PART
I
Item
1.
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Identity
of Directors, Senior Management and Advisers
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Not
applicable.
Item
2.
|
Offer
Statistics and Expected Timetable
|
Not
applicable.
A.
|
Selected
Financial Data
|
Except
as otherwise indicated, all financial statements and other financial information included in this Annual Report are presented
solely under U.S. GAAP.
The
following table presents selected consolidated financial data as of and for each of the five years in the period ended December
31, 2017. The selected consolidated financial data presented below are derived from our audited consolidated financial statements
for these periods, and should be read in conjunction with these financial statements and the related notes thereto. Our audited
consolidated balance sheets as of December 31, 2016 and 2017 and our audited consolidated statements of operations and cash flows
for each of the three years ended December 31, 2017 and the related notes thereto are included elsewhere in this annual report.
You should read the selected financial data in conjunction with Item 5 “Operating and Financial Review and Prospects.”
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|
Years ended December 31,
|
|
|
|
2013
|
|
|
2014
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|
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2015
|
|
|
2016
|
|
|
2017
|
|
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|
($ in thousands, except share and per share data)
|
|
Consolidated Statements of Operations Data:
|
|
|
|
Total revenues
|
|
$
|
18,480
|
|
|
$
|
25,020
|
|
|
$
|
20,928
|
|
|
$
|
18,052
|
|
|
$
|
18,062
|
|
Gross profit
|
|
|
10.609
|
|
|
|
15,070
|
|
|
|
12,298
|
|
|
|
11,221
|
|
|
|
11,029
|
|
Operating income
|
|
|
2.159
|
|
|
|
7,457
|
|
|
|
6,416
|
|
|
|
5,206
|
|
|
|
4,686
|
|
Other Financial income (expenses) – net
|
|
|
163
|
|
|
|
(306
|
)
|
|
|
(114
|
)
|
|
|
166
|
|
|
|
630
|
|
Net income
|
|
|
2,185
|
|
|
|
5,483
|
|
|
|
5,018
|
|
|
|
4,203
|
|
|
|
5,612
|
|
Earnings per ordinary share:
|
|
|
|
|
|
|
|
|
|
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|
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Basic
|
|
$
|
0.12
|
|
|
$
|
0.29
|
|
|
$
|
0.26
|
|
|
$
|
0.22
|
|
|
$
|
0.29
|
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
0.29
|
|
|
$
|
0.26
|
|
|
$
|
0.22
|
|
|
$
|
0.29
|
|
Weighted average number of ordinary shares used in computation of earnings per ordinary share – in thousands:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,869
|
|
|
|
18,949
|
|
|
|
19,183
|
|
|
|
19,234
|
|
|
|
19,292
|
|
Diluted
|
|
|
18,890
|
|
|
|
19,032
|
|
|
|
19,283
|
|
|
|
19,307
|
|
|
|
19,559
|
|
|
|
As of December 31,
|
|
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|
2013
|
|
|
2014
|
|
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2015
|
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2016
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2017
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|
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($ in thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,212
|
|
|
$
|
8,100
|
|
|
$
|
11,475
|
|
|
$
|
9,165
|
|
|
$
|
5,014
|
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Working capital
|
|
|
14,540
|
|
|
|
14,818
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|
|
|
14,734
|
|
|
|
15,217
|
|
|
|
14,921
|
|
Total assets
|
|
|
29,624
|
|
|
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30,347
|
|
|
|
30,225
|
|
|
|
29,000
|
|
|
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27,378
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Share capital and additional paid-in capital
|
|
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30,250
|
|
|
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25,778
|
|
|
|
25,916
|
|
|
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26,052
|
|
|
|
26,234
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|
Treasury Shares
|
|
|
(2,287
|
)
|
|
|
(1,863
|
)
|
|
|
(1,692
|
)
|
|
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(1,607
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)
|
|
|
(1,554
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)
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Total shareholders’ equity
|
|
|
20,989
|
|
|
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22,411
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|
|
|
21,848
|
|
|
|
21,285
|
|
|
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21,022
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B.
|
Capitalization
and Indebtedness
|
Not
applicable.
C.
|
Reasons
for the Offer and Use of Proceeds
|
Not
applicable.
We
believe that the occurrence of any one or some combination of the following factors would have a material adverse effect on our
business, financial condition and results of operations.
Risks
Relating to Our Business
If
we are unable to compete effectively in the marketplace, we may suffer a decrease in market share, revenues and profitability.
Competition
in our industry is intense and we expect competition to increase. We compete both with established global billing companies, such
as Amdocs and Oracle, as well as with local billing companies. Some of our competitors have greater financial, technical, sales,
marketing and other resources and greater name recognition than we do. Some of our competitors, mainly the ones that focus on
specific markets, compete with us on pricing. New competitors may emerge and rapidly acquire significant market share. We cannot
guarantee that we will be able to compete effectively against current or future competitors or that competitive pressure will
not harm our financial results.
Our
backlog, revenues and operating results may vary significantly from quarter to quarter.
Our
backlog, revenues and operating results may vary significantly from quarter to quarter due to a number of factors, including the
following:
|
●
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the
timing of orders and/or deliveries for our software may be delayed as customers typically
order and/or implement our billing and customer care software only after other vendors
have provided the network infrastructure, a process that is subject to delay. It is therefore
difficult for us to predict the timing of orders and/or revenue recognition;
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●
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the
ability of our customers to expand their operations and increase their subscriber base,
including their ability to obtain financing;
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|
●
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potential
termination of contracts by our customer due to lack of financing, internal changes or
any other reason; and
|
|
●
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changes
in our pricing policies or competitive pricing by our competitors.
|
Due
to all of the foregoing, we cannot predict revenues for any future quarter with any significant degree of accuracy. Accordingly,
we believe that period-to-period comparisons of our operating results are not necessarily meaningful and you should not rely upon
them as indications of future performance. In future quarters, our operating results may be below the expectations of public market
analysts and investors, and as a result, the price of our ordinary shares may fall.
The
customer base for our wireline and wireless billing and customer care products is characterized by very small to medium size telephony
carriers. If this market segment fails to grow, the demand for our billing and customer care software would diminish substantially.
Our
wireline and wireless billing and customer care products target very small to medium size carriers. Our growth in this field depends
on continued growth of carriers of this size. We cannot be certain that carriers of this size will be able to successfully compete
with large telephony carriers in existing markets or will successfully develop in new and emerging markets. If this market segment
fails to grow, the demand for our billing and customer care software would diminish substantially and our business would suffer.
In addition, there may never be significant demand for new billing and customer care software by providers of telecom services.
