinary Shares (including gain deemed recognized if our Ordinary Shares are used as security for a
loan) and upon receipt of certain excess distributions (generally, distributions that exceed 125% of the average amount of distributions
in respect to such shares received during the preceding three taxable years or, if shorter, during the U.S. holder’s holding
period prior to the distribution year) with respect to our Ordinary Shares as if such income had been recognized ratably over the
U.S. holder’s holding period for the shares. The U.S. holder’s income for the current taxable year would include (as
ordinary income) amounts allocated to the current taxable year and to any taxable year prior to the first day of the first taxable
year for which we were a PFIC. Tax would also be computed at the highest ordinary income tax rate in effect for each other taxable
year to which income is allocated, and an interest charge on the tax as so computed would also apply. The tax liability with respect
to the amount allocated to the taxable year prior to the taxable year of the distribution or disposition cannot be offset by any
net operating losses. Additionally, if we were a PFIC, U.S. holders who acquire our Ordinary Shares from decedents (other than
nonresident aliens) would be denied the normally-available step-up in basis for such shares to fair market value at the date of
death and, instead, would have a tax basis in such shares equal to the lesser of the decedent’s basis or the fair market
value of such shares on the decedent’s date of death.
As an alternative
to the tax treatment described above, a U.S. holder could elect to treat us as a “qualified electing fund” (a QEF),
in which case the U.S. holder would be taxed, for each taxable year that we are a PFIC, on its pro rata share of our ordinary earnings
and net capital gain (subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge).
Special rules apply if a U.S. holder makes a QEF election after the first taxable year in its holding period in which we are a
PFIC. We have agreed to supply U.S. holders with the information needed to report income and gain under a QEF election if we were
a PFIC. Amounts includable in income as a result of a QEF election will be determined without regard to our prior year losses or
the amount of cash distributions, if any, received from us. A U.S. holder’s basis in its Ordinary Shares will increase by
any amount included in income and decrease by any amounts not included in income when distributed because such amounts were previously
taxed under the QEF rules. So long as a U.S. holder’s QEF election is in effect with respect to the entire holding period
for its Ordinary Shares, any gain or loss realized by such holder on the disposition of its Ordinary Shares held as a capital asset
generally will be capital gain or loss. Such capital gain or loss ordinarily would be long-term if such U.S. holder had held such
Ordinary Shares for more than one year at the time of the disposition and would be eligible for a reduced rate of taxation for
certain non-corporate U.S. holders. The maximum long-term capital gains rate is 20% for individuals with annual taxable income
that exceeds certain thresholds. The QEF election is made on a shareholder-by-shareholder basis, applies to all Ordinary Shares
held or subsequently acquired by an electing U.S. holder and can be revoked only with the consent of the IRS. The QEF election
must be made on or before the U.S. holder’s tax return due date, as extended, for the first taxable year to which the election
will apply.
As an alternative
to making a QEF election, a U.S. holder of PFIC stock that is “marketable stock” (e.g., “regularly traded”
on the NASDAQ Global Select Market) may, in certain circumstances, avoid certain of the tax consequences generally applicable to
holders of stock in a PFIC by electing to mark the stock to market as of the beginning of such U.S. holder’s holding period
for our Ordinary Shares. Special rules apply if a U.S. holder makes a mark-to-market election after the first year in its holding
period in which we are a PFIC. As a result of such an election, in any taxable year that we are a PFIC, a U.S. holder would generally
be required to report gain or loss to the extent of the difference between the fair market value of the Ordinary Shares at the
end of the taxable year and such U.S. holder’s tax basis in such shares at that time. Any gain under this computation, and
any gain on an actual disposition of our Ordinary Shares in a taxable year in which we are PFIC, would be treated as ordinary income.
Any loss under this computation, and any loss on an actual disposition of our Ordinary Shares in a taxable year in which we are
PFIC, would be treated as ordinary loss to the extent of the cumulative net-mark-to-market gain previously included. Any remaining
loss from marking our Ordinary Shares to market will not be allowed, and any remaining loss from an actual disposition of our Ordinary
Shares generally would be capital loss. A U.S. holder’s tax basis in its Ordinary Shares is adjusted annually for any gain
or loss recognized under the mark-to-market election. There can be no assurances that there will be sufficient trading volume with
respect to our Ordinary Shares for the Ordinary Shares to be considered “regularly traded” or that our Ordinary Shares
will continue to trade on the NASDAQ Capital Market. Accordingly, there are no assurances that our Ordinary Shares will be marketable
stock for these purposes. As with a QEF election, a mark-to-market election is made on a shareholder-by-shareholder basis, applies
to all Ordinary Shares held or subsequently acquired by an electing U.S. holder and can only be revoked with consent of the IRS
(except to the extent our Ordinary Shares no longer constitute “marketable stock”).
Based on an
analysis of our assets and income, we believe that we were not a PFIC for 2019. We currently expect that we will not be a PFIC
in 2020. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of future
income and assets, which are relevant to this determination. Accordingly, there can be no assurance that we will not become a PFIC
in any future taxable years. U.S. holders who hold our Ordinary Shares during a period when we are a PFIC will be subject to the
foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for U.S. holders who made QEF, mark-to-market or
certain other special elections. U.S. holders are urged to consult their tax advisors about the PFIC rules, including the consequences
to them of making a mark-to-market or QEF election with respect to our Ordinary Shares in the event that we qualify as a PFIC.
Non-U.S. holders
of Ordinary Shares
Except as provided below,
a non-U.S. holder of our Ordinary Shares will not be subject to U.S. federal income or withholding tax on the receipt of dividends
on, or the proceeds from the disposition of, our Ordinary Shares, unless, in the case of U.S. federal income taxes, that item is
effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States and, in the case of a
resident of a country which has an income tax treaty with the United States, such item is attributable to a permanent establishment
in the United States or, in the case of an individual, a fixed place of business in the United States. In addition, gain recognized
on the disposition of our Ordinary Shares by an individual non-U.S. holder will be subject to tax in the United States if the non-U.S.
holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.
Tax on Net Investment Income
A U.S. holder that is an individual or estate,
or a trust that does not fall into a special class of trusts that is exempt from the tax, will be subject to a 3.8% tax on the
lesser of (1) the U.S. holder’s “net investment income” for the relevant taxable year and (2) the excess of the
U.S. holder’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals
will be between $125,000 and $250,000, depending on the individual’s circumstances). A U.S. holder’s net investment
income generally will include its dividends on our Ordinary Shares and net gains from dispositions of our Ordinary Shares, unless
those dividends or gains are derived in the ordinary course of the conduct of trade or business (other than trade or business that
consists of certain passive or trading activities). Net investment income, however, may be reduced by deductions properly allocable
to that income. A U.S. holder that is an individual, estate or trust is urged to consult its tax adviser regarding the applicability
of the Medicare tax to its income and gains in respect of its investment in the Ordinary Shares.
Information Reporting and Backup Withholding
A U.S. holder generally
is subject to information reporting and may be subject to backup withholding at a rate of up to 28% with respect to dividend payments
on, or receipt of the proceeds from the disposition of, our Ordinary Shares. Backup withholding will not apply with respect to
payments made to exempt recipients, including corporations and tax-exempt organizations, or if a U.S. holder provides a correct
taxpayer identification number, certifies that such holder is not subject to backup withholding or otherwise establishes an exemption.
Non-U.S. holders are not subject to information reporting or backup withholding with respect to dividend payments on, or receipt
of the proceeds from the disposition of, our Common Shares in the U.S., or by a U.S. payor or U.S. middleman, provided that such
non-U.S. holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption.
Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a holder,
or alternatively, the holder may be eligible for a refund of any excess amounts withheld under the backup withholding rules, in
either case, provided that the required information is furnished to the IRS.
Information Reporting by Certain U.S.
Holders
U.S. citizens and individuals
taxable as resident aliens of the United States that own “specified foreign financial assets” with an aggregate value
in a taxable year in excess of certain threshold (as determined under Treasury regulations) and that are required to file a U.S.
federal income tax return generally will be required to file an information report with respect to those assets with their tax
returns. IRS Form 8938 has been issued for that purpose. “Specified foreign financial assets” include any financial
accounts maintained by foreign financial institutions, foreign stocks held directly, and interests in foreign estates, foreign
pension plans or foreign deferred compensation plans. Under those rules, our Ordinary Shares, whether owned directly or through
a financial institution, estate or pension or deferred compensation plan, would be “specified foreign financial assets”.
Under Treasury regulations, the reporting obligation applies to certain U.S. entities that hold, directly or indirectly, specified
foreign financial assets. Penalties can apply if there is a failure to satisfy this reporting obligation. A U.S. Holder is urged
to consult his tax adviser regarding his reporting obligation.
The above description
is not intended to constitute a complete analysis of all tax consequences relating to acquisition, ownership and disposition of
our ordinary shares. You should consult your tax advisor concerning the tax consequences of your particular situation.
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F.
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Dividends
and Paying Agents
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Not applicable.
Not applicable.
We are subject to certain
of the reporting requirements of the Exchange Act, as applicable to “foreign private issuers” as defined in Rule 3b-4
under the Exchange Act. As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our
proxy solicitations are not subject to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, and
transactions in our equity securities by our officers and directors are exempt from reporting and the “short-swing”
profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act
to file periodic reports and financial statements as frequently or as promptly as U.S. companies whose securities are registered
under the Exchange Act. However, we file with the SEC an annual report on Form 20-F containing financial statements audited by
an independent accounting firm. We also submit to the SEC reports on Form 6-K containing (among other things) press releases and
unaudited financial information. We post our annual report on Form 20-F on our website (www.magicsoftware.com) promptly
following the filing of our annual report with the SEC. The information on our website is not incorporated by reference into this
annual report.
The Exchange Act file number for our SEC filings
is 000-19415.
The SEC maintains a website at www.sec.gov
that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings
with the SEC using its EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.
The documents concerning our company that
are referred to in this annual report may also be inspected at our offices located at 5 Haplada Street, Or Yehuda 6021805, Israel.
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I.
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Subsidiary
Information
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Not applicable.
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ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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We are exposed to a variety of market risks,
primarily changes in interest rates affecting our investments in marketable securities and foreign currency fluctuations.
Cash Investments, Marketable Securities
and Interest Rate Risk
Our cash investment policy
seeks to preserve principal and maintain adequate liquidity while maximizing the income we receive from our investments without
significantly increasing the risk of loss. To minimize investment risk, we maintain a diversified portfolio across various maturities,
types of investments and issuers, which may include, from time to time, money market funds, U.S. government bonds, state debt,
bank deposits and certificates of deposit, and investment grade corporate debt. Our cash management policy does not allow us to
purchase or hold commodity instruments, structures or “sub-prime” related holdings (such as auction rate securities
and collateralized debt obligation) or other financial instruments for trading purposes.
As of December 31, 2019,
we had approximately $88.9 million in cash and cash equivalents and short term bank deposits and $6.6 million in marketable securities.
Our marketable securities include investments in commercial and government bonds and foreign banks. As of such date our marketable
securities portfolio was composed primarily of governmental and commercial bonds bearing average annual interest rates of approximately
2.9%, with average maturities of 0.3 years and maximum maturities of 0.6 years. The performance of the capital markets affects
the values of the funds we hold in marketable securities. These assets are subject to market fluctuations. In such case, the fair
value of our investments may decline. As of December 31, 2019, net unrealized profits in our marketable securities portfolio totaled
$1,600 (one thousand and six hundred dollars). We periodically monitor our investments for adverse material holdings related to
the underlying financial solvency of the issuers of the marketable securities in our portfolio.
