PART
I
|
Item
1.
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Identity
of Directors, Senior Management and Advisers
|
Not
applicable.
|
Item
2.
|
Offer
Statistics and Expected Timetable
|
Not
applicable.
|
A.
|
Selected
Financial Data
|
Except
as otherwise indicated, all financial statements and other financial information included in this Annual Report are presented
solely under U.S. GAAP.
The
following table presents selected consolidated financial data as of and for each of the five years in the period ended December
31, 2018. The selected consolidated financial data presented below are derived from our audited consolidated financial statements
for these periods and should be read in conjunction with these financial statements and the related notes thereto. Our audited
consolidated balance sheets as of December 31, 2017 and 2018 and our audited consolidated statements of operations and cash flows
for each of the three years ended December 31, 2018 and the related notes thereto are included elsewhere in this annual report.
You should read the selected financial data in conjunction with Item 5 “Operating and Financial Review and Prospects.”
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|
Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
($ in thousands, except share and per share data)
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
25,020
|
|
|
$
|
20,928
|
|
|
$
|
18,052
|
|
|
$
|
18,062
|
|
|
$
|
18,135
|
|
Gross profit
|
|
|
15,070
|
|
|
|
12,298
|
|
|
|
11,221
|
|
|
|
11,029
|
|
|
|
11,989
|
|
Operating income
|
|
|
7,457
|
|
|
|
6,416
|
|
|
|
5,206
|
|
|
|
4,686
|
|
|
|
5,350
|
|
Financial income (expenses) – net
|
|
|
(306
|
)
|
|
|
(114
|
)
|
|
|
166
|
|
|
|
630
|
|
|
|
222
|
|
Net income
|
|
$
|
5,483
|
|
|
$
|
5,018
|
|
|
$
|
4,203
|
|
|
$
|
5,612
|
|
|
$
|
5,134
|
|
Earnings per ordinary share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.26
|
|
|
$
|
0.22
|
|
|
$
|
0.29
|
|
|
$
|
0.27
|
|
Diluted
|
|
$
|
0.29
|
|
|
$
|
0.26
|
|
|
$
|
0.22
|
|
|
$
|
0.29
|
|
|
$
|
0.27
|
|
Weighted average number of ordinary shares used in computation of earnings per ordinary share – in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,949
|
|
|
|
19,183
|
|
|
|
19,234
|
|
|
|
19,292
|
|
|
|
19,344
|
|
Diluted
|
|
|
19,032
|
|
|
|
19,283
|
|
|
|
19,307
|
|
|
|
19,559
|
|
|
|
19,561
|
|
|
|
As of December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
($ in thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,100
|
|
|
$
|
11,475
|
|
|
$
|
9,165
|
|
|
$
|
5,014
|
|
|
$
|
2,739
|
|
Working capital
|
|
|
14,818
|
|
|
|
14,734
|
|
|
|
15,217
|
|
|
|
14,921
|
|
|
|
15,272
|
|
Total assets
|
|
|
30,347
|
|
|
|
30,225
|
|
|
|
29,000
|
|
|
|
27,378
|
|
|
|
25,978
|
|
Share capital and additional paid-in capital
|
|
|
25,778
|
|
|
|
25,916
|
|
|
|
26,052
|
|
|
|
26,234
|
|
|
|
26,458
|
|
Treasury Shares
|
|
|
(1,863
|
)
|
|
|
(1,692
|
)
|
|
|
(1,607
|
)
|
|
|
(1,554
|
)
|
|
|
(1,515
|
)
|
Total shareholders’ equity
|
|
$
|
22,411
|
|
|
$
|
21,848
|
|
|
$
|
21,285
|
|
|
$
|
21,022
|
|
|
$
|
20,982
|
|
|
B.
|
Capitalization
and Indebtedness
|
Not
applicable.
|
C.
|
Reasons
for the Offer and Use of Proceeds
|
Not
applicable.
We
believe that the occurrence of any one or some combination of the following factors would have a material adverse effect on our
business, financial condition and results of operations.
Risks
Relating to Our Business
If
we are unable to compete effectively in the marketplace, we may suffer a decrease in market share, revenues and profitability.
Competition
in our industry is intense and we expect competition to increase. We compete both with established global billing companies, such
as Amdocs and Oracle, as well as with local billing companies. Some of our competitors have greater financial, technical, sales,
marketing and other resources and greater name recognition than we do. Some of our competitors, mainly the ones that focus on
specific markets, compete with us on pricing. New competitors may emerge and rapidly acquire significant market share. We cannot
guarantee that we will be able to compete effectively against current or future competitors or that competitive pressure will
not harm our financial results.
Our
backlog, revenues and operating results may vary significantly from quarter to quarter.
Our
backlog, revenues and operating results may vary significantly from quarter to quarter due to a number of factors, including the
following:
|
●
|
the
timing of orders and/or deliveries for our software may be delayed as customers typically
order and/or implement our billing and customer care software only after other vendors
have provided the network infrastructure, a process that is subject to delay. It is therefore
difficult for us to predict the timing of orders and/or revenue recognition;
|
|
●
|
the
ability of our customers to expand their operations and increase their subscriber base,
including their ability to obtain financing;
|
|
●
|
potential
termination of contracts by our customer due to lack of financing, internal changes,
consolidation, competition or any other reason; and
|
|
●
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changes
in our pricing policies or competitive pricing by our competitors.
|
Due
to all of the foregoing, we cannot predict revenues for any future quarter with any significant degree of accuracy. Accordingly,
we believe that period-to-period comparisons of our operating results are not necessarily meaningful, and you should not rely
upon them as indications of future performance. In future quarters, our operating results may be below the expectations of public
market analysts and investors, and as a result, the price of our ordinary shares may fall.
We
seek to expand our business through acquisitions, which could result in diversion of resources and extra expenses and which may
involve other risks that could disrupt our business and harm our financial condition.
It
is part of our strategy to pursue acquisitions of business, products and technologies, or the establishment of joint venture arrangements
in order to offer new products or services or otherwise enhance our market position or strategic strengths, and we are actively
evaluating potential acquisition opportunities. The negotiation of potential acquisitions or joint ventures, as well as the integration
of an acquired or jointly developed business, technology or product, could cause diversion of management’s attention from
the day-to-day operation of our business. This could impair our relationships with our employees, customers, distributors, resellers
and marketing allies. Future acquisitions could result in:
|
●
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potentially
dilutive issuances of equity securities;
|
|
●
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the
incurrence of debt and contingent liabilities;
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|
●
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amortization
of intangible assets;
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|
●
|
changes
in our business model and margins;
|
|
●
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research
and development write-offs; and
|
|
●
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other
acquisition-related expenses.
|
In
addition, we have limited experience with respect to negotiating an acquisition and operating an acquired business. Due to the
multiple risks and difficulties associated with any acquisition, there can be no assurance that we will be successful in achieving
our expected strategic, operating and financial goals for any such acquisition. If future acquisitions disrupt our operations,
our business may suffer.
We
may not be successful in the integration of our acquisitions.
We
cannot assure you that we have identified, or will be able to identify, all material adverse issues related to the integration
of our acquisitions, such as significant defects in the internal control policies of companies that we have acquired. In addition,
our acquisitions could lead to difficulties in integrating acquired personnel and operations and in retaining and motivating key
personnel from these businesses. In some instances, we may need to depend on the seller of an acquired business to provide us
with certain transition services in order to meet the needs of our customers. Any failure to recognize significant defects in
the internal control policies of acquired companies or properly integrate and retain personnel, and any interruptions of transition
services, may require a significant amount of time and resources to address.
If
we do not continually enhance our products and service offerings, introduce new products and features and adopt and monetize new
technologies and methodologies in the marketplace, we may have difficulty retaining existing customers and attracting new customers.
We
believe that our future success will depend, to a significant extent, upon our ability to enhance our existing products and services,
to introduce new products, services and features to meet the requirements of our customers, and to adopt to and leverage new technologies
and methodologies such as cloud, microservices-based architecture, in a rapidly developing and evolving market. We devote significant
resources to refining and expanding our base software modules and to developing our products, services and development methodologies
and tools. In some instances, we rely on cooperative relationships with third parties to assist us in delivering certain products
and services to our customers. Our present or future products, services and technology may not satisfy the evolving needs of the
communications industry or of other industries that we serve. If we are unable to anticipate or respond adequately to such needs,
due to resource, technological or other constraints, our business and results of operations could be harmed.
Our
future success will depend on our ability to develop and maintain long-term relationships with our customers and to meet their
expectations in providing products and performing services.
We
believe that our future success will depend to a significant extent on our ability to develop and maintain long-term relationships
with successful network operators and service providers with the financial and other resources required to invest in significant
ongoing development of our products and services. If we are unable to develop new customer relationships, our business will be
harmed. In addition, our business and results of operations depend in part on our ability to provide high quality services to
customers that have already implemented our products. If we are unable to meet customers’ expectations in providing products
or performing services, our business and results of operations could be harmed.
If
our security measures for our software, hardware, services or cloud offerings are compromised and as a result, our data, our customers’
data or our IT systems are accessed improperly, made unavailable, or improperly modified, our products and services may be perceived
as vulnerable, which may materially affect our business and result in potential legal liability.
Our
products and services, including our cloud offerings, store, retrieve, and manage our customers’ information and data, as
well as our own data. We have a reputation for secure and reliable product offerings and related services and we have invested
a great deal of time and resources in protecting the integrity and security of our products, services and the internal and external
data that we manage. Despite our efforts to implement network security measures, we cannot guarantee that our systems are fully
protected from vulnerabilities related to IT-related viruses, worms and other malicious software programs, attacks,
break-ins and similar disruptions from unauthorized tampering by computer hackers and others. Such cybersecurity incident
could include an attempt to gain unauthorized access to digital systems for purposes of misappropriating assets or sensitive information,
corrupting data, or causing operational disruption. Security measures in our products and services may be penetrated or bypassed
by computer hackers and others who may gain unauthorized access to our or our customers’ or partners’ software, hardware,
cloud offerings, networks, data or systems. They may use a wide variety of methods, which may include developing and deploying
malicious software to attack our products third-party data, products or services incorporated into our own. Data may also be accessed
or modified improperly as a result of customer, partner or employee error or malfeasance and third parties may attempt to fraudulently
induce customers, partners, employees or suppliers into disclosing sensitive information such as user names, passwords or other
information in order to gain access to our data or IT systems or our customers’ or partners’ data or IT systems. Any
of the foregoing occurrences could create system disruptions and cause shutdowns or denials of service or compromise data, including
personal or confidential information, of us, our partners or our customers.
If
a cyber-attack or other security incident (for example phishing, advanced persistent threats, or social engineering) were to result
in unauthorized access to, or deletion of, and/or modification and/or exfiltration of our customers’ data, other external
data or our own data or our IT systems or if the services we provide to our customers were disrupted, customers could lose confidence
in the security and reliability of our products and services, including our cloud offerings, and perceive them not to be secure.
This in turn could lead to fewer customers using our products and services and result in reduced revenue and earnings. The costs
we would incur to address and fix these security incidents would increase our expenses. These risks will increase as we continue
to grow our cloud and network offerings and store and process increasingly large amounts of data, including personal information
and our customers’ confidential information and data and other external data, and host or manage parts of our customers’
businesses in cloud-based IT environments.
Any
of the events described above could cause our customers to make claims against us for damages allegedly resulting from a security
breach or service disruption, which could adversely affect our business, results of operation and financial condition.
Regulatory,
legislative or self-regulatory developments relating to privacy and data collection and protection, and uncertainties regarding
the application or interpretation of applicable laws and regulations, could harm our business.
We
are subject to laws, directives, and regulations relating to the collection, use, retention, disclosure, security and transfer
of personal data. These laws, directives, and regulations, and their interpretation and enforcement continue to evolve and may
be inconsistent from jurisdiction to jurisdiction. For example, the General Data Protection Regulation (“GDPR”), which
regulates the use of personally identifiable information, went into effect in the European Union (“EU”) on May 25,
2018, applies globally to all of our activities conducted from an establishment in the EU, to related products and services that
we offer to EU customers and to non-EU customers which offer services in the EU. The GDPR also affect our role as product
developers, as we are required to adopt “privacy by design” principles in order to address our customers’ need
to apply privacy adequate solutions when handling their subscribers’ data. Complying with the GDPR and similar emerging
and changing privacy and data protection requirements may cause us to incur substantial costs or require us to change our business
practices. Noncompliance with our legal obligations relating to privacy and data protection could result in penalties, fines,
legal proceedings by governmental entities or others, loss of reputation, legal claims by individuals and customers and significant
legal and financial exposure and could affect our ability to retain and attract customers.
System
disruptions and failures may result in customer dissatisfaction, customer loss or both, which could materially and adversely affect
our reputation and business.
Our
systems are an integral part of our customers’ business operations. The continued and uninterrupted performance of these
systems for our customers is critical to our success. Customers may become dissatisfied by any system failure that interrupts
our ability to provide services to them.
Our
ability to serve our customers depends on our ability to protect our systems and infrastructure against damages and unexpected
adverse events. We also depend on various cloud providers and co-location datacenter providers which provide us environments,
tools and applications on which we provide our products. Although we maintain insurance that we believe is appropriate for our
business and industry, such coverage may not be sufficient to compensate for any significant losses that may occur as a result
of any of these events. In addition, we have experienced systems outages and service interruptions in the past, none of which
has had a material adverse effect on us. However, a prolonged system-wide outage or frequent outages could cause harm to our customers
and to our reputation and reduce the attractiveness of our services significantly, which could result in decreased demand for
our products and services and could cause our customers to make claims against us for damages allegedly resulting from an outage
or interruption. Any damage or failure that interrupts or delays our operations could result in material harm to our business
and expose us to material liabilities.
The
customer base for our wireline and wireless billing and customer care products is characterized by very small to medium size telephony
carriers. If this market segment fails to grow, the demand for our billing and customer care software would diminish substantially.
Our
wireline and wireless billing and customer care products target very small to medium size carriers. Our growth in this field depends
on continued growth of carriers of this size. We cannot be certain that carriers of this size will be able to successfully compete
with large telephony carriers in existing markets or will successfully develop in new and emerging markets. If this market segment
fails to grow, the demand for our billing and customer care software would diminish substantially and our business would suffer.
In addition, there may never be significant demand for new billing and customer care software by providers of telecom services.
If
we fail to attract and retain qualified personnel, we will not be able to implement our business strategy or operate our business
effectively.
Our
products require sophisticated software development, sales, professional services and technical customer support. Our success
depends on our ability to attract, train, motivate and especially retain highly skilled personnel within each of these areas of
expertise. Qualified personnel in these areas are in great demand worldwide and are likely to remain a limited resource. We cannot
assure you that we will be able to retain the skilled employees we require. In addition, the resources required to retain such
personnel may adversely affect our operating margins. The failure to retain qualified personnel may harm our business. In particular,
we maintain a large engineering and support center in Iasi, Romania and have encountered many successful attempts from other technology
companies to recruit our employees after we have trained them. If this phenomenon continues and increases, we may not be able
to retain the highly skilled personnel and may be forced to significantly raise the salaries of our Romanian employees and our
results of operations will be consequently harmed.
Because
our revenues are generated in numerous countries, our results of operations could suffer if we are unable to manage international
operations effectively.
Our
sales are made in many countries, with different legislation and complex taxation rules and in many states in the United States.
Managing our existing international operations and additional international markets requires significant management attention
and financial resources. Our ability to penetrate some international markets may be limited due to different technical standards,
protocols and requirements for our products in different markets. In addition, conducting our business internationally subjects
us to a number of risks, including:
|
●
|
the
burden of compliance with a wide variety of foreign laws and regulations;
|
|
●
|
staffing
and managing foreign operations;
|
|
●
|
increased
risk of collection;
|
|
●
|
potentially
adverse tax consequences;
|
|
●
|
burdens
that may be imposed by tariffs and other trade barriers; and
|
|
●
|
adverse
effects of political and economic instability.
|
We
currently benefit from local tax benefits that may be discontinued or reduced.
We
have derived benefits from various programs, including Israeli tax benefits relating to our “Approved and Preferred Enterprise”
programs, and starting in 2017, we have derived benefits relating to the “Preferred Technological Enterprise” program
under the Israel Law for the Encouragement of Capital Investment, 1959.
To
be eligible for tax benefits as a “Preferred Technological Enterprise,” we must continue to meet certain conditions.
Should it be determined that our Preferred Technological Enterprise programs have not met, or do not meet, the statutory conditions,
our income taxes will increase.
Additional
tax liabilities could materially adversely affect our results of operations and financial condition.
As
a global corporation, we are subject to income and other taxes both in Israel and in various foreign jurisdictions. Our domestic
and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing
of recognizing revenues and expenses. Additionally, the amount of income taxes paid or accrued is subject to our interpretation
of applicable laws in the jurisdictions in which we do business. From time to time, we are subject to income and other tax audits
in various jurisdictions, the timings of which are unpredictable. While we believe we comply with applicable tax laws, there can
be no assurance that a governing tax authority will not have a different interpretation of the law and assess us with additional
taxes. Should we be assessed additional taxes, there could be a material adverse effect on our results of operations and financial
condition.
If
we experience loss of one or more existing customers, we may suffer a decrease in revenues, reputation and profitability.
A
significant part of our revenues is derived from our existing customer base, maintenance agreements, customizations and additional
professional services. Small service providers may be acquired by larger carriers and replace our solutions with the buyer’s
existing billing platform, cease operations due to lack of funding, or terminate their relationship with us due to their financial
condition, loss of market share and competitive pricing, as occurred with customers of ours over the years. If one or more customers
cease using our solutions or services due to replacements or any other reason, our business and results of operations would suffer.
Because
some of our customers require highly complex implementations and we sell fixed price projects, we may underestimate the effort
and time required to implement such projects, resulting in a lower or negative profit margin for such projects and the incurrence
of contractual penalties for late performance. This could materially harm our results of operations.
In
2018, we derived 82% of our revenues from the sale of software and related services to telecommunications service providers. As
projects become more complex, the risk for on-time and on-budget implementation increases. Each such contract may include penalties
and potential liability for damages arising from late performance. These customers conduct a lengthy and complex approval and
purchasing process, and the pricing for each project needs to be competitive in order to win. Our cost of sales increases as the
length of the approval process increases because we need to support each opportunity during the time required for the customer
to determine their specifications and the time required for the customer to receive internal approval to commit significant resources
towards acquisition of the billing solution. The project implementation may be delayed due to customer related reasons such as
lack of resources, delay in the build-up of the customer’s network infrastructure or deferral in making implementation scope
related decisions. Our estimate for the cost includes the effort required to release new versions comprising enhanced functionality,
the on-site professional services effort needed to perform migration of data from a customer’s existing platform and to
develop, test and implement the customizations specifically requested by the customer.
All
the delays, either by us or by a third party, increase the cost of supplying the project and expose us to potential claims from
customers and may decrease our revenues and could materially harm our profitability, business and results of operations.
Our
business may be negatively affected by exchange rate fluctuations.
Although
the majority of our revenues are denominated in U.S. dollars, or dollars, or $, approximately 39% of our expenses are incurred
in New Israeli Shekel, or NIS, and approximately 48% of our expenses are linked to the Euro. As a result, we may be negatively
affected by fluctuations in the exchange rates between the Euro or the NIS and the dollar. We cannot predict any future trends
in the rate of devaluation or appreciation of the NIS or of the Euro against the dollar. If the dollar cost of our operations
in Israel and/or Romania increases, our dollar-measured results of operations will be adversely affected. In addition, some of
our revenues are denominated in Euro, some are denominated in Canadian dollar, or CAD and some are denominated in Great Britain
Pound, or GBP. As a result, our dollar-measured results of operations will be adversely affected by devaluation in the GBP, CAD
or Euro relative to the dollar. We may choose to limit these exposures by entering into hedging transactions. However, hedging
transactions may not enable us to avoid exchange-related losses, and our business may be harmed by exchange rate fluctuations.
From
time to time, our software and the systems into which it is integrated contain undetected errors. This may cause us to experience
a significant decrease in market acceptance and use of our software products and we may be subject to warranty and other liability
claims.
From
time to time, our software, as well as the systems into which it is integrated, contains undetected errors. Because of this integration,
it can be difficult to determine the source of the errors. Also, from time to time, hardware systems we resell contain certain
defects or errors. As a result, and regardless of the source of the errors, we could experience one or more of the following adverse
results:
|
●
|
diversion
of our resources and the attention of our personnel from our research and development
efforts to address these errors;
|
|
●
|
negative
publicity and injury to our reputation that may result in loss of existing or future
customers; and
|
|
●
|
loss
of or delay in revenue and loss of market share.
|
In
addition, we may be subject to claims based on errors in our software or mistakes in performing our services. Our licenses and
agreements generally contain provisions such as disclaimers of warranties and limitations on liability for special, consequential
and incidental damages, designed to limit our exposure to potential claims. However, not all of our contracts contain these provisions
and we cannot assure you that the provisions that exist will be enforceable. In addition, while we maintain product liability
and professional indemnity insurance, we cannot assure you that this insurance will provide sufficient, or any, coverage for these
claims. A product liability or professional indemnity claim, whether or not successful, could adversely affect our business by
damaging our reputation, increasing our costs, and diverting the attention of our management team.
We
depend on a limited number of key personnel who would be difficult to replace. If we lose the services of these individuals, our
business may be harmed.
Because
our markets are constantly changing, the success of our business depends in large part upon the continuing contributions of our
senior management. Specifically, continued growth and success largely depend on the managerial and technical skills of our founder,
President and Chief Executive Officer, Ms. Monica Iancu, and other members of senior management. Because the demand for highly
qualified senior personnel exceeds the supply of this type of personnel, it will be difficult to replace members of our management
if one or more of them were to leave us. If either Ms. Iancu or other members of the senior management team are unable or unwilling
to continue their employment with us, our business may be harmed.
Our
success depends on our ability to continually develop and market new and more technologically advanced products and enhancements.
The
market for our products and the services they are used to support is characterized by:
|
●
|
rapid
technological advances like the development of new standards for communications protocols;
|
|
●
|
frequent
new service offerings and enhancements by our customers, such as value-added IP-based
services and new rating plans; and
|
|
●
|
changing
customer needs.
|
We
believe that our future success will largely depend upon our ability to continue to enhance our existing products and successfully
develop and market new products on a cost-effective and timely basis. We cannot assure you that we will be successful in developing
and marketing new products that respond adequately to technological change. Our failure to do so would have a material adverse
effect on our ability to market our own products.
If
we are unable to adequately protect our intellectual property or become subject to a claim of infringement, our business may be
materially adversely affected.
Our
success and ability to compete depend substantially upon our internally developed or acquired technology. Any misappropriation
of our technology could seriously harm our business. In order to protect our technology and products, we rely on a combination
of trade secret, copyright and trademark law. Despite our efforts to protect our intellectual property rights, unauthorized parties
may attempt to copy or otherwise obtain and use our software or technology or to develop software with the same functionality.
Policing unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent misappropriation,
particularly in foreign countries where the laws may not protect our intellectual property rights as fully as in the United States.
If
anyone asserts a claim against us relating to proprietary technology or information, we might seek to license his intellectual
property or to develop non-infringing technology. We might not be able to obtain a license on commercially reasonable terms or
on any terms. Alternatively, our efforts to develop non-infringing technology could be unsuccessful. Our failure to obtain the
necessary licenses or other right or to develop non-infringing technology could prevent us from selling our software and could
therefore seriously harm our business.
We
use certain “open source” software tools that may be subject to intellectual property infringement claims or that may
subject our derivative works or products to unintended consequences, possibly impairing our product development plans, interfering
with our ability to support our clients or requiring us to allow access to the source code of our products or necessitating that
we pay licensing fees.
Certain
of our products contain open source code and we may use more open source code in the future. In addition, certain third-party
software that we embed in our products contains open source code. Open source code is code that is covered by a license agreement
that permits the user to liberally use, copy, modify and distribute the software without cost, provided that users and modifiers
abide by certain licensing requirements. The original developers of the open source code provide no warranties on such code.
As
a result of the use of open source software, we could be subject to suits by parties claiming ownership of what they believe to
be their proprietary code or we may incur expenses in defending claims alleging non-compliance with certain open source code license
terms. In addition, third-party licensors do not provide intellectual property protection with respect to the open source components
of their products, and we may be unable to be indemnified by such third-party licensors in the event that we or our customers
are held liable in respect of the open source software contained in such third-party software. If we are not successful in defending
against any such claims that may arise, we may be subject to injunctions and/or monetary damages or be required to remove the
open source code from our products. Such events could disrupt our operations and the sales of our products, which would negatively
impact our revenues and cash flow.
Moreover,
under certain conditions, the use of open source code to create derivative code may obligate us to make the resulting derivative
code available to others at no cost. The circumstances under which our use of open source code would compel us to offer derivative
code at no cost are subject to varying interpretations. If we are required to publicly disclose the source code for such derivative
products or to license our derivative products that use an open source license, our previously proprietary software products may
be available to others without charge. If this happens, our customers and our competitors may have access to our products without
cost to them, which could harm our business. Certain open source licenses require as a condition to use, modification or distribution
of such open source that proprietary software incorporated into, derived from or distributed with such open source be disclosed
or distributed in source code form, be licensed for the purpose of making derivative works or be redistributable at no charge.
The foregoing may under certain conditions be interpreted to apply to our software, depending upon the use of the open source
and the interpretation of the applicable open source licenses.
We
monitor our use of open source code to avoid subjecting our products to conditions we do not intend. The use of open source code,
however, may ultimately subject some of our products to unintended conditions so that we are required to take remedial action
that may divert resources away from our development efforts.
We
are subject to ongoing costs and risks associated with complying with extensive corporate governance and disclosure requirements.
As
an Israeli company subject to U.S. federal securities laws, we spend a significant amount of management time and resources to
comply with laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley
Act of 2002, SEC regulations, Nasdaq listing rules and the Israeli Companies Law, 1999 (the “Companies Law”, or the
“Israeli Companies Law”). In connection with our compliance with Section 404 and the other applicable provisions of
the Sarbanes-Oxley Act of 2002, our management and other personnel devote a substantial amount of time to assure that we continue
to comply with these requirements. There is no guarantee that these efforts will result in management assurance that our internal
control over financial reporting is adequate in future periods. If our internal controls are found to be ineffective in future
periods, it could harm our operations, financial reporting or financial results.
Risks
Relating to the Market of our Ordinary Shares
Our
share price has fluctuated and could continue to fluctuate significantly.
The
market for our ordinary shares, as well as the prices of shares of other technology companies, has been volatile. The price of
our ordinary shares has fluctuated significantly over the years. A number of factors, many of which are beyond our control, may
cause the market price of our ordinary shares to fluctuate significantly, such as:
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sales
of a substantial number of our ordinary shares;
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fluctuations
in our quarterly revenues and earnings and those of our publicly held competitors;
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public
announcements concerning us or our competitors;
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changes
in pricing policies by us or our competitors;
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market
conditions in our industry; and
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the
general state of the securities market (particularly the technology sector).
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We
do not control these matters and any of them may adversely affect our share price. In addition, trading in shares of companies
listed on the Nasdaq Global Market in general and trading in shares of technology companies in particular has been subjected to
extreme price and volume fluctuations that have been unrelated or disproportionate to operating performance. These broad market
and industry factors may depress our share price, regardless of our actual operating results. Given the likely volatility that
exists for our ordinary shares, sales of a substantial number of our ordinary shares could cause the market price of our ordinary
shares to decline.
If
we are characterized as a passive foreign investment company, our U.S. shareholders will be subject to adverse tax consequences.
If,
for any taxable year, either, (i) 75% or more of our gross income is passive income; or (ii) 50% or more of our assets, averaged
over the year and generally determined based upon value, including cash (even if held as working capital), produce or are held
to produce passive income, we may be characterized as a “passive foreign investment company”, or PFIC for United States
federal income tax purposes. For this determination, passive income includes dividends, interest, royalties, rents, annuities
and the excess of gain over losses from the disposition of assets that produce passive income.
As
a result of our cash position and the value of our assets, we may be deemed to be a PFIC for U.S. federal income tax purposes.
If
we are characterized as a PFIC, our shareholders who are residents of the United States will be subject to adverse U.S. tax consequences.