If
we fail to attract and retain qualified personnel, we will not be able to implement our business strategy or operate our business
effectively.
Our
products require sophisticated software development, sales, professional services and technical customer support. Our success
depends on our ability to attract, train, motivate and especially retain highly skilled personnel within each of these areas of
expertise. Qualified personnel in these areas are in great demand worldwide and are likely to remain a limited resource. We cannot
assure you that we will be able to retain the skilled employees we require. In addition, the resources required to retain such
personnel may adversely affect our operating margins. The failure to retain qualified personnel may harm our business. In particular,
we maintain a large engineering and support center in Iasi, Romania and have encountered many successful attempts from other technology
companies to recruit our employees after we have trained them. If this phenomenon continues and increases, we may not be able
to retain the highly skilled personnel and may be forced to significantly raise the salaries of our Romanian employees and our
results of operations will be consequently harmed.
Because
our revenues are generated in numerous countries, our results of operations could suffer if we are unable to manage international
operations effectively.
Our
sales are made in many countries, with different legislation and complex taxation rules and in many states in the United States.
Managing our existing international operations and additional international markets requires significant management attention
and financial resources. Our ability to penetrate some international markets may be limited due to different technical standards,
protocols and requirements for our products in different markets. In addition, conducting our business internationally subjects
us to a number of risks, including:
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the
burden of compliance with a wide variety of foreign laws and regulations;
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●
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staffing
and managing foreign operations;
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●
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increased
risk of collection;
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●
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potentially
adverse tax consequences;
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●
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burdens
that may be imposed by tariffs and other trade barriers; and
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●
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adverse
effects of political and economic instability.
|
We
currently benefit from local tax benefits that may be discontinued or reduced.
We
have derived benefits from various programs, including Israeli tax benefits relating to our “Approved and Preferred Enterprise”
programs, and starting in 2017 we have derived benefits relating to the “Preferred Technological Enterprise” program
under the Israel Law for the Encouragement of Capital Investment, 1959.
To
be eligible for tax benefits as a “Preferred Technological Enterprise,” we must continue to meet certain conditions.
Should it be determined that our Preferred Technological Enterprise programs have not met, or do not meet, the statutory conditions,
our income taxes will increase.
Additional
tax liabilities could materially adversely affect our results of operations and financial condition.
As
a global corporation, we are subject to income and other taxes both in Israel and various foreign jurisdictions. Our domestic
and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing
of recognizing revenues and expenses. Additionally, the amount of income taxes paid or accrued is subject to our interpretation
of applicable laws in the jurisdictions in which we do business. From time to time, we are subject to income and other tax audits
in various jurisdictions, the timings of which are unpredictable. While we believe we comply with applicable tax laws, there can
be no assurance that a governing tax authority will not have a different interpretation of the law and assess us with additional
taxes. Should we be assessed additional taxes, there could be a material adverse effect on our results of operations and financial
condition.
If
we experience loss of one or more existing customers, we may suffer a decrease in revenues, reputation and profitability.
A
significant part of our revenues is derived from our existing customer base, maintenance agreements, customizations and additional
professional services. Small service providers may be acquired by larger carriers and replace our solutions with the buyer’s
existing billing platform, cease operations due to lack of funding, or terminate their relationship with us due to their financial
condition, loss of market share and competitive pricing, as occurred with customers of ours over the years. If one or more customers
cease using our solutions or services due to replacements or any other reason, our business and results of operations would suffer.
Because
some of our customers require highly complex implementations and we sell fixed price projects, we may underestimate the effort
and time required to implement such projects, resulting in a lower or negative profit margin for such projects and the incurrence
of contractual penalties for late performance. This could materially harm our results of operations.
In
2017, we derived 82% of our revenues from the sale of software and related services to telecommunications service providers. As
the deal size increases, our projects become more complex and the risk of on-time and on-budget implementation increases. Each
such contract may include penalties and potential liability for damages arising from our late performance. These customers conduct
a lengthy and complex approval and purchasing process, and the pricing for each project needs to be competitive in order to win.
Our cost of sales increases as the length of the approval process increases because we need to support each opportunity during
the time required for the customer to determine their specifications and the time required for the customer to receive internal
approval to commit significant resources towards acquisition of the billing solution. The project implementation may be delayed
due to customer related reasons such as lack of resources, delay in the build-up of the customer’s network infrastructure or deferral
in making implementation scope related decisions. Our estimate for the cost includes the effort required to release new versions
comprising enhanced functionality, the on-site professional services effort needed to perform migration of data from a customer’s
existing platform and to develop, test and implement the customizations specifically requested by the customer.
All
the delays, either by us or by a third party, increase the cost of supplying the project and expose us to potential claims from
customers and may decrease our revenues and could materially harm our profitability, business and results of operations.
Our
business may be negatively affected by exchange rate fluctuations.
Although
the majority of our revenues are denominated in U.S. dollars, approximately 38% of our expenses are incurred in New Israeli Shekel,
or NIS, and approximately 47% of our expenses are tied to the Euro. As a result, we may be negatively affected by fluctuations
in the exchange rates between the Euro or the NIS and the U.S. dollar. We cannot predict any future trends in the rate of devaluation
or appreciation of the NIS or of the Euro against the U.S. dollar. If the U.S. dollar cost of our operations in Israel and/or
Romania increases, our U.S. dollar-measured results of operations will be adversely affected. In addition, some of our revenues
are denominated in Euro, some are denominated in Canadian dollar, or CAD and some are denominated in Great Britain Pound, or GBP.
As a result, our U.S. dollar-measured results of operations will be adversely affected by devaluation in the GBP, CAD or Euro
relative to the U.S. dollar. We may choose to limit these exposures by entering into hedging transactions. However, hedging transactions
may not enable us to avoid exchange-related losses, and our business may be harmed by exchange rate fluctuations.
From
time to time, our software and the systems into which it is integrated contain undetected errors. This may cause us to experience
a significant decrease in market acceptance and use of our software products and we may be subject to warranty and other liability
claims.