Our exposure to market
risk for changes in interest rates relates primarily to our investment in marketable securities. Investments in both fixed rate
and floating rate interest bearing securities carry a degree of interest rate risk. The fair market value of fixed rate securities
may be adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted
if interest rates fall. Due in part to these factors, our future financial results may be negatively affected in the event that
interest rates fluctuate.
Foreign Currency Exchange Risk
Our financial results
may be negatively impacted by foreign currency fluctuations. Our foreign operations are transacted through a global network of
subsidiaries. These sales and related expenses are generally denominated in currencies other than the U.S. dollar. Because our
financial results are reported in U.S. dollars, our results of operations may be adversely impacted by fluctuations in the rates
of exchange between the U.S. dollar and such other currencies as the financial results of our foreign subsidiaries are converted
into U.S. dollars in consolidation. Our earnings are predominantly affected by fluctuations in the value of the U.S. dollar as
compared to the NIS, as well as the value of the U.S. dollar as compared to the euro, Japanese Yen and British Pound.
We measure and record
non-monetary accounts in our balance sheet (principally fixed assets and prepaid expenses) in U.S. dollars. For this measurement,
we use the U.S. dollar value in effect at the date that the asset or liability was initially recorded in our balance sheet (the
date of the transaction).
Our operating expenses
may be affected by fluctuations in the value of the U.S. dollar as it relates to foreign currencies, with NIS, euro and Japanese
Yen having the greatest potential impact. In managing our foreign exchange risk, we periodically enter into foreign exchange hedging
contracts. Our goal is to mitigate the potential exposure with these contracts. By way of example, an increase of 10% in the value
of the NIS relative to the U.S. dollar in 2019 would have resulted in an increase in the U.S. dollar reporting value of our operating
income of $1.5 million for that year, while a decrease of 10% in the value of the NIS relative to the U.S. dollar in 2019 would
have resulted in a decrease in the U.S. dollar reporting value of our operating income of $1.2 million for the year. An increase
of 10% in the value of the euro, the Japanese yen and the British Pound relative to the U.S. dollar in 2019 would have resulted
in an increase in the U.S. dollar reporting value of our operating income of $0.8 million, $0.4 million and $0.1 million, respectively,
for that year, while a decrease of 10% in the value of the euro, Japanese Yen and British Pound relative to the U.S. dollar in
2019 would have resulted in a decrease in the U.S. dollar reporting value of our operating income of $0.7 million, $0.3 million
and $0.1 million, respectively, for that year.
Equity Price Risk
As of December 31, 2019,
we had $5.5 million of trading securities that are classified as available for sale.
Those securities have exposure to equity price risk. The estimated potential loss in fair value resulting from a hypothetical 10%
decrease in prices quoted on stock exchanges is approximately $0.5 million.
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ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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Not applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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U.S.
dollars in thousands
MAGIC
SOFTWARE ENTERPRISES LTD., an Israeli company (“the Group” or “the Company”), is a global provider of:
(i) proprietary application development and business process integration platforms that accelerate the planning, development,
deployment and integration of on-premise, mobile and cloud business applications (“the Magic Technology”); (ii) selected
packaged vertical software solutions; and (iii) a vendor of software services and IT outsourcing software services.
Magic
Technology enables enterprises to accelerate the process of delivering business solutions that meet current and future needs and
allow customers to dramatically improve their business performance and return on investment. To complement its software products
and to increase its traction with customers, the Group also offers a complete portfolio of software services in the areas of infrastructure
design and delivery, application development, technology planning and implementation services, communications services and solutions,
and supplemental IT professional outsourcing services. The Company reports its results on the basis of two reportable business
segments: software services (which include proprietary and non-proprietary software solutions, maintenance and support and related
services) and IT professional services (see Note 18 for further details).
The
Company’s principal markets are the United States, Israel, Europe and Japan (see Note 18).
For
information about the Company’s holdings in subsidiaries and affiliates, see Appendix to the consolidated financial statements.
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
|
The
consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles
(“U.S. GAAP”), applied on a consistent basis, as follows, unless otherwise stated:
Use
of estimates
The
preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments
and assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based
upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Financial
statements in United States dollars
A
substantial portion of the revenues and expenses of the Company and of certain subsidiaries is generated in U.S. dollars (“dollar”).
The Company’s management believes that the dollar is the currency of the primary economic environment in which the Company
and certain subsidiaries operate. Thus, the functional and reporting currency of the Company and certain subsidiaries is the dollar.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with the Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 830, “Foreign Currency
Matters”. All transaction gains and losses of the remeasurement of monetary balance sheet items are reflected in the statements
of income as financial income or expenses, as appropriate. Monetary accounts and transactions maintained in dollars are presented
at their original amounts.
For
those foreign subsidiaries whose functional currency is not the dollar, all balance sheet amounts have been translated using the
exchange rates in effect at each balance sheet date. Statement of income amounts have been translated using the average exchange
rate prevailing during each year. Such translation adjustments are reported as a component of accumulated other comprehensive
income (loss) in equity.
Principles
of consolidation
The
consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Intercompany balances
and transactions, including profit from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation.
Changes
in the Company’s ownership interest in a subsidiary with no change of control are treated as equity transactions, with any
difference between the amount of consideration paid and the change in the carrying amount of the non-controlling interest, recognized
in equity.
Non-controlling
interests of subsidiaries represent the non-controlling shareholders’ share of the total comprehensive income (loss) of
the subsidiaries and fair value of the net assets upon the acquisition of the subsidiaries. The non-controlling interests are
presented in equity separately from the equity attributable to the equity holders of the Company. Redeemable non-controlling interests
are classified as mezzanine equity, separate from permanent equity, on the consolidated balance sheets and measured at each reporting
period at the higher of their redemption amount or the non-controlling interest book value, in accordance with the requirements
of ASC 810 “Consolidation” and ASC 480-10-S99-3A, “Distinguishing Liabilities from Equity”.
The
following table provides a reconciliation of the redeemable non-controlling interests for the year ended December 31, 2019:
January 1, 2019
|
|
$
|
27,235
|
|
Net income attributable to redeemable non-controlling interest
|
|
|
3,111
|
|
Increase in value of put options of redeemable non-controlling interests
|
|
|
7,471
|
|
Dividend declared to redeemable non-controlling interest
|
|
|
(3,395
|
)
|
Acquisition of redeemable non-controlling interests
|
|
|
(4,604
|
)
|
Foreign currency translation adjustments
|
|
|
1,996
|
|
Redeemable non-controlling interest reclassification to non-controlling interest
|
|
|
(9,899
|
)
|
|
|
|
|
|
December 31, 2019
|
|
$
|
21,915
|
|
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
Cash
and cash equivalents
Cash
and cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of
three months or less, at acquisition.
Cash
and cash equivalents include amounts held primarily in NIS, dollar, Euro, Japanese Yen and British Pound.
Short-term
deposits and restricted deposits
Short-term
deposits include deposits with original maturities of more than three months and less than one year. Such deposits are presented
at cost (including accrued interest) which approximates their fair value. Restricted deposits are used to secure certain of the
Group’s ongoing projects and are classified under other long-term receivables.
Marketable
securities
The
Company accounts for all its investments in marketable securities in accordance with ASC No. 320, “Investments – Debt
and Equity Securities”. The Company classifies all of its marketable securities as available for sale and held for trading.
Available for sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in “accumulated
other comprehensive income (loss)” in equity. Realized gains and losses on sale of investments are included in “financial
income (expense), net” and are derived using the specific identification method for determining the cost of securities.
The
amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization
together with interest on securities is included in “financial expense (income), net”.
The
Company recognizes an impairment charge when a decline in the fair value of its investments in debt securities below the cost
basis of such securities is judged to be other-than-temporary. Factors considered in making such a determination include the duration
and severity of the impairment, the reason for the decline in value, the potential recovery period and the Company’s intent
to sell, including whether it is more likely than not that the Company will be required to sell the investment before recovery
of cost basis. For securities that are deemed other-than-temporarily impaired, the amount of impairment is recognized in “net
gain (impairment net of gains) on sale of marketable securities previously impaired” in the statements of income and is
limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive
income.
The
Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying
contractual maturity date and the Company’s expectations of sales and redemptions in the following year.
Held
for trading securities are measured at fair value through profit or loss.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
Property
and equipment, net
Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over
the estimated useful lives of the assets, at the following annual rates:
|
|
Years
|
|
|
|
Computers
and peripheral equipment
|
|
3
- 5
|
Office
furniture and equipment
|
|
7
- 15 (mainly 7)
|
Motor
vehicles
|
|
7
|
Software
|
|
3
– 5 (mainly 5)
|
Leasehold
improvements are amortized using the straight-line method over the term of the lease (including option terms that are deemed to
be reasonably assured) or the estimated useful life of the improvements, whichever is shorter.
Business
combinations
The
Company accounts for business combinations under ASC 805, “Business Combinations”. ASC 805 requires recognition of
assets acquired, liabilities assumed, contingent consideration, non-controlling interest and redeemable non-controlling interest
in the acquiree at the acquisition date, to be measured at their fair values as of that date. As required by ASC 820, “Fair
Value Measurements and Disclosures” the Company applies assumptions, judgments and estimates that marketplace participants
would consider in determining the fair value of assets acquired, liabilities assumed, non-controlling interest and redeemable
non-controlling interest in the acquiree at the acquisition date. Any excess of the fair value of net assets acquired over purchase
price and any subsequent changes in estimated contingencies are to be recorded in earnings. Acquisition related costs are expensed
to the statements of income in the period incurred. The cumulative impact of measurement period adjustments, including the impact
to prior periods, is recognized in the reporting period in which the adjustment is identified.
During
the years ended December 31, 2017, 2018 and 2019 the Company recorded $ 300, $ (38) and $ 255, with respect to changes in the
fair value of contingent consideration liability, respectively.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
Research
and development costs
Research
and development costs incurred in the process of software development before establishment of technological feasibility are charged
to expenses as incurred. Costs incurred subsequent to the establishment of technological feasibility are capitalized according
to the principles set forth in ASC 985-20, “Costs of Software to be Sold, Leased or Marketed”.
The
Company and its subsidiaries establish technological feasibility upon completion of a detailed program design or working model.
ASC
985-20-35 requires that a product be amortized when the product is available for general release to customers. The Company considers
a product to be available for general release to customers when the Company completes its internal validation of the product that
is necessary to establish that the product meets its design specifications including functions, features, and technical performance
requirements. Internal validation includes the completion of coding, documentation and testing that ensure bugs are reduced to
a minimum. The internal validation of the product takes place a few weeks before the product is made available to the market.
In certain instances, the Company enters into a short pre-release stage, during which the product is made available to a selected
number of customers as a beta program for their own review and familiarization. Subsequently, the release is made generally available
to customers from the Company’s download area. Once a product is considered available for general release to customers,
the capitalization of costs ceases and amortization of such costs to “Cost of revenues” begins.
Capitalized
software costs are amortized on a product by product basis by the straight-line method over the estimated useful life of the software
product (approximately 5 years, due to their high rates of acceptance, the continued reliance on these products by existing customers,
and the demand for such products from prospective customers, all of which validate the Company’s expectations) which provides
greater amortization expense compared to the revenue-curve method.
