☐ REGISTRATION STATEMENT PURSUANT
TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ SHELL COMPANY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company
report. . . . . . . . . . .
Securities registered or to be registered
pursuant to Section 12(b) of the Act:
Securities registered or to be registered
pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s
classes of capital or common stock as of the close of the period covered by the annual report
Indicate by check mark if the registrant is well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
Indicate by checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T h(§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “accelerated filer”
and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
If an emerging growth company that prepares its financial statements
in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant has elected to follow:
If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Certain matters discussed in this annual
report are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act
and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, that are based on our beliefs, assumptions
and expectations, as well as information currently available to us. Such forward-looking statements may be identified by the use
of the words “anticipate,” “believe,” “estimate,” “expect,” “may,”
“will,” “plan” and similar expressions. Such statements reflect our current views with respect to future
events and are subject to certain risks and uncertainties. There are important factors that could cause our actual results, levels
of activity, performance or achievements to differ materially from the results, levels of activity, performance or achievements
expressed or implied by the forward-looking statements, including, but not limited to:
While we believe such forward-looking statements
are based on reasonable assumptions, should one or more of the underlying assumptions prove incorrect, or these risks or uncertainties
materialize, our actual results may differ materially from those expressed or implied by the forward-looking statements. Please
read the risks discussed in Item 3 – “Key Information” under the caption “Risk Factors” and cautionary
statements appearing elsewhere in this annual report in order to review conditions that we believe could cause actual results to
differ materially from those contemplated by the forward-looking statements.
You should not rely upon forward-looking statements as predictions
of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot
guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements
will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements
for any reason after the date of this annual report, to conform these statements to actual results or to changes in our expectations.
PART I
|
Item 1.
|
Identity of Directors, Senior Management and Advisers
|
Not applicable.
|
Item 2.
|
Offer Statistics and Expected Timetable
|
Not applicable.
A.
|
Selected Financial Data.
|
The following tables summarize certain selected
consolidated financial data for the periods and as of the dates indicated. We derived the statement of operations financial data
for the years ended December 31, 2017, 2018 and 2019, and the balance sheet data as of December 31, 2018 and 2019, from our audited
consolidated financial statements included elsewhere in this annual report. The selected consolidated statement of income financial
data for the years ended December 31, 2015 and 2016, and the balance sheet data as of December 31, 2015, 2016 and 2017, are derived
from our audited financial statements not included in this annual report. Our historical consolidated financial statements are
prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and presented in U.S. dollars. You should
read the information presented below in conjunction with those statements.
The information presented below is qualified
by the more detailed historical consolidated financial statements, the notes thereto and the discussion under “Operating
and Financial Review and Prospects” included elsewhere in this annual report.
Selected Financial Data:
|
|
Year Ended December 31,
|
|
|
|
(In thousands, except per share data)
|
|
Statement of Income Data:
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
185,636
|
|
|
$
|
216,190
|
|
|
$
|
269,194
|
|
|
$
|
289,707
|
|
|
$
|
325,674
|
|
Cost of revenues
|
|
|
111,192
|
|
|
|
130,402
|
|
|
|
175,678
|
|
|
|
180,138
|
|
|
|
196,153
|
|
Gross profit
|
|
|
74,444
|
|
|
|
85,788
|
|
|
|
93,516
|
|
|
|
109,569
|
|
|
|
129,521
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
10,235
|
|
|
|
16,488
|
|
|
|
31,955
|
|
|
|
34,415
|
|
|
|
37,378
|
|
Selling, marketing, general and administrative
|
|
|
39,859
|
|
|
|
44,460
|
|
|
|
60,559
|
|
|
|
52,133
|
|
|
|
54,274
|
|
Total operating expenses
|
|
|
50,094
|
|
|
|
60,948
|
|
|
|
92,514
|
|
|
|
86,547
|
|
|
|
91,652
|
|
Operating income
|
|
|
24,350
|
|
|
|
24,840
|
|
|
|
1,002
|
|
|
|
23,022
|
|
|
|
37,869
|
|
Financial expenses (income), net
|
|
|
(163
|
)
|
|
|
(533
|
)
|
|
|
3,010
|
|
|
|
3,991
|
|
|
|
2,768
|
|
Income (loss) before taxes on income (tax benefit)
|
|
|
24,513
|
|
|
|
25,373
|
|
|
|
(2,008
|
)
|
|
|
19,031
|
|
|
|
35,101
|
|
Taxes on income (tax benefit)
|
|
|
4,213
|
|
|
|
5,772
|
|
|
|
(2,564
|
)
|
|
|
5,031
|
|
|
|
8,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
20,300
|
|
|
|
19,601
|
|
|
|
556
|
|
|
|
14,000
|
|
|
|
26,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributed to non-controlling interest
|
|
|
59
|
|
|
|
(43
|
)
|
|
|
(189
|
)
|
|
|
215
|
|
|
|
244
|
|
Attributed to redeemable non-controlling interest
|
|
|
1
|
|
|
|
(135
|
)
|
|
|
43
|
|
|
|
-
|
|
|
|
-
|
|
Adjustment to redeemable non-controlling interest
|
|
|
224
|
|
|
|
443
|
|
|
|
350
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Sapiens
|
|
|
20,016
|
|
|
|
19,336
|
|
|
|
352
|
|
|
|
13,785
|
|
|
|
26,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per share attributable to Sapiens’ shareholders
|
|
$
|
0.42
|
|
|
$
|
0.40
|
|
|
$
|
0.01
|
|
|
$
|
0.28
|
|
|
$
|
0.53
|
|
Diluted net earnings per share attributable to Sapiens’ shareholders
|
|
$
|
0.41
|
|
|
$
|
0.40
|
|
|
$
|
0.01
|
|
|
$
|
0.28
|
|
|
$
|
0.52
|
|
Weighted average number of shares used in computing basic net earnings per share
|
|
|
48,121
|
|
|
|
48,947
|
|
|
|
49,170
|
|
|
|
49,827
|
|
|
|
50,031
|
|
Weighted average number of shares used in computing diluted net earnings per share
|
|
|
49,327
|
|
|
|
49,780
|
|
|
|
49,926
|
|
|
|
50,106
|
|
|
|
50,653
|
|
|
|
At December 31,
|
|
Balance Sheet Data:
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54,351
|
|
|
$
|
60,908
|
|
|
$
|
71,467
|
|
|
$
|
64,628
|
|
|
$
|
66,295
|
|
Marketable securities
|
|
|
39,651
|
|
|
|
35,448
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Working capital
|
|
|
51,342
|
|
|
|
72,453
|
|
|
|
60,804
|
|
|
|
48,206
|
|
|
|
42,311
|
|
Total assets
|
|
|
242,271
|
|
|
|
257,851
|
|
|
|
373,619
|
|
|
|
378,865
|
|
|
|
452,421
|
|
Series B Debentures (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
78,281
|
|
|
|
79,809
|
|
|
|
68,748
|
|
Capital stock
|
|
|
234,658
|
|
|
|
227,463
|
|
|
|
221,863
|
|
|
|
215,613
|
|
|
|
217,711
|
|
Total equity(2)
|
|
$
|
181,809
|
|
|
$
|
194,391
|
|
|
$
|
200,874
|
|
|
$
|
202,484
|
|
|
$
|
225,498
|
|
(1)
|
In September 2017, we issued NIS 280 million (approximately $78.3 million, net of $0.96 million of debt discount and issuance costs) principal amount of Series B unsecured, non-convertible debentures, in a public offering and private placement in Israel. For more information concerning the Series B debentures, please see Item 5.B “Liquidity and Capital Resources”—”Israeli Public Offering and Private Placement of Debentures”.
|
(2)
|
On April 22, 2015, March 31, 2016, October 18, 2017, September 16, 2018 and August 5, 2019, our Board of Directors declared one-time cash dividends of $0.15, $0.20, $0.20, $0.20 and $0.22 per Common Share (or approximately $7.2 million, $10.0 million, $9.8 million, $10.0 million and $11.0 million, in the aggregate, respectively), which were paid on June 1, 2015, June 1, 2016, December 14, 2017, October 30, 2018 and September 3, 2019, respectively.
|
|
B.
|
Capitalization and Indebtedness.
|
Not applicable.
|
C.
|
Reasons for the Offer and Use of Proceeds.
|
Not applicable.
We operate globally in a dynamic and rapidly
changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of those risks
and uncertainties that may have a material adverse effect on our business, financial position, results of operations or cash flows.
Risks Relating to Our Business, Our Industry and Our Financing
Activities
The global outbreak of COVID-19 (coronavirus) may negatively
impact the global economy in a significant manner for an extended period of time, and also adversely affect our operating results
in a material manner.
As of the date of this annual report, the
COVID-19 (coronavirus) pandemic had made a significant impact on global economic activity, with governments around the world having
closed office spaces, public transportation and schools, and restricting travel. These closures and restrictions, if continued
for a sustained period, could trigger a global recession that could negatively impact our business in a material manner. Most importantly,
our insurer customers may be less likely to purchase large insurance software systems if they face a wave of claims related to
the virus, or they may reduce the amount of work for which they retain our services if they experience a slowdown in their businesses,
Prolonged economic uncertainties or downturns
in certain regions or industries could materially adversely affect our business. Our business depends on our current and prospective
customers’ ability and willingness to invest money in core systems, which in turn is dependent upon their overall economic
health. Negative economic conditions in the global economy or certain regions such as the U.S. or Europe, including conditions
resulting from financial and credit market fluctuations, could cause a decrease in corporate spending on products and services
that we sell. Wide-spread viruses and epidemics like the recent novel coronavirus outbreak, could also negatively affect our customers’
spending on our products and services. In 2019, 50% of our revenues generated from North America, 41% of our revenues generated
from Europe, and 9% from the rest of the world. In addition, a significant portion of our revenue is generated from customers
in the financial services industry, including banking and insurance. Negative economic conditions may cause customers generally,
and in that industry in particular, to reduce their IT spending. Customers may delay or cancel projects, choose to focus on in-house
development efforts or seek to lower their costs by renegotiating maintenance and support agreements. Additionally, customers may
be more likely to make late payments in worsening economic conditions, which could require us to increase our collection efforts
and require us to incur additional associated costs to collect expected revenues. To the extent purchases of licenses for our software
are perceived by customers and potential customers to be discretionary, our revenues may be disproportionately affected by delays
or reductions in general IT spending. If economic conditions generally or in the industries in which we operate specifically, worsen
from present levels, our results of operations could be adversely affected.
The
implementation of our M&A growth strategy, which requires the integration of our multiple acquired companies, including, most
recently, sum.cumo, Cálculo, Adaptik, KnowledgePrice.com and StoneRiver and
their respective businesses, operations and employees with our own, involves significant risks, and the failure to integrate successfully
may adversely affect our future results.
In
the past decade we have completed 13 acquisitions. Most recently, in the first quarter of 2020, we acquired sum.como, after having
acquired Cálculo in the fourth quarter of 2019, Adaptik in the fourth quarter
of 2018, and KnowledgePrice.com and StoneRiver in 2017. These acquisitions are part of our integrated M&A growth strategy,
which is centered on three key factors: growing our customer base, expanding geographically and adding complementary solutions
to our portfolio— all while we seek to ensure our continued high quality of services and product delivery. Any failure to
successfully integrate the business, operations and employees of our acquired companies, or to otherwise realize the anticipated
benefits of these acquisitions, could harm our results of operations. Our ability to realize these benefits will depend on the
timely integration and consolidation of organizations, operations, facilities, procedures, policies and technologies, and the
harmonization of differences in the business cultures between these companies and their personnel. Integration of these businesses
will be complex and time-consuming, will involve additional expense and could disrupt our business and divert management’s
attention from ongoing business concerns. The challenges involved in integrating sum.como, Cálculo,
Adaptik, and other former acquisitions include:
|
●
|
Preserving customer,
supplier and other important relationships
|
|
●
|
Integrating complex,
core products and services that we acquire with our existing products and services
|
|
●
|
Integrating financial
forecasting and controls, procedures and reporting cycles
|
|
●
|
Combining and integrating information technology, or IT, systems
|
|
●
|
Integrating employees and related HR systems and benefits, maintaining employee morale and retaining key employees
|
|
●
|
Potential confusion that we may have in our dealings with customers and prospective customers as to the products we are offering to them and potential overlap among those products
|
The benefits we expect to realize from these
acquisitions are, necessarily, based on projections and assumptions about the combined businesses of our company, and assume, among
other things, the successful integration of these acquired entities into our business and operations. The acquisitions of StoneRiver
and Adaptik, in particular, significantly expanded our presence and scale in the North American insurance industry, and has been
helping us to further accelerate our growing market footprint in the U.S. P&C space. Our projections and assumptions concerning
our acquisitions may be inaccurate, however, and we may not successfully integrate the acquired companies and our operations in
a timely manner, or at all. We may also be exposed to unexpected contingencies or liabilities of the acquired companies. If we
do not realize the anticipated benefits of these transactions, our growth strategy and future profitability could be adversely
affected.
Our development cycles are lengthy, we may not have the
resources available to complete development of new, enhanced or modified solutions and we may incur significant expenses before
we generate revenues, if any, from our solutions.
Because our solutions are complex and require
rigorous testing, development cycles can be lengthy, taking us up to two years to develop and introduce new, enhanced or modified
solutions. Moreover, development projects can be technically challenging and expensive. The nature of these development cycles
may cause us to experience delays between the time we incur expenses associated with research and development and the time we generate
revenues, if any, from such expenses. We may also not have sufficient funds or other resources to make the required investments
in product development. Furthermore, we may invest substantial resources in the development of solutions that do not achieve market
acceptance or commercial success. Even where we succeed in our sales efforts and obtain new orders from customers, the complexity
involved in delivering our solutions to such customers makes it more difficult for us to consummate delivery in a timely manner
and to recognize revenue and maximize profitability. Failure to deliver our solutions in a timely manner could result in order
cancellations, damage our reputations and require us to indemnify our customers. Any of these risks relating to our lengthy and
expensive development cycle could have a material adverse effect on our business, financial conditions and results of operations.
Our sales cycle is variable and often lengthy, depends
upon many factors outside our control, and requires us to expend significant time and resources prior to generating associated
revenues.
The typical sales cycle for our solutions
and services is lengthy and unpredictable, requires pre-purchase evaluation by a significant number of persons in our customers’
organizations, and often involves a significant operational decision by our customers. Our sales efforts involve educating our
customers and industry analysts and consultants about the use and benefits of our solutions, including the technical capabilities
of our solutions and the efficiencies achievable by organizations deploying our solutions. Customers typically undertake a significant
evaluation process, which frequently involves not only our solutions, but also those of our competitors and can result in a lengthy
sales cycle. Our sales cycle for new customers is typically one year to two years and can extend even longer in some cases. We
spend substantial time, effort and money in our sales efforts without any assurance that such efforts will produce any sales.
Investment in highly skilled research and development
and customer support personnel is critical to our ability to develop and enhance our solutions and support our customers, but an
increase in such investment may reduce our profitability.
As a provider of software solutions that
rely upon technological advancements, we rely heavily on our research and development activities to remain competitive. We consequently
depend in large part on the ability to attract, train, motivate and retain highly skilled information technology professionals
for our research and development team, particularly individuals with knowledge and experience in the insurance industry. Because
our software solutions are highly complex and are generally used by our customers to perform critical business functions, we also
depend heavily on other skilled technology professionals to provide ongoing support to our customers. Skilled technology professionals
are often in high demand and short supply. If we are unable to hire or retain qualified research and development personnel and
other technology professionals to develop, implement and modify our solutions, we may be unable to meet the needs of our customers.
Even if we succeed in retaining the necessary skilled personnel in our research and development and customer support efforts, our
investments in our personnel and product development efforts increase our costs of operations and thereby reduce our profitability,
unless accompanied by increased revenues. Given the highly competitive industry in which we operate, we may not succeed in increasing
our revenues in line with our increasing investments in our personnel and research and development efforts.
Furthermore, as we seek to expand the marketing
and offering of our products into new territories, it requires the retention of new, additional skilled personnel with knowledge
of the particular market and applicable regulatory regime. Such skilled personnel may not be available at a reasonable cost relative
to the additional revenues that we expect to generate in those territories, or may not be available at all. In particular, wage
costs in lower-cost markets where we have recently added personnel, such as India, are increasing and we may need to increase the
levels of our employee compensation more rapidly than in the past to remain competitive. The transition of projects to new locations
may also lead to business disruptions due to differing levels of employee knowledge and organizational and leadership skills. Although
we have never experienced an organized labor dispute, strike or work stoppage, any such occurrence, including in connection with
unionization efforts, could disrupt our business and operations and harm our financial condition.
Failure to manage our rapid growth— both organic
and non-organic—could effectively harm our business.
We have recently experienced, and expect
to continue to experience, rapid growth in our number of employees, especially in India, and in our international operations that
has placed, and will continue to place, a significant strain on our operational and financial resources and our personnel. To manage
our anticipated future growth effectively, we must continue to maintain and may need to enhance our information technology infrastructure,
financial and accounting systems and controls and manage expanded operations and employees in geographically distributed locations.
We also must attract, train and retain a significant number of additional qualified sales and marketing personnel, professional
services personnel, software engineers, technical personnel and management personnel. Our failure to manage our rapid growth effectively
could have a material adverse effect on our business, results of operations and financial condition. Our growth could require significant
capital expenditures and may divert financial resources from other projects, such as the development of new services or product
enhancements. For example, since it may take as long as six months to hire and train a new member of our professional services
staff, we make decisions regarding the size of our professional services staff based upon our expectations with respect to customer
demand for our products and services. If these expectations are incorrect, and we increase the size of our professional services
organization without experiencing an increase in sales of our products and services, we will experience reductions in our gross
and operating margins and net income. If we are unable to effectively manage our growth, our expenses may increase more than expected,
our revenues could decline or grow more slowly than expected and we may be unable to implement our business strategy. Our rapid
growth may also be accompanied by greater exposure to litigation, including suits by clients, vendors, employees or former employees,
as the sizes of our workforce and our overall international operations increase. All such litigation carries with it related costs
and could divert our management’s attention from ongoing business concerns. We also intend to continue to expand into additional
international markets which, if not technologically or commercially successful, could harm our financial condition and prospects.
The skilled and highly qualified workforce that we need
to develop, implement and modify our solutions may be difficult to hire, train and retain, and we could face increased costs to
attract and retain our skilled workforce.
Our business operations depend in large
part on our ability to attract, train, motivate and retain highly skilled information technology professionals, software programmers
and communications engineers on a worldwide basis. In addition, our competitive success will depend on our ability to attract and
retain other outstanding, highly qualified employees, consultants and other professionals. Because our software products are highly
complex and are generally used by our customers to perform critical business functions, we depend heavily on skilled technology
professionals. Skilled technology professionals are often in high demand and short supply. If we are unable to hire or retain qualified
technology professionals to develop, implement and modify our solutions, we may be unable to meet the needs of our customers. In
addition, serving several new customers or implementing several new large-scale projects in a short period of time may require
us to attract and train additional IT professionals at a rapid rate. Once we hire and train our skilled employees, if there is
a downturn in worldwide economic conditions and in our business, we may need to lay off some of those employees, which will result
in our wasting the time and resources invested in training them, and wasting their accumulated know-how.
If we fail to adapt to changing market conditions and
cannot compete successfully with existing or new competitors, our business could be harmed.
We may be unable to compete successfully
with existing or new competitors. Our failure to adapt to changing market conditions and to compete successfully with established
or new competitors could have a material adverse effect on our results of operations and financial condition. We face intense competition
for the software products and services that we sell, including competition for managed services we provide to customers under long-term
service agreements. These managed services include management of data center operations and IT infrastructure, application management
and ongoing support, systems modernization and consolidation, and management of end-to-end business processes for billing and customer
care operations.
The market for communications information
systems is highly competitive and fragmented, and we expect competition to continue to increase. We compete with independent software
and service providers and with the in-house IT and network departments of communications companies. Our main competitors include
firms that provide IT services (including consulting, systems integration and managed services), software vendors that sell products
for specific aspects of a total information system, software vendors that specialize in systems for particular communications services
(such as internet, wireline and wireless services, cable, satellite and service bureaus) and network equipment providers that offer
software systems in combination with the sale of network equipment. We also compete with companies that provide digital commerce
software and solutions.
We believe that our ability to compete
with other vendors, as well as with in-house IT and network departments of communications companies, depends on a number of factors,
including:
|
●
|
The development by others of software products and services that are competitive with our products and services
|
|
●
|
The price at which others offer competitive software and services
|
|
●
|
The ability of competitors to deliver projects at a level of quality that rivals our own
|
|
●
|
The responsiveness of our competitors to customer needs
|
|
●
|
The ability of our competitors to hire, retain and motivate key personnel
|
A number of our competitors have long
operating histories; large customer bases; substantial financial, technical, sales, marketing and other resources; and strong name
recognition. Current and potential competitors have established, and may establish in the future, cooperative relationships among
themselves, or with third parties to increase their abilities to address the needs of our existing, or prospective, customers.
Additionally, our competitors have acquired,
and may continue to acquire in the future, companies that may enhance their market offerings. New competitors or alliances among
competitors may emerge and rapidly acquire significant market share. As a result, our competitors may be able to adapt more quickly
than us to new or emerging technologies and changes in customer requirements, and may be able to devote greater resources to the
promotion and sale of their products. We cannot guarantee that we will be able to compete successfully with existing or new competitors.
If we fail to adapt to changing market conditions and to compete successfully with established or new competitors, our results
of operations and financial condition may be adversely affected.
We may be required to increase or decrease the scope of
our operations in response to changes in the demand for our products and services, and if we fail to successfully plan and manage
changes in the size of our operations, our business will suffer.
In the past, we have both grown and contracted
our operations, in some cases rapidly, to profitably offer our products and services in a continuously changing market. If we are
unable to manage these changes, or to plan and manage any future changes in the size and scope of our operations, our business
will be negatively impacted.
Restructurings and cost reduction measures
that we have implemented in the past have reduced the size of our operations and workforce. Reductions in personnel can result
in significant severance, administrative and legal expenses, and may also adversely affect or delay various sales, marketing and
product development programs and activities. These cost reduction measures have included, and may in the future include, employee
separation costs and consolidating and/or relocating certain of our operations to different geographic locations.
Acquisitions, organic growth and absorption
of significant numbers of customers’ employees in connection with managed services projects have, from time to time, increased
our headcount. During periods of expansion, we may need to serve several new customers or implement several new large-scale projects
in short periods of time. This may require us to attract and train additional IT professionals at a rapid rate, as well as quickly
expand our facilities, which may be difficult to successfully implement.
If existing customers are not satisfied with our solutions
and services and either do not make subsequent purchases from us or do not continue using such solutions and services, or if our
relationships with our largest customers are impaired, our revenue could be negatively affected.
We depend heavily on repeat product and
service revenues from our base of existing customers. Five of our customers accounted for, in the aggregate, 20.7% and 15.6% of
our revenues in the years ended December 31, 2018 and 2019, respectively. If our existing customers are not satisfied with our
solutions and services, they may not enter into new project contracts with us or continue using our technologies. A significant
decline in our revenue stream from existing customers, including due to termination of agreement(s), would have a material adverse
effect on our business, results of operations and financial condition.
Our business often involves long-term, large, complex
implementation projects across the globe, which involve uncertainties, mainly during the implementation period, such as changes
to the estimated project costs and changes in project schedule. Such changes may cause disputes between us and our customers,
due to failure on our part, or even in absence of failures on our part, and may in some cases result in cancellation of those
projects. Such cancellation can adversely impact our revenues, profitability and/or, in some cases, our relationship with the
relevant customer.
Our business is characterized by relatively
large, complex implementation projects or engagements that can have a significant impact on our total revenue and cost of revenue
from quarter to quarter. A high percentage of our expenses, particularly employee compensation, are relatively fixed. Therefore,
variations in the timing of the initiation, estimate of scope of work, progress or completion of projects or engagements can cause
significant variations in operating results from quarter to quarter.
This is particularly the case for fixed-price
contracts, where our delivery requirements sometimes span more than one year. For a highly complex, fixed-price project that requires
customization, we may not be able to accurately estimate our actual costs of completing the project. We are often dependent on
the assistance of third-parties (such as our customers’ vendors or IT employees, or our system integrator partners) in implementing
such a project, which may not be provided in a timely manner. If our actual cost-to-completion of such a project significantly
exceeds the estimated costs, we could experience a loss on the related contract, which (when multiplied by multiple projects) could
have a material adverse effect on our results of operations, financial position and cash flow.
Similarly, delays in implementation projects
(whether fixed price or not) may affect our revenue and cause our operating results to vary widely. Our solutions are delivered
over periods of time ranging from several months to a few years. Payment terms are generally based on periodic payments or on
the achievement of milestones. Any delays in payment or in the achievement of milestones may have a material adverse effect on
our results of operations, financial position or cash flows.
For non-fixed price contracts, we generally
provide our customers with up-front estimates regarding the duration, budget and costs associated with the implementation of our
products. Due to the complexities described above, however, we may not meet those upfront estimates and/or the expectations of
our customers, which could lead to a dispute with a client.
As
an example, in 2017, we were involved in a dispute with a significant customer (which accounted for approximately 12% of our
revenues in 2016) under a software development project agreement. Work on the project was eventually canceled due to the
dispute and we entered into a settlement agreement with the customer, which resulted in a reduction in our revenues and
operating profit relative to our prior estimates for 2017. In 2018, a significant customer in South Africa changed the scope
of an ongoing project significantly, which resulted in a decrease in the revenues realized from that customer during 2018,
thereby adversely impacting our revenues in 2018. In 2019, a significant European customer cancelled, for convenience (and
not due a failure by us to comply with the terms of the agreement with such customer) an implementation project. While we
recognized and collected the vast majority of the sums payable to us under the foregoing implementation project, the
cancellation resulted in the loss of potential future revenues from this customer. Similar such disputes with other
significant customers in the future, whether due to failure on our part, or even absent such failure on our part, could
result in lost revenues, and lower profit margins, and could harm our reputation, thereby adversely affecting our ability to
attract new customers and to sell additional solutions and services to existing customers.
We may be liable to our clients for damages caused by
a violation of intellectual property rights, the disclosure of other confidential information, including personally identifiable
information, system failures, errors or unsatisfactory performance of services, and our insurance policies may not be sufficient
to cover these damages.
We often have access to, and are required
to collect and store, sensitive or confidential client information, including personally identifiable information. Some of our
client agreements do not limit our potential liability for breaches of confidentiality, infringement indemnity and certain other
matters. Furthermore, breaches of confidentiality may entitle the aggrieved party to equitable remedies, including injunctive relief.
If any person, including any of our employees and subcontractors, penetrates our network security or misappropriates sensitive
or confidential client information, including personally identifiable information, we could be subject to significant liability
from our clients or from our clients’ customers for breaching contractual confidentiality provisions or privacy laws. Despite
measures we take to protect the intellectual property and other confidential information or personally identifiable information
of our clients, unauthorized parties, including our employees and subcontractors, may attempt to misappropriate certain intellectual
property rights that are proprietary to our clients or otherwise breach our clients’ confidences. Unauthorized disclosure
of sensitive or confidential client information, including personally identifiable information, or a violation of intellectual
property rights, whether through employee misconduct, breach of our computer systems, systems failure or otherwise, may subject
us to liabilities, damage our reputation and cause us to lose clients.
Many of our contracts involve projects that
are critical to the operations of our clients’ businesses and provide benefits to our clients that may be difficult to quantify.
Any failure in a client’s system or any breach of security could result in a claim for substantial damages against us, regardless
of our responsibility for such failure. Furthermore, any errors by our employees in the performance of services for a client, or
poor execution of such services, could result in a client terminating our engagement and seeking damages from us.
In addition, while we have taken steps to
protect the confidential information that we have access to, including confidential information we may obtain through usage of
our cloud-based services, our security measures may be breached. If a cyber-attack or other security incident were to result in
unauthorized access to or modification of our customers’ data or our own data or our IT systems or in disruption of the services
we provide to our customers, or if our products or services are perceived as having security vulnerabilities, we could suffer significant
damage to our business and reputation.
Although we attempt to limit our contractual
liability for consequential damages in rendering our services, these limitations on liability may not apply in all circumstances,
may be unenforceable in some cases, or may be insufficient to protect us from liability for damages. There may be instances when
liabilities for damages are greater than the insurance coverage we hold and we will have to internalize those losses, damages and
liabilities not covered by our insurance.
Changes in privacy regulations may impose additional costs
and liabilities on us, limit our use of information, and adversely affect our business.
Personal privacy has become a significant
issue in the United States, Europe, and many other countries where we operate. Many government agencies and industry regulators
continue to impose new restrictions and modify existing requirements about the collection, use, and disclosure of personal information.
Changes to laws or regulations affecting privacy and security may impose additional liability and costs on us and may limit our
use of such information in providing our services to customers. If we were required to change our business activities, revise or
eliminate services or products, or implement burdensome compliance measures, our business and results of operations may be harmed.
Additionally, we may be subject to regulatory enforcement actions resulting in fines, penalties, and potential litigation if we
fail to comply with applicable privacy laws and regulations.
In particular, our European activities are
subject to the European Union General Data Protection Regulation, or GDPR, which has created additional compliance requirements
for us. GDPR broadens the scope of personal privacy laws to protect the rights of European Union citizens and requires organizations
to report on data breaches within 72 hours and be bound by more stringent rules for obtaining the consent of individuals on how
their data can be used. GDPR became enforceable on May 25, 2018 and non-compliance may expose entities such as our company to significant
fines or other regulatory claims. In the United States, our operations in various states, such as New York and California, are
now subject to expanded privacy regulations. In California, we are subject to the California Consumer Privacy Act, or CCPA, a statute
that went into effect on January 1, 2020. The CCPA imposes enhanced disclosure requirements for us regarding our interactions with
customers who are residents of California, such as comprehensive privacy notices for consumers when we, or our agents, collect
their personal information. We may be further required to ensure third-party compliance, as under the CCPA we could be liable if
third parties that collect, process or retain personal information on our behalf violate the CCPA’s privacy requirements.
The sanctions for non-compliance could include fines and/or civil lawsuits.
While we have invested in, and intend to
continue to invest in, reasonably necessary resources to comply with these standards, to the extent that we fail to adequately
comply, that failure could have an adverse effect on our business, financial conditions, results of operations and cash flows.
Significant disruptions of our information technology
systems or breaches of our data security could adversely affect our business.
A significant invasion, interruption, destruction
or breakdown of our information technology, or IT, systems and/or infrastructure by persons with authorized or unauthorized access
could negatively impact our business and operations. We could also experience business interruption, information theft and/or reputational
damage from cyber attacks, which may compromise our systems and lead to data leakage internally. Both data that has been inputted
into our main IT platform, which covers records of transactions, financial data and other data reflected in our results of operations,
as well as data related to our proprietary rights (such as research and development, and other intellectual property- related data),
are subject to material cyber security risks. Our IT systems have been, and are expected to continue to be, the target of malware
and other cyber attacks. To date, we are not aware that we have experienced any loss of, or disruption to, material information
as a result of any such malware or cyber attack.
We have invested in advanced detection,
prevention and proactive systems to reduce these risks. Based on independent audits, we believe that our level of protection is
in keeping with the industry standards of peer technology companies. We also maintain a disaster recovery solution, as a means
of assuring that a breach or cyber attack does not necessarily cause the loss of our information. We furthermore review our protections
and remedial measures periodically in order to ensure that they are adequate.
Despite these protective systems and remedial
measures, techniques used to obtain unauthorized access are constantly changing, are becoming increasingly more sophisticated and
often are not recognized until after an exploitation of information has occurred. We may be unable to anticipate these techniques
or implement sufficient preventative measures, and we therefore cannot assure you that our preventative measures will be successful
in preventing compromise and/or disruption of our information technology systems and related data. We furthermore cannot be certain
that our remedial measures will fully mitigate the adverse financial consequences of any cyber attack or incident.
Errors or defects in our software solutions could inevitably
arise and would harm our profitability and our reputation with customers, and could even give rise to claims against us.
The quality of our solutions, including
new, modified or enhanced versions thereof, is critical to our success. Since our software solutions are complex, they may contain
errors that cannot be detected at any point in their testing phase. While we continually test our solutions for errors or defects
and work with customers to identify and correct them, errors in our technology may be found in the future. Testing for errors or
defects is complicated because it is difficult to simulate the breadth of operating systems, user applications and computing environments
that our customers use, and our solutions themselves are increasingly complex. Errors or defects in our technology have resulted
in terminated work orders and could result in delayed or lost revenue, diversion of development resources and increased services,
termination of work orders, damage to our brand and warranty and insurance costs in the future. In addition, time-consuming implementations
may also increase the number of services personnel we must allocate to each customer, thereby increasing our costs and adversely
affecting our business, results of operations and financial condition.
In addition, since our customers rely on
our solutions to operate, monitor and improve the performance of their business processes, they are sensitive to potential disruptions
that may be caused by the use of, or any defects in, our software. As a result, we may be subject to claims for damages related
to software errors in the future. Liability claims could require us to spend significant time and money in litigation or to pay
significant damages. Regardless of whether we prevail, diversion of key employees’ time and attention from our business,
the incurrence of substantial expenses and potential damage to our reputation might result. While the terms of our sales contracts
typically limit our exposure to potential liability claims and we carry errors and omissions insurance against such claims, there
can be no assurance that such insurance will continue to be available on acceptable terms, if at all, or that such insurance will
provide us with adequate protection against any such claims. A significant liability claim against us could have a material adverse
effect on our business, results of operations and financial position.
Incorrect or improper use of our products or our failure
to properly train customers on how to implement or utilize our products could result in customer dissatisfaction and negatively
affect our business, results of operations, financial condition and growth prospects.