From
time to time, our software, as well as the systems into which it is integrated, contains undetected errors. Because of this integration,
it can be difficult to determine the source of the errors. Also, from time to time, hardware systems we resell contain certain
defects or errors. As a result, and regardless of the source of the errors, we could experience one or more of the following adverse
results:
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●
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diversion
of our resources and the attention of our personnel from our research and development
efforts to address these errors;
|
|
●
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negative
publicity and injury to our reputation that may result in loss of existing or future
customers; and
|
|
●
|
loss
of or delay in revenue and loss of market share.
|
In
addition, we may be subject to claims based on errors in our software or mistakes in performing our services. Our licenses and
agreements generally contain provisions such as disclaimers of warranties and limitations on liability for special, consequential
and incidental damages, designed to limit our exposure to potential claims. However, not all of our contracts contain these provisions
and we cannot assure you that the provisions that exist will be enforceable. In addition, while we maintain product liability
and professional indemnity insurance, we cannot assure you that this insurance will provide sufficient, or any, coverage for these
claims. A product liability or professional indemnity claim, whether or not successful, could adversely affect our business by
damaging our reputation, increasing our costs, and diverting the attention of our management team.
We
may expand our business through acquisitions that could result in diversion of resources and extra expenses, and which may involve
other risks that could disrupt our business and harm our financial condition.
We
may pursue acquisitions of business, products and technologies, or the establishment of joint venture arrangements, that could
expand our business. The negotiation of potential acquisitions or joint ventures as well as the integration of an acquired or
jointly developed business, technology or product could cause diversion of management’s attention from the day-to-day operation
of our business. This could impair our relationships with our employees, customers, distributors, resellers and marketing allies.
Future acquisitions could result in:
|
●
|
potentially
dilutive issuances of equity securities;
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|
●
|
the
incurrence of debt and contingent liabilities;
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|
●
|
amortization
of intangible assets;
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|
●
|
changes
in our business model and margins;
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|
●
|
research
and development write-offs; and
|
|
●
|
other
acquisition-related expenses.
|
In
addition, we have limited experience with respect to negotiating an acquisition and operating an acquired business. If future
acquisitions disrupt our operations, our business may suffer.
We
depend on a limited number of key personnel who would be difficult to replace. If we lose the services of these individuals, our
business may be harmed.
Because
our markets are constantly changing, the success of our business depends in large part upon the continuing contributions of our
senior management. Specifically, continued growth and success largely depend on the managerial and technical skills of our founder
and CEO, Monica Iancu, and other members of senior management. Because the demand for highly qualified senior personnel exceeds
the supply of this type of personnel, it will be difficult to replace members of our management if one or more of them were to
leave us. If either Ms. Iancu or other members of the senior management team are unable or unwilling to continue their employment
with us, our business may be harmed.
Our
success depends on our ability to continually develop and market new and more technologically advanced products and enhancements.
The
market for our products and the services they are used to support is characterized by:
|
●
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rapid
technological advances like the development of new standards for communications protocols;
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|
●
|
frequent
new service offerings and enhancements by our customers, such as value-added IP-based
services and new rating plans; and
|
|
●
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changing
customer needs.
|
We
believe that our future success will largely depend upon our ability to continue to enhance our existing products and successfully
develop and market new products on a cost-effective and timely basis. We cannot assure you that we will be successful in developing
and marketing new products that respond adequately to technological change. Our failure to do so would have a material adverse
effect on our ability to market our own products.
If
we are unable to adequately protect our intellectual property or become subject to a claim of infringement, our business may be
materially adversely affected.
Our
success and ability to compete depend substantially upon our internally developed or acquired technology. Any misappropriation
of our technology could seriously harm our business. In order to protect our technology and products, we rely on a combination
of trade secret, copyright and trademark law. Despite our efforts to protect our intellectual property rights, unauthorized parties
may attempt to copy or otherwise obtain and use our software or technology or to develop software with the same functionality.
Policing unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent misappropriation,
particularly in foreign countries where the laws may not protect our intellectual property rights as fully as in the United States.
If
anyone asserts a claim against us relating to proprietary technology or information, we might seek to license his intellectual
property or to develop non-infringing technology. We might not be able to obtain a license on commercially reasonable terms or
on any terms. Alternatively, our efforts to develop non-infringing technology could be unsuccessful. Our failure to obtain the
necessary licenses or other right or to develop non-infringing technology could prevent us from selling our software and could
therefore seriously harm our business.
Breaches
in the security of the data collected by our systems could adversely affect our reputation and hurt our business.
Customers
rely on third-party security features to protect privacy and integrity of customer data. Our products may be vulnerable to breaches
in security due to failures in the security mechanisms, the operating system, the hardware platform or the networks linked to
the platform. All our solutions provide web access to information, presenting additional security issues for our customers. Security
vulnerabilities could jeopardize the security of information stored in and transmitted through the computer systems of our customers.
A party that is able to circumvent our security mechanisms could misappropriate proprietary information or cause interruptions
in the operations of our customers. Security breaches could damage our reputation and product acceptance would be significantly
harmed, which would cause our business to suffer.
We
use certain “open source” software tools that may be subject to intellectual property infringement claims or that may
subject our derivative works or products to unintended consequences, possibly impairing our product development plans, interfering
with our ability to support our clients or requiring us to allow access to the source code of our products or necessitating that
we pay licensing fees.
Certain
of our products contain open source code and we may use more open source code in the future. In addition, certain third party
software that we embed in our products contains open source code. Open source code is code that is covered by a license agreement
that permits the user to liberally use, copy, modify and distribute the software without cost, provided that users and modifiers
abide by certain licensing requirements. The original developers of the open source code provide no warranties on such code.
As
a result of the use of open source software, we could be subject to suits by parties claiming ownership of what they believe to
be their proprietary code or we may incur expenses in defending claims alleging non-compliance with certain open source code license
terms. In addition, third party licensors do not provide intellectual property protection with respect to the open source components
of their products, and we may be unable to be indemnified by such third-party licensors in the event that we or our customers
are held liable in respect of the open source software contained in such third party software. If we are not successful in defending
against any such claims that may arise, we may be subject to injunctions and/or monetary damages or be required to remove the
open source code from our products. Such events could disrupt our operations and the sales of our products, which would negatively
impact our revenues and cash flow.
Moreover,
under certain conditions, the use of open source code to create derivative code may obligate us to make the resulting derivative
code available to others at no cost. The circumstances under which our use of open source code would compel us to offer derivative
code at no cost are subject to varying interpretations. If we are required to publicly disclose the source code for such derivative
products or to license our derivative products that use an open source license, our previously proprietary software products may
be available to others without charge. If this happens, our customers and our competitors may have access to our products without
cost to them, which could harm our business. Certain open source licenses require as a condition to use, modification or distribution
of such open source that proprietary software incorporated into, derived from or distributed with such open source be disclosed
or distributed in source code form, be licensed for the purpose of making derivative works or be redistributable at no charge.
The foregoing may under certain conditions be interpreted to apply to our software, depending upon the use of the open source
and the interpretation of the applicable open source licenses.