The
Company assesses the recoverability of these intangible assets on a regular basis by assessing the net realizable value of these
intangible assets based on the estimated future gross revenues from each product reduced by the estimated future costs of completing
and disposing of it, including the estimated costs of performing maintenance and customer support over its remaining economical
useful life using internally generated projections of future revenues generated by the products, cost of completion of products
and cost of delivery to customers over its remaining economical useful life. During the years ended December 31, 2017, 2018 and
2019, no such unrecoverable amounts were identified.
Research
and development costs incurred in the process of developing product enhancements are generally charged to expenses as incurred.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
Leases
Effective of January 1, 2019, the
Company adopted Topic 842, which requires the recognition of lease assets and lease liabilities by lessees for leases classified
as operating leases. Topic 842 is effective for interim and annual reporting periods beginning after December 15, 2018. In July
2018, the FASB issued amendments to Topic 842 in ASU 2018-11, which provide a transition election to not restate comparative periods
for the effects of applying the new standard. This transition election permits entities to change the date of initial application
to the beginning of the earliest comparative period presented, or retrospectively at the beginning of the period of adoption through
a cumulative-effect adjustment. The Company has adopted Topic 842 using the modified retrospective transition approach by applying
the new standard to all leases existing on the date of initial application. Results and disclosure requirements for reporting periods
beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to
be reported in accordance with the Company’s historical accounting under Topic 840.
The Company elected the package of practical expedients permitted
under the transition guidance, which allowed the Company to carry forward the historical lease classification, the Company’s
assessment on whether a contract was or contains a lease, and initial direct costs for any leases that existed prior to January
1, 2019. The Company also elected to keep leases with an initial term of 12 months or less, which do not include an option to renew
the lease agreement, off the balance sheet, and recognize the associated lease payments in the consolidated statements of income
on a straight-line basis over the lease term.
As
a result of the adoption of Topic 842 on January 1, 2019, the Company recorded operating lease right of use (“ROU”)
assets and operating lease liabilities of $12,322. The adoption
did not impact the Company’s retained earnings, or prior year consolidated statements of income and statements of cash flows.
The Company determines if an arrangement is a lease at inception.
The Company’s assessment is based on: (1) whether the contract involves the use of an identified asset, (2) whether the Company
obtains the right to substantially all of the economic benefits from the use of the asset throughout the period of use, and (3)
whether the Company has the right to direct the use of the asset.
Leases are classified as either finance leases or operating
leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of
the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised,
the lease term is for a major part of the remaining useful life of the asset, the present value of the lease payments equals or
exceeds substantially all of the fair value of the asset, or the underlying asset is of such a specialized nature that it is expected
to have no alternative use to the lessor at the end of lease term. A lease is classified as an operating lease if it does not meet
any one of these criteria. Since all of the Company’s lease contracts do not meet any one of the criteria above, the Company
concluded that all of its lease contracts should be classified as operating leases.
ROU
assets and liabilities are recognized on the commencement date based on the present value of remaining lease payments over the
lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement.
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate (“IBR”)
based on the information available on the commencement date in determining the present value of lease payments. The Company’s
IBR is estimated to approximate the interest rate for collateralized borrowing with similar terms and payments and in economic
environments where the leased asset is located. Certain leases include options to extend or terminate the
lease. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received.
Moreover, the ROU asset may also include initial direct costs, which are incremental costs of a lease that would not have been
incurred if the lease had not been obtained. The Company uses the long-lived assets impairment guidance in Accounting Standards
Codification (“ASC”) Subtopic 360-10, “Property, Plant, and Equipment - Overall,” to determine whether
a right-of-use asset is impaired, and if so, the amount of the impairment loss to recognize. An option to extend the lease is considered
in connection with determining the ROU asset and lease liability when it is reasonably certain that the Company will exercise that
option. An option to terminate is considered unless it is reasonably certain that the Company will not exercise the option.
Offices
The Company leases space for offices in various locations worldwide
under operating leases. These contracts are considered as operating leases presented in ROU assets.
MAGIC
SOFTWARE ENTERPRISES LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
Motor
vehicles
The Company leases motor vehicles. Each leasing contract is
generally valid for a term of three years. These contracts are considered as operating leases presented in ROU assets.
For the vast majority of the Company’s motor
vehicle lease agreements, the lease payments include inconsequential non-lease payments, such as license and registration fees,
insurance and maintenance. As a result, the Company elected to not separate non-lease components from lease components, and instead,
to account for each separate lease component and the non-lease component associated with that lease component as a single lease
component.
Impairment of long-lived
assets, right of use assets and intangible assets subject to amortization
The Company’s long-lived
assets (assets group) to be held or used, including right of use assets and intangible assets that are subject to amortization,
are reviewed for impairment in accordance with ASC 360, “Property, Plant and Equipment” whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated
by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
As
required by ASC 820, “Fair Value Measurements and Disclosures” the Company applies assumptions, judgments and estimates
that marketplace participants would consider in determining the fair value of long-lived assets (or asset groups).
During
the years ended December 31, 2017, 2018 and 2019, no impairment losses have been identified.
Goodwill
Goodwill
represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets
acquired. Under ASC 350, “Intangibles - Goodwill and Other”, goodwill is subject to an annual impairment test or more
frequently if impairment indicators are present. Goodwill impairment is deemed to exist if the net book value of a reporting unit
exceeds its estimated fair value. As of December 31, 2019, the Company operates in four reporting units within its operating segments.
Goodwill
reflects the excess of the consideration paid or transferred plus the fair value of contingent consideration and any non-controlling
interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired.
ASC
350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no
further impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment
test is performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed
directly to performing the first step of the goodwill impairment test.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The provisions of ASC 350 require
that the quantitative two-step impairment test will be performed on goodwill at the level of the reporting units. In the first
step, or “Step one”, the Company compares the fair value of each reporting unit to its carrying value. If
the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired, and the Company is not required
to perform further testing. If the carrying value of the net assets exceeds the fair value, then the Company must perform the second
step, or “Step two”, of the impairment test in order to determine the implied fair value of goodwill which
requires the Company to make judgments that involve the use of significant estimates and assumptions.
The Company determines the fair
value of each reporting unit by using the income approach, which utilizes a discounted cash flow model, as it believes that this
approach best approximates the reporting unit’s fair value. Judgments and assumptions related to revenue, operating income,
future short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures, cash flows, and
market conditions are inherent in developing the discounted cash flow model. The Company considers historical rates and current
market conditions when determining the discount and growth rates to use in its analyses. If these estimates or their related assumptions
change in the future, the Company may be required to record impairment charges for its goodwill.
The Company performed an annual
impairment test as of December 31, of each of 2017, 2018 and 2019 and did not identify any impairment losses (see Note 9).
Intangible assets
Intangible assets that are
not considered to have an indefinite useful life are amortized over their economic useful life using a method of amortization
that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up. Acquired
technology and non-compete agreements were amortized on a straight line basis and customer relationships and backlog were amortized
on an accelerated method basis over a period between 1 - 15 years based on the intangible assets identified.
Revenue recognition
The Company implements
the provisions of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with
Customers (“ASC 606”). See Note 19 for further disclosures required under ASC 606.
Revenues are recognized
when control of the promised goods or services are transferred to the customers, in an amount that reflects the consideration that
the company expects to receive in exchange for those goods or services.
The Company determines revenue
recognition through the following steps:
|
|
●
|
identification of the contract with a customer;
|
|
|
|
|
|
|
●
|
identification of the performance obligations in the contract;
|
|
|
|
|
|
|
●
|
determination of the transaction price;
|
|
|
|
|
|
|
●
|
allocation of the transaction price to the performance obligations in the contract; and
|
|
|
|
|
|
|
●
|
recognition of revenue when, or as, the Company satisfies a performance obligation.
|
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The Company enters into contracts
that can include various combinations of products, software and professional services, as detailed below, which are generally capable
as being distinct from each other and accounted for as separate performance obligations.
The Company derives its revenues
from licensing the rights to use its software (proprietary and non-proprietary), provision of related professional services, maintenance
and technical support as well as from other software and IT professional services (either fixed price or based on time and materials).
The Company sells its products primarily through direct sales force and indirectly through distributors and value added resellers.
Under ASC 606, an entity recognizes
revenue when or as it satisfies a performance obligation by transferring software license or software related services to the customer,
either at a point in time or over time. The company recognizes its revenues from software sales at a point in time upon delivery
of its software license. The software license is considered a distinct performance obligation, as the customer can benefit from
the software on its own. Revenues from contracts that involve significant customization to customer-specific specifications are
performance obligations the Company generally accounts for as performance obligations satisfied over time. The underlying deliverable
is owned and controlled by the customer, and does not create an asset with an alternative use to the Company. The Company recognizes
revenue of such contracts over time using cost inputs, which recognize revenue and gross profit as work is performed based on a
ratio between actual costs incurred compared to the total estimated costs for the contract, to measure progress toward completion
of its performance obligations, which is similar to the method prior to the adoption of ASC 606. Provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss
for the entire contract. During the years ended December 31, 2017, 2018 and 2019, no material estimated losses were identified.
In addition, the Company provides professional services that do not involve significant customization to customer-specific specifications.
For contracts that do not involve significant customization to customer-specific specifications (typically staffing or consulting
services) revenue is recognized as the services are performed, either on a straight-line basis or based on the hours of services
that were provided to the customer, in accordance with the terms of the contracts.
The Company’s revenues
from post contract support are derived from annual maintenance contracts providing for unspecified upgrades for new versions and
enhancements on a when-and-if-available basis for an annual fee. The right for an unspecified upgrade for new versions and enhancements
on a when-and-if-available basis do not specify the features, functionality and release date of future product enhancements for
the customer to know what will be made available and the general timeframe in which it will be delivered. The Company considers
the post contract support performance obligation as a distinct performance obligation that is satisfied over time, and recognized
on a straight-line basis over the contractual period.
Revenue from professional services,
both related to software and IT professional services businesses consists of either fixed price or time and materials, and are
considered performance obligations that are satisfied over time, and revenues are recognized as the services are provided.
The transaction price is allocated
to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices of software licenses
are estimated using the residual approach, due to the lack of selling software licenses on a standalone basis. Standalone selling
prices of services are determined by considering several external and internal factors including, but not limited to, transactions
where the specific performance obligation is sold separately.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The Company generally does not
grant a right of return to its customers. When a right of return exists, the Company defers revenue until the right of return expires,
at which time revenue is recognized provided that all other revenue recognition criteria are met.
Revenue from third-party sales
is recorded at a gross or net amount according to certain indicators. The application of these indicators for gross and net reporting
of revenue depends on the relative facts and circumstances of each sale.
The Company pays commissions
to sales and marketing and certain management personnel based on their attainment of certain predetermined sales or profit goals.
When sales commissions are considered incremental costs of obtaining a contract with a customer they are deferred and amortized
on a systematic basis that is consistent with the transfer to the customer of the performance obligations to which the asset relates.
The Company expenses sales commissions as they are incurred when the amortization period would have been less than one year. In
addition, generally, sales commissions which are paid upon contract renewal are commensurate with the initial commissions
as the renewal amounts are substantially identical to the initial commission costs. During the year ended December 31, 2019, no
costs have been capitalized.