Our treatment as a PFIC could result in a reduction in the after-tax return to shareholders resident in the United States and
may cause a reduction in the value of our shares. If we were to be treated as a PFIC, our shareholders will be required, absent
certain elections, to pay an interest charge together with tax calculated at the then prevailing highest tax rates on ordinary
income on certain “excess distributions” including any gain on the sale of Ordinary Shares. The consequences of holding
shares in a PFIC are described below under “Additional Information - United States Federal Income Tax Consequences - Passive
Foreign Investment Companies.” Prospective investors should consult with their own tax advisors with respect to the tax
consequences applicable to them of investing in our Ordinary Shares.
Risks
Relating to Our Location in Israel
Potential
political, economic and military instability in Israel may harm our operating results.
We
are organized under the laws of the State of Israel and most of our senior management is located in Israel. Accordingly, our operating
results are directly influenced by economic, political and military conditions in and relating to Israel. Since the establishment
of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, Hamas (an Islamist militia
and political group in the Gaza Strip) and Hezbollah (an Islamist militia and political group in Lebanon). Recent political uprisings,
social unrest and violence in various countries in the Middle East and North Africa, including Israel’s neighbor Syria,
are affecting the political stability of those countries and have enabled the development of extremist groups. This instability
may lead to deterioration of the political relationships that exist between Israel and these countries and has raised concerns
regarding security in the region and the potential for armed conflict. In addition, Iran has threatened to attack Israel and is
believed to be developing nuclear weapons. Iran is also believed to have a strong influence among parties hostile to Israel in
areas that neighbor Israel, such as the Syrian government, Hamas in Gaza and Hezbollah in Lebanon. Any armed conflicts or political
instability in the region could negatively affect business conditions and harm our results of operations. We cannot predict the
effect on the region of the increase in the degree of violence between Israel and the Palestinians. Furthermore, several countries
and trade groups restrict business with Israel and Israeli companies, and additional countries and trade groups may restrict doing
business with Israel and Israeli companies for political reasons. These restrictive laws and policies may seriously harm our operating
results, financial condition or the expansion of our business. In addition, the current situation in Israel could adversely affect
our operations if our customers and/or strategic allies believe that instability in the region could affect our ability to fulfill
our commitments.
It
may be difficult to enforce a U.S. judgment against us, our officers and directors or to assert U.S. securities laws claims in
Israel.
We
are incorporated in the State of Israel. Substantially most of our executive officers and directors are nonresidents of the United
States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore,
it may be difficult for a shareholder, or any other person or entity, to collect a judgment obtained in the United States against
us or any of these persons, or to effect service of process upon these persons in the United States.
We
have been informed by our legal counsel in Israel that it may be difficult to bring original actions in Israel to enforce civil
liabilities under the Securities Act and the Exchange Act. Israeli courts may refuse to hear a claim based on a violation of U.S.
securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court
agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to
be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process.
Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing these
matters.
Subject
to specified time limitations and legal procedures, under the rules of private international law currently prevailing in Israel,
Israeli courts may enforce a U.S. judgment in a civil matter, including judgments based upon the civil liability provisions of
the U.S. securities laws and including a monetary or compensatory judgment in a non-civil matter, provided that the following
key conditions are met:
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subject
to limited exceptions, the judgment is final and non-appealable;
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the
judgment was given by a court competent under the laws of the state of the court and
is otherwise enforceable in such state;
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the
judgment was rendered by a court competent under the rules of private international law
applicable in Israel;
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the
laws of the state in which the judgment was given provide for the enforcement of judgments
of Israeli courts;
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adequate
service of process has been effected and the defendant has had a reasonable opportunity
to present his arguments and evidence;
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the
judgment and its enforcement are not contrary to the law, public policy, security or
sovereignty of the State of Israel;
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the
judgment was not obtained by fraud and does not conflict with any other valid judgment
in the same matter between the same parties; and
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an
action between the same parties in the same matter was not pending in any Israeli court
at the time the lawsuit was instituted in the U.S. court.
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Provisions
of Israeli law and our articles of association may delay, prevent or make difficult a change of control and therefore may depress
the price of our stock.
Some
of the provisions of our articles of association and Israeli law could, together or separately:
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discourage
potential acquisition proposals;
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delay
or prevent a change in control; and
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limit
the price that investors might be willing to pay in the future for our ordinary shares.
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In
particular, our articles of association provide that our board of directors will be divided into three classes that serve staggered
three-year terms and authorize our board of directors to adopt protective measures to prevent or delay a coercive takeover, including
without limitation the adoption of a “Shareholder Rights Plan.” In addition, Israeli corporate law regulates mergers
and acquisitions of shares through tender offers, requires approvals for transactions involving significant shareholders and regulates
other matters that may be relevant to these types of transactions. See Item 10.B “Memorandum and Articles of Associations
- Mergers and Acquisitions under Israeli Law.” Furthermore, Israeli tax law treats stock-for-stock acquisitions between
an Israeli company and a foreign company less favorably than does U.S. tax law. For example, Israeli tax law may subject a shareholder
who exchanges his ordinary shares for shares in another corporation to taxation prior to the sale of the shares received in such
stock-for stock swap.
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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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General
Our
name is MIND C.T.I. Ltd. for both legal as well as commercial purposes. We were incorporated under the laws of the State of Israel
on April 6, 1995 as a company with limited liability, and we are subject to the Israeli Companies Law and the regulations promulgated
thereunder. Our principal executive offices are located at Industrial Park, Building 7, Yoqneam 2069202, Israel. Our telephone
number is +972 4 993 6666. Our agent in the United States is MIND Software, Inc. and its principal offices are located at 12520
Prosperity Drive, Suite 220, Silver Spring, MD 20904, USA.
Principal
Capital Expenditures
During
2016, 2017 and 2018, the aggregate cash amount of our capital expenditures were $68,000, $71,000 and $46,000, respectively. These
expenditures were mainly for the purchase of equipment and licenses for software tools to be used by our engineering teams. We
currently have no material commitments for capital expenditures.
B.
Business Overview
Overview
We
develop, manufacture, market and implement real-time and off-line convergent billing and customer care software solutions for
various types of communication providers, including traditional wireline and wireless, voice over IP, or VoIP, and broadband IP
network operators, LTE operators, cable operators and mobile virtual network operators, or MVNOs.
Our
convergent billing and customer care solution supports multiple services, including voice, data and content services as well as
prepaid, postpaid and pay-in-advance payment models in a single platform. Prepaid subscribers can enjoy the full range of services
offered by the provider, with their special bundles, rating plans and limits. The prepaid solution authorizes each service and
controls each session in real time, taking care that the balance is not exceeded. Postpaid subscribers, including credit-limited
and non-limited, retail or business customers, represent the loyal and the higher average revenue per user (ARPU), market. All
services used by a postpaid subscriber appear in a single bill, which includes all charges, including one-time, recurring and
usage-related charges. Our billing solution (MINDBill) is truly convergent and it includes our own integrated real-time mediation
product that provides interfaces with IP, Intelligent Networks, or IN, and traditional telecommunication equipment, as well as
our own point-of-sale solution.
Our
billing and customer care solution includes a powerful workflow engine to support the implementation of business processes such
as subscriber registration, order management, trouble ticket and debt collection. It also includes an integral point of sale (POS)
solution that covers all dealer, store and cashier management and sales processes. We base our solution on a multi-layered architecture
supporting real-time distributed processing, achieving performance, scalability and high availability. It uses an open architecture,
including Service Oriented Architecture (SOA) and robust Application Programming Interfaces (APIs) thus enabling fast and seamless
integration with other systems and third-party applications. The MIND solution uses standardized best-of-breed object-oriented
design concepts and development technologies such as Java, Angular, Spring, XML Web-services, REST APIs, and Micro-Services. It
is JEE based and is powered by a commercial application server.
MINDBill
can be installed on-premises or in a cloud environment.
We
also provide professional services, primarily to our billing and customer care customers, consisting of installation, turnkey
project implementation services, customer support, training and maintenance services, software and process customization and project
management. Our professional services also include enhanced support options, known as managed services, which are mainly offered
to customers in the United States and Europe and are performed from our offices. These managed services include performing day
to day billing operational tasks.
In
addition to our billing and customer care solutions, we offer unified communications solutions call management systems used by
organizations for call accounting, telecom expense management, traffic analysis and fraud detection. Our enterprise software product
has been installed on about 20,000 switches around the world, for traditional telephony, for IP switches and hybrid networks.
Our latest product, PhonEX ONE, delivers one unified solution for all voice communication expenses including traditional, IP and
mobile telephony. The flexible and scalable architecture of PhonEX ONE meets the needs of large enterprises, supporting an unlimited
number of extensions and sites, it provides full functionality through a web browser, based on Microsoft SQL database and the
advanced ASP.NET technology.
Our
Market Opportunity
Billing
and Customer Care Industry
Billing
and customer care are critical to telecommunications service providers as they enable them to manage customer relations, track
and bill for usage, and launch, deploy and charge new services, marketing programs and rate plans. The need for comprehensive
billing solutions is driven by the market trend that requires service providers to introduce new services, to be innovative in
creating new product offerings and to optimize business processes for maximum efficiency. We provide tier 2 and tier 3 service
providers with flexible, easy to deploy, truly convergent and scalable billing solutions.
From
time to time, telecommunications service providers initiate searches for billing solutions to replace existing ones in order to
offer additional services, reduce costs and improve service. In addition, our existing customers occasionally consider adding
new modules that we developed to their existing platform, replacing other vendors or migrating to a newer version with up-to-date
technology and enhanced functionality.
Also,
from time to time, new providers surface and introduce new offering to the market or try to attract a specific targeted customer
base. They build new infrastructure or resell traffic and initiate searches for billing solutions.
Convergence
Implementation
of convergent solutions has become a common demand and we encounter opportunities as carriers seek to replace multiple existing
solutions with one convergent platform.
The
convergent billing solution in the telecommunications
industry enables operators to manage efficiently, on one platform, all subscribers and all services. It includes convergence of
payment methods like prepaid
and postpaid, as well as services like fixed telephony, mobile
telephony, broadband, cable and IPTV.
Mobile
Market and IP Services Industry
The
two niches in the mobile market in which we see opportunities are the rural mobile carriers market in the United States and the
new generation operators that offer high-speed mobile internet services over 4G LTE networks. We have a number of such carriers
as customers and we are focused on delivering solutions that address these particular markets. As 5G networks and IoT solutions
will enter the market over the coming years there will be additional opportunities for new and innovative solutions.
Providers
of multiple services typically require billing and customer care products that can handle authentication, authorization and accounting
needs in real-time in order to determine the types of services to which the subscriber is entitled, as well as any applicable
limits to the availability of the services. This real-time functionality is particularly important for prepaid billing plans.
Our proven solutions cover all these needs, as described below.
Our
Billing and Customer Care Solution
We
develop, market and support real-time and off-line, scalable billing and customer care software, including mediation and rating,
for providers of voice, data and content services that are designed to meet their complex, mission-critical provisioning, authentication,
authorization, accounting and reporting needs. Our billing and customer care software provides our customers with the following
benefits:
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Real-Time
Solution
. Service providers require a system that enables authentication, authorization
and accounting and, if needed, cut-off, all in real-time. We believe that the MIND solution
is one of the few billing and customer care products that offers real-time functionality
for both prepaid and postpaid billing plans, and that has a real-time rating engine able
to support rating of voice, data and content services simultaneously;
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Mediation
and Service Fulfillment
. IP and traditional networks that can offer voice, data,
video and content services are based on various network elements each of which generates
billable information. We believe that the MIND solution is one of the few billing and
customer care products that provide real-time collection and correlation of various events
from multiple sources that relate to the same session and convert them into billable
records. In addition, the MIND solution enables end-to-end automated flow for service
creation and activation, meaning that from the order for service handled by the customer
care representative until the service activation, the activities that need to be completed
are automatically fulfilled by MIND;
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Scalability
.
Our billing solution (MINDBill) is designed to support millions of subscribers and at
the same time they enable service providers to grow from accommodating a small number
of subscribers to a large number of subscribers, primarily through the addition of hardware
and licenses. Our solutions’ design allows a service provider to expand its infrastructure,
business model and subscriber base without the need to replace its billing and customer
care software; and
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Improved
Time to Market
. MINDBill is modular, extensible software products, based on software
architecture designed for easy adaptability and implementation. These features allow
each of our customers to tailor our products to meet their individual needs in terms
of the number of subscribers serviced and the variety of services provided. In addition,
our products can be customized relatively quickly, enabling our customers to improve
their time to market as they initially implement their networks and, later, as they add
and modify the services they provide.
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Our
Strategy
Our
objective is to be a leader in the market for convergent billing and customer care software for tier 2 and tier 3 service providers
and to maintain profitability.
The
key elements of our strategy to become a leader in the market for convergent billing and customer care software for tier 2 and
tier 3 service providers include:
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Leverage
our brand name recognition and technical expertise
. We introduced our billing and
customer care software in 1997. We believe that our early position in the market and
our reputation for offering high quality, reliable billing and customer care software
has provided us with brand name recognition. We intend to leverage our reputation, brand
name and recognition in the wireline and wireless markets;
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Maintain
and expand our technological expertise
. We believe that our reputation in the market
is due in large part to our technological expertise. We make significant investments
in research and development to continually enhance our products to meet the changing
needs in the telecom industry. We intend to continue our commitment to technology, both
to enhance our existing products and to develop new products for growing markets; and
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Expand
professional services opportunities
.
As our projects are of larger scale and as convergent
service offerings become more complex, our customers require more consulting services,
especially for customization, as well as for project management, installation and training,
technical support and maintenance. We aim to increase our revenues from consulting services.
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Billing
and Customer Care Solutions
The
key functionalities of our billing and customer care solutions are as follows:
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Mediation
.
Providing real-time and batch event collection, interfacing with the voice, content,
data, service delivery and routing network elements;
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Provisioning
.
Setting up the ability of a subscriber to use services, enabling features and quantitative
limits on network elements and legacy billing solutions;
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Authentication
& Authorization
. Authenticate subscribers who connect to the network to use voice
or data services, and authorize a particular usage by reviewing the type of service,
the account balance, pre-rating the service and calculating the resulting cut-off parameters;
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Accounting
.
When each session is completed, the rating engine calculates the amount to be charged
to the subscriber and updates the balance of the account in real-time. In addition, the
usage detail records are stored for invoicing and reporting;
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Interconnect
Billing
. MINDBill generates reports that enable providers to bill for traffic and
services that are being transported across their networks by other providers;
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Roaming
.
MINDBill provides the ability to define and manage the required roaming contract terms
and the applicable tariff plan for each roaming partner;
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Virtual
Providers
. MINDBill allows carriers to have resellers of traffic under different
brand names and manage them as Virtual Providers;
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Multiple
Services and Products Support
. MINDBill allows operators to provide advanced voice,
data, content and video services. Our product catalog allows bundling of groups of services
into tailor-made packages with special rates, discounts and promotions;
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Rating
.
MINDBill includes a flexible real-time rating engine that facilitates a wide variety
of billing plans and tariff parameters. Our rating engine includes support for content-based
rates, rates based on the day of the week, time of the day, call origin and destination
and multi-currency rates for international services. It supports an unlimited number
of free-unit and money-bundle, voucher-based payment models and much more;
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Invoicing
.
MINDBill supports all stages of invoice generation, multiple billing cycles and invoice
on demand. Invoices include usage details, monthly recurring charges, discounts and taxes.
Invoices can be printed locally or exported to printing service bureaus, using a customizable
invoice layout;
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Account
Receivables (A/R)
. MINDBill manages all A/R activities, monitors the A/R status online
and ensures a continuous cash flow. It supports multiple payment methods: cash, check,
credit and debit cards, vouchers and more. It offers a flexible open application server
programming interface (API) for payments interfaces to banks and credit card clearing
houses and has pre-integrated interfaces with major financial institutions, banks, clearinghouses
and credit bureaus. The A/R module supports deposits life cycle management, including
payments and refunds, dispute management and resolution, resulting in the appropriate
adjustments. MINDBill identifies the ageing debt for every open invoice according to
the company classification policy (30-60-90 days) and initiates the built-in debt collection
process;
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Collection
procedures
. The MINDBill flexible collection facility defines the collection policy
using different collection paths. The solution provides full monitoring and control of
the collection treatment (dunning process). It identifies customers with past due debts
and ensures that they are handled in accordance with the company policy;
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Subscriber
Self-Care Web Interface
. MINDBill includes a user-friendly subscriber web interface
that allows subscribers to obtain real time information about their account, including
invoice information, call details and payment history. Our solution also offers a set
of APIs to facilitate seamless integration of an existing customer self-care application
with our billing solution;
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Customer
Support Representative Web Interface
. MINDBill includes a powerful and user-friendly
customer support representative web interface that allows operators to perform customer
care from any location;
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Point
of Sale (POS).
Our POS enables operators to offer their products and services in
retail stores, selling services, equipment and accessories to new and existing customers
and even to non-subscribers. POS integrates with external systems, such as credit card
clearinghouses, external taxation engines, field service software, and address validation
systems. POS main modules:
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Sales
Module
– a PC and Tablet-based cashier station that facilitates services, equipment
and accessories sales, returns and repairs, through an easy to use interface on a single
receipt. It enables cash, check and credit card payments and supports cash drawer, credit
card swipe, barcode reader and ribbon printer;
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Resource
Management Module –
an inventory system that supports the operator’s
warehouses and stores, automating the management and tracking of goods sold. It manages
the equipment by serial number, status, and location, supporting the full goods life-cycle.
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Business
Processes Workflow Environment
. MINDBill includes an automated business processes
workflow engine to implement our customers’ unique business rules, creating tailored
business processes such as managing subscriptions, order management, trouble tickets
and debt collection. For example, a tailored account creation process may include account
registration, package selection, provisioning and activation steps, it may involve different
users from various departments, integration with external legacy systems and third-party
services and more;
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Call
Management and Traffic Analysis Reports (CMS)
. This module allows service providers
to generate reports and graphic analysis of usage activity. Information such as peak
hours, usage loads or duration of sessions enables operators to analyze subscriber behavior
and improve their marketing and business development strategies. In addition, the traffic
analysis reports assist service providers in planning the growth and development of their
networks;
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Fraud
Detection
. MINDBill includes a customizable fraud detection tool that enables detection
of “stolen” calls and telephone misuse. It detects, locates and warns of
any suspicious activity by activating alarms; and
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Monitoring.
MINDBill includes a monitoring tool that enables 24x7 operational control, proactive
monitoring and historical analysis of the behavior and well-being of our platform and
the resources it is using, such as database and operating system. This tool can forward
monitoring information to external network managing systems using simple network management
protocol (SNMP).
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Enterprise
Software
Our
enterprise product, known as PhonEX ONE, is used by corporations for telecom expense management, call accounting, traffic analysis
and fraud detection. PhonEX ONE is a call management system that collects, records and stores all call information and enables:
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to
generate near real-time reports on the enterprise’s telephone use;
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monitor
quality of experience;
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track
agent’s performance in contact centers;
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produce
sophisticated reports and graphics for easy and effective analysis of call activity;
and
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allocate
telephone expenses to specific departments, individual clients or projects.
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These
functions allow organizations to more effectively manage their telecommunications resources. The system is easy to install and
configure, user-friendly and compatible with any switchboard system, traditional or IP. The system performs call management and
traffic analysis as well as fraud management in the same manner as our billing solutions. In addition, the system is multi-lingual
and multi-currency, which means that reports can be generated in any currency defined in the system, or in two currencies simultaneously.
PhonEX
ONE can be installed on-premises or in a cloud environment.
PhonEX
ONE, delivers one unified solution for management of all telecom expenses, including traditional voice, IP voice and data, and
mobile telephony. The flexible and scalable architecture of PhonEX ONE meets the needs of large enterprises, supporting an unlimited
number of extensions and sites. PhonEX ONE provides tools to monitor, budget and manage voice traffic in order to achieve maximum
control over telecommunication expenses. Some of its major advantages are:
|
●
|
Fully
web-based solution.
The PhonEX ONE fully web-based solution enables managers and
users to conveniently access their telecom expenses management system anytime and from
anywhere, using a web browser without decreasing their control over the traffic;
|
|
●
|
Quality
of Service (QoS) Monitoring.
PhonEX ONE enables quantification of the user’s
perceived audio call quality so the organization can ensure the relevant communication
quality of experience of its contact centers, calls between branches, out-going calls,
etc.;
|
|
●
|
User
centric
. The PhonEX ONE user-centric architecture provides a consolidated solution
for the collection, analysis, reporting, and managing of all the telecommunication and
data traffic expenses;
|
|
●
|
Dashboard
.
A visual representation of the most significant information regarding calls, a useful
tool that helps administrators to get a quick and relevant image of the general system
activity. The Dashboard can quickly provide - through its graphical and non-graphical
monitors - a snapshot over the outgoing and incoming calls, traffic and exceptions as
well as several top requested reports;
|
|
●
|
Multi-site
solution
. The PhonEX ONE scales to support large multi-site organizations using voice
and data equipment from multiple vendors. PhonEX ONE supports complex hierarchies on
which any employee can be associated to any branch of the organization and under a separate
matrix to any corporate department;
|
|
●
|
ASP.NET
and MS-SQL database
. PhonEX ONE is designed using the Microsoft .Net technology and
has extensive configuration capabilities using XML files with server – client interaction;
|
|
●
|
Certification
by IP switch vendors
. PhonEX ONE is interoperable and certified on a timely manner
with new releases of IP switch vendors, including Cisco and Microsoft;
|
|
●
|
Enhanced
security.
PhonEX ONE security management includes user authentication, security group
restrictions, event log monitoring and encryption methodology of data base entries. This
management tool enables a secure and easy control over the system;
|
|
●
|
Modular
architecture supporting high scalability
. The PhonEX ONE’s scalable system
architecture supports an unlimited number of sites and extensions;
|
|
●
|
Guard
and Alerter.
The PhonEX ONE Guard and Alerter provide sophisticated tools for fraud
prevention, alerting on phone misuse, budget surpass, possible toll fraud or other abnormal
behaviors within the organization; and
|
|
●
|
Multilingual
and multicurrency
. The built-in support of multiple languages and multiple currencies
enables telecom expense management for multinational organizations.
|
We
intend to further develop and market these products as the market for Voice over IP systems for enterprises grows.
Professional
Services
We
provide professional services to our customers, consisting primarily of project management, customization, installations, customer
support, training and maintenance services. As our projects become more complex, more customers require customization services
to add specialized features to their systems. We also offer enhanced support options, called managed services, which are mainly
offered to customers in the United States and are performed from our offices. The managed services include performing day to day
billing operational tasks. The managed services contracts are usually for a term of three to five years and are paid on a monthly
basis. We also have the ability to implement Software-as-a-Service (SaaS) models in a similar way.
Technology
Our
software products are based on an open architecture, which was developed using industry standard API that enables it to readily
integrate with other software applications. These application program interfaces create an object-oriented, multi-layered architecture
that support a distributed environment. Our object-oriented technology enables the design and implementation of software utilizing
reusable business objects rather than complex procedural codes. Our layered architecture organizes these business objects to optimize
the interface between the user and the application. We implement our software in a distributed configuration. This allows various
modules to be installed on different servers to support the system’s scalability and security. We utilize a business processes
workflow environment that facilitates the implementation of tailored and automated business processes to fit our customers’
unique business rules.
We
believe that our technology allows us to offer products with the following benefits:
|
●
|
fast
integration and interoperability with telecommunications equipment of major manufacturers,
legacy systems and external software;
|
|
●
|
modular
architecture that allows our products to be easily scalable and enables us to customize
our software relatively quickly;
|
|
●
|
reliable
products that support high availability of the service for mission-critical applications.
Our automatic fail-over mechanism ensures minimal loss of service in case of a component
failure; and
|
|
●
|
security
at all levels of the architecture. Each user of the system may be assigned to different
security groups. Service providers are therefore able to determine and audit access to
the system. In addition, firewalls can be installed to prevent unauthorized access to
the system.
|
Our
software products are based on multiple-tier architecture, consisting of the following tiers:
|
●
|
Client
Application Tier: This is the top tier graphic user interface between the user and the
application. It includes client applications for customer registration, sales, customer
care and billing administration. In addition, it includes Web service and REST interfaces
that enable external applications to interact with the business tier;
|
|
●
|
Business
Object Tier: This tier includes the business logic and rules of the system. This tier
manages accounts, services, events and tariffs. It includes an object request broker
that facilitates the transfer of information requested by the client application tier
from the database tier; and
|
|
●
|
Database
Tier: This tier includes the Oracle database server and management software where the
actual billing and customer care information is stored.
|
Sales
and Marketing
Sales
Billing
and Customer Care Solutions
We
conduct our sales and marketing activities primarily directly as well as through our marketing alliances with network equipment
vendors and systems integrators. These marketing allies and resellers provide us with a global extension of our direct sales force.
We also engage in joint marketing activities with our allies, including joint responses to requests for proposals. We believe
that these relationships also help validate our technology and facilitate broad market acceptance of our software.
Our
agreements with our marketing allies, distributors and resellers are non-exclusive, do not contain minimum sales or marketing
performance requirements and may be terminated at any time with notice.
Enterprise
Software
We
conduct our sales and marketing activities primarily directly, by our sales force located in the MIND offices in the United States
and in Israel, as well as through appointed distributors and resellers throughout the world. We engage with our system integrators
and equipment vendors for global marketing activities and responses to tenders.
Marketing
Our
marketing programs are focused on creating awareness, interest and preference for our products and services. We engage in a variety
of marketing activities, including:
|
●
|
participating
in industry trade shows and special events;
|
|
●
|
conducting
ongoing public and press relations programs; and
|
|
●
|
conducting
training seminars for vendors and system integrators.
|
Principal
Markets
The
following table shows our revenues for each of the past three years classified by type of revenue and geographic region.
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
($ in thousands)
|
|
The Americas (total)
|
|
$
|
12,714
|
|
|
$
|
12,995
|
|
|
$
|
13,130
|
|
Sale of Licenses
|
|
|
2,689
|
|
|
|
962
|
|
|
|
1,032
|
|
Services
|
|
|
10,025
|
|
|
|
12,033
|
|
|
|
12,098
|
|
Asia Pacific and Africa (total)
|
|
|
1,125
|
|
|
|
909
|
|
|
|
793
|
|
Sale of Licenses
|
|
|
316
|
|
|
|
202
|
|
|
|
212
|
|
Services
|
|
|
809
|
|
|
|
707
|
|
|
|
581
|
|
Europe (total)
|
|
|
3,333
|
|
|
|
3,181
|
|
|
|
3,328
|
|
Sale of Licenses
|
|
|
732
|
|
|
|
920
|
|
|
|
709
|
|
Services
|
|
|
2,601
|
|
|
|
2,261
|
|
|
|
2,619
|
|
Israel (total)
|
|
|
880
|
|
|
|
977
|
|
|
|
884
|
|
Sale of Licenses
|
|
|
187
|
|
|
|
357
|
|
|
|
198
|
|
Services
|
|
|
693
|
|
|
|
620
|
|
|
|
686
|
|
Total
|
|
|
18,052
|
|
|
|
18,062
|
|
|
|
18,135
|
|
Sale of Licenses
|
|
|
3,924
|
|
|
|
2,441
|
|
|
|
2,151
|
|
Services
|
|
|
14,128
|
|
|
|
15,621
|
|
|
|
15,984
|
|
Customers
Billing
and Customer Care Solutions
Our
billing and customer care solutions have been installed for a large base of customers worldwide, including:
|
●
|
Traditional
telephony providers that evolved into quad-play providers, offering wireless, wireline,
cable, content and internet services, such as Moldtelecom, Belize Telemedia and Docomo
Pacific;
|
|
●
|
Wireless
telephony providers, LTE operators and MVNO’s, such as KDDI America, Inc., Chat
Mobility and SI Wireless;
|
|
●
|
Cable
providers that also offer voice services, such as EastLink; and
|
|
●
|
Mobile
Virtual Network Enablers (MVNEs), such as Pelephone Communications Ltd.
|
Enterprise
Software
Our
enterprise software has been installed on about 20,000 switches around the world, for customers that include international banking
firms, global technology leaders, government agencies and other small to very large organizations.