We
monitor our use of open source code to avoid subjecting our products to conditions we do not intend. The use of open source code,
however, may ultimately subject some of our products to unintended conditions so that we are required to take remedial action
that may divert resources away from our development efforts.
We
are subject to ongoing costs and risks associated with complying with extensive corporate governance and disclosure requirements.
As
an Israeli company subject to U.S. federal securities laws, we spend a significant amount of management time and resources to
comply with laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley
Act of 2002, SEC regulations, Nasdaq listing rules and the Israeli Companies Law. In connection with our compliance with Section
404 and the other applicable provisions of the Sarbanes-Oxley Act, our management and other personnel devote a substantial amount
of time to assure that we continue to comply with these requirements. There is no guarantee that these efforts will result in
management assurance that our internal control over financial reporting is adequate in future periods. If our internal controls
are found to be ineffective in future periods, it could harm our operations, financial reporting or financial results.
Risks
Relating to the Market of our Ordinary Shares
Our
share price has fluctuated and could continue to fluctuate significantly.
The
market for our ordinary shares, as well as the prices of shares of other technology companies, has been volatile. The price of
our ordinary shares has fluctuated significantly over the years. A number of factors, many of which are beyond our control, may
cause the market price of our ordinary shares to fluctuate significantly, such as:
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●
|
sales
of a substantial number of our ordinary shares;
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|
●
|
fluctuations
in our quarterly revenues and earnings and those of our publicly held competitors;
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|
●
|
public
announcements concerning us or our competitors;
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|
●
|
changes
in pricing policies by us or our competitors;
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|
●
|
market
conditions in our industry; and
|
|
●
|
the
general state of the securities market (particularly the technology sector).
|
We
do not control these matters and any of them may adversely affect our share price. In addition, trading in shares of companies
listed on the Nasdaq Global Market in general and trading in shares of technology companies in particular has been subjected to
extreme price and volume fluctuations that have been unrelated or disproportionate to operating performance. These broad market
and industry factors may depress our share price, regardless of our actual operating results. Given the likely volatility that
exists for our ordinary shares, sales of a substantial number of our ordinary shares could cause the market price of our ordinary
shares to decline.
If
we are characterized as a passive foreign investment company, our U.S. shareholders will be subject to adverse tax consequences.
If,
for any taxable year, either, (1) 75% or more of our gross income is passive income or (2) 50% or more of our assets, averaged
over the year and generally determined based upon value, including cash (even if held as working capital), produce or are held
to produce passive income, we may be characterized as a “passive foreign investment company”, or PFIC for United States
federal income tax purposes. For this determination, passive income includes dividends, interest, royalties, rents, annuities
and the excess of gain over losses from the disposition of assets that produce passive income.
As
a result of our cash position and the value of our assets, we may be deemed to be a PFIC for U.S. federal income tax purposes.
If
we are characterized as a PFIC, our shareholders who are residents of the United States will be subject to adverse U.S. tax consequences.
Our treatment as a PFIC could result in a reduction in the after-tax return to shareholders resident in the United States and
may cause a reduction in the value of our shares. If we were to be treated as a PFIC, our shareholders will be required, absent
certain elections, to pay an interest charge together with tax calculated at the then prevailing highest tax rates on ordinary
income on certain “excess distributions” including any gain on the sale of Ordinary Shares. The consequences of holding
shares in a PFIC are described below under “Additional Information - United States Federal Income Tax Consequences - Passive
Foreign Investment Companies.” Prospective investors should consult with their own tax advisors with respect to the tax consequences
applicable to them of investing in our Ordinary Shares.
Risks
Relating to Our Location in Israel
Potential
political, economic and military instability in Israel may harm our operating results.
We
are organized under the laws of the State of Israel and most of our senior management is located in Israel. Accordingly, our operating
results are directly influenced by economic, political and military conditions in and relating to Israel. Since the establishment
of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, Hamas (an Islamist militia
and political group in the Gaza Strip) and Hezbollah (an Islamist militia and political group in Lebanon). Recent political uprisings,
social unrest and violence in various countries in the Middle East and North Africa, including Israel’s neighbor Syria,
are affecting the political stability of those countries and have enabled the development of extremist groups. This instability
may lead to deterioration of the political relationships that exist between Israel and these countries and has raised concerns
regarding security in the region and the potential for armed conflict. In addition, Iran has threatened to attack Israel and is
believed to be developing nuclear weapons. Iran is also believed to have a strong influence among parties hostile to Israel in
areas that neighbor Israel, such as the Syrian government, Hamas in Gaza and Hezbollah in Lebanon. Any armed conflicts or political
instability in the region could negatively affect business conditions and harm our results of operations. We cannot predict the
effect on the region of the increase in the degree of violence between Israel and the Palestinians. Furthermore, several countries
and trade groups restrict business with Israel and Israeli companies, and additional countries and trade groups may restrict doing
business with Israel and Israeli companies for political reasons. These restrictive laws and policies may seriously harm our operating
results, financial condition or the expansion of our business. In addition, the current situation in Israel could adversely affect
our operations if our customers and/or strategic allies believe that instability in the region could affect our ability to fulfill
our commitments.
It
may be difficult to enforce a U.S. judgment against us, our officers and directors or to assert U.S. securities laws claims in
Israel.
We
are incorporated in the State of Israel. Substantially most of our executive officers and directors are nonresidents of the United
States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore,
it may be difficult for a shareholder, or any other person or entity, to collect a judgment obtained in the United States against
us or any of these persons, or to effect service of process upon these persons in the United States.
We
have been informed by our legal counsel in Israel that it may be difficult to bring original actions in Israel to enforce civil
liabilities under the Securities Act and the Exchange Act. Israeli courts may refuse to hear a claim based on a violation of U.S.
securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court
agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to
be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process.
Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing these
matters.
Subject
to specified time limitations and legal procedures, under the rules of private international law currently prevailing in Israel,
Israeli courts may enforce a U.S. judgment in a civil matter, including judgments based upon the civil liability provisions of
the U.S. securities laws and including a monetary or compensatory judgment in a non-civil matter, provided that the following
key conditions are met:
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●
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subject
to limited exceptions, the judgment is final and non-appealable;
|
|
●
|
the
judgment was given by a court competent under the laws of the state of the court and
is otherwise enforceable in such state;
|
|
●
|
the
judgment was rendered by a court competent under the rules of private international law
applicable in Israel;
|
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●
|
the
laws of the state in which the judgment was given provide for the enforcement of judgments
of Israeli courts;
|
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●
|
adequate
service of process has been effected and the defendant has had a reasonable opportunity
to present his arguments and evidence;
|
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|
the
judgment and its enforcement are not contrary to the law, public policy, security or
sovereignty of the State of Israel;
|
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|
the
judgment was not obtained by fraud and does not conflict with any other valid judgment
in the same matter between the same parties; and
|
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an
action between the same parties in the same matter was not pending in any Israeli court
at the time the lawsuit was instituted in the U.S. court.
|
Provisions
of Israeli law and our articles of association may delay, prevent or make difficult a change of control and therefore may depress
the price of our stock.