The Company does not assess
whether a contract has a significant financing component if the expectation at contract inception is such that the period between
payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
Accrued severance pay and
retirement plans
The Company’s and its
Israeli subsidiaries’ obligation for severance pay with respect to their Israeli employees (for the period for which the
employees were not included under Section 14 of the Severance Pay Law, 1963) is calculated pursuant to the Israeli Severance Pay
Law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date,
and are presented on an undiscounted basis (referred to as the “Shut Down Method”). Employees are entitled to one
month’s salary for each year of employment or a portion thereof. The Company’s obligation for all of its Israeli employees
is fully provided for by monthly deposits with insurance policies and severance pay funds and by an accrual.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The carrying value of deposited
funds includes profits (losses) accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment
of the obligations pursuant to the Israeli Severance Pay Law or labor agreements and are recorded as an asset in the Company’s
consolidated balance sheet.
The Company and its Israeli
subsidiaries’ agreements with most of their Israeli employees are in accordance with Section 14 of the Severance Pay Law,
1963, mandating that upon termination of such employees’ employment, all the amounts accrued in their insurance policies
shall be released to them instead of severance compensation. Upon release of deposited amounts to the employee, no additional liability
exists between the parties regarding the matter of severance pay and no additional payments are payable by the Company or its subsidiaries
to the employee. Further, the related obligation and amounts deposited on behalf of such obligation are not stated on the balance
sheet, as the Company and its subsidiaries are legally released from their obligations to employees once the deposit amounts have
been paid.
The Group has a number of savings
plans in the United States that qualify under Section 401(k) of the Internal Revenue Code. U.S. employees may contribute up to
100% of their pretax or post-tax salary, but not more than statutory limits. Matching contributions are discretionary and if made,
are up to 3% of the participants annual contributions. When contributions are granted, they are invested in proportion to
each participant’s voluntary contributions in the investment options provided under the plan.
Severance expenses for the years
ended December 31, 2017, 2018 and 2019 amounted to approximately $ 3,748, $ 4,052 and $ 4,712, respectively.
Advertising expenses
Advertising expenses are charged
to selling and marketing expenses, as incurred. Advertising expenses for the years ended December 31, 2017, 2018 and 2019 amounted
to $ 384, $ 304 and $ 519, respectively.
Income taxes
The Company accounts for income
taxes in accordance with ASC 740, “Income Taxes”. ASC 740 prescribes the use of the “asset and liability”
method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated
realizable value. Deferred tax assets and liabilities are classified as non-current.
The Company utilizes a two-step
approach for recognizing and measuring uncertain tax positions accounted for in accordance with an amendment of ASC 740 “Income
Taxes.” Under the first step the Company evaluates a tax position taken or expected to be taken in a tax return by determining
if the weight of available evidence indicates that it is more likely than not that, based on its technical merits, the tax position
will be sustained on audit, including resolution of any related appeals or litigation processes.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The second step is to measure
the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement with the tax authorities.
The Company accrued interest and penalties related to unrecognized tax benefits in its provisions for income taxes.
Basic and diluted net earnings
per share
Basic net earnings per share
are computed based on the weighted average number of ordinary shares outstanding during each year. Diluted net earnings per share
are computed based on the weighted average number of ordinary shares outstanding during each year, plus dilutive potential ordinary
shares considered outstanding during the year, in accordance with ASC 260, “Earnings Per Share.”
A portion of the outstanding
stock options have been excluded from the calculation of the diluted earnings per share because such securities are anti-dilutive.
The total weighted average number of ordinary shares related to the outstanding options excluded from the calculations of diluted
earnings per share was 2,093 for the years ended December 31, 2017. As of December 31, 2018, and December 31, 2019, there were
no outstanding options excluded from the calculations of diluted earnings per share.
Stock-based compensation
The Company accounts for stock-based
compensation in accordance with ASC 718, “Compensation - Stock Compensation” which requires the measurement and recognition
of compensation expense based on estimated fair values for all share-based payment awards made. ASC 718 requires companies to estimate
the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s
consolidated statement of income.
The Company recognizes compensation
expenses for the value of its awards, which have graded vesting based on the accelerated method over the requisite service period
of each of the awards, net of estimated forfeitures.
The Company uses the Binomial
option-pricing model (“the Binomial model”) to estimate the fair value for any options granted. The Binomial model
takes into account variables such as volatility, dividend yield rate, and risk-free interest rate and also allows for the use
of dynamic assumptions and considers the contractual term of the option, the probability that the option will be exercised prior
to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value
of the option.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The fair value of each option
granted using the Binomial model, was estimated on the date of grant with the following assumptions: expected volatility was based
upon actual historical stock price movements and was calculated as of the grant dates for different periods, since the Binomial
model can be used for different expected volatilities for different periods. The risk-free interest rate was based on the yield
from U.S. Treasury zero-coupon bonds with an equivalent term to the contractual term of the options. The expected term of options
granted was derived from the output of the option valuation model and represented the period of time that options granted were
expected to be outstanding. Estimated forfeitures were based on actual historical pre-vesting forfeitures. Since dividend payments
are applied to reduce the exercise price of the option, the effect of the dividend protection was reflected by using an expected
dividend assumption of zero.
For awards with performance
conditions, compensation cost is recognized over the requisite service period if it is ‘probable’ that the performance
conditions will be satisfied.
No grants were made to employees
or directors in 2017 or in 2019.
During the years ended December
31, 2017, 2018 and 2019, the Company recognized stock-based compensation expense related to employee stock options in the amount
of $ 78, $ 194 and $ 74, respectively, as follows:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
7
|
|
Research and development, net
|
|
|
-
|
|
|
|
4
|
|
|
|
8
|
|
Selling and marketing
|
|
|
74
|
|
|
|
4
|
|
|
|
-
|
|
General and administrative
|
|
|
-
|
|
|
|
184
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
74
|
|
|
$
|
194
|
|
|
$
|
78
|
|
Concentrations of credit
risk
Financial instruments that
potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents, short-term deposits,
restricted cash, marketable securities, trade receivables and foreign currency derivative contracts.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The Company’s cash and
cash equivalents, short-term deposits and restricted cash are invested primarily in bank deposits with major banks worldwide, mainly
in the United States and Israel, however, such cash and cash equivalents and short-term deposits in the United States may be in
excess of insured limits and are not insured in other jurisdictions. The Company believes that since these deposits may be redeemed
upon demand and since such institutions are of high rating they bear low risk.
The Company’s marketable
securities include investments in commercial and government bonds and foreign banks. The Company’s marketable securities
are considered to be highly liquid and have a high credit standing (also refer to Note 4). In addition, management considered its
portfolios in foreign banks to be well-diversified.
The Company’s trade receivables
are derived from sales to customers located primarily in the United States, Israel, Europe and Japan. An allowance for doubtful
accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection. The expense
related to doubtful accounts for the years ended December 31, 2017, 2018 and 2019 was $ 1,164, $ 1,070 and $ 958, respectively.
From time to time the Company
enters into foreign exchange forward contracts and option contracts intended to protect against the changes in value of forecasted
non-dollar currency cash flows related to salary and related expenses. These derivative instruments are designed to offset the
Company’s non-dollar currency exposure.
Fair value measurements
The Company accounts for certain
assets and liabilities at fair value under ASC 820, “Fair Value Measurements and Disclosures”. Fair value is an exit
price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes
a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
|
Level 1 -
|
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets;
|
|
Level 2 -
|
Includes other inputs that are directly or indirectly observable in the marketplace, other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets with insufficient volume or infrequent transactions, or other inputs that are observable (model-derived valuations in which significant inputs are observable), or can be derived principally from or corroborated by observable market data;
|
|
|
|
|
Level 3 -
|
Unobservable inputs which are supported by little or no market activity;
|
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The fair value hierarchy also
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company categorized each of its fair value measurements in one of these three levels of hierarchy. Assets and liabilities measured
at fair value on a recurring basis are comprised of marketable securities, foreign currency forward contracts and contingent consideration
of acquisitions (see Note 5).
The carrying amounts reported
in the balance sheet for cash and cash equivalents, short term bank deposits, trade receivables, other accounts receivable, short-term
bank credit, trade payables and other accounts payable approximate their fair values due to the short-term maturities of such instruments.
Comprehensive income (loss)
The Company accounts for comprehensive
income (loss) in accordance with ASC 220, “Comprehensive Income.” This Statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income
(loss) generally represents all changes in equity during the period except those resulting from investments by, or distributions
to, shareholders. The Company determined that its items of other comprehensive income (loss) relate to gain and loss on foreign
currency translation adjustments, unrealized gain and loss on derivative instruments designated as hedges and unrealized gain
and loss on available-for-sale marketable securities.
Recently adopted accounting pronouncement
On January 1, 2019, the Company
adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”), as amended, which supersedes
the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities
and corresponding right-of-use (“ROU”) assets on the balance sheet and to provide enhanced disclosures surrounding
the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new guidance using
the modified retrospective transition approach by applying the new standard to all leases existing on the date of initial application
and not restating comparative periods. The most significant impact was the recognition of ROU assets and lease liabilities for
operating leases. For information regarding the impact of Topic 842 adoption, see Notes 2 and Note 21.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
Recently issued accounting
pronouncements and not yet adopted
In June 2016, the FASB Issued
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new
standard requires financial assets measured at amortized cost be presented at the net amount expected to be collected, through
an allowance for credit losses that is deducted from the amortized cost basis. The standard will be effective for the Company beginning
January 1, 2020, with early adoption permitted. The Company does not expect that this new guidance will have a material impact
on the Company’s consolidated financial statements.
In January 2017, the FASB issued
ASU 2017-04 (ASU 2017-04): Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04
eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the
fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit
with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 is effective for annual or interim goodwill
impairment tests performed in fiscal years beginning after December 15, 2019, and early adoption is permitted. The Company does
not expect that this new guidance will have a material impact on the Company’s consolidated financial statements.
NOTE 3:-
|
BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS
|
|
a.
|
On June 30, 2019, the Company acquired a 100% interest in NetEffects Inc (“NetEffects”), a U.S.-based services company, specializes in IT staffing and recruiting, for a total consideration of $ 12,500, of which $ 9,400 was paid upon closing and the remaining $ 3,100 will be paid in three installments in the first, second and third closing day anniversary. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations for the years ended December 31, 2018 and 2019 were not presented, since the acquisition is immaterial. The acquisition was accounted for by the purchase method.
|
The results of operations were
included in the consolidated financial statements of the Company commencing July 1, 2019.
The following table summarizes
the estimated fair values of the assets acquired and liabilities at the date of acquisition:
Net assets, excluding cash acquired
|
|
$
|
91
|
|
Intangible assets
|
|
|
8,716
|
|
Goodwill
|
|
|
3,526
|
|
Total assets acquired net of acquired cash
|
|
$
|
12,333
|
|
The estimated
fair values of the tangible and intangible assets are provisional and are based on information that was available as of the acquisition
date to estimate the fair value of these amounts. The Company’s management believes the information provides a reasonable
basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair
values. Therefore, provisional measurements of fair value reflected are subject to change. The Company expects to finalize the
tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than the measurement
period.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 3:-
|
BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)
|
|
b.
|
On
April 1st, 2019 the Company acquired a 100% interest in PowWow Inc (“PowWow”), creator of SmartUX™, A
leading Low-Code Development Platform for Mobilizing and Modernizing Enterprise Apps, for a total consideration of $8.4
million, out of which $2 million is contingent on future performance. Acquisition related costs were immaterial.