Competition
Billing
and Customer Care Solutions
Competition
in the market for billing and customer care software is intense and we expect competition to continue to be strong. We compete
with many local companies and worldwide companies such as Amdocs, CSG and Optiva.
We
believe that our competitive advantage is based on:
|
●
|
our
ability to rapidly deploy a complete turn-key product-based solution;
|
|
●
|
our
truly convergent platform using one database and one product catalog for both prepaid
and postpaid subscribers;
|
|
●
|
our
solutions’ functionality, which includes billing, customer care, point-of-sale,
mediation, provisioning, online charging for multiple services and interconnect reporting;
|
|
●
|
our
proven platform and our many years of wireless and IP experience to satisfy customer
requirements; and
|
|
●
|
our
flexibility to meet customer requirements in a short time frame.
|
Some
of our competitors have greater financial, technical, sales, marketing and other resources and greater name recognition than we
do. Some of our competitors have lower cost structure and compete with us on pricing. Current and potential competitors have established,
and may establish in the future, cooperative relationships among themselves or with third parties to increase their ability to
address the needs of prospective customers. Accordingly, new competitors or alliances among competitors may emerge and rapidly
acquire significant market share and their solutions could achieve greater market acceptance than our solutions.
Enterprise
Software
Our
competitors in the market for enterprise software products are mainly local companies. To compete effectively, companies must
be able to offer adequate technical support and ongoing product development. In addition, multinational companies prefer call
accounting systems that can be installed at their various offices throughout the world, and therefore require call accounting
products that are multilingual and support the local telecommunication requirements. The principal factors upon which we compete
are scalability, ease of use, being certified by major IP switch vendors and the multi-lingual and multi-currency nature of our
system.
|
C.
|
Organizational
Structure
|
Set
forth below is a list of our significant subsidiaries:
|
●
|
MIND
Software Limited, a wholly owned subsidiary, incorporated in the United Kingdom;
|
|
●
|
MIND
Software, Inc. (formerly Sentori, Inc.), a wholly owned subsidiary, incorporated in the
State of Delaware; and
|
|
●
|
MIND
Software SRL., a wholly owned subsidiary of MIND Software Limited, incorporated in Romania.
|
In
2017, we sold Dirot Comp SRL, a wholly-owned subsidiary of ours incorporated in Romania, for approximately $1.2 million, and we
recorded a net one-time capital gain of $0.9 million. We sold this subsidiary because the sole asset owned by it was a plot of
land in Romania on which we had planned to build our own office building, and we came to the conclusion that it would be preferable
to rent office space instead.
|
D.
|
Property,
Plant and Equipment
|
Our
headquarters are located in Yoqneam, Israel, approximately 50 miles north of Tel Aviv. We lease approximately 10,000 square feet
at our Yoqneam headquarters. We also lease approximately 2,100 square feet of office space in Silver Spring, Maryland, approximately
24,000 square feet in Iasi, Romania and approximately 7,400 square feet in Suceava, Romania. The office in Maryland is used primarily
for supporting our customers in the United States, while the offices in Iasi and Suceava are used primarily for software development
and for customer support. The office in Maryland is the group’s headquarters in the Americas.
|
Item
4A.
|
Unresolved
Staff Comments
|
Not
applicable.
|
Item
5.
|
Operating
and Financial Review and Prospects
|
The
following discussion and analysis of our financial condition and results of operations should be read together with our audited
consolidated financial statements and the related notes included elsewhere in this annual report. The following discussion contains
forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in certain
circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown
risks and uncertainties, including those identified under “Cautionary Note Regarding Forward-Looking Statements” and
under “Risk Factors” elsewhere in this annual report.
Overview
We
were incorporated in Israel in 1995 and started providing our enterprise software products in that year. In 1997, we introduced
our billing and customer care software for Voice over IP. We have enhanced our billing solutions since then to support multiple
IP services, wireless and wireline carriers and triple play (voice, data and content) service providers. In 2018, 82% of our total
revenues were derived from providing our billing and customer care software and 18% of our total revenues were derived from providing
our enterprise software. In 2018, license fees represented 12% of our total revenues and services represented 88% of our total
revenues. In 2018, two customers accounted for approximately 15% and 12% of our total revenues. In 2017, two customers accounted
for approximately 16% and 12% of our total revenues. In 2016, one customer accounted for approximately 14% of our total revenues.
We expect to continue to derive sizeable revenues from a small number of changing customers.
The
telecom carriers compete mainly on price. Our customers encounter profitability challenges and continually aim to reduce both
operating and capital expenditures. We believe that our up-to-date, versatile, comprehensive product-based billing platform and
agile delivery fit perfectly with multi-play service providers and address their challenge of reducing operational cost. While
the markets appear to be still active, showing ongoing demand for our products and services, extensive pre-sales efforts are required
and many processes are extended or constantly delayed. Consolidation in the telecom markets was not favorable to us in the last
years, and we closed fewer deals than in previous years. Accordingly, we expect challenges in maintaining our revenues level in
the near term. During the last three years we invested significantly in the new version of MINDBill, which was released in 2017,
already operational at four customers and acquired by an additional four customers, where we expect to complete deployments in
2019. We plan to continue investing in technology, cloud solutions and seeking to enter new markets, as we continue to focus on
our profitability targets.
In
August 2005, we acquired Sentori, Inc. (now named MIND Software, Inc.), a leading provider of billing and customer care solutions
to tier 3 and tier 2 wireless carriers and mobile virtual network operators, or MVNO’s, mainly in the United States and
the Caribbean. In October 2007, we acquired the U.K.-based Omni Consulting Company Limited (now named MIND Software Limited),
which provided billing and customer care software solutions in a service bureau mode, mainly to European carriers.
In
July 2003, we adopted a dividend policy, according to which we declare, subject to specific board approval and applicable law,
a dividend distribution once per year, in the amount of our net income from the previous year. In October 2010, our board updated
this policy slightly. The new policy changes only the amount to be distributed, the new amount being equal to our EBITDA plus
financial income (expenses) minus taxes on income. Additionally, our board approved dividend distributions in 2003, 2007, 2008,
2009, 2010, 2011 and 2014 that were subject to approvals from an Israeli Court, in accordance with Section 303 of the Israeli
Companies Law due to the fact that we did not have sufficient retained earnings, which court approvals were received. Since 2003,
the cash dividends add up to approximately $4.54 per share to (including the 2019 declared dividend). The amount per share that
we distributed in 2017 and 2018 was $0.32 and $0.30, respectively, and $0.26 per share was declared in March 2019. The board decision
to approve the annual distribution is based, among other factors, on our cash position at that time, potential acquisitions and
future cash needs. The board may decide to discontinue the dividend distribution in whole or in part at any time.
Revenues
.
We are paid license fees by our customers for the right to use our products, based on (i) traffic volume, which is measured by
factors such as number of subscribers, and (ii) the functionality of the system, based on application modules that are added to
the software. In relation to our professional services, other than maintenance services and managed services, we mainly quote
a fixed price based on the type of service offered, estimated direct labor costs and the expenses that we will incur to provide
these services. We also provide Agile development teams that perform solution enhancements, each dedicated for a period of time
to a specific customer, for a fixed cost per person per month. Fees for maintenance services are based on a percentage of the
solution fee and are paid annually, quarterly or monthly. Fees for managed services are primarily based on the number of subscribers
or customers business volume and are paid monthly.
We
primarily use two business models when we sell our solutions, the license model and the managed services model. In the license
model, the customer pays a one-time implementation fee, a one-time license fee for a perpetual license limited by the traffic
metrics chosen by the customer, and additional fees to expand the chosen traffic metrics limitation. In addition, we are paid
maintenance fees to renew periodically the maintenance agreement at the customer discretion. In the managed services model, the
customer pays a one-time implementation fee, a monthly fee that includes a periodic license (right to use), maintenance and services
fees, calculated by the metrics chosen by the customer (mainly, number of subscribers).
We
provide a revenue breakdown for our billing and customer care software and our enterprise call management software. We believe
that this information provides a better understanding of our performance and allows investors to make a more informed judgment
about our business.
Cost
of Revenues
. The cost of revenues consists primarily of direct labor costs and overhead expenses related to software installation
and maintenance. Cost of revenues also includes, among other things, software license fees to third parties, primarily Oracle,
hardware, travel expenses, packaging and shipping costs.
Research
and Development Expenses
. Our research and development expenses consist primarily of compensation, overhead and related costs
for research and development personnel and depreciation of testing and other equipment. Research and development costs related
to software products are expensed as incurred until the “technological feasibility” of the product has been established.
Because of the relatively short time period between “technological feasibility” and product release, no software development
costs have been capitalized. We expect to continue to make investments in research and development.
Selling
and Marketing Expenses
. Our selling and marketing expenses consist primarily of compensation, overhead and related costs,
for sales and marketing personnel, the operation of international sales offices, sales commissions, marketing programs, public
relations, promotional materials, travel expenses, trade shows and exhibition expenses.
General
and Administrative Expenses
. Our general and administrative expenses consist primarily of compensation, overhead and related
costs for executives and administrative personnel, professional fees, insurance, provisions for doubtful accounts and other general
corporate expenses.
Financial
Income (Expenses), Net
. Our financial income (expenses), net consists mainly of interest earned on bank deposits and short-term
investments, gains and losses from the conversion of monetary balance sheet items denominated in non-dollar currencies into dollars,
net of financing costs, and bank charges.
Taxes
on Income.
See “Corporate Tax Rate” below.
The
following discussion of our results of operations for the years ended December 31, 2016, 2017 and 2018, including the percentage
data in the following table, is based upon our statements of operations contained in our consolidated financial statements for
those years, and the related notes thereto, included in Item 18:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(% of revenues)
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
37.8
|
|
|
|
38.9
|
|
|
|
33.9
|
|
Gross profit
|
|
|
62.2
|
|
|
|
61.1
|
|
|
|
66.1
|
|
Research and development expenses
|
|
|
19.5
|
|
|
|
18.9
|
|
|
|
20.7
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
6.1
|
|
|
|
6.9
|
|
|
|
7.0
|
|
General and administrative
|
|
|
7.7
|
|
|
|
9.3
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
28.9
|
|
|
|
26.0
|
|
|
|
29.5
|
|
Gain on disposal of a subsidiary
|
|
|
-
|
|
|
|
4.9
|
|
|
|
-
|
|
Financial income (expenses), net
|
|
|
0.9
|
|
|
|
3.5
|
|
|
|
1.2
|
|
Income before taxes on income
|
|
|
29.8
|
|
|
|
34.4
|
|
|
|
30.7
|
|
Income tax expense
|
|
|
6.5
|
|
|
|
3.3
|
|
|
|
2.4
|
|
Net income
|
|
|
23.3
|
%
|
|
|
31.1
|
%
|
|
|
28.3
|
%
|
Comparison
of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
Revenues
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2017
|
|
|
2018
|
|
|
% Change
|
|
|
|
($ in millions)
|
|
|
|
|
License sales
|
|
$
|
2.5
|
|
|
$
|
2.1
|
|
|
|
(16
|
)
|
Professional services
|
|
|
15.6
|
|
|
|
16.0
|
|
|
|
2.6
|
|
Total revenues
|
|
$
|
18.1
|
|
|
$
|
18.1
|
|
|
|
-
|
|
Revenues
in 2018 remained the same as in 2017.
Revenues
from our billing and customer care product solutions for service providers slightly increased from $14.7 million in 2017 to $14.9
million in 2018. The increase was primarily attributed to multiple enhancements ordered by our existing customers.
Revenues
from our enterprise products decreased from $3.4 million in 2017 to $3.2 million in 2018. The decrease was primarily attributed
to the trend of market decrease and we expect this trend to continue.
Revenues
from licenses significantly decreased from $2.5 million in 2017 to $2.1 million in 2018, mainly due to the changes in revenue
recognition standard (Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”)
under which we categorize all the revenue from managed services contracts as services. The professional services significantly
increased from $15.6 million in 2017 to $16.0 million in 2018 in accordance with the decrease in licenses.
The
following table presents the geographic distribution of our revenues:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
(% of revenues)
|
|
The Americas
|
|
|
71.9
|
%
|
|
|
72.4
|
%
|
Asia Pacific and Africa
|
|
|
5.0
|
|
|
|
4.4
|
|
Europe
|
|
|
17.7
|
|
|
|
18.3
|
|
Israel
|
|
|
5.4
|
|
|
|
4.9
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Our
revenues in the Americas slightly increased from $13.0 million in 2017 to $13.1 million in 2018, and as a percentage of total
revenues increased from 71.9% in 2017 to 72.4% in 2018. Our revenues in Europe slightly increased from $3.2 million in 2017 to
$3.3 million in 2018 and as a percentage of total revenues increased from 17.7% in 2017 to 18.3% in 2018, mainly due to the appreciation
of the dollar in relation to the Euro. Our revenues in Israel decreased from $1.0 million in 2017 to $0.9 million in 2018, and
as a percentage of total revenues decreased from 5.4% in 2017 to 4.9% in 2018.
Cost
of Revenues
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2017
|
|
|
2018
|
|
|
% Change
|
|
|
|
($ in millions)
|
|
|
|
|
Cost of sales of license
|
|
$
|
0.2
|
|
|
$
|
0.08
|
|
|
|
(60
|
)
|
Cost of services
|
|
|
6.8
|
|
|
|
6.07
|
|
|
|
(10.7
|
)
|
Total cost of revenues
|
|
$
|
7.0
|
|
|
$
|
6.15
|
|
|
|
(12.1
|
)
|
Total
cost of revenues in 2018 decreased by $0.85 million, compared with 2017 due to a $ 0.73 million decrease in the cost of services,
mainly as a result of efficiency measures that were effectively implemented, and a $0.12 million decrease in cost of licenses
that occurred due to the decrease in cost of third-party licenses.
Gross
profit as a percentage of total revenues increased from 61.1% in 2017 to 66.1% in 2018, mainly due to the decrease in cost of
revenues while the revenues remained substantially the same.
Operating
Expenses
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2017
|
|
|
2018
|
|
|
% Change
|
|
|
|
($ in millions)
|
|
|
|
|
Research and development
|
|
$
|
3.4
|
|
|
$
|
3.7
|
|
|
|
8.8
|
|
Selling and marketing
|
|
|
1.2
|
|
|
|
1.3
|
|
|
|
8.3
|
|
General and administrative
|
|
|
1.7
|
|
|
|
1.6
|
|
|
|
(5.9
|
)
|
Total operating expenses
|
|
$
|
6.3
|
|
|
$
|
6.6
|
|
|
|
4.8
|
|
Research
and Development
. We have made substantial investment in research and development to maintain our advanced technology, to add
functionality to our products and to keep developing Version 8, the latest version of our MINDBill platform. The increase in our
research and development expenses by 8.8% in 2018, compared to 2017, was primarily due to an increase in labor costs. Research
and development expenses as a percentage of revenues increased from 18.9% in 2017 to 20.7% in 2018, primarily due to the increase
in research and development expenses while the revenues remained substantially the same. We expect cost of employment per employee
to continue to increase, as the global need for software engineers constantly grows and more European companies adopt near-shore
outsourcing. The cost of employment may also be negatively affected by fluctuations in the exchange rates between the Euro and/or
the NIS and the dollar.
Selling
and Marketing Expenses
. Selling and marketing expenses increased from $1.2 million in 2017 to $1.3 million in 2018, mainly
attributed to our investment into entering the German market. Selling and marketing expenses as a percentage of revenues slightly
increased from 6.9% in 2017 to 7.0% in 2018, mainly due to the above-mentioned slight increase in selling and marketing expenses,
while the revenues remained substantially the same.
General
and Administrative Expenses
. General and administrative expenses slightly decreased from $1.7 million in 2017 to $1.6 million
in 2018. General and administrative expenses as a percentage of revenues decreased from 9.3% in 2017 to 8.9% in 2018.
Impairment
of Goodwill
. No impairment of goodwill was required following the impairment test performed during 2017 and 2018.
Financial
Income (Expenses).
In 2017, financial income consisted of interest income incurred mainly on short-term bank deposits and
marketable and available-for-sale securities of approximately $229,000, currency exchange rate fluctuations in the aggregate amount
of approximately $415,000, offset by bank charges in the aggregate amount of approximately $14,000. In 2018, financial income
consisted of interest income incurred mainly on short-term bank deposits and marketable and available-for-sale securities in the
aggregate amount of approximately $340,000, offset by a loss from currency exchange rate fluctuations in the aggregate amount
of approximately $107,000 and by bank charges in the aggregate amount of approximately $11,000.
Income
Tax Expense.
Income tax expenses are comprised of current tax expenses and deferred tax expenses/income. On a regular basis,
we estimate our actual current tax exposures and assess temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in deferred taxes, which are included on our consolidated balance sheet.
In 2017, our income tax expenses in the amount of $0.6 million included mainly taxes on income in Israel in the amount of $0.5
million and a decrease in deferred taxes in the amount of $63,000. In 2018, our income tax expenses in the amount of $0.4 million
included mainly taxes on income in Israel in the amount of $0.39 million and an increase in deferred taxes in the amount of $2,000.
Comparison
of the Year Ended December 31, 2017 to the Year Ended December 31, 2016
Revenues
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
|
% Change
|
|
|
|
($ in millions)
|
|
|
|
|
License sales
|
|
$
|
3.9
|
|
|
$
|
2.5
|
|
|
|
(35.9
|
)
|
Professional services
|
|
|
14.2
|
|
|
|
15.6
|
|
|
|
9.9
|
|
Total revenues
|
|
$
|
18.1
|
|
|
$
|
18.1
|
|
|
|
-
|
|
Revenues
in 2017 remained the same as in 2016.
Revenues
from our billing and customer care product solutions for service providers slightly increased from $14.6 million in 2016 to $14.7
million in 2017. The increase was primarily attributed to a large deal we signed in 2016, for which the revenues were recognized
mainly in 2017.
Revenues
from our enterprise products decreased from $3.5 million in 2016 to $3.4 million in 2017. The decrease was primarily attributed
to a significant decrease in our volume of sales of our enterprise products in the United States of America.
Revenues
from professional services increased from $14.2 in 2016 to $15.6 in 2017. The increase in 2017 was primarily attributed to a large
deal we signed in 2016 that includes ample professional services and to the increase in sales of consulting services, on-site
technical support and customizations to existing customers.
The
following table presents the geographic distribution of our revenues:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
(% of revenues)
|
|
The Americas
|
|
|
70.4
|
%
|
|
|
71.9
|
%
|
Asia Pacific and Africa
|
|
|
6.2
|
|
|
|
5.0
|
|
Europe
|
|
|
18.5
|
|
|
|
17.7
|
|
Israel
|
|
|
4.9
|
|
|
|
5.4
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Our
revenues in the Americas increased from $12.7 million in 2016 to $13.0 million in 2017 and as a percentage of total revenues increased
from 70.4% in 2016 to 71.9% in 2017. The increase in 2017 was primarily attributed to the abovementioned large deal we signed
in 2016, for which the revenues were recognized mainly in 2017. Our revenues in Europe decreased from $3.3 million in 2016 to
$3.2 million in 2017 and as a percentage of total revenues decreased from 18.5% in 2016 to 17.7% in 2017, mainly due to lower
revenue recognition of a large deal we signed in late 2013 that approaches completion. Our revenues in Israel increased from $0.9
million in 2016 to $1.0 million in 2017 and as a percentage of total revenues increased from 4.9% in 2016 to 5.4% in 2017, mainly
due to an increase in the services we provide to our MVNO customer in Israel.
Cost
of Revenues
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
|
% Change
|
|
|
|
($ in millions)
|
|
|
|
|
Cost of sales of license
|
|
$
|
0.3
|
|
|
$
|
0.2
|
|
|
|
(33.3
|
)
|
Cost of services
|
|
|
6.5
|
|
|
|
6.8
|
|
|
|
4.6
|
|
Total cost of revenues
|
|
$
|
6.8
|
|
|
$
|
7.0
|
|
|
|
2.9
|
|
Total
cost of revenues in 2017 increased by $0.2 million, compared with 2016 due to an increase of $0.3 million in cost of services,
mainly due to an increase in purchases of equipment and deferred charges of $0.4 million, an increase in travel expenses of $0.1
million and a decrease in labor-related costs of $0.2 million, offset by the decrease in cost of licenses by $0.1 million that
occurred due to the decrease in revenue from licenses.
Gross
profit as a percentage of revenues slightly decreased from 62.2% in 2016 to 61.1% in 2017, mainly due to the increase in cost
of services while the revenues remained substantially the same.
Operating
Expenses
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
|
% Change
|
|
|
|
($ in millions)
|
|
|
|
|
Research and development
|
|
$
|
3.5
|
|
|
$
|
3.4
|
|
|
|
(2.9
|
)
|
Selling and marketing
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
0.1
|
|
General and administrative
|
|
|
1.4
|
|
|
|
1.7
|
|
|
|
21.4
|
|
Total operating expenses
|
|
$
|
6.0
|
|
|
$
|
6.3
|
|
|
|
5.0
|
|
Research
and Development
. We have made substantial investment in research and development to maintain our advanced technology, to add
functionality to our products and to develop Version 8, the latest version of our MINDBill platform. The decrease in our research
and development expenses by 2.9% in 2017, compared to 2016, was primarily due to a decrease in subcontracting expenses. Research
and development expenses as a percentage of revenues slightly decreased from 19.5% in 2016 to 18.9% in 2017, primarily due to
the increase in research and development expenses while the revenues remained substantially the same.
Selling
and Marketing Expenses
. Selling and marketing expenses increased from $1.1 million in 2016 to $1.2 million in 2017, mainly
due to an increase in selling and marketing related payroll expenses and an increase in participating in conventions. Selling
and marketing expenses as a percentage of revenues increased from 6.1% in 2016 to 6.9% in 2017, mainly due to the above-mentioned
slight increase in selling and marketing expenses while the revenues remained substantially the same.
General
and Administrative Expenses
. General and administrative expenses increased from $1.4 million in 2016 to $1.7 million in 2017,
mainly due to a successful collection of one customer’s debt in 2016, which was recorded as a doubtful account in 2015 and
an increase in general and administrative related payroll expenses as a result of the devaluation of the dollar in relation to
the NIS. General and administrative expenses as a percentage of revenues increased from 7.7% in 2016 to 9.3% in 2017, mainly due
to the above-mentioned increase in general and administrative expenses while the revenues remained substantially the same.
Impairment
of Goodwill
. No impairment of goodwill was required following the impairment test performed during 2016 and 2017.
Financial
Income (Expenses).
In 2016, financial income consisted of interest income incurred mainly on short-term bank deposits and
marketable and available-for-sale securities in the aggregate amount of approximately $263,000, offset by bank charges and a realized
loss from sale of available-for-sale securities in the aggregate amount of approximately $97,000. In 2017, financial income consisted
of interest income incurred mainly on short-term bank deposits and marketable and available-for-sale securities of approximately
$229,000, currency exchange rate fluctuations in the aggregate amount of approximately $415,000, offset by bank charges in the
aggregate amount of approximately $14,000.
Income
Tax Expense.
Income tax expenses are comprised of current tax expenses and deferred tax expenses/income. On a regular basis,
we estimate our actual current tax exposures and assess temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in deferred taxes, which are included on our consolidated balance sheet.
In 2016, our income tax expenses in the amount of $1.2 million included mainly taxes on income in the amount of $1.0 million ($0.9
million in Israel) and a decrease in deferred taxes in the amount of $146,000. In 2017, we have derived tax benefits relating
to the “Preferred Technological Enterprise” program under the Israel Law for the Encouragement of Capital Investment,
1959 and our income tax expenses in the amount of $0.6 million included mainly taxes on income in Israel in the amount of $0.5
million and a decrease in deferred taxes in the amount of $63,000.
Critical
Accounting Policies
Revenue
Recognition
. As from January 1, 2018, we apply the provisions of ASC 606, “Revenue from Contracts with Customers”,
as follows
:
i)
Licenses
: Revenue from perpetual licenses is classified as software license revenue. Software license revenue is recognized
up front upon delivery of the licensed product and the utility that enables the customer to access authorization keys, provided
that a signed contract has been received.
ii)
Services:
Revenue from training, support and other services is recognized as the services are performed. For contracts in
which the service consists of a single performance obligation, such as providing a training class to a customer, we recognize
revenue upon completion of the performance obligation. For service contracts that are longer in duration and often include multiple
performance obligations (for example, both training and consulting), we measure the progress toward completion of the obligations
and recognizes revenue accordingly. In measuring progress towards the completion of performance obligations, we typically utilize
output-based estimates for services with contractual billing arrangements that are not based on time and materials, and estimates
output based on the total tasks completed as compared to the total tasks required for each work contract. Input-based estimates
are utilized for services that involve general consultations with contractual billing arrangements based on time and materials,
utilizing direct labor as the input measure.
Contracts
may include a combination of our various products and services offerings, software, consulting services, and maintenance. For
contracts with multiple performance obligations, we account for individual performance obligations separately if they are distinct.
Significant judgment may be required to identify distinct obligations within a contract. The total transaction price is allocated
to the individual performance obligations based on the ratio of the relative established standalone selling prices (SSP), or our
best estimate of SSP, of each distinct product or service in the contract. Revenue is then recognized for each distinct performance
obligation.
iii)
Managed Service
s: Revenues from managed services include a monthly fee for services and a right to access our software and
are recorded as service revenues. We do not provide the customer with the contractual right to take possession of the software
at any time during the period under these contracts. The monthly fee is based mainly on the number of subscribers or customer’s
business volume and the contracts include a minimum monthly charge. These revenues are recognized on a monthly basis when those
services are satisfied.
Impairment
of Goodwill.
Goodwill represents the excess of the aggregate purchase price paid over the fair value of the net assets acquired
in our business combinations. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes
in circumstances indicate that the carrying value may not be recoverable. Events or changes in circumstances that could trigger
an impairment review include a significant adverse change in business climate, an adverse action or assessment by a regulator,
unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the
strategy for our overall business, significant negative industry or economic trends, or significant underperformance relative
to expected historical or projected future results of operations. We have the option to first assess qualitative factors to determine
whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value
of a reporting unit is less than its carrying value, including goodwill. If, after assessing the totality of events or circumstances,
we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, additional
impairment testing is not required. However, if we conclude otherwise, we are required to perform the first step of a two-step
impairment test. Alternatively, we may elect to proceed directly to the first step of the two-step impairment test and bypass
the qualitative assessment. The first step of the impairment test involves comparing the estimated fair value of a reporting unit
with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired
and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, the carrying
amount of the goodwill is compared to its implied fair value. The estimate of implied fair value of goodwill may require valuations
of certain internally generated and unrecognized intangible assets. If the carrying amount of goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
We
have a single reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value of our
company as a whole.
We
perform annual testing for impairment of the goodwill during the third quarter of each year. As of September 30, 2018, the fair
value of the reporting unit exceeded its carrying value.
Recently
Issued Accounting Pronouncements
Recently
issued accounting pronouncements are described in Note 1 to our consolidated financial statements included in Item 18.
Our
Functional Currency
The
currency of the primary economic environment in which we operate is the dollar. In 2018, the majority of our revenues were denominated
in dollars. In addition, most of our marketing costs are incurred outside Israel, primarily in dollars. Transactions and balances
originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are remeasured into
dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions
and other items reflected in our income statements, the following exchange rates are used:
|
●
|
for
transactions, exchange rates at the transaction dates or average rates; and
|
|
●
|
for
other items (derived from non-monetary balance sheet items such as depreciation and amortization
or similar items), historical exchange rates.
|
The
resulting currency transaction gains or losses are reported as financial income or expenses as appropriate.
Impact
of Foreign Currency Fluctuations on Results of Operations
The
dollar cost of our operations may be significantly influenced by currency fluctuations.
The
weakening of the dollar in global markets will have a negative effect on our profitability as we receive payment in dollars for
most of our sales while we incur a significant portion of our expenses, principally salaries and related personnel expenses, in
NIS and Euro.
A
devaluation of the NIS in relation to the dollar has the effect of reducing dollar amount of any of our expenses or liabilities
which are payable in NIS, unless these expenses or payables are linked to the dollar. This devaluation also has the effect of
decreasing the dollar value of any asset, which consists of NIS or receivables payable in NIS, unless the receivables are linked
to the dollar.
Any
increase in the value of the NIS and/or Euro in relation to the dollar has the effect of increasing the dollar value of our expenses.