Our products are complex and are deployed
in a wide variety of network environments. The proper use of our solutions requires training of the customer. If our solutions
are not used correctly or as intended, inadequate performance may result. Additionally, our customers or third-party partners may
incorrectly implement or use our solutions. Our solutions may also be intentionally misused or abused by customers or their employees
or third parties who are able to access or use our solutions. Similarly, our solutions are sometimes installed or maintained by
customers or third parties with smaller or less qualified IT departments, potentially resulting in sub-optimal installation and,
consequently, performance that is less than the level anticipated by the customer. Because our customers rely on our software,
services and maintenance support to manage a wide range of operations, the incorrect or improper use of our solutions, our failure
to properly train customers on how to efficiently and effectively use our solutions, or our failure to properly provide implementation
or maintenance services to our customers has resulted in terminated work orders and may result in termination of work orders, negative
publicity or legal claims against us in the future. Also, as we continue to expand our customer base, any failure by us to properly
provide these services will likely result in lost opportunities for follow-on sales of our software and services.
In addition, if there is substantial turnover
of customer personnel responsible for implementation and use of our products, or if customer personnel are not well trained in
the use of our products, customers may defer the deployment of our products, may deploy them in a more limited manner than originally
anticipated or may not deploy them at all. Further, if there is substantial turnover of the customer personnel responsible for
implementation and use of our products, our ability to make additional sales may be substantially limited.
The market for software solutions
and related services is highly competitive.
The market for software solutions and related
services and for business solutions for the insurance and financial services industry in particular, is highly competitive. Many
of our smaller competitors have been acquired by larger competitors, which provides such smaller competitors with greater resources
and potentially a larger client base for which they can develop solutions. Our customers or potential customers may prefer suppliers
that are larger than us, are better known in the market or that have a greater global reach. In addition, we and some of our competitors
have developed systems to allow customers to outsource their core systems to external providers (known as BPO). We are seeking
to partner with BPO providers, but there can be no assurance that such BPO providers will adopt our solutions rather than those
of our competitors. Determinations by current and potential customers to use BPO providers that do not use our solutions may result
in the loss of such customers and limit our ability to gain new customers.
Consolidation in the insurance industry
in which some of our clients operate also increases competitiveness for us by reducing the number of potential clients for whose
business we and our competitors compete. The high level of continuity with which insurance and other financial services clients
remain with their providers of software-related services also increases general competitiveness by tying clients to their service
providers and thereby shrinking the market of potential clients.
Assertions by third parties of infringement or other violation
by us of their intellectual property rights could result in significant costs and substantially harm our business and results of
operations.
The software industry is characterized by
the existence of a large number of patents and frequent claims and related litigation regarding patents and other intellectual
property rights. In particular, leading companies in the software industry own large numbers of patents, copyrights, trademarks
and trade secrets, which they may use to assert claims against us. From time to time, third parties, including certain of these
leading companies, may assert patent, copyright, trademark or other intellectual property claims against us, our customers and
partners, and those from whom we license technology and intellectual property.
Although we believe that our products and
services do not infringe upon the intellectual property rights of third parties, we cannot assure you that third parties will not
assert infringement or misappropriation claims against us with respect to current or future products or services, or that any such
assertions will not require us to enter into royalty arrangements or result in costly litigation, or result in us being unable
to use certain intellectual property. We cannot assure you that we are not infringing or otherwise violating any third party intellectual
property rights. Infringement assertions from third parties may involve patent holding companies or other patent owners who have
no relevant product revenues, and therefore our own issued and pending patents may provide little or no deterrence to these patent
owners in bringing intellectual property rights claims against us.
Any intellectual property infringement or
misappropriation claim or assertion against us, our customers or partners, and those from whom we license technology and intellectual
property could have a material adverse effect on our business, financial condition, reputation and competitive position regardless
of the validity or outcome. If we are forced to defend against any infringement or misappropriation claims, whether they are with
or without merit, are settled out of court, or are determined in our favor, we may be required to expend significant time and financial
resources on the defense of such claims. Furthermore, an adverse outcome of a dispute may require us to pay damages, potentially
including treble damages and attorneys’ fees, if we are found to have willfully infringed on a party’s intellectual
property; cease making, licensing or using our products or services that are alleged to infringe or misappropriate the intellectual
property of others; expend additional development resources to redesign our products or services; enter into potentially unfavorable
royalty or license agreements in order to obtain the right to use necessary technologies or works; and to indemnify our partners,
customers, and other third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable
to us, or at all, and may require significant royalty payments and other expenditures. Any of these events could seriously harm
our business, results of operations and financial condition. In addition, any lawsuits regarding intellectual property rights,
regardless of their success, could be expensive to resolve and divert the time and attention of our management and technical personnel.
Although we apply measures to protect our intellectual
property rights and our source code, there can be no assurance that the measures that we employ to do so will be successful.
In accordance with industry practice, since
we have no registered patents on our software solution technologies, we rely on a combination of contractual provisions and intellectual
property law to protect our proprietary technology. We believe that due to the dynamic nature of the computer and software industries,
copyright protection is less significant than factors such as the knowledge and experience of our management and personnel, the
frequency of product enhancements and the timeliness and quality of our support services. We seek to protect the source code of
our products as trade secret information and as unpublished copyright works. We also rely on security and copy protection features
in our proprietary software. We distribute our products under software license agreements that grant customers a personal, non-transferable
license to use our products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of our products.
In addition, while we attempt to protect trade secrets and other proprietary information through non-disclosure agreements with
employees, consultants and distributors, not all of our employees have signed invention assignment agreements. Although we intend
to protect our rights vigorously, there can be no assurance that these measures will be successful. Our failure to protect our
rights, or the improper use of our products by others without licensing them from us could have a material adverse effect on our
results of operations and financial condition.
We and our customers rely on technology and intellectual
property of third parties, the loss of which could limit the functionality of our products and disrupt our business.
We use technology and intellectual property
licensed from unaffiliated third parties in certain of our products, and we may license additional third-party technology and intellectual
property in the future. Any errors or defects in this third-party technology and intellectual property could result in errors that
could harm our brand and business. In addition, licensed technology and intellectual property may not continue to be available
on commercially reasonable terms, or at all. The loss of the right to license and distribute this third party technology could
limit the functionality of our products and might require us to redesign our products.
Further, although we believe that there
are currently adequate replacements for the third-party technology and intellectual property we presently use and distribute, the
loss of our right to use any of this technology and intellectual property could result in delays in producing or delivering affected
products until equivalent technology or intellectual property is identified, licensed or otherwise procured, and integrated. Our
business would be disrupted if any technology and intellectual property we license from others or functional equivalents of this
software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we
would be required either to attempt to redesign our products to function with technology and intellectual property available from
other parties or to develop these components ourselves, which would result in increased costs and could result in delays in product
sales and the release of new product offerings. Alternatively, we might be forced to limit the features available in affected products.
Any of these results could harm our business and impact our results of operations.
We could be required to provide the source code of our
products to our customers.
Some of our customers have the right to
require the source code of our products to be deposited into a source code escrow. Under certain circumstances, our source code
could be released to our customers. The conditions triggering the release of our source code vary by customer. A release of our
source code would give our customers access to our trade secrets and other proprietary and confidential information which could
harm our business, results of operations and financial condition. A few of our customers have the right to use the source code
of some of our products based on the license agreements signed with such clients (mostly with respect to older versions of our
solutions), although such use is limited for specific matters and cases, these clients are exposed to some of our trade secrets
and other proprietary and confidential information which could harm us.
Some of our services and technologies may use “open
source” software, which may restrict how we use or distribute our services or require that we release the source code of
certain products subject to those licenses.
Some of our services and technologies may
incorporate software licensed under so-called “open source” licenses, including, but not limited to, the GNU General
Public License and the GNU Lesser General Public License. In addition to risks related to license requirements, usage of open source
software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide
warranties or controls on origin of the software. Additionally, open source licenses typically require that source code subject
to the license be made available to the public and that any modifications or derivative works to open source software continue
to be licensed under open source licenses. These open source licenses typically mandate that proprietary software, when combined
in specific ways with open source software, become subject to the open source license. If we combine our proprietary software with
open source software, we could be required to release the source code of our proprietary software.
We take steps to ensure that our proprietary
software is not combined with, and does not incorporate, open source software in ways that would require our proprietary software
to be subject to an open source license. However, few courts have interpreted open source licenses, and the manner in which these
licenses may be interpreted and enforced is therefore subject to some uncertainty. Additionally, we rely on multiple software programmers
to design our proprietary technologies, and although we take steps to prevent our programmers from including open source software
in the technologies and software code that they design, write and modify, we do not exercise complete control over the development
efforts of our programmers and we cannot be certain that our programmers have not incorporated open source software into our proprietary
products and technologies or that they will not do so in the future. In the event that portions of our proprietary technology are
determined to be subject to an open source license, we could be required to publicly release the affected portions of our source
code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each of which
could reduce or eliminate the value of our services and technologies and materially and adversely affect our business, results
of operations and prospects.
Catastrophes may adversely impact the P&C insurance
industry, preventing us from expanding or maintaining our existing customer base and increasing our revenues.
Our customers include P&C insurance
carriers that have experienced, and will likely experience in the future, catastrophe losses that adversely impact their businesses.
Catastrophes can be caused by various events, including, amongst others, hurricanes, tsunamis, floods, windstorms, earthquakes,
hail, tornados, explosions, severe weather and fires, or the spread of pandemics of disease, such as the cornoavirus. Moreover,
acts of terrorism or war could cause disruptions in our or our customers’ businesses or the economy as a whole. The risks
associated with natural disasters and catastrophes are inherently unpredictable, and it is difficult to predict the timing of such
events or estimate the amount of loss they will generate. In the event a future catastrophe adversely impacts our current or potential
customers, we may be prevented from maintaining and expanding our customer base and from increasing our revenues because such events
may cause customers to postpone purchases of new products and professional service engagements or discontinue projects.
Decreases in the capital markets may adversely impact
the life insurance industry, thereby preventing us from expanding or maintaining our existing customer base and increasing our
revenues.
Our customers include life insurance carriers
that have invested some of their funds in the capital markets. Those carriers may experience in the future major losses in those
capital market investments that may cause disruptions to their businesses or to the economy as a whole. Any such major disruption,
may cause those existing or potential new customers to postpone purchases of new products or professional service engagements,
or discontinue existing projects, which, in turn, may prevent us from increasing our revenues, or from maintaining or expanding
our customer base.
There may be consolidation in the insurance market, which
could reduce the use of our products and services and adversely affect our revenues.
Mergers or consolidations among our customers
could reduce the number of our customers and potential customers. This could adversely affect our revenues even if these events
do not reduce the aggregate number of customers or the activities of the consolidated entities. If our customers merge with or
are acquired by other entities that are not our customers, or that use fewer of our products and services, they may discontinue
or reduce their use of our products and services. Any of these developments could materially and adversely affect our results of
operations and cash flows.
Our deed of trust related to our
Series B Debentures contains certain affirmative covenants and restrictive provisions that, if breached, could result in an increase
in the interest rate and, potentially, an acceleration of our obligation to repay those debentures, which we may be unable to effect.
In the deed of trust that we have entered
into with the trustee for the holders of our Series B Debentures, or the debentures, which we offered and sold in an Israeli public
offering and Israeli private placement in September 2017, we have undertaken to maintain a number of conditions and limitations
on the manner in which we can operate our business, including limitations on our ability to undergo a change of control, distribute
dividends, incur a floating charge on our assets, or undergo an asset sale or other change that results in a fundamental change
in our operations. The deed of trust also requires us to comply with certain financial covenants, including maintenance of a minimum
shareholders’ equity level and a maximum ratio of financial indebtedness to shareholders’ equity, at levels that are
customary for companies of comparable size. These limitations and covenants may force us to pursue less than optimal business strategies
or forego business arrangements that could otherwise be financially advantageous to us and, by extension, our debenture holders.
The deed of trust furthermore provides for an upwards adjustment in the interest rate payable under the debentures in the event
that our debentures’ rating is downgraded below a certain level. A breach of the financial covenants for more than two successive
quarters or a substantial downgrade in the Israeli rating of the debentures (below BBB-) would constitute an event of default that
could result in the acceleration of our obligation to repay the debentures, of which there is US$58.9 million principal amount
outstanding (as of March 1, 2020), which accelerated repayment may be difficult for us to effect.
Risks Relating to Our International Operations
Our international sales and operations subject us to additional
risks that can adversely affect our business, results of operations and financial condition.
We are continuing to expand our international
operations as part of our growth strategy. In fiscal years 2018 and 2019, 52.8% and 49.8%, respectively, of our revenues were derived
from outside of North America. Our current international operations and our plans to further expand our international operations
subject us to a variety of risks, including:
|
●
|
Increased exposure to fluctuations in foreign currency exchange rates
|
|
|
|
|
●
|
Complexity in our tax planning, and increased exposure to changes in tax regulations in various jurisdictions in which we operate, which could adversely affect our operating results and frustrate our ability to conduct effective tax planning
|
|
●
|
Increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations
|
|
|
|
|
●
|
Longer payment cycles and difficulties in enforcing contracts and collecting accounts receivable
|
|
|
|
|
●
|
The need to localize our products and licensing programs for international customers
|
|
|
|
|
●
|
Lack of familiarity with and unexpected changes in foreign regulatory requirements
|
|
|
|
|
●
|
The burden of complying with a wide variety of foreign laws and legal standards
|
|
|
|
|
●
|
Compliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, particularly in emerging market countries
|
|
|
|
|
●
|
The potential worsening of the coronavirus outbreak on a global scale, which may cause customers to cancel projects with us, prevent potential future opportunities for our business and harm our ability to maintain a healthy workforce that can implement our services and solutions offerings
|
|
|
|
|
●
|
The unknown and potential adverse impact of Brexit on our EU- and UK- based operations and revenues
|
|
|
|
|
●
|
Import and export license requirements, tariffs, taxes and other trade barriers
|
|
|
|
|
●
|
Increased financial accounting and reporting burdens and complexities
|
|
|
|
|
●
|
Weaker protection of intellectual property rights in some countries
|
|
|
|
|
●
|
Multiple and possibly overlapping tax regimes
|
|
|
|
|
●
|
Political, social and economic instability abroad, terrorist attacks and general security concerns
|
As we continue to expand our business globally,
our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with
our international operations. Any of these risks could harm our international operations and reduce our international sales, adversely
affecting our business, results of operations, financial condition and growth prospects.
International operations in the insurance industry, in
which a significant portion of our business is concentrated, are accompanied by additional costs related to adaptation to regulations
in specific territories.
As we seek to expand the marketing and offering
of our products into new territories, because insurance regulations vary by legal jurisdiction, the investment required to adapt
our solutions to the legal and language requirements of such territories may prevent or delay us from effectively expanding into
such territories. Such adaptation process requires the retention of new, additional skilled personnel with knowledge of the particular
market and applicable regulatory regime. Such skilled personnel may not be available at a reasonable cost relative to the additional
revenues that we expect to recognize in those territories, or may not be available at all.
Our international operations expose us to risks associated
with fluctuations in foreign currency exchange rates that could adversely affect our business.
Most of our revenues are derived from international
operations that are conducted in local currencies. Those operations are conducted in US dollars, GBP, Euro, NIS, Indian rupee,
or INR, and Polish zloty, or PLN. In 2018 and 2019, our revenues were approximately 56.9% and 55.6%, respectively, in US dollars,
with the remainder in the other currencies.
In some territories, like in Israel, India
and Poland, our cost of operations in local currency is higher than the revenues derived from such operations. In other territories,
our revenues are higher than our cost of operations in local currency. Because exchange rates between the NIS, GBP, Euro, INR and
the PLN against the US dollar fluctuate continuously, exchange rate fluctuations and especially larger periodic devaluations could
negatively affect our revenue and profitability.
In certain locations, we engage in
currency-hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our financial
position and results of operations. However, there can be no assurance that any such hedging transactions will materially reduce
the effect of fluctuation in foreign currency exchange rates on such results. In addition, if for any reason exchange or price
controls or other restrictions on the conversion of foreign currencies were imposed, our financial position and results of operations
could be adversely affected.
Our business may be materially affected by changes to
fiscal and tax policies. Potentially negative or unexpected tax consequences of these policies, or the uncertainty surrounding
their potential effects, could adversely affect our results of operations and share price.
As a multinational corporation, we are subject
to income taxes, withholding taxes and indirect taxes in numerous jurisdictions worldwide. Significant judgment and management
attention and resources are required in evaluating our tax positions and our worldwide provision for taxes. In the ordinary course
of business, there are many activities and transactions for which the ultimate tax determination is uncertain. In addition, our
tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting, and other laws,
regulations, principles and interpretations. This may include recognizing tax losses or lower than anticipated earnings in jurisdictions
where we have lower statutory rates and higher than anticipated earnings in jurisdictions where we have higher statutory rates,
changes in foreign currency exchange rates, or changes in the valuation of our deferred tax assets and liabilities.
We may be audited in various jurisdictions,
and such jurisdictions may assess additional taxes against us. If we experience unfavorable results from one or more such tax audits,
there could be an adverse effect on our tax rate and therefore on our net income. Although we believe our tax estimates are reasonable,
the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals,
which could have a material adverse effect on our operating results or cash flows in the period or periods for which a determination
is made. Additionally, we are subject to transfer pricing rules and regulations, including those relating to the flow of funds
between us and our affiliates, which are designed to ensure that appropriate levels of income are reported in each jurisdiction
in which we operate.
As we continue to expand our business in emerging markets,
such as India, we face increasing challenges that could adversely impact our results of operations, reputation and business.
One-third of our employees are currently
located in India. Our significant presence in India, in particular our Research & Development personnel and our personnel for
the delivery of our professional services, poses a number of challenges. These challenges are related to more volatile economic
conditions, poor protection of intellectual property, inadequate protection against crime (including counterfeiting, corruption
and fraud), lack of due process, and inadvertent breaches of local laws or regulations. In addition, local business practices may
be inconsistent with international regulatory requirements, such as anti-corruption and anti-bribery laws and regulations (including
the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act) to which we are subject. It is possible that some of our employees,
subcontractors, agents or partners may violate such legal and regulatory requirements, which may expose us to criminal or civil
enforcement actions, including penalties and suspension or disqualification from U.S. federal procurement contracting. If we fail
to comply with such legal and regulatory requirements, our business and reputation may be harmed.
Conducting business in India involves
unique challenges, including potential political instability; threats of terrorism; the transparency, consistency and effectiveness
of business regulation; corruption; the protection of intellectual property; and the availability of sufficient qualified local
personnel. Any of these or other challenges associated with operating in India may adversely affect our business or operations.
Terrorist activity in India and Pakistan has contributed to tensions between those countries and our operations in India may be
adversely affected by future political and other events in the region.
Risks Related to an Investment in our Common Shares
There is relatively limited trading volume for our common
shares, which reduces liquidity for our shareholders, and may furthermore cause the share price to be volatile, all of which may
lead to losses by investors.
There has historically been limited trading
volume in our common shares, both on the NASDAQ Capital Market and the TASE. While over the past couple of years, there has been
improvement, the trading volume is still relatively low, which results in reduced liquidity for our shareholders. As a further
result of the historically limited volume, our common shares have experienced significant market price volatility in the past and
may experience significant market price and volume fluctuations in the future, in response to factors such as announcements of
developments related to our business, announcements by competitors, quarterly fluctuations in our financial results and general
conditions in the industry in which we compete.
We are a foreign private issuer under
the rules and regulations of the SEC and are therefore exempt from a number of rules under the Exchange Act and are permitted to
file less information with the SEC than a domestic U.S. reporting company, which reduces the level and amount of disclosure that
you receive.
As a foreign private issuer under the Exchange
Act, we are exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural
requirements for proxy solicitations. Moreover, we are not required to file periodic reports and financial statements with the
SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act; and are not required
to comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information. In addition,
our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery
provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of
our common shares. Accordingly, you receive less information about our company than you would receive about a domestic U.S. company,
and are afforded less protection under the U.S. federal securities laws than you would be afforded in holding securities of a domestic
U.S. company.
As a foreign private issuer, we are also
permitted, and have begun, to follow certain home country corporate governance practices instead of those otherwise required under
the Listing Rules of the NASDAQ Stock Market for domestic U.S. issuers. We have informed NASDAQ that we follow home country practice—in
the Cayman Islands— with regard to, among other things, composition of our Board of Directors (whereby a majority of the
members of our Board of Directors need not be “independent directors,” as is generally required for domestic U.S. issuers),
director nomination procedure and approval of compensation of officers. In addition, we have opted to follow home country law instead
of the Listing Rules of the NASDAQ Stock Market that require that a listed company obtain shareholder approval for certain dilutive
events, such as the establishment or amendment of certain equity-based compensation plans, an issuance that will result in a change
of control of the Company, certain transactions other than a public offering involving issuances of a 20% or greater interest in
the Company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices
as opposed to the requirements that would otherwise apply to a United States company listed on the NASDAQ Capital Market may provide
our shareholders with less protection than they would have as stockholders of a domestic U.S. company.
Our controlling shareholder, Formula Systems (1985) Ltd.,
beneficially owns approximately 47.8% of our outstanding Common Shares and therefore asserts a controlling influence over matters
requiring shareholder approval, which could delay or prevent a change of control that may benefit our public shareholders.
Formula Systems (1985) Ltd. beneficially
owns approximately 47.8% of our outstanding Common Shares. As a result, it exercises a controlling influence over our operations
and business strategy and has sufficient voting power to control the outcome of various matters requiring shareholder approval.
These matters may include:
|
■
|
The composition of our board of directors, which has the authority to direct our business and to appoint and remove our officers
|
|
■
|
Approving or rejecting a merger, consolidation or other business combination
|
|
■
|
Amending our Articles, which govern the rights attached to our Common Shares
|
This concentration of ownership of our Common
Shares could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our Common
Shares that might otherwise give you the opportunity to realize a premium over the then-prevailing market price of our Common Shares.
This concentration of ownership may also adversely affect our share price.
Our U.S. shareholders may suffer adverse tax consequences
if we are classified as a passive foreign investment company or as a “controlled foreign corporation”.
Generally, if for any taxable year 75% or
more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be measured
in part by the market value of our Common Shares, which is subject to change) are held for the production of, or produce, passive
income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes under
the Internal Revenue Code of 1986, as amended, or the Code. Based on our gross income and gross assets, and the nature of our business,
we believe that we were not classified as a PFIC for the taxable year ended December 31, 2019. Because PFIC status is determined
annually based on our income, assets and activities for the entire taxable year, it is not possible to determine whether we will
be characterized as a PFIC for the taxable year ending December 31, 2020, or for any subsequent year, until we finalize our financial
statements for that year. Furthermore, because the value of our gross assets is likely to be determined in large part by reference
to our market capitalization, a decline in the value of our Common Shares may result in our becoming a PFIC. Accordingly, there
can be no assurance that we will not be considered a PFIC for any taxable year. Our characterization as a PFIC could result in
material adverse tax consequences for you if you are a U.S. investor, including having gains realized on the sale of our Common
Shares treated as ordinary income, rather than a capital gain, the loss of the preferential rate applicable to dividends received
on our Common Shares by individuals who are U.S. holders, and having interest charges apply to distributions by us and the proceeds
of share sales. Certain elections exist that may alleviate some of the adverse consequences of PFIC status and would result in
an alternative treatment (such as mark-to-market treatment) of our Common Shares. Prospective U.S. investors should consult
their own tax advisers regarding the potential application of the PFIC rules to them. Prospective U.S. investors should refer
to “Item 10.E. Taxation—U.S. Federal Income Tax Considerations” for discussion of additional U.S. income tax
considerations applicable to them based on our treatment as a PFIC.
Certain U.S. holders of our Common Shares
may suffer adverse tax consequences if we or any of our non-U.S. subsidiaries are characterized as a “controlled foreign
corporation,” or a CFC, under Section 957(a) of the Code. Certain changes to the CFC constructive ownership rules under Section
958(b) of the Code introduced by the U.S. Tax Act may cause one or more of our non-U.S. subsidiaries to be treated as CFCs, may
also impact our CFC status, and may adversely affect holders of our Common Shares that are United States shareholders. Generally,
for U.S. shareholders that own 10% or more of the combined vote or combined value of our Common Shares, this may result in adverse
U.S. federal income tax consequences and these shareholders may be subject to certain reporting requirements with the U.S. Internal
Revenue Service. Any such 10% U.S. shareholder should consult its own tax advisors regarding the U.S. tax consequences of acquiring,
owning, or disposing our Common Shares and the impact of the U.S. Tax Act, especially the changes to the rules relating to CFCs.
Risks Related to Our Israeli Operations and Our Status as
a Cayman Islands Company
The tax benefits that are available to us require us to
continue to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes
We derive and expect to continue to derive
significant benefits from various programs, including Israeli tax benefits relating to our “Preferred Technology Enterprise”,
or PTE programs. To be eligible for tax benefits as a Preferred Technology Enterprise, we must continue to meet certain conditions.
If we do not meet the conditions stipulated in the Israeli Law for the Encouragement of Capital Investments, 5719-1959, or the
Investment Law and the regulations promulgated thereunder, as amended, for the PTE, any of the associated tax benefits may be cancelled
and we would be required to repay the amount of such benefits, in whole or in part, including interest and consumer price index,
or CPI, linkage (or other monetary penalties). Further, in the future these tax benefits may be reduced or discontinued. While
we believe that we have met and continue to meet the conditions that entitle us to previously-obtained Israeli tax benefits, there
can be no assurance that the Israeli Tax Authority will agree.
The Israeli government grants that our Israeli subsidiary
has received require us to meet several conditions and restrict our ability to manufacture products and transfer know-how developed
using such grants outside of Israel and require us to satisfy specified conditions.
One of our Israeli subsidiaries received
grants in the past from the government of Israel through the National Technological Innovation Authority, or the Innovation Authority
(formerly operating as Office of the Chief Scientist of the Ministry of Economy of the State of Israel, or the OCS), for the financing
of a portion of its research and development expenditures in Israel with respect to our legacy technology. In consideration for
receiving grants from the Innovation Authority, we are obligated to pay the Innovation Authority royalties from the revenues generated
from the sale of products (and related services) developed (in whole or in part) using the Innovation Authority funds, in an amount
that is up to 100% to 150% of the aggregate amount of the total grants that we received from the Innovation Authority, plus annual
interest for grants received after January 1, 1999. We must fully and originally own any intellectual property developed using
the Innovation Authority grants and any right derived therefrom unless transfer thereof is approved in accordance with the provisions
of the Israeli Encouragement of Research, Development and Technological Innovation Law, 5744-1984, or the Innovation Law (formerly
known as the Encouragement of Industrial Research and Development Law, 5744-1984, or the Research Law), and related regulations.
When a company develops know-how, technology
or products using grants provided by the Innovation Authority, the terms of these grants and the Innovation Law restrict the transfer
of such know-how, and the transfer of manufacturing or manufacturing rights of such products, technologies or know-how outside
of Israel. Even after the repayment of such grants in full, we will remain subject to the restrictions set forth under the Innovation
Law, including:
|
●
|
Transfer of know-how outside of Israel. Any transfer of the know-how that was developed with the funding of the Innovation Authority, outside of Israel, requires prior approval of the Innovation Authority, and the payment of a redemption fee.
|
|
●
|
Local manufacturing obligation. The terms of the grants under the Innovation Law require that the manufacturing of products resulting from Innovation Authority-funded programs be carried out in Israel, unless a prior written approval of the Innovation Authority is obtained (except for a transfer of up to 10% of the production rights, for which a notification to the Innovation Authority is sufficient).
|
|
●
|
Certain reporting obligations. We, as any recipient of a grant or a benefit under the Innovation Law, are required to file reports on the progress of activities for which the grant was provided as well as on our revenues from know-how and products funded by the Innovation Authority. In addition, we are required to notify the Innovation Authority of certain events detailed in the Innovation Law.
|
Therefore, if aspects of our technologies
are deemed to have been developed with Innovation Authority funding, the discretionary approval of an Innovation Authority committee
would be required for any transfer to third parties outside of Israel of know-how or manufacturing or manufacturing rights related
to those aspects of such technologies. We may not receive those approvals. Furthermore, the Innovation Authority may impose certain
conditions on any arrangement under which it permits us to transfer technology or development out of Israel.
The transfer of Innovation Authority-supported
technology or know-how outside of Israel may involve the payment of significant amounts, depending upon the value of the transferred
technology or know-how, the amount of Innovation Authority support, the time of completion of the Innovation Authority-supported
research project and other factors. Furthermore, the consideration available to our shareholders in a transaction involving the
transfer outside of Israel of technology or know-how developed with Innovation Authority funding (such as a merger or similar transaction)
may be reduced by any amounts that we are required to pay to the Innovation Authority.
We received grants from the Innovation Authority
prior to an extensive amendment to the Research Law that came into effect as of January 1, 2016, or the Amendment, which may also
affect the terms of existing grants. The Amendment provides for an interim transition period (which has not yet expired), after
which time our grants will be subject to terms of the Amendment. Under the Research Law, as amended by the Amendment, the Innovation
Authority is provided with a power to modify the terms of existing grants. Such changes, if introduced by the Innovation Authority
in the future, may impact the terms governing our grants.
Our shareholders may face difficulties in protecting their
interests because we are incorporated under Cayman Islands law
Our corporate affairs are governed by our
memorandum of association, or the Memorandum, our articles of association, or the Articles, the Companies Law (2016 Revision) of
the Cayman Islands, or the Companies Law, and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors under the laws of the Cayman Islands are not as clearly established under statutes or judicial
precedent as in jurisdictions in the United States. Therefore, you may have more difficulty in protecting your interests than
would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less developed
nature of Cayman Islands law in this area.
The Companies Law permits mergers and consolidations
between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. Dissenting shareholders
have the right to be paid the fair value of their shares (which, if not agreed between the parties, will be determined by the Cayman
Islands court) if they follow the required procedures, subject to certain exceptions. Court approval is not required for a merger
or consolidation which is effected in compliance with these statutory procedures.
In addition, there are statutory provisions
that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number
of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths
in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by
proxy at a meeting convened for that purpose. The convening of the meeting and subsequently the arrangement must be sanctioned
by the Grand Court of the Cayman Islands. A dissenting shareholder has the right to express to the court the view that the transaction
ought not to be approved.
When a takeover offer is made and accepted
by holders of 90.0% of the shares within four months, the offeror may, within a two-month period, require the holders of the remaining
shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but
this is unlikely to succeed unless there is evidence of fraud, bad faith or collusion.
If the arrangement and reconstruction is
thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily
be available to dissenting shareholders of a corporation incorporated in a jurisdiction in the United States, providing rights
to receive payment in cash for the judicially determined value of the shares. This may make it more difficult for you to assess
the value of any consideration you may receive in a merger or consolidation or to require that the offeror give you additional
consideration if you believe the consideration offered is insufficient.
Shareholders of Cayman Islands exempted
companies have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists
of shareholders. Our directors have discretion under our Memorandum and Articles to determine whether or not, and under what conditions,
our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This
may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or
to solicit proxies from other shareholders in connection with a proxy contest.
Subject to limited exceptions, under Cayman
Islands law, a minority shareholder may not bring a derivative action against the board of directors.
Our home jurisdiction,
the Cayman Islands, has been added by the European Council to the EU’s list of non-cooperative jurisdictions for tax purposes,
commonly referred to as the ‘EU blacklist’. This status, if not removed, may have an adverse impact upon our reputation
and, potentially, our financial condition and results of our activities.
In February 2020, the Cayman Islands was
added to a list of non-cooperative jurisdictions for tax purposes, commonly referred to as
the ‘EU blacklist’. It is commonly believed that the reason for the inclusion of the Cayman Islands in that
list was due to its having missed the EU’s deadline (end of 2019) for the introduction of legislation for the registration
of private funds domiciled in the Cayman Islands (the legislation was introduced in the last quarter of 2019, but did not formally
become law until early February 2020).
While there is a common expectation that
the Cayman Islands will be removed from the blacklist when the list is next updated, in March 2020, we cannot assure you that will
be the case. The reputational harm associated with our being a Cayman Islands entity could potentially have an adverse impact on
our financial condition and results of operations if that status continues for an extended period of time.
Service of process and enforcement
of legal proceedings commenced against us in the United States may be difficult to obtain.
We operate under the laws of the Cayman
Islands and a majority of our assets are located outside of the United States. In addition, most of our directors and executive
officers reside outside of the United States. As a result, it may be difficult for investors to affect service of process within
the United States upon us and such other persons, or to enforce judgments obtained against such persons in United States courts,
and bring any action, including actions predicated upon the civil liability provisions of the United States securities laws. In
addition, it may be difficult for investors to enforce, in original actions brought in courts or jurisdictions located outside
of the United States, rights predicated upon the United States securities laws.
Based on the advice of our Cayman Islands
legal counsel, we believe no reciprocal statutory enforcement of foreign judgments exists between the United States and the Cayman
Islands, and that foreign judgments originating from the United States are not directly enforceable in the Cayman Islands. A prevailing
party in a United States proceeding against us or our officers or directors would have to initiate a new proceeding in the Cayman
Islands using the United States judgment as evidence of the party’s claim. A prevailing party could rely on the summary judgment
procedures available in the Cayman Islands, subject to available defenses in the Cayman Islands courts, including, but not limited
to, the lack of competent jurisdiction in the United States courts, lack of due service of process in the United States proceeding
and the possibility that enforcement or recognition of the United States judgment would be contrary to the public policy of the
Cayman Islands.