Unaudited pro forma condensed results of operations for the years ended December 31, 2018 and 2019 were not presented, since
the acquisition is immaterial. The acquisition was accounted for by the purchase method.
|
The results
of operations were included in the consolidated financial statements of the Company commencing March 1, 2019.
The following table summarizes
the estimated fair values of the assets acquired and liabilities at the date of acquisition
Net assets, excluding cash acquired
|
|
$
|
(1,557
|
)
|
Intangible assets
|
|
|
2,855
|
|
Goodwill
|
|
|
7,145
|
|
Total assets acquired net of acquired cash
|
|
$
|
8,443
|
The
estimated fair values of the tangible and intangible assets are provisional and are based on information that was available as
of the acquisition date to estimate the fair value of these amounts. The Company’s management believes the information provides
a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize
those fair values. Therefore, provisional measurements of fair value reflected are subject to change. The Company expects to finalize
the tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than the
measurement period.
|
c.
|
On February 28, 2019, the Company acquired a 100% interest in OnTarget Group Inc. (“OnTarget”), a U.S.-based services company, specializes in outsourcing of software development services, for a total consideration of $ 12,456 of which $ 6,000 was paid upon closing and the remaining amount constitutes a deferred payment depending on the future operating results achieved by OnTarget. Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations for the years ended December 31, 2018 and 2019 were not presented, since the acquisition is immaterial. The acquisition was accounted for by the purchase method.
|
The results of operations were included in the consolidated financial statements of the Company commencing March 1, 2019.
The following table summarizes
the estimated fair values of the assets acquired and liabilities at the date of acquisition:
Net assets, excluding cash acquired
|
|
$
|
(832
|
)
|
Intangible assets
|
|
|
4,908
|
|
Goodwill
|
|
|
8,380
|
|
Total assets acquired net of acquired cash
|
|
$
|
12,456
|
|
The estimated
fair values of the tangible and intangible assets are provisional and are based on information that was available as of the acquisition
date to estimate the fair value of these amounts. The Company’s management believes the information provides a reasonable
basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair
values. Therefore, provisional measurements of fair value reflected are subject to change. The Company expects to finalize the
tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than the
measurement period.
On
October 1, 2019 the Company acquired additional an 30% of its subsidiary Infinigy Solutions LLC (“Infinigy”), a
U.S.-based services company focused on expanding the development and implementation of technical solutions which deliver
design-driven turnkey solutions, combining Architecture and Engineering, or A&E design project management and general
contracting competencies, across the wireless communications industry, for a total cash consideration of approximately $
4,393, which was paid upon closing. Subsequent to the share purchase the Company holds 100% of Infinigy.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 4:-
|
MARKETABLE SECURITIES
|
The Company invests in marketable
debt securities, which were classified at fair value through profit or loss and as available-for-sale securities. The following
is a summary of marketable securities:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Fair value through profit or loss (1)
|
|
$
|
1,112
|
|
|
$
|
1,156
|
|
Available-for-sale
|
|
|
5,488
|
|
|
|
8,757
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,600
|
|
|
$
|
9,913
|
|
(1)
|
The Company recognized trading losses in the amount of $ 35 during the year ended December 31, 2019.
|
|
b.
|
The following is a summary of marketable securities which are classified as available-for-sale:
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Amortized
cost
|
|
|
Unrealized
losses
|
|
|
Unrealized
gains
|
|
|
Market
value
|
|
|
Amortized
cost
|
|
|
Unrealized
losses
|
|
|
Unrealized
gains
|
|
|
Market
value
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
5,487
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
5,488
|
|
|
$
|
8,851
|
|
|
$
|
(94
|
)
|
|
$
|
-
|
|
|
$
|
8,757
|
|
Marketable securities with contractual
maturities within one year and from one to three years are as follows:
|
|
Amortized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
cost
|
|
|
Gains
|
|
|
Losses
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
5,487
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
5,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,487
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
5,488
|
|
As of December 31, 2018 and
2019, management believes the impairments are not other than temporary and therefore the impairment losses were recorded in accumulated
other comprehensive income (loss).
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 4:-
|
MARKETABLE SECURITIES (Cont.)
|
The following is the change
in the other comprehensive income of available-for-sale securities
|
|
Other
comprehensive
income (loss)
|
|
|
|
|
|
Other comprehensive income from available-for-sale securities as of January 1, 2018
|
|
$
|
(58
|
)
|
Unrealized losses from available-for-sale securities
|
|
|
(36
|
)
|
Other comprehensive loss from available-for-sale securities as of December 31, 2018
|
|
$
|
(94
|
)
|
Unrealized gains from available-for-sale securities
|
|
|
95
|
|
Other comprehensive loss from available-for-sale securities as of December 31, 2019
|
|
$
|
1
|
|
NOTE 5:-
|
FAIR VALUE MEASUREMENTS
|
In accordance with ASC 820,
the Company measures its investment in marketable securities at fair value. Generally
equity funds are classified within Level 1, this is because these assets are valued using quoted prices in active markets. Foreign
currency derivative contracts, certain corporate bonds and convertible bonds are classified within Level 2 as the valuation inputs
are based on quoted prices and market observable data of similar instruments.
Contingent consideration is
classified within Level 3. The Company values the Level 3 contingent consideration using discounted cash flow of the expected future
payments, whose inputs include interest rate.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 5:-
|
FAIR VALUE MEASUREMENTS (Cont.)
|
The Company’s financial
assets and liabilities measured at fair value on a recurring basis, consisted of the following types of instruments:
|
|
December 31, 2019
|
|
|
|
Fair value measurements using input type
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
-
|
|
|
$
|
5,488
|
|
|
$
|
-
|
|
|
$
|
5,488
|
|
Convertible bonds
|
|
|
-
|
|
|
|
1,112
|
|
|
|
-
|
|
|
|
1,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
-
|
|
|
$
|
6,600
|
|
|
$
|
-
|
|
|
$
|
6,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,964
|
|
|
$
|
5,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financials liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,964
|
|
|
$
|
5,964
|
|
|
|
December 31, 2018
|
|
|
|
Fair value measurements using input type
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
-
|
|
|
$
|
8,757
|
|
|
$
|
-
|
|
|
$
|
8,757
|
|
Convertible bonds
|
|
|
-
|
|
|
|
1,156
|
|
|
|
-
|
|
|
|
1,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
-
|
|
|
$
|
9,913
|
|
|
$
|
-
|
|
|
$
|
9,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
414
|
|
|
$
|
414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financials liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
414
|
|
|
$
|
414
|
|
Fair value measurements using
significant unobservable inputs (Level 3):
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Opening balance
|
|
$
|
414
|
|
|
$
|
1,333
|
|
Increase in contingent consideration due to acquisitions
|
|
|
5,851
|
|
|
|
124
|
|
Payment of contingent consideration
|
|
|
(585
|
)
|
|
|
(974
|
)
|
Increase in fair value of contingent consideration
|
|
|
255
|
|
|
|
210
|
|
Decrease in fair value of contingent consideration
|
|
|
-
|
|
|
|
(248
|
)
|
Amortization of interest and exchange rate
|
|
|
29
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
$
|
5,964
|
|
|
$
|
414
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 6:-
|
OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
4,467
|
|
|
$
|
3,712
|
|
Government authorities
|
|
|
5,052
|
|
|
|
2,053
|
|
Related parties
|
|
|
183
|
|
|
|
303
|
|
Other
|
|
|
3,143
|
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,845
|
|
|
$
|
7,029
|
|
NOTE 7:-
|
PROPERTY AND EQUIPMENT, NET
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
1,461
|
|
|
$
|
981
|
|
Computers and peripheral equipment
|
|
|
16,640
|
|
|
|
15,221
|
|
Office furniture and equipment
|
|
|
4,287
|
|
|
|
3,774
|
|
Motor vehicles
|
|
|
1,170
|
|
|
|
1,217
|
|
Software
|
|
|
3,394
|
|
|
|
3,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,952
|
|
|
|
24,277
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
622
|
|
|
|
470
|
|
Computers and peripheral equipment
|
|
|
15,702
|
|
|
|
14,528
|
|
Office furniture and equipment
|
|
|
3,288
|
|
|
|
2,699
|
|
Motor vehicles
|
|
|
598
|
|
|
|
564
|
|
Software
|
|
|
3,093
|
|
|
|
2,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,303
|
|
|
|
21,205
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost
|
|
$
|
3,649
|
|
|
$
|
3,072
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 7:-
|
PROPERTY AND EQUIPMENT, NET (Cont.)
|
Depreciation expenses amounted
to $ 1,046, $ 1,175 and $ 1,261 for the years ended December 31, 2017, 2018 and 2019, respectively.
NOTE 8:-
|
INTANGIBLE ASSETS, NET
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Original amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software costs
|
|
$
|
82,878
|
|
|
$
|
78,793
|
|
Customer relationships
|
|
|
70,032
|
|
|
|
54,850
|
|
Backlog and non-compete agreement
|
|
|
2,712
|
|
|
|
2,712
|
|
Acquired technology
|
|
|
15,867
|
|
|
|
12,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,489
|
|
|
|
149,077
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software costs
|
|
|
70,326
|
|
|
|
66,123
|
|
Customer relationships
|
|
|
40,550
|
|
|
|
33,578
|
|
Backlog and non-compete agreement
|
|
|
2,712
|
|
|
|
2,674
|
|
Acquired technology
|
|
|
6,773
|
|
|
|
5,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,361
|
|
|
|
107,598
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
51,128
|
|
|
$
|
41,479
|
|
|
b.
|
Amortization expenses amounted to $ 12,565, $ 11,389 and $ 12,764 for the years ended December 31, 2017, 2018 and 2019, respectively.
|
|
c.
|
The estimated future amortization expense of intangible assets as of December 31, 2019 is as follows:
|
2020
|
|
$
|
11,910
|
|
2021
|
|
|
9,849
|
|
2022
|
|
|
7,632
|
|
2023
|
|
|
6,174
|
|
2024
|
|
|
4,869
|
|
2025 and thereafter
|
|
|
10,694
|
|
|
|
|
|
|
|
|
$
|
51,128
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
Changes in the carrying amount
of goodwill for the years ended December 31, 2018 and 2019 according to the Company’s reportable segments are as follows
(see also Note 18):
|
|
IT
professional
services
|
|
|
Software
services
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2018
|
|
$
|
48,403
|
|
|
$
|
49,786
|
|
|
$
|
98,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business combination
|
|
|
-
|
|
|
|
277
|
|
|
|
277
|
|
Measurement period adjustments
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
(18
|
)
|
Foreign currency translation adjustments
|
|
|
(1,694
|
)
|
|
|
(1,748
|
)
|
|
|
(3,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
$
|
46,691
|
|
|
$
|
48,315
|
|
|
$
|
95,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business combination
|
|
|
12,691
|
|
|
|
3,382
|
|
|
|
16,073
|
|
Measurement period adjustments
|
|
|
(785
|
)
|
|
|
3,762
|
|
|
|
2,977
|
|
Foreign currency translation adjustments
|
|
|
1,749
|
|
|
|
1,938
|
|
|
|
3,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
$
|
60,346
|
|
|
$
|
57,397
|
|
|
$
|
117,743
|
|
The Company performed an annual
impairment test as of December 31, of each of 2017, 2018 and 2019 and did not identify any impairment losses (see Note 2).