Because exchange rates between the NIS and Euro to the 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. The effects
of foreign currency re-measurements are reported in our consolidated financial statements in current operations.
|
B.
|
Liquidity
and Capital Resources
|
Since
our inception, we have financed our operations mainly through cash generated by operations. We supplemented this source by two
private rounds of equity financing, the first in 1997 (with a follow-on in 1999) and the second in 2000 and our initial public
offering in 2000, which raised total net proceeds in the amount of $44.3 million.
As
of December 31, 2018, we had approximately $2.7 million in cash and cash equivalents, and our working capital was $15.3 million.
In our opinion, our working capital is sufficient for our requirements for the foreseeable future.
The
majority of our cash and cash equivalents and our deposits are denominated in dollars.
Net
Cash Provided by Operating Activities
. Net cash provided by operating activities in 2018 was $4.5 million, attributable to
our net income of $5.1 million, non-cash related items, net, in the amount of $0.5 million, a net decrease in operating assets
and liabilities items in the amount of $1.1 million. Net cash provided by operating activities in 2017 was $2.7 million, attributable
to our net income of $5.6 million, non-cash related items, net, in the amount of $0.3 million, gain on disposal of subsidiary
in the amount of $0.9 million, a net increase in operating assets items in the amount of $0.8 million and a net decrease in operating
liabilities items in the amount of $1.4 million. Net cash provided by operating activities in 2016 was $5.2 million, attributable
to our net income of $4.2 million, non-cash related items, net, in the amount of $0.4 million, a net decrease in operating assets
items in the amount of $1.2 million and a net decrease in operating liabilities items in the amount of $0.6 million.
The
increase in net cash provided by operating activities of $1.7 million from 2017 to 2018 reflects mainly a decrease in our net
income of $0.5 million, a one-time gain on disposal of subsidiary in the amount of $0.9 million in 2017, and a decrease of $1.1
million in operating assets and liabilities in 2018, compared with a decrease of $2.2 million in 2017. The decrease in net cash
provided by operating activities of $2.5 million from 2016 to 2017 reflects mainly an increase in our net income of $1.4 million
(including a one-time gain on disposal of subsidiary in the amount of $0.9 million), an increase in accounts receivable of $0.8
million in 2017, compared with a decrease of $1.2 million in 2016, a decrease of $0.3 million in accounts payable and accruals
in 2017, compared with a decrease of $1.2 million in 2016, and a decrease of $1.1 million in deferred revenues in 2017, compared
with an increase of $0.7 million in 2016.
Net
Operating Working Capital
As
of December 31, 2018, net operating working capital was $15.2 million, compared with $14.9 million as of December 31, 2017. The
increase of $0.3 million is due to an increase in accounts receivable. As of December 31, 2017, net operating working capital
was $14.9 million, compared with $15.2 million as of December 31, 2016. The decrease of $0.3 million is due to an increase in
short-term investments in the amount of $2.2 million, an increase of $0.8 million in account receivables, a decrease of $0.4 million
in accounts payables, a decrease of $0.5 million in deferred revenues, offset by a decrease in cash and cash equivalents in the
amount of $4.2 million.
Cash
Deposits
As
of December 31, 2018, we had approximately $8.7 million in bank deposits with maturities of between three and twelve months.
Marketable
Securities
As
of December 31, 2018, we held marketable securities of approximately $4.4 million (consisting mainly of municipal bonds which
are held for trading).
Net
Cash Provided by/Used in Investing Activities
. In 2018, we increased our investments in short-term bank deposits by $2.6 million,
and we decreased our investments in marketable securities by $1.8 million. In 2017, we increased our investments in short-term
bank deposits by $1.2 million, we used $0.1 million for capital expenditures and we increased our investments in marketable securities
by $1.1 million and we received proceeds from sale of subsidiary of approximately $1.2 million (1.1 million Euro).
Net
Cash Used in Financing Activities
. In 2018, our financing activities used $5.76 million due to a cash dividend of $5.8 million,
offset by $0.04 million in proceeds from the exercise of employee stock options. In 2017, our financing activities used $6.1 million
due to a cash dividend of $6.2 million, offset by $0.1 million in proceeds from the exercise of employee stock options. In 2016,
our financing activities used $5.1 million due to a cash dividend of $5.2 million, offset by $0.1 million in proceeds from the
exercise of employee stock options.
Capital
Expenditures
. The aggregate cash amount of our capital expenditures was $68,000, $71,000 and $46,000 in 2016, 2017 and 2018,
respectively. These expenditures were principally for the purchase of equipment, mainly for our engineering teams. Although we
have no material commitments for capital expenditures, we anticipate an increase in capital expenditures if we purchase or merge
with companies or purchase assets in order to obtain complementary technology and to expand our product offerings, customer base
and geographical presence.
Cash
Dividends
. Since 2003, we distributed aggregate cash dividends of approximately $4.54 per share to our shareholders, including
$0.27 per share in 2016, $0.32 per share in 2017, $0.30 per share in 2018 and we declared $0.26 per share in March 2019. For information
about our dividend policy, please see Item 8 “Financial Information - Dividend Policy.”
|
C.
|
Research
and Development, Patents and Licenses, etc.
|
We
believe that investment in research and development is essential for maintaining and expanding our technological expertise in
the market for billing and customer care software and to our strategy of being a leading provider of new and innovative convergent
billing products. Our customers provide significant feedback for product development and innovation.
We
have invested significant time and resources to create a structured process for undertaking research and product development.
We believe that the method that we use for our product development and testing is well suited for identifying market needs, addressing
the activities required to release new products, and bringing development projects to market successfully. Our product development
activities also include the release of new versions of our products. Although we expect to develop new products internally, we
may, based upon timing and cost considerations, acquire or license technologies or products from third parties.
We
invested in research and development $3.5 million (or 19.5% of revenues) in 2016, $3.4 million (or 18.9% of revenues) in 2017
and $3.7 million (or 20.7% of revenues) in 2018. The increase in 2018 was mainly the result of the increase in salaries in the
research and development department. Our engineering department comprised approximately 144 employees at the end of 2018.
Our
billing and customer care solutions target tier 2 and tier 3 service providers. The trend that we believe is currently driving
the market is eliminating niche solutions and replacing multiple platforms with one convergent real time billing solution. The
need for comprehensive billing solutions is also driven by the market trend that requires service providers to introduce new services
more rapidly, to be innovative in creating new product offers and to optimize business processes for maximum efficiency by enabling
consumers to purchase services on-line. The self-service trend requires advanced subscriber management capabilities and supporting
omni-channel models. This type of new required functionality is more likely to be implemented with cloud-based solutions.
Another
trend that we expect will have an impact on our business is the build-up and launch of commercially operating 4G LTE networks.
The carriers that implement LTE technologies require new real time billing systems that will enable them to introduce new products
including 4G data sharing within families and companies, prepaid 4G services, high definition voice (VoLTE), and the range of
mobile broadband services.
Another
trend that we expect will have an impact on our business is the growing acceptance of Software as a Service (SaaS) model, as both
carriers and enterprises are looking at different options of leveraging cloud solutions to fulfill their business needs.
Unified
communications (UC) is an increasingly important investment for organizations looking to improve productivity and responsiveness
while reducing their IT costs. The convergence of voice, video, and data communications around a shared IP-based infrastructure
- allowing users to easily make a call, send a message, or join an audio or video conference - is bringing benefits to businesses
of various sizes, industries and geography.
The
new business models include Unified Communications as a Service (UCaaS) or Billing as a Service (BaaS) along the Managed Services
model we support already.
Our
goal is to develop marketing and sales relationships with the vendors of UCaaS under which our UC solutions (enterprise software)
will be sold as part of these vendors’ offering. This requires us to develop new sales channels, and this process is time
consuming and requires the investment of some resources to conclude the necessary agreements and to certify and train these new
channel partners.
|
E.
|
Off-balance
Sheet Arrangements
|
We
do not have any off-balance sheet arrangements.
|
F.
|
Tabular
Disclosure of Contractual Obligations
|
|
|
Payment due by period
($ in thousands)
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
Operating Lease Obligations
|
|
$
|
891
|
|
|
$
|
492
|
|
|
$
|
295
|
|
|
$
|
104
|
|
|
Item
6.
|
Directors,
Senior Management and Employees
|
|
A.
|
Directors
and Senior Management
|
The
following table sets forth certain information regarding our directors and executive officers as of the date of filing of this
Annual Report:
Name
|
|
Age
|
|
Position
|
Monica
Iancu
|
|
61
|
|
President
and Chief Executive Officer, Director
|
Ran
Mendelaw
|
|
41
|
|
Chief
Financial Officer
|
Gilad
Parness
|
|
50
|
|
Vice
President, Enterprise Solutions
|
Oren
Tanhum
|
|
48
|
|
Vice
President, Professional Services
|
Shoval
Cohen Nissan
|
|
44
|
|
Vice
President, Information Technology
|
Reuben
Halevi
|
|
61
|
|
Chief
Technology Officer
|
Liviu
Serea
|
|
64
|
|
General
Manager, MIND Romania
|
Iulian
Dimitriu
|
|
47
|
|
Vice
President, Engineering
|
Danny
Engle
|
|
50
|
|
Vice
President, Sales for North America
|
Mihail
Rotenberg
|
|
67
|
|
Chairman
of the Board of Directors
|
Meir
Nissensohn
|
|
75
|
|
Director
|
Joseph
Tenne
|
|
63
|
|
Director
|
The
background of each of our directors and executive officers is as follows:
Monica
Iancu.
Ms. Iancu founded MIND and has been President and Chief Executive Officer of our company since inception and, until
April 6, 2012, also served as the Chairperson. Ms. Iancu holds a B.Sc. degree in Computer Science and a Master’s degree
in Telecommunications (with expertise in Voice and Data Integration over the Ethernet) from the Technion, Israel Institute of
Technology.
Ran
Mendelaw
. Mr. Mendelaw joined MIND in May 2018 as Chief Financial Officer, bringing over 15 years
of experience in accounting, financial management and public companies. For the last two years before joining MIND, he served
as a group controller in a public industrial company – Tadir-Gan Precision Products 1993 Ltd. (traded on the Tel Aviv Stock
Exchange: TDGN). Prior to that, he served for ten years as senior manager at PwC Israel (Haifa, Israel). During his role at PwC
Israel, he performed audits for some Hi-Tech companies traded on NASDAQ. Mr. Mendelaw holds a B.A. degree in Accounting and Economics
from Haifa University and he is a Certified Public Accountant in Israel.
Gilad
Parness
. Mr. Parness joined MIND in 2004 as a team leader in MINDBill Support. He was promoted to Support Manager and later
to Director of Professional Services leading the Sentori support team in 2007, and in 2009 joined our Sales and Account Management.
Mr. Parness was promoted to Vice President of Enterprise Solutions in 2014 and leads the engineering, the support and the sales
teams. Mr. Parness holds a Practical Engineer degree from Tel Chai College.
Oren
Tanhum.
Mr. Tanhum joined MIND in July 1997 as a software engineer and was involved in the development of all versions of
our billing platform. Throughout his almost 20 years with us, he has been promoted in the R&D organization, filling leadership
roles at all levels. He has also served as a Project Manager, responsible for planning of projects through their successful delivery.
He was promoted to R&D Director in October 2006 and to Vice President of Professional Services in October 2016. Mr. Tanhum
holds a B.A. degree in Mathematics and Computer Science from Haifa University.
Shoval
Cohen Nissan
. Mr. Cohen Nissan has served as our IT Manager since December 1998 and was promoted to Vice President of IT in
2016. Mr. Cohen Nissan leads the planning and management of the supporting infrastructure company-wide and the implementation
of network security at the corporate level. He also acts as Purchasing Manager for our internal needs and customer solutions.
Mr. Cohen Nissan holds a Practical Engineering degree from Braude College.
Reuben
Halevi
. Reuben rejoined MIND in April 2018 as CTO, bringing over 25 years of a proven track record as an executive, business
and technical leader and consultant in the US and Israeli software industry. Since 2015 Reuben works as a consultant, assisting
hi-tech startup companies in all business aspects. Prior to that, he served in several executive roles, including as VP Engineering
at MIND in 2014-2015, VP R&D and US COO at Retalix (RTLX, acquired by NCR). Reuben holds a B.Sc. degree in Industrial Engineering
& Management from the Technion (Cum Laude).
Liviu
Serea
. Mr. Serea has served as General Manager of our Romania office since January 2001. Before joining MIND, for over five
years Mr. Serea managed a local company involved in hardware assembly, distribution and support. Mr. Serea holds a M.Sc. degree
in Electronics and Telecommunications from the Politechnic Institute, Iasi, Romania.
Iulian
Dimitriu.
Mr. Dimitriu joined us as a software testing engineer in June 2001 and was promoted to Director of Quality Assurance
in June 2012. Before joining MIND he held different programming positions in local software companies. Mr. Dimitriu was promoted
to Vice President of Engineering in July 2016. Mr. Dimitriu holds a B.Sc. degree in Computer Science from Asachi University in
Iasi, Romania.
Danny
Engle
. Mr. Engle is Vice President of North American Sales for MIND Software, Inc. (formerly Sentori, Inc.). Mr. Engle joined
Sentori in 2003 as Director of Sales, and in 2005 was promoted to Sentori’s Vice President of North American Sales. Mr.
Engle is responsible for Sales, Customer Account Management and Partner Relationship Management. Prior to joining Sentori, Mr.
Engle was District Manager at Siebel Systems, a leading CRM solutions provider. Mr. Engle holds a B.S. degree in Business Administration
from the University of Texas.
Mihail
Rotenberg
. Mr. Rotenberg, has served as an independent director of our company since May 2008 and as our Chairman since May
2012. He is the founder of BreezeCOM Ltd., which merged to become Alvarion Ltd. Mr. Rotenberg served as the CEO of BreezeCOM from
1993 to 2000. From 2000 to 2005, Mr. Rotenberg served as President and CEO of Accessnet SA, a wireless internet service provider
in Romania, which was sold in 2005 to Clearwire Inc. Mr. Rotenberg holds a Ph.D. degree from Polytechnic University, Bucharest,
Romania.
Meir
Nissensohn.
Mr. Nissensohn has served as an independent and external director of our company since August 2014. Mr. Nissensohn
served as the Chairman of the Board of Directors and Chief Executive Officer of IBM Israel Ltd. from 1996 to 2012, having joined
IBM Israel as a computer programmer in 1969. Since his retirement from IBM, he is involved in various business initiatives with
venture capital funds and serves as a director at several companies, including O.R.T. Technologies and Top Ramdor Systems, both
companies listed on the Tel Aviv Stock Exchange. Mr. Nissensohn holds a B.Sc. degree in Industrial Engineering from the Technion,
Israeli Institute of Technology, and a post graduate degree in Business Administration (Finance) and an M.B.A. degree, both from
Tel Aviv University.
Joseph
Tenne.
Mr. Tenne has served as an independent and external director of our company since August 2014. Since May 2017, Mr.
Tenne served as a financial consultant to Itamar Medical Ltd., a company listed on Nasdaq and on the Tel Aviv Stock Exchange.
Mr. Tenne serves as a director at AudioCodes Ltd., at OPC Energy Ltd., at Ability Inc. and at Ratio Oil Explorations (Finance)
Ltd. From 2014 to 2017, Mr. Tenne served as the CFO and VP Finance of Itamar Medical Ltd. From 2005 to 2013, Mr. Tenne served
as the CFO of Ormat Technologies, Inc., a company listed on the New York Stock Exchange and on the Tel Aviv Stock Exchange. From
1997 until 2003, Mr. Tenne was a partner in Kesselman & Kesselman, Certified Public Accountants in Israel and a member of
PricewaterhouseCoopers International Limited (“PwC Israel”). Mr. Tenne holds a B.A. degree in Accounting and Economics
and an M.B.A. degree from Tel Aviv University. Mr. Tenne is also a Certified Public Accountant in Israel.
To
the best of our knowledge, there are no family relationships between any of the directors or members of senior management named
above. To the best of our knowledge, there is no arrangement or understanding with major shareholders, customers, suppliers or
others, pursuant to which any person referred to above was selected as a director or member of senior management.
|
B.
|
Compensation
of Directors and Executive Officers
|
The
aggregate direct remuneration paid to all persons who served in the capacity of director or executive officer during 2018 was
approximately $2.0 million, including approximately $103,356 that was set aside for pension and retirement benefits. This does
not include amounts expensed by us for automobiles made available to our officers or expenses, including business, travel, professional
and business association dues and expenses, reimbursed to officers, and do not include equity-based compensation expenses.
During
2018, we granted to our executive officers under our option plans options to purchase 20,000 ordinary shares at exercise price
of $0.003 per share. All these options expire in 2023.
The
table below outlines the compensation granted to our five most highly compensated office holders during or with respect to the
year ended December 31, 2018. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
Summary
Compensation Table
Name of Officer
|
|
Position of Officer
|
|
Salary
($)
|
|
|
Cash Bonus / Commissions
($)
(1)
|
|
|
Equity-Based Compensation
($)
(2)
|
|
|
All Other Compensation ($)
(3)
|
|
|
Total
($)
|
|
Monica Iancu
|
|
President and Chief Executive Officer
|
|
$
|
240,000
|
|
|
$
|
240,000
|
|
|
|
-
|
|
|
$
|
23,690
|
|
|
$
|
503,690
|
|
Ran Mendelaw
|
|
Chief Financial Officer (starting May 2018)
|
|
$
|
46,491
|
|
|
|
-
|
|
|
$
|
24,414
|
|
|
$
|
20,276
|
|
|
$
|
91,181
|
|
Danny Engle
|
|
Vice President of Sales, North America
|
|
$
|
130,050
|
|
|
$
|
295,411
|
|
|
|
-
|
|
|
$
|
4,800
|
|
|
$
|
430,261
|
|
Gilad Parness
|
|
Vice President, Enterprise Solutions
|
|
$
|
94,700
|
|
|
$
|
22,000
|
|
|
|
-
|
|
|
$
|
35,156
|
|
|
$
|
151,856
|
|
Shoval Cohen Nisaan
|
|
Vice President, Information Technology
|
|
$
|
86,697
|
|
|
$
|
22,000
|
|
|
|
-
|
|
|
$
|
33,972
|
|
|
$
|
142,669
|
|
|
(1)
|
Amounts
reported in this column represent annual incentive bonuses granted to the Covered Executives or commissions based on performance-metric
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 stock-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 insurance and benefits, risk insurance (
e.g.
, life insurance
or disability insurance), convalescence or recreation pay, payments for social security, and other personal benefits and perquisites
consistent with the Company’s guidelines. All amounts reported in this column represent incremental cost of the Company.
|
On
June 24, 2013, at our 2013 annual general meeting of shareholders, our shareholders approved a new compensation policy for directors
and officers. In accordance with the Companies Law, the compensation terms of office holders of public companies are required
to be determined in accordance with a compensation policy that is reviewed and approved at least one every three years. On August
11, 2016, at our 2016 annual general meeting of shareholders, our shareholders re-approved the existing compensation policy for
directors and officers.
On
May 4, 2017, our board of directors resolved that each of our external directors will be entitled to receive an annual fee of
$13,200 and a participation fee of $680 per meeting. On August 9, 2017, payment in the same amounts to each of our non-executive
directors was approved by our shareholders. At the meeting our shareholders also approved that the remuneration of those of our
external directors who our Board classifies as “expert external directors” (as such term is defined in the Israeli
Companies Law) will be 20% more than the remuneration of non-expert external directors.
Board
of Directors
Our
board is divided into three classes of directors, denominated Class I, Class II and Class III. The term of Class I will expire
in 2019, Class II in 2020 and Class III in 2021. Monica Iancu is a member of Class I, Mihail Rotenberg and Joseph Tenne are members
of Class II and Meir Nissensohn is a member of Class III. At each annual general meeting of shareholders, directors will be elected
by a simple majority of the votes cast for a three-year term to succeed the directors whose terms then expire. There is no legal
limit on the number of terms that may be served by directors.
Pursuant
to regulations that took effect in April 2016, a Nasdaq-listed company that does not have a controlling shareholder is entitled
to opt out of the provisions of the Companies Law requiring at least two external directors and certain related requirements,
so long as the company complies with the SEC regulations and Nasdaq listing rules regarding independent directors and the composition
of the audit and compensation committees. In May 2016, our board of directors decided to adopt this relief, subject to the shareholder
approval of related amendments to our articles of association, which occurred in August 2016.
Under
the Companies Law, our board of directors must determine the minimum number of directors having financial and accounting experience,
as defined in the regulations, which our board of directors should have. In determining the number of directors required to have
such expertise, the board of directors must consider, among other things, the type and size of the company and the scope and complexity
of its operations. Our board of directors has determined that we require one director with the requisite financial and accounting
expertise.
Audit
Committee
Under
the Companies Law, our board of directors is required to appoint an audit committee, comprised of at least three directors. The
members of the audit committee must satisfy certain independence standards under the Companies Law. Our audit committee consists
of Mr. Joseph Tenne (Chairman of the audit committee), Mr. Mihail Rotenberg and Mr. Meir Nissensohn.
Under
the Companies Law, the roles of the audit committee include examining flaws in the management of the company’s business,
in consultation with the internal auditor and the company’s independent accountants, suggesting remedial measures, approving
specified related party transactions, establishing whistleblower procedures and assessing the company’s internal audit system
and the performance of its internal auditor. The approval of the audit committee is required to effect specified actions and transactions
with office holders, controlling shareholders and entities in which they have a personal interest.
The
Companies Law defines the term “office holder” of a company to include a director, the chief executive officer, the
chief business manager, a vice president and any officer that reports directly to the chief executive officer.
Under
the Nasdaq rules, our audit committee assists the board in fulfilling its responsibility for oversight of the quality
and integrity of our accounting, auditing and financial reporting practices and financial statements and the independence qualifications
and performance of our independent auditors. Our audit committee also has the authority and responsibility to oversee our
independent auditors, to recommend for shareholder approval the appointment and, where appropriate, replacement of our independent
auditors and to pre-approve audit engagement fees and all permitted non-audit services and fees. We have adopted an audit committee charter,
which sets forth the qualifications, powers and responsibilities of our audit committee.
Our
audit committee also serves as (i) our compensation committee, as described below, and (ii) our nominations committee, authorized
to recommend all director nominees for the selection of the board of directors, provided that no such recommendation is
required in cases, if any, where the right to nominate a director legally belongs to a third party. In its capacity as our compensation
committee, the audit committee is authorized to, among other things, review, approve and recommend to our board of directors base
salaries, incentive bonuses, including the specific goals and amounts, stock option grants, employment agreements, and any other
benefits, compensation or arrangements of our office holders.
Under
the Companies Law, at least once every three years our compensation committee is required to propose for shareholder approval
by a special majority, a policy governing the compensation of office holders based on specified criteria, to review, from time
to time, modifications to the compensation policy and examine its implementation and to approve the actual compensation terms
of office holders prior to approval thereof by the board of directors.
All
the members of our audit committee are “independent directors” under the Nasdaq rules and meet the additional qualifications
for membership on an audit committee and a compensation committee under applicable law.
Internal
Auditor
Under
the Companies Law, the board of directors must appoint an internal auditor proposed by the audit committee. The role of the internal
auditor is to examine, among other things, whether the company’s actions comply with the law and orderly business procedure.
The internal auditor must satisfy certain independence standards. Ms. Dana Gottesman-Erlich C.P.A., partner of the accounting
firm of BDO Israel, serves as our internal auditor.
Fiduciary
Duties of Office Holders
The
Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company. The duty of care requires an office
holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same
circumstances. The duty of care includes a duty to use reasonable means to obtain:
|
●
|
information
on the advisability of a given action brought for his approval or performed by him by
virtue of his position; and
|
|
●
|
all
other important information pertaining to these actions.
|
The
duty of loyalty of an office holder includes a duty to:
|
●
|
refrain
from any conflict of interest between the performance of his duties in the company and
the performance of his other duties or his personal affairs;
|
|
●
|
refrain
from any activity that is competitive with the company;
|
|
●
|
refrain
from exploiting any business opportunity of the company to receive a personal gain for
himself or others; and
|
|
●
|
disclose
to the company any information or documents relating to a company’s affairs which
the office holder has received due to his position as an office holder.
|
Disclosure
of Personal Interest of an Office Holder
The
Companies Law requires that an office holder of a company disclose to the company any personal interest that he may have and all
related material information known to him, in connection with any existing or proposed transaction by the company. The disclosure
is required to be made promptly and in any event no later than the board of directors meeting in which the transaction is first
discussed. If the transaction is an extraordinary transaction, 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 these people; or
|
|
●
|
any
corporation in which the office holder is a 5% or greater shareholder, director or general
manager or in which he has the right to appoint at least one director or the general
manager.
|
Under
Israeli law, an extraordinary transaction is a transaction:
|
●
|
other
than in the ordinary course of business;
|
|
●
|
otherwise
than on market terms; or
|
|
●
|
that
is likely to have a material impact on the company’s profitability, assets or liabilities.
|
Approval
of Related Party Transactions
Once
an office holder complies with the above disclosure requirement, the board of directors may approve a transaction between the
company and an office holder, or a third party in which an office holder has a personal interest. A transaction that is adverse
to the company’s interest may not be approved.
If
the transaction is an extraordinary transaction, approval of both the audit committee and the board of directors is required.
Under specific circumstances, shareholder approval may also be required.
Office
Holder Compensation
In
general, all office holders’ terms of compensation – including fixed remuneration, bonuses, equity compensation, retirement
or termination payments, indemnification, liability insurance and the grant of an exemption from liability – must comply
with the company’s compensation policy. In addition, the compensation terms of directors, the chief executive officer, and
any employee or service provider who is considered a controlling shareholder generally must be approved separately by the compensation
committee, the board of directors and the shareholders of the company, in that order. The compensation terms of other officers
require the approval of the compensation committee and the board of directors.
Disclosure
of Personal Interests of a Controlling Shareholder
Under
the Companies Law, the disclosure requirements, which apply to an office holder, also apply to a controlling shareholder of a
public company. For this purpose, a controlling shareholder is a shareholder who has the ability to direct the activities of a
company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the
voting rights, but excluding a shareholder whose power derives solely from his or her position on the board of directors or any
other position with the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder
has a personal interest (other than compensation matters, which are discussed above under “Office Holder Compensation”),
require the approval of the audit committee, the board of directors and the shareholders of the company, in that order. Except
under specific circumstances, such a transaction needs to be re-approved in accordance with the foregoing procedure once in every
three years. The shareholder approval must be by a majority of the shares voted on the matter, provided that either:
|
●
|
at
least a majority of the shares of shareholders who have no personal interest in the transaction
and who vote on the matter vote in favor thereof; or
|
|
●
|
the
shareholders who have no personal interest in the transaction who vote against the transaction
do not represent more than two percent of the voting rights in the company.
|
Shareholders
generally have the right to examine any document in the company’s possession pertaining to any matter that requires shareholder
approval. If this information is made public in Israel or elsewhere, we will file the information with the Securities and Exchange
Commission in the United States.
For
information concerning the direct and indirect personal interests of an office holder and principal shareholders in specified
transactions with us, see Item 7.B “Related Party Transactions.”
Executive
Officers
Our
executive officers are appointed by our board of directors and serve at the discretion of our board of directors. We maintain
written employment agreements with our executive officers. Each agreement terminates upon 30 days’ written notice and provides
for standard terms and conditions of employment. All of our executive officers have agreed not to compete with us for 12 months
(or 24 months in the case of Monica Iancu) following the termination of their employment with us. Monica Iancu is entitled to
severance pay upon termination of her employment by either her or us (other than by us for cause) and to receive, during each
month of the six-month period following termination of her employment by us, or by her for cause, an amount of salary and benefits
equal to her former monthly salary and other benefits. Under Israeli case law, the non-competition undertakings of employees may
not be enforceable.