Depending on the nature of damages awarded,
civil liabilities under the Securities Act or the Exchange Act for original actions instituted outside the Cayman Islands may or
may not be enforceable. For example, a United States judgment awarding remedies unobtainable in any legal action in the courts
of the Cayman Islands, such as treble damages, would likely not be enforceable under any circumstances.
|
Item 4.
|
Information on the Company
|
|
A.
|
History and Development of the Company.
|
Corporate Details
Our legal and commercial name is Sapiens
International Corporation N.V., and we were incorporated and registered in Curaçao on April 6, 1990. In August 2018, following
shareholder approval, we migrated the legal domicile of our company to the Cayman Islands and now operate as a public limited liability
company under the provisions of the Companies Law (2016 Revision) of the Cayman Islands. We are registered as an Israeli company
for tax purposes only. Our principal place of business is located at Azrieli Center, 26 Harokmim Street, Holon, 5885800, Israel,
and our telephone number there is +972-3-790-2000. Sapiens Americas Corporation is our agent in the United States. Our World Wide
Web address is www.sapiens.com. The information contained on that web site is not a part of this annual report and is not incorporated
by reference herein. Our SEC filings are available to you on the SEC’s website at http://www.sec.gov. This site contains
reports and other information regarding issuers that file electronically with the SEC. The information on that website is not part
of this annual report and is not incorporated by reference herein. Except as described elsewhere in this annual report, we have
not had any important events in the development of our business since January 1, 2019.
Capital Expenditures and Divestitures since January 1,
2017
In the first quarter of 2017, we acquired
StoneRiver, a US-based provider of a wide range of technology solutions and services to insurance carriers, agents, and broker-dealers,
whose product groups encompass P&C solutions, Life solutions, workers compensation, reinsurance solutions and F&C for all
major business lines. The acquisition has enabled us to expand the range of solutions and services that we offer in North America.
We paid approximately $101 million in cash, subject to certain adjustments based on working capital, transaction expenses, unpaid
debt and certain litigation matters. For further information, please see Note 1(c) to our consolidated financial statements included
in Item 18 of this annual report.
In the fourth quarter of 2017, we acquired
KnowledgePrice.com, a Latvian company that specializes in digital insurance services and consulting. The total purchase price was
approximately $6.8 million, out of which $4.1 million was paid at closing and the remainder was subject to earn-outs based on the
revenues of KnowledgePrice.com following the closing. For further information, please see Note 1(c) to our consolidated financial
statements included in Item 18 of this annual report.
In the first quarter of 2018, we acquired
Adaptik, a New Jersey company engaged in the development of software solutions for P&C insurers, including policy administration,
rating, billing, customer management, task management and product design. The total purchase price was approximately $18.2 million
in cash, subject to adjustment, and about $3.7 million was subject to earn out-based specific criteria and continued employment
of founders.
In the third quarter of 2019, we acquired
Cálculo, a leading vendor of insurance consulting and managed services, and a core
solution to the Spanish market. Cálculo’s team of insurance system experts
(one of the largest in Spain) and solid customer base are expected to help us to continue our global expansion by entering the
large Iberian market. We paid approximately $5.8 million in the acquisition, subject to adjustment, and about $1.7 million
was subject to earn out-based specific criteria and continued employment of founders.
In the first quarter of 2020, we acquired
sum.cumo, a German-based technology provider that offers digital, consumer-centric solutions mainly to the insurance sector, for
a purchase price of $22.9 million in cash. An additional $1.8 million was paid to sum.cumo’s senior executives as
part of an existing agreement between sum.cumo and their former shareholders. . In
addition, we issued 173,003 restricted shares units worth approximately $4.4 million to sum.cumo’s senior management,
for which vesting is subject to performance criteria. Sum.cumo’s senior executives may be entitled to future payments
of up to $2.2 million that are subject to both earn out-based and retention specific criteria over
the next four years.
Our principal capital expenditures during
the last three years related mainly to the purchase of computer equipment and software for use by our subsidiaries, as well as
$6.9 million for construction of our new campus initiated in Bangalore, India in July 2019. Our capital expenditures totaled approximately
$2.6 million in 2017, $1.9 million in 2018 and $11.5 million in 2019.
Sapiens is a leading global provider of
software solutions for the insurance industry. Our extensive expertise is reflected in our innovative software platforms, suites,
solutions and services for property & casualty (P&C); reinsurance; life, pension & annuity (L&A); financial &
compliance (F&C); workers’ compensation (WC); and financial markets. Our company offers a full digital suite that provides
an end-to-end, holistic and seamless digital experience for carriers, agents, customers and assorted insurance personnel, across
multiple devices and technologies. Sapiens’ offerings enable our customers to effectively manage their core business functions
– including policy administration, claims and billing – and they support insurers during their digital transformation
journeys. Our portfolio also covers underwriting, illustration and electronic application.
Sapiens supplies decision management solutions
tailored to a variety of financial services providers, so business users across verticals can quickly deploy business logic and
comply with policies and regulations throughout their organizations.
Our platforms possess modern, modular architecture
and are digital-driven. They empower customers to respond to the rapidly changing insurance market and frequent regulatory changes,
while improving the efficiency of their core operations. These process enhancements increase revenue and reduce costs.
2019 was a year of double-digit growth and
acquisitions for Sapiens, while we also invested in building the foundation for further expansion in 2020 and beyond.
In February 2020, Sapiens acquired sum.cumo,
a German-based technology provider that offers disruptive, digital, innovative and consumer-centric solutions mainly to the insurance
sector. Sapiens aims to expand its footprint by offering Sapiens’ complete product and services portfolio in the DACH region
(Germany, Switzerland and Austria), alongside sum.cumo’s offerings. sum.cumo’s experts in consulting, user experience,
marketing and technology enable the region’s insurers to launch successful eCommerce environments.
As described below, in October of 2019,
Sapiens acquired Cálculo, a leading vendor of insurance consulting and managed services, and a core solution to the Spanish
market. Cálculo was established in 1966 and possesses over 150 insurance experts and 25 insurance company customers in Spain.
Cálculo’s team of experts, one of the largest core insurance system teams in Spain, and impressive customer base that
includes several blue-chip companies, will help Sapiens continue its global expansion by facilitating its entry into the large
Iberian market.
In February 2019, Sapiens announced a complete
rebranding that highlights our evolution to a unified global provider of insurance software solutions. The new brand identity marks
Sapiens’ growth into a one-stop shop for insurance software solutions. Sapiens renamed its entire product portfolio and changed
the look-and-feel and contents of all its marketing collateral, and launched a new website. Our master brand architecture and descriptive
solution names quickly communicate our offerings’ main functions and frame Sapiens as a unified company (following the acquisitions
described above). The updated look features our human-to-human (H2H) approach, reflecting the long-term partnerships we have with
customers and employees, and the entirely new marketing communications collateral we developed.
In February 2018, Sapiens acquired Adaptik,
a Pennsylvania-based firm that offers P&C insurers policy administration and billing capabilities for commercial, personal,
specialty and workers’ compensation lines of business. The acquisition was another step in Sapiens’ journey to offer
the U.S. insurance market a modern, modular, fully integrated property & casualty insurance platform.
In February 2017, Sapiens acquired StoneRiver,
a U.S. based company that offered a rich product portfolio comprised of claims, billing, rating, underwriting, illustration, reinsurance
and F&C solutions for all major insurance business lines, across both P&C and L&A. StoneRiver’s comprehensive
set of solutions complements Sapiens’ offerings and has helped Sapiens accelerate its growth in the U.S. market, as well
as globally.
The acquisition of StoneRiver and then Adaptik
created synergy with Sapiens’ strong capabilities and enable us to offer a truly modern, comprehensive property & casualty
digital insurance platform to the U.S. market. Sapiens possesses an innovative P&C digital insurance platform that combines
three powerful core components: Sapiens PolicyPro for Property & Casualty; Sapiens BillingPro for Property &
Casualty; and Sapiens ClaimsPro for Property & Casualty, accompanied by Sapiens’ existing solutions for data and
analytics, digital engagement and distribution, and the cloud.
In December 2017, Sapiens expanded its
Digital capabilities through the acquisition of KnowledgePrice.com (KnowledgePrice), a technology specialist with expertise in
digital insurance services and consulting. Privately-held KnowledgePrice employed digital insurance technology experts and supplied
services to leading insurance providers in the UK and Europe. KnowledgePrice personnel joined the Sapiens Digital division and
now staff a Sapiens center for excellence for digital engagement services.
Sapiens’ expanded Digital division,
which focuses on enabling our customers to deliver on the future of user and customer expectations, creates innovative offerings
and provides full support during customers’ digital journeys.
Sapiens’ enhanced managed services
offerings and cloud deployment have been adopted by several major customers and are expected to continue growing in the coming
years. By allowing Sapiens to manage a substantial part of their ongoing IT operations, customers can focus on their core insurance
competency and business.
Software Solutions
Our software portfolio is comprised of:
|
●
|
Property & Casualty – a comprehensive software platform, suite and solutions supporting a broad range of business lines, including personal, commercial and specialty lines, as well as reinsurance and workers’ compensation (see below).
|
Our portfolio includes Sapiens
Platform for Property & Casualty (which is comprised of core, data and digital solutions) and two core suites: Sapiens CoreSuite
for Property & Casualty (for North America) and Sapiens IDITSuite for Property & Casualty (for EMEA and APAC). The core
suites are offered as a full suite, or insurers can choose standalone components: policy, billing and claims. Sapiens CoreSuite
is based on technology acquired from Adaptik and StoneRiver, while the Sapiens IDITSuite technology evolved from our previous Sapiens
IDIT offering. Smaller, more agile insurance providers can choose Sapiens Stingray for Property & Casualty in North America
and e-Tica in Iberia.
|
●
|
Life, Pension & Annuities – a comprehensive software platform, suite and complementary solutions for the management of a diversified range of products for life, pension & annuities. Our portfolio includes the Sapiens Platform for Life, Pension & Annuities; Sapiens CoreSuite for Life, Pension & Annuities; Sapiens UnderwritingPro for Life & Annuities; Sapiens ApplicationPro for Life & Annuities; Sapiens IllustrationPro for Life & Annuities; and Sapiens ConsolidationMaster for Life & Pension.
|
|
●
|
Digital – Sapiens DigitalSuite offers an end-to-end, holistic and seamless digital experience for insurance customers, agents, brokers, risk managers, customer groups and third-party service providers. The suite is pre-integrated with Sapiens’ core suites and other industry-leading core systems. Comprised of innovative digital solutions and content libraries to facilitate diverse customer journeys, DigitalSuite includes Sapiens AgentConnect and Sapiens CustomerConnect, our portal solutions. As part of our digital offering, Sapiens offers the following data products: Sapiens Intelligence, an analytics platform that drives analytics adoption across the organization with compelling, insightful dashboards and apps; Sapiens IntelligencePro, a comprehensive BI solution with pre-configured reports, dashboards and scorecards; and Sapiens Advanced Analytics, which uses AI and Machine Learning to generate actionable insights based on different models across the insurance value chain.
|
|
●
|
Reinsurance – complete reinsurance software solutions for full financial control and auditing support. Our portfolio includes: Sapiens ReinsuranceMaster, Sapiens ReinsurancePro and Sapiens Reinsurance GO.
|
|
●
|
Workers’ Compensation – Sapiens workers’ compensation offerings handle comprehensive policy/billing and claims needs. Our solution portfolio includes Sapiens Platform for Workers’ Compensation, Sapiens CoreSuite for Workers’ Compensation, Sapiens PolicyPro for Workers’ Compensation and Sapiens ClaimsPro for Workers’ Compensation. Providers looking to preserve greater agility may select Sapiens GO for Workers’ Compensation, which is comprised of Sapiens PolicyGo for Workers’ Compensation, Sapiens ClaimsGo for Workers’ Compensation and Sapiens Connect for Workers’ Compensation.
|
|
●
|
Financial & Compliance – we offer financial & compliance solutions comprised of both annual statement and insurance accounting software. This software includes Sapiens FinancialPro, Sapiens Financial GO, Sapiens StatementPro, Sapiens CheckPro and Sapiens Reporting Tools.
|
|
●
|
Decision Management – Sapiens Decision is an enterprise-scale platform that enables institutions and “citizen developers” across verticals to centrally author, store and manage all organizational business logic. Organizations use it to track, verify and ensure that every decision is based on the most up-to-date rules and policies. Our Decision management products are offered across verticals (including commercial banking, investment banking, mortgage banking, insurance – for both P&C and life, government, etc.).
|
|
●
|
Technology-Based – tailor-made solutions (unrelated to the insurance or financial services market) based on our Sapiens eMerge platform, which provides end-to-end, modular business solutions, ensuring rapid time to market.
|
Services
Our services modernize and automate
processes for insurance providers and financial institutions around the globe, helping to create greater organizational efficiencies,
reduce costs and provide a better end user experience. They can be divided into three main categories: program delivery,
business services and managed services (our various methodologies are applied across the categories).
Program delivery includes:
|
●
|
Project and program management
|
|
|
|
|
●
|
Training
|
|
|
|
|
●
|
Testing
|
|
|
|
|
●
|
Migration
|
|
|
|
|
●
|
Implementation and integration
|
Business services are comprised of:
|
●
|
Business transformation – planning and strategy, business process evaluation, training and change management
|
|
|
|
|
●
|
Digital transformation – business model and processes transformation, and data management consolidation, as well as data migration
|
|
|
|
|
●
|
User acceptance testing (UAT)
|
|
|
|
|
●
|
System integration
|
Managed services include:
|
●
|
Hosting services
|
|
|
|
|
●
|
Application and system management
|
|
|
|
|
●
|
Ongoing production support
|
Sapiens has partnered with Microsoft Azure
to offer its policy administration systems and accompanying services over private and public (single tenant) clouds. The company
maintains an agnostic approach that also utilizes Amazon Web Services (AWS). Sapiens’ cloud deployment includes full infrastructure
for operations, plus the option of choosing cloud-related managed services delivered by Sapiens’ experienced professional
services team.
Methodologies:
Sapiens offers various delivery methodologies,
including Waterfall and Agile (and a combination of the two). We also provide delivery tools and delivery performance indicators.
Built on a solid foundation of insurance
domain expertise, proven technology and a history of successful deployments, our organization assists clients in identifying and
eliminating IT barriers to achieve business objectives.
Our Marketplace and its Needs
Our Target Markets
We operate in a large market undergoing
significant transformation. According to the Gartner report, “Forecast: Enterprise IT Spending for the Insurance Market,
Worldwide, 2017-2023, 3Q19 Update” (a market statistics research report by Gartner, a research and consulting firm, written
by Rajesh Narayan and Rika Narisawa that was published on November 6, 2019, and which we refer to herein as the “Gartner
report”), Gartner forecasted global insurance market IT spending to grow by 4.4% in 2019 and to reach $225 billion in U.S.
dollars. This industry is predicted to reach nearly $265 billion by 2023, growing at a 4.2% compound annual growth rate (CAGR)
from 2018 through 2023. This growth will be driven by an increase in IT services spending and software spending at CAGRs of 5.3%
and 10%, respectively, according to the Gartner Report.
Gartner forecasts total insurance IT spending
on software in 2020 will be $53 billion (software includes application software [analytics and business intelligence, back office/ERP
and supply chain, front office/CRM, collaboration}; infrastructure software {application development and middleware, information
management, storage management software, and system and network management}; and vertical/industry-specific applications).
Sapiens believes that our current total
addressable market for core insurance software solutions and the accompanied point solutions is approximately $40 billion, which
we expect will grow as a result of insurance carriers’ and financial institutions’ need to address, via modern software
solutions from external providers, the operational challenges presented by the inefficiency of their legacy core systems. Legacy
systems reflect technical and functional limitations that adversely impact carriers’ ability to swiftly launch new, innovative
products that satisfy their customers’ changing needs and preferences.
By slowing down carriers’ business
and geographic expansion, legacy systems create operational inefficiencies that result in increased business risk and financial
costs. They are also a barrier for the adoption of digital capabilities, due to their inability to communicate and interact with
innovative digital solutions. Today’s insurance providers are looking for more than just the traditional core capabilities.
They seek insurance platforms with a wider range of capabilities, including full digitalization.
Sapiens’ customers are operating in
a constantly evolving regulatory environment. Sometimes their legacy systems simply do not support new regulatory requirements,
which puts insurance providers at risk of costly non-compliance. There is also a strong trend of shifting attention to the end-customer
experience and activities, with a focus on digital operations. Many insurers are currently unable to provide the type of quality
digital experience that their customers are already enjoying across most other verticals and customer satisfaction is only one
of the many recognized benefits of going digital. This can only be supported via increased usage of data for decision-making, risk
analysis, customer evaluation and rating, which requires a streamlined data flow and easy access to information from multiple sources.
We believe these challenges will accelerate
the shift from spending on legacy systems to new vendor software solutions. It is also Sapiens’ view that these challenges
are too difficult to overcome via in-house systems and the majority of insurers will turn to external software vendors, such as
Sapiens.
Property & Casualty Market
Property & casualty insurance protects policyholders
against a range of losses on items of value. P&C insurance includes the personal segment, which is insurance coverage
for individuals, with products such as motor, home, personal property and travel; the commercial segment, covering aspects
of commercial activity, such as commercial property, car fleets and professional liability; and specialty lines, covering
unique domains, such as marine, art and credit insurance. This market also includes workers’ compensation for market carriers,
administrators and state funds.
During the past few years, the P&C market
has been characterized by a fast rate of digital adoption. New business and technology models are adopted rapidly, to launch innovative
business offerings. This requires advanced software solutions, both on the core layer, which needs to be flexible and open, and
with the variety of digital tools addressing customer experience needs.
Life, Pension & Annuity Markets
Life, pension & annuity providers offer
their customers a wide range of products for long-term savings, protection, pension and insurance. They assist policyholders with
financial planning through life insurance, medical and investment products. Their products can be classified into several areas,
primarily investment and savings, risk and protection, pension and health-related products. These products can be targeted to individuals,
as well as group- and employee-benefit types of products.
The products in this field are long-term in
nature. When insurance providers consider purchasing new platforms from Sapiens, the decision is typically slower and involves
multiple decision-makers throughout the organization.
Digital Market
Insurance carriers risk losing their customers
if they do not provide the type of digital experience that all of us have come to expect from the retailers and service providers
we interact with daily. Additionally, agents, brokers and other channel and service providers require a powerful digital ecosystem
to capably carry out their crucial tasks.
It is not enough to simply provide a portal
to offer today’s consumers the online presence they demand, or to work with an isolated analytics system to parse data. A
big step up is needed via an all-encompassing digital approach featuring integrated components functioning at their highest levels
and complementing each other.
Reinsurance Market
Reinsurance is insurance that is purchased by
an insurance company (ceded reinsurance) from another insurance company (assumed reinsurance) as a means of risk management. The
reinsurer and the insurer enter into a reinsurance agreement, which details the conditions upon which the reinsurer would pay the
insurer’s losses. The reinsurer is paid a reinsurance premium by the insurer and the insurer issues insurance policies to
its own policyholders. The insurer must maintain an accurate system of records to track its reinsurance contracts and treaties,
to avoid claims leakage.
Workers’ Compensation
Workers’ compensation is one of the largest
lines of business in the P&C industry in North America. But future profitability is getting harder to maintain, with medical
and indemnity costs per lost time claim increasing at rates greater than inflation. Insurance organizations require technology
solutions that can adapt quickly to business and market conditions, offering high levels of accuracy and efficiency.
Financial & Compliance Market
Financial professionals face overwhelming challenges
as they struggle to satisfy ever-changing regulatory requirements, while meeting the demands of managerial reporting. The move
towards globalization has introduced new currencies, and CEOs need more performance data for strategic decision-making. Organizations
require one partner to optimize efficiencies with solutions that can be implemented quickly.
Decision Management Market
Increasing competition, regulatory burden, customer
experience expectations and the proliferation of digital and product innovation requirements have necessitated a shift in thinking
and approach among organizations across verticals. By replacing conventional policy and process management with the discipline
known as “decision management,” financial institutions are bridging the gap between business and IT, by enabling business
users to rapidly frame requirements in formal business models that can be easily understood by all stakeholders.
The decision management processes affect overall
corporate performance, including its impact on customers and competitors. Decision management systems are a key performance component
of every financial services organization, as they help the organization define, avoid and hedge financial risk.
Needs of our Target Markets
Large insurance and financial organizations
must constantly invest in their IT systems to respond to key market drivers. They require the ability to:
|
●
|
Satisfy today’s sophisticated, tech-savvy and demanding end-customers – who demand the type of instant, personalized service they enjoy from Netflix or Amazon – via digitalization and innovative initiatives, providing a stronger customer experience and engagement.
|
|
●
|
Use advanced technologies, such as artificial intelligence (AI) and machine learning, to facilitate, improve and automate traditional insurance processes.
|
|
|
|
|
●
|
Provide innovative business models, based on technology capabilities and digital operation (such as portals, web-based acquisition processes, advanced analytics, customer engagement platforms and data sources – including wearables, the Internet of Things and robo-advice.
|
|
|
|
|
●
|
Respond to complex and evolving regulatory standards (past and current standards include Solvency II, IFRS 17, Dodd-Frank legislation, GDPR, etc.)
|
|
|
|
|
●
|
Support internal customers’ growth and operations. This includes reducing the time to market of new products, expanding into new geographies, reducing costs and streamlining operations.
|
|
|
|
|
●
|
Rapidly launch new products and propositions to the market, within a short timeframe and using existing, pre-defined capabilities.
|
Specific Needs of the Insurance Market
The insurance market is a large, complex and
highly regulated environment. Insurance carriers operate in a super-competitive and quickly evolving ecosystem, which necessitates
differentiating their value propositions. Additionally, providers operate under a rigid regulatory regime that demands fast compliance.
The insurance market is going through a rapid evolution process, driven by new technologies, complex ecosystems, digital capabilities
and new business models, all enabled by new technologies.
To efficiently manage their operations, insurance
carriers require IT platforms that enable rapid introduction of changes via configurable, user-driven activities, integration with
internal and external systems, control and auditing of employees’ work, support for omni-channel distribution and clear visibility
into the carrier’s business operations, through streamlining and intelligent usage of data.
To compete in the rapidly changing environment,
and win the competition for end customers, insurance carriers require a coherent digital proposition, allowing them to better interact
with their customers in a digital and omni-channel manner. They are increasingly using robotics, predictive analytics, AI and machine
learning to automate processes and obtain stronger business insights. The cloud can also be utilized for improved operations and
scale.
Insurance carriers are experiencing substantial
operational challenges due to the inefficiency of their legacy policy administration systems and their lack of digitalization.
These legacy systems, which include both technical and functional limitations, acutely impact carriers’ ability to cope with
growing challenges, such as the need for innovation, the shift of power to the consumer, and the dynamic and constantly changing
regulatory environment.
We believe the following are key considerations
for insurance carriers that are considering upgrading their legacy systems:
|
●
|
Dynamic business environment with constantly changing regulations – insurance carriers still use outdated legacy systems that are costly and time-consuming to modify or upgrade. This has prevented them from innovating and growing. Carriers who use legacy systems may find it difficult to modify existing products, introduce new products and reach untapped market segments. Frequently changing global regulatory requirements necessitate specialized data and business rules, which makes change implementation particularly challenging.
|
|
●
|
Change in end-consumers’ behavior and the shift of power to consumers – insurance carriers must rapidly adapt to the shifting needs and behaviors of consumers, including the types and terms of insurance products offered, and how consumers access information. Insurance providers require systems with integration capability and support for multi-channel distribution, so they can reach their clients’ customers and partners using multiple methods, including social media, across devices.
|
|
●
|
A need to improve operational efficiency and reduce total cost of ownership – Sapiens believes that a significant percentage of insurance carriers are still using inefficient and outdated processes that do not automate operations and workflows, and thus do not offer efficient process management. Many of these processes likely have high error rates. Additionally, the ongoing maintenance of legacy systems is expensive and technically difficult. A specialized IT staff with the requisite skills and experience needed to maintain these systems is difficult to find and then eventually replace. Insurers seek systems that are modern, digital, automated, efficient and easy to maintain, and can lower costs over the long term.
|
|
●
|
Increasing global and multi-national operation – a rising number of insurers are accelerating their growth initiatives through global acquisitions. These insurers seek a single provider who can deliver solutions that will be used across markets, combining the support of local regulatory requirements and specific customer needs, while driving a generic corporate business approach and strategy across the globe, reducing costs and overhead.
|
|
●
|
Exploring new business models and innovative propositions – carriers are increasingly looking to: join innovative ecosystems; adopt and use new technologies, and partner with insurtechs; bring modern and differentiating propositions to the market; reduce cost; enhance and speed customer engagement; and improve their business parameters and KPIs.
|
|
|
|
|
●
|
Going digital – digitalization holds significant potential for insurers, but only if they manage to efficiently digitalize their operations, support multi-channel distribution and ensure that agents and customers are able to access real-time, accurate data at any time and from anywhere – across devices.
|
Business Decision Management Market Needs
Many large organizations, particularly in the
financial services market, must comply with complex regulations. They operate in highly competitive markets that require quick
responses. Business logic drives most of the financial services transactions and is the backbone of an organization’s policies
and strategies, and its ability to successfully operate.
To achieve efficiency, business owners must
assume ownership of the business logic and possess the ability to define and modify it, standardize it and reuse it across the
organization. Business logic is defined today by business owners and compliance officers, but IT departments translate the requirements
into code. This process raises several key challenges: the result does not always accurately reflect the business requirements;
the new requirements might conflict with, or override, previous requirements; and the entire process is not fully audited. These
gaps often create an inefficient and risk-exposed organization.
Sapiens’ Software Solutions
Overview
Sapiens is a leading global provider of software
solutions for the insurance industry. By enabling our insurance and financial services customers to digitize their business and
be more agile in the face of changing business environments, we help them take advantage of powerful current trends – such
as artificial intelligence, drones, machine learning, virtual assistants, etc. – while simultaneously reducing IT costs.
We offer our insurance customers a range of
packaged software solutions that are:
|
●
|
Digital – revealing their history and anticipating their future needs, while facilitating easy engagement across preferred interaction channels and multiple devices.
|
|
|
|
|
●
|
Data-driven – based on set of data analysis tools, from data-warehouse and reporting, through business intelligence and analytics, to predictive and advanced analytics – so our customers can become a data-driven operation.
|
|
|
|
|
●
|
Highly automated – by using various technologies, from decision to robotics, we improve efficiency and offer agile customer engagement.
|
|
|
|
|
●
|
Comprehensive and functionally-rich – support for insurance standards, regulations and processes, by providing field-proven functionality and best practices.
|
|
|
|
|
●
|
Customizable & configurable – easily matches our customers’ specific business requirements. Our flexible architecture and configurable structure allow quick functionality augmentation that permits our platform to be used across different markets, unique business requirements and regulatory regimes. We utilize our knowledge and extensive insurance best practices and feature business-led configuration.
|
|
●
|
Open architecture and insurtech ecosystem – provides easy integration to any external application under any technology, allowing streamlined connectivity to all satellite applications. This enhances the digital experience and omni-channel distribution, while maintaining total platform independence and system reliability. Easy interaction with various insurtech companies providing point-solutions that can be consumed by our platforms is enabled.
|
|
|
|
|
●
|
Component-based and scalable – allows our customers to deploy platforms and solutions in a phased and modular approach, reducing risk and harm to the business, while supporting the growth plans and cost efficiency of the organization.
|
Our packaged software solutions enable:
|
●
|
Rapid deployment of new insurance products – via configurable software, which creates a competitive advantage in all the insurance markets we serve.
|
|
|
|
|
●
|
Improvement of operational efficiency and reduction of risk – full insurance process automation, with configurable workflows, audit and control, streamlined insurance practices, and simple integration and maintenance.
|
|
|
|
|
●
|
Reduction of overhead for IT maintenance – easy-to-integrate solutions with flexible and modern architecture, resulting in lower costs for ongoing maintenance, modifications, additions and integration.
|
|
|
|
|
●
|
Enhanced omni-channel distribution and focus on the customers – event-driven architecture, a proactive client management approach, rapid access to all levels of data, and a holistic view of clients and distributors.
|
|
|
|
|
●
|
Cloud-first as a preferred deployment model – with the flexibility to also provide an on-premise deployment.
|
|
|
|
|
●
|
Support for digitalization –insurers and financial services institutions who manage to efficiently digitalize their operations, support omni-channel distribution and ensure that agents and customers are able to access real-time, accurate data at any time and from anywhere – including tablets and mobile devices – will unlock massive potential.
|
|
|
|
|
●
|
Managed services – offering our customers access to a long-term engagement by providing comprehensive support for their daily IT operations, while allowing them to focus on their business KPIs.
|
Sapiens Property & Casualty Solutions
Sapiens Platform for Property & Casualty
The Sapiens Platform for Property & Casualty
is an end-to-end, cloud-based platform with advanced digital capabilities. It can be implemented as a pre-integrated platform,
or as standalone modules. The platform addresses all P&C carrier needs across all lines of business and distribution channels,
offering a wealth of digital features. It is comprised of core (policy, billing and claims), data (advanced analytics) and digital
(a full suite) solutions.
Sapiens offers two core suites, based on region:
Sapiens CoreSuite for Property & Casualty (North America)
Sapiens CoreSuite for Property & Casualty
is comprised of three fully integrated, core components that can also be deployed stand-alone: Sapiens PolicyPro, Sapiens BillingPro
and Sapiens ClaimsPro.
CoreSuite is pre-integrated with additional
components that can be selected, including business intelligence, reinsurance and portal solutions (customer and agent), as well
as various interfaces.
This modular, automated, highly customizable
suite offers a single platform for personal, commercial and specialty lines of business (LoBs). This increases organizational
efficiency by reducing manual effort, generates competitive advantages and saves costs.
Sapiens IDITSuite for Property & Casualty (EMEA & APAC)
The Sapiens IDITSuite for Property & Casualty
is a component-based, standalone software solution suite that offers policy, billing and claims and forms the core of the Sapiens
Platform for Property & Casualty. IDITSuite supports all end-to-end core operations and processes for the non-life P&C
market from inception, to renewal and claims. This pre-integrated, fully digital suite offers customer and agent portals, business
intelligence and more. IDITSuite enables insurers to expand their offerings by testing new lines of business, products and services
using our flexible product factory.
The suite is modular and can integrate with
your ecosystem’s components. Sapiens IDITSuite for Property & Casualty includes multiple lines of business in one policy
for multiple insured objects and assets. It can support corporate agreements and master policy structures. IDITSuite is designed
with growth and change in mind, with extensive multi-company, multi-branding, multi-currency and multi-lingual capabilities. The
IDITSuite management system is built on open technology and can be used across devices.
Sapiens Policy Administration Solutions
The Sapiens’ policy solutions for property & casualty come pre-integrated with the core system. They are easily integrated with existing and external systems and applications.
The solutions manage the end-to-end policy administration lifecycle of an insurance contract, from initial quote, through rating
and policy issuance. They also feature a complete range of policy issuance and amendment capabilities. Agents, underwriters and
customers use the solutions to quote, issue and administer policies. The offerings provide comprehensive policy lifecycle support
for all P&C lines of business.
Sapiens Billing Solutions
The Sapiens’ billing solution for P&C
enables carriers, MGAs and brokers to manage the full lifecycle of premium services, taxes and fees, along with commission billing,
collection and disbursements. P&C carriers can integrate with third-party systems and data repositories, enjoy best-in-class
usability and automate processes throughout the billing lifecycle.
Sapiens Claims Solutions
Sapiens’ claims solutions for
property & casualty provide simplified management and automated control of claims management handling and the settlement
process. They offer intelligent, rules-driven workflow with effective claim assignment, ensuring faster cycle times, as well
as rules-driven automatic claims payment.
Sapiens Stingray for Property & Casualty
Sapiens Stingray for Property & Casualty
is a complete solution with quick implementation for all P&C insurance lines, providing a complete core processing solution
right out of the box. Its modular software components are designed with flexibility in mind. This solution is customizable and
well-suited for tiers 4-5.
e-Tica Solution for Property & Casualty (Spain)
The e-Tica solution for Property & Casualty
empowers insurance companies with a product engine, as well as policy, billing, claims and reinsurance capabilities. A fourth-generation
solution, e-Tica supports all core operations and processes for the P&C market, and supports bank assurance, brokers and direct
insurance.
The suite is modular, flexible and customizable
through module workshops. Additionally, main features include connectivity (simple integration with other applications), robustness
(based on an infrastructure of leading, consolidated tools in the market), cloud-based (platform is deployed today in the cloud
and on premise), web technology (developed with JEE technology and open standards), easy evolution (scalable technology and deployment
in multiple configurations) and accessibility (from any place, any time).
e-Tica ecosystem is being enhanced through new
features in micro services technology, like group policy management and injury agreements.
P&C Digital Offerings
The Sapiens DigitalSuite offers an end-to-end,
holistic and seamless digital experience for P&C customers, agents, brokers, customer groups and third-party service providers.
The suite is pre-integrated with Sapiens’ P&C core and is comprised of digital engagement and digital enablement components.
The suite is cloud-based.
Sapiens Life, Pension & Annuity Solutions
Sapiens Platform for Life, Pension & Annuities
The Sapiens Platform for Life, Pension &
Annuities is a modern, digital insurance platform that includes core, data and digital solutions. With the ability to deploy its
offerings as a complete platform, or as standalone modules, Sapiens can address life providers’ needs across all their lines
of business and distribution channels. Our mature platform is cloud and API-based, and features a strong core and advanced analytics,
as well as data enablement and full digital engagement capabilities.
Sapiens CoreSuite for Life, Pension & Annuities
Sapiens CoreSuite for Life, Pension & Annuities
is designed to provide excellence in the administration of insurance business, facilitate digital transformation and fast time-to-value
for digital strategies, and create greater efficiency via legacy consolidation. It offers insurers:
|
●
|
A single platform for individual and group business
|
|
●
|
Transformation, enablement and execution for digital strategies
|
|
●
|
Greater efficiency via improved automation, user experience and system consolidation
|
Single Platform
The Sapiens CoreSuite software suite supports
the end-to-end administration of group and individual life, annuities, pension and investment business ‒ in a single system.