Some
of the provisions of our articles of association and Israeli law could, together or separately:
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discourage
potential acquisition proposals;
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|
delay
or prevent a change in control; and
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|
limit
the price that investors might be willing to pay in the future for our ordinary shares.
|
In
particular, our articles of association provide that our board of directors will be divided into three classes that serve staggered
three-year terms and authorize our board of directors to adopt protective measures to prevent or delay a coercive takeover, including
without limitation the adoption of a “Shareholder Rights Plan.” In addition, Israeli corporate law regulates mergers
and acquisitions of shares through tender offers, requires approvals for transactions involving significant shareholders and regulates
other matters that may be relevant to these types of transactions. See Item 10.B “Memorandum and Articles of Associations
- Mergers and Acquisitions under Israeli Law.” Furthermore, Israeli tax law treats stock-for-stock acquisitions between
an Israeli company and a foreign company less favorably than does U.S. tax law. For example, Israeli tax law may subject a shareholder
who exchanges his ordinary shares for shares in another corporation to taxation prior to the sale of the shares received in such
stock-for stock swap.
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Item
4.
|
Information
on the Company
|
A.
|
History
and Development of the Company.
|
General
Our
name is MIND C.T.I. Ltd. for both legal as well as commercial purposes. We were incorporated under the laws of the State of Israel
on April 6, 1995 as a company with limited liability, and we are subject to the Israeli Companies Law, 1999 and the regulations
promulgated thereunder. Our principal executive offices are located at Industrial Park, Building 7, Yoqneam 2069202, Israel. Our
telephone number is +972 4 993 6666. Our agent in the United States is MIND Software Inc. and its principal offices are located
at 12520 Prosperity Drive, Suite 220, Silver Spring, MD 20904, USA.
Principal
Capital Expenditures
During
2015, 2016 and 2017, the aggregate cash amount of our capital expenditures were $146,000, $68,000 and $71,000, respectively. These
expenditures were mainly for the purchase of equipment and licenses for software tools to be used by our engineering teams. We
currently have no material commitments for capital expenditures.
Overview
We
develop, manufacture, market and implement real-time and off-line convergent billing and customer care software solutions for
various types of communication providers, including traditional wireline and wireless, voice over IP, or VoIP, and broadband IP
network operators, LTE operators, cable operators and mobile virtual network operators, or MVNOs.
Our
convergent billing and customer care solution supports multiple services, including voice, data and content services as well as
prepaid, postpaid and pay-in-advance payment models in a single platform. Prepaid subscribers can enjoy the full range of services
offered by the provider, with their special bundles, rating plans and limits. The prepaid solution authorizes each service and
controls each session in real time, taking care that the balance is not exceeded. Postpaid subscribers, including credit-limited
and non-limited, retail or business customers, represent the loyal and the higher average revenue per user, or ARPU, market. All
services used by a postpaid subscriber appear in a single bill, which includes all charges, including one-time, recurring and
usage-related charges. Our billing solution (MINDBill) is unique as it is truly convergent and it includes our own integrated
real-time mediation product that provides interfaces with IP, Intelligent Networks, or IN, and traditional telecommunication equipment,
as well as our own point-of-sale solution.
Our
billing and customer care solution includes a powerful workflow engine to support the implementation of business processes such
as subscriber registration, order management, trouble ticket and debt collection. It also includes an integral point of sale (POS)
solution that covers all dealer, store and cashier management and sales processes. We base our solution on a multi-layered architecture
supporting real-time distributed processing, achieving performance, scalability and high availability. It uses an open architecture,
including Service Oriented Architecture (SOA) and robust Application Programming Interfaces (API’s) thus enabling fast and
seamless integration with other systems and third party applications. The MIND solution is built using standardized best-of-breed
object-oriented design concepts and development technologies such as Java, Angular, Spring and XML. It is JEE based and is powered
by a commercial application server.
MINDBill
can be installed on-premises or in a cloud environment.
We
also provide professional services, primarily to our billing and customer care customers, consisting of installation, turnkey
project implementation services, customer support, training and maintenance services, software and process customization and project
management. Our professional services also include enhanced support options, known as managed services, which are mainly offered
to customers in the United States and Europe and are performed from our offices. These managed services include performing day
to day billing operational tasks.
In
addition to our billing and customer care solutions, we offer unified communications solutions call management systems used
by organizations for call accounting, telecom expense management, traffic analysis and fraud detection. Our enterprise
software product has been installed on about 20,000 switches around the world, for traditional telephony, for IP switches and
hybrid networks. Our latest product, PhonEX ONE, delivers one unified solution for all voice communication expenses including
traditional, IP and mobile telephony. The flexible and scalable architecture of PhonEX-ONE meets the needs of large
enterprises, supporting an unlimited number of extensions and sites, it provides full functionality through a web browser,
based on Microsoft SQL database and the advanced ASP.NET technology.
Our
Market Opportunity
Billing
and Customer Care Industry
Billing
and customer care are critical to telecommunications service providers as they enable them to manage customer relations, track
and bill for usage, and launch, deploy and charge new services, marketing programs and rate plans. The need for comprehensive
billing solutions is driven by the market trend that requires service providers to introduce new services, to be innovative in
creating new product offerings and to optimize business processes for maximum efficiency. We provide tier 2 and tier 3 service
providers with flexible, easy to deploy, truly convergent and scalable billing solutions.
From
time to time, telecommunications service providers initiate searches for billing solutions to replace existing ones in order to
offer additional services, reduce costs and improve service. In addition, our existing customers occasionally consider adding
new modules that we developed to their existing platform, replacing other vendors or migrating to a newer version with up-to-date
technology and enhanced functionality.
Also,
from time to time, new providers surface and introduce new offering to the market or try to attract a specific targeted customer
base. They build new infrastructure or resell traffic and initiate searches for billing solutions.
Convergence
Implementation
of convergent solutions has become a common demand and we encounter opportunities as carriers seek to replace multiple existing
solutions with one convergent platform.
The
convergent billing solution in the telecommunications
industry enables operators to manage efficiently, on one platform, all subscribers and all services. It includes convergence of
payment methods like prepaid
and postpaid, as well as services like fixed telephony, mobile
telephony, broadband, cable and IPTV.