The
numbers and breakdowns of our employees as of the end of the past three years are set forth in the following table:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Approximate numbers of employees by geographic location
|
|
|
|
|
|
|
|
|
|
Israel
|
|
|
42
|
|
|
|
41
|
|
|
|
34
|
|
Romania
|
|
|
217
|
|
|
|
197
|
|
|
|
185
|
|
United States
|
|
|
3
|
|
|
|
2
|
|
|
|
2
|
|
Total workforce
|
|
|
262
|
|
|
|
240
|
|
|
|
221
|
|
Approximate numbers of employees by category of activity
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administration
|
|
|
15
|
|
|
|
19
|
|
|
|
17
|
|
Research and development
|
|
|
161
|
|
|
|
151
|
|
|
|
144
|
|
Professional services and customer support
|
|
|
79
|
|
|
|
62
|
|
|
|
54
|
|
Sales and marketing
|
|
|
7
|
|
|
|
8
|
|
|
|
6
|
|
Total workforce
|
|
|
262
|
|
|
|
240
|
|
|
|
221
|
|
We
are subject to Israeli labor laws and regulations with respect to our Israeli employees. These laws principally concern matters
such as paid annual vacation, paid sick days, length of the work day and work week, minimum wages, pay for overtime, insurance
for work-related accidents, pension plans and severance payments upon the retirement or death of an employee or termination of
employment under specified circumstances. The severance payments may be funded, in whole or in part, through Managers’ Insurance
or a Pension Fund, as described below. The payments to the Managers’ Insurance fund or Pension Fund toward severance amount
to 6% or 8.33% of base salaries. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National
Insurance Institute, which is similar to the U.S. Social Security Administration. Since January 1, 1995, these amounts also include
payments for health insurance. The payments to the National Insurance Institute equal up to approximately 19.5% of base salaries,
of which the employee contributes approximately two-thirds and the employer contributes approximately one-third. Our general practice
in Israel is to contribute funds on behalf of all of our employees to Managers’ Insurance or a Pension Fund. Each employee
who agrees to participate in the Managers’ Insurance plan contributes 6.0% of his or her base salary and we contribute 14.8%
(and such contributions include contributions towards the severance component). Each employee who agrees to participate in the
Pension Fund contributes 6.0% or 7.0% of his or her base salary and we contribute 14.8% or 15.8% (and such contributions include
contributions towards the severance component). Another savings plan we offer some of our employees, although not legally required,
is known as the Advanced Studies Fund. Each employee who agrees to participate in the Advanced Studies fund contributes up to
2.5% of base salary and we contribute up to 7.5%.
Furthermore,
by order of the Israeli Ministry of Labor, Social Affairs and Social Services, all employers and employees are subject to provisions
of collective bargaining agreements between the Histadrut, Federation of Labor, and the Coordination Bureau of Economic Organizations
in Israel. These provisions principally concern cost of living increases, recreation pay, commuting expenses and other conditions
of employment. We provide our employees with benefits and working conditions above the required minimums. Our employees are not
represented by a labor union. To date, we have not experienced any work stoppages and our relationships with our employees are
good.
As
of March 1, 2019, Monica Iancu beneficially owned 3,316,265, or 17.05% of our ordinary shares. None of our other directors or
members of senior management beneficially owns 1% or more of our ordinary shares.
We
have established stock option plans to provide for the issuance of options to our directors, officers and employees. Our most
recent share incentive plan was adopted by our shareholders at our 2011 annual general meeting (the “2011 Share Incentive
Plan”). Under the 2011 Share Incentive Plan, our ordinary shares and/or options to purchase our ordinary shares may be issued
from time to time to our directors, officers, employees, consultants and contractors at exercise prices and on other terms and
conditions as determined by our board of directors. Our board of directors determines the exercise price and the vesting period
of options granted. Unless otherwise is determined by our Board, any award granted under the 2011 Share Incentive Plan will have
a four-year vesting schedule, such that 50% of the award will vest on the second anniversary of the commencement date and 25%
of the award will vest on each of the third and fourth anniversaries of the commencement date, and the exercise price will be
equal to the average closing price per share of our ordinary shares on the stock market during the 30 trading day period immediately
preceding the date of grant of such award. The total pool of shares reserved for the 2011 Share Incentive Plan permits the issuance
of shares and/or options to acquire up to 1,800,000 ordinary shares.
As
of March 1, 2019, options to purchase 657,200 ordinary shares were outstanding and options for 1,999,090 ordinary shares had been
exercised. The options vest over three to five years, primarily commencing on the date of grant. Generally, options not previously
exercised will expire approximately five to seven years after they are granted. Our board of directors elected the capital gains
treatment afforded under Section 102 of the Israeli Income Tax Ordinance [New Version], 1961, or the Tax Ordinance, in respect
of options and ordinary shares awarded to our Israeli employees under our option or share incentive plans after January 1, 2003.
Accordingly, gains derived from options awarded to our Israeli employees and held by a trustee for two years from the date of
grant, will generally be taxed as capital gains at a rate of 25%, and we will generally not be entitled to recognize an expense
for the award of such options.
On
September 15, 2014, Ms. Iancu adopted a Rule 10b5-1 Sales Plan in order to establish a systematic program by which Oppenheimer
& Co. Inc. is instructed to sell on Nasdaq up to 2,600,000 ordinary shares held by her pursuant to the guidelines set forth
therein. As of March 1, 2019, Ms. Iancu had sold 537,735 ordinary shares under the plan.
|
Item
7.
|
Major
Shareholders and Related Party Transactions
|
The
following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of March 1, 2019,
unless otherwise specified, by each person who is known to own beneficially 5% or more of the outstanding ordinary shares.
Name of Beneficial Owners
|
|
Total Shares Beneficially Owned
|
|
|
Percentage of
Ordinary Shares
(1)
|
|
Monica Iancu
|
|
|
3,316,265
|
(2)
|
|
|
17.05
|
%
|
Invesco Ltd. and affiliates
|
|
|
1,200,000
|
(3)
|
|
|
6.17
|
%
|
|
(1)
|
Based on 19,448,218 ordinary shares outstanding on March
1, 2019.
|
|
(2)
|
Based on a Schedule 13G/A filed with the SEC on March 5,
2015.
|
|
(3)
|
Based
on a Schedule 13G filed with the SEC on February 14, 2017, Invesco Advisers, Inc. is a subsidiary of Invesco Ltd. and advises
the Invesco European Small Company Fund, which owns the foregoing shares.
|
|
(4)
|
On
January 11, 2019, Morgan Stanley filed a Schedule 13G reporting beneficial ownership of 967,301 ordinary shares, constituting
5.0% of our outstanding ordinary shares. Due to stock option exercises, as of March 1, 2019, such shares represented less than
5.0% of our outstanding ordinary shares.
|
As
of March 1, 2019, there were ten holders of record of our ordinary shares in the United States who collectively held less than
1% of our outstanding ordinary shares. In addition to this amount, there were also 16,507,061 shares held by the Depositary Trust
Company in the United States. The number of record holders in the United States is not representative of the number of beneficial
holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held of
record by brokers or other nominees.
|
B.
|
Related
Party Transactions
|
None.
|
C.
|
Interests
of Experts and Counsel
|
Not
applicable.
|
Item
8.
|
Financial
Information
|
|
A.
|
Consolidated
Statements and Other Financial Information
|
Financial
Statements
See
Item 18.
Export
Sales
We
conduct our sales activities primarily directly, by our sales force located in the MIND offices in the United States and Israel.
For information regarding our revenues by geographic market, see Item 5 — “Operating and Financial Review and Prospects.”
Legal
Proceedings
We
are, or may be, from time to time named as a defendant in certain routine litigation incidental to our business. However, we are
currently not a party to any legal proceedings which may have or have had in the recent past significant effects on our financial
position or profitability.
Dividend
Policy
Our
dividend policy was adopted in 2003, and in October 2010 our board of directors updated this policy slightly. The original policy
called for us to distribute a cash dividend once in each calendar year, in the amount of our net income from the previous year.
This policy commenced in 2004 with respect to our net income for 2003. The new policy changes only the amount to be distributed,
the new amount being equal to our EBITDA plus financial income (expenses) minus taxes on income. Each dividend under the policy
is subject to board approval and the requirements of applicable law. Our board of directors plans to declare the annual dividend
when it approves the applicable year-end financial statements.
Except
as otherwise disclosed in this annual report, no significant change has occurred since December 31, 2018.
|
Item
9.
|
The
Offer and Listing
|
|
A.
|
Offer
and Listing Details
|
Our
ordinary shares have been listed on the Nasdaq Global Market under the symbol MNDO since August 8, 2000.
The
following table sets forth, for the periods indicated, the high and low closing prices of our ordinary shares as reported on the
Nasdaq Global Market. The table contains actual prices in dollars, without adjustment for dividends paid on our ordinary shares.
Period
|
|
High
|
|
|
Low
|
|
Last six months:
|
|
|
|
|
|
|
February 2019
|
|
|
2.50
|
|
|
|
2.42
|
|
January 2019
|
|
|
2.50
|
|
|
|
2.26
|
|
December 2018
|
|
|
2.29
|
|
|
|
2.20
|
|
November 2018
|
|
|
2.30
|
|
|
|
2.20
|
|
October 2018
|
|
|
2.35
|
|
|
|
2.21
|
|
September 2018
|
|
|
2.43
|
|
|
|
2.30
|
|
|
|
|
|
|
|
|
|
|
Last eight quarters:
|
|
|
|
|
|
|
|
|
Q4 2018
|
|
|
2.35
|
|
|
|
2.20
|
|
Q3 2018
|
|
|
2.43
|
|
|
|
2.08
|
|
Q2 2018
|
|
|
2.35
|
|
|
|
2.14
|
|
Q1 2018
|
|
|
2.84
|
|
|
|
2.21
|
|
Q4 2017
|
|
|
2.84
|
|
|
|
2.61
|
|
Q3 2017
|
|
|
2.59
|
|
|
|
2.43
|
|
Q2 2017
|
|
|
2.58
|
|
|
|
2.36
|
|
Q1 2017
|
|
|
2.90
|
|
|
|
2.30
|
|
|
|
|
|
|
|
|
|
|
Last five years:
|
|
|
|
|
|
|
|
|
2018
|
|
|
2.87
|
|
|
|
2.08
|
|
2017
|
|
|
2.90
|
|
|
|
2.30
|
|
2016
|
|
|
2.68
|
|
|
|
2.00
|
|
2015
|
|
|
3.99
|
|
|
|
2.36
|
|
2014
|
|
|
4.20
|
|
|
|
1.87
|
|
Not
applicable.
Our
ordinary shares are quoted on the Nasdaq Global Market under the symbol MNDO.
Not
applicable.
Not
applicable.
Not
applicable.
|
Item
10.
|
Additional
Information
|
Not
applicable.
|
B.
|
Memorandum
and Articles of Associations
|
Objects
and Purposes
We
were first registered under Israeli law on April 6, 1995 as a private company, and on August 8, 2000 became a public company.
Our registration number with the Israeli registrar of companies is 51-213448-7. The full details of our objects and purposes can
be found in Section 2 of our Memorandum of Association filed with the Israeli registrar of companies. Among the objects and purposes
stipulated are the following: “to engage in any kind of commercial and/or productive business and to engage in any action
or endeavor which the company’s managers consider to be beneficial to the company.”
Transfer
of Shares and Notices
Fully
paid ordinary shares are issued in registered form and may be freely transferred pursuant to our articles of association unless
such transfer is restricted or prohibited by another instrument. Unless otherwise prescribed by law, we will provide at least
21 calendar days’ prior notice of any general shareholders meeting.
Election
of Directors
The
ordinary shares do not have cumulative voting rights in the election of directors. Thus, the holders of ordinary shares conferring
more than 50% of the voting power have the power to elect all the directors, to the exclusion of the remaining shareholders. Our
board is divided into three classes of directors serving staggered three-year terms.
Dividend
and Liquidation Rights
Dividends
on our ordinary shares may be paid only out of profits and other surplus, as defined in the Companies Law, as of our most recent
financial statements or as accrued over a period of two years, whichever is higher, unless otherwise approved by a court order.
Our board of directors is authorized to declare dividends, provided that there is no reasonable concern that the dividend will
prevent us from satisfying our existing and foreseeable obligations as they become due. In the event of our liquidation, after
satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to their
respective holdings. Dividend or liquidation right may be affected by the grant of preferential dividends or distribution rights
to the holders of a class of shares with preferential rights that may be authorized in the future.
Voting,
Shareholders’ Meetings and Resolutions
Holders
of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders.
These
voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential
rights that may be authorized in the future.
We
have two types of general shareholders meetings: the annual general meetings and extraordinary general meetings. These meetings
may be held either in Israel or in any other place the board of directors determines. An annual general meeting must be held in
each calendar year, but not more than 15 months after the last annual general meeting. Our board of directors may convene an extraordinary
meeting, from time to time, at its discretion and is required to do so upon the request of shareholders holding at least 5% of
our ordinary shares.
The
quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person or by proxy who
hold or represent between them at least 25% of the outstanding voting shares, unless otherwise required by applicable rules. Nasdaq
generally requires a quorum of 33-1/3%, but we have an exemption from that requirement and instead follow the generally accepted
business practice for companies in Israel. A meeting adjourned for lack of a quorum generally is adjourned to the same day in
the following week at the same time and place or any time and place as the Chairman may designate with the consent of the shareholders
voting on the matter adjourned. At such reconvened meeting, the required quorum consists of any two members present in person
or by proxy, unless otherwise required by applicable rules.
Under
the Companies Law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders
require a simple majority of the shares present, in person or by proxy, and voting on the matter. However, our articles of association
require approval of 75% of the shares present and voting to remove directors or change the structure of our staggered board of
directors.
We
file annual reports on Form 20-F electronically with the SEC and post a copy on our website.
Duties
of Shareholders
Under
the Companies Law, each and every shareholder has a duty to act in good faith in exercising his rights and fulfilling his obligations
towards the company and other shareholders and to refrain from abusing his power in the company, such as in voting in the general
meeting of shareholders on the following matters:
|
●
|
any
amendment to the articles of association;
|
|
●
|
an
increase of the company’s authorized share capital;
|
|
●
|
approval
of certain actions and transactions which require shareholder approval.
|
In
addition, each and every shareholder has the general duty to refrain from depriving rights of other shareholders. Furthermore,
any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote
and any shareholder that, pursuant to the provisions of the articles of association, has the power to appoint or to prevent the
appointment of an office holder in the company or any other power toward the company is under a duty to act in fairness towards
the company. The Companies Law does not describe the substance of this duty of fairness. These various shareholder duties, which
typically do not apply to shareholders of U.S. companies, may restrict the ability of a shareholder to act in what the shareholder
perceives to be its own best interests.
Restrictions
on Non-Israeli Residents
The
ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries which are
in a state of war with Israel, is not restricted in any way by our memorandum of association or articles of association or by
the laws of the State of Israel.
Mergers
and Acquisitions under Israeli Law
The
Companies Law includes provisions that allow a merger transaction and requires that each company that is party to a merger approve
the transaction by its board of directors and a vote of the majority of its shares, voting on the proposed merger at a shareholders’
meeting. For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority
of the shares held by parties other than the other party to the merger, or by any person who holds 25% or more of the shares or
the right to appoint 25% or more of the directors of the other party, vote against the merger. Upon the request of a creditor
of either party of the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable
concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties
to the merger. In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that a proposal
of the merger has been filed by each party with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger
was approved by the shareholders of each party.
The
Companies Law also provides that an acquisition of shares of public company must be made by means of tender offer if as a result
of the acquisition the purchaser would become a 25% or more shareholder of the company and there is no 25% or more shareholder
in the company. In addition, an acquisition of shares of a public company must be made by means of a tender offer if as a result
of the acquisition the purchaser would become a 45% or more shareholder of the company and there is no 45% or more shareholder
in the company. These requirements do not apply if the acquisition (i) is made in a private placement that received shareholder
approval, (ii) was from a 25% shareholder of the company and resulted in the acquirer becoming a 25% shareholder of the company
or (iii) was from a 45% shareholder of the company and resulted in the acquirer becoming a 45% shareholder of the company. The
tender offer must be extended to all shareholders, but the offer or is not required to purchase more than 5% of the company’s
outstanding shares, regardless of how many shares are tendered by shareholders. The tender offer may be consummated only if (i)
at least 5% of the company’s outstanding shares will be acquired by the offer and (ii) the number of shares tendered in
the offer exceeds the number of shares whose holders objected to the offer.
If
as a result of an acquisition of shares the acquirer will hold more than 90% of a company’s outstanding shares, the Companies
Law requires that the acquisition be made by means of a tender offer for all of the outstanding shares. If as a result of a full
tender offer the acquirer would own more than 95% of the outstanding shares, then all the shares that the acquirer offered to
purchase will be transferred to it. The law provides for appraisal rights if any shareholder files a request in court within six
months following the consummation of a full tender offer, although the acquirer may stipulate that any tendering shareholders
forfeit their appraisal rights. If as a result of a full tender offer the acquirer would own 95% or less of the outstanding shares,
then the acquirer may not acquire shares that will cause his shareholding to exceed 90% of the outstanding shares.
Finally,
Israeli tax law treats stock-for-stock acquisitions between an Israeli company and a foreign company less favorably than does
U.S. tax law. For example, Israeli tax law subjects a shareholder who exchanges his ordinary shares for shares in another corporation
to taxation prior to the sale of the shares received in such stock-for-stock swap.
Modification
of Class Rights
Our
articles of association provide that the rights attached to any class (unless otherwise provided by the terms of such class),
such as voting, rights to dividends and the like, may be varied by a shareholders resolution, subject to the approval of the holders
of a majority of the issued shares of that class.
Board
of Directors
According
to the Companies Law and our articles of association, the oversight of the management of our business is vested in our board of
directors. The board of directors may exercise all such powers and may take all such actions that are not specifically granted
to our shareholders. As part of its powers, our board of directors may cause the company to borrow or secure payment of any sum
or sums of money, at such times and upon such terms and conditions as it thinks fit, including the grants of security interests
on all or any part of the property of the company.
A
resolution proposed at any meeting of the board of directors shall be deemed adopted if approved by a majority of the directors
present and voting on the matter. For additional information, please see Item 6.C “Board Practices.”
Exculpation
of Office Holders
Under
the Companies Law, an Israeli company may not exempt an office holder from liability for a breach of his duty of loyalty, but
may exempt in advance an office holder from his liability to the company, in whole or in part, for a breach of his duty of care
(except in connection with distributions) provided the articles of association of the company allow it to do so. Our articles
allow us to exempt our office holders to the fullest extent permitted by law.
Insurance
of Office Holders
Our
articles of association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance
of the liability of any of our office holders, with respect to an act performed in the capacity of an office holder for:
|
●
|
a
breach of his duty of care to us or to another person;
|
|
●
|
a
breach of his duty of loyalty to us, provided that the office holder acted in good faith
and had reasonable cause to assume that his act would not prejudice our interests; or
|
|
●
|
a
financial liability imposed upon him in favor of another person.
|
Indemnification
of Office Holders
Our
articles of association provide that we may indemnify an office holder against the following obligations and expenses imposed
on or incurred by the office holder with respect to an act performed in the capacity of an office holder:
|
●
|
a
financial obligation imposed on him in favor of another person by a court judgment, including
a settlement or an arbitrator’s award approved by the court; such indemnification
may be approved (i) after the liability has been incurred or (ii) in advance, provided
that our undertaking to indemnify is limited to events that our board of directors believes
are foreseeable in light of our actual operations at the time of providing the undertaking
and to a sum or criterion that our board of directors determines to be reasonable under
the circumstances;
|
|
●
|
reasonable
litigation expenses, including attorneys’ fees, expended by the office holder as
a result of an investigation or proceeding instituted against him by a competent authority,
provided that such investigation or proceeding concluded without the filing of an indictment
against him and either (A) concluded without the imposition of any financial liability
in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability
in lieu of criminal proceedings but relates to a criminal offense that does not require
proof of criminal intent or in connection with a financial sanction;
|
|
●
|
reasonable
litigation expenses, including attorneys’ fees, expended by the office holder or
charged to him by a court in connection with: (A) proceedings we institute against him
or instituted on our behalf or by another person; or (B) a criminal charge from which
he was acquitted; or (C) a criminal proceeding in which he was convicted of an offense
that does not require proof of criminal intent; and
|
|
●
|
a
financial obligation imposed upon an office holder and reasonable litigation expenses,
including attorney fees, expended by the office holder as a result of an administrative
proceeding instituted against him. Without derogating from the generality of the foregoing,
such obligation or expense will include a payment which the office holder is obligated
to make to an injured party as set forth in Section 52(54)(a)(1)(a) of the Israeli Securities
Law, 1968 (the “Securities Law”) and expenses that the office holder incurred
in connection with a proceeding under Chapters H’3, H’4 or I’1 of the
Securities Law, including reasonable legal expenses, which term includes attorney fees.
|
Limitations
on Exculpation, Insurance and Indemnification
The
Companies Law provides that a company may not exculpate or indemnify an office holder, or enter into an insurance contract, which
would provide coverage for any monetary liability incurred as a result of any of the following:
|
●
|
a
breach by the office holder of his duty of loyalty unless, with respect to indemnification
or insurance coverage, the office holder acted in good faith and had a reasonable basis
to believe that the act would not prejudice the company;
|
|
●
|
a
breach by the office holder of his duty of care if the breach was done intentionally
or recklessly;
|
|
●
|
any
act or omission done with the intent to derive an illegal personal benefit; or
|
|
●
|
any
fine levied against the office holder.
|
In
addition, under the Companies Law, indemnification of, and procurement of insurance coverage for, our office holders must be approved
by our audit committee and our board of directors and, if the beneficiary is a director, by our shareholders.
We
have agreed to exempt from liability and indemnify our office holders to the fullest extent permitted under the Companies Law.
We have obtained directors and officers liability insurance for the benefit of our office holders.
None.
There
are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary
shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank
of Israel regarding certain transactions. However, legislation remains in effect, pursuant to which currency controls can be imposed
by administrative action at any time.
Israeli
Tax Considerations
The
following is a summary of the current tax structure applicable to companies in Israel, with special reference to its effect on
us. Note that this tax structure and any resulting benefit may not apply for any income derived by our foreign subsidiaries, which
subsidiaries may be taxed according to tax laws applicable to their country of residence. The following also contains a discussion
of the material Israeli tax consequences to persons purchasing our ordinary shares. To the extent that the discussion is based
on tax legislation, which has not been subject to judicial or administrative interpretation, we cannot assure you that the tax
authorities or courts will accept the views expressed in the discussion in question.
Prospective
purchasers 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.
General
Corporate Tax Structure
The
general rate of corporate tax in Israel to which Israeli companies are subject is 23% for the 2018 tax year and future years.
The general rate of capital gains tax in Israel to which Israeli companies are subject is the corporate tax rate. However, the
effective tax rate payable by a company which derives income from a “Preferred Enterprise” (as defined below) may
be considerably less, as further discussed below.
Law
for the Encouragement of Capital Investments, 1959
General
The
Law for Encouragement of Capital Investments, 1959, or the Investments Law, as in effect until 2005, provided that upon application
to the Investment Center of the Ministry of Industry and Trade of the State of Israel, a proposed capital investment in eligible
facilities may be designated as an “Approved Enterprise.” Please see discussion below regarding a reform of the Investments
Law that came into effect in 2011.
Our
Approved and Preferred Enterprises
During
2011, we decided to implement the new legislation amending the Investments Law, while waiving future benefits provided from
the Approved Enterprise program under the Investments Law (see more details hereinafter).
Further
information with regard to our Approved and Preferred Enterprise programs can be found in Item 3, “Risk Factors” under
the caption “We currently benefit from local tax benefits that may be discontinued or reduced” and in Note 8 of our
Consolidated Financial Statements under the caption “Taxes on Income.”
Reform
of the Investments Law - 2011
On
December 29, 2010, the Israeli parliament approved an amendment to the Investments Law, effective as of January 1, 2011, which
constitutes a reform of the incentives regime under such law. This amendment revises the objectives of the Investments Law to
focus on achieving enhanced growth in the business sector, improving the Israeli industry’s competitiveness in international
markets and creating employment and development opportunities in remote areas of Israel. The amendment allows enterprises meeting
certain required criteria to enjoy grants as well as tax benefits. The amendment also introduces certain changes to the map of
geographic development areas for purposes of the Investments Law, which will take effect in future years.
The
amendment generally abolishes the previous tax benefit routes that were afforded under the Investments Law, specifically the tax-exemption
periods previously allowed, and introduces new tax benefits for industrial enterprises meeting the criteria of the law, which
include the following:
|
●
|
A
reduced corporate tax rate for industrial enterprises, provided that more than 25% of
their annual income is derived from export, which will apply to the enterprise’s
entire preferred income the reduced tax rate in recent years is 9% for development area
A and 16% for the rest of Israel. Under an amendment to the Investment Law enacted in
December 2016, the reduced tax rate of 9% decreased to 7.5% for 2017 and thereafter.
|
|
●
|
The
reduced tax rates will no longer be contingent upon making a minimum qualifying investment
in productive assets.
|
|
●
|
A
definition of “preferred income” was introduced into the Investments Law
to include certain types of income that are generated by the Israeli production activity
of a Preferred Enterprise.
|
|
●
|
A
reduced dividend withholding tax rate of 15% will apply to dividends paid from preferred
income to both Israeli and non-Israeli investors, with an exemption from such withholding
tax applying to dividends paid to an Israeli company. Under a later amendment of the
Investments Law, the dividend withholding tax rate of 15% was increased to 20% for dividends
paid from preferred income that accrued from the tax year 2014 and onwards.
|
The
amendment will generally apply to preferred income produced or generated by a Preferred Company (as defined in the Investments
Law) commencing from January 1, 2011. The amendment contains various transition provisions which allow, under certain circumstances,
to apply the new regime to investment programs previously approved or elected under the Investments Law in its previous form.
Although this recent amendment took effect on January 1, 2011, the transitional provisions of its adoption also allow the company
to defer its adoption to future years.
The
2017 amendment (“Preferred Technological Enterprises”)
Amendment
73 to the Investments Law, which came into effect on January 1, 2017, provides a new tax incentive regime. Regulations have been
promulgated to implement the “Nexus Principles,” based on OECD guidelines published as part of the Base Erosion and
Profit Shifting (BEPS) project.
The
new incentive regime will apply to “Preferred Technological Enterprises” that meet certain conditions, including all
of the following:
|
●
|
The
company’s average R&D expenses in the three years prior to the current tax
year must be greater than or equal to 7% of its total revenue or exceed NIS 75 million
(approximately $19 million) per year; and
|
|
●
|
The
company must satisfy one of the following conditions:
|
|
●
|
at
least 20% of the workforce (or at least 200 employees) are employed in R&D;
|
|
●
|
a
venture capital investment in an amount approximately equivalent to at least NIS 8 million
was previously made in the company, and the company has not changed its business following
such investment; or
|
|
●
|
growth
in sales or workforce by an average of 25% over the three years preceding the applicable
tax year, and the company’s total revenue was at least NIS 10 million or at least 50
employees are employed by the company over the three years preceding the applicate tax
year.
|
A
Preferred Technological Enterprises will be subject to a corporate tax rate of 12% unless it is located in a specified development
zone, in which case the rate will be 7.5% with respect to the portion of income derived from intellectual property developed in
Israel. The withholding tax on dividends from such enterprises will be 4% for dividends paid to a foreign parent company holding
at least 90% of the shares of the distributing company. For other dividend distributions, the withholding tax rate will be 20%
(or a lower rate under a tax treaty, if applicable).
On
February 18, 2018, the Israel Tax Authority issued a tax ruling granting us “Preferred Technological Enterprise” status,
subject to the conditions and terms of the tax ruling. The grant of the status means that starting January 1, 2017 we are
subject to a reduced Israeli corporate tax rate of 7.5% on any future taxable “technological income”.
The
tax ruling applies for five years until 2021 and may be extended for further periods subject to receipt of an additional ruling
from the Israeli Tax Authority.
Dividends
Taxation
When
dividends are distributed from the Preferred Enterprise, they are generally considered to be attributable to the entire enterprise
and their effective tax rate is a result of a weighted combination of the applicable tax rates. Further information with regard
to taxation of dividends can be found in Note 8 of our Consolidated Financial Statements under the caption “Taxes on Income.”
We
paid dividends to our shareholders in the amount of $5.2 million in 2016, $6.2 million in 2017 and $5.8 million in 2018. In March
2019, we declared a dividend of approximately $5.0 million and withholding tax held at a rate of 20%.