NOTE 10:-
|
SHORT TERM DEBT
|
|
|
|
|
Interest
|
|
|
|
|
|
Linkage
|
|
rate
|
|
December 31,
|
|
|
|
basis
|
|
%
|
|
2019
|
|
|
2018
|
|
Short-term credit from banks
|
|
USD
|
|
U.S Prime -0.2
|
|
$
|
688
|
|
|
$
|
2,362
|
|
Short-term credit from banks
|
|
NIS
|
|
Israeli Prime + 0.8
|
|
|
868
|
|
|
|
-
|
|
Current maturities of long-term loans from financial institutions
|
|
NIS
|
|
2.25 - 3.0
|
|
|
5,523
|
|
|
|
6,299
|
|
|
|
|
|
|
|
$
|
7,079
|
|
|
$
|
8,661
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 11:-
|
ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Employees and payroll accruals
|
|
$
|
21,092
|
|
|
$
|
16,242
|
|
Accrued expenses
|
|
|
6,790
|
|
|
|
6,219
|
|
Government authorities
|
|
|
4,110
|
|
|
|
1,426
|
|
Other
|
|
|
627
|
|
|
|
571
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,619
|
|
|
$
|
24,458
|
|
|
|
Linkage
|
|
Interest
|
|
December 31,
|
|
|
|
basis
|
|
rate
|
|
2019
|
|
|
2018
|
|
|
|
|
|
%
|
|
|
|
|
|
|
Loans from banks and other (1)
|
|
NIS
|
|
2.25 - 5
|
|
$
|
20,951
|
|
|
$
|
25,572
|
|
Other long term debt
|
|
|
|
|
|
|
112
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,063
|
|
|
$
|
25,687
|
|
Current maturities
|
|
NIS
|
|
|
|
|
(5,523
|
)
|
|
|
(6,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,540
|
|
|
$
|
19,388
|
|
(1)
|
On November 2016, the Company obtained a loan in the amount of $ 31,356 linked to the New Israel Shekel from an Israeli financial institution. The principal amount of the loan is payable in seven equal annual installments with the final payment due on November 2, 2023 and bears a fixed interest rate of 2.60% per annum, payable in two semi-annual payments.
|
Under the terms of the loan with
the Israeli financial institution, the Company has undertaken to maintain the following financial covenants, as they will be expressed
in its consolidated financial statements, as described:
|
a.
|
Total equity attributable to Magic Software Enterprises shareholders shall not be lower than $ 100,000 at all times;
|
|
b.
|
The Company’s consolidated cash and cash equivalent and marketable securities available for sales shall not be less than $ 10,000;
|
|
c.
|
The ratio of the Company’s consolidated total financial debts to consolidated total assets will not exceed 50%;
|
|
d.
|
The ratio of the Company’s total financial debts less cash, short-term deposits and short-term marketable securities to the annual EBITDA will not exceed 3.25 to 1; and
|
|
e.
|
The Company shall not create any pledge on all of its property and assets in favor of any third party without the financial institution’s consent.
|
As of December 31, 2019, the Company
was in compliance with the financial covenants.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 13:-
|
TAXES ON INCOME
|
|
1.
|
Corporate tax rate in Israel:
|
The Israeli corporate income tax
rate was 24% in 2017, and 23% in 2018 and 2019.
|
2.
|
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (“the Law”):
|
Effective January 1, 2011, the
Knesset enacted the Law for Economic Policy for 2011 and 2012 (Amended Legislation), and among other things, amended the Law, (“the
Amendment”). According to the Amendment, a flat corporate tax rate of 16% was established for exporting industrial enterprises
(over 25%). The reduced tax rate will not be program dependent and will apply to the “Preferred Enterprise’s”
(as such term is defined in the Investment Law) entire “preferred income”.
The Amendment also prescribes that
any dividends distributed to individuals or foreign residents from the preferred enterprise’s earnings as above will be subject
to tax at a rate of 20%.
One of its Israeli subsidiaries
have elected to apply the new incentives regime under the Amendment to their industrial activity in Israel, subject to meeting
its requirements, starting in 2011.
New Amendment- Preferred Technology
Enterprise
In December 2016, the Israeli Knesset
passed Amendment 73 to the Investment Law which included a number of changes to the Investments Law regimes. Certain changes were
scheduled to come into effect beginning January 1, 2017, provided that regulations are promulgated by the Finance Ministry to implement
the “Nexus Principles” based on OECD guidelines which were published as part of the Base Erosion and Profit Shifting
(BEPS) project. The regulations were approved on May 1, 2017 and accordingly, these changes have come into effect. Applicable benefits
under the new regime include:
Introduction of a benefit regime
for “Preferred Technology Enterprises” granting a 12% tax rate in central Israel – on income deriving from Intellectual
Property, subject to a number of conditions being fulfilled, including a minimal amount or ratio of annual R&D expenditure
and R&D employees, as well as having at least 25% of annual income derived from exports. A Preferred Technology Enterprise
(“PTE”) is defined as an enterprise which meets the aforementioned conditions and for which total consolidated revenues
of its parent company and all subsidiaries are less than NIS 10 billion.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 13:-
|
TAXES ON INCOME (Cont.)
|
A 12% capital gains tax rate on
the sale of a preferred intangible asset to a foreign affiliated enterprise, provided that the asset was initially purchased from
a foreign resident at an amount of NIS 200 million or more.
A withholding tax rate of 20% for
dividends paid from PTE income (with an exemption from such withholding tax applying to dividends paid to an Israeli company).
Such rate may be reduced to 4% on dividends paid to a foreign resident company, subject to certain conditions regarding percentage
of foreign ownership of the distributing entity.
In the years 2017 and 2018, part
of the Company’s taxable income in Israel was entitled to a preferred 12% tax rate in the preferred technological enterprise
track under Amendment 73 to the Investment Law.
In 2019
the Company transitioned to the preferred enterprise track entitling it to a preferred 16% tax rate under Amendment 73 to the Investment
Law.
The
Company’s Israeli entities have received final tax assessments for their Israeli tax return filings through the year 2013.
Tax
benefits under the Law for the Encouragement of Industry (Taxes), 1969:
The Company qualifies as an Industrial
Company within the meaning of the Law for the Encouragement of Industry (Taxes), 1969 (the “Industrial Encouragement Law”).
The Industrial Encouragement Law defines an “Industrial Company” as a company that is resident in Israel and that derives
at least 90% of its income in any tax year, other than income from defense loans, capital gains, interest and dividends, from an
enterprise whose major activity in a given tax year is industrial production. Under the Industrial Encouragement Law, the Company
is entitled to amortization of the cost of purchased know-how and patents over an eight-year period for tax purposes as well as
accelerated depreciation rates on equipment and buildings.
Eligibility for the benefits under
the Industrial Encouragement Law is not subject to receipt of prior approval from any governmental authority.
|
5.
|
Foreign Exchange Regulations:
|
Under the Foreign Exchange Regulations,
the Company and one of its Israeli subsidiaries calculate their tax liability in U.S. dollars according to certain orders. The
tax liability, as calculated in U.S. dollars is translated into NIS according to the exchange rate as of December 31 of each year.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 13:-
|
TAXES ON INCOME (Cont.)
|
|
b.
|
Non-Israeli subsidiaries:
|
Non-Israeli subsidiaries are taxed
according to the tax laws in their respective domiciles of residence. If earnings are distributed to Israel in the form of dividends
or otherwise, the Company may be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits)
and foreign withholding tax rates.
Neither Israeli income taxes, foreign
withholding taxes nor deferred income taxes were provided in relation to undistributed earnings of the non-Israeli subsidiaries.
This is because the Company intends to permanently reinvest undistributed earnings in the foreign subsidiaries in which those earnings
arose. If these earnings were distributed in the form of dividends or otherwise, the Company would be subject to additional Israeli
income taxes (subject to an adjustment for foreign tax credits) and non-Israeli withholding taxes.
The amount of the Company’s
cash and cash equivalents that are currently held outside of Israel that would be subject to income taxes if distributed as dividends
is $ 12,426. However, a determination of the amount of the unrecognized deferred tax liability for temporary difference related
to those undistributed earnings of foreign subsidiaries is not practicable due to the complexity of the structure of our group
of subsidiaries for tax purposes and the difficulty of projecting the amount of future tax liability.
Tax Reform- United States of America
The U.S. Tax Cuts and Jobs Act
of 2017 (“TCJA”) was approved by the U.S. Congress on December 20, 2017 and signed into law by U.S. President Donald
J. Trump on December 22, 2017. This legislation makes complex and significant changes to the U.S. Internal Revenue Code. Such changes
include a reduction in the corporate tax rate and limitations on certain corporate deductions and credits, among other changes.
The TCJA reduces the U.S. federal
corporate income tax rate from 35% to 21% effective January 1, 2018. In addition, the TCJA makes certain changes to the depreciation
rules and implements new limits on the deductibility of certain expenses and deduction.
The Company’s subsidiaries
in the United States do not have any foreign subsidiaries and, therefore, the remaining provisions of the TCJA have no material
impact on the Company’s results of operations.
The Company re-measured its U.S.
deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 13:-
|
TAXES ON INCOME (Cont.)
|
|
c.
|
Net operating loss carryforwards:
|
As of December 31, 2019, three
Israeli subsidiaries of the Company had operating loss carryforwards of $ 14,053 (mainly F.T.S Formula Telecom Solutions,
Ltd. which accounts for $ 11,850), which can be carried forward to offset against taxable income in the future for an indefinite
period.
One of the Company’s subsidiaries
in England had estimated total available tax loss carryforwards of $ 3,964 as of December 31, 2019, which can be carried forward
to offset against future taxable income.
|
d.
|
Income before taxes on income:
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
17,806
|
|
|
$
|
25,839
|
|
|
$
|
19,442
|
|
Foreign
|
|
|
14,666
|
|
|
|
6,008
|
|
|
|
4,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,472
|
|
|
$
|
31,847
|
|
|
$
|
24,245
|
|
Taxes on income (tax benefit) consist
of the following:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
7,266
|
|
|
$
|
5,186
|
|
|
$
|
5,928
|
|
Foreign
|
|
|
1,636
|
|
|
|
1,359
|
|
|
|
1,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,902
|
|
|
|
6,545
|
|
|
|
7,439
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
(1,001
|
)
|
|
|
81
|
|
|
|
(1,160
|
)
|
Foreign
|
|
|
(1,027
|
)
|
|
|
445
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,028
|
)
|
|
|
526
|
|
|
|
(1,108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income
|
|
$
|
6,874
|
|
|
$
|
7,071
|
|
|
$
|
6,331
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 13:-
|
TAXES ON INCOME (Cont.)
|
|
f.
|
Deferred tax assets and liabilities:
|
Deferred 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. Significant components of the Company and its subsidiaries deferred tax assets are as
follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
4,529
|
|
|
$
|
3,914
|
|
Allowances, reserves and intangible assets
|
|
|
1,584
|
|
|
|
1,361
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets before valuation allowance
|
|
|
6,113
|
|
|
|
5,275
|
|
Less - valuation allowance
|
|
|
(3,925
|
)
|
|
|
(3,417
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
2,188
|
|
|
$
|
1,858
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Long-term tax assets
|
|
$
|
2,188
|
|
|
$
|
1,858
|
|
Long-term tax liabilities
|
|
|
(11,069
|
)
|
|
|
(10,343
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(8,881
|
)
|
|
$
|
(8,485
|
)
|
Deferred tax liabilities are mainly
in respect of certain property and equipment, acquired intangible assets and capitalized software costs.