The suite offers a 360-degree view of the customer from their policy administration system, across all distribution channels and
communication streams.
Existing System Consolidation
Many insurers still use systems developed decades
ago that cannot support today’s regulatory changes, digital marketplace and demanding customers. Too many manual processes
can lead to errors that impact customer experience. Our unique conversion approach reduces the risks involved in migrating from
existing legacy systems.
Sapiens UnderwritingPro for Life, Pension & Annuities
Sapiens UnderwritingPro
for Life, Pension & Annuities is a web-based solution for automated underwriting and new business case management that is part
of Sapiens’ core suite. It speeds new business processes for insurance carriers and their channels, offering an intuitive
user interface with critical updates and task assignments provided on a real-time dashboard. Sapiens UnderwritingPro enables underwriters
and case managers to work on multiple cases simultaneously.
Sapiens ApplicationPro for Life & Annuities
Sapiens ApplicationPro
for Life & Annuities is web-based insurance application software that provides carriers with the choice of a standalone eApplication
system, or a more comprehensive solution that seamlessly integrates with Sapiens IllustrationPro for Life & Annuities and Sapiens
UnderwritingPro for Life & Annuities. Sapiens ApplicationPro is robust electronic application software that helps carriers
address critical business drivers, such as decreasing time-to-issue and reducing policy acquisition costs, all in an extremely
intuitive and easy-to-use package.
Sapiens IllustrationPro for Life &
Annuities
Sapiens IllustrationPro
for Life & Annuities is a point-of-sale solution, offering responsive product illustrations from any location in an electronic
environment, with internet and desktop support. ACORD®-compliant, it offers straight-through processing, from point-of-sale
to application e-submission, supported by a needs analysis suite. IllustrationPro explains complex products in a compelling way.
Its powerful calculation engines handle the most complex product illustrations, including the appropriate historical and hypothetical
references.
Sapiens ConsolidationMaster for Life & Pension
Sapiens ConsolidationMaster is a purpose-built,
end-to-end, legacy, portfolio-focused system with a unique migration methodology that deals with “dirty” data. The
solution has over 500 product templates capable of supporting the compliant administration of legacy products in any language and
regulatory jurisdiction. ConsolidationMaster is designed to significantly cut the costs that are commonly associated with legacy
platforms.
Digital Transformation
Sapiens CoreSuite features full pre-integration
to the Sapiens DigitalSuite and digital capabilities have been enhanced via adaptors. This facilitates digital transformation
and fast time-to-value for digital strategies. It enables life carriers to become engaged, agile organizations with increased sales
opportunities. By integrating CoreSuite with our advanced analytics solution and data warehouse, we can quickly generate actionable
insights, self-service business intelligence and data discovery capabilities, across all mobile devices (and in the cloud).
Sapiens Digital Offerings
Sapiens DigitalSuite offers an end-to-end, holistic
and seamless digital experience for customers, agents, brokers, risk managers, customer groups and third-party service providers.
The suite is pre-integrated with Sapiens’ core solutions, and other industry-leading core systems, and can be easily integrated
with existing systems. Our DigitalSuite is comprised of innovative digital solutions and content libraries to facilitate diverse
customer journeys, including our rich portal content: Sapiens AgentConnect and Sapiens CustomerConnect.
Sapiens DigitalSuite was designed to enable
our carrier customers to deliver on the future of user and customer expectations. DigitalSuite is an offering that can react to
market changes, support flexible interaction with dynamic APIs and offer a modern user experience. Our DigitalSuite features component-based
architecture, built on modern technologies and customer-centric design.
As part of our digital offering, Sapiens offers
our data products, which include: Sapiens Intelligence, an analytics platform that drives analytics adoption across the organization
with compelling, insightful dashboards and apps; and Sapiens Advanced Analytics, using AI and machine learning, generates actionable
insights based on different models across the insurance value chain. All digital offerings are entirely supported in the cloud.
Sapiens Digital API Layer
This highly scalable layer facilitates an
open-communication, API-based platform that enables carriers to interact with insurtech companies, ecosystem technology providers
and business partners. By enabling seamless interaction with any service under any technology, Sapiens’ open architecture
ensures that providers will easily choose the building blocks they need. They’ll be able to seamlessly integrate all elements
within their insurance ecosystem, to succeed today and prepare for the future.
Sapiens Digital Studio
Sapiens DigitalStudio – which features
journey builders, journey analytics (available Q4 2020), an API composition engine and deployment management capabilities –
enables business users to create and maintain digital journeys. This component empowers insurers with agility and fast time to
market, based on its “one click deploy” functionality. Insurers can easily define new APIs on the fly, with full versioning
capabilities and an extendable UI components library.
Sapiens PartnerHub
Sapiens is a global organization with over three
decades of extensive experience in insurance innovation and technology. We seek out and identify the most relevant, advanced and
innovative technology solutions for the insurance market. We connect third-party technology and insurtech solutions to our Sapiens
PartnerHub, from where we make their offerings available to insurers for their own use, and for the use of their customers.
Sapiens Reinsurance Solutions
Sapiens ReinsuranceMaster
Sapiens ReinsuranceMaster is a comprehensive
business and accounting system, providing a superior solution for all types of reinsurance contracts – treaty and facultative,
and proportional and non-proportional. It enables insurers of all sizes to manage their entire range of reinsurance contracts and
activities for all lines of business, including rich accounting functionality and reporting capabilities.
Our reinsurance solution enables full and flexible
control of reinsurance processes, with built-in automation of contracts, calculations and processes. By incorporating fully automated
functions adapted conveniently for your business procedures, Sapiens Reinsurance provides flexible and total financial control
of your reinsurance processes, including complete support for all auditing requirements and statutory compliance.
Sapiens ReinsurancePro
Sapiens ReinsurancePro is an efficient reinsurance
administration system, supporting all types of reinsurance processing, regardless of volume, in one comprehensive and powerful
reinsurance system. The system produces Schedule F automatically. Our solution enables insurance companies to manage and automate
the underwriting and administration of reinsurance, including treaty and facultative, ceded, assumed and retroceded reinsurance.
Sapiens Reinsurance GO
Sapiens Reinsurance GO is designed to meet the
ceded reinsurance processing needs of property & casualty providers, from calculating premium and claim cessions, to producing
the data required for Schedule F. Sapiens Reinsurance GO consolidates reinsurance accounting and cash management into one area.
It automatically attaches and calculates ceded premium, commissions, losses, reserves and LAE, and allocates ceded transactions
to reinsurers.
Sapiens Workers’ Compensation Offerings
Sapiens Platform for Workers’ Compensation
Sapiens Platform for Workers’ Compensation
includes the Sapiens CoreSuite for Workers’ Compensation, Sapiens Connect for Worker’s Connection (a portal solution)
and Sapiens IntelligencePro (business intelligence).
Sapiens CoreSuite for Workers’ Compensation
Sapiens CoreSuite for Workers’ Compensation
offers larger carriers, administrators and state funds the technology solutions that enable them to adapt quickly to business and
market conditions, offering high levels of accuracy and efficiency. The suite provides broad functionality throughout the entire
insurance lifecycle for workers’ compensation, via a core suite, as well as policy, claims and intelligence modules that
can be deployed individually, or as an integrated solution. This suite can be purchased as an integrated offering, or standalone
components: Sapiens PolicyPro and Sapiens ClaimsPro.
Sapiens GO for Workers’ Compensation
Sapiens GO for Workers’ Compensation was
developed specifically for carriers, managing general agents (MGAs), self-insurance funds and third-party administrators. Sapiens
GO can deliver a turnkey solution in just 120 days. With its streamlined user interface and advanced business features, the suite
addresses critical objectives. This suite can be purchased as an integrated offering, or standalone components: Sapiens PolicyGO
and Sapiens ClaimsGO for Workers’ Compensation.
Sapiens Financial & Compliance Solutions
Sapiens FinancialPro
Sapiens FinancialPro is accounting software
designed for insurers to meet their unique requirements for cash, statutory and GAAP reporting, well as unique allocation and consolidation
needs. It handles multi-basis accounting and inter-company transactions, and facilitates the speed and accuracy of financial reporting.
Sapiens insurance experts assist carriers in collecting and reporting information they need to expedite all regulatory processes.
Sapiens Financial GO
Sapiens Financial GO offers small- and mid-sized
insurers a competitive edge in today’s marketplace, because it is developed and supported by highly experienced insurance
experts. The solution is designed to meet insurers’ specific requirements for cash, statutory and GAAP reporting, as well
as unique allocation and consolidation needs. Sapiens Financial GO manages and presents data to help insurance managers make informed
decisions.
Sapiens StatementPro
Sapiens StatementPro makes statement preparation
faster and simpler by offering one-click navigation between statements, pages and form validations (cross-checks) to the pages
they reference. Intuitive workflow and helpful wizards lead users effortlessly through each step, transforming the filing process
and offering one-step filing. Additionally, Sapiens offers Sapiens CheckPro and Sapiens reporting tools.
Sapiens Business Decision Management Solutions
Sapiens Decision is a complete decision management
platform that places software development in the hands of the business domain, creating “citizen developers,” and enforces
business logic across all enterprise applications. Decision effectively addresses the complexity of determining and then translating
business logic – data, business rules and machine learning used to make business decisions – into operational code.
The business side of the organization can model, validate, test and simulate the business logic required for all new processes
using Sapiens Decision. The process takes days or weeks, instead of months or years. A rigorous, structured approach ensures accuracy,
efficiency and consistency during modeling. The models may then be automatically generated and deployed as code into automated
DevOps environments, ensuring that the software is fully aligned with the organization’s business needs.
We are currently focusing on the development
and marketing of Sapiens Decision in the financial services market in North America and Western Europe, and we are building best
practices where the scale and complexity of operations requires enterprise-grade technology that can easily be adapted as policies
and business strategies rapidly evolve. We developed and market Sapiens Decision for several verticals, including the insurance
industry, and leverage our industry knowledge and close relationships with our existing customers and partners. Decision targets
multiple markets:
Sapiens Decision for Consumer & Commercial Banking
Sapiens Decision for Consumer & Commercial
Banking addresses the cost of change. It enables banks to efficiently adapt their operations to the demands of digital transformation,
changing regulations, customer demands and increasing competition, using model-driven development (MDD). With the MDD approach,
Sapiens Decision for Consumer & Commercial Banking enables businesspeople to define business logic in easily understood models.
Sapiens Decision for Investment Banking
With Sapiens Decision for Investment Banking,
the investment bank’s business domain is actively involved in the design, implementation, analysis, testing and optimization
of decisions. The process takes days or weeks, instead of months or years. It enforces business logic across all enterprise applications.
Sapiens Decision for Mortgage Banking
Sapiens Decision for Mortgage Banking enables
mortgage institutions to overcome obstacles and empowers them to achieve improved business control, governance and efficiency.
Sapiens Decision for Insurance
Sapiens Decision for Insurance enables insurers
to efficiently adapt their business operations to the demands of digital transformation, changing regulations, customer demands
and increasing competition. It is currently used by a top-tier, P&C insurance company to implement process automation and effect
digital transformation.
Sapiens Decision for Government
Sapiens Decision for Government provides the
capability to automate manual processes, alleviates gaps coming from different roles and interpretations, and creates fully validated
policy artifacts in a format that other roles in the organization can understand.
Technology-Based Solutions
Sapiens eMerge
Sapiens eMerge is a rules-based, model-driven
architecture that enables the creation of tailor-made, mission-critical core enterprise applications with little or no coding.
Our technology is intended to allow customers to meet complex and unique requirements using a robust development platform. For
example, we perform proxy porting for our customers in an efficient, cost effective manner with Sapiens eMerge.
Sapiens’ Global Services
As noted previously, the Sapiens Service Suite
is comprised of three main pillars: program delivery, business services and managed services, as well as our
various methodologies (which are applied across the first three pillars).
Program delivery includes:
|
●
|
Project and program management
|
|
|
|
|
●
|
Core development and implementation
|
|
|
|
|
●
|
Integration
|
|
|
|
|
●
|
Deployment
|
|
|
|
|
●
|
Testing
|
Business transformation services are comprised
of:
|
●
|
Business transformation – planning and strategy, business process evaluation, training and change management
|
|
|
|
|
●
|
Digital transformation – business model and processes transformation, plus data management consolidation and data migration
|
|
|
|
|
●
|
User acceptance testing (UAT)
|
|
|
|
|
●
|
System integration
|
Managed services include:
|
●
|
Hosting services
|
|
|
|
|
●
|
Application and system management
|
|
|
|
|
●
|
Ongoing production support
|
Our services modernize and automate processes
for insurance providers and financial institutions around the globe, helping to create greater organizational efficiencies, reduce
costs and provide a better end-user experience. Built on a solid foundation of insurance domain expertise, proven technology and
a heritage of successful deployments, we assist clients in identifying and eliminating IT barriers to achieve business objectives.
Benefits include:
|
●
|
Project delivery experience – more than 35 years of field-proven project delivery of core system solutions, based on best practices and accumulated experience
|
|
|
|
|
●
|
System integration – we help our customers deploy modern solutions, while expertly integrating these solutions with their legacy environments that must be supported
|
|
|
|
|
●
|
Global presence – insurance and technology domain experts are located close to our customers to provide professional services
|
Our implementation teams assist customers in
building implementation plans, integrating our software solutions with their existing systems, and deploying specific requirements
unique to each customer and installation. Sapiens’ business services include API integration management and business intelligence
(BI) and advanced analytics consolidation. Our managed services offer ongoing production support and a 24/7 help desk.
Sapiens’ service teams possess strong
technology skills and industry expertise. The level of service and business understanding they provide contributes to the long-term
success of our customers. This helps us develop strategic relationships with our customers, enhances information exchange and deepens
our understanding of the needs of companies within the industry.
Through our service teams, we provide a wide
scope of services and consultancy around our core solutions, both in the initial project implementation stage, as well as ongoing
additional services. Many of our customers also use our services and expertise to assist them with various aspects of daily maintenance,
ongoing system administration and the addition of new solution enhancements.
Such services include:
|
●
|
Adding new lines of business and functional coverage to existing solutions running in production
|
|
|
|
|
●
|
Ongoing support services for managing and administering the solutions
|
|
|
|
|
●
|
Creating new functionalities, per specific requirements of our customers
|
|
|
|
|
●
|
Assisting with compliance for new regulations and legal requirements
|
In addition, most of our clients elect to enter
into an ongoing maintenance and support contract with us. The terms of such a contract are usually twelve months and are renewed
every year. A maintenance contract entitles the customer to technology upgrades (when made generally available) and technical support.
We also offer introductory and advanced classes and training programs available at our offices and customer sites.
We partner with several system integration and
consulting firms to achieve scalable, cost-effective implementations for our customers. Sapiens has developed an efficient, repeatable
methodology that is closely aligned with the unique capabilities of our solutions.
Our Strengths
Comprehensive digital platform of high-end,
crucial business-solutions for insurance – Sapiens is a one-stop shop offering end-to-end solutions for both the
P&C and L&A markets, supporting most sub-segments of these markets and the complete lifecycle of product lines. Our software
supports and enables our customers’ core insurance business processes throughout the full lifecycle, including policy administration,
billing and claims. These are accompanied by the Sapiens DigitalSuite, which offers strong analytics, data management and customer
engagement capabilities. We believe this is a unique offering among software providers. Built for global and multi-national operations,
our solutions are used in a variety of international regulatory, language and currency environments. And our digital suite is pre-integrated
with our Sapiens core products.
Innovative solutions with leading functionality
and technology – Our platforms, suites and solutions are based on advanced, modern architectures that are specifically
designed to satisfy our customers’ needs. These offerings are integrated, modular and component-based, and include scalable
product suites supporting various lines of business. By using our solutions, carriers can support new sales channels, including
mobile and social, reduce time to market for new product launches and lower total cost of ownership. Additionally, we significantly
invest in research and development to ensure that our products employ new technology, are compatible with the needs of our clients
and are easy to use. As a result, our products maintain a leadership position, as recognized by top industry analysts – such
as Celent, Gartner and Novarica – for their levels of technology and functionality.
One-stop shop across products and services
– In addition to our market-leading products across P&C and L&A, we possess consulting and implementation capabilities,
which we use to customize our products and design the solution that best meets our customers’ requirements. We believe our
customers do business with us not only because of our leading products, but also due to our complementary service offerings, which
enhance our products and enable clients to maximize the value derived from our solutions.
Additionally, Sapiens’ managed services
proposition enables our customers to benefit from a long-term engagement model that helps them take care of their IT operational
aspects and ongoing business support. We believe that this approach lowers the risks for our clients, as they transition to a new
system, and at the same time provides them with the desired functionality. We consult with each of our customers to determine their
specific needs and then enhance our core solution and customize the appropriate interfaces.
Strong, diverse and stable customer base
– Sapiens currently serves more than 500 customers globally, including some of the world’s largest global
insurance carriers and financial institutions. Our customer base is diversified across insurance providers of all types and sizes.
We have been able to successfully maintain these customers due to our broad product portfolio geared toward addressing the needs
of the various industries. In addition, our business decision management platform is applicable across the financial services industry,
including a wide range of financial institutions, and offers an opportunity for further diversification in other markets. Such
a diversified portfolio of products enables us to benefit further from cross- and up-sell opportunities to this large customer
base. Geographically, we derived 50.2%, 41.1%, 4.7% and 4.1% of our revenues from the North American, European, and Asia-Pacific
regions, and from South Africa, respectively, in the year ended December 31, 2019, and 47.1%, 44.4%, 4.6% and 3.9% from these respective
areas, in the year ended December 31, 2018.
Long-term relationships with customers –
Our products are at the core of our customers’ businesses, which ensures that our customers continue to use and co-invest
in our products, providing us with long-term relationships that result in revenue stability. Installing a new core system is a
major undertaking for insurance carriers that involves extended pre-production work and entails a comprehensive integration and
implementation effort that is offered as part of our services. Many of our customer relationships have been in place for more than
a decade and we have benefited from recurring revenues as customers request support, upgrades and enhancements for our systems.
We successfully leverage these relationships in a mutually beneficial way, by marketing complementary solutions to our loyal customer
base.
Global company – Sapiens’
500 customers and 3,300 (approximately) employees are located in 27 countries around the world. We have five major development,
delivery and support centers in Israel, U.S., India, Poland and the UK. Sapiens’ “think global, act local” approach
is based on having experts in close proximity to Sapiens customers, to establish and maintain strong relationships, and provide
fast support when necessary.
Proven management team – Sapiens’
management team has extensive experience in the insurance and financial services industries, and we have been able to achieve our
business and development objectives to date. Management has also been successful in retaining key personnel from the companies
we acquired, enabling us to benefit from their experience and knowledge of the acquired products and technology. Our management
team possesses a variety of skills in product development, business development, sales, marketing, technology and finance, as well
as a unique knowledge of the financial services industry. We have maximized contributions from our hard-working, talented and innovative
employees.
Our Strategy
Leveraging our offerings, geographic presence
and experienced management team, our goal is to further expand our presence in the markets in which we operate and further enhance
our leadership in the global market. Our growth strategy is solidly based on both existing and new customers, and will include
mergers and acquisitions, when applicable, to accelerate our growth. We plan to achieve our goals by focusing on the following
principles:
Continue to innovate and extend the leadership
of our product offerings – we plan to continue to invest in research and development (R&D) to enhance our software
platforms, as well as expand our business and technology partnerships, and to ensure our offerings remain leading products, in
terms of functionality and technology. Sapiens believes our focus on innovation, combined with our industry expertise, will enable
us to improve our existing offerings and allow us to produce new solutions for the benefit of our customers and partners.
Leverage our global footprint to offer our
complete platform/solutions – we intend to broaden our existing offering of solutions to enhance our presence in the
geographies in which we currently operate. In particular, we believe that there is considerable opportunity to grow sales of our
P&C platforms in the United States, Canada and Europe. Additionally, we plan to market our current suite of solutions to previously
untapped countries in Europe, including the DACH region and Spain, and to continue to generate revenue on existing products in
new geographies. Sapiens also plans to expand the market reach of our business decision management platform into Europe and the
Asia Pacific region.
Mergers and Acquisitions (M&As) –
our M&A approach facilitates our growth strategy. We continually (but also prudently) seek to identify new growth markets to
penetrate via acquisition of local offices and customer bases. In addition, we aim to enhance our product portfolio with complementary
solutions that will help our customers excel. Sapiens believes that our acquisition of local customer bases and expertise will
accelerate our market penetration in strategic regions. We continue to successfully leverage our North American acquisitions to
strengthen our presence in North America, and accelerate our footprint in the North American P&C market. At the same time,
we are planning to leverage our latest acquisitions of Cálculo in Spain and sum.cumo in Germany to enhance our European
market expansion.
Capture adjacencies and new opportunities
– insurance software vendor engagements with insurers are often long-term. To maximize the value of our current offerings
and leverage our ongoing relationships with customers, Sapiens plan to feature and promote our digital suite and managed services
proposition to enhance our presence in the insurance market. Additionally, we plan to focus on deeper penetration of the financial
services market with our business decision management platform. Our business decision management platform can be used in a wide
variety of organizations to facilitate streamlined and efficient regulatory compliance.
Invest in sales and marketing –
we plan to strengthen our sales and marketing teams by working with and training sales professionals with experience in the insurance
industry, or with connections to new or existing customers. We continually try to expand market awareness of our brand and solutions,
and enter new markets and domains within the insurance technology space. We believe that the strength of our core solutions, the
experience of our sales and marketing team, and our established and growing customer base create a significant opportunity to provide
new and complementary solutions that address the ongoing needs of our customers.
Focus on our existing customer base –
one of our strongest assets is our large and continuously-growing customer base and our long-term relationship with our customers.
As we continuously grow our product portfolio, our value-added services, and our managed services proposition, Sapiens has a unique
opportunity to enhance our footprint within our existing customers base via cross- and up-selling. By providing additional services
and products, Sapiens can grow its presence with established customers. The company plans to strengthen its account management
team and in 2018 we made a strategic decision to create a new team to evolve our previous customer support model from a “siloed-by-business”
support approach to what is now a fully integrated customer success team that supports all Sapiens’ product lines. We continued
to recruit key executives in 2019, and we will expand this team throughout 2020.
Competitive Landscape
Sapiens is focused on serving insurers. The
market for core software solutions for the insurance industry is highly competitive and characterized by rapidly changing technologies,
evolving industry standards and customer requirements, and frequent innovation. In addition, we offer a business decision management
platform, mainly to financial services organizations.
Competitive Landscape for our Insurance Software Solutions
Our competitors in the insurance software solutions
market differ from us based on size, geography and lines of business. Some of our competitors offer a full suite, while others
offer only one module; some operate in specific (domestic) geographies, while others operate on a global basis. And delivery models
vary, with some competitors keeping delivery in-house, using IT outsourcing (ITO), or business process outsourcing (BPO).
The insurance software solutions market is highly
competitive and demanding. Maintaining a leading position is challenging, because it requires:
|
●
|
Development of new core insurance solutions, which necessitates a heavy R&D investment and in-depth knowledge of complex insurance environments
|
|
|
|
|
●
|
Technology innovation to attract new customers, with rapid, technology-driven changes in the insurance business model and new propositions coming
|
|
|
|
|
●
|
A global presence and the ability to support global insurance operations
|
|
|
|
|
●
|
Ability to manage multiple partnerships, due to the changing landscape of insurers’ ecosystems
|
|
|
|
|
●
|
Extensive knowledge of regulatory requirements and how to fulfill them (they can be burdensome and require specific IT solutions)
|
|
|
|
|
●
|
Continued support and development of the solutions entails a critical mass of customers that support an ongoing R&D investment
|
|
|
|
|
●
|
Know-how of insurance system requirements and an ability to bridge between new systems and legacy technologies
|
|
|
|
|
●
|
Enabling mission-critical operations that require experience, domain expertise and proven delivery capabilities to ensure success
|
The complex requirements of this market create
a high barrier to entry for new players. As for existing players, these requirements have led to a marked increase in M&A transactions
in the insurance software solutions sector, since small, local vendors have not been able to sustain growth without continuing
to fund their R&D departments and following the globalization trend of their customers.
We believe Sapiens is well-positioned to leverage
our modern solutions, customer base and global presence to compete in this market and meet its challenges. In addition, our accumulated
experience and expert teams allow us to provide a comprehensive response to the IT challenges of this market.
Different types of competitors include:
|
●
|
Global software providers with their own IP
|
|
|
|
|
●
|
Local/domestic software vendors with their own IP, operating in a designated geographic market and/or within a designated segment of the insurance industry
|
|
|
|
|
●
|
BPO providers who offer end-to-end outsourcing of insurance carriers’ business, including core software administration (although BPO providers want to buy comprehensive software platforms to serve as part of the BPO proposition from vendors and may seek to purchase our solutions for this purpose)
|
|
|
|
|
●
|
Internal IT departments, who often prefer to develop solutions in-house
|
|
|
|
|
●
|
New insurtech companies with niche solutions
|
We differentiate ourselves from our competitors via the following
key factors:
|
●
|
We offer innovative and modern software solutions, with rich functionality and advanced, intuitive user interfaces
|
|
|
|
|
●
|
Sapiens uses model-driven architecture that allows rapid deployment of the system, while reducing total cost of ownership
|
|
●
|
Our solutions are built using an architecture that allows customers to implement the full solution or components, and readily integrate the solution or individual components into their existing IT landscape
|
|
|
|
|
●
|
Strong and global partnership program, with established IT players and new insurtech companies, to ensure linkage to innovative technologies and new business models, as well as ongoing work to embed innovation into Sapiens platforms
|
|
|
|
|
●
|
We recognize technology trends and invest in adjusting our solutions to keep pace with today’s frenetic evolutions
|
|
|
|
|
●
|
We are able to fund R&D investment and maintain the competitive advantage of our products, due to our large and growing customer base and financial stability
|
|
|
|
|
●
|
Our delivery methodology is based on extensive insurance industry experience and cooperation with large insurance companies globally. Our track record over the past few years in developing a strong offshore development center is also a significant parameter in differentiating our abilities in the services space
|
|
|
|
|
|
We leverage our proven track record of successful delivery to help our customers deploy our modern solutions, while integrating with their legacy environment (when that legacy environment must remain supported)
|
Competitive Landscape for Business Decision Management Solutions
Sapiens Decision is a pioneer in this disruptive
market landscape. Since the introduction of our innovative approach to enterprise architecture to the market, we have identified
only a small number of potential competitors.
We differentiate ourselves from our potential
competitors through the following key factors:
|
●
|
We believe that Sapiens Decision is the only solution (that is currently generally available and already in production) that offers a true separation of the business logic in a decision management system for large enterprises
|
|
|
|
|
●
|
Sapiens Decision is unique in its proven ability to support complex environments, with a full audit trail and governance that is crucial for large financial services organizations
|
|
|
|
|
●
|
We understand complex environments where Decision is deployed, due to our experience delivering complex, mission-critical solutions
|
Geographical Scope of Our Operations
For a breakdown of the geographical regions
in which our revenues are generated and the relative amounts of such revenues over the course of the last three fiscal years, please
see: “Item 5 – Operating and Financial Review and Prospects—A. Operating Results—Revenue by geographical
region” below in this annual report.
Sales and Marketing
Our main sales channel is direct sales, with
a small portion of partner sales. Our sales team is dispersed across our regional offices in North America, the United Kingdom,
Belgium, France, Israel, Australia, India, Poland and the Nordics. Following the acquisitions of Cálculo and sum.cumo, we
will now also have regional offices in Spain and Germany. The direct sales force is geared to large organizations within the insurance
and financial services industry.
In 2019, we continued to significantly invest
in our target regions – North America, the UK, Europe and South Africa – and in our sales, presales, domain experts
and marketing teams. We anticipate that our sales team will leverage their proximity to customers and prospective clients to drive
more business, and offer our services across our target markets.
Our account managers were focused on building
ongoing relationships with existing customers during the past year, to maintain a high level of customer satisfaction and identify
up-selling opportunities within these organizations. We believe that a high level of post-contract customer support is important
to our continued success.
As part of our sales process, we typically sell
a package that includes a license, implementation, customization and integration services, and training services. All of our clients
for whom we have deployed our solutions elect to enter into an ongoing maintenance and support contract with us. We aim to expand
our distribution model to include more channel partners and system integrators, but we intend to maintain the direct sales model
as our prime distribution channel.
We attend major industry trade shows to improve
our visibility and our market recognition. Additionally, we host client conferences– such as our annual Sapiens Summit/Client
Conference, which took place in North Atlanta, U.S. in September 2016; in Lisbon, Portugal in October 2017; in San Antonio, Texas,
U.S. in 2018; and in Phoenix, Arizona and Rome, Italy in 2019. We continue investing in our web presence and digital marketing
activities to generate leads and enhance our brand recognition. Sapiens maintains a blog channel (“Sapiens Spotlight”)
and we also invest in our working relationships and advisory services within the global industry-analyst community.
We work together with standards providers –
such as ACORD and MISMO– to further enrich our offerings and provide our customers with comprehensive and innovative solutions
that address the entire breadth of their business needs.
Intellectual Property
Sapiens relies on a combination of contractual
provisions and intellectual property law to protect our proprietary technology. We believe that due to the dynamic nature of the
insurance and software industries, factors such as the knowledge and experience of our management and personnel, the frequency
of product enhancements and the timeliness and quality of our support services build upon the protection offered by copyrights.
We seek to protect the source code of our products
as trade secret information and as unpublished copyright work, although in some cases, we agree to place our source code into escrow.
We also rely on security and copy protection features in our proprietary software. We distribute our products under software license
agreements that grant customers a personal, non-transferable license to use our products and contain terms and conditions prohibiting
the unauthorized reproduction, reverse engineering or misuse of our products. In addition, we attempt to protect trade secrets
and other proprietary information through agreements with employees, consultants and distributors.
Our trademark rights include rights associated
with our use of our trademarks, and rights obtained by registration of our trademarks. Our use and registration of our trademarks
do not ensure that we have superior rights to others that may have registered or used identical or related marks on related goods
or services. We have registrations for the mark “Sapiens” in USA, Benelux, Germany, France, Italy Switzerland and Israel.
In the past we have registered trademarks and tradenames for many of our products both in the US and in the European Union, and
we intend to continue to do so going forward. The initial terms of protection for our registered trademarks range from 10-20 years
and are renewable thereafter.
In the third quarter of 2014, we acquired Knowledge
Partners International LLC, or KPI, and the assets of The Decision Model, or TDM, which included certain intellectual property
rights, including a patent held by TDM and a patent application for The Event Model, or TEM. Both TDM and TEM relate to decision
management methodology. See “Item 4.B. Business Overview— Sapiens Business Decision Management Solutions” for
further information.
In the first quarter of 2017, we acquired StoneRiver.
The acquisition of StoneRiver included the acquisition of about 25 registered trademarks and one issued patent.
Regulatory Impact
The global financial services industry is subject
to significant government regulations that are constantly changing. Financial services companies must comply with regulations,
such as the Sarbanes-Oxley Act, Solvency II, Retail Distribution Review (known as RDR) in the United Kingdom, the Dodd-Frank Act,
the GDPR (enforceable as of May 25, 2018) and other directives regarding transparency. In addition, many individual countries have
increased supervision over financial services operating in their market.
For example, regulators in Europe have been
very active, motivated by past financial crises and the need for pension restructuring. Distribution of policies is being optimized
with the increasing use of bank assurance (selling insurance through a bank’s established distribution channels), supermarkets
and kiosks (insurance stands). Increased activity – such as that occurring in Europe – would generally tend to have
a positive impact on the demand for our software solutions and services. Nevertheless, insurers are cautiously approaching spending
increases, and while many companies have not taken proactive steps to replace their software solutions in recent years, many of
them are now looking for innovative, modern replacements to meet the regulatory changes.
For further information,
please see Item 5.D below, “Trend Information.”
|
C.
|
Organizational
Structure.
|
Sapiens International Corporation
N.V., or Sapiens N.V., is the parent company of the Sapiens group of companies. Our significant subsidiaries are as follows (subsidiary
companies of other Sapiens subsidiaries are listed in indented format beneath their respective parent companies below):
Sapiens International Corporation
B.V., or Sapiens B.V.: incorporated in the Netherlands and 100% owned by Sapiens N.V.
Unless otherwise indicated, the other
subsidiaries of Sapiens listed below are 100% owned by Sapiens B.V.:
Sapiens Israel Software Systems Ltd.: incorporated in
Israel
Sapiens North America Inc.: incorporated in Ontario, Canada
Sapiens (UK) Limited: incorporated in England
|
●
|
Cálculo,
S.A. (owned 100% by Sapiens {UK} Limited)
|
Sapiens France S.A.S.: incorporated in France
Sapiens Japan Co.: incorporated in Japan and 90% owned by Sapiens B.V.
Sapiens Americas Corporation: incorporated in New York,
U.S. (this entity includes the operations of each of the following former wholly-owned subsidiaries of Sapiens Americas Corporation,
which were merged into it effective as of January 1, 2019: Maximum Processing Inc., 4Sight Business Intelligence Inc., StoneRiver,
Inc. and Adaptik Corporation)
Sapiens Technologies (1982) Ltd.: incorporated in Israel
Sapiens Deutschland GmbH: incorporated in Germany (owned
100% by Sapiens Technologies (1982) Ltd.)
|
●
|
Sapiens
Deutschland Consulting GmbH & Co. KG: incorporated in Germany (owned 100% by Sapiens Deutschland GmbH and Sapiens B.V.)
|
sum.cumo GmbH, (owned 100% by Sapiens Deutschland
GmbH)
IDIT Software Solutions (Sweden)
AB, owned 100% by Sapiens Technologies (1982) Ltd.)