Mobile
Market and IP Services Industry
The
two niches in the mobile market in which we see opportunities are the rural mobile carriers market in the United States and the
new generation operators that offer high-speed mobile internet services over 4G LTE networks. We have a number of such carriers
as customers and we are focused on delivering solutions that address these particular markets.
Providers
of multiple services typically require billing and customer care products that can handle authentication, authorization and accounting
needs in real-time in order to determine the types of services to which the subscriber is entitled, as well as any applicable
limits to the availability of the services. This real-time functionality is particularly important for prepaid billing plans.
Our proven solutions cover all these needs, as described below.
Our
Billing and Customer Care Solution
We
develop, market and support real-time and off-line, scalable billing and customer care software, including mediation and rating,
for providers of voice, data and content services that are designed to meet their complex, mission-critical provisioning, authentication,
authorization, accounting and reporting needs. Our billing and customer care software provides our customers with the following
benefits:
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Real-Time
Solution
. Service providers require a system that enables authentication, authorization
and accounting and, if needed, cut-off, all in real-time. We believe that the MIND solution
is one of the few billing and customer care products that offers real-time functionality
for both prepaid and postpaid billing plans, and that has a real-time rating engine able
to support rating of voice, data and content services simultaneously;
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Mediation
and Service Fulfillment
. IP and traditional networks that can offer voice, data,
video and content services are based on various network elements each of which generates
billable information. We believe that the MIND solution is one of the few billing and
customer care products that provide real-time collection and correlation of various events
from multiple sources that relate to the same session and convert them into billable
records. In addition, the MIND solution enables end-to-end automated flow for service
creation and activation, meaning that from the order for service handled by the customer
care representative until the service activation, the activities that need to be completed
are automatically fulfilled by MIND;
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Scalability
.
Our billing solution (MINDBill) is designed to support millions of subscribers and at
the same they enable service providers to grow from accommodating a small number of subscribers
to a large number of subscribers, primarily through the addition of hardware and licenses.
Our solutions’ design allows a service provider to expand its infrastructure, business
model and subscriber base without the need to replace its billing and customer care software;
and
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●
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Improved
Time to Market
. MINDBill is modular, extensible software products, based on software
architecture designed for easy adaptability and implementation. These features allow
each of our customers to tailor our products to meet their individual needs in terms
of the number of subscribers serviced and the variety of services provided. In addition
our products can be customized relatively quickly, enabling our customers to improve
their time to market as they initially implement their networks and, later, as they add
and modify the services they provide.
|
Our
Strategy
Our
objective is to be a leader in the market for convergent billing and customer care software for tier 2 and tier 3 service providers
and to maintain profitability.
The
key elements of our strategy to become a leader in the market for convergent billing and customer care software for tier 2 and
tier 3 service providers include:
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Leverage
our brand name recognition and technical expertise
. We introduced our billing and
customer care software in 1997. We believe that our early position in the market and
our reputation for offering high quality, reliable billing and customer care software
has provided us with brand name recognition. We intend to leverage our reputation, brand
name and recognition in the wireline and wireless markets;
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Maintain
and expand our technological expertise
. We believe that our reputation in the market
is due in large part to our technological expertise. We make significant investments
in research and development to continually enhance our products to meet the changing
needs in the telecom industry. We intend to continue our commitment to technology, both
to enhance our existing products and to develop new products for growing markets; and
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●
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Expand
professional services opportunities
.
As our projects are of larger scale
and as convergent service offerings become more complex, our customers require more consulting
services, especially for customization, as well as for project management, installation
and training, technical support and maintenance. We aim to increase our revenues from
consulting services.
|
Billing
and Customer Care Solutions
The
key functionalities of our billing and customer care solutions are as follows:
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●
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Mediation
.
Providing real-time and batch event collection, interfacing with the voice, content,
data, service delivery and routing network elements;
|
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Provisioning
.
Setting up the ability of a subscriber to use services, enabling features and quantitative
limits on network elements and legacy billing solutions;
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|
Authentication
& Authorization
. Authenticate subscribers who connect to the network to use voice
or data services, and authorize a particular usage by reviewing the type of service,
the account balance, pre-rating the service and calculating the resulting cut-off parameters;
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●
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Accounting
.
When each session is completed, the rating engine calculates the amount to be charged
to the subscriber and updates the balance of the account in real-time. In addition, the
usage detail records are stored for invoicing and reporting;
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●
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Interconnect
Billing
. MINDBill generates reports that enable providers to bill for traffic and
services that are being transported across their networks by other providers;
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●
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Roaming
.
MINDBill provides the ability to define and manage the required roaming contract terms
and the applicable tariff plan for each roaming partner;
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●
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Virtual
Providers
. MINDBill allows carriers to have resellers of traffic under different
brand names and manage them as Virtual Providers;
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|
Multiple
Services and Products Support
. MINDBill allows operators to provide advanced voice,
data, content and video services. Our product catalog allows bundling of groups of services
into tailor-made packages with special rates, discounts and promotions;
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●
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Rating
.
MINDBill includes a flexible real-time rating engine that facilitates a wide variety
of billing plans and tariff parameters. Our rating engine includes support for content
based rates, rates based on the day of the week, time of the day, call origin and destination
and multi-currency rates for international services. It supports an unlimited number
of free-unit and money-bundle, voucher based payment models and much more;
|
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●
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Invoicing
.
MINDBill supports all stages of invoice generation, multiple billing cycles and invoice
on demand. Invoices include usage details, monthly recurring charges, discounts and taxes.
Invoices can be printed locally or exported to printing service bureaus, using a customizable
invoice layout;
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●
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Account
Receivables (A/R)
. MINDBill manages all A/R activities, monitors the A/R status online
and ensures a continuous cash flow. It supports multiple payment methods: cash, check,
credit and debit cards, vouchers and more. It offers a flexible open application server
programming interface (API) for payments interfaces to banks and credit card clearing
houses and has pre-integrated interfaces with major financial institutions, banks, clearinghouses
and credit bureaus. The A/R module supports deposits life cycle management, including
payments and refunds, dispute management and resolution, resulting in the appropriate
adjustments. MINDBill identifies the ageing debt for every open invoice according to
the company classification policy (30-60-90 days) and initiates the built-in debt collection
process;
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Collection
procedures
. The MINDBill flexible collection facility defines the collection policy
using different collection paths. The solution provides full monitoring and control of
the collection treatment (dunning process). It identifies customers with past due debts
and ensures that they are handled in accordance with the company policy;
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Subscriber
Self-Care Web Interface
. MINDBill includes a user-friendly subscriber web interface
that allows subscribers to obtain real time information about their account, including
invoice information, call details and payment history. Our solution also offers a set
of APIs to facilitate seamless integration of an existing customer self-care application
with our billing solution;
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Customer
Support Representative Web Interface
. MINDBill includes a powerful and user-friendly
customer support representative web interface that allows operators to perform customer
care from any location;
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Point
of Sale (POS).