The Company has provided valuation
allowances in respect of certain deferred tax assets resulting from operating losses carry forwards and other reserves and allowances
due to uncertainty concerning realization of these deferred tax assets.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 13:-
|
TAXES ON INCOME (Cont.)
|
|
g.
|
Reconciliation of the theoretical tax expense to the actual tax expense:
|
A reconciliation between the theoretical
tax expense, assuming all income is taxed at the statutory tax rate applicable to income for an Israeli company (2017, 2018 and
2019 statutory tax rate 24%, 23% and 23%, respectively), and the actual tax expense as reported in the statements of income is
as follows:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes, as reported in the consolidated statements of income
|
|
$
|
32,472
|
|
|
$
|
31,847
|
|
|
$
|
24,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory tax rate
|
|
|
23
|
%
|
|
|
23
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical tax expenses on the above amount at the Israeli statutory tax rate
|
|
$
|
7,468
|
|
|
$
|
7,325
|
|
|
$
|
5,819
|
|
Tax adjustment in respect of different tax rates
|
|
|
465
|
|
|
|
(826
|
)
|
|
|
268
|
|
Deferred taxes on losses for which full valuation allowance was provided in the past
|
|
|
(227
|
)
|
|
|
(11
|
)
|
|
|
658
|
|
Tax-deductible costs, not included in the accounting costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(38
|
)
|
Tax expenses in respect of prior years, net
|
|
|
(37
|
)
|
|
|
(22
|
)
|
|
|
(488
|
)
|
Non-deductible expenses
|
|
|
|
|
|
|
45
|
|
|
|
70
|
|
Uncertain tax position and other differences
|
|
|
(795
|
)
|
|
|
560
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
|
|
$
|
6,874
|
|
|
$
|
7,071
|
|
|
$
|
6,331
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 13:-
|
TAXES ON INCOME (Cont.)
|
|
h.
|
The Company applies ASC 740, “Income Taxes” with regards to tax uncertainties. During the years ended December 31, 2017, and 2018 the Company recorded $ 300, $ 1,050 (respectively) of tax expenses as a result of this application.
|
A reconciliation of the beginning
and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
Gross unrecognized tax benefits at January 1, 2017
|
|
$
|
825
|
|
|
|
|
|
|
Increase in tax positions taken in prior years
|
|
|
300
|
|
|
|
|
|
|
Decrease in tax positions taken in prior years
|
|
|
-
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31, 2017
|
|
|
1,125
|
|
|
|
|
|
|
Increase in tax positions taken in prior years
|
|
|
1,050
|
|
|
|
|
|
|
Decrease in tax positions taken in prior years
|
|
|
-
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31, 2018
|
|
|
2,175
|
|
|
|
|
|
|
Increase in tax positions taken in prior years
|
|
|
-
|
|
|
|
|
|
|
Decrease in tax positions taken in prior years
|
|
|
-
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31, 2019
|
|
$
|
2,175
|
|
Although the Company believes that
it has adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement, there is no assurance
that the final tax outcome of its tax audits will not be different from that which is reflected in the Company’s income tax
provisions. Such differences could have a material effect on the Company’s income tax provision, cash flow from operating
activities and net income in the period in which such determination is made.
|
a.
|
The Ordinary shares of the Company are listed on the NASDAQ Global Select Market in the United States and are traded on the Tel-Aviv Stock Exchange in Israel.
|
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
Under the Company’s 2007
Stock Option Plan, as amended (“the 2007 Plan”), options may be granted to employees, officers, directors and consultants
of the Company and its subsidiaries. Pursuant to the original 2007 Stock Option Plan, the Company reserved 1,500,000 Ordinary shares
for issuance. In 2012, the Company increased the number of Ordinary shares reserved for issuance under the 2007 Plan by additional
1,000,000 Ordinary shares.
On December 31, 2015 the Company’s
Board of Directors increased the amount of Ordinary shares reserved for issuance under the 2007 Plan by additional 250,000 Ordinary
shares and extended the 2007 Plan by 10 years whereas it will expire on August 1, 2027. As of December 31, 2019, an aggregate of
962,500 Ordinary shares of the Company are available for future grants under the 2007 Plan. Each option granted under the 2007
Plan is exercisable for a period of ten years from the date of the grant of the option.
The exercise price for each option
is determined by the Board of Directors and set forth in the Company’s award agreement. Unless determined otherwise by the
Board of Directors, the option exercise price shall be equal to or higher than the share market price at the grant date. The options
generally vest over 3-4 years. Any option that is forfeited or canceled before expiration becomes available for future grants under
the 2007 Plan.
A summary of employee option activity
under the 2007 Plan as of December 31, 2019 and changes during the year ended December 31, 2019 are as follows:
|
|
Number
of options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
term
(in years)
|
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2019
|
|
|
220,767
|
|
|
$
|
3.83
|
|
|
|
3.81
|
|
|
$
|
1,684
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(78,500
|
)
|
|
$
|
2.47
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(22,500
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
119,767
|
|
|
$
|
2.58
|
|
|
|
1.37
|
|
|
$
|
1,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
|
|
119,767
|
|
|
$
|
2.58
|
|
|
|
1.37
|
|
|
$
|
1,171
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
The aggregate intrinsic value in
the table above represents the total intrinsic value that would have been received by the option holders had all option holders
exercised their options on December 31, 2019. This amount is changed based on the market value of the Company’s Ordinary
shares. Total intrinsic value of options exercised during the years ended December 31, 2017, 2018 and 2019 was $ 502, $ 617
and $ 537, respectively. As of December 31, 2019, there was no unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Plans.
The options outstanding as of December
31, 2019, have been separated into ranges of exercise price categories, as follows:
Exercise price
|
|
Options
outstanding
|
|
|
Weighted
average
remaining
contractual life
(years)
|
|
|
Weighted
average
exercise price
|
|
|
Options
exercisable
|
|
|
Weighted
average
exercise price of exercisable options
|
|
In $
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.01-2
|
|
|
40,000
|
|
|
|
0.30
|
|
|
$
|
1.38
|
|
|
|
40,000
|
|
|
$
|
1.38
|
|
3.01-4
|
|
|
73,517
|
|
|
|
1.77
|
|
|
$
|
3.02
|
|
|
|
73,517
|
|
|
$
|
3.02
|
|
5.01-6
|
|
|
6,250
|
|
|
|
3.61
|
|
|
$
|
5.02
|
|
|
|
6,250
|
|
|
$
|
5.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,767
|
|
|
|
1.37
|
|
|
$
|
2.58
|
|
|
|
119,767
|
|
|
$
|
2.58
|
|
|
c.
|
Accumulated other comprehensive income (loss):
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated realized and unrealized gain (loss) on available-for-sale securities, net
|
|
$
|
1
|
|
|
$
|
(94
|
)
|
|
$
|
(58
|
)
|
Accumulated foreign currency translation adjustments
|
|
|
(351
|
)
|
|
|
(6,057
|
)
|
|
|
115
|
|
Accumulated unrealized gain on derivative instruments, net
|
|
|
26
|
|
|
|
26
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
$
|
(324
|
)
|
|
$
|
(6,125
|
)
|
|
$
|
83
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
On August 9, 2017, the Company’s
Board of Directors decided to amend the dividend distribution policy announced in 2012. According to the Company’s amended
policy, each year the Company will distribute a dividend of up to 75% of its annual distributable profits. The Company’s
Board of Directors may at its discretion and at any time, change, whether as a result of a one-time decision or a change in policy,
the rate of dividend distributions and/or decide not to distribute a dividend, all at its discretion.
On February 22, 2017, the Company
declared a dividend distribution of $ 0.085 per share ($ 3,775 in the aggregate) which was paid on April 5, 2017. On August
13, 2017, the Company declared a dividend distribution of $ 0.13 per share ($ 5,779 in the aggregate) which was paid on September
13, 2017. On February 28, 2018, the Company declared a dividend distribution of $ 0.13 per share ($ 5,785 in the aggregate) which
was paid on March 26, 2018. On August 8, 2018, the Company declared a dividend distribution of $ 0.155 per share ($ 7,563 in the
aggregate) which was paid on September 5, 2018. On March 4, 2019, the Company declared a dividend distribution of $ 0.15
per share ($ 7,335 in the aggregate) which was paid on March 25, 2019. On August 13, 2019, the Company declared a dividend distribution
of $ 0.156 per share ($ 7,628 in the aggregate) which was paid on September 12, 2019.
NOTE 15:-
|
RELATED PARTIES TRANSACTIONS
|
Agreements
with controlling shareholder and its affiliates:
The
Company has in effect agreements with affiliated companies pursuant to which the Company has rendered services amounting to approximately
$ 2,511, $ 2,535 and $ 4,300, in aggregate for the years ended December 31, 2017, 2018 and 2019, respectively and acquired services
amounting to approximately $ 165, $ 309 and $ 224 for the years ended December 31, 2017, 2018 and 2019, respectively.
As of December 31, 2018 and 2019, the
Company had trade and other receivables balances due to its related parties in amount of approximately $ 601 and $ 648, respectively.
In addition, as of December 31, 2018 and 2019, the Company had trade payables balances due from its related parties in amount
of approximately $ 106 and $ 31, respectively.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 16:-
|
COMMITMENTS AND CONTINGENCIES
|
|
a.
|
Guarantees and Collaterals:
|
As of December 31, 2019, the Company
has provided performance bank guarantees in the amount of $805 as security for the performance of various contracts with customers.
As of December 31, 2019, the Company has restricted bank deposits of $ 433 in favor of the issuing banks.
|
b.
|
From time to time, the Company and/or its subsidiaries are subject to legal, administrative and regulatory proceedings, claims, demands and investigations in the ordinary course of business, including claims with respect to intellectual property, contracts, employment and other matters. The Company accrues a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. These accruals are reviewed and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter.
|
Lawsuits have been brought against
the Company in the ordinary course of business. The Company intends to defend itself vigorously against those lawsuits.
In September 2016, an Israeli
software company, that was previously involved in an arbitration proceeding with us in 2015 and won damages from us of $2.4
million, filed a lawsuit seeking damages of NIS 34,106 against the Company and one its subsidiaries. This lawsuit was filed
as part of an arbitration proceeding. In the lawsuit, the software company claimed that warning letters that the Company sent
to its clients in Israel and abroad, warning those clients against the possibility that the conversion procedure offered by
the software company may amount to an infringement of the Company’s copyrights (the “Warning Letters”), as
well as other alleged actions, have caused the software company damages resulting from loss of potential business. The
lawsuit is based on rulings given in the 2015 arbitration proceeding in which it was allegedly ruled that the Warning Letters
constituted a breach of a non-disclosure agreement (NDA) signed between the parties.