Law
for the Encouragement of Industry (Taxes), 1969
Under
the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law, a company qualifies as an “Industrial
Company” if it is resident in Israel and at least 90% of its income in a given tax year, determined in NIS, exclusive of
income from capital gains, interest and dividends, is derived from Industrial Enterprises owned by that company. An “Industrial
Enterprise” is defined as an enterprise whose major activity in a particular tax year is industrial production activity.
Industrial
Companies qualify (based on tax regulations) for accelerated depreciation rates for machinery, equipment and buildings used by
an Industrial Enterprise. An Industrial Company owning an Approved Enterprise, as described above, may choose between the above
depreciation rates and the depreciation rates available to Approved Enterprises.
Pursuant
to the Industry Encouragement Law, an Industrial Company is also entitled to amortize the purchase price of know-how and patents
over a period of eight years beginning with the year in which such rights were first used.
In
addition, an Industrial Company is entitled to deduct over a three-year period expenses involved with the issuance and listing
of shares on a stock exchange and has the right, under certain conditions, to elect to file a consolidated tax return with related
Israeli Industrial Companies that satisfy conditions set forth in the law.
Eligibility
for the benefits under the law is not subject to receipt of prior approval from any governmental authority. We believe that we
currently qualify as an Industrial Company within the definition of the Industry Encouragement Law. However, the definition may
be amended from time to time and the Israeli tax authorities, which reassess our qualifications annually, may determine that we
no longer qualify as an Industrial Company. As a result of either of the foregoing, the benefits described above might not be
available in the future.
Israeli
Transfer Pricing Regulations
On
November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance,
came into force (the “Transfer Pricing Regulations”). Section 85A of the Tax Ordinance and the Transfer Pricing Regulations
generally require that all cross-border transactions carried out between related parties will be conducted on an arm’s length
principle basis and will be taxed accordingly.
Capital
Gains Tax on the Sale of our Ordinary Shares
General
Israeli
law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax
purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by non-residents of Israel, unless
a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides
otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is equal to the increase
in the purchase price of the relevant asset 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 gain is the excess of the total
capital gain over the inflationary surplus.
Israeli
Residents
Generally,
as of January 1, 2012, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market
or not, is 25% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such
shares, in which case the gain will generally be taxed at a rate of 30%. Additionally, if such shareholder is considered a “significant
shareholder” at any time during the 12-month period preceding such sale,
i.e.
, such shareholder holds directly or
indirectly, including with others, at least 10% of any “means of control” in the company, the tax rate will be 30%.
However, the foregoing tax rates will not apply to individuals: (i) who are dealers in securities; or (ii) who acquired their
shares prior to an initial public offering (that may be subject to a different tax arrangement). Israeli companies are subject
to the corporate tax rate on capital gains derived from the sale of listed shares.
The
tax basis of shares acquired prior to January 1, 2003 will be determined in accordance with the average closing share price in
the three trading days preceding January 1, 2003. However, a taxpayer may elect the actual adjusted cost of the shares as the
tax basis provided he can provide sufficient proof of such adjusted cost.
As
of January 1, 2017, shareholders that are individuals who have taxable income that exceeds NIS 640,000 in a tax year (linked to
the CPI each year, which amounts to NIS 641,880 in the 2018 tax year), will be subject to an additional tax, referred to as High
Income Tax, at the rate of 3% on their taxable income for such tax year which is in excess of such threshold. For this purpose,
taxable income will include taxable capital gains from the sale of our shares and taxable income from dividend distributions.
Non-Residents
of Israel
Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on a recognized
stock market outside of Israel, provided that such capital gains are not derived from a permanent establishment in Israel and
that such shareholders did not acquire their shares prior to the issuer’s initial public offering. However, non-Israeli
corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of more than 25% in such
non-Israeli corporation, or (ii) 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.
In
some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration
may be subject to the withholding of Israeli tax at the source.
Pursuant
to the Convention between the Government of the United States of America and the Government of Israel with Respect to Taxes on
Income, as amended (the “U.S.- Israel Tax Treaty”), the sale, exchange or disposition of our ordinary shares by a
person who qualifies as a resident of the United States and is entitled to claim the benefits afforded to a resident, or a Treaty
U.S. Resident, will not be subject to Israeli capital gains tax unless (i) that Treaty U.S. Resident held, directly or indirectly,
shares representing 10% or more of our voting power during any part of the 12-month period preceding the sale, exchange or disposition
or (ii) the capital gains from such sale can be allocated to a permanent establishment in Israel. A sale, exchange or disposition
of our ordinary shares by a Treaty U.S. Resident who held, directly or indirectly, shares representing 10% or more of our voting
power at any time during the 12-month period preceding the sale, exchange or disposition will be subject to Israeli capital gains
tax, to the extent applicable. However, under the U.S.-Israel Tax Treaty, this Treaty U.S. Resident would be permitted to claim
a credit for such taxes against U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to
the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to state or local taxes.
A
non-resident of Israel who receives dividend income or that realizes capital gains derived from the sale of our ordinary shares,
from which tax was withheld at the source, is generally exempted from the duty to file tax returns in Israel with respect to such
income, provided such income was not derived from a business conducted in Israel by the taxpayer and the taxpayer has no other
taxable sources of income in Israel.
Dividend
Taxation
Income
Taxes on Dividends Distributed by the Company to Israeli Residents
As
of January 1, 2012, the distribution of dividend income to Israeli residents will generally be subject to income tax at a rate
of 25% for individuals and will be exempt from income tax for corporations. The portion of dividends paid out of profits earned
under a Preferred Enterprise tax status of the Company to individuals is subject to withholding tax at the rate of 20%.
In
addition, if an Individual Israeli shareholder is considered a “significant shareholder” at any time during the 12-month
period preceding such distribution, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of
any means of control in the company, the tax rate on the dividend (not sourced from Preferred Enterprise income) will be 30%.
For
information with respect to the applicability of High Income Tax on distribution of dividends, see “Capital Gains Tax on
Sales of Our Ordinary Shares - Taxation of Israeli Residents.”
Income
Taxes on Dividends Distributed by the Company to Non-Israeli Residents
Subject
to the provisions of applicable tax treaties, dividend distributions from regular profits (non-Preferred Enterprise) by the Company
to a non-resident shareholder are generally subject to withholding tax of 25%. The portion of dividends paid out of profits earned
under a Preferred Enterprise tax status of the Company is subject to withholding tax at the rate of 20%.
Generally,
under the U.S-Israel Tax Treaty the maximum rate of withholding tax on dividends paid to a shareholder who is a resident of the
United States (as defined in the U.S. – Israel Tax Treaty) will be 25%. However, when a U.S. tax resident corporation is
the recipient of the dividend, the withholding tax rate on a dividend out of regular (non-Approved/Preferred Enterprise) profits
may be reduced to 12.5% under the U.S-Israel Tax Treaty, where the following conditions are met:
|
(a)
|
the
recipient corporation owns at least 10% of the outstanding voting rights of the Company
for all of the period preceding the dividend during the Company’s current and prior
taxable year; and
|
|
(b)
|
generally
not more than 25% of the gross income of the paying corporation for its prior tax year
consists of certain interest and dividend income.
|
Otherwise,
the usual rates apply. Dividends paid to such U.S. corporation from income derived during any period for which the Israeli company
is entitled to the reduced tax rate applicable to an Approved or Preferred Enterprise will be subject to a 15% tax rate, provided
that the conditions in clauses (a) and (b) above are met.
U.S.
Federal Income Taxation
Subject
to the limitations described in the next paragraph, the following discussion summarizes the material U.S. federal income tax consequences
to a “U.S. Holder” arising from the purchase, ownership and sale of the Ordinary Shares. For this purpose, a “U.S.
Holder” is a holder of Ordinary Shares that is: (1) an individual citizen or resident of the United States, including an
alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under
U.S. federal income tax laws; (2) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes)
or a partnership (other than a partnership that is not treated as a U.S. person under any applicable U.S. Treasury Regulations)
created or organized in or under the laws of the United States or the District of Columbia or any political subdivision thereof;
(3) an estate, the income of which is subject to U.S. federal income tax regardless of source; (4) a trust if a court within the
United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority
to control all substantial decisions of the trust; (5) a trust that has a valid election in effect to be treated as a U.S. person
to the extent provided in U.S. Treasury regulations; or (6) any person otherwise subject to U.S. federal income tax on a net income
basis in respect of the Ordinary Shares, if such status as a U.S. Holder is not overridden pursuant to the provisions of an applicable
tax treaty.
This
summary is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal
income tax considerations that may be relevant to a decision to purchase or hold our Ordinary Shares. This summary generally considers
only U.S. Holders that will own our Ordinary Shares as capital assets. Except to the limited extent discussed below, this summary
does not consider the U.S. federal tax consequences to a person that is not a U.S. Holder, nor does it describe the rules applicable
to determine a taxpayer’s status as a U.S. Holder. This summary is based on the provisions of the Internal Revenue Code
of 1986, as amended, or the Code, final, temporary and proposed U.S. Treasury Regulations promulgated thereunder, administrative
and judicial interpretations thereof, and the U.S./Israel Income Tax Treaty, all as in effect as of the date hereof and all of
which are subject to change, possibly on a retroactive basis, and all of which are open to differing interpretations. The Company
will not seek a ruling from the U.S. Internal Revenue Service, or the IRS, with regard to the U.S. federal income tax treatment
of an investment in our Ordinary Shares by U.S. Holders and, therefore, can provide no assurances that the IRS will agree with
the conclusions set forth below.
This
discussion does not address all of the aspects of U.S. federal income taxation that may be relevant to a particular shareholder
based on such shareholder’s particular circumstances and in particular does not discuss any estate, gift, generation-skipping,
transfer, state, local or foreign tax considerations. In addition, this discussion does not address the U.S. federal income tax
treatment of a U.S. Holder who is: (1) a bank, life insurance company, regulated investment company, or other financial institution
or “financial services entity”; (2) a broker or dealer in securities or foreign currency; (3) a person who acquired
our Ordinary Shares in connection with employment or other performance of services; (4) a U.S. Holder that is subject to the U.S.
alternative minimum tax; (5) a U.S. Holder that holds our Ordinary Shares as a hedge or as part of a hedging, straddle, conversion
or constructive sale transaction or other risk-reduction transaction for U.S. federal income tax purposes; (6) a tax-exempt entity;
(7) real estate investment trusts; (8) a U.S. Holder that expatriates out of the United States or a former long-term resident
of the United States; or (9) a person having a functional currency other than the dollar. This discussion does not address the
U.S. federal income tax treatment of a U.S. Holder that owns, directly or constructively, at any time, Ordinary Shares representing
10% or more of our voting power. Additionally, the U.S. federal income tax treatment of persons who hold Ordinary Shares through
a partnership or other pass-through entity are not considered.
You
are encouraged to consult your own tax advisor with respect to the specific U.S. federal and state income tax consequences to
you of purchasing, holding or disposing of our Ordinary Shares, including the effects of applicable state, local, foreign or other
tax laws and possible changes in the tax laws.
Distributions
on Ordinary Shares
Subject
to the discussion under the heading “Passive Foreign Investment Companies” below, a U.S. Holder will be required to
include in gross income as ordinary income the amount of any distribution paid on Ordinary Shares (including the amount of any
Israeli tax withheld on the date of the distribution), to the extent that such distribution does not exceed our current and accumulated
earnings and profits, as determined for U.S. federal income tax purposes. The amount of a distribution which exceeds our earnings
and profits will be treated first as a non-taxable return of capital, reducing the U.S. Holder’s tax basis for the Ordinary
Shares to the extent thereof, and then capital gain. Corporate holders generally will not be allowed a deduction for dividends
received. For noncorporate U.S. Holders, to the extent that their total adjusted income does not exceed applicable thresholds,
the maximum federal income tax rate for “qualified dividend income” and long-term capital gains is generally 15%.
For those noncorporate U.S. Holders whose total adjusted income exceeds such income thresholds, the maximum federal income tax
rate for “qualified dividend income” and long-term capital gains is generally 20%. For this purpose, “qualified
dividend income” means,
among other things
, dividends received from a “qualified foreign corporation.”
A “qualified foreign corporation” is a corporation that is entitled to the benefits of a comprehensive tax treaty
with the United States which includes an exchange of information program. The IRS has stated that the Israel/U.S. Tax Treaty satisfies
this requirement and we believe we are eligible for the benefits of that treaty.
In
addition, our dividends will be qualified dividend income if our Ordinary Shares are readily tradable on Nasdaq or another established
securities market in the United States. Dividends will not qualify for the preferential rate if we are treated, in the year the
dividend is paid or in the prior year, as a passive foreign investment company, or PFIC. A U.S. Holder will not be entitled to
the preferential rate: (1) if the U.S. Holder has not held our Ordinary Shares or ADRs for at least 61 days of the 121-day period
beginning on the date which is 60 days before the ex-dividend date, or (2) to the extent the U.S. Holder is under an obligation
to make related payments on substantially similar property. Any days during which the U.S. Holder has diminished its risk of loss
on our Ordinary Shares are not counted towards meeting the 61-day holding period. Finally, U.S. Holders who elect to treat the
dividend income as “investment income” pursuant to Code section 163(d)(4) will not be eligible for the preferential
rate of taxation.
The
amount of a distribution with respect to our Ordinary Shares will be measured by the amount of the fair market value of any property
distributed, and for U.S. federal income tax purposes, the amount of any Israeli taxes withheld therefrom. (See discussion above
under “Israeli Taxation Considerations - Taxation of Our Shareholders - Dividends.”) Cash distributions paid by us
in NIS will be included in the income of U.S. Holders at a dollar amount based upon the spot rate of exchange in effect on the
date the dividend is includible in the income of the U.S. Holder, and U.S. Holders will have a tax basis in such NIS for U.S.
federal income tax purposes equal to such dollar value. If the U.S. Holder subsequently converts the NIS, any subsequent gain
or loss in respect of such NIS arising from exchange rate fluctuations will be U.S. source ordinary exchange gain or loss.
Distributions
paid by us will generally be foreign source income for U.S. foreign tax credit purposes. Subject to the limitations set forth
in the Code, U.S. Holders may elect to claim a foreign tax credit against their U.S. income tax liability for Israeli income tax
withheld from distributions received in respect of the Ordinary Shares. In general, these rules limit the amount allowable as
a foreign tax credit in any year to the amount of regular U.S. tax for the year attributable to foreign source taxable income.
This limitation on the use of foreign tax credits generally will not apply to an electing individual U.S. Holder whose creditable
foreign taxes during the year do not exceed $300, or $600 for joint filers, if such individual’s gross income for the taxable
year from non-U.S. sources consists solely of certain passive income. A U.S. Holder will be denied a foreign tax credit with respect
to Israeli income tax withheld from dividends received with respect to the Ordinary Shares if such U.S. Holder has not held the
Ordinary Shares for at least 16 days out of the 31-day period beginning on the date that is 15 days before the ex-dividend date
or to the extent that such U.S. Holder is under an obligation to make certain related payments with respect to substantially similar
or related property. Any day during which a U.S. Holder has substantially diminished his or her risk of loss with respect to the
Ordinary Shares will not count toward meeting the 16-day holding period. A U.S. Holder will also be denied a foreign tax credit
if the U.S. Holder holds the Ordinary Shares in an arrangement in which the U.S. Holder’s reasonably expected economic profit
is insubstantial compared to the foreign taxes expected to be paid or accrued. The rules relating to the determination of the
U.S. foreign tax credit are complex, and U.S. Holders should consult with their own tax advisors to determine whether, and to
what extent, they are entitled to such credit. U.S. Holders that do not elect to claim a foreign tax credit may instead claim
a deduction for Israeli income taxes withheld, provided such U.S. Holders itemize their deductions.
Disposition
of Shares
Except
as provided under the PFIC rules described below, 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 such U.S. Holder’s tax basis in
the sold Ordinary Shares and the amount realized on the disposition of such Ordinary Shares (or its dollar equivalent determined
by reference to the spot rate of exchange on the date of disposition, if the amount realized is denominated in a foreign currency).
The gain or loss realized on the sale or exchange or other disposition of Ordinary Shares will be long-term capital gain or loss
if the U.S. Holder has a holding period of more than one year at the time of the disposition.
In
general, gain realized by a U.S. Holder on a sale, exchange or other disposition of Ordinary Shares will generally be treated
as U.S. source income for U.S. foreign tax credit purposes. A loss realized by a U.S. Holder on the sale, exchange or other disposition
of Ordinary Shares is generally allocated to U.S. source income. However, U.S. Treasury Regulations require such loss to be allocated
to foreign source income to the extent specified dividends were received by the taxpayer within the 24-month period preceding
the date on which the taxpayer recognized the loss. The deductibility of a loss realized on the sale, exchange or other disposition
of Ordinary Shares is subject to limitations.
Tax
on Net Investment Income
U.S.
Holders who are individuals, estates or trusts will generally be required to pay 3.8% tax on their net investment income (including
dividends on and gains from the sale or other disposition of our Ordinary Shares), or in the case of estates and trusts on their
net investment income that is not distributed. In each case, the 3.8% Medicare tax applies only to the extent the U.S. Holder’s
total adjusted income exceeds applicable thresholds.
Passive
Foreign Investment Companies
Special
U.S. federal income tax laws apply to a U.S. Holder who owns shares of a corporation that was (at any time during the U.S. Holder’s
holding period) a PFIC. We would be treated as a PFIC for U.S. federal income tax purposes for any tax year if, in such tax year,
either:
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●
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75%
or more of our gross income (including our pro rata share of gross income for any company, U.S. or foreign, in which we are considered
to own 25% or more of the shares by value), in a taxable year is passive (the “Income Test”); or
|
|
●
|
At
least 50% of our assets, averaged over the year and generally determined based upon value (including our pro rata share of the
assets of any company in which we are considered to own 25% or more of the shares by value), in a taxable year are held for the
production of, or produce, passive income (the “Asset Test”).
|
For
this purpose, passive income generally consists of dividends, interest, rents, royalties, annuities and income from certain commodities
transactions and from notional principal contracts. Cash is treated as generating passive income.
If
we are or become a PFIC, each U.S. Holder who has not elected to treat us as a qualified electing fund by making a “QEF
election”, or who has not elected to mark the shares to market (as discussed below), would, upon receipt of certain distributions
by us and upon disposition of our Ordinary Shares at a gain, be liable to pay U.S. federal income tax at the then prevailing highest
tax rates on ordinary income plus interest on such tax, as if the distribution or gain had been recognized ratably over the taxpayer’s
holding period for the Ordinary Shares. In addition, when shares of a PFIC are acquired by reason of death from a decedent that
was a U.S. Holder, the tax basis of such shares would not receive a step-up to fair market value as of the date of the decedent’s
death, but instead would be equal to the decedent’s basis if lower, unless all gain were recognized by the decedent. Indirect
investments in a PFIC may also be subject to special U.S. federal income tax rules.
The
PFIC rules would not apply to a U.S. Holder who makes a QEF election for all taxable years that such U.S. Holder has held the
Ordinary Shares while we are a PFIC, provided that we comply with specified reporting requirements. Instead, each U.S. Holder
who has made such a QEF election is required for each taxable year that we are a PFIC to include in income such U.S. Holder’s
pro rata
share of our ordinary earnings as ordinary income and such U.S. Holder’s
pro rata
share of our net
capital gains as long-term capital gain, regardless of whether we make any distributions of such earnings or gain. In general,
a QEF election is effective only if we make available certain required information. The QEF election is made on a shareholder-by-shareholder
basis and generally may be revoked only with the consent of the IRS. U.S. Holders should consult with their own tax advisors regarding
eligibility, manner and advisability of making a QEF election if we are treated as a PFIC.
A
U.S. Holder of PFIC shares which are traded on qualifying public markets, including the Nasdaq, can elect to mark the shares to
market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable
year between the fair market value of the PFIC shares and the U.S. Holder’s adjusted tax basis in the PFIC shares. Losses
are allowed only to the extent of net mark-to-market gain previously included income by the U.S. Holder under the election for
prior taxable years.
In
light of the complexity of PFIC rules, we cannot assure you that we have not been or are not a PFIC or will avoid becoming a PFIC
in the future. U.S. Holders who hold 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 specified exceptions for U.S. Holders who made a QEF or mark-to-market election. U.S.
Holders are strongly urged to consult their tax advisors about the PFIC rules, including tax return filing requirements and the
eligibility, manner, and consequences to them of making a QEF or mark-to-market election with respect to our Ordinary Shares in
the event we that qualify as a PFIC.
Information
Reporting and Withholding
A
U.S. Holder may be subject to backup withholding (at a rate of 24%) with respect to cash dividends and proceeds from a disposition
of Ordinary Shares. In general, back-up withholding will apply only if a U.S. Holder fails to comply with specified identification
procedures. Backup withholding will not apply with respect to payments made to designated exempt recipients, such as corporations
and tax-exempt organizations. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal
income tax liability of a U.S. Holder, provided that the required information is timely furnished to the IRS.
Under
the Hiring Incentives to Restore Employment Act of 2010 (the “HIRE Act”), some payments made to “foreign financial
institutions” in respect of accounts of U.S. stockholders at such financial institutions may be subject to withholding at
a rate of 30%. U.S. Treasury Regulations provide that such withholding will only apply to distributions paid on or after January
1, 2014, and to other “withholdable payments” (including payments of gross proceeds from a sale or other disposition
of our Ordinary Shares) made on or after January 1, 2017. U.S. Holders should consult their tax advisors regarding the effect,
if any, of the HIRE Act on their ownership and disposition of our Ordinary Shares. See “Non-U.S. Holders of Ordinary Shares.”
Non-U.S.
Holders of Ordinary Shares
Except
as provided below, an individual, corporation, estate or trust that is not a U.S. Holder generally will not be subject to U.S.
federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our Ordinary Shares.
A
non-U.S. Holder may be subject to U.S. federal income or withholding tax on a dividend paid on our Ordinary Shares or the proceeds
from the disposition of our Ordinary Shares if: (1) such item is effectively connected with the conduct by the non-U.S. Holder
of a trade or business in the United States or, in the case of a non-U.S. Holder that is a resident of a country which has an
income tax treaty with the United States, such item is attributable to a permanent establishment or, in the case of gain realized
by an individual non-U.S. Holder, a fixed place of business in the United States; (2) in the case of a disposition of our Ordinary
Shares, the individual non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the sale and
other specified conditions are met; (3) the non-U.S. Holder is subject to U.S. federal income tax pursuant to the provisions of
the U.S. tax law applicable to U.S. expatriates.
In
general, non-U.S. Holders will not be subject to backup withholding with respect to the payment of dividends on our Ordinary Shares
if payment is made through a paying agent, or office of a foreign broker outside the United States. However, if payment is made
in the United States or by a U.S. related person, non-U.S. Holders may be subject to backup withholding, unless the non-U.S. Holder
provides on an applicable Form W-8 (or a substantially similar form) a taxpayer identification number, certifies to its foreign
status, or otherwise establishes an exemption. A U.S. related person for these purposes is a person with one or more current relationships
with the United States.
The
amount of any backup withholding from a payment to a non-U.S. Holder will be allowed as a credit against such holder’s U.S.
federal income tax liability and may entitle such holder to a refund, provided that the required information is timely furnished
to the IRS.
The
HIRE Act may impose withholding taxes on some types of payments made to “foreign financial institutions” and some
other non-U.S. entities. Under the HIRE Act, the failure to comply with additional certification, information reporting and other
specified requirements could result in withholding tax being imposed on payments of dividends and sales proceeds to U.S. Holders
that own Ordinary Shares through foreign accounts or foreign intermediaries and specified non-U.S. Holders. The HIRE Act imposes
a 30% withholding tax on dividends on, and gross proceeds from the sale or other disposition of, Ordinary Shares paid from the
United States to a foreign financial institution or to a foreign nonfinancial entity, unless (1) the foreign financial institution
undertakes specified diligence and reporting obligations or (2) the foreign nonfinancial entity either certifies it does not have
any substantial U.S. owners or furnishes identifying information regarding each substantial U.S. owner. In addition, if the payee
is a foreign financial institution, it generally must enter into an agreement with the U.S. Treasury that requires, among other
things, that it undertake to identify accounts held by specified U.S. persons or U.S.-owned foreign entities, annually report
certain information about such accounts, and withhold 30% on payments to other specified account holders. U.S. Treasury Regulations
provide that such withholding will only apply to distributions paid on or after January 1, 2014, and to other “withholdable
payments” (including payments of gross proceeds from a sale or other disposition of our Ordinary Shares) made on or after
January 1, 2017. You should consult your tax advisor regarding the HIRE Act.
|
F.
|
Dividends
and paying agents
|
Not
applicable.
Not
applicable.
We
are subject to certain of the information reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act.
As a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act prescribing the content of proxy
statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing”
profit recovery provisions contained in Section 16 of the Exchange Act, with respect to their purchase and sale of our shares.
In addition, we are not required to file reports and financial statements with the SEC as frequently or as promptly as U.S. companies
whose securities are registered under the Exchange Act. However, we are required to file with the SEC, within four months after
the end of each fiscal year, an annual report on Form 20-F containing financial statements audited by an independent accounting
firm. We publish unaudited interim financial information after the end of each quarter. We furnish this quarterly financial information
to the SEC under cover of a Form 6-K.
We
are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private
issuers and fulfill the obligations with respect to such requirements by filing reports with the Securities and Exchange Commission,
or SEC. You may read and copy any document we file, including any exhibits, with the SEC without charge at the SEC’s public
reference room at 100 F Street, N.E., Washington, D.C. 20549.Copies of such material may be obtained by mail from the Public Reference
Branch of the SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room. Certain of our SEC filings are also available to the public at the SEC’s website at http://www.sec.gov,
and on our website at http://www.mindcti.com.
You
may request a copy of our SEC filings, at no cost, by e-mailing to investor@mindcti.com
and upon said request copies will be sent by e-mail. A copy of each report submitted in accordance with applicable U.S. law is
available for review at our principal executive offices.
|
I.
|
Subsidiary
Information
|
Not
applicable.
|
Item
11.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market
risk represents the risk of changes in the value of our financial instruments as a result of fluctuations in foreign currency
exchange rates.
The
following table sets forth our consolidated balance sheet exposure with respect to change in foreign currency exchange rates as
of December 31, 2018.
Currency
|
|
Current
Monetary Assets
(Liabilities)-net
|
|
|
|
($ in thousands)
|
|
NIS
|
|
$
|
415
|
|
EURO
|
|
|
419
|
|
Romanian RON
|
|
|
3
|
|
Other non-dollar currencies
|
|
|
121
|
|
|
|
$
|
958
|
|
Our
annual expenses paid in NIS are approximately $5.2 million. Accordingly, we estimate that a hypothetical increase of the value
of the NIS against the dollar by 1% would result in an increase in our operating expenses by approximately $52,000 for the year
ended December 31, 2018.
We
are exposed to changes in prices of various securities in which we invest. As of December 31, 2018, we held short term investments
(mainly highly-rated municipal bonds) of approximately $4.4 million, which are held for trading and presented in the balance sheet
as marketable securities. These debt securities are exposed to potential loss in market value due to a decline in debt securities
prices. The potential loss in fair value resulting from a 10% adverse change in debt securities prices would be approximately
$0.44 million.
As
of December 31, 2018, we did not hold any derivative financial instruments for either trading or non-trading purposes.
|
Item
12.
|
Description
of Securities Other Than Equity Securities
|
None.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of MIND C.T.I. LTD.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of MIND C.T.I. Ltd. and its subsidiaries (“the Company”) as of December 31, 2018 and 2017, and the related
consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the
three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Brightman
Almagor Zohar & Co.
Certified
Public Accountants
Member
of Deloitte Touche Tohmatsu
Limited
Tel
Aviv, Israel
March
21, 2019
We have served as the Company’s auditor
since 2009.