Our POS enables operators to offer their products and services in
retail stores, selling services, equipment and accessories to new and existing customers
and even to non-subscribers. POS integrates with external systems, such as credit card
clearinghouses, external taxation engines and address validation systems. POS main modules:
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Sales
Module
– a cashier station that facilitates services, equipment and accessories
sales, returns and repairs, through an easy to use interface on a single receipt. It
enables cash, check and credit card payments and supports cash drawer, credit card swipe,
barcode reader and ribbon printer;
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Resource
Management Module –
an inventory system that supports the operator’s
warehouses and stores, automating the management and tracking of goods sold. It manages
the equipment by serial number, status, and location, supporting the full goods life-cycle.
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Business
Processes Workflow Environment
. MINDBill includes an automated business processes
workflow engine to implement our customers’ unique business rules, creating tailored
business processes such as managing subscriptions, order management, trouble tickets
and debt collection. For example, a tailored account creation process may include account
registration, package selection, provisioning and activation steps, it may involve different
users from various departments, integration with external legacy systems and third party
services and more;
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Call
Management and Traffic Analysis Reports (CMS)
. This module allows service providers
to generate reports and graphic analysis of usage activity. Information such as peak
hours, usage loads or duration of sessions enables operators to analyze subscriber behavior
and improve their marketing and business development strategies. In addition, the traffic
analysis reports assist service providers in planning the growth and development of their
networks;
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Fraud
Detection
. MINDBill includes a customizable fraud detection tool that enables detection
of “stolen” calls and telephone misuse. It detects, locates and warns of
any suspicious activity by activating alarms; and
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Monitoring.
MINDBill includes a monitoring tool that enables 24x7 operational control, proactive
monitoring and historical analysis of the behavior and well-being of our platform and
the resources it is using, such as database and operating system. This tool can forward
monitoring information to external network managing systems using simple network management
protocol (SNMP).
|
Enterprise
Software
Our
enterprise product, known as PhonEX-ONE, is used by corporations for telecom expense management, call accounting, traffic analysis
and fraud detection. PhonEX ONE is a call management system that collects, records and stores all call information and enables:
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●
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to
generate near real-time reports on the enterprise’s telephone use;
|
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●
|
monitor
quality of experience;
|
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|
track
agents performance in contact centers
|
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●
|
produce
sophisticated reports and graphics for easy and effective analysis of call activity;
and
|
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|
allocate
telephone expenses to specific departments, individual clients or projects.
|
These
functions allow organizations to more effectively manage their telecommunications resources. The system is easy to install and
configure, user-friendly and compatible with any switchboard system, traditional or IP. The system performs call management and
traffic analysis as well as fraud management in the same manner as our billing solutions. In addition, the system is multi-lingual
and multi-currency, which means that reports can be generated in any currency defined in the system, or in two currencies simultaneously.
PhonEX-ONE
can be installed on-premises or in a cloud environment.
PhonEX-ONE,
delivers one unified solution for management of all telecom expenses, including traditional voice, IP voice and data, and mobile
telephony. The flexible and scalable architecture of PhonEX-ONE meets the needs of large enterprises, supporting an unlimited
number of extensions and sites. PhonEX-ONE provides tools to monitor, budget and manage voice traffic in order to achieve maximum
control over telecommunication expenses. Some of its major advantages are:
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Fully
web-based solution.
The PhonEX-ONE fully web-based solution enables managers and
users to conveniently access their telecom expenses management system anytime and from
anywhere, using a web browser without decreasing their control over the traffic
;
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●
|
Quality
of Service (QoS) Monitoring.
PhonEX ONE enables quantification of the user’s
perceived audio call quality so the organization can ensure the relevant communication
quality of experience of its contact centers, calls between branches, out-going calls,
etc.
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●
|
User
centric
. The PhonEX-ONE user-centric architecture provides a consolidated solution
for the collection, analysis, reporting, and managing of all the telecommunication and
data traffic expenses;
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Dashboard
.
A visual representation of the most significant information regarding calls, a useful
tool that helps administrators to get a quick and relevant image of the general system
activity. The Dashboard can quickly provide - through its graphical and non-graphical
monitors - a snapshot over the outgoing and incoming calls, traffic and exceptions as
well as several top requested reports;
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●
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Multi-site
solution
. The PhonEX-ONE scales to support large multi-site organizations using voice
and data equipment from multiple vendors. PhonEX-ONE supports complex hierarchies on
which any employee can be associated to any branch of the organization and under a separate
matrix to any corporate department;
|
|
●
|
ASP.NET
and MS-SQL database
.
PhonEX-ONE is designed using the Microsoft .Net technology and has extensive configuration
capabilities using XML files with server – client interaction;
|
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|
Certification
by IP switch vendors
. PhonEX-ONE is interoperable and certified on a timely manner
with new releases of IP switch vendors, including Cisco and Microsoft;
|
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●
|
Enhanced
security.
PhonEX-ONE
security management includes user authentication, security group restrictions, event
log monitoring and encryption methodology of data base entries. This management tool
enables a secure and easy control over the system;
|
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●
|
Modular
architecture supporting high scalability
.
The PhonEX-ONE’s scalable system architecture supports an unlimited number of sites
and extensions;
|
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●
|
Guard
and Alerter.
The PhonEX-ONE Guard and Alerter provide sophisticated tools for fraud
prevention, alerting on phone misuse, budget surpass, possible toll fraud or other abnormal
behaviors within the organization; and
|
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●
|
Multilingual
and multicurrency
.
The built-in support of multiple languages and multiple currencies enables
telecom
expense management
for multinational organizations.
|
We
intend to further develop and market these products as the market for Voice over IP systems for enterprises grows.
Professional
Services
We
provide professional services to our customers, consisting primarily of project management, customization, installations, customer
support, training and maintenance services. As our projects become more complex, more customers require customization services
to add specialized features to their systems. We also offer enhanced support options, called managed services, which are mainly
offered to customers in the United States and are performed from our offices. The managed services include performing day to day
billing operational tasks. The managed services contracts are usually for a term of three to five years and are paid on a monthly
basis. We also have the ability to implement Software-as-a-Service (SaaS) models in a similar way.