The Company rejected the claims
by the Israeli software company and moved to dismiss the lawsuit entirely. At this point, all the relevant motions have been filed
and all witnesses deposed including legal summaries. The Company is unable to make a reasonably reliable estimate of its chances
of successfully defending this lawsuit.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 17:-
|
NET EARNINGS PER SHARE
|
The following table
sets forth the computation of basic and diluted net earnings per share:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Magic shareholders
|
|
$
|
20,266
|
|
|
$
|
19,883
|
|
|
$
|
15,442
|
|
Accretion of redeemable non-controlling interests
|
|
$
|
(7,471
|
)
|
|
$
|
(1,726
|
)
|
|
$
|
-
|
|
Net income attributable to Magic shareholders after accretion of redeemable non-controlling interests
|
|
$
|
12,795
|
|
|
$
|
18,157
|
|
|
$
|
15,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Ordinary shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net earnings per share
|
|
|
48,896,163
|
|
|
|
46,665,042
|
|
|
|
44,435,671
|
|
Effect of dilutive securities
|
|
|
97,920
|
|
|
|
131,648
|
|
|
|
161,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net earnings per share
|
|
|
48,994,083
|
|
|
|
46,796,690
|
|
|
|
44,597,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted earnings per share
|
|
$
|
0.26
|
|
|
$
|
0.39
|
|
|
$
|
0.35
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 18:-
|
SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
|
|
a.
|
The Company reports its results on the basis of two reportable business segments: software services (which include proprietary and none proprietary software technology) and IT professional services.
|
The Company evaluates segment performance
based on revenues and operating income of each segment. The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. This data is presented in accordance with ASC 280, “Segment
Reporting.”
Headquarters’ general and
administrative costs have not been allocated between the different segments.
Software services
The Company develops markets, sells
and supports a proprietary and none proprietary application platform, software applications, business and process integration solutions
and related services.
IT professional services
The Company offers advanced and
flexible IT services in the areas of infrastructure design and delivery, application development, technology planning and implementation
services, communications services and solutions, as well as supplemental outsourcing services.
There are no significant transactions
between the two segments.
|
b.
|
The following is information about reported segment results of operation:
|
|
|
Software services
|
|
|
IT
professional services
|
|
|
Unallocated expense
|
|
|
Total
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
77,100
|
|
|
$
|
181,040
|
|
|
$
|
-
|
|
|
$
|
258,140
|
|
Expenses
|
|
|
63,649
|
|
|
|
164,558
|
|
|
|
3,977
|
|
|
|
232,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
$
|
13,451
|
|
|
$
|
16,482
|
|
|
$
|
(3,977
|
)
|
|
$
|
25,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
9,242
|
|
|
$
|
4,100
|
|
|
$
|
269
|
|
|
$
|
13,611
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 18:-
|
SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont.)
|
|
|
Software
services
|
|
|
IT
professional
services
|
|
|
Unallocated
expense
|
|
|
Total
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
81,332
|
|
|
$
|
203,043
|
|
|
$
|
-
|
|
|
$
|
284,375
|
|
Expenses
|
|
|
63,902
|
|
|
|
183,985
|
|
|
|
4,790
|
|
|
|
252,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
$
|
17,430
|
|
|
$
|
19,058
|
|
|
$
|
(4,790
|
)
|
|
$
|
31,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
8,727
|
|
|
$
|
3,611
|
|
|
$
|
226
|
|
|
$
|
12,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
86,140
|
|
|
$
|
239,490
|
|
|
$
|
-
|
|
|
$
|
325,630
|
|
Expenses
|
|
|
71,825
|
|
|
|
216,842
|
|
|
|
3,311
|
|
|
|
291,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
$
|
14,315
|
|
|
$
|
22,648
|
|
|
$
|
(3,311
|
)
|
|
$
|
33,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
8,799
|
|
|
$
|
5,059
|
|
|
$
|
167
|
|
|
$
|
14,025
|
|
|
c.
|
The Company’s business is divided into the following geographic areas: United States, Israel, Europe, Japan and other regions. Total revenues are attributed to geographic areas based on the location of the customers.
|
The following table presents total
revenues classified according to geographical destination for the years ended December 31, 2017, 2018 and 2019:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
158,095
|
|
|
$
|
137,066
|
|
|
$
|
123,113
|
|
Israel
|
|
|
124,523
|
|
|
|
103,850
|
|
|
|
91,917
|
|
Europe
|
|
|
25,788
|
|
|
|
28,257
|
|
|
|
26,635
|
|
Japan
|
|
|
12,499
|
|
|
|
9,797
|
|
|
|
9,253
|
|
Other
|
|
|
4,725
|
|
|
|
5,405
|
|
|
|
7,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
325,630
|
|
|
$
|
284,375
|
|
|
$
|
258,140
|
|
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 18:-
|
SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont.)
|
|
d.
|
The Company’s long-lived assets are located as follows:
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
108,608
|
|
|
$
|
100,206
|
|
United States
|
|
|
68,989
|
|
|
|
30,222
|
|
Japan
|
|
|
6,406
|
|
|
|
5,082
|
|
Other
|
|
|
3,248
|
|
|
|
2,800
|
|
Europe
|
|
|
3,103
|
|
|
|
1,247
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
190,354
|
|
|
$
|
139,557
|
|
|
e.
|
The Company does not allocate its assets to its reportable segments; accordingly, asset information by reportable segments is not presented.
|
|
f.
|
In 2017, 2018 and 2019, the Company had one major customer, included in the IT professional services segment, which accounted for 13%, 13% and 9% of the group revenues, respectively.
|
NOTE 19:-
|
REVENUE RECOGNITION
|
The Company adopted ASC 606
on January 1, 2018 for all open contracts at the date of initial application, and applied the standard using modified retrospective
approach, with the cumulative effect of applying ASC 606 recognized as an adjustment to the opening retained earnings balance.
Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted
and continue to be reported under the accounting standards in effect for the prior period.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 19:-
|
REVENUE RECOGNITION (Cont.)
|
The following table includes
estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied or partially
unsatisfied at the end of the reporting period and are part of a contract that has an original expected duration of more than one
year:
|
|
2020
|
|
|
2021
|
|
|
2022 and thereafter
|
|
Software license and related revenues and consulting services
|
|
$
|
6,632
|
|
|
$
|
1,786
|
|
|
$
|
1,899
|
|
Contract balances:
The following table provides information about trade
receivables, contract assets (unbilled receivables) and contract liabilities (deferred revenues) from contracts with customers
(in thousands):
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Trade receivables (net of allowance for doubtful accounts)
|
|
$
|
96,694
|
|
|
$
|
90,274
|
|
Deferred revenues
|
|
$
|
8,724
|
|
|
$
|
4,857
|
|
Trade receivable are recorded
when the right to consideration becomes unconditional, and an invoice is issued to the customer.
Billing terms and conditions
generally vary by contract type. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either
at periodic intervals (e.g., monthly or quarterly) or upon achievement of contractual milestones.
Deferred revenues represent
contract liabilities, and include unearned amounts received under contracts with customers and not yet recognized as revenues.
During the year ended December
31, 2019, the Company recognized $4,857 that was included in deferred revenues (short-term contract liability) balance at January
1, 2019.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
NOTE 20:-
|
SELECTED STATEMENTS OF INCOME DATA
|
|
a.
|
Research and development costs, net:
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Total costs
|
|
$
|
12,382
|
|
|
$
|
9,362
|
|
|
$
|
10,713
|
|
Less - capitalized software costs
|
|
|
(4,143
|
)
|
|
|
(3,666
|
)
|
|
|
(3,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
$
|
8,239
|
|
|
$
|
5,696
|
|
|
$
|
6,942
|
|
|
b.
|
Financial income (expenses), net:
|
Bank charges and interest from loans offset by interest from short term deposits
|
|
$
|
(374
|
)
|
|
$
|
(986
|
)
|
|
$
|
(1,124
|
)
|
Interest expenses related to liabilities in connection with acquisitions
|
|
|
(11
|
)
|
|
|
(4
|
)
|
|
|
(62
|
)
|
Interest income from marketable securities, net of amortization of premium on marketable securities
|
|
|
212
|
|
|
|
284
|
|
|
|
284
|
|
Gain (loss) arising from foreign currency translation and other
|
|
|
(1,007
|
)
|
|
|
855
|
|
|
|
(809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income (expenses), net
|
|
$
|
(1,180
|
)
|
|
$
|
149
|
|
|
$
|
(1,711
|
)
|
The
Company leases substantially all of its office space and vehicles under operating leases. The Company’s leases have
original lease periods expiring between 2020 and 2028. Some leases include an option to renew. The Company does not assume
renewals in its determination of the lease term unless the renewals are deemed to be reasonably certain at lease
commencement. Lease payments included in the measurement of the lease liability comprise the following: the fixed
non-cancellable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will
be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated
early.
In
November 2019, the Company entered into a lease agreement for new corporate offices of Comblack IT in Ramat Gan, Israel. The
lease expires in April 2025, with an option by the Company to extend for an additional 5-year term. The Company deemed this
option as reasonably certain to be renewed.
The Company has several leased offices in the United
States, with expiry dates varying between 2020 and 2024, with renewal options varying between 2021 and 2030.
Under Topic 842, all leases with durations greater
than 12 months, including non-cancellable operating leases, are now recognized on the balance sheet. The aggregated present value
of lease agreements is recorded as a long-term asset titled ROU asset.
The corresponding lease liabilities are classified
between operating lease liabilities which are current and long-term.
The
components of operating lease costs were as follows: Basic rent expenses, management fees, parking expenses and maintenance
costs.
MAGIC SOFTWARE ENTERPRISES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands
The following is a summary of weighted average remaining
lease terms and discount rates for all of the Company’s operating leases:
|
|
December 31,
|
|
|
|
2019
|
|
Weighted average remaining lease term (years)
|
|
|
3.55
|
|
Weighted average discount rate
|
|
|
2.05
|
%
|
Cash paid for amounts included in the measurement
of operating lease liabilities was $3,595 (included in cash flows from operating activities).
Maturities
of lease liabilities are as follows:
2020
|
|
$
|
4,407
|
|
2021
|
|
|
3,208
|
|
2022
|
|
|
2,070
|
|
2023
|
|
|
1,586
|
|
2024
|
|
|
1,086
|
|
2025 and thereafter
|
|
|
3,746
|
|
Total undiscounted cash flows
|
|
$
|
16,103
|
|
Less imputed interest
|
|
|
(1,151
|
)
|
Present value of lease liabilities
|
|
|
14,952
|
|
|
NOTE
22:-
|
SUBSEQUENT EVENTS
|
On January 1, 2020 the Company increased its equity interest
from 60% to 80.05% in Roshtov Software Industries Ltd (“Roshtov”), an Israeli-based software company and a market
leader in Israel for ambulator patient record information systems, for a total cash consideration of approximately $ 15,000, paid
upon closing.
The Company and Roshtov two minority shareholders
hold a mutual Call and Put options respectively for the remaining 19.95% interest in Roshtov.
On April 15, 2020 the Company increased its equity
interest from 70% to 80.2% in Comblack IT Ltd. (“Comblack”), an Israeli-based company that specializes in software
professional and outsource management services for mainframes and complex large-scale environments, for a total cash consideration
of approximately $ 3,600, of which an amount of $ 3,000 was paid upon closing and the remaining will be paid over a period
of up to 18 months. The consideration may be subject to further adjustment (upward or downward) based on Comblack operational performance
in 2020 and 2021.
MAGIC SOFTWARE ENTERPRISES LTD.
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
|