Sapiens Software Solutions (IDIT) Ltd., or Sapiens IDIT:
incorporated in Israel (owned 100% by Sapiens Technologies (1982) Ltd.)
IDIT Europe: incorporated in Belgium
(owned 100% by Sapiens IDIT)
Sapiens Software Solutions (Life and Pension) Ltd., or
Sapiens L&P: incorporated in Israel (owned 100% by Sapiens Technologies (1982) Ltd.)
Neuralmatic Ltd.: incorporated in
Israel (owned 66% by Sapiens L&P)
Sapiens NA Insurance Solutions Inc.: incorporated in
Delaware, US (owned 100% by Sapiens L&P)
Sapiens (UK) Insurance Software Solutions Limited: incorporated
in the UK (owned 100% by Sapiens L&P))
Formula Insurance Solutions France (F.I.S France):
incorporated in France (owned 100% by Sapiens (UK) Insurance Software Solutions Limited)
Sapiens Software Solutions (Australia) PTY. Ltd.(Former
FIS- AU Pty Limited: incorporated in Australia (owned 100% by Sapiens (UK) Insurance Software Solutions Limited)
Sapiens Software Solutions Denmark ApS: incorporated
in Denmark (owned 100% by Sapiens (UK) Insurance Software Solutions Limited)
Sapiens SA (PTY) Ltd.: incorporated in South Africa
(owned 100% by Sapiens (UK) Insurance Software Solutions Limited)
Sapiens Software Solutions (Norway) AS): incorporated
in Norway (owned 100% by Sapiens (UK) Insurance Software Solutions Limited)
Sapiens Software Solutions (Decision) Ltd., or Sapiens
Decision (owned 92.89% by Sapiens Technologies (1982) Ltd.)
Sapiens (UK) Decision Limited (owned
100% by Sapiens Decision)
Sapiens Decision NA Inc. (owned 100%
by Sapiens Decision)
Knowledge Partners International LLC, or KPI (owned 100%
by Sapiens Decision NA Inc.)
Sapiens Technologies (1982) India Private Limited (formerly
Ibexi Solutions Private Limited): incorporated in India (owned 100% by Sapiens Technologies (1982) Ltd. and Sapiens Software Solutions
(IDIT) Ltd.)
Sapiens Software Solutions (Singapore) PTE. LTD (formerly
Ibexi Solutions Pte Limited): incorporated in Singapore (owned 100% by Sapiens Software Solutions (India) Private Limited)
Sapiens Software Solutions (Poland) Sp. z o.o. (formerly
Insseco Sp. z o.o.): incorporated in Poland (owned 100% by Sapiens Technologies (1982) Ltd.)
Sapiens Software Solutions Istanbul YAZILIM HİZMETLERİ
İÇ VE DIŞ TİCARET ANONİM ŞİRKETİ: incorporated in Turkey (owned 100% by Sapiens Technologies
(1982) Ltd.)
LLC Sapiens Software Solutions (Latvia) (formerly KnowledgePrice.com):
incorporated in Latvia (owned 100% by Sapiens Technologies (1982) Ltd.)
We are a member of the Asseco Group.
Asseco Group is a federation of companies engaged in information technology. Asseco Group
operates in most of the European countries as well as in Israel, the U.S., Japan, and Canada. Asseco Group companies are listed
on the Warsaw Stock Exchange, Tel-Aviv Stock Exchange as well as on the U.S. NASDAQ Stock Market. Asseco Group offers comprehensive,
proprietary IT solutions for all sectors of the economy.
Asseco holds a controlling interest in Formula
Systems (1985) Ltd., or Formula (NASDAQ: FORTY and TASE: FORT). Based on information provided to the Company by Formula, Formula
held 24,029,094 of our Common Shares, or approximately 47.8% of our outstanding Common Shares, as of March 31, 2020. As of March
31, 2020, Asseco held 25.6% of the outstanding share capital of Formula. In addition, under its October 2017 shareholders agreement
with our Chairman of the Board, Asseco has been granted an irrecoverable proxy to vote an additional 1,971,973 ordinary shares
of Formula, thereby effectively giving Asseco beneficial ownership (voting power) over an aggregate of 38.5%
of Formula’s outstanding ordinary shares.
Based on the foregoing beneficial ownership
by each of Formula and Asseco, each of Formula and Asseco may be deemed to directly or indirectly (as appropriate) control us.
|
D.
|
Property,
Plants and Equipment.
|
We lease office space, constituting our primary
office locations, in the following countries: Israel, the United States, India, Poland, South Africa, the United Kingdom, Latvia,
China, Canada and Denmark. The lease terms for the spaces that we currently occupy are generally five to eleven years. Based on
our current occupancy, we lease (except for owned real property indicated below) the following amount of office space in the following
locations, which constitute our primary locations:
|
●
|
Israel – approximately 166,205 square feet;
|
|
|
|
|
●
|
United States – approximately 88,395 square feet*;
|
|
|
|
|
●
|
India – approximately 162,841 square feet;
|
|
|
|
|
●
|
Poland – approximately 33,924 square feet;
|
|
●
|
South Africa – approximately 3,931 square feet;
|
|
|
|
|
●
|
United Kingdom – approximately 12,554 square feet;
|
|
|
|
|
●
|
Latvia – approximately 11,401 square feet;
|
|
|
|
|
●
|
China – approximately 2,860 square feet;
|
|
|
|
|
●
|
Spain – approximately 12,128 square feet;
|
|
|
|
|
●
|
Canada – approximately 1,407 square feet;
|
|
|
|
|
●
|
Germany – approximately 32,283 square feet;
|
* 10,243 square feet of such office space in the United States constitutes
owned real property.
Our Israeli offices house our corporate headquarters,
as well as our core delivery research and development activities. As of December 31, 2019, the lease at our Israeli facility is
for a term of in excess of three remaining years, and we have an option to extend the term for an additional five years. In 2019,
our rental costs totaled $9.4 million, in the aggregate, for all of our leased offices. We believe that our existing facilities
are adequate for our current needs.
|
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 in conjunction with our consolidated financial statements and
the notes thereto included elsewhere herein. Our financial statements have been prepared in accordance with U.S. GAAP. This discussion
contains forward-looking statements that are subject to known and unknown risks and uncertainties. As a result of many factors,
such as those set forth under Item 3.D “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements”
in the Introduction to this annual report, our actual results may differ materially from those anticipated in these forward-looking
statements.
Overview
We are a leading global provider of software
solutions for the insurance industry. Our extensive expertise is reflected in our innovative software platforms, suites, solutions
and services for property & casualty (P&C); life, pension & annuity (L&A); reinsurance; financial and compliance
(F&C); workers’ compensation (WC); and financial markets. Our company offers a full digital suite that facilitates an
innovative, holistic and seamless digital experience for carriers, agents, customers and assorted insurance personnel, across multiple
devices and technologies. Our offerings enable our customers to effectively manage their core business functions, including policy
administration, claims and billing, and offer support during an insurer’s journey to becoming a digital insurer. Our portfolio
also covers underwriting, illustration and electronic applications. We also supply a complete reinsurance offering for providers
and a decision management platform tailored to a variety of financial services providers, so business users can quickly deploy
business logic and comply with policies and regulations across their organizations.
We derive our revenues principally from the
sale, implementation, maintenance and support of our solutions and from providing consulting and other services related to our
products. Revenues are comprised primarily of revenues from services, including systems integration and implementation and product
maintenance and support, and from licenses of our products.
Results of Operations
The following tables set forth certain data
from our results of operations for the years ended December 31, 2017, 2018 and 2019, as well as such data as a percentage of our
revenues for those years. The data has been derived from our audited consolidated financial statements included in this annual
report. The operating results for the below years should not be considered indicative of results for any future period. This information
should be read in conjunction with the audited consolidated financial statements and notes thereto included in this annual report.
The below tables provide data for each
of the years ended December 31, 2017, 2018 and 2019. However, the below discussion of our results of operations omits a comparison
of our results for the years ended December 31, 2017 and 2018. In order to view that discussion, please see “Item 5. Operating
and Financial Review and Prospects—A. Operating Results—Results of Operations” in our Annual Report on Form 20-F
for the year ended December 31, 2018, which we filed with the SEC on March 27, 2019.
Statement of Income Data
(U.S. dollars, in thousands, except share
and per share data)
|
|
For the year ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Revenues
|
|
$
|
269,194
|
|
|
$
|
289,707
|
|
|
$
|
325,674
|
|
Cost of revenues
|
|
|
175,678
|
|
|
|
180,138
|
|
|
|
196,153
|
|
Gross profit
|
|
|
93,516
|
|
|
|
109,569
|
|
|
|
129,521
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
31,955
|
|
|
|
34,414
|
|
|
|
37,378
|
|
Selling, marketing, general and administrative
|
|
|
60,559
|
|
|
|
52,133
|
|
|
|
54,274
|
|
Total operating expenses
|
|
|
92,514
|
|
|
|
86,547
|
|
|
|
91,652
|
|
Operating income
|
|
|
1,002
|
|
|
|
23,022
|
|
|
|
37,869
|
|
Financial expense, net
|
|
|
(3,010
|
)
|
|
|
(3,991
|
)
|
|
|
(2,768
|
)
|
Income (loss) before taxes on income (tax benefit)
|
|
|
(2,008
|
)
|
|
|
19,031
|
|
|
|
35,101
|
|
Taxes on income (tax benefit)
|
|
|
(2,564
|
)
|
|
|
5,031
|
|
|
|
8,610
|
|
Net income
|
|
|
556
|
|
|
|
14,000
|
|
|
|
26,491
|
|
Attributed to non-controlling interests
|
|
|
(189
|
)
|
|
|
215
|
|
|
|
244
|
|
Attributed to redeemable non-controlling interest
|
|
|
(43
|
)
|
|
|
-
|
|
|
|
-
|
|
Adjustment to redeemable non-controlling interest
|
|
|
350
|
|
|
|
-
|
|
|
|
-
|
|
Net income attributable to Sapiens’ shareholders
|
|
$
|
352
|
|
|
$
|
13,785
|
|
|
$
|
26,247
|
|
Statement of Income Data
|
(as a Percentage of Revenues)
|
|
|
|
For the year ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
65.3
|
%
|
|
|
62.2
|
%
|
|
|
60.2
|
%
|
Gross profit
|
|
|
34.7
|
%
|
|
|
37.8
|
%
|
|
|
39.8
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11.9
|
%
|
|
|
11.9
|
%
|
|
|
11.4
|
%
|
Selling, marketing, general and administrative
|
|
|
22.5
|
%
|
|
|
18
|
%
|
|
|
16.7
|
%
|
Total operating expenses
|
|
|
34.4
|
%
|
|
|
29.9
|
%
|
|
|
28.1
|
%
|
Operating income
|
|
|
0.4
|
%
|
|
|
7.9
|
%
|
|
|
11.6
|
%
|
Financial expense, net
|
|
|
1.1
|
%
|
|
|
1.4
|
%
|
|
|
0.8
|
%
|
Income (loss) before taxes on income (tax benefit)
|
|
|
0.7
|
%
|
|
|
6.6
|
%
|
|
|
10.8
|
%
|
Taxes on income (tax benefit)
|
|
|
1.0
|
%
|
|
|
1.7
|
%
|
|
|
2.6
|
%
|
Net income
|
|
|
0.2
|
%
|
|
|
4.8
|
%
|
|
|
8.2
|
%
|
Attributed to non-controlling interests
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Attributed to redeemable non-controlling interest
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Adjustment to redeemable non-controlling interest
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Net income attributable to Sapiens’ shareholders
|
|
|
0.1
|
%
|
|
|
4.8
|
%
|
|
|
8.1
|
%
|
Comparison of the years ended December 31, 2018 and 2019
Revenues
Please refer to “Critical Accounting Policies
and Estimates” below in this Item 5.A for a description of our accounting policies related to revenue recognition.
Our overall revenues increased by $36.0 million,
or 12.4%, to $325.7 million for the year ended December 31, 2019 from $289.7 million for the year ended December 31, 2018, as shown
in the table below:
|
|
Year
ended
December 31, 2018
|
|
|
Year-over-
year change
|
|
|
Year
ended
December 31, 2019
|
|
($ in thousands)
|
|
$
|
289,707
|
|
|
|
12.4
|
%
|
|
$
|
325,674
|
|
Revenues are derived primarily from implementation
of our solutions and post-implementation services such as ongoing support and maintenance and professional services as part of
an overall solution that we offer to our customers. The net increase in revenues of approximately $36.0 million for the year ended
December 31, 2019 was primarily attributable to our core business growth, mainly in the P&C business, as well as additional
revenues from acquired entities, which contributed $4.8 million towards that increase, primarily from the acquisition of Calculo,
which was completed on September 27, 2019, and the acquisition of Adaptik, which was completed in March 2018 and the revenues
from which were included for a full-year in 2019 (as opposed to 10 months in 2018).
Revenues by geographical region
The dollar amount and
percentage of our revenues attributable to each of the geographical regions in which we conduct our operations for the years
ended December 31, 2018 and 2019, respectively, as well as the percentage change between such periods, were as follows:
|
|
Year
ended
December 31, 2018
|
|
|
Year-over-
|
|
|
Year
ended
December 31, 2019
|
|
($
in thousands)
|
|
Revenues
|
|
|
Percentage
|
|
|
year
change
|
|
|
Revenues
|
|
|
Percentage
|
|
Geographical region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America*
|
|
$
|
136,477
|
|
|
|
47.1
|
%
|
|
|
19.8
|
%
|
|
|
163,565
|
|
|
|
50.2
|
%
|
Europe**
|
|
|
128,513
|
|
|
|
44.4
|
%
|
|
|
4.2
|
%
|
|
|
133,851
|
|
|
|
41.1
|
%
|
Asia Pacific
|
|
|
13,371
|
|
|
|
4.6
|
%
|
|
|
12.6
|
%
|
|
|
15,053
|
|
|
|
4.6
|
%
|
South Africa
|
|
|
11,346
|
|
|
|
3.9
|
%
|
|
|
16.4
|
%
|
|
|
13,205
|
|
|
|
4.1
|
%
|
Total
|
|
$
|
289,707
|
|
|
|
100
|
%
|
|
|
12.4
|
%
|
|
|
325,674
|
|
|
|
100
|
%
|
|
*
|
Revenues
from North America that are shown in the above table consist of revenues from the United States, plus approximately $0.7 million
and $0.4 million of revenues generated in Canada in the years ended December 31, 2018 and 2019, respectively.
|
|
**
|
Revenues
from Europe include revenues from the United Kingdom, or UK, Israel and other European countries.
Revenues from the UK amounted
to $38.8 million and $41.1 million during the years ended December 31, 2018 and 2019, respectively.
|
Our revenues in North America increased by $27.1
million, or 19.8%, to $163.6 million for the year ended December 31, 2019 from $136.5 million for the year ended December 31, 2018.
That increase was comprised of additional revenues attributable to the acquisition of Adaptik, which acquisition was completed
in March 2018 and the revenues from which were included for a full-year in 2019 (as opposed to 10 months in 2018), which contributed
$2.0 million to the increase. An additional increase of $25.1 million in revenues was attributable to our core business growth,
mainly in the P&C business in North America.
Our revenues in Europe increased by $5.3 million,
or 4.2%, to $133.9 million in the year ended December
31, 2019 from $128.5 million in the year ended December 31, 2018. The increase was primarily attributable to $2.8 million of revenues
that we realized from a newly acquired entity, Calculo, whose operations we began to consolidate on September 27, 2019.
Our revenues in Asia Pacific, or APAC, increased
by $1.7 million, or 12.6%, to $15.1 million in the year ended December 31, 2019 from $13.4 million in the year ended December 31,
2018. The increase was primarily attributable to growth of our core P&C business in APAC.
Our revenues in South Africa increased by $1.9
million, or 16.4%, to $13.2 million in the year ended December 31, 2019 from $11.3 million in the year ended December 31, 2018.
That increase was primarily attributable to our core business growth, in both the P&C and L&A businesses in South Africa.
Cost of Revenues
Our cost of revenues for the years ended December
31, 2018 and 2019, respectively (both in absolute terms and as a percentage of our overall revenues), as well as the percentage
change between those years, are provided in the below table:
($ in thousands)
|
|
Year ended
December 31,
2018
|
|
|
Year-over-
year change
|
|
|
Year ended
December 31,
2019
|
|
Cost of revenues
|
|
$
|
180,138
|
|
|
|
8.9
|
%
|
|
$
|
196,153
|
|
Cost of revenues as a percentage of revenues
|
|
|
62.2
|
%
|
|
|
|
|
|
|
60.2
|
%
|
Cost of revenues consist primarily of costs
associated with providing services to customers, including compensation expense to employees and subcontractors, travel expenses,
as well as amortization of acquired technologies and depreciation. Our cost of revenues increased by $16.0 million, or 8.9%, to
$196.1 million for the year ended December 31, 2019, as compared to $180.1 million for the year ended December 31, 2018. The increase
in absolute cost of revenues of $16.0 million was primarily attributable to our need to support our overall organic core business
growth. Cost of revenues decreased as a percentage of our revenues during the year ended December 31, 2019, to 60.2%, as compared
to 62.2% during the year ended December 31, 2018. The 2% decrease in the cost of revenues as a percentage of our revenues was primarily
attributable to the significant increase in our offshore activities, as well as our continuous implementation of cost-efficiency
measures.
Gross profit
Our gross profit for the years ended December
31, 2018 and 2019, respectively (both in absolute terms and as a percentage of our overall revenues), as well as the percentage
change between those periods, are provided in the below table:
($ in thousands)
|
|
Year ended
December 31,
2018
|
|
|
Year over-
year change
|
|
|
Year ended
December 31,
2019
|
|
Gross profit
|
|
$
|
109,569
|
|
|
|
18.2
|
%
|
|
$
|
129,521
|
|
Gross profit as a percentage of revenues
|
|
|
37.8
|
%
|
|
|
|
|
|
|
39.8
|
%
|
Our gross profit increased by $20.0 million,
or 18.2%, to $129.5 million for the year ended December 31, 2019, as compared to $109.5 million for the year ended December 31,
2018. This increase was primarily attributable to the absolute increase in our revenues by $36.0 million for the year ended December
31, 2019 compared to the year ended December 31, 2018. Moreover, the increase can be further attributed to the increase in gross
margin by 2.0% from 2018 to 2019 which originated from our continuous implementation of cost-efficiency measures, as well as the
increase in our offshore activities in 2019. The increase in gross profit as a percentage of revenues for the year ended December
31, 2019 was due to the factors described above.
Operating expenses
The amount of each category of operating expense
for the years ended December 31, 2018 and 2019, respectively, as well as the percentage change in each such expense category between
such periods, and the percentage of our revenues constituted by our total operating expenses in each such period, is provided in
the below table:
($ in thousands)
|
|
Year ended
December 31,
2018
|
|
|
Year-over-
year change
|
|
|
Year ended
December 31,
2019
|
|
Research and development, net
|
|
$
|
34,414
|
|
|
|
8.6
|
%
|
|
$
|
37,378
|
|
Selling, marketing, general and administrative
|
|
|
52,133
|
|
|
|
4.1
|
%
|
|
|
54,274
|
|
Total operating expenses
|
|
$
|
86,547
|
|
|
|
5.9
|
%
|
|
$
|
91,652
|
|
Percentage of total revenues
|
|
|
29.9
|
%
|
|
|
|
|
|
|
28.1
|
%
|
Research and development, or R&D, expenses
are primarily comprised of compensation expense to employees and subcontractors, net of capitalization of software development
costs. Our gross research and development expenses (before capitalization of eligible software development costs) for the year
ended December 31, 2019 totaled $43.0 million compared to $39.6 million in the year ended December 31, 2018. That increase of $3.4
million, or 8.8%, was primarily attributable to an increase in our investment in R&D during 2019, particularly in our P&C
and Digital offerings. Capitalization of software development costs accounted for $5.7 million of our research and development
expenses, net for the year ended December 31, 2019, compared to $5.2 million in the year ended December 31, 2018, constituting
an insignificant change from 2018 to 2019.
Selling, marketing, general and administrative,
or SG&A, expenses, which are primarily comprised of compensation expenses for employees and subcontractors, were $54.3 million
for the year ended December 31, 2019 compared to $52.1 million in the year ended December 31, 2018, representing an increase of
$2.2 million. The increase is mainly attributable to several recruitments of executives, particularly in North America. As a percentage
of total revenues, our SG&A decreased from 18.0% in the year ended December 31, 2018, to 16.7% for the year ended December
31, 2019.
Operating income
Operating income and operating income as a percentage
of total revenues for the years ended December 31, 2018 and 2019, respectively, as well as the percentage change in operating income
between such periods, were as follows:
($ in thousands)
|
|
Year ended
December 31, 2018
|
|
|
Year-over-
year change
|
|
|
Year ended
December 31, 2019
|
|
Operating income
|
|
$
|
23,022
|
|
|
|
64.5
|
%
|
|
$
|
37,869
|
|
Percentage of total revenues
|
|
|
7.9
|
%
|
|
|
|
|
|
|
11.6
|
%
|
The increase in our operating income during
the year ended December 31, 2019 relative to the year ended December 31, 2018 as an absolute amount, and the increase in operating
income as a percentage of our revenues, as reflected in the above table, were attributable to the various gross profit and operating
expenses trends described above, most significantly the increase in our revenues, as well as the increase in our offshore activities
during 2019, which contributed to our increased profitability in 2019..
Financial expenses, net
The amount of our financial expenses, net, for
the years ended December 31, 2018 and 2019, respectively, and the percentage of our revenues for those respective periods constituted
by such amounts, as well as the percentage change in such amounts between such periods, were as follows:
($ in thousands)
|
|
Year ended
December 31,
2018
|
|
|
Year-over-
year change
|
|
|
Year ended
December 31,
2019
|
|
Financial expense, net
|
|
$
|
3,991
|
|
|
|
(30.6
|
)%
|
|
$
|
2,768
|
|
Percentage of total revenues
|
|
|
1.4
|
%
|
|
|
|
|
|
|
0.8
|
%
|
Financial expenses, net, were $2.8 million for
the year ended December 31, 2019 compared to financial expenses of $4.0 million in the year ended December 31, 2018.
The decrease in financial expenses in 2019 was
primarily related to a decrease in the outstanding amount of our Series B Debentures, which resulted in a decrease of $0.4 million
of interest expenses during 2019. A further decrease of $0.8 million is attributable to a decrease in our losses from hedging instruments
and exchange rate differences during 2019, which contributed financial loss in amounts of $1.1 million and $0.3 million in 2018
and 2019, respectively.
Taxes on income)
Taxes on income, both as a dollar value and
as a percentage of income before taxes on income, for the years ended December 31, 2018 and 2019, respectively, as well as the
percentage change in the amount of taxes on income between such periods, were as follows:
($ in thousands)
|
|
Year ended
December 31,
2018
|
|
|
Year-over-
year change
|
|
|
Year ended
December 31,
2019
|
|
Taxes on income
|
|
$
|
5,031
|
|
|
|
71.1
|
%
|
|
$
|
8,610
|
|
As a percentage of income before taxes on income
|
|
|
26.4
|
%
|
|
|
|
|
|
|
24.5
|
%
|
In 2019, we recognized a net tax on income
of $8.6 million, compared to $5.0 million in 2018. The increase in taxes on income is attributable to higher taxable income in
2019 compared to 2018.
Our effective income tax rate varies from period
to period as a result of the various jurisdictions in which we operate, as each jurisdiction has its own system of taxation (not
only with respect to the nominal rate, but also with respect to the allowance of deductions, credits and other benefits). We record
a valuation allowance if we believe that it is more likely than not that the deferred income taxes regarding the loss carry forwards
and other temporary differences, on which a valuation allowance has been provided, will not be realized in the foreseeable future.
We do not recognize certain of the deferred tax assets relating to the net operating losses of certain of our subsidiaries worldwide
due to the uncertainty of the realization of such tax benefits in the foreseeable future.
Net income attributable to Sapiens shareholders
The amount of net income attributable to Sapiens
shareholders and such amount as a percentage of revenues for the years ended December 31, 2018 and 2019, respectively, as well
as the percentage change in net income attributable to Sapiens shareholders between such periods, were as follows:
($ in thousands)
|
|
Year ended
December 31,
2018
|
|
|
Year-over-
year change
|
|
|
Year ended
December 31, 2019
|
|
Net income attributable to Sapiens shareholders
|
|
$
|
13,785
|
|
|
|
90.4
|
%
|
|
$
|
26,247
|
|
Percentage of total revenues
|
|
|
4.8
|
%
|
|
|
|
|
|
|
8.1
|
%
|
As a percentage of total revenues, our net income
attributable to Sapiens shareholders increased from 4.8% in the year ended December 31, 2018 to 8.1% for the year ended December
31, 2019, reflecting the cumulative effect of all of the above-described line items from our statements of income.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance
with U.S. GAAP. The preparation of our financial statements required us to make estimations and judgments that affect the reporting
amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities within the reporting
period. We have based our estimates on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis of making judgments about the values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
More detailed descriptions of these policies are provided in Note 2 to our consolidated financial statements included under Item
18 of this annual report.
We believe that the following critical accounting
policies affect the estimates and judgments that we made in preparing our consolidated financial statements:
|
●
|
Goodwill, long lived assets and other identifiable intangible assets
|
Revenue Recognition
Effective as of January 1, 2018, we implement
the provisions of Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers (which
we refer to as ASC 606). See Note 17 to our consolidated financial statements included in this annual report for further disclosures
required under ASC 606.
Revenues are recognized when control of the
promised goods or services are transferred to the customers, in an amount that reflects the consideration that we expect to receive
in exchange for those goods or services.
We determine revenue recognition through the
following steps:
|
●
|
identification of the contract with a customer;
|
|
●
|
identification of the performance obligations in the contract;
|
|
●
|
determination of the transaction price;
|
|
●
|
allocation of the transaction price to the performance obligations in the contract; and
|
|
●
|
recognition of revenue when, or as, the Company satisfies a performance obligation.
|
Most of the Company’s contracts with customers
contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately,
if they are distinct.
On most occasions, the Company generates revenues
from sales of software licenses which include significant implementation services. Such software licenses and implementation services
are not considered distinct performance obligations, and are accounted for as combined performance obligations. In addition, the
Company generates revenues from post implementation consulting services and maintenance services.
Revenues from contracts (either fixed price
or Time and Materials (T&M)) that involve significant implementation, customization, or integration of the Company’s
software license to customer-specific requirements are performance obligations that are satisfied over time. The underlying deliverable
is owned and controlled by the customer, and does not create an asset with an alternative use to the Company. In addition, the
entity has enforceable right to payment for performance completed to date. Accordingly, the Company recognizes revenue on such
contracts over time, using the percentage of completion accounting method. The Company recognizes revenue and gross profit as the
work is performed, based on a ratio between actual costs incurred compared to the total estimated costs for the contract. Provisions
for estimated losses on uncompleted contracts are made during the period in which such losses become probable, in the amount of
the estimated loss on the entire contract.
When post implementation and consulting services
do not involve significant customization, the Company accounts for such services as performance obligations satisfied over time,
and revenues are recognized as the services are provided.
When the Company enters into a contract for
the sale of software license which does not require significant implementation services, and the customer receives the rights to
use the perpetual or term-based software license, the Company recognizes revenue from the sale of the software license at the time
of delivery, when the customer receives control of the software license. The software license is considered a distinct performance
obligation, as the customer can benefit from the software on its own.
The Company allocates the transaction price
for each contract to each performance obligation identified in the contract based on the relative standalone selling price (SSP).
The Company determines SSP for the purposes of allocating the transaction price to each performance obligation by considering several
external and internal factors, including, but not limited to, transactions where the specific performance obligations are sold
separately, historical actual pricing practices for professional services based on cost plus margins, and geographies in which
the Company offers its services in accordance with ASC 606. If a specific performance obligation, such as the software license,
is sold for a broad range of amounts (that is, the selling price is highly variable) or if the Company has not yet established
a price for that good or service, and the good or service has not previously been sold on a standalone basis (that is, the selling
price is uncertain), the Company applies the residual approach whereby all other performance obligations within a contract are
first allocated a portion of the transaction price based upon their respective SSPs, with any residual amount of transaction price
allocated to the remaining specific performance obligation.
In addition to software license fees, contracts
with customers may contain an agreement to provide for maintenance services. The Company considers the maintenance performance
obligation as a distinct performance obligation that is satisfied over time, and recognized on a straight-line basis over the contractual
period.
Sales commissions are considered incremental
and recoverable costs of obtaining a contract with a customer. Sales commissions paid for initial contracts, which are not commensurate
with sales commissions paid for renewal contracts, are capitalized and amortized over an expected period of benefit. Sales commissions
on initial contracts, which are commensurate with sales commissions paid for renewal contracts, are capitalized and then amortized
correspondingly to the recognized revenue of the related initial contracts. Sales commissions for renewal contracts are capitalized
and then amortized on a straight line basis over the related contractual renewal period. If the expected amortization period is
one-year or less, the commission fee is expensed as incurred. Amortization expense related to these costs are included in sales
and marketing expenses.
Business Combinations
According to ASC 805 “Business Combination”
we are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities
assumed based on their estimated fair values. In allocating the purchase price of acquired companies to the tangible and intangible
assets acquired and liabilities assumed, we developed the required assumptions underlying the valuation work. Critical estimates
in developing such assumptions underlying the valuing of certain of the intangible assets include but are not limited to: future
expected cash flows from customer contracts, acquired developed technologies and discount rates. Management’s estimates of
fair value are based upon assumptions believed to be reasonable, utilizing a market participant approach, but which are inherently
uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.
We were assisted by third party valuators in applying the required economic models (such as income approach), in order to estimate
the fair value of assets acquired and liabilities assumed in our business combination transactions.
Goodwill, long lived assets and other identifiable intangible
assets
Goodwill represents the excess of the purchase
price in a business combination over the fair value of the net tangible and intangible assets acquired. Under ASC 350, “Intangibles
- Goodwill and Other”, goodwill is subject to an annual impairment test or more frequently if impairment indicators are present.
Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The Company
operates in a total of four reporting units: P&C, L&A, IPEL and Decision.
The P&C unit operates our business
related to Property & Casualty solutions, workers compensation and reinsurance worldwide (except for those managed under the
IPEL unit). The L&A unit is responsible for our business related to life, pension & annuity solutions worldwide. The IPEL
unit handles all of our activities in Israel, Poland, Latvia and Spain (for all of our offerings), as well as our activities related
to our eMerge product. Our Decision unit is responsible for all of our business related to our decision management offering. See
“Item 4.B. Business Overview” for further information concerning our products and services.
We applied the provisions of ASC 350 for our
annual impairment test. Under the provisions, an entity 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 amount. If the qualitative assessment does not result in a more likely than not indication of impairment,
no further impairment testing is required.
Based on our annual impairment test during the
fourth quarter of each of 2017, 2018 and 2019, no impairment to our goodwill was required.
Nevertheless, it is possible that our determination
that goodwill for a reporting unit is not impaired could change in the future if current economic conditions deteriorate or remain
difficult for an extended period of time. We continue to monitor the relationship between our market capitalization and book value,
as well as the ability of our reporting units to deliver current and income and cash flows sufficient to support the book values
of the net assets of their respective businesses.
As of December 31, 2019, we had a total of $228.7 million of
goodwill and intangible assets, of which $24.0 million were attributable to capitalized software development costs, and the remainder
of which were acquired as part of our prior acquisitions.
In accordance with ASC 360, “Property,
Plant and Equipment,” or ASC 360, our long-lived assets are reviewed for impairment annually and whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated
by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. In measuring the recoverability of assets, we are required
to make estimates and judgments in assessing our forecast and cash flows and compare that with the carrying amount of the assets.
Additional significant estimates used by management in the methodologies used to assess the recoverability of our long-lived assets
include estimates of future cash-flows, future short-term and long-term growth rates, market acceptance of products and services,
and other judgmental assumptions, which are also affected by factors detailed in our Risk Factors section in this annual report
(see “Item 3.D. Key Information – Risk Factors”). If these estimates or the related assumptions change in the
future, we may be required to record impairment charges for our long-lived assets.
We evaluate our intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, in accordance
with ASC 360 (as described above). In evaluating potential impairment of these assets, we specifically consider whether any indicators
of impairment are present, including, but not limited to whether there:
|
●
|
Has been a significant adverse change in the business climate that affects the value of an asset
|
|
●
|
Has been a significant change in the extent or manner in which an asset is used
|
|
●
|
Is an expectation that the asset will be sold or disposed of before the end of its originally estimated useful life.
|
If indicators of impairment are present, we
compare the estimated undiscounted cash flows that the specific asset is expected to generate to its carrying value. These estimates
involve significant subjectivity. If such assets are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the asset exceeds its fair value.
Our policy for capitalized software costs determines
the timing of our recognition of certain development costs. Software development costs incurred from the point of reaching technological
feasibility until the time of general product release are capitalized. We define technological feasibility as the completion of
a detailed program design. The determination of technological feasibility requires the exercise of judgment by our management.
Since we sell our products in a market that is subject to rapid technological changes, new product development and changing customer
needs, changes in circumstances and estimations may significantly affect the timing and the amounts of software development costs
capitalized and thus our financial condition and results of operations.
Capitalized software development costs are amortized
commencing with general product release by the straight-line method over the estimated useful life of the software product (primarily
seven years). We assess the recoverability of this intangible asset on a regular basis by determining whether the amortization
of the asset over its remaining life can be recovered through undiscounted future operating cash flows from the specific software
product sold.