MIND C.T.I. LTD
CONSOLIDATED BALANCE SHEETS
|
|
|
|
December 31,
|
|
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
|
Note
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
A S S E T S
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
9a
|
|
$
|
2,739
|
|
|
$
|
5,014
|
|
Short-term bank deposits
|
|
9a
|
|
|
8,714
|
|
|
|
6,102
|
|
Marketable securities
|
|
2a
|
|
|
4,352
|
|
|
|
5,878
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
|
|
2,130
|
|
|
|
1,239
|
|
Other
|
|
9b
|
|
|
560
|
|
|
|
843
|
|
Prepaid expenses
|
|
|
|
|
209
|
|
|
|
347
|
|
Inventories
|
|
|
|
|
4
|
|
|
|
4
|
|
Total current assets
|
|
|
|
|
18,708
|
|
|
|
19,427
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS AND OTHER NON-CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - available-for-sale
|
|
2b
|
|
|
105
|
|
|
|
544
|
|
Long-term bank deposits
|
|
9a
|
|
|
98
|
|
|
|
101
|
|
Severance pay fund
|
|
5
|
|
|
1,439
|
|
|
|
1,642
|
|
Deferred income taxes
|
|
8e
|
|
|
34
|
|
|
|
32
|
|
PROPERTY
AND EQUIPMENT,
net of accumulated depreciation and amortization
|
|
3
|
|
|
164
|
|
|
|
202
|
|
GOODWILL
|
|
4
|
|
|
5,430
|
|
|
|
5,430
|
|
Total assets
|
|
|
|
$
|
25,978
|
|
|
$
|
27,378
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accruals:
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
|
$
|
147
|
|
|
$
|
113
|
|
Other
|
|
9c
|
|
|
1,501
|
|
|
|
837
|
|
Deferred revenues
|
|
|
|
|
1,788
|
|
|
|
3,556
|
|
Total current liabilities
|
|
|
|
|
3,436
|
|
|
|
4,506
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
|
|
|
43
|
|
|
|
138
|
|
Employees’ rights upon retirement
|
|
5
|
|
|
1,517
|
|
|
|
1,712
|
|
Total liabilities
|
|
|
|
|
4,996
|
|
|
|
6,356
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY:
|
|
7
|
|
|
|
|
|
|
|
|
Share capital - Ordinary shares of NIS 0.01 par value – Authorized: 88,000,000 shares at December 31, 2018 and 2017; Issued: 21,660,010 shares at December 31, 2018 and 2017; Outstanding: 19,439,218 and 19,307,418 shares at December 31, 2018 and 2017, respectively
|
|
|
|
|
54
|
|
|
|
54
|
|
Additional paid-in capital
|
|
|
|
|
26,404
|
|
|
|
26,180
|
|
Accumulated other comprehensive loss
|
|
|
|
|
(877
|
)
|
|
|
(804
|
)
|
Accumulated deficit
|
|
|
|
|
(3,084
|
)
|
|
|
(2,854
|
)
|
Treasury shares - 2,220,792 and 2,352,592 shares at December 31, 2018 and 2017, respectively
|
|
|
|
|
(1,515
|
)
|
|
|
(1,554
|
)
|
Total shareholders’ equity
|
|
|
|
|
20,982
|
|
|
|
21,022
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
|
|
$
|
25,978
|
|
|
$
|
27,378
|
|
The accompanying notes are an integral
part of the financial statements.
MIND C.T.I. LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
2 0 1 6
|
|
|
|
|
|
U.S. dollars in thousands,
|
|
|
|
Note
|
|
except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
10a
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of licenses
|
|
|
|
$
|
2,151
|
|
|
$
|
2,441
|
|
|
$
|
3,924
|
|
Services
|
|
|
|
|
15,984
|
|
|
|
15,621
|
|
|
|
14,128
|
|
|
|
|
|
|
18,135
|
|
|
|
18,062
|
|
|
|
18,052
|
|
COST OF REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales of licenses
|
|
|
|
|
80
|
|
|
|
238
|
|
|
|
349
|
|
Cost of services
|
|
|
|
|
6,066
|
|
|
|
6,795
|
|
|
|
6,482
|
|
|
|
|
|
|
6,146
|
|
|
|
7,033
|
|
|
|
6,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
|
|
11,989
|
|
|
|
11,029
|
|
|
|
11,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESEARCH AND DEVELOPMENT EXPENSES
|
|
10b
|
|
|
3,747
|
|
|
|
3,417
|
|
|
|
3,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING AND MARKETING EXPENSES
|
|
10c
|
|
|
1,268
|
|
|
|
1,250
|
|
|
|
1,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
10d
|
|
|
1,624
|
|
|
|
1,676
|
|
|
|
1,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
|
|
5,350
|
|
|
|
4,686
|
|
|
|
5,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAIN ON DISPOSAL OF A SUBSIDIARY
|
|
|
|
|
-
|
|
|
|
893
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL INCOME - NET
|
|
10e
|
|
|
222
|
|
|
|
630
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE TAXES ON INCOME
|
|
|
|
|
5,572
|
|
|
|
6,209
|
|
|
|
5,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAXES ON INCOME
|
|
8f
|
|
|
438
|
|
|
|
597
|
|
|
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
|
$
|
5,134
|
|
|
$
|
5,612
|
|
|
$
|
4,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
- Basic and diluted
|
|
10f
|
|
$
|
0.27
|
|
|
$
|
0.29
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES USED IN COMPUTATION OF
EARNINGS PER SHARE - IN THOUSANDS
|
|
10f
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
19,344
|
|
|
|
19,292
|
|
|
|
19,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
19,561
|
|
|
|
19,559
|
|
|
|
19,307
|
|
The accompanying notes are an integral
part of the financial statements.
MIND C.T.I. LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
|
|
Years ended December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
2 0 1 6
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
5,134
|
|
|
$
|
5,612
|
|
|
$
|
4,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) from available-for-sale securities
|
|
|
(73
|
)
|
|
|
63
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COMPREHENSIVE INCOME
|
|
$
|
5,061
|
|
|
$
|
5,675
|
|
|
$
|
4,408
|
|
MIND C.T.I. LTD.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
|
|
Share
capital
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Additional
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
paid-in
|
|
|
comprehensive
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
|
|
|
|
of
shares
|
|
|
Amount
|
|
|
capital
|
|
|
loss
|
|
|
deficit
|
|
|
shares
|
|
|
Total
|
|
|
|
In
thousands
|
|
|
U.S.
dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AS OF JANUARY 1, 2016
|
|
|
19,202
|
|
|
$
|
54
|
|
|
$
|
25,862
|
|
|
$
|
(1,072
|
)
|
|
$
|
(1,304
|
)
|
|
$
|
(1,692
|
)
|
|
$
|
21,848
|
|
CHANGES
DURING 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
205
|
|
|
|
4,203
|
|
|
|
-
|
|
|
|
4,408
|
|
Dividend paid (Note 7c)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,192
|
)
|
|
|
-
|
|
|
|
(5,192
|
)
|
Employees share based
compensation expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
136
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
136
|
|
Exercise
of options issued to employees from treasury shares
|
|
|
59
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AS OF DECEMBER 31, 2016
|
|
|
19,261
|
|
|
$
|
54
|
|
|
$
|
25,998
|
|
|
$
|
(867
|
)
|
|
$
|
(2,293
|
)
|
|
$
|
(1,607
|
)
|
|
$
|
21,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGES
DURING 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63
|
|
|
|
5,612
|
|
|
|
-
|
|
|
|
5,675
|
|
Dividend paid (Note 7c)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,173
|
)
|
|
|
-
|
|
|
|
(6,173
|
)
|
Employees share based
compensation expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
182
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
182
|
|
Exercise
of options issued to employees from treasury shares
|
|
|
46
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AS OF DECEMBER 31, 2017
|
|
|
19,307
|
|
|
$
|
54
|
|
|
$
|
26,180
|
|
|
$
|
(804
|
)
|
|
$
|
(2,854
|
)
|
|
$
|
(1,554
|
)
|
|
$
|
21,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGES
DURING 2018:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
(loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(73
|
)
|
|
|
5,134
|
|
|
|
-
|
|
|
|
5,061
|
|
Dividend paid (Note 7c)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,799
|
)
|
|
|
-
|
|
|
|
(5,799
|
)
|
Employees share based
compensation expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
224
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
224
|
|
Exercise of options issued
to employees from treasury shares
|
|
|
132
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39
|
|
|
|
39
|
|
Cumulative
effect of adoption of new accounting pronouncements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
435
|
|
|
|
|
|
|
|
435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AS OF DECEMBER 31, 2018
|
|
|
19,439
|
|
|
$
|
54
|
|
|
$
|
26,404
|
|
|
$
|
(877
|
)
|
|
$
|
(3,084
|
)
|
|
$
|
(1,515
|
)
|
|
$
|
20,982
|
|
The accompanying notes are an integral
part of the financial statements.
MIND C.T.I. LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years ended December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
2 0 1 6
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,134
|
|
|
$
|
5,612
|
|
|
$
|
4,203
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
84
|
|
|
|
104
|
|
|
|
161
|
|
Deferred income taxes, net
|
|
|
(2
|
)
|
|
|
63
|
|
|
|
146
|
|
Accrued severance pay
|
|
|
113
|
|
|
|
(145
|
)
|
|
|
(123
|
)
|
Foreign currency exchange rate loss from marketable securities
|
|
|
-
|
|
|
|
-
|
|
|
|
128
|
|
Unrealized loss from marketable securities, net
|
|
|
78
|
|
|
|
30
|
|
|
|
23
|
|
Employees share-based compensation
|
|
|
224
|
|
|
|
182
|
|
|
|
136
|
|
Gain on disposal of subsidiary
|
|
|
-
|
|
|
|
(893
|
)
|
|
|
-
|
|
Realized loss (gain) on sale of marketable securities
|
|
|
(32
|
)
|
|
|
25
|
|
|
|
(44
|
)
|
Changes in operating asset and liability items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
(750
|
)
|
|
|
(141
|
)
|
|
|
1,145
|
|
Other
|
|
|
350
|
|
|
|
(680
|
)
|
|
|
37
|
|
Decrease (increase) in prepaid expenses and deferred cost of revenues
|
|
|
138
|
|
|
|
(28
|
)
|
|
|
(9
|
)
|
Decrease in inventories
|
|
|
-
|
|
|
|
1
|
|
|
|
4
|
|
Increase (decrease) in accounts payable and accruals:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
34
|
|
|
|
62
|
|
|
|
(186
|
)
|
Other
|
|
|
664
|
|
|
|
(396
|
)
|
|
|
(1,031
|
)
|
Increase (decrease) in deferred revenues
|
|
|
(1,569
|
)
|
|
|
(1,050
|
)
|
|
|
654
|
|
Net cash provided by operating activities
|
|
|
4,466
|
|
|
|
2,746
|
|
|
|
5,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales (investment in) of marketable securities, net
|
|
|
1,846
|
|
|
|
(798
|
)
|
|
|
1,074
|
|
Purchase of property and equipment
|
|
|
(46
|
)
|
|
|
(71
|
)
|
|
|
(68
|
)
|
Severance pay funds
|
|
|
(105
|
)
|
|
|
93
|
|
|
|
82
|
|
Investment in short-term bank deposits
|
|
|
(2,612
|
)
|
|
|
(1,170
|
)
|
|
|
(3,535
|
)
|
Proceeds from sale of subsidiary
|
|
|
-
|
|
|
|
1,169
|
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(917
|
)
|
|
|
(777
|
)
|
|
|
(2,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options exercised and paid
|
|
|
39
|
|
|
|
53
|
|
|
|
85
|
|
Dividend paid
|
|
|
(5,799
|
)
|
|
|
(6,173
|
)
|
|
|
(5,192
|
)
|
Net cash used in financing activities
|
|
|
(5,760
|
)
|
|
|
(6,120
|
)
|
|
|
(5,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
(2,211
|
)
|
|
|
(4,151
|
)
|
|
|
(2,310
|
)
|
BALANCE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR
|
|
|
5,014
|
|
|
|
9,165
|
|
|
|
11,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF YEAR
|
|
$
|
2,803
|
*
|
|
$
|
5,014
|
|
|
$
|
9,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
FLOW AND NON-CASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid (refunded)
|
|
$
|
(19
|
)
|
|
$
|
935
|
|
|
$
|
841
|
|
* Total cash and cash equivalents of $2,739
and restricted cash of $64 that included in other receivables.
The accompanying notes are an integral
part of the financial statements.
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
MIND C.T.I.
Ltd. (the “Company”) is an Israeli company, which together with its subsidiaries operate in one business segment, providing
integrated products and services. The Company designs, develops, markets, supports, implements and operates billing and customer
care systems, including consulting and managed services, primarily to wireless, wireline, next-generation service providers throughout
the world. The Company also provides a call management system used by enterprises for call accounting, traffic analysis, and fraud
detection.
The Company
has wholly-owned subsidiaries in the United States (“Mind Software Inc.” or “Sentori”), Romania (“Mind
Software Srl”), U.K. (“Mind Software Limited” or “Omni”) and Germany (“Mind CTI GmbH”).
The consolidated
financial statements were prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”).
|
3)
|
Use of estimates in preparation of financial statements
|
The preparation
of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting years. Actual results could differ from those estimates.
The most significant estimates with regard to the Company’s consolidated financial statements relate to revenue recognition
of products and service sales using the percentage of completion method and the impairment of goodwill.
The currency
of the primary economic environment in which the operations of the Company and its subsidiaries are conducted is the U.S. dollar
(“dollar” or “$”). Most of the Company’s revenues are derived from sales outside of Israel, which
are denominated primarily in dollars. In addition, the majority of the Company’s cash reserves and financing activities are
denominated in dollars. Thus, the functional currency of the Company and its subsidiaries is the dollar.
Transactions and balances originally
denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are re-measured into dollars
using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and
other items (detailed below) reflected in the statements of operations, the following exchange rates are used: (i) for transactions:
exchange rates at transaction dates or average rates; and (ii) for other items (derived from non-monetary balance sheet items,
such as depreciation and amortization, etc.) - historical exchange rates. The resulting currency translation gains or losses are
carried to financial income or expenses, as appropriate.
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
|
b.
|
Principles of consolidation:
|
|
1)
|
The consolidated financial statements include the accounts
of the Company and all of its wholly-owned subsidiaries.
|
|
2)
|
Inter-company balances and transactions have been eliminated
in consolidation. Profits from inter-company sales, not yet realized outside the Company and its subsidiaries, have also been
eliminated.
|
|
c.
|
Comprehensive income (loss):
|
The purpose
of reporting comprehensive income (loss) is to report a measure of all changes in equity of an entity that result from recognized
transactions and other economic events of the period resulting from transactions from non-owner sources.
The chief
operating decision maker for the Company is the President and Chief Executive Officer. The President and Chief Executive Officer
reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Accordingly, management has determined that the Company operates in one reportable segment.
The Company and its
subsidiaries consider all highly liquid investments, which include short-term bank deposits (up to three months from original
date of deposit) that are not restricted as to withdrawal or use, to be cash equivalents.
|
f.
|
Fair Value of financial instruments:
|
The Company
records its financial assets and liabilities at fair value. The accounting guidance for fair value provides a framework for measuring
fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction
between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes
the inputs used in the valuation methodologies in measuring fair value:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other
than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company recognizes transfers
among Level 1, Level 2 and Level 3 classifications as of the actual date of the events or change in circumstances that caused the
transfers.
The Company’s
financial instruments, including cash equivalents, short-term and long-term bank deposits, accounts receivable, accounts payable
and accrued liabilities have carrying amounts which approximate fair value due to the short-term maturity of these instruments.
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
|
g.
|
Short-term bank deposits:
|
Bank deposits
with maturities of more than three months but less than one year are included in short-term bank deposits. These deposits are presented
at cost and earn interest at market rates. The deposits and accumulated interest approximate fair value.
|
h.
|
Marketable securities:
|
Marketable
securities are classified as “financial assets held at fair value through profit or loss” when held for trading or
are designated upon initial recognition as financial assets at fair value through profit or loss.
Financial
asset at fair value through profit or loss is shown at fair value. Any gain or loss arising from changes in fair value, including
those originating from changes in exchange rates is recognized in profit or loss in the period in which the change occurred. Net
gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset.
Available-for-sale investments
are classified within short-term investments, or long-term investments based on the remaining maturity of the investment, and are
reported at fair value, with unrealized gains and losses, net of tax, presented as a separate component of shareholders’
equity within accumulated other comprehensive income. All realized gains and losses and unrealized losses resulting from declines
in fair value that are other-than-temporary are recorded in financial expenses, net in the period of occurrence. The Company uses
the specific identification method to determine the realized gains and losses on investments. For all investments in marketable
securities, the Company assesses whether the impairment is other-than-temporary. If the fair value of a security is less than its
amortized cost basis, an impairment is considered other-than-temporary if (i) the Company has the intent to sell the security
or it is more likely than not that the Company will be required to sell the security before recovery of its entire amortized cost
basis, or (ii) the Company does not expect to recover the entire amortized cost of the security. If an impairment is considered
other-than-temporary based on condition (i), the entire difference between the amortized cost and the fair value of the security
is recognized in earnings. If an impairment is considered other-than-temporary based on condition (ii), the amount representing
credit losses, defined as the difference between the present value of the cash flows expected to be collected and the amortized
cost basis of the security, will be recognized in earnings, and the amount relating to all other factors will be recognized in
other comprehensive income or loss. The Company evaluates both qualitative and quantitative factors such as duration and severity
of the unrealized losses, credit ratings, default and loss rates of the underlying collateral, structure and credit enhancements
to determine if a credit loss may exist. See also Note 2.
Inventories are valued at the
lower of cost or market value. Cost is determined by the “first-in, first-out” method. Most of the inventories consist
of acquired hardware.
|
j.
|
Long-term bank deposits:
|
Long-term bank deposits are deposits
with maturities of more than one year. These deposits are presented at cost and earn interest at market rates. The deposits and
accumulated interest approximate fair value.
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
|
k.
|
Property and equipment:
|
|
1)
|
These assets are stated at cost less accumulated depreciation.
|
|
2)
|
The assets are depreciated by the straight-line method,
on basis of their estimated useful life.
|
Annual rates of depreciation are
as follows:
|
|
%
|
Computers and electronic equipment
|
|
15-33
|
|
|
(mainly 33)
|
Office furniture and equipment
|
|
6-7
|
Vehicles
|
|
15
|
Leasehold improvements are amortized
by the straight-line method over the term of the lease, which is shorter than the estimated useful life of the improvements.
Goodwill
reflects the excess of the purchase price of subsidiaries acquired over the fair value of net assets acquired. Under Accounting
Standards Codification (“ASC”) 350, “Intangibles – Goodwill and Others”, goodwill is not amortized
but rather tested for impairment at least annually. The Company has a single reporting unit and consequently evaluates goodwill
for impairment based on an evaluation of the fair value of the Company as a whole. The Company performs annual testing for impairment
of the goodwill during the third quarter of each year, see also Note 4.
The Company
accounts for income taxes, in accordance with the provisions of ASC 740 “Income Taxes”, under the liability method
of accounting. Under the liability method, deferred taxes are determined based on the differences between the financial statement
and tax basis of assets and liabilities at enacted tax rates in effect in the year in which the differences are expected to reverse.
Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts expected to be realized.
Deferred
tax liabilities and assets are classified as non-current.
For uncertain
tax positions, the Company follows a two-step approach to recognizing and measuring uncertain tax positions. The first step is
to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit. The second step is to measure the tax benefit as the largest amount that
is more than 50% likely of being realized upon ultimate resolution. The Company’s policy is to include interest and penalties
related to unrecognized tax benefits within income tax expense.
The Company’s
revenues consist of revenues generated from software licensing, sales of professional services, including integration and implementation,
sales of third-party hardware and software, maintenance services, managed services and training.
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company
adopted ASC 606
,
“Revenue from Contracts with Customers” (“ASC 606”), on January 1, 2018 using the
modified retrospective approach for all contracts not completed as of the date of adoption. 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 in accordance
with ASC 605, “Revenue Recognition” (“ASC 605”). The adoption of ASC 606 represents a change
in accounting principle that will more closely align revenue recognition with the delivery of the Company’s software licenses,
maintenance and services. ASC 606 requires an entity to evaluate revenue recognition by identifying a contract with a customer,
identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to
the performance obligations in the contract, and recognizing revenue when (or as) the entity satisfies a performance obligation.
The Company
recorded an increase to accumulated deficit of $435 thousand, on January 1, 2018 due to the cumulative effect of the ASC 606
adoption.
Under ASC
606, revenue is measured as the amount of consideration the Company expects to be entitled to, in exchange for transferring products
or providing services to its customers and is recognized when performance obligations under the terms of contracts with the Company’s
customers are satisfied. ASC 606 prescribes a five-step model for recognizing revenue from contracts with customers: (i) identify
contract(s) with the customer; (ii) identify the separate performance obligations in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price to the separate performance obligations in the contract; and (v) recognize revenue when
(or as) each performance obligation is satisfied.
Revenue from
perpetual licenses is classified as software license revenue. Software license revenue is recognized up front upon delivery of
the licensed product and the utility that enables the customer to access authorization keys, provided that a signed contract has
been received.
Revenue from
training, support and other services is recognized as the services are performed. For contracts in which the service consists of
a single performance obligation, such as providing a training class to a customer, the Company recognizes revenue upon completion
of the performance obligation. For service contracts that are longer in duration and often include multiple performance obligations
(for example, both training and consulting), the Company measures the progress toward completion of the obligations and recognizes
revenue accordingly. In measuring progress towards the completion of performance obligations, the Company typically utilizes output-based
estimates for services with contractual billing arrangements that are not based on time and materials, and estimates output based
on the total tasks completed as compared to the total tasks required for each work contract. Input-based estimates are utilized
for services that involve general consultations with contractual billing arrangements based on time and materials, utilizing direct
labor as the input measure.
Contracts
may include a combination of the Company’s various products and services offerings, software, consulting services, and maintenance.
For contracts with multiple performance obligations, the Company accounts for individual performance obligations separately if
they are distinct. Significant judgment may be required to identify distinct obligations within a contract.
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
The total
transaction price is allocated to the individual performance obligations based on the ratio of the relative established standalone
selling prices (SSP), or the Company’s best estimate of SSP, of each distinct product or service in the contract. Revenue
is then recognized for each distinct performance obligation.
Revenues
from managed services include a monthly fee for services and a right to access the Company’s software and are recorded as
service revenues. The Company does not provide the customer with the contractual right to take possession of the software at any
time during the period under these contracts. The monthly fee is based mainly on the number of subscribers or customer’s
business volume and the contracts include a minimum monthly charge. These revenues are recognized on a monthly basis when those
services are satisfied.
|
o.
|
Research and development expenses:
|
Pursuant to ASC 985-20, “Software
- Costs of Software to be Sold, Leased, or Marketed”, development costs related to software products are expensed as incurred
until the “technological feasibility” of the product has been established. Because of the relatively short time period
between “technological feasibility” and product release, and the insignificant amount of costs incurred during such
period, no software development costs have been capitalized.
|
p.
|
Allowance for doubtful accounts:
|
The allowance is determined
for specific debts doubtful of collection.
|
q.
|
Share-based compensation:
|
The Company accounts for share-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 to employees. 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 statements of operations.
The Company recognizes compensation
cost for an award with only service conditions that has a graded vesting schedule using the straight-line method over the requisite
service period for the entire award, net of estimated forfeitures.
|
r.
|
Earnings per share (“EPS”):
|
Basic EPS is computed by dividing
net income by the weighted average number of shares outstanding during the year, net of treasury shares.
Diluted EPS reflects the increase
in the weighted average number of shares outstanding that would result from the assumed exercise of employee stock options, calculated
using the treasury-stock-method.
Treasury shares are presented
as a reduction in shareholders’ equity, at their cost to the Company, under “Treasury shares”.
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
|
t.
|
Concentration of credit risks:
|
Most of the Company’s
and its subsidiaries’ cash and cash equivalents as of December 31, 2018 and 2017 were deposited with Israeli, European
and U.S. banks. The Company is not aware of any specific credit risks in respect of these banks.
The Company’s revenues
have been generated from a large number of customers. Consequently, the exposure to credit risks relating to trade
receivables is limited. The Company performs ongoing credit evaluations of its customers for the purpose of determining the
appropriate allowance for doubtful accounts.
|
u.
|
Recently Issued accounting pronouncements:
|
In February
2016, the Financial Accounting Standards Board (the “FASB”) issued ASC Update (“ASU”) No. 2016-02, “Leases
(Topic 842)”. The purpose of ASU 2016-02 is to increase the transparency and comparability among organizations by recognizing
lease assets and liabilities on the balance sheet, including those previously classified as operating leases under current U.S.
GAAP, and disclosing key information about leasing arrangements. Topic 842, as amended, is effective for public entities for annual
periods beginning after December 15, 2018, including interim periods within those annual periods.
The Company
currently plans to adopt the standard using the transition method provided by ASU No. 2018-11, Leases (Topic 842): Targeted Improvements.
Under this method, The Company will initially apply the new leasing rules on January 1, 2019, rather than at the earliest comparative
period presented in the financial statements. Prior periods presented will be in accordance with the existing lease guidance.
Upon
transition, the Company plans to apply the package of practical expedients permitted under Topic 842 transition guidance to our
entire lease portfolio at January 1, 2019. As a result, the Company is not required to reassess (i) whether any expired or existing
contracts are or contain leases, (ii) the classification of any expired or existing leases, and (iii) initial direct costs for
any existing leases.
As a result
of adopting Topic 842, the Company expects to recognize additional right-of-use assets and corresponding liabilities on its consolidated
balance sheets of approximately $794 thousand, with no material impact to its consolidated statements of operations or consolidated
statements of cash flows.
In August
2018, the FASB issued new guidance related to the disclosure requirements for fair value measurements. This guidance modifies the
disclosure requirements for fair value measurements by removing, modifying, and/or adding certain disclosures and is effective
for the first interim period within annual fiscal years beginning after December 15, 2019 (The Company’s fiscal 2020). Early
adoption related to modifying existing disclosures is permitted while delaying adoption of the additional disclosures until the
effective date. This guidance will not have a material impact on the Company’s consolidated financial statements.
In August
2018, the FASB issued new guidance related to the disclosure requirements for defined benefit pension or other postretirement plans.
This guidance modifies the disclosure requirements for defined benefit plans by removing, modifying, and/or adding certain disclosures
and is effective for fiscal years beginning after December 15, 2020 (fiscal 2021 for the Company) with early adoption permitted.
These amendments must be applied on a retrospective basis for all periods presented. The Company is currently evaluating how this
guidance will impact the disclosures related to the Company’s defined benefit plans. This guidance will not have a material
impact on the Company’s consolidated financial statements.
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
In November
2018, the FASB issued ASU No. 2018-18, “Collaborative Arrangements”. ASU 2018-18 clarifies the interaction between
collaborative arrangements and the new revenue standards. ASU 2018-18 will be effective for the Company on October 1, 2020, and
early adoption is permitted. The Company is currently evaluating the impact of adoption of ASU 2018-18 on its consolidated financial
statements.
NOTE 2 - MARKETABLE SECURITIES
|
|
December 31,
|
|
Maturity year
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
Short-term (a):
|
|
|
|
|
|
|
Municipal bond
|
|
$
|
3,325
|
|
|
$
|
4,806
|
|
Corporate bond
|
|
|
1,027
|
|
|
|
1,072
|
|
|
|
$
|
4,352
|
|
|
$
|
5,878
|
|
|
|
|
|
|
|
|
|
|
Long-term security bond (b) Perpetual
|
|
$
|
105
|
|
|
$
|
544
|
|
|
(a)
|
The Company invests in highly-rated marketable securities,
and its policy limits the amount of credit exposure to any one issuer. The Company’s investment policy requires investments
to be investment grade, rated single - A or better, with the objective of minimizing the potential risk of principal loss. Fair
values were determined for each individual security in the investment portfolio based on quoted prices in active markets.
|
|
(b)
|
As of December 31, 2018, the Company held a long-term
security bond which is classified as available-for-sale security and presented at fair value. The fair value of the available-for-sale
security based on quoted prices in active markets for identical instruments (Level 1 as defined under ASC 820, “Fair Value
Measurement”).
|
NOTE 3 - PROPERTY AND EQUIPMENT
|
a.
|
Composition of assets, grouped by major classification,
is as follows:
|
|
|
December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
Computers and electronic equipment
|
|
$
|
1,892
|
|
|
$
|
1,848
|
|
Office furniture and equipment
|
|
|
155
|
|
|
|
155
|
|
Vehicles
|
|
|
122
|
|
|
|
146
|
|
Leasehold improvements
|
|
|
22
|
|
|
|
18
|
|
|
|
|
2,191
|
|
|
|
2,167
|
|
Less - accumulated depreciation and amortization
|
|
|
(2,027
|
)
|
|
|
(1,965
|
)
|
|
|
$
|
164
|
|
|
$
|
202
|
|
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY AND EQUIPMENT (continued)
|
b.
|
Depreciation and amortization expenses totaled $84
thousand, $104 thousand and $161 thousand in the years ended December 31, 2018, 2017 and 2016, respectively.
|
|
c.
|
Property and equipment - by geographical location:
|
|
|
December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
76
|
|
|
$
|
85
|
|
Romania
|
|
|
88
|
|
|
|
116
|
|
United States
|
|
|
-
|
|
|
|
1
|
|
|
|
$
|
164
|
|
|
$
|
202
|
|
NOTE 4 - GOODWILL
Goodwill represents the excess
of the aggregate purchase price paid over the fair value of the net assets acquired in our business combinations. Goodwill is not
amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying
value may not be recoverable.