Taxes on Income
We account for income taxes in accordance with
ASC 740 “Income Taxes,” or ASC 740. ASC 740 prescribes the use of the asset and liability method, whereby deferred
tax assets and liability account balances are determined based on the differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Future realization of our deferred tax assets ultimately depends on the existence of sufficient taxable income
within the available carryback or carryforward periods. Sources of taxable income include future reversals of existing taxable
temporary differences, future taxable income, taxable income in prior carryback years and tax planning strategies. We record a
valuation allowance to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. Changes in
our valuation allowance impact income tax expense in the period of adjustment. Our deferred tax valuation allowances require significant
judgment and uncertainties, including assumptions about future taxable income that are based on historical and projected information.
ASC 740 addresses the determination of whether
tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, a
company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will
be sustained on examination by the taxing authorities, based on the technical merits of the position. We assess our income tax
positions and record tax benefits based upon management’s evaluation of the facts, circumstances, and information available
at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we record
the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing
authority having full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not
that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. We classify liabilities for uncertain
tax positions as non-current liabilities unless the uncertainty is expected to be resolved within one year. We classify interest
as financial expenses and penalties as selling, marketing, general and administration expenses.
As a global company, we use significant judgment
to calculate and provide for income taxes in each of the tax jurisdictions in which we operate. In the ordinary course of our business,
there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise
as a consequence of transfer pricing for transactions with our subsidiaries and tax credit estimates. In addition, the calculation
of acquired tax attributes and the associated limitations are complex and although our income tax reserves are based on our best
knowledge, we may be subject to unexpected audits by tax authorities in the various countries where we have subsidiaries, which
may result in material adjustments to the reserves established in our consolidated financial statements and have a material adverse
effect on our results of operations. We estimate our exposure to unfavorable outcomes related to these uncertainties and estimate
the probability for such outcomes.
Although we believe our estimates are reasonable,
no assurance can be given that the final tax outcome will not be different from what is reflected in our historical income tax
provisions, returns, and accruals. Such differences, or changes in estimates relating to potential differences, could have a material
impact on our income tax provision and operating results in the period in which such a determination is made.
Recently Issued Accounting Pronouncements
For a description of our recently issued and
recently adopted accounting pronouncements, see Notes 2(x) and 2(w) to our consolidated financial statements appearing elsewhere
in this annual report.
Impact of Tax Policies and Programs on our Operating Results
Israeli Tax Considerations and Government Programs
Tax regulations have a material impact on our
business, particularly in Israel where we have our headquarters and due to our election to be treated as an Israeli resident corporation
for tax purposes. The following summary describes the current tax structure applicable to companies in Israel, with special reference
to its effect on us.
General Corporate Tax Structure
Generally, Israeli companies are subject to
corporate tax on their taxable income. As of 2018 and thereafter, the corporate tax rate is 23%. However, the effective tax rate
payable by a company that derives income from an AE, BE, PFE or a PTE, in each case, as defined and further discussed below, may
be considerably lower. See “Law for the Encouragement of Capital Investments” in this Item 5.A below. In addition,
Israeli companies are currently subject to regular corporate tax rate on their capital gains.
Besides being subject to the general corporate
tax rules in Israel, certain of our Israeli subsidiaries have also, from time to time, applied for and received certain grants
and tax benefits from, and participate in, programs sponsored by the Government of Israel, as described below.
Law for the Encouragement of Industry (Taxes), 1969
The Law for the Encouragement of Industry (Taxes),
5729-1969, or the Industry Encouragement Law, provides several tax benefits for an “Industrial Company”. Pursuant to
the Industry Encouragement Law, a company qualifies as an Industrial Company if it is an Israeli resident company which was incorporated
in Israel and at least 90% of its income in any tax year (other than income from certain government loans) is generated from an
“Industrial Enterprise” that it owns and located in Israel or in the “Area,” in accordance with the definition
under Section 3A of the Israeli Income Tax Ordinance (New Version) 1961, or the Ordinance An “Industrial Enterprise”
is defined as an enterprise whose major activity, in any given tax year, is industrial production.
An Industrial Company is entitled to certain
corporate tax benefits, including:
|
●
|
Amortization of the cost of purchased patents, or the right to use a patent or know-how or certain other intangible property rights (other than goodwill) that were purchased in good faith and are used for the development or promotion of the Industrial Enterprise, over an eight year period commencing on the year in which such rights were first exercised
|
|
●
|
The right to elect, under certain conditions, to file a consolidated tax return together with Israeli Industrial Companies controlled by it
|
|
●
|
Expenses related to a public offering are deductible in equal amounts over three years beginning from the year of the offering
|
Eligibility for benefits under the Industry
Encouragement Law is not subject to receipt of prior approval from any governmental authority.
We believe that certain of our Israeli subsidiaries
currently qualify as Industrial Companies within the definition under the Industry Encouragement Law. We cannot assure you that
we will continue to qualify as Industrial Companies or that the benefits described above will be available in the future.
Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959,
or the Investment Law, provides certain incentives for capital investments in a production facility (or other eligible assets).
Generally, an investment program that is implemented in accordance with the provisions of the Investment Law, referred to an Approved
Enterprise, or AE, a Beneficiary Enterprise, or BE, a Preferred Enterprise, or PFE, or a Preferred Technological Enterprise, or
PTE, or a Special Preferred Technological Enterprise, or SPFE, is entitled to benefits as discussed below. These benefits may include
cash grants from the Israeli government and tax benefits, based upon, among other things, the geographic location in Israel of
the facility in which the investment is made. In order to qualify for these incentives, an AE, BE, PFE or PTE is required to comply
with the requirements of the Investment Law.
The Investment Law has been amended several
times over the recent years, with the three most significant changes effective as of April 1, 2005 (referred to as the 2005
Amendment), as of January 1, 2011 (referred to as the 2011 Amendment) and as of January 1, 2017 (referred to as the 2017 Amendment).
Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision
by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the amended Investment
Law. Similarly, the 2011 Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of
the Investment Law prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect up
to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or
elect instead, irrevocably, to forego such benefits and elect the benefits of the 2011 Amendment. The 2017 Amendment introduced
new benefits for Technological Enterprises, alongside the existing tax benefits.
Tax benefits under the 2011 Amendment that became effective on
January 1, 2011
The 2011 Amendment canceled the availability
of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced new benefits
for income generated by a “Preferred Company” through its PFE (as such terms are defined in the Investment Law) as
of January 1, 2011. A Preferred Company is defined as either (i) a company incorporated in Israel which is not wholly owned by
a governmental entity or (ii) a limited partnership that (a) was registered under the Israeli Partnerships Ordinance and (b) all
of its limited partners are companies incorporated in Israel, but not all of them are governmental entities; which has, among other
things, PFE status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company was entitled
to a reduced corporate tax rate of 15% with respect to its preferred income (“PFI”) attributed to its PFE in
2011 and 2012, unless the PFE is located in a certain development zone, in which case the rate was 10%. Such corporate tax rate
was reduced to 12.5% and 7%, respectively, in 2013 and was increased to 16% and 9%, respectively, in 2014 until 2016. Pursuant
to the 2017 Amendment, in 2017 and thereafter, the corporate tax rate for a PFE that is located in a specified development zone
was decreased to 7.5%, while the reduced corporate tax rate for other development zones remains 16%. Income derived by a Preferred
Company from a Special PFE (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years,
to further reduced tax rates of 8%, or 5% if the Special PFE is located in a certain development zone. As of January 1, 2017, the
definition for Special PFE includes less stringent conditions.
The classification of income generated from
the provision of usage rights in know-how or software that were developed in a PFE, as well as royalty income received with respect
to such usage, is subject, as PFE income, to the issuance of a pre-ruling from the Israel Tax Authority that stipulates that such
income is associated with the productive activity of the PFE in Israel.
Dividends paid out of PFI attributed to
a PFE or to a Special PFE are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided
in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for
a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if
such dividends are subsequently distributed from such Israeli company to individuals or a non-Israeli company, withholding tax
at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply). From 2017 to 2019, dividends paid
out of PFI attributed to a PFE, directly to a foreign parent company, were subject to withholding tax at source at the rate of
5% (temporary provisions).
The 2011 Amendment also provided transitional
provisions to address companies already enjoying current benefits under the Investment Law. These transitional provisions provide,
among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in 2011
with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval
that was granted to an AE, which chose to receive grants, before the 2011 Amendment became effective, will remain subject to the
provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions; and (ii) the terms
and benefits included in any certificate of approval that was granted to an AE, that had participated in an alternative benefits
program, before the 2011 Amendment became effective, will remain subject to the provisions of the Investment Law as in effect on
the date of such approval, provided that certain conditions are met. As of December 31, 2015, some of our Israeli subsidiaries
had filed a request to apply the new benefits under the 2011 Amendment.
New Tax benefits under the 2017 Amendment that became effective
on January 1, 2017
The 2017 Amendment was enacted as part of
the Economic Efficiency Law that was published on December 29, 2016, and is effective as of January 1, 2017. The 2017 Amendment
provides new tax benefits for two types of Technology Enterprises, as described below, and is in addition to the other existing
tax beneficial programs under the Investment Law.
The 2017 Amendment provides that a technology
company satisfying certain conditions will qualify as a PTE and will thereby enjoy a reduced corporate tax rate of 12% on income
that qualifies as Preferred Technology Income, or PTI, as defined in the Investment Law. The tax rate is further reduced to 7.5%
for a PTE located in development zone A. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of
12% on capital gain derived from the sale of certain Benefited Intangible Assets (as defined in the Investment Law) to a related
foreign company if the Benefited Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least
NIS 200 million, and the sale receives prior approval from the National Authority for Technological Innovation (previously known
as the Israeli Office of the Chief Scientist) (referred to as IIA).
The 2017 Amendment further provides that
a technology company satisfying certain conditions will qualify as a Special PTE (an enterprise for which, among others, total
consolidated revenues of its parent company and all subsidiaries is at least NIS 10 billion) and will thereby enjoy a reduced
corporate tax rate of 6% on PTI regardless of the company’s geographic location within Israel. In addition, a Special PTE
will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefited Intangible Assets”
to a related foreign company if the Benefited Intangible Assets were either developed by the Special Preferred Technology Enterprise
or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from IIA. A Special PTE that
acquires Benefited Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for
at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed by a PTE or a Special
PTE, paid out of PTI, are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided
in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for
a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if
such dividends are subsequently distributed from such Israeli company to individuals or a non-Israeli company, withholding tax
at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply). If such dividends are distributed
to a foreign company that holds solely or together with other foreign companies 90% or more in the Israeli company and other conditions
are met, the withholding tax rate will be 4% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance
of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
We examined the impact of the
2017 Amendment and the degree to which we will qualify as a PTE or Special PTE, and the amount of PTI that we may have, or other
benefits that we may receive, from the 2017 Amendment. Beginning in 2017, part of the Company’s taxable income in Israel
is entitled to a preferred 12% tax rate under the 2017 Amendment.
Tax Benefits for Research and Development
Israeli tax law allows, under certain conditions,
a tax deduction for research and development expenditures, including capital expenditures, for the year in which they are incurred.
Such expenditures must relate to scientific research and development projects, and must be approved by the relevant Israeli
government ministry, determined by the field of research. Furthermore, the research and development must be for the promotion
of the company’s business and carried out by or on behalf of the company seeking such tax deduction. However, the amount
of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific
research and development projects. Expenditures not so approved by the relevant Israeli government ministry, but otherwise
qualifying for deduction, are deductible over a three-year period.
B.
|
Liquidity and Capital Resources
|
To date, we have substantially satisfied
our capital and liquidity needs through cash flows from operations and sales of our equity and debt securities.
Cash flows provided from operations were
$27.7 million and $66.2 million during the years ended December 31, 2018 and 2019, respectively. We used $25.6 million and $41.9
million of cash in investing activities during the years ended December 31, 2018 and 2019, respectively. We used $9.4 million and
$20.7 million of cash in financing activities during the years ended December 31, 2018 and 2019, respectively. As of December 31,
2018 and 2019, we had $64.6 million and $66.3 million, respectively, of cash and cash equivalents, and $48.2 million and $42.3
million, respectively, of working capital.
We expect that we will continue to generate
positive cash flows from operations on an annual basis, although this may fluctuate significantly on a quarterly basis. We believe
that based on our current operating forecast, the combination of existing working capital and expected cash flows from operations
will be sufficient to finance our ongoing operations for the next twelve months.
On March 18, 2020, we entered into a secured credit agreement with HSBC Bank plc. Pursuant to the credit
agreement, we borrowed $20 million, for a one-year term. See
Note 19(b)
Our future capital requirements will depend
on many factors, including the rate of growth of our revenues, the expansion of our sales and marketing activities and the timing
and extent of our spending to support our research and development efforts and expansion into other markets. Under our new dividend
policy, we will distribute a dividend in an amount of up to 40% of our annual net profit (non-GAAP) each year to our shareholders.
See “Item 8. Financial Information - Dividend Policy”. We may also seek to invest in, or acquire complementary businesses,
applications or technologies. To the extent that existing cash and cash equivalents and cash from operations are insufficient to
fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additional
funds may not be available on terms favorable to us or at all.
Israeli Public Offering and Private
Placement of Debentures
In September 2017, we published with the
Israeli Securities Authority, or the ISA, and the Tel Aviv Stock Exchange, or the TASE, a shelf offering report for an offering
of a new series of debentures—Series B, unsecured, non-convertible debentures, or the Series B Debentures— in Israel,
which offering included institutional and public bid processes. Pursuant to the offering, we offered, issued and sold a total of
234,144 units of Series B Debentures of principal amount of NIS 1,000 each for aggregate gross proceeds of approximately NIS 234.14
million (approximately $66.2 million).
Immediately following the public offering,
we entered into agreements with Israeli accredited investors for the private placement to those investors, in Israel, of an additional
NIS 45.86 million (approximately $12.96 million) principal amount of Series B Debentures. The Series B Debentures were sold in
the private placement at a price of NIS 995.5 for each NIS 1,000 principal amount, thereby generating approximately NIS 45.65 million
($12.9 million) of additional proceeds for our company.
Upon the completion of the public offering
and private placement of Series B Debentures, we had issued and sold the full NIS 280 million (approximately $79.2 million) principal
amount of Series B Debentures that we had offered in the Israeli public offering.
The Series B Debentures were offered as,
and trade on the TASE as, 280,000 units of NIS 1,000 principal amount each. In the case of the privately placed Series B Debentures,
resale by the purchasers was restricted for an initial period, in accordance with the Israeli Securities Law, 5728-1968, and the
regulations thereunder.
The outstanding principal amount of the
Series B Debentures is linked to the US dollar and bears interest at an annual rate of 3.37%, payable on a semi-annual basis (on
January 1 and July 1 of 2018 through 2025, with one final interest payment on January 1, 2026). The principal of the Series B Debentures
is payable in eight equal annual payments beginning on January 1, 2019, with the final payment due on January 1, 2026. The first
two installments, in amounts of $9.9 million and $9.9 million, were paid on January 1, 2019 and 2020, respectively.
In connection with our offering of the Series
B Debentures, we received from S&P Maalot (a subsidiary of S&P Global) a corporate credit rating and a rating for the Series
B Debentures, which S&P Maalot affirmed, as of July 2019 and 2018, as ilA+, with stable outlook.
We have been using, and expect to continue
to use, the net proceeds from the Series B Debentures for general corporate purposes, including repayment of our long-term loan
that was outstanding during 2017, financing our operating and investment activities, and financing future acquisitions.
We have extended the effectiveness of our
Israeli shelf prospectus until August 7, 2020, during which time we may offer additional debentures (Series B or other series).
Cash Flows
Comparison of the years ended December 31, 2018 and 2019
The following tables summarize the sources
and uses of our cash in the years ended December 31, 2018 and 2019:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
|
(in thousands US$)
|
|
Net cash provided from operating activities
|
|
$
|
27,700
|
|
|
$
|
66,157
|
|
Net cash used in investing activities
|
|
|
(25,581
|
)
|
|
|
(41,868
|
)
|
Net cash provided used in financing activities
|
|
|
(9,428
|
)
|
|
|
(20,654
|
)
|
Operating Activities
We derived positive cash flows from operating
activities of $27.7 million and $66.2 million during the years ended December 31, 2018 and 2019, respectively. This increase in
cash flows provided by operating activities for the year ended December 31, 2019 relative to the year ended December 31, 2018 resulted
primarily from an increase in net income of $12.5 million, from $14 million to $26.5 million, which was due to the factors described
above, and a significant improvement in our collection from customers, which helped improve our cash provided by operating activities
by $18.1 million compared to 2018.
Investing Activities
Net cash used in investing activities increased
to $41.9 million for the year ended December 31, 2019, compared to $25.6 million in the year ended December 31, 2018, primarily
due to an increase of $9.6 million in purchase of property and equipment. The majority of this amount is attributable to the new
campus initiated in Bangalore, India in July 2019. In addition, we invested $24.0 million in deposits during 2019, of which $22.9
million was deposited in a trust in order to secure the acquisition of sum.cumo GmbH, which was finalized during February 2020.
This increase in cash used in investing activities was offset in part by a decrease in use of cash for the acquisition of businesses
during 2019, which decreased to $1.6 million in 2019, reflecting the net cash used for the acquisition of Calculo, compared to
$18.5 million in 2018, representing the net cash used for the acquisition of Adaptik.
Financing Activities
We used $20.7 million of cash during the
year ended December 31, 2019 for financing activities, as compared to using $9.4 million of cash in the year ended December 31,
2018. Cash used in financing activities in the year ended December 31, 2019, was primarily attributable to the payment of the first
installment of our Series B Debentures, in the amount of $9.9 million, on January 1, 2019. The increase can be further attributed
to cash used for payment of a cash dividend in a total amount of approximately $11.0 million. In the year ended December 31, 2018,
cash used in financing activities was primarily attributable to payment of a cash dividend in a total amount of approximately $10
million.
C.
|
Research and Development, Patents and Licenses, etc.
|
See the caption
titled “Research and Development” in part A. “Operating Results” of this Item 5 above for a description
of our R&D policies and amounts expended thereon during the last two fiscal years.
Trends Impacting Our Industry and Our Business
There are various sales and marketing trends that influence our business. As of the date of this Form 20-F, the COVID-19 (coronavirus) global outbreak has begun to significantly impact the global economy, as some governments have adopted various restrictions that impact economic activity, including restrictions on travel and public gatherings, and the closing of schools. Although the final overall impact on economic activity is difficult to predict, Gartner has recommended potential action items for chief information officers (CIOs). In its “Coronavirus (COVID-19) Outbreak: Short- and Long-Term Actions for CIOs” report, which was published on March 4, 2020 (written by Sandy Shen, Owen Chen, Arnold Gao, Deacon D.K. Wan, Lily Wok and Julian Sun), Gartner noted that the virus will impact growth patterns, work modes and the continuity of operations. The report advised CIOs to create action plans for future disruptions and prepare for an eventual rebound.
Other analyst reports, which were published before the global outbreak, highlighted potential growth opportunities and areas of focus for insurers.
In Celent’s “Property/Casualty Insurer CIO Pressures and Priorities 2020: North America Edition” report, which was published on February 13, 2020, Donald Light outlined P&C insurer CIO priorities for 2020. These included a focus on growth, innovation and process optimization; and utilizing insurtech for multiple process areas. Three types of applications were cited as a high priority for replacement by insurers: core systems, data and analytics, and portals.
The EY Insurance Outlooks report, “2020 US and Americas Insurance Outlook,” suggests that insurers should focus on improving operations and the customer experience, with the aim of long-term customer engagements. This can be achieved via rapid development and deployment of new product types that are more customer-centric, according to the report.
Nicolas Michellod’s Celent webinar, “2020 Insurance Technology Outlook: Three Trends to Watch in APAC and EMEA,” noted that core system transformation is a high priority for APAC and European insurance CIOs. Fifty percent (50%) of APAC insurers have a core transformation underway and another 20% plan to begin this year. Forty-six percent (46%) of European insurers have a project underway and 19% intend to start this year.
General Trend Information
As people accumulate more property and live
longer, the insurance industry has become more competitive. The competition for the customers’ business requires insurers
to improve customer experience, be faster to market with new products and offer innovative channels, such as social media and mobile.
Innovative technology infrastructure is necessary to support these business initiatives.
In addition, insurers are faced with the
increasing significance of regulatory changes to protect the policyholder in many markets, particularly large insurers that are
considered important to the stability of the world economic system. Many insurers are integrating enterprise risk management as
standard operating procedure, while spreading ownership of risk throughout the strategic decision-making process.
As customers become more sophisticated,
the support of innovative products and distribution channels is mandatory. Insurers are identifying growth opportunities by attracting
new customers and retaining current customers by seeking to reinvent the customer experience and provide quote and policy information
to their customers upon request.
With today’s strong trend of shifting
attention to the end-customer experience and activities, there is an increasing focus on digital operations to support the increasing
usage of the Internet for sales, recommendations and general communication. This affects the carriers’ needs to innovate
their product proposition through a flexible and modern solution. Another substantial trend is the increasing usage of data for
decision-making, risk analysis, and customers’ evaluation and rating, which requires streamlined data flow and easy access
to information from multiple sources.
Increased global competition, the need to
improve distribution channels and provide an enhanced customer experience, and efforts to expand into new countries and markets,
have required heavy investments from insurers, resulting in a trend towards consolidation. This has mainly included consolidation
of applications, databases, development tools, hardware and data centers.
E.
|
Off-Balance Sheet Arrangements
|
We have not engaged
in nor been a party to any off-balance sheet transactions.
F.
|
Contractual Obligations
|
The following table sets forth information
on our short-term and long-term contractual obligations as at December 31, 2019.
|
|
Payments
due by period
|
|
|
|
Total
|
|
|
Less
than 1 year
|
|
|
1
to 3
Years
|
|
|
3
to 5 years
|
|
|
Over
5 years
|
|
|
|
(in thousands)
|
|
Accrued
severance pay, net (1)
|
|
$
|
1,258
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,258
|
|
Operating leases
|
|
|
65,346
|
|
|
|
8,426
|
|
|
|
21,871
|
|
|
|
18,791
|
|
|
|
16,258
|
|
Liability
to the Innovation Authority (2)
|
|
|
223
|
|
|
|
223
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Series
B Debentures (3)
|
|
|
69,287
|
|
|
|
9,898
|
|
|
|
29,695
|
|
|
|
29,694
|
|
|
|
-
|
|
Contingent
payment obligations – acquisitions (4)
|
|
|
4,192
|
|
|
|
2,851
|
|
|
|
1,341
|
|
|
|
-
|
|
|
|
-
|
|
Total
Contractual Cash Obligations
|
|
$
|
140,306
|
|
|
$
|
21,398
|
|
|
$
|
52,907
|
|
|
$
|
48,485
|
|
|
$
|
17,516
|
|
(1)
|
Accrued severance pay relates to accrued severance obligations mainly to our Israeli employees as required under Israeli labor law. We are legally required to pay severance upon certain circumstances, primarily upon termination of employment by our company, retirement or death of the respective employee. Our liability for all of our Israeli employees is fully provided for by monthly deposits with insurance policies and by an accrual.
|
(2)
|
Does not include contingent liabilities to the Innovation Authority of approximately $6.3 million as described in Note 11(a) to our consolidated financial statements contained elsewhere in this annual report.
|
(3)
|
Future principal payments for the Series B Debentures without interest.
|
(4)
|
Contingent payment obligations for our acquisitions do not include contingent payments in an amount of up to $3.2 million, in the aggregate, that are subject to continued employment by the recipients thereof.
|
The total amount of unrecognized tax benefits
for uncertain tax positions was $5.8 million as of December 31, 2019. Payment of these obligations would result from settlements
with taxing authorities. Due to the uncertainties related to those tax matters, we are currently unable to make a reasonably reliable
estimate of when cash settlement with a relevant tax authority will occur. See Note 12(i) to our consolidated financial statements
contained elsewhere in this annual report, as of December 31, 2019.
ITEM 6.
|
Directors, Senior Management and Employees
|
A.
|
Directors and Senior Management
|
The following table
and below biographies set forth certain information regarding the current executive officers and directors of the Company as of
March 31, 2020.
Name
|
|
Age
|
|
Position
|
Guy Bernstein
|
|
52
|
|
Chairman of the Board of Directors
|
Roni Al-Dor
|
|
59
|
|
President, Chief Executive Officer and Director
|
Naamit Salomon
|
|
56
|
|
Director
|
Yacov Elinav (1)
|
|
75
|
|
Director
|
Uzi Netanel (1)
|
|
84
|
|
Director
|
Eyal Ben Chlouche (1)
|
|
58
|
|
Director
|
Roni Giladi
|
|
49
|
|
Chief Financial Officer
|
(1)
|
Member of Audit Committee
|
Guy Bernstein has served
as a director of the Company since January 1, 2007 and was appointed Chairman of the Board of Directors on November 12, 2009.
Mr. Bernstein has served as the chief executive officer of Formula, our parent company, since January 2008. From
December 2006 to November 2010, Mr. Bernstein served as a director and the chief executive officer of Emblaze Ltd. or
Emblaze, our former controlling shareholder. From April 2004 to December 2006, Mr. Bernstein served as the chief
financial officer of Emblaze. He also served as a director of Emblaze from April 2004 until November 2010. Prior to joining
Emblaze, Mr. Bernstein served as Chief Financial and Operations Officer of Magic Software, a position he held since 1999. Mr.
Bernstein joined Magic Software from Kost Forer Gabbay & Kasierer, a member of EY Global, where he acted as senior
manager from 1994 to 1997. Mr. Bernstein also serves as Chief Executive Officer of Magic Software and Chairman of the Board
of Matrix IT Ltd. Mr. Bernstein is a Certified Licensed Public Accountant and holds a BA in Accounting and Economics from Tel
Aviv University.
Roni Al-Dor joined the Company
as President and Chief Executive Officer in November 2005 and has served as a director of the Company since November 2005. Prior
to joining the Company, Mr. Al-Dor was one of the two founders of TTI Team Telecom International Ltd., or TTI, a global supplier
of operations support systems to communications service providers and from August 1996 until 2004, Mr. Al-Dor served as President
of TTI. Prior to that, Mr. Al-Dor served as TTI’s Co-President from November 1995 until August 1996 and its Vice President
from September 1992 to November 1995. During his service in the Israeli Air Force, Mr. Al-Dor worked on projects relating to computerization
in aircrafts. Mr. Al-Dor is a graduate of the military computer college of the Israeli Air Force, studied computer science and
management at Bar Ilan University and attended the Israel Management Center for Business Administration.
Eyal Ben-Chlouche has served
as a director of the Company since August 15, 2008, Mr. Ben-Chlouche served as the Commissioner of Capital Market Insurance and
Savings at the Israeli Ministry of Finance from 2002 through 2005, where he was responsible for implementation of fundamental reforms
in pension savings. Prior to that, he served as a Deputy Commissioner of Capital Market Insurance and Savings and as a Senior Foreign
Exchange and Investment Manager in the Foreign Exchange Department of the Bank of Israel. He also served as an Investment
Officer in the Foreign Exchange Department of the Bank of England, in London. Mr. Ben-Chlouche served as Chairman of the Board
of Directors of the Shahar Group, Chairman of the Advisory Board of Directors of the Shekel Group until the end of 2007 and serves
as a director of Matrix IT Ltd. and Migdal Holding Ltd. Mr. Ben-Chlouche also serves on the Board of Directors of several other
private companies. Mr. Ben-Chlouche also serves as Chairman of the Advisory Board of the Caesarea Center for Capital Markets and
Risk Management. In 2005, Mr. Ben-Chlouche served as a member of the Bachar Committee on Capital Market Reform in Israel. Mr. Ben-Chlouche
is an independent director.
Naamit Salomon has served
as a director of the Company since September 2003. She held the position of Chief Financial Officer of Formula from August 1997
until December 2009. Since January 2010 Ms. Salomon has served as a partner in an investment company. Ms. Salomon also serves as
a director of Magic. From 1990 through August 1997, Ms. Salomon was a controller of two large, privately held companies in the
Formula Group. Ms. Salomon holds a BA in economics and business administration from Ben Gurion University and an LL.M. from the
Bar-Ilan University.
Yacov Elinav has served as
a director of the Company since March 2005. For over 30 years, Mr. Elinav served in various positions at Bank Hapoalim B.M., which
is listed on the London and Tel Aviv Stock Exchanges, including over 10 years as a member of the Board of Management, responsible
for subsidiary and related companies. From 1992 through 2006, Mr. Elinav served as Chairman of the Board of Directors of
Diur B.P. Ltd., the real estate subsidiary of Bank Hapoalim. From August 2004 until 2009, Mr. Elinav served as Chairman of the
Board of Directors of DS Securities and Investments, Ltd. From August 2004 through 2008, Mr. Elinav served as Chairman of the Board
of Directors of DS Provident Funds Ltd., and from 2010 until August 2015, served as Chairman of the Board of Directors of Golden
Pages Ltd.. Mr. Elinav also serves on the Board of Directors of several other public and private companies. Mr. Elinav is an independent
director.
Uzi Netanel has served
as a director of the Company since March 2005. He has served as chairman of the Board of Directors of Maccabi Enterprise
Development & Management Ltd. since 2005, and as a director of Maccabi Health Services since 2005. He previously served
as Chairman of Maccabi Group Holdings Ltd., from 2005 through 2011. From 2004 through 2007, Mr. Netanel served as Chairman of
Board of Directors of M.L.L Software & Computers, and from 2000 through 2011 served as a director of Bazan and Carmel
Olephine. From 2001 through 2003, Mr. Netanel served as partner in the FIMI Opportunity Fund. From 1993 through 2001, he
served as Active Chairman of Israel Discount Capital Markets and Investments Ltd. From 1997 to 1999, Mr. Netanel served as
Chairman of Poliziv Plastics Company (1998) Ltd. From 2005 through 2014, he served as director of Maman Group and from 2012
through 2014, he served as director of Gadot Biochemicals. Mr. Netanel also serves on the Board of Directors of Acme Trading,
Assuta Health Centers and Dorcel (B.A.Z.) Ltd. Mr. Netanel is an independent director.
Roni Giladi joined the Company
as Chief Financial Officer in July 2007. Prior to joining the Company, Mr. Giladi served as the Director of Finance at Emblaze
from January 2007. Prior to joining Emblaze, Mr. Giladi served as Chief Financial Officer of RichFX, from August 2003 until November
2006, after serving as Corporate Controller from June 2002. Prior to RichFX, Mr. Giladi worked at EY Israel, from 1997-2002, as
a manager in the high-tech practice group. Mr. Giladi is Certified Licensed Public Accountant and holds a BA in Business Management
and Accounting from the College of Management in Israel.
Under our Articles, the Board of Directors
must have a minimum of three, and may have a maximum of 24, directors. Directors of the Company are appointed by our General Meeting
of Shareholders and hold office until the expiration of the term of their appointment by our General Meeting of Shareholders, or
until they resign or are suspended or dismissed by the General Meeting of Shareholders. The Board of Directors may appoint up to
four directors in addition to the directors elected by the General Meeting of Shareholders, subject to the maximum number of directors
permitted, and any such appointment shall be effective until the next General Meeting of Shareholders. The Board of Directors may
fill any vacancies on the Board of Directors, whether as a result of the resignation or dismissal of a director, or as a result
of a decision of the Board of Directors to expand the Board of Directors.
Our executive officers are appointed by,
and serve at the discretion of, our Board of Directors.
Our Chairman, Guy Bernstein, serves as the
Chief Executive Officer of Formula and as a director of Asseco. In addition, Ms. Salomon, another Board member of ours, who served
as an executive officer of Formula until December 2009, is a member of the Board of Directors of our affiliate Magic Software Enterprises
Ltd. Formula directly owns (as of March 31, 2020) approximately 47.8% of our currently outstanding Common Shares, and Asseco holds
25.6% of the outstanding share capital of Formula, as well as the power to vote an additional 1,971,973 ordinary shares of Formula,
thereby effectively giving Asseco beneficial ownership (voting power) over an aggregate of 38.5% of Formula’s outstanding
ordinary shares.
B.
|
Compensation of Directors and Officers
|
The aggregate amount of compensation paid
by us, or accrued by us, for all directors and executive officers as a group for services in all capacities with respect to the
fiscal year ended December 31, 2019 was $1.8 million, which includes amounts set aside or accrued to provide cash bonuses, pension,
retirement or similar benefits.
These compensation amounts do not include
amounts expended by us for automobiles made available to our officers or expenses (including business travel and professional and
business association dues) reimbursed to such officers. The foregoing amounts also exclude the value of stock option grants to
our directors and officers pursuant to our 2011 Share Incentive Plan, which is described below.
We have employment agreements with our officers.
We also enter into confidentiality agreements with our personnel and have entered into non-competition and confidentiality agreements
with our officers and high-level technical personnel, in each case in the ordinary course of business. We do not maintain
key person life insurance on any of our executive officers.
Board Fees and Expenses
We reimburse all members of our Board of
Directors for reasonable out-of-pocket expenses incurred in connection with their attendance at meetings of the Board of Directors
or its committees.
We paid with respect to 2019 fees of approximately
$117,000, in the aggregate, to all of our independent directors (except to our Chairman of the Board, as described below), in respect
of their service on our Board of Directors, including for attending or participating in meetings of the Board of Directors and
its committees, and for participating in Board action taken via unanimous written consent. Such fees were set in accordance with
the rates paid to “external directors” under the Israeli Companies Law 5759-1999. Although we are not an Israeli company
and are not subject to the Israeli Companies Law, we deem certain standards of that body of law (including compensation to Board
members) relevant to a company such as ours. In addition to fees paid to our other independent directors, we also paid approximately
$25,000 to Formula in respect of the service of its Chief Executive Officer, Guy Bernstein, as our Chairman of the Board.
Stock Option and Incentive Plan
2011 Share Incentive Plan
In 2011, in connection with our acquisition
of IDIT and FIS, our Board of Directors adopted our 2011 Share Incentive Plan, or the 2011 Plan, pursuant to which our employees,
directors, officers, consultants, advisors, suppliers, business partners, customers and any other person or entity whose services
are considered valuable are eligible to receive options, restricted shares, restricted share units and other share-based awards.
The number of Common Shares available under the 2011 Plan was set at 4,000,000.
Options granted under the 2011 Plan may
be ISOs or NQSOs within the meaning of Section 422 of the Code. In the case of Israeli grantees, we intend that options granted
comply with, and benefit from, applicable tax laws and regulations in Israel. We are also eligible to grant restricted stock, restricted
share units and other share-based compensation in addition to or in lieu of any other award under the 2011 Plan.
The 2011 Plan is administered by the compensation
committee of our Board of Directors, or the Compensation Committee. Subject to the provisions of the 2011 Plan, the Compensation
Committee determines the type of award, when and to whom awards will be granted and the number of shares covered by each award.
The Compensation Committee also determines the terms, provisions, and kind of consideration payable (if any), with respect to awards.
The Compensation Committee has discretionary authority to interpret the 2011 Plan and to adopt practices related thereto. In determining
the persons to whom awards shall be granted and the number of shares covered by each award, the Compensation Committee takes into
account their present and potential contributions to the success of the Company and such other factors as the Compensation Committee
shall deem relevant in connection with accomplishing the purpose of the 2011 Plan.
Under the 2011 Plan, an option may be granted
on such terms and conditions as the Compensation Committee may approve, and generally may be exercised for a period of up to 6
years from the date of grant. Options granted under the 2011 Plan become exercisable in four equal, annual installments, beginning
with the first anniversary of the date of the grant, or pursuant to such other schedule as the Compensation Committee may provide
in the option agreement. The exercise price of such options generally will be not less than 100% of the fair market value per share
of the Common Shares at the date of the grant. In the case of ISOs, certain limitations apply with respect to the aggregate value
of option shares which can become exercisable for the first time during any one calendar year, and certain additional limitations
apply to “Ten Percent Shareholders” (as defined in the 2011 Plan). The Compensation Committee may provide for the payment
of the exercise price in cash, by delivery of other Common Shares having a fair market value equal to such option exercise price,
by a combination thereof or by any method in accordance with the terms of the option agreements. The exercise price for each outstanding
option to purchase one Common Share granted under the 2011 Plan is subject to reduction by the per share amount of any dividend
that we declare from time to time while the option is outstanding. The 2011 Plan contains special rules governing the period during
which options may be exercised in the case of death, disability, or other termination of employment. Options are not transferable
except by will or pursuant to applicable laws of descent and distribution upon death of an employee, unless otherwise approved
by our Board of Directors.
The 2011 Plan also provides for the granting
of restricted share awards, which are awards of Common Shares that may not be disposed of, except by will or the laws of descent
and distribution, for such period as the Compensation Committee determines (which we refer to as the restricted period). The Compensation
Committee may also impose such other conditions and restrictions on the shares as it deems appropriate, including the satisfaction
of performance criteria. The Compensation Committee may provide that such restrictions will lapse with respect to specified percentages
of the awarded shares on successive anniversaries of the date of the award. During the restricted period, the grantee is entitled
to receive dividends with respect to, and to vote the shares awarded to him or her. If, during the restricted period, the grantee’s
continuous employment with the Company terminates for any reason, any shares remaining subject to restrictions will be forfeited.
The Compensation Committee has the authority to cancel any or all outstanding restrictions prior to the end of the restricted period,
including cancellation of restrictions in connection with certain types of termination of employment.
The 2011 Plan furthermore provides for the
granting of restricted share units, which are awards that are settled by the issuance of a number of Common Shares. The grantee
has no rights with respect to such Common Shares until they are actually issued to the grantee. In January 2020, we granted RSUs
under the 2011 Plan to (i) employees of sum.cumo, as part of the consideration for the acquisition of that company, as well (ii)
other employees. The Compensation Committee may also grant other share-based awards under the 2011 Plan, such as share appreciation
rights.
In February 2016, our Board of Directors
approved the reservation of an additional 4,000,000 Common Shares for issuance under the 2011 Plan. As of December 31, 2019, 1,869,412
Common Shares were issuable upon the exercise of outstanding options under the 2011 Plan, at a weighted average exercise price
of $10.25 per share, of which options to purchase 970,408 Common Shares had vested. 1,020,000 of such Common Shares were issuable
upon the exercise of outstanding options held by our directors and executive officers. As of December 31, 2019, 3,044,730 Common
Shares were available for future grant under the 2011 Plan.
Members of our Board of Directors are elected
by a vote at the annual general meeting of shareholders and serve for a term of one year, until the following year’s annual
meeting. Directors may serve multiple terms and are elected by a majority of the votes cast at the meeting. The Chief Executive
Officer serves until his removal by the Board of Directors or resignation from office. Our non-employee directors do not have agreements
with the Company for benefits upon termination of their service as directors.
Audit Committee
The Audit Committee of our Board of Directors
is comprised of three independent directors (as determined by our Board of Directors in accordance with NASDAQ Listing Rule 5605(c)(2)(A)
and Rule 10A-3 under the Exchange Act), who were appointed to that committee by the Board of Directors: Yacov Elinav, Uzi Netanel
and Eyal Ben Chlouche. Mr. Elinav serves as the chairman of the committee. The Board of Directors has furthermore determined that
Mr. Elinav meets the definition of an audit committee financial expert (as defined in paragraph (b) of Item 16A of Form 20-F promulgated
by the SEC). The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities
by reviewing financial information, internal controls and the audit process. In addition, the committee is responsible for oversight
of the work of our independent auditors. The committee meets at regularly scheduled quarterly meetings.
Compensation Committee
The Compensation Committee of our Board
of Directors is comprised of three directors, who were appointed to that committee by the Board of Directors: Uzi Netanel, Naamit
Salomon and Guy Bernstein. Mr. Bernstein serves as the chairman of the committee. The Compensation Committee is responsible for
the review and approval of grants of options to our employees and other compensation matters as requested by our Board of Directors
from time to time.
Corporate Governance Policies Adopted by Board
While not incorporated in Israel, our headquarters
are located in Israel and we therefore voluntarily conform with corporate governance practices that are customary for an Israeli
company whose shares are listed on the NASDAQ Stock Market. Accordingly, our Board of Directors has adopted various policies and
procedures that apply to our employees and directors and that are meant to implement risk management on a company-wide level, including,
among others, the following:
|
●
|
Code of Ethics— constitutes a guide of principles designed to help our employees conduct business honestly and with integrity (and which is referenced in Item 16B below).
|
|
●
|
Whistleblower Policy— enables the anonymous submission by our employees of reports regarding illegal or dishonest activities.
|
|
●
|
Insider Trading Policy— implements restrictions (including quarterly blackout periods) for our employees that reinforce legal prohibitions on their use of material inside information in effecting transactions in our securities.
|
|
●
|
Antifraud Policy— aimed at detecting and preventing fraud, misappropriations, and other irregularities by our employees, including any intentional, false representation or concealment of material facts for the purpose of inducing another to act upon it in connection with their activities with third parties on behalf of our company.
|
|
●
|
Related Party Transactions Policy— intended to ensure the proper disclosure to, and approval by (if approved), our Audit Committee of transactions between our company and any of its related parties (including officers, directors and Formula and Asseco— our largest direct and indirect shareholders, respectively) in an amount equal to or exceeding $120,000, in order to ensure that any such transactions are in the best interest of our company and our shareholders. The policy provides that our General Counsel and CFO review and approve all related party transactions, and report such transactions to our Audit Committee, although only those transactions equal to or exceeding $120,000 require approval of the Audit Committee.
|
Internal Auditor
Our Company has appointed an internal auditor.
The role of the internal auditor is
to provide assurance that the Company’s risk management, governance and internal control processes are operating
effectively. This includes examining, among other things, our compliance with applicable law and orderly business procedures, including
the implementation of proper internal controls in compliance with SOX requirements and our Related Party Transactions Policy.
NASDAQ Opt-Outs for a Foreign Private Issuer
We are a foreign private issuer within the
meaning of NASDAQ Listing Rule 5005(a)(18), since we are governed by the laws of the Cayman Islands and we meet the other criteria
set forth for a “foreign private issuer” under Rule 3b-4(c) under the Exchange Act.
Pursuant to NASDAQ Listing Rule 5615(a)(3),
a foreign private issuer may follow home country practice in lieu of certain provisions of the NASDAQ Listing Rule 5600 series
and certain other NASDAQ Listing Rules. Please see “Item 16G. Corporate Governance” below for a description of the
manner in which we rely upon home country practice in lieu of compliance with certain of the NASDAQ Listing Rules.
As of December 31, 2019, we had a total
of 2,959 employees, a 24% increase relative to the end of 2018.
The following table sets forth the number
of our employees as of the end of each of the past three fiscal years, according to their geographic regions:
Geographic Region
|
|
Total Number of Employees as of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
Israel
|
|
|
864
|
|
|
|
726
|
|
|
|
701
|
|
UK and Europe
|
|
|
407
|
|
|
|
358
|
|
|
|
533
|
|
North America
|
|
|
511
|
|
|
|
527
|
|
|
|
581
|
|
Asia Pacific
|
|
|
594
|
|
|
|
767
|
|
|
|
1,144
|
|
Total Employees
|
|
|
2,376
|
|
|
|
2,378
|
|
|
|
2,959
|
|
The number of our Common Shares beneficially
owned by our directors and executive officers individually, and by our directors and executive officers as a group, as of March
31, 2020, is as follows:
|
|
Shares Beneficially Owned
|
|
|
|
Number
|
|
|
Percent (1)
|
|
|
|
|
|
Roni Al-Dor
|
|
|
1,374,781
|
(2)
|
|
|
2.7
|
%
|
All directors and executive officers(3)
as a group (7 persons, including Roni Al-Dor) (3)
|
|
|
1,639,529
|
(4)
|
|
|
3.2
|
%
|
(1)
|
Unless otherwise indicated below, the persons in the above table have sole voting and investment power with respect to all shares shown as beneficially owned by them. The percentages shown are based on 50,229,215 Common Shares outstanding (which excludes 2,328,296 Common Shares held in treasury) as of March 31, 2020, plus such number of Common Shares as the relevant person or group had the right to receive upon exercise of options that are exercisable within 60 days of March 31, 2020.
|
(2)
|
Includes options to purchase 600,000 Common Shares under the 2011 Plan at an exercise price ranging between $7.60 to $11.23 per share expiring no later than May 2021, which are vested or will become vested within 60 days of March 31, 2020. See Item 6 - “Directors, Senior Management and Employees— Compensation of Directors and Officers”.
|
(3)
|
Each of our directors and executive officers who is not separately identified in the above table beneficially owns less than 1% of our outstanding Common Shares (including options to purchase Common Shares held by each such party that are vested or will vest within 60 days of March 31, 2020) and has therefore not been separately identified.
|
(4)
|
Includes options to purchase 820,000 Common Shares at exercise prices ranging from $7.60 to $11.23 per share, which are vested or will become vested within 60 days of March 31, 2020.
|
Item 7.
|
Major Shareholders and Related Party Transactions
|
The following table sets forth, as of March
31, 2020, certain information with respect to the beneficial ownership of the Company’s Common Shares by each person known
by the Company to own beneficially more than 5% of the outstanding Common Shares, based on information provided to us by the holders
or disclosed in public filings of the shareholders with the Securities and Exchange Commission.
We determine beneficial ownership of shares
under the rules of Form 20-F promulgated by the SEC and include any Common Shares over which a person possesses sole or shared
voting or investment power, or the right to receive the economic benefit of ownership, or for which a person has the right to acquire
any such beneficial ownership at any time within 60 days.
|
|
Shares Beneficially Owned
|
|
Name and Address
|
|
Number
|
|
|
Percent(1)
|
|
Formula Systems (1985) Ltd.
5 HaPlada Street
Or Yehuda 60218, Israel
|
|
|
24,029,094
|
(2)
|
|
|
47.8
|
%
|
Harel Insurance Investments & Financial Services Ltd.
Harel House; 3 Abba Hillel Street; Ramat Gan 52118, Israel
|
|
|
2,724,924
|
(3)
|
|
|
5.4
|
%
|
(1)
|
The percentages shown are based on 50,229,215 Common Shares outstanding (which excludes 2,328,296 Common Shares held in treasury) as of March 31, 2020.
|
(2)
|
The number of Common Shares shown as owned by Formula is based on information provided to the Company by Formula as of March 31, 2020. Also based on information provided to the Company, as of March 31, 2020, Asseco held 25.6% of the outstanding share capital of Formula. In addition, on October 4, 2017, Asseco entered into a shareholders agreement with our Chairman of the Board, under which agreement Asseco has been granted an irrecoverable proxy to vote an additional 1,971,973 ordinary shares of Formula, thereby effectively giving Asseco beneficial ownership (voting power) over an aggregate of 38.5% of Formula’s outstanding ordinary shares. The address of Asseco is Olchowa 14 35-322 Rzeszow, Poland.
|
(3)
|
Based on an amended Statement of Beneficial Ownership on Schedule 13G/A filed with the SEC on January 23, 2020. Of the 2,724,924 Common Shares reported as beneficially owned by Harel Insurance Investments & Financial Services Ltd., or Harel, (i) 2,615,058 Common Shares are held for members of the public through, among others, provident funds and/or mutual funds and/or pension funds and/or insurance policies and/or exchange traded funds, which are managed by subsidiaries of Harel, each of which subsidiaries operates under independent management and makes independent voting and investment decisions, (ii) 41,188 Common Shares are held by third-party client accounts managed by subsidiaries of Harel as portfolio managers, each of which subsidiaries operates under independent management and makes independent investment decisions and has no voting power in the securities held in such client accounts, and (iii) 68,678 Common Shares are beneficially held for Harel’s own account.. Harel does not admit beneficial ownership of more than those 68,678 Common Shares.
|
To the best of our knowledge, each of the
entities listed in the above table has sole voting and investment power with respect to all shares shown as beneficially owned
by it, except to the extent described above.
Significant changes in holdings of
major shareholders
From time to time, Formula has increased
its beneficial shareholding in our Company through market purchases of additional Common Shares. Formula’s beneficial ownership
of our Common Shares constituted 48.9% of our outstanding share capital as of the start of 2017. That beneficial ownership has
been diluted down to 47.8% as of March 31, 2020, primarily as a result of various minor issuances related to stock options exercise
of Common Shares that we have made.
Harel reported in an initial Schedule 13G
filed on December 20, 2018 that it had become a significant shareholder of our company, having acquired 2,534,268 Common Shares,
constituting 5.1% of our outstanding Common Shares, as of December 15, 2018. Its holdings have increased slightly to 5.1% and then
5.4% of our outstanding Common Shares, as of December 31, 2018 and 2019, as reported in its amended Schedule 13G filed on January
29, 2019 and January 23, 2020, respectively.
Clal Insurance Enterprises Holdings Ltd.,
or Clal, reported in an initial Schedule 13G filed on March 26, 2018 that it had become a significant shareholder, holding 2,719,363
Common Shares, constituting 5.2% of our outstanding Common Shares, as of March 16, 2018. Its holdings then increased to 3,254,525
Common Shares (exclusive of shares held by its affiliate, Epsilon), constituting 6.5% of our outstanding Common Shares, as of December
31, 2018, as reported in its amended Schedule 13G filed on February 14, 2019. Clal reported in February 2020 that as of December
31, 2019, it no longer held 5% or more of our outstanding Common Shares.
Our former significant shareholder, Yelin
Lapidot Holdings Management Ltd. and its affiliates, collectively referred to as Yelin, held 2,765,424 Common Shares, or 5.6% of
our outstanding Common Shares, as of December 31, 2017 (based on Amendment No. 1 to Schedule 13G filed by Yelin, Yair Lapidot and
Dov Yelin on January 31, 2018). Subsequently, however, Yelin reported in Amendment No. 2 to Schedule 13G, filed on February 11,
2019, that its beneficial ownership decreased once again below 5% as of December 31, 2018.
Our former significant shareholder, Migdal
Insurance & Financial Holdings Ltd., or Migdal, acquired 2,468,836 Common Shares, or 5.0%, as of July 12, 2017, based on its
Schedule 13G filed on August 28, 2017, thereby becoming a significant shareholder of our company. Since that time, its ownership
fell slightly below 5%, then rose again above 5% and then fell again below 5% (2,418,367 Common Shares, or 4.86% of outstanding
Common Shares), as of December 31, 2018, based on a Statement of Beneficial Ownership on Schedule 13G filed by Migdal with the
SEC on February 14, 2019.
Voting rights of major shareholders
The major shareholders disclosed above do
not have different voting rights than other shareholders with respect to the Common Shares that they hold.
Holders of record
As of March 31, 2020, there were 53 holders
of record of our Common Shares, including 37 holders of record with addresses in the United States who held a total of 42,567,394
Common Shares (out of which 42,559,112 Common Shares are held of record by CEDE & Co), representing approximately 84.7% of
our issued and outstanding Common Shares. 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, because many of these Common Shares
were held of record by nominees (including CEDE & Co., as nominee for a large number of banks, brokers, institutions and underlying
beneficial holders of our Common Shares). In particular, Formula, which held as of March 31, 2020 (in part as a record holder
and in part as an underlying beneficial holder) 24,029,094 Common Shares, representing 47.8% of our issued and outstanding shares,
is not a United States company.
Control of the Company
Based on Formula’s beneficial ownership
of 47.8% of the outstanding Common Shares of the Company (as of March 31, 2020), and based on Asseco’s beneficial ownership
of 38.5% of the outstanding share capital of Formula (also as of that date), both Formula and Asseco may be deemed to control the
Company. We are unaware of any arrangements the operation of which may at a subsequent date result in a change of control of the
Company.
B.
|
Related Party Transactions
|
Registration Rights Agreement with Major Shareholders
The description of the Registration Rights
Agreement set forth in Item 10.C “Material Contracts” is incorporated by reference herein.
Fees Paid to Major Shareholder for Board Service of its Affiliate
We paid to our major shareholder, Formula,
approximately $25,000 in respect of our share of the director fees of Guy Bernstein, our Chairman, for the year ended December
31, 2019. Mr. Bernstein serves as the Chief Executive Officer of Formula and a director of Asseco. Formula directly owns (as of
March 31, 2020) approximately 47.8% of our currently outstanding Common Shares.
Additional Agreements and Transactions with Affiliated Companies
of Formula and Asseco
During the year ended December 31, 2019,
we paid to affiliated companies of Formula approximately $6.0 million, in the aggregate, pursuant to services agreements that we
have in place with those companies under which we receive services. In 2019, we also purchased from those affiliated companies
an aggregate of approximately $0.2 million of hardware and software. Please see Note 14 to our audited consolidated financial statements
included in Item 18 of this annual report for further information.
In addition, during 2019, Sapiens Poland
performed services as a sub-contractor on behalf of Asseco for clients of Asseco in a total amount of approximately $3.4 million.
For historical reasons, Asseco issues invoices to those clients and then Sapiens in turn invoices Asseco on a back-to-back basis
(with no margin to Asseco).
Further, we paid to Formula approximately
$0.1 million in respect of our share of its D&O insurance for each of our directors and officers for the period between December
18, 2018 and February 28, 2019, and an additional $0.1 million in respect of our share of that D&O insurance for the period
between March 1, 2019 and February 28. 2020
Trade Payables and Receivables
As of December 31, 2019, we had trade payables
balances due to, and trade receivables balances due from, our related parties in amounts of approximately $1.6 million and $0.7
million, respectively.
C.
|
Interests of Experts and Counsel.
|
Not applicable.
Item 8.
|
Financial Information
|
A.
|
Consolidated Statements and Other Financial Information.
|
Financial Statements
See our consolidated financial statements
and related notes in Item 18.
Export Sales
In 2019, 91.6% of our revenues originated
from customers located outside of Israel.
For information on our revenues breakdown
by geographic region for the past three years, see Item 5.A, “Operating and Financial Review and Prospects— Operating
Results— Comparison of the years ended December 31, 2018 and 2019— Revenues by geographical region” in this annual
report, as well as Item 5.A, “Operating and Financial Review and Prospects— Operating Results— Comparison of
the years ended December 31, 2017 and 2018— Revenues by geographical region” in our annual report on Form 20-F for
the year ended December 31, 2018, which we filed with the SEC on March 27, 2019.
Legal Proceedings
From time to time, we are a party to various
legal proceedings and claims that arise in the ordinary course of business. Currently, there are no such legal proceedings pending
or threatened against us that we believe may have a significant effect on our financial condition or profitability.
Dividend Policy
In August 2019, our Board of Directors adopted
a dividend policy. Under that policy, on an annual basis, after publishing our annual audited
consolidated financial statements in our annual report on Form 20-F, our Board of Directors will announce the distribution of a
cash dividend in an amount of up to 40% of our annual net profit (on a non-GAAP basis). Our Board of Directors may change,
whether as a result of a one-time decision or a change in policy, the rate of dividend distributions and/or decide not to distribute
a dividend. The distribution of dividends will be made in compliance with Cayman Islands law, the Memorandum and the Articles,
as well as our contractual obligations. Concurrently with our adoption of this new dividend policy, we declared a cash dividend
of $0.22 per share, or $11 million, in the aggregate, which was paid in September 2019.
For more information about distribution
of dividends, the related requirements of Cayman Islands law and various tax implications, please see: “Item 10. Additional
Information— Memorandum and Articles of Association”; “Item 10. Additional Information—
Exchange Controls”; and “Item 10. Additional Information— Taxation.”
No significant change, other than as otherwise
described in this annual report, has occurred in our operations since the date of our consolidated financial statements included
in this annual report.
ITEM 9.
|
THE OFFER AND LISTING
|
A. and C.
|
Offer and Listing Details and Markets
|
Our Common Shares are listed on the NASDAQ
Capital Market and on the TASE under the symbol “SPNS”.
The closing price of our Common Shares on
the NASDAQ Capital Market on March 31, 2020, being the latest practicable date prior to publication of this annual report, was
$19.02.
The closing price of our Common Shares on
the TASE on March 31, 2020, being the latest practicable date prior to publication of this annual report, was NIS 68.90, or $19.33
(as converted from NIS based on the NIS-U.S. dollar representative exchange rate reported by the Bank of Israel as of March 31,
2020).
Under current Israeli law, we satisfy our
reporting obligations in Israel by furnishing to the applicable Israeli regulators those reports that we are required to file or
submit in the United States.
Not applicable.
Not applicable.
Not applicable.
F.
|
Expenses of the Issue.
|
Not applicable.
Item 10.
|
Additional Information
|
Not applicable.
B.
|
Memorandum and Articles of Association.
|
Migration of Legal Domicile from Curaçao to Cayman
Islands
On August 21, 2018, we completed the process
of migrating the legal domicile of our company from Curaçao to the Cayman Islands. That migration and the accompanying adoption
of charter documents suitable for a Cayman Islands exempted company under the Companies Law (as revised) of the Cayman Islands—
our Memorandum and our Articles— required shareholder approval under Curaçao law, which approval was obtained at our
annual general meeting of shareholders that was held on November 29, 2017. As part of our completion of the migration, we received
(i) a ruling that the migration will not constitute a taxable event for our shareholders under Israeli tax law (being the jurisdiction
of our residency for tax purposes) and (ii) approval that the migration will not constitute a taxable event for our shareholders
under Curacao tax law.
We have provided herein descriptions related
to our status as a Cayman Islands company. Copies of our Memorandum and Articles, which serve as exhibits to this annual report,
were annexed as Appendix A to the proxy statement for our 2017 annual general meeting of shareholders, which was appended
as Exhibit 99.1 to our Report of Foreign Private Issuer on Form 6-K furnished to the SEC on October 26, 2017. A table comparing
certain Curacao law provisions to Cayman Islands law provisions was annexed as Appendix B to that same proxy statement.
1.
Registration and Purposes.
The Company is registered and existing under
the laws of the Cayman Islands. Its registered number is 341242.
As set out in Article
II of our Memorandum of Association, the objects and purpose for which the Company is established are unrestricted, and the Company
has full power and authority to exercise all functions of a natural person of full capacity, including (without limitation):
|
●
|
To establish, participate in or have any other interest in business enterprises concerned with the development and commercial operation of software
|
|
●
|
To finance directly or indirectly the activities of the Company, its subsidiaries and affiliates
|
|
●
|
To borrow and to lend moneys
|
|
●
|
To engage in the purchase and sale of securities, futures, real estate, business debts, commodities and intellectual property
|
|
●
|
To undertake, conduct and promote research and development
|
|
●
|
To guarantee, pledge, mortgage or otherwise encumber assets as security for the obligations of the Company or third parties
|
|
●
|
To do all that may be useful or necessary for the attainment of the above purposes
|
2. Board of Directors.
A director who knows or ought to understand
that in a certain instance there is mention of a conflicting interest between the Company and him acting privately or ex officio,
will timely inform the Board of Directors of such conflict of interest. No conflict of interest will be deemed to exist between
the Company and one or more of its directors in case of a contract or transaction between the Company and such director(s) or the
Company and any other corporation, partnership, association, or other organization in which such director(s) are directors or officers,
or have a financial interest, solely for that reason, or solely because such director(s) are present or participates in the meeting
of the Board of Directors or Committee thereof which authorizes the contract or transaction, or solely because his or their votes
are counted for such purpose if (a) the material facts of the interest or relationship are disclosed or are known to the Board
of Directors or the Committee, and the Board of Directors or Committee in good faith authorizes the relevant contract or transaction
by the affirmative votes of a majority of the disinterested directors, even though such disinterested directors may be less than
a quorum, or (b) the material facts of the interest or relationship are disclosed or are known to the shareholders entitled to
vote thereon, and the contract or transaction is specifically approved in good faith by vote of such shareholders; or (c) the contract
or transaction is fair as to the Company as of the time it is authorized, approved or ratified by the Board of Directors, a Committee
thereof or the shareholders and, for such purposes, interested directors may be counted in determining the presence of a quorum
at a meeting of the Board of Directors or of a Committee that authorizes such contract or transaction. The Articles provide that
the directors shall receive such compensation as the Board of Directors may from time to time prescribe. Members of the Board
of Directors have the power to vote compensation to themselves, even if they lack an independent quorum.
The Articles do not require directors to
resign at a certain age or to purchase a certain number of Common Shares. The Articles do not grant borrowing powers to directors;
nor do they require directors to resign at a certain age or to purchase a certain number of Common Shares.
3. Rights and Preferences.
The Company has only one class of shares
of common stock authorized and outstanding— the Common Shares. All previous issuances of preferred shares have been converted
into Common Shares. The rights and preferences of the holders of Common Shares are summarized below.
Holders of the Common Shares are entitled
to one vote for each whole share on all matters to be voted upon by shareholders, including the election of directors. Holders
of the Common Shares do not have cumulative voting rights in the election of directors. All Common Shares are equal to each other
with respect to liquidation and dividend rights. Holders of the Common Shares are entitled to receive dividends out of funds legally
available under Cayman Islands law, if and when declared by the Board of Directors in accordance with the Memorandum and Articles.
See “Dividend Policy” below. In the event of the liquidation of the Company, all assets available for distribution
to the holders of the Common Shares are distributable among them according to their respective holdings. Holders of the Common
Shares have no preemptive rights to purchase any additional, unissued Common Shares. The foregoing summary of the Common Shares
does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Memorandum and Articles.
In August 2019, our Board of Directors adopted
a dividend policy. Under that policy, on an annual basis, after publishing our annual audited
consolidated financial statements in our annual report on Form 20-F, our Board of Directors will announce the distribution of a
cash dividend in an amount of up to 40% of our annual net profit (on a non-GAAP basis). Our Board of Directors may change,
whether as a result of a one-time decision or a change in policy, the rate of dividend distributions and/or decide not to distribute
a dividend. The distribution of dividends will be made in compliance with Cayman Islands law, the Memorandum and the Articles,
as well as our contractual obligations. Please see “Item 8. Financial Information—A. Consolidated Statements
and Other Financial Information—Dividend Policy” above for further information concerning our dividend policy.
Our ability to pay dividends is subject
to the limitations of the Companies Law (as revised) of the Cayman Islands, the Memorandum and the Articles. In direct connection
with the approval of our annual accounts, the Board of Directors shall decide on the distribution of the profits. Profits can either
be reserved or distributed to the shareholders in accordance with the Articles. Our Board of Directors has the right to reserve
the profits at its discretion. Our Board of Directors may at any time resolve to make any interim distributions, if justified by
the anticipated profits of our company. The Companies Law and the Articles further provide that a (interim) distribution of dividends
can only occur if, at the moment of distribution, the equity of our company equals at least the nominal capital of our company
and, as a result of the distribution, it will not fall below the nominal capital. Nominal capital is the sum of the par values
of all of the issued shares of our company’s capital stock at any moment in time.
4. Changing the Rights of the Shareholders.
The general meeting of shareholders decides
upon any change in the Memorandum and/or Articles. A resolution to amend the Memorandum and/or Articles generally requires the
approval of two-thirds of the voting rights of shares present (in person or by proxy) and voting at a meeting of shareholders called
for the purpose of approving such an amendment. An increase in our authorized share capital, however, merely requires approval
by at least a simple majority of the votes actually cast at a meeting of shareholders at which a quorum is present.
5. General Meetings.
At least one general meeting of shareholders
must be held each year. Pursuant to the Articles, general meetings may be held in or outside of the Cayman Islands. Special general
meetings of shareholders may be called at any time by the Chairman of the Board, the Co-Chairman, the Board of Directors or the
holders of Common Shares representing at least ten percent (10%) of the total voting rights attached to the issued and outstanding
Common Shares who shall have requisitioned the Board of Directors to convene such meeting to be held within a period of ten weeks
after such request has been made. Written notice of no less than 12 nor more than 60 calendar days must be provided to the Company’s
shareholders prior to any general meeting. Every shareholder has the right to attend any meeting of shareholders in person or by
proxy and to address the meeting. No action may be taken at any meeting of shareholders unless a quorum consisting of holders of
at least one-half of the shares outstanding and entitled to vote are present at the meeting in person or by proxy. If a quorum
is not present at the originally-called shareholder meeting, a second shareholder meeting, is held within two months. At that second
meeting, valid resolutions may be adopted with respect to any matter stated in the notice of the original meeting and also in the
notice of such second meeting or which by law is required to be brought before the shareholders (subject to certain exceptions),
despite the absence of a quorum.
6. Limitations to Own Securities.
The Articles contain no limits on the
right to own securities.
7. Change of Control.
The Articles contain no provisions that
would prevent or delay a change of control of the Company. For more information regarding provisions of the Cayman Companies Law
that may impact a change of control of the Company, please see the table that was annexed as Appendix B to the proxy statement
for our 2017 annual general meeting of shareholders, which was appended as Exhibit 99.1 to our Report of Foreign Private Issuer
on Form 6-K furnished to the SEC on October 26, 2017.
8. Disclosure of Ownership.
The Articles contain no provisions requiring
a shareholder to disclose his or her interest at a certain time; however, holders of our shares are subject to the reporting provisions
of the SEC. In addition, the Companies Law (as revised) of the Cayman Islands contains provisions requiring the disclosure of certain
beneficial interests; however, such provisions do not apply to the Company, its shareholders or ultimate beneficial owners for
so long as the Company’s Common Shares are listed on an “approved stock exchange” (as defined in the Companies Law
(as revised) of the Cayman Islands, which currently includes NASDAQ and the Tel Aviv Stock Exchange).
We are not party to any material contract
within the two years prior to the date of this annual report, other than contracts entered into in the ordinary course of business,
or as otherwise described below:
Deed of Trust in Favor of Series B Debenture Holders
In connection with our Israeli public offering
and private placement of NIS 280 million (approximately US $79.2 million) principal amount of our Series B Debentures, in the aggregate,
in September 2017 (which debentures are traded on the TASE), we entered into a deed of trust with a trustee in favor of the debenture
holders. In the deed of trust, we have agreed to repay the principal amount of the debentures in eight equal payments that will
be paid once a year on January 1 of each of the years 2019 through 2026 (included). We made the first such principal payment on
January 1, 2019. The outstanding principal amount bears interest at an annual rate of 3.37%, payable in half-yearly payments on
January 1 and July 1 of each of the years 2018 through 2026 (included). The principal and interest are payable in NIS, subject
to adjustment in accordance with fluctuations in the exchange rate between the U.S. dollar and the NIS.
Under the deed of trust, we have undertaken
to maintain a number of conditions and limitations on the manner in which we can operate our business, including limitations on
our ability to undergo a change of control, distribute dividends, incur a floating charge on our assets, or undergo an asset sale
or other change that results in a fundamental change in our operations. The deed of trust also requires us to comply with certain
financial covenants, as described below. The deed of trust furthermore provides for an upwards adjustment in the interest rate
payable under the debentures in the event that our debentures’ rating is downgraded below a certain level. A breach of the
financial covenants for more than two successive quarters or a substantial downgrade in the rating of the debentures (below BBB-)
could result in the acceleration of our obligation to repay the debentures.
The deed of trust includes the following
provisions:
|
●
|
A negative pledge, subject to certain exceptions
|
|
●
|
A covenant not to distribute dividends unless (i) our shareholders’ equity (not including minority interests) shall not be less than $160 million, (ii) our net financial indebtedness (financial indebtedness net of cash, marketable securities, deposits and other liquid financial instruments) does not exceed 65% of net CAP (which is defined as financial indebtedness, net, plus shareholders equity, including minority interest), (iii) the amount of the dividend does not exceed our profits for the year ended December 31, 2016 and the first three quarters of the year ended December 31, 2017, plus 75% of our profits as of September 1, 2017 and up to the date of distribution, and (iv) no event of default shall have occurred
|
|
●
|
Financial covenants, including (i) the equity attributable to the shareholders of Sapiens (not including minority interests), as reported in our annual or quarterly financial statements, will not be less than $120 million, and (ii) Sapiens’ net financial indebtedness (financial indebtedness net of cash, marketable securities, deposits and other liquid financial instruments) shall not exceed 65% of net CAP (which is defined as financial indebtedness, net, plus shareholders equity, including minority interest)
|
As of December 31, 2019, we were in compliance
with the foregoing financial covenants.