Events or changes in circumstances
that could trigger an impairment review include a significant adverse change in business climate, an adverse action or assessment
by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired
assets or the strategy for our overall business, significant negative industry or economic trends, or significant underperformance
relative to expected historical or projected future results of operations.
The Company has the option to
first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it
is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If, after
assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value
of a reporting unit is less than its carrying amount, additional impairment testing is not required. However, if the Company concludes
otherwise, the Company is required to perform the first step of a two-step impairment test.
Alternatively, the Company may
elect to proceed directly to the first step of the two-step impairment test and bypass the qualitative assessment. The first step
of the impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill.
If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary.
If, however, the fair value
of the reporting unit is less than book value, the carrying amount of the goodwill is compared to its implied fair value. The estimate
of implied fair value of goodwill may require valuations of certain internally generated and unrecognized intangible assets. If
the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount
equal to the excess.
The Company performed the annual
impairment tests during the third quarter of 2018, 2017 and 2016 and did not identify any indication for impairment losses.
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 - EMPLOYEES’ RIGHTS UPON RETIREMENT
|
a.
|
Israeli
law generally requires payment of severance pay upon dismissal of an employee or upon
termination of employment in certain other circumstances. The severance pay liability
of the Company to its Israeli employees, based upon the number of years of service and
the latest monthly salary, is partly covered by regular deposits with severance pay funds
and pension funds, and by purchase of insurance policies; under labor agreements, the
deposits with recognized pension funds and the insurance policies, as above, are in the
employees’ names and are, subject to certain limitations, the property of the employees.
|
The
amounts accrued and the portions funded, with severance pay funds and by the insurance policies are reflected in the financial
statements as follows:
|
|
December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
Accrued severance pay
|
|
$
|
1,517
|
|
|
$
|
1,712
|
|
Less - amounts funded (presented in “investment and other non-current assets”)
|
|
|
(1,439
|
)
|
|
|
(1,642
|
)
|
Unfunded balance
|
|
$
|
78
|
|
|
$
|
70
|
|
The
amounts of accrued severance pay as above cover the Company’s severance pay liability in accordance with labor agreements
in force and based on salary components which, in management’s opinion, create entitlement to severance pay. The Company
records the obligation as if it was payable at each balance sheet date on an undiscounted basis.
Withdrawals
from the funds are generally made for the purpose of paying severance pay.
|
b.
|
The
severance pay expenses were $134 thousand, $113 thousand and $169 thousand in the years
ended December 31, 2018, 2017 and 2016, respectively.
|
NOTE
6 - COMMITMENTS
The
Company and its subsidiaries entered into premises lease agreements that will expire between 2019 and 2025.
Future
minimum lease commitments of the Company and its subsidiaries under the above leases, at exchange rates in effect on December 31,
2018, are as follows:
|
|
U.S. dollars in thousands
|
|
Years ending December 31:
|
|
|
|
2019
|
|
$
|
492
|
|
2020
|
|
|
199
|
|
2021
|
|
|
48
|
|
2022
|
|
|
48
|
|
2023-2025
|
|
|
104
|
|
|
|
$
|
891
|
|
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 - SHAREHOLDERS’ EQUITY
The
Company’s ordinary shares are traded in the United States on the NASDAQ National Market, under the symbol MNDO.
During
the period between September 2008 and December 2009, the Company has purchased an aggregate amount of 3,165,092 ordinary shares
for a total consideration of approximately $2.8 million. Currently, the Company does not have an active buyback plan. As of December
31, 2018, the remaining treasury shares are 2,220,792 which amounted to $1.5 million after exercise of options issued to employees
from treasury shares in the amount of $39 thousand, $53 thousand and $85 thousand in the years ended December 31, 2018, 2017 and
2016 respectively.
Dividends
paid per share in the years ended December 31, 2018, 2017 and 2016 were $0.30, $0.32 and $0.27, respectively.
The
Company paid dividends to its shareholders in the amounts of $5.8 million, $6.2 million and $5.2 million during the years ended
December 31, 2018, 2017 and 2016, respectively.
In
2011, the Board of Directors and the 2011 Annual General Meeting of the Company’s shareholders approved a share incentive
plan (the “2011 Share Incentive Plan”). Under the 2011 Share Incentive Plan, options for up to 1,800,000 ordinary
shares of NIS 0.01 par value are to be granted to employees of the Company and its subsidiaries, directors, consultants or
contractors of the Company.
Each
option can be exercised to purchase one ordinary share. Immediately upon issuance, the ordinary shares issuable upon the exercise
of the options will confer on holders the same rights as the other ordinary shares.
The
Board of Directors determines the exercise price and the vesting period of the options granted. The outstanding options granted
under the abovementioned plan vest over 2-4 years. Options not exercised will expire 5 years after the day of grant.
The
compensation costs charged against income for all of the Company’s equity incentive plans during the years ended December 31,
2018, 2017 and 2016 were approximately $224 thousand, $182 thousand and $137 thousand, respectively without any reduction in income
taxes.
Under
Section 102 of the Israeli Income Tax Ordinance, pursuant to an election made by the Company thereunder, Israeli employees
(except for employees who are deemed “Controlling Members” under the Israeli Income Tax Ordinance) are subject to
a lower tax rate on capital gains accruing to them in respect of Section 102 awards. However, the Company is not allowed
to claim as an expense for tax purposes the amounts credited to such employees.
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 - SHAREHOLDERS’ EQUITY (continued)
|
1)
|
The
following is a summary of the status of the 2011 Share Incentive Plan as of December 31,
2018, 2017 and 2016, and changes during the years ended on those dates:
|
|
|
Years ended December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
2 0 1 6
|
|
|
|
Number
|
|
|
Weighted average exercise price
|
|
|
Number
|
|
|
Weighted average exercise price
|
|
|
Number
|
|
|
Weighted average exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at beginning of year
|
|
|
813,100
|
|
|
$
|
1.490
|
|
|
|
875,500
|
|
|
$
|
1.600
|
|
|
|
710,300
|
|
|
$
|
2.510
|
|
Changes during year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted (a)
|
|
|
118,000
|
|
|
$
|
0.003
|
|
|
|
90,000
|
|
|
$
|
0.650
|
|
|
|
344,000
|
|
|
$
|
0.003
|
|
Exercised
|
|
|
(131,800
|
)
|
|
$
|
0.003
|
|
|
|
(46,000
|
)
|
|
$
|
1.150
|
|
|
|
(59,000
|
)
|
|
$
|
1.450
|
|
Forfeited
|
|
|
(74,100
|
)
|
|
$
|
0.500
|
|
|
|
(78,400
|
)
|
|
$
|
1.410
|
|
|
|
(117,800
|
)
|
|
$
|
2.490
|
|
Expired
|
|
|
(51,000
|
)
|
|
$
|
2.950
|
|
|
|
(28,000
|
)
|
|
$
|
2.950
|
|
|
|
(2,000
|
)
|
|
$
|
2.160
|
|
Options outstanding at end of year
|
|
|
674,200
|
|
|
$
|
1.46
|
|
|
|
813,100
|
|
|
$
|
1.490
|
|
|
|
875,500
|
|
|
$
|
1.600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
350,000
|
|
|
$
|
2.630
|
|
|
|
303,000
|
|
|
$
|
2.900
|
|
|
|
246,500
|
|
|
$
|
2.870
|
|
Vested and expected to vest at end of year
|
|
|
637,361
|
|
|
$
|
1.540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value of options granted during the year (b)
|
|
|
|
|
|
$
|
1.46
|
|
|
|
|
|
|
$
|
1.30
|
|
|
|
|
|
|
$
|
1.46
|
|
|
(a)
|
In
the year ended December 31, 2018, the options were granted with an exercise price equal
to NIS 0.01.
|
In
the year ended December 31, 2017, the options were granted with an exercise price equal to the average closing price per share
of the Company’s ordinary shares on the stock market during the 30-day trading period immediately preceding the date of
grant of such option, or with an exercise price equal to par value of NIS 0.01.
In
the year ended December 31, 2016, the options were granted with an exercise price equal to par value of NIS 0.01.
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 - SHAREHOLDERS’ EQUITY (continued)
|
(b)
|
The
fair value of each stock option granted is computed on the date of grant according to
the Black-Scholes option-pricing model with the following assumptions:
|
|
|
Years ended December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
2 0 1 6
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility*
|
|
|
28
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average risk-free interest rate
|
|
|
2.6
|
%
|
|
|
1.9
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected average term - in years
|
|
|
3.88
|
|
|
|
3.88
|
|
|
|
3.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Volatility
is based on historical volatility of the Company’s share price for periods matching the
expected term of the option until exercise.
|
As
of December 31, 2018, there were approximately $422 thousand of total unrecognized compensation costs, net of expected forfeitures,
related to nonvested share-based compensation awards granted under the stock option plan. The costs are expected to be recognized
over a weighted average period of 1.44 years.
|
2)
|
The
following table summarizes information about options outstanding and exercisable as of
December 31, 2018:
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of exercise prices
|
|
|
Number outstanding at December 31,
2 0 1 8
|
|
|
Weighted average remaining contractual
life
|
|
|
Weighted average exercise
price
|
|
|
Number exercisable at December 31,
2 0 1 8
|
|
|
Weighted average remaining contractual life
|
|
|
Weighted average exercise
price
|
|
|
|
|
|
|
|
Years
|
|
|
|
|
|
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.003
|
|
|
|
334,200
|
|
|
|
3.46
|
|
|
$
|
0.003
|
|
|
|
37,000
|
|
|
|
2.84
|
|
|
$
|
0.003
|
|
|
$ 2.425 – 2.947
|
|
|
|
340,000
|
|
|
|
0.92
|
|
|
$
|
2.90
|
|
|
|
313,000
|
|
|
|
0.86
|
|
|
$
|
2.94
|
|
The
total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 were approximately $266 thousand,
$70 thousand and $51 thousand, respectively. As of December 31, 2018, the aggregate intrinsic value of the outstanding options
is $738 thousand, and the aggregate intrinsic value of the exercisable options is $84 thousand.
NOTE
8 - TAXES ON INCOME
|
a.
|
Tax
benefits under the Law for the Encouragement of Industry (Taxes), 1969:
|
The
Company is an “industrial company”, as defined by this law. As such, the Company is entitled to claim depreciation
at increased rates for equipment used in industrial activity, as stipulated by regulations published under the inflationary adjustments
law.
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - TAXES ON INCOME (continued)
|
b.
|
Tax
benefits under the Law for the Encouragement of Capital Investments, 1959 (the “Investment
Law”):
|
|
1)
|
On
February 18, 2018, the Company received a status of “Technologic Preferred Enterprise”
as defined under the Encouragement of Capital Investment Law (the “Approval”).
In accordance with the Approval, starting in 2017 and until 2021, revenues originating
from granting the right of use as defined in the Approval, will be defined as Technologic
Preferred Revenue, as defined under the Law, and will be subject to a tax rate of 7.5%.
|
Prior
to 2017 the Company received a status of “Preferred Enterprise” as described in (2) below.
|
2)
|
Tax
benefits under the 2011 Amendment
|
On
January 6, 2011 an amendment (Amendment No. 68) to the Investment Law (the “2011 Amendment”) was published. The 2011
Amendment significantly revised the tax incentive regime in Israel, commencing on January 1, 2011.
The 2011 Amendment introduced
a new status of “Preferred Enterprise”. Similarly to the “Approved Enterprise” status, a Preferred Company
is an industrial company meeting certain conditions (including a minimum threshold of 25% export). However, under the 2011 Amendment
the requirement for a minimum investment in productive assets in order to be eligible for the benefits granted under the Investments
Law as with respect to “approved enterprise” status was cancelled. Dividends distributed from income which is attributed
to a “Preferred Enterprise” will be subject to withholding tax at source at the following rates: (i) Israeli resident
corporations - 0%, (ii) Israeli resident individuals – 15% (iii) non-Israeli residents - 15%, subject to a reduced tax rate
under the provisions of an applicable double tax treaty.
On
July 30, 2013 the Israeli Parliament passed a Law for the change in the order of National Priorities (legislative amendments to
achieve budget objectives for 2013 and 2014), 2013. As part of the legislation, the Investment Law was amended so that the
tax rate applicable to a “Preferred Enterprise” in this period in Development Area A will be 9% and the tax rate in
other parts of the country will be 16%. Similarly, it was determined that the tax rate on dividends distributed to individuals
and foreign residents out of preferred income will be increased to 20% as from January 1, 2014 as opposed to the current rate
at that time of 15%.
The following table summarizes
the reduced flat tax rate with respect to the income attributed to the Preferred Enterprise:
Tax Year
|
|
Development
Region “A”
|
|
|
Other Areas
within Israel
|
|
|
|
|
|
|
|
|
2011-2012
|
|
|
10
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
7
|
%
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
2014 and thereafter
|
|
|
9
|
%
|
|
|
16
|
%
|
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - TAXES ON INCOME (continued)
The
Company is located in Development Region “A” and during 2011 had chosen the status of the 2011 Amendment.
If
only a portion of the Company’s capital investments is approved, its effective tax rate will be the result of a weighted combination
of the applicable rates. The tax benefits from any certificate of approval relate only to taxable income attributable to the specific
“Preferred Enterprise”. Income derived from activity that is not integral to the activity of the “Preferred
Enterprise” will not enjoy tax benefits. The Company’s entitlement to the above benefits is subject to fulfillment of certain
conditions under the Investment Law and related regulations.
During
2013, the Company applied for a tax ruling with respect to 2012 and future years. During 2014, the Company obtained the ruling,
which provides that the portion of the income attributed to the “Preferred Enterprise” (and thereby subject to lower
tax rates) will be calculated each year based on, among other things, the ratio between the number of the employees in Israel
and abroad. According to the ruling, the tax rate on income in Israel in the year ended December 31, 2016 was approximately 22%.
|
c.
|
Other
applicable tax rates:
|
|
1)
|
Income
from other sources in Israel
|
In
January 2016, a legislation to amend the corporate income tax law was published. The legislation determined a decrease of the
corporate income tax law as of January 1, 2016 to 25% (1.5% decrease).
In
December 2016, a legislation to amend the corporate income tax law was published. The legislation determined a decrease of
the corporate income tax law as of January 1, 2017 to 24% and another decrease of the corporate income tax law as of January 1,
2018 to 23%.
|
2)
|
Income
of non-Israeli subsidiaries
|
Non-Israeli
subsidiaries are taxed according to tax laws in their countries of residence.
|
d.
|
Deferred
income taxes:
|
|
1)
|
Provided in respect of the following:
|
|
|
December 31
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
$
|
25
|
|
|
$
|
23
|
|
Carryforward tax losses
|
|
|
964
|
|
|
|
1,738
|
|
Other
|
|
|
9
|
|
|
|
9
|
|
Less - valuation allowance
|
|
|
(964
|
)
|
|
|
(1,738
|
)
|
|
|
$
|
34
|
|
|
$
|
32
|
|
Deferred
income tax assets are presented in the balance sheet among non-current assets.
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - TAXES ON INCOME (continued)
|
2)
|
As
of December 31, 2018, the carryforward tax losses are related mainly to the Company’s
subsidiaries (in the U.S. and U.K.) and amounted to approximately $4.7 million. The Company
has provided valuation allowance in respect of deferred tax assets resulting from carryforward
tax losses of the Company’s subsidiaries. Management currently believes that it is more
likely than not that those deferred tax losses will not be realized in the foreseeable
future.
|
|
e.
|
Taxes
on income included in the statements of operations:
|
|
|
Years ended December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
2 0 1 6
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
In Israel
|
|
$
|
396
|
|
|
$
|
491
|
|
|
$
|
945
|
|
Outside Israel
|
|
|
44
|
|
|
|
43
|
|
|
|
78
|
|
|
|
|
440
|
|
|
|
534
|
|
|
|
1,023
|
|
Taxes in respect of previous years -
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Deferred taxes in Israel
|
|
|
(2
|
)
|
|
|
63
|
|
|
|
146
|
|
|
|
$
|
438
|
|
|
$
|
597
|
|
|
$
|
1,169
|
|
|
2)
|
Following
is a reconciliation of the theoretical tax expense, assuming all income is taxed at the regular tax rates applicable to companies
in Israel (see c. above), and the actual tax expense:
|
|
|
Years ended December 31,
|
|
|
|
2018
|
|
|
2 0 1 7
|
|
|
2 0 1 6
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income, as reported in the statements of operations*
|
|
$
|
5,572
|
|
|
$
|
6,209
|
|
|
$
|
5,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical tax expense
|
|
|
1,281
|
|
|
|
1,428
|
|
|
|
1,343
|
|
Less - tax benefits arising from Technologic Preferred Enterprise or Approved Enterprise status, see b. above
|
|
|
(772
|
)
|
|
|
(1,110
|
)
|
|
|
(208
|
)
|
|
|
|
509
|
|
|
|
318
|
|
|
|
1,135
|
|
Increase (decrease) in taxes resulting from permanent differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
Disallowable deductions
|
|
|
44
|
|
|
|
41
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation allowance
|
|
|
(106
|
)
|
|
|
244
|
|
|
|
373
|
|
Changes in taxes resulting from computation of deferred taxes at a rate which is different from the theoretical rate and other
|
|
|
(9
|
)
|
|
|
(6
|
)
|
|
|
(381
|
)
|
Taxes on income for the reported years:
|
|
$
|
438
|
|
|
$
|
597
|
|
|
$
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* As follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable in Israel
|
|
|
4,751
|
|
|
$
|
5,162
|
|
|
$
|
4,406
|
|
Taxable outside Israel
|
|
|
821
|
|
|
|
1,047
|
|
|
|
966
|
|
|
|
$
|
5,572
|
|
|
$
|
6,209
|
|
|
$
|
5,372
|
|
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - TAXES ON INCOME (continued)
The
Company has received final assessments from the tax authorities, through the year ended December 31, 2013. The subsidiaries,
except Mind Software Limited, have not been assessed since incorporation. Mind Software Limited has received final tax assessments
through tax year 2006. Mind Software Srl has received final tax assessment through tax year 2013.
|
g.
|
Sale
of S.C. Dirot COMP S.R.L (“DIROT”):
|
In
April 2017, the Company sold its holdings in DIROT for EUR 1,100 thousand. Following the sale, the Company recognized a capital
gain, which was partially offset against carryforward capital tax losses from previous years.
NOTE
9 - SUPPLEMENTARY BALANCE SHEET INFORMATION
|
a.
|
Cash,
cash equivalents and deposits:
|
|
|
December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
|
U.S. dollars in
|
|
|
|
thousands
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,389
|
|
|
$
|
2,744
|
|
Cash equivalents
|
|
|
314
|
|
|
|
159
|
|
Total cash
|
|
$
|
2,739
|
|
|
$
|
5,014
|
|
|
|
|
|
|
|
|
|
|
Short term deposits (a)
|
|
$
|
8,714
|
|
|
$
|
6,102
|
|
|
|
|
|
|
|
|
|
|
Long term deposit (b)
|
|
$
|
98
|
|
|
$
|
101
|
|
Total
|
|
$
|
11,551
|
|
|
$
|
11,217
|
|
|
(a)
|
The
average rate of short-term deposits is 2.92%.
|
|
(b)
|
The
deposit maturity is June 2020 and the rate is 1.8%.
|
|
b.
|
Accounts
receivable other:
|
|
|
December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
|
U.S. dollars in
|
|
|
|
thousands
|
|
|
|
|
|
|
|
|
Government
|
|
$
|
227
|
|
|
$
|
659
|
|
Employees
|
|
|
19
|
|
|
|
25
|
|
Sundry
|
|
|
314
|
|
|
|
159
|
|
|
|
$
|
560
|
|
|
$
|
843
|
|
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 -
SUPPLEMENTARY BALANCE SHEET INFORMATION
|
c.
|
Accounts
payable and accruals - other:
|
|
|
December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
|
U.S. dollars in
|
|
|
|
thousands
|
|
|
|
|
|
|
|
|
Payroll and related expenses
|
|
$
|
899
|
|
|
$
|
507
|
|
Government institutions
|
|
|
218
|
|
|
|
208
|
|
Accrued vacation pay
|
|
|
79
|
|
|
|
52
|
|
Accrued expenses and sundry
|
|
|
305
|
|
|
|
70
|
|
|
|
$
|
1,501
|
|
|
$
|
837
|
|
NOTE
10 - SELECTED STATEMENT OF OPERATIONS DATA
|
1)
|
The
Company’s revenues derive from sale of software products in one operating segment. The Company has two product lines: (i) product
line “A” - billing and customer care solutions for service providers; and (ii) product line “B” - call
accounting and call management solutions for enterprises.
|
The
following table sets forth the revenues classified by product lines:
|
|
Years ended December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
2 0 1 6
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Product line “A”
|
|
$
|
14,923
|
|
|
$
|
14,722
|
|
|
$
|
14,544
|
|
Product line “B”
|
|
|
3,212
|
|
|
|
3,340
|
|
|
|
3,508
|
|
|
|
$
|
18,135
|
|
|
$
|
18,062
|
|
|
$
|
18,052
|
|
|
2)
|
The
following table sets forth the geographical revenues classified by geographical location
of the customers:
|
|
|
Years ended December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
2 0 1 6
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
13,130
|
|
|
$
|
12,995
|
|
|
$
|
12,711
|
|
Europe
|
|
|
3,328
|
|
|
|
3,181
|
|
|
|
3,333
|
|
Israel
|
|
|
884
|
|
|
|
977
|
|
|
|
880
|
|
Other
|
|
|
793
|
|
|
|
909
|
|
|
|
1,128
|
|
|
|
$
|
18,135
|
|
|
$
|
18,062
|
|
|
$
|
18,052
|
|
|
3)
|
The
Company adopted ASC 606 on January 1, 2018 using the modified retrospective approach
for all contracts not completed as of the date of adoption. Under the previous pronouncement
ASC 605, the total revenues for the year ended December 31, 2018 would have been $17,959
thousand.
|
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - SELECTED STATEMENT OF OPERATIONS DATA (continued)
|
b.
|
Research
and development expenses:
|
|
|
Years ended December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
2 0 1 6
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and related expenses
|
|
$
|
3,136
|
|
|
$
|
2,788
|
|
|
$
|
2,682
|
|
Rent and related expenses
|
|
|
335
|
|
|
|
280
|
|
|
|
330
|
|
Depreciation and amortization
|
|
|
34
|
|
|
|
37
|
|
|
|
53
|
|
Subcontracting
|
|
|
87
|
|
|
|
165
|
|
|
|
307
|
|
Other
|
|
|
155
|
|
|
|
147
|
|
|
|
145
|
|
|
|
$
|
3,747
|
|
|
$
|
3,417
|
|
|
$
|
3,517
|
|
|
c.
|
Selling
and marketing expenses:
|
|
|
Years ended December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
2 0 1 6
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and related expenses
|
|
$
|
978
|
|
|
$
|
953
|
|
|
$
|
911
|
|
Depreciation and amortization
|
|
|
6
|
|
|
|
5
|
|
|
|
5
|
|
Travel and conventions
|
|
|
67
|
|
|
|
58
|
|
|
|
71
|
|
Other
|
|
|
217
|
|
|
|
234
|
|
|
|
118
|
|
|
|
$
|
1,268
|
|
|
$
|
1,250
|
|
|
$
|
1,105
|
|
|
d.
|
General
and administrative expenses:
|
|
|
Years ended December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
2 0 1 6
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and related expenses
|
|
$
|
1,026
|
|
|
$
|
1,105
|
|
|
$
|
1,039
|
|
Depreciation and amortization
|
|
|
15
|
|
|
|
16
|
|
|
|
18
|
|
Insurance
|
|
|
36
|
|
|
|
42
|
|
|
|
50
|
|
Office expenses
|
|
|
53
|
|
|
|
58
|
|
|
|
69
|
|
Professional services
|
|
|
333
|
|
|
|
326
|
|
|
|
242
|
|
Allowance for doubtful accounts and bad debts
|
|
|
-
|
|
|
|
-
|
|
|
|
(245
|
)
|
Other
|
|
|
161
|
|
|
|
129
|
|
|
|
220
|
|
|
|
$
|
1,624
|
|
|
$
|
1,676
|
|
|
$
|
1,393
|
|
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 - SELECTED STATEMENT OF OPERATIONS DATA (continued)
|
e.
|
Financial
income (expense) - net:
|
|
|
Years ended December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
2 0 1 6
|
|
|
|
U.S. dollars in thousands
|
|
Income:
|
|
|
|
|
|
|
|
|
|
Interest on bank deposits and short-term investments
|
|
$
|
208
|
|
|
$
|
75
|
|
|
$
|
49
|
|
Non-dollar currency gains - net
|
|
|
-
|
|
|
|
415
|
|
|
|
13
|
|
Income from marketable securities
|
|
|
77
|
|
|
|
136
|
|
|
|
143
|
|
Realized gain from sale of available-for-sale securities
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
Interest on available-for-sale securities
|
|
|
27
|
|
|
|
42
|
|
|
|
58
|
|
|
|
|
340
|
|
|
|
668
|
|
|
|
263
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-dollar currency losses - net
|
|
|
(107
|
)
|
|
|
-
|
|
|
|
-
|
|
Realized loss from sale of available-for-sale securities
|
|
|
-
|
|
|
|
(24
|
)
|
|
|
(84
|
)
|
Bank commissions and charges
|
|
|
(11
|
)
|
|
|
(14
|
)
|
|
|
(13
|
)
|
|
|
|
(118
|
)
|
|
|
(38
|
)
|
|
|
(97
|
)
|
|
|
$
|
222
|
|
|
$
|
630
|
|
|
$
|
166
|
|
|
f.
|
Earnings
per ordinary share (“EPS”):
|
The
following table sets forth the computation of the Company’s basic and diluted net loss per share of common stock:
|
|
Years ended December 31,
|
|
|
|
2 0 1 8
|
|
|
2 0 1 7
|
|
|
2 0 1 6
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares issued and
outstanding - used in computation of basic EPS
|
|
|
19,344
|
|
|
|
19,292
|
|
|
|
19,234
|
|
Add - incremental shares from assumed exercise of
options
|
|
|
217
|
|
|
|
267
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in
computation of diluted EPS
|
|
|
19,561
|
|
|
|
19,559
|
|
|
|
19,307
|
|
In
the years ended December 31, 2018, 2017 and 2016, options that their effect was anti-dilutive were not taken into account in computing
the diluted EPS.
The number of
options that could potentially dilute EPS in the future and were not included in the computation of diluted EPS is 334,200 options,
354,000 options and 489,500 options, for the years ended December 31, 2018, 2017 and 2016 respectively.
NOTE
11 - RELATED PARTIES
As
of December 31, 2018 and 2017, the Company had an accrual in the amount of $240 thousand and $240 thousand, respectively, pursuant
to an employment agreement with its President and Chief Executive Officer.
During
the year ended December 31, 2018, 2017 and 2016, the Company recorded salary expenses, cash bonus and directors’ fee to its related
parties in the amount of $557 thousand, $558 thousand and $596 thousand, respectively.
NOTE
12 - SUBSEQUENT EVENT
In
March 2019, the Company declared a dividend to its shareholders in the amount of approximately $5.0 million.
F-27
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