We also agreed to standard
events of default under the deed of trust, together with the following specific events of default (among others):
|
●
|
Cross default, including following an immediate repayment initiated in relation to other indebtedness (other than non-recourse debt) in an amount that exceeds 5% of our total balance sheet
|
|
|
|
|
●
|
Suspension of trading of the debentures on the TASE over a period of 60 days, or the delisting of the debentures from the TASE
|
|
|
|
|
●
|
Failure to have the debentures rated over a period of 60 days;
|
|
|
|
|
●
|
If the rating of the debentures is less than BBB- by Standard and Poors Maalot or less than Baa3 by Midroog Ltd. or drops below an equivalent rating of another rating agency (as of July 2019, Standard and Poors Maalot has affirmed a rating of ilA+ for the debentures)
|
|
|
|
|
●
|
If there is a change in control without consent of the rating agency (a change of control is deemed to occur if Formula ceases the be the controlling shareholder of our company, whether directly or indirectly. Formula will be considered a controlling shareholder for so long as it continues to hold at least 25% of the means of control of our company (within the meaning of the Israeli Securities Law) and there is no other person or entity holding a higher percentage. To the extent that Formula holds such controlling interest jointly with others, it will be deemed to remain our controlling shareholder if it maintains the highest percentage ownership among such other shareholders)
|
|
|
|
|
●
|
The existence and continuation of a bankruptcy event involving our company, or the liquidation of our company or writing off of our assets
|
|
●
|
Our failure to comply with the above-described financial covenants for two consecutive quarters
|
|
|
|
|
●
|
There has been a material adverse change in the business of our company compared to the position of our company shortly before the issuance of the debentures and there is a material concern that we will not be able to pay our obligations under the debentures on time
|
|
|
|
|
●
|
If we distribute a dividend contrary to the above-described limitations on dividends
|
|
|
|
|
●
|
Breach of our undertakings regarding the issuance of additional Series B Debentures
|
|
|
|
|
●
|
The sale of 25% or more of our assets, or a change in the main sphere of our activity as a company
|
|
|
|
|
●
|
Failure to comply with the negative pledge covenant
|
Registration Rights Agreement
In connection with our acquisitions of each
of IDIT and FIS, which were consummated in the third quarter of 2011, we granted the shareholders of IDIT (or the IDIT Selling
Shareholders), the shareholders of FIS (or the FIS Selling Shareholders, to which we refer, together with the IDIT Selling Shareholders,
as the Holders) and Formula certain registration rights under a Registration Rights Agreement. Under the Registration Rights Agreement,
the Holders and Formula are entitled to piggyback registration rights in connection with any registration statement that we file
(subject to customary exceptions). The Holders also agreed to execute a lock-up agreement if requested by the representative of
the underwriters in any underwritten offering. Based on information that we have received from our transfer agent, we do not believe
that the IDIT Selling Shareholders and the FIS Selling Shareholders still hold a significant number of Common Shares that are entitled
to the foregoing registration rights under the Registration Rights Agreement as of the current time.
There are no exchange control or currency
regulations in the Cayman Islands that would affect the payment of dividends, interest or other payments to non-resident holders
of the Company’s securities, including the Common Shares. Other jurisdictions in which the Company conducts operations may
have various currency or exchange controls. In addition, the Company is subject to the risk of changes in political conditions
or economic policies which could result in new or additional currency or exchange controls or other restrictions being imposed
on the operations of the Company. As to the Company’s securities, Cayman Islands law and the Memorandum and Articles impose
no limitations on the right of non-resident or foreign owners to hold or vote such securities.
Israeli Taxation Considerations for Our Shareholders
The following is a short summary of the
material provisions of the tax environment to which shareholders may be subject. This summary is based on the current provisions
of tax law. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative
interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities
or the courts.
The summary does not address all of the
tax consequences that may be relevant to all purchasers of our Common Shares in light of each purchaser’s particular circumstances
and specific tax treatment. For example, the summary below does not address the tax treatment of residents of Israel and traders
in securities who are subject to specific tax regimes. As individual circumstances may differ, holders of our Common Shares should
consult their own tax adviser as to the United States, Israeli, Cayman Islands or other tax consequences of the purchase, ownership
and disposition of Common Shares. The following is not intended, and should not be construed, as legal or professional tax advice
and is not exhaustive of all possible tax considerations. Each individual should consult his or her own tax or legal adviser.
Tax Consequences Regarding Disposition of Our Common Shares
Overview
Israeli law generally imposes a capital
gain tax on the sale of capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located
in Israel, including shares of Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is
available or unless a tax treaty between Israel and the seller’s country of residence provides otherwise. The Ordinance distinguishes
between “Real Capital Gain” and “Inflationary Surplus”. The Inflationary Surplus is a portion of the total
capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase
in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase
and the date of sale. The Real Capital Gain is the excess of the total capital gain over the Inflationary Surplus.
Capital gain
Israeli Resident Shareholders
As of January 1, 2012, the tax rate
applicable to Real Capital Gain derived by Israeli individuals from the sale of shares, whether or not listed on a stock exchange,
is 25%, unless such shareholder claims a deduction for interest and linkage differences expenses in connection with the purchase
and holding of such shares, in which case the gain will generally be taxed at a rate of 30%. However, if such shareholder is considered
a Substantial Shareholder (i.e., a person who holds, directly or indirectly, alone or together with another person who collaborates
with such person on a permanent basis, 10% or more of any of the company’s “means of control” (including, among
other things, the right to receive profits of the company, voting rights, the right to receive the company’s liquidation
proceeds and the right to appoint a director)) at the time of sale or at any time during the preceding 12-month period, such gain
will be taxed at the rate of 30%. Individual shareholders dealing in securities in Israel are taxed at their marginal tax rates
applicable to business income (up to 47% in 2018 and thereafter).
Under current Israeli tax legislation, the
tax rate applicable to Real Capital Gain derived by Israeli resident corporations from the sale of shares of an Israeli company
is the general corporate tax rate. As described above, the corporate tax rate as of 2018 and thereafter is 23%.
Non-Israeli Residents Shareholders
Israeli capital gain tax is imposed on the
disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or rights to
shares in an Israeli resident company; or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a
tax treaty between Israel and the seller’s country of residence provides otherwise. As mentioned above, Real Capital Gain
is generally subject to tax at the corporate tax rate (23% in 2018 and thereafter) if generated by a company, or at the rate of
25% or 30%, if generated by an individual. Individual and corporate shareholders dealing in securities in Israel are taxed at the
tax rates applicable to business income (a corporate tax rate for a corporation and a marginal tax rate of up to 47% for an individual
in 2018 and thereafter).
Notwithstanding the foregoing, shareholders
who are non-Israeli residents (individuals and corporations) are generally exempt from Israeli capital gain tax on any gains derived
from the sale, exchange or disposition of shares publicly traded on the Tel Aviv Stock Exchange or on a recognized stock exchange
outside of Israel, provided, among other things, that (i) such gains are not generated through a permanent establishment that
the non-Israeli resident maintains in Israel, (ii) the shares were purchased after being listed on a recognized stock exchange,
and (iii) with respect to shares listed on a recognized stock exchange outside of Israel, such shareholders are not subject to
the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985. However, non-Israeli corporations will not be entitled to the
foregoing exemptions if Israeli residents (a) have a controlling interest of more than 25% in such non-Israeli corporation, or
(b) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly. Such exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares
are deemed to be business income.
In addition, a sale of shares may be exempt
from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, under the U.S.-Israel Tax Treaty,
or the U.S-Israel Treaty, the sale, exchange or disposition of shares of an Israeli company by a shareholder who is a U.S. resident
(for purposes of the U.S.-Israel Treaty) holding the shares as a capital asset is exempt from Israeli capital gain tax unless either
(i) the shareholder holds, directly or indirectly, shares representing 10% or more of the voting rights during any part of the
12-month period preceding such sale, exchange or disposition; (ii) the shareholder, if an individual, has been present in Israel
for a period or periods of 183 days or more in the aggregate during the applicable taxable year; (iii) the capital gain arising
from such sale are attributable to a permanent establishment of the shareholder which is maintained in Israel; (iv) the capital
gain arising from such sale, exchange or disposition is attributed to real estate located in Israel; (v) the capital gain arising
from such sale, exchange or disposition is attributed to royalties; or (vi) the shareholder is a U.S. resident (for purposes of
the U.S.-Israel Treaty) and is not holding the shares as a capital asset. In each case, the sale, exchange or disposition of such
shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Treaty, a U.S. resident would
be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed with respect to the sale, exchange
or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S-Israel Treaty does not provide
such credit against any U.S. state or local taxes.
In some instances where our
shareholders may be liable for Israeli tax on the sale of their Common Shares, the payment of the consideration may be subject to
the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their
capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of
all of the shares of an Israeli resident company, in the form of a merger or otherwise, the Israel Tax Authority may require
from shareholders who are not liable for Israeli tax to sign declarations in forms specified by this authority or obtain a
specific exemption from the Israel Tax Authority to confirm their status as non-Israeli resident, and, in the absence of such
declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.
Taxes Applicable to Dividends
Israeli Resident Shareholders
Israeli residents who are individuals are
generally subject to Israeli income tax for dividends paid on our common shares (other than bonus shares or share dividends) at
25%, or 30% if the recipient of such dividend is a Substantial Shareholder at the time of distribution or at any time during the
preceding 12-month period. However, dividends distributed from taxable income allocated and accrued during the benefits period
of an AE are subject to withholding tax at the rate of 15% (if the dividend is distributed during the tax benefits period under
the Investment Law or within 12 years after such period, except with respect to an FIC, in which case the 12 year limit does not
apply) or 20% with respect to PFE. An average rate will be set in case the dividend is distributed from mixed types of income (regular
and Approved/ Beneficiary/Preferred income).
Israeli resident corporations are generally
exempt from Israeli corporate tax for dividends paid on shares of Israeli resident corporations (like our common shares). However,
dividends distributed from taxable income accrued during the benefits period of an AE are subject to withholding tax at the rate
of 15%, if the dividend is distributed during the tax benefits period under the Investment Law or within 12 years after such period.
Non-Israeli Resident Shareholders
Non-Israeli residents (whether individuals
or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on our Common
Shares, at the rate of 25% or 30% (if the dividend recipient is a Substantial Shareholder at the time of distribution or at any
time during the preceding 12-month period) or 15% if the dividend is distributed from income attributed to our AE or BE, or 20%
with respect to PFE. Such dividends are generally subject to Israeli withholding tax at a rate of 25% so long as the shares are
registered with a Nominee Company (whether the recipient is a Substantial Shareholder or not), and 15% if the dividend is distributed
from income attributed to an AE or BE or 20% if the dividend is distributed from income attributed to a PFE, unless a reduced rate
is provided under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority
allowing for a reduced tax rate). For example, under the U.S-Israel Treaty, the maximum rate of tax withheld in Israel on dividends
paid to a holder of our common shares who is a U.S. resident (for purposes of the U.S.-Israel Treaty) is 25%. However, generally,
the maximum rate of withholding tax on dividends, not generated by our AE or BE , that are paid to a U.S. corporation holding
at least 10% or more of our outstanding voting capital from the start of the tax year preceding the distribution of the dividend
through (and including) the distribution of the dividend, is 12.5%, provided that no more than 25% of our gross income for such
preceding year consists of certain types of dividends and interest. Notwithstanding the foregoing, dividends distributed from income
attributed to an AE or BE are subject to a withholding tax rate of 15% for such a U.S. corporation shareholder, provided that the
condition related to our gross income for the previous year (as set forth in the previous sentence) is met. The aforementioned
rates will not apply if the dividend income was generated through a permanent establishment of the U.S. resident which is maintained
in Israel. If the dividend is attributable partly to income derived from an AE a BE, or a PFE, and partly to other sources of income,
the withholding rate will be a blended rate reflecting the relative portions of the two types of income. U.S residents who are
subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for U.S. federal income tax purposes
in the amount of the taxes withheld, subject to detailed rules contained in United States tax legislation.
A non-Israeli resident who receives dividends
from which tax was withheld is generally exempt from the obligation to file tax returns in Israel with respect to such income,
provided that (i) such income was not generated from business conducted in Israel by the taxpayer, (ii) the taxpayer
has no other taxable sources of income in Israel with respect to which a tax return is required to be filed and (iii) the taxpayer
is not obliged to pay excess tax (as further explained below).
Excess Tax
Individuals who are subject to tax in Israel
(whether any such individual is an Israeli resident or non-Israeli resident) are also subject to an additional tax for income exceeding
a certain level. For 2017 and onwards, the additional tax is at a rate of 3% on annual income exceeding NIS 649,560 for 2019 (approximately
$0.2 million), which amount is linked to the annual change in the Israeli consumer price index, including, but not limited to,
dividends, interest and capital gain.
Estate and Gift Tax
Israeli law presently does not impose estate
or gift taxes.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes
on individuals or corporations based upon profits, income, gains or appreciation, and there is no taxation in the nature of inheritance
tax or estate duty or withholding tax that will be applicable to us or to any holder of our Common Shares. There are currently
no other taxes that are material to us or our shareholders levied by the Government of the Cayman Islands except for stamp duties
that may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. No
stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands exempted companies except those that hold
interests in land in the Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange control
regulations or currency restrictions in the Cayman Islands.
U.S. Federal Income Tax Considerations
Subject to the limitations described herein,
this discussion summarizes certain U.S. federal income tax consequences of the purchase, ownership and disposition of our Common
Shares to a U.S. holder. A U.S. holder is a holder of our Common Shares who is:
|
●
|
An individual who is a citizen or resident of the U.S. for U.S. federal income tax purposes
|
|
●
|
A corporation (or another entity taxable as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any political subdivision thereof, or the District of Columbia
|
|
●
|
An estate, the income of which may be included in gross income for U.S. federal income tax purposes regardless of its source
|
|
●
|
A trust (i) if, in general, a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (ii) an electing trust that was in existence on August 19, 1996 and was treated as a domestic trust on that date
|
Unless otherwise specifically indicated,
this discussion does not consider the U.S. tax consequences to a person that is not a U.S. holder (which we refer to as a non-U.S.
holder) and considers only U.S. holders that will own our Common Shares as capital assets (generally, for investment).
This discussion is based on current provisions
of the Internal Revenue Code of 1986, as amended, or the Code, current and proposed Treasury Regulations promulgated under the
Code and administrative and judicial interpretations of the Code, all as currently in effect and all of which are subject to change,
possibly with a retroactive effect. This discussion does not address all aspects of U.S. federal income taxation that may be relevant
to any particular U.S. holder based on the U.S. holder’s particular circumstances. In particular, this discussion does not
address the U.S. federal income tax consequences to U.S. holders who are broker-dealers, insurance companies, real estate investment
trusts, regulated investment companies, grantor trusts, individual retirement and tax-deferred accounts, certain former citizens
or long-term residents of the U.S., tax-exempt organizations, financial institutions , “financial service entities”
or who own, directly, indirectly or constructively, 10% or more of the vote or value of the our outstanding shares, U.S. holders
holding our Common Shares as part of a hedging, straddle or conversion transaction, U.S. holders whose functional currency is not
the U.S. dollar, U.S. holders that acquired our Common Shares upon the exercise of employee stock options or otherwise as compensation,
and U.S holders who are persons subject to the alternative minimum tax, who may be subject to special rules not discussed below.
Additionally, the tax treatment of persons
who are, or hold our Common Shares through a partnership or other pass-through entity is not considered, nor is the possible application
of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S. tax laws.
You are advised to consult your tax advisor
with respect to the specific U.S. federal, state, local and foreign tax consequences of purchasing, holding or disposing of our
Common Shares.
Taxation of Distributions on Common Shares
Subject to the discussion below under “Tax
Consequences if We Are a Passive Foreign Investment Company,” a distribution paid by us with respect to our Common Shares
to a U.S. holder will be treated as dividend income to the extent that the distribution does not exceed our current and accumulated
earnings and profits, as determined for U.S. federal income tax purposes.
Dividends that are received by U.S. holders
that are individuals, estates or trusts generally will be taxed at the rate applicable to long-term capital gains, provided those
dividends meet the requirements of “qualified dividend income.” The maximum long-term capital gains rate is 20% for
individuals with annual taxable income that exceeds certain thresholds. In addition, under the Patient Protection and Affordable
Care Act, higher income taxpayers must pay an additional 3.8 percent tax on net investment income to the extent certain threshold
amounts of income are exceeded. See “Tax on Net Investment Income” in this Item below. For this purpose, qualified
dividend income generally includes dividends paid by a foreign corporation if certain holding period and other requirements are
met and either (a) the stock of the foreign corporation with respect to which the dividends are paid is “readily tradable”
on an established securities market in the U.S. (e.g., the NASDAQ Capital Market) or (b) the foreign corporation is eligible for
benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to
be satisfactory by the U.S. Secretary of the Treasury. Dividends that fail to meet such requirements and dividends received by
corporate U.S. holders are taxed at ordinary income rates. No dividend received by a U.S. holder will be a qualified dividend (i)
if the U.S. holder held the Common Share with respect to which the dividend was paid for less than 61 days during the 121-day period
beginning on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding for this purpose, under
the rules of Code Section 246(c), any period during which the U.S. holder has an option to sell, is under a contractual obligation
to sell, has made (and not closed) a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy,
or has otherwise diminished its risk of loss by holding other positions with respect to, such Common Share (or substantially identical
securities); or (ii) to the extent that the U.S. holder is under an obligation (pursuant to a short sale or otherwise) to make
related payments with respect to positions in property substantially similar or related to the Common Share with respect to which
the dividend is paid. If we were to be a “passive foreign investment company” (as such term is defined in the Code),
or PFIC, for any taxable year, dividends paid on our Common Shares in such year or in the following taxable year would not be qualified
dividends. See the discussion below regarding our PFIC status under “Tax Consequences if We Are a Passive Foreign Investment
Company.” In addition, a non-corporate U.S. holder will be able to take qualified dividend income into account in determining
its deductible investment interest (which is generally limited to its net investment income) only if it elects to do so; in such
case the dividend income will be taxed at ordinary income rates.
The amount of any distribution which exceeds
the amount treated as a dividend will be treated first as a non-taxable return of capital, reducing the U.S. holder’s tax
basis in our Common Shares to the extent thereof, and then as capital gain from the deemed disposition of the Common Shares. Corporate
holders will not be allowed a deduction for dividends received in respect of the Common Shares.
Distributions of current or accumulated
earnings and profits paid in foreign currency to a U.S. holder will be includible in the income of a U.S. holder in a U.S. dollar
amount calculated by reference to the exchange rate on the day the distribution is received. A U.S. holder that receives a foreign
currency distribution and converts the foreign currency into U.S. dollars subsequent to receipt may have foreign exchange gain
or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally
be U.S. source ordinary income or loss.
Taxation of the Disposition of Common Shares
Subject to the discussion below under “Tax
Consequences if We Are a Passive Foreign Investment Company,” upon the sale, exchange or other disposition of our Common
Shares, a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the amount realized on the
disposition and the U.S. holder’s tax basis in our Common Shares. The gain or loss recognized on the disposition of the Common
Shares will be long-term capital gain or loss if the U.S. holder held the Common Shares for more than one year at the time of the
disposition and would be eligible for a reduced rate of taxation for certain non-corporate U.S. holders. The maximum long-term
capital gains rate is 20% for individuals with annual taxable income that exceeds certain thresholds. In addition, under the Patient
Protection and Affordable Care Act, higher income taxpayers must pay an additional 3.8 percent tax on net investment income to
the extent certain threshold amounts of income are exceeded. See “Tax on Net Investment Income” in this Item below.
Capital gain from the sale, exchange or other disposition of Common Shares held for one year or less is short-term capital gain
and taxed as ordinary income. Gain or loss recognized by a U.S. holder on a sale, exchange or other disposition of our Common Shares
generally will be treated as U.S. source income or loss. The deductibility of capital losses is subject to certain limitations.
A U.S. holder that uses the cash method
of accounting calculates the dollar value of the proceeds received on the sale as of the date that the sale settles. However, a
U.S. holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the
trade date and may therefore realize foreign currency gain or loss. A U.S. holder that uses the accrual method may avoid realizing
foreign currency gain or loss by electing to use the settlement date to determine the proceeds of sale for purposes of calculating
the foreign currency gain or loss. In addition, a U.S. holder that receives foreign currency upon disposition of its Common Shares
and converts the foreign currency into dollars after the settlement date or trade date (whichever date the U.S. holder is required
to use to calculate the value of the proceeds of sale) may have foreign exchange gain or loss based on any appreciation or depreciation
in the value of the foreign currency against the dollar, which will generally be U.S. source ordinary income or loss.
Tax Consequences if We Are a Passive Foreign Investment
Company
We would be a passive foreign investment
company, or PFIC, for a taxable year if either (1) 75% or more of our gross income in the taxable year is passive income; or (2)
the average percentage (by value determined on a quarterly basis) in a taxable year of our assets that produce, or are held for
the production of, passive income is at least 50%. Passive income for this purpose generally includes, among other things, certain
dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property
that gives rise to passive income. If we own (directly or indirectly) at least 25% by value of the stock of another corporation,
we would be treated for purposes of the foregoing tests as owning our proportionate share of the other corporation’s assets
and as directly earning our proportionate share of the other corporation’s income. As discussed below, we believe that we
were not a PFIC for 2019.
If we were a PFIC, each U.S. holder would
(unless it made one of the elections discussed below on a timely basis) be taxable on gain recognized from the disposition of our
Common Shares (including gain deemed recognized if our Common Shares are used as security for a loan) and upon receipt of certain
excess distributions (generally, distributions that exceed 125% of the average amount of distributions in respect to such shares
received during the preceding three taxable years or, if shorter, during the U.S. holder’s holding period prior to the distribution
year) with respect to our Common Shares as if such income had been recognized ratably over the U.S. holder’s holding period
for the shares. The U.S. holder’s income for the current taxable year would include (as ordinary income) amounts allocated
to the current taxable year and to any taxable year prior to the first day of the first taxable year for which we were a PFIC.
Tax would also be computed at the highest ordinary income tax rate in effect for each other taxable year to which income is allocated,
and an interest charge on the tax as so computed would also apply. The tax liability with respect to the amount allocated to the
taxable year prior to the taxable year of the distribution or disposition cannot be offset by any net operating losses. Additionally,
if we were a PFIC, U.S. holders who acquire our Common Shares from decedents (other than nonresident aliens) would be denied the
normally-available step-up in basis for such shares to fair market value at the date of death and, instead, would have a tax basis
in such shares equal to the lesser of the decedent’s basis or the fair market value of such shares on the decedent’s
date of death.
As an alternative to the tax treatment described
above, a U.S. holder could elect to treat us as a “qualified electing fund” (a QEF), in which case the U.S. holder
would be taxed, for each taxable year that we are a PFIC, on its pro rata share of our ordinary earnings and net capital gain (subject
to a separate election to defer payment of taxes, which deferral is subject to an interest charge). Special rules apply if a U.S.
holder makes a QEF election after the first taxable year in its holding period in which we are a PFIC. We have agreed to supply
U.S. holders with the information needed to report income and gain under a QEF election if we were a PFIC. Amounts includable in
income as a result of a QEF election will be determined without regard to our prior year losses or the amount of cash distributions,
if any, received from us. A U.S. holder’s basis in its Common Shares will increase by any amount included in income and decrease
by any amounts not included in income when distributed because such amounts were previously taxed under the QEF rules. So long
as a U.S. holder’s QEF election is in effect with respect to the entire holding period for its Common Shares, any gain or
loss realized by such holder on the disposition of its Common Shares held as a capital asset generally will be capital gain or
loss. Such capital gain or loss ordinarily would be long-term if such U.S. holder had held such Common Shares for more than one
year at the time of the disposition and would be eligible for a reduced rate of taxation for certain non-corporate U.S. holders.
The maximum long-term capital gains rate is 20% for individuals with annual taxable income that exceeds certain thresholds. The
QEF election is made on a shareholder-by-shareholder basis, applies to all Common Shares held or subsequently acquired by an electing
U.S. holder and can be revoked only with the consent of the IRS. The QEF election must be made on or before the U.S. holder’s tax
return due date, as extended, for the first taxable year to which the election will apply.
As an alternative to making a QEF election,
a U.S. holder of PFIC stock that is “marketable stock” (e.g., “regularly traded” on the NASDAQ Capital
Market) may, in certain circumstances, avoid certain of the tax consequences generally applicable to holders of stock in a PFIC
by electing to mark the stock to market as of the beginning of such U.S. holder’s holding period for our Common Shares. Special
rules apply if a U.S. holder makes a mark-to-market election after the first year in its holding period in which we are a PFIC.
As a result of such an election, in any taxable year that we are a PFIC, a U.S. holder would generally be required to report gain
or loss to the extent of the difference between the fair market value of the Common Shares at the end of the taxable year and such
U.S. holder’s tax basis in such shares at that time. Any gain under this computation, and any gain on an actual disposition
of our Common Shares in a taxable year in which we are PFIC, would be treated as ordinary income. Any loss under this computation,
and any loss on an actual disposition of our Common Shares in a taxable year in which we are PFIC, would be treated as ordinary
loss to the extent of the cumulative net-mark-to-market gain previously included. Any remaining loss from marking our Common Shares
to market will not be allowed, and any remaining loss from an actual disposition of our Common Shares generally would be capital
loss. A U.S. holder’s tax basis in its Common Shares is adjusted annually for any gain or loss recognized under the mark-to-market
election. There can be no assurances that there will be sufficient trading volume with respect to our Common Shares for the Common
Shares to be considered “regularly traded” or that our Common Shares will continue to trade on the NASDAQ Capital Market.
Accordingly, there are no assurances that our Common Shares will be marketable stock for these purposes. As with a QEF election,
a mark-to-market election is made on a shareholder-by-shareholder basis, applies to all Common Shares held or subsequently acquired
by an electing U.S. holder and can only be revoked with consent of the IRS (except to the extent our Common Shares no longer constitute
“marketable stock”).
Based on an analysis of our assets and income,
we believe that we were not a PFIC for 2019. We currently expect that we will not be a PFIC in 2020. The tests for determining
PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, which are relevant
to this determination. Accordingly, there can be no assurance that we will not become a PFIC in any future taxable years. U.S.
holders who hold our Common Shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease
to be a PFIC, subject to certain exceptions for U.S. holders who made QEF, mark-to-market or certain other special elections. U.S.
holders are urged to consult their tax advisors about the PFIC rules, including the consequences to them of making a mark-to-market
or QEF election with respect to our Common Shares in the event that we qualify as a PFIC.
Tax on Net Investment Income
A U.S. holder that is an individual or estate,
or a trust that does not fall into a special class of trusts that is exempt from the tax, will be subject to a 3.8% tax on the
lesser of (1) the U.S. holder’s “net investment income” for the relevant taxable year and (2) the excess
of the U.S. holder’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals
will be between $125,000 and $250,000, depending on the individual’s circumstances). A U.S. holder’s net investment
income generally will include its dividends on our Common Shares and net gains from dispositions of our Common Shares, unless those
dividends or gains are derived in the ordinary course of the conduct of trade or business (other than trade or business that consists
of certain passive or trading activities). Net investment income, however, may be reduced by deductions properly allocable to that
income. A U.S. holder that is an individual, estate or trust is urged to consult its tax adviser regarding the applicability of
the Medicare tax to its income and gains in respect of its investment in the Common Shares.
Non-U.S. holders of Common Shares
Except as provided below, a non-U.S. holder
of our Common Shares will not be subject to U.S. federal income or withholding tax on the receipt of dividends on, or the proceeds
from the disposition of, our Common Shares, unless, in the case of U.S. federal income taxes, that item is effectively connected
with the conduct by the non-U.S. holder of a trade or business in the United States and, in the case of a resident of a country
which has an income tax treaty with the United States, such item is attributable to a permanent establishment in the United States
or, in the case of an individual, a fixed place of business in the United States. In addition, gain recognized on the disposition
of our Common Shares by an individual non-U.S. holder will be subject to tax in the United States if the non-U.S. holder is present
in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.
Information Reporting and Backup Withholding
A U.S. holder generally is subject to information
reporting and may be subject to backup withholding at a rate of up to 28% with respect to dividend payments on, or receipt of the
proceeds from the disposition of, our Common Shares. Backup withholding will not apply with respect to payments made to exempt
recipients, including corporations and tax-exempt organizations, or if a U.S. holder provides a correct taxpayer identification
number, certifies that such holder is not subject to backup withholding or otherwise establishes an exemption. Non-U.S. holders
are not subject to information reporting or backup withholding with respect to dividend payments on, or receipt of the proceeds
from the disposition of, our Common Shares in the U.S., or by a U.S. payor or U.S. middleman, provided that such non-U.S. holder
provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption. Backup withholding
is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a holder, or alternatively,
the holder may be eligible for a refund of any excess amounts withheld under the backup withholding rules, in either case, provided
that the required information is furnished to the IRS.
Information Reporting by Certain U.S. Holders
U.S. citizens and individuals taxable as
resident aliens of the United States that own “specified foreign financial assets” with an aggregate value in a taxable
year in excess of certain threshold (as determined under Treasury regulations) and that are required to file a U.S. federal income
tax return generally will be required to file an information report with respect to those assets with their tax returns. IRS Form
8938 has been issued for that purpose. “Specified foreign financial assets” include any financial accounts maintained
by foreign financial institutions, foreign stocks held directly, and interests in foreign estates, foreign pension plans or foreign
deferred compensation plans. Under those rules, our Common Shares, whether owned directly or through a financial institution, estate
or pension or deferred compensation plan, would be “specified foreign financial assets”. Under Treasury regulations,
the reporting obligation applies to certain U.S. entities that hold, directly or indirectly, specified foreign financial assets.
Penalties can apply if there is a failure to satisfy this reporting obligation. A U.S. Holder is urged to consult his tax adviser
regarding his reporting obligation.
The above description is not intended
to constitute a complete analysis of all tax consequences relating to acquisition, ownership and disposition of our Common Shares.
You should consult your tax advisor concerning the tax consequences of your particular situation.
F.
|
Dividends and Paying Agents.
|
Not applicable.
Not applicable.
We are currently subject to the information
and periodic reporting requirements of the Exchange Act that are applicable to foreign private issuers. Although as a foreign private
issuer we are not required to file periodic information as frequently or as promptly as United States companies, we generally do
publicly announce our quarterly and year-end results promptly and file periodic information with the United States Securities and
Exchange Commission under cover of Form 6-K. As a foreign private issuer, we are also exempt from the rules under the Exchange
Act prescribing the furnishing and content of proxy statements and our officers, directors and principal shareholders are exempt
from the reporting and other provisions in Section 16 of the Exchange Act. Our SEC filings are filed electronically on the EDGAR
reporting system and may be obtained through that medium. You may also obtain copies of such materials from the SEC at prescribed
rates. The SEC also maintains a web site that contains reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of that web site is http://www.sec.gov. The Exchange Act file number
for our Securities and Exchange Commission filings is 000-20181.
Information about Sapiens is also available
on our website at http://www.sapiens.com. Such information on our website is not part of this annual report.
I.
|
Subsidiary Information.
|
Not applicable.
Item 11.
|
Quantitative and Qualitative Disclosure about Market Risk.
|
Market risks relating to our operations
result primarily from changes in exchange rates, interest rates or weak economic conditions in the markets in which we sell our
products and services. We have been and we are actively monitoring these potential exposures. To manage the volatility relating
to these exposures, we may enter into various forward contracts or other hedging instruments. Our objective is to reduce, where
it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency rates and
interest rates.
Foreign Currency Risk. We
conduct our business in various foreign currencies, primarily those of Israel and the United Kingdom, and to a lesser extent of
Europe and Canada. A devaluation of the NIS, GBP and Euro in relation to the US dollar has the effect of reducing the US dollar
amount of any of our expenses or liabilities which are payable in those currencies (unless such expenses or payables are linked
to the US dollar) while reducing the US dollar amount of any of our revenues which are payable to us in those currencies.
Because exchange rates between the NIS,
GBP and Euro, on the one hand, and the US dollar, on the other hand, fluctuate continuously, exchange rate fluctuations and especially
larger periodic devaluations will have an impact on our revenue and profitability and period-to-period comparisons of our results.
The effects of foreign currency re-measurements are reflected as financial expenses in our consolidated financial statements. A
hypothetical 10% movement in foreign currency rates (primarily the NIS, GBP and Euro) against the US dollar, with all other variables
held constant on the expected sales, would have resulted in a decrease or increase in 2019 sales revenues of a maximum of $14.4
million, or an effect of 4.4% on total revenues.
We monitor our foreign currency exposure
and, from time to time, may enter into currency forward contracts or put/call currency options to hedge balance sheet exposure.
We may use such contracts to hedge exposure to changes in foreign currency exchange rates associated with balance sheet balances
denominated in a foreign currency and anticipated costs to be incurred in a foreign currency.
Market Risk. We currently
do not invest in, or otherwise hold, for trading or other purposes, any financial instruments subject to market risk.
Interest Rate Risk. We pay
interest on our credit facilities based on the LIBOR interest rate for some of our liabilities. As a result, changes in
the general level of interest rates directly affect the amount of interest payable by us under these facilities. However, we expect
our exposure to risk from changes in interest rates to be minimal and not material. Therefore, no quantitative tabular disclosures
are required.
Item 12.
|
Description of Securities Other than Equity Securities.
|
Not applicable.