Technology
Our
software products are based on an open architecture, which was developed using industry standard API that enables it to readily
integrate with other software applications. These application program interfaces create an object-oriented, multi-layered architecture
that support a distributed environment. Our object-oriented technology enables the design and implementation of software utilizing
reusable business objects rather than complex procedural codes. Our layered architecture organizes these business objects to optimize
the interface between the user and the application. We implement our software in a distributed configuration. This allows various
modules to be installed on different servers to support the system’s scalability and security. We believe that our technology
allows us to offer products with the following benefits:
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●
|
fast
integration and interoperability with telecommunications equipment of major manufacturers,
legacy systems and external software;
|
|
●
|
modular
architecture that allows our products to be easily scalable and enables us to customize
our software relatively quickly;
|
|
●
|
reliable
products that support high availability of the service for mission-critical applications.
Our automatic fail-over mechanism ensures minimal loss of service in case of a component
failure; and
|
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●
|
security
at all levels of the architecture. Each user of the system may be assigned to different
security groups. Service providers are therefore able to determine and audit access to
the system. In addition, firewalls can be installed to prevent unauthorized access to
the system.
|
Our
software products are based on multiple-tier architecture, consisting of the following tiers:
|
●
|
Client
Application Tier: This is the top tier graphic user interface between the user and the
application. It includes client applications for customer registration, customer care
and billing administration. In addition, it includes Web service interfaces that enable
external applications to interact with the business tier;
|
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●
|
Business
Object Tier: This tier includes the business logic and rules of the system. This tier
manages accounts, services, events and tariffs. It includes an object request broker
that facilitates the transfer of information requested by the client application tier
from the database tier; and
|
|
●
|
Database
Tier: This tier includes the Oracle database server and management software where the
actual billing and customer care information is stored.
|
Sales
and Marketing
Sales
Billing
and Customer Care Solutions
We
conduct our sales and marketing activities primarily directly as well as through our marketing alliances with network equipment
vendors and systems integrators. These marketing allies and resellers provide us with a global extension of our direct sales force.
We also engage in joint marketing activities with our allies, including joint responses to requests for proposals. We believe
that these relationships also help validate our technology and facilitate broad market acceptance of our software.
Our
agreements with our marketing allies, distributors and resellers are non-exclusive, do not contain minimum sales or marketing
performance requirements and may be terminated at any time with notice.
Enterprise
Software
We
conduct our sales and marketing activities primarily directly, by our sales force located in the MIND offices in the United States
and Israel, as well as through appointed distributors and resellers throughout the world. We engage with our system integrators
and equipment vendors for global marketing activities and responses to tenders.
Marketing
Our
marketing programs are focused on creating awareness, interest and preference for our products and services. We engage in a variety
of marketing activities, including:
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●
|
participating
in industry trade shows and special events;
|
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●
|
conducting
ongoing public and press relations programs; and
|
|
●
|
conducting
training seminars for vendors and system integrators.
|
Principal
Markets
The
following table shows our revenues for each of the past three years classified by type of revenue and geographic region.
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
($
in thousands)
|
|
The Americas (total)
|
|
$
|
11,292
|
|
|
$
|
12,714
|
|
|
$
|
12,995
|
|
Sale of Licenses
|
|
|
1,396
|
|
|
|
2,689
|
|
|
|
962
|
|
Services
|
|
|
9,896
|
|
|
|
10,025
|
|
|
|
12,033
|
|
Asia Pacific and Africa (total)
|
|
|
1,522
|
|
|
|
1,125
|
|
|
|
909
|
|
Sale of Licenses
|
|
|
458
|
|
|
|
316
|
|
|
|
202
|
|
Services
|
|
|
1,064
|
|
|
|
809
|
|
|
|
707
|
|
Europe (total)
|
|
|
6,697
|
|
|
|
3,333
|
|
|
|
3,181
|
|
Sale of Licenses
|
|
|
1,806
|
|
|
|
732
|
|
|
|
920
|
|
Services
|
|
|
4,891
|
|
|
|
2,601
|
|
|
|
2,261
|
|
Israel (total)
|
|
|
1,417
|
|
|
|
880
|
|
|
|
977
|
|
Sale of Licenses
|
|
|
282
|
|
|
|
187
|
|
|
|
357
|
|
Services
|
|
|
1,135
|
|
|
|
693
|
|
|
|
620
|
|
Total
|
|
|
20,928
|
|
|
|
18,052
|
|
|
|
18,062
|
|
Sale of Licenses
|
|
|
3,942
|
|
|
|
3,924
|
|
|
|
2,441
|
|
Services
|
|
|
16,986
|
|
|
|
14,128
|
|
|
|
15,621
|
|
Customers
Billing
and Customer Care Solutions
Our
billing and customer care solutions have been installed for a large base of customers worldwide, including:
|
●
|
traditional
telephony providers that evolved into quad-play providers, offering wireless, wireline,
cable, content and internet services, such as Moldtelecom, Belize Telemedia and Docomo
Pacific;
|
|
●
|
wireless
telephony providers, LTE operators and MVNO’s, such as KDDI America, Inc., Chat
Mobility and SI Wireless;
|
|
●
|
cable
providers that also offer voice services, such as EastLink; and
|
|
●
|
Mobile
Virtual Network Enablers (MVNEs), such as Pelephone Telecommunications Ltd.
|
Enterprise
Software
Our
enterprise software has been installed on about 20,000 switches around the world, for customers that include international banking
firms, global technology leaders, government agencies and other small to very large organizations.
Competition
Billing
and Customer Care Solutions
Competition
in the market for billing and customer care software is intense and we expect competition to continue to be strong. We compete
with many local companies and worldwide companies such as Amdocs, Redknee and Oracle.
We
believe that our competitive advantage is based on:
|
●
|
our
ability to rapidly deploy a complete turn-key product based solution;
|
|
●
|
our
truly convergent platform using one database and one product catalog for both prepaid
and postpaid subscribers;
|
|
●
|
our
solutions’ functionality, which includes billing, customer care, point-of-sale,
mediation, provisioning, online charging for multiple services and interconnect reporting;
|
|
●
|
our
proven platform and our many years of wireless and IP experience to satisfy customer
requirements; and
|
|
●
|
our
flexibility to meet customer requirements in a short time frame.
|
Some
of our competitors have greater financial, technical, sales, marketing and other resources and greater name recognition than we
do. Some of our competitors have lower cost structure and compete with us on pricing. Current and potential competitors have established,
and may establish in the future, cooperative relationships among themselves or with third parties to increase their ability to
address the needs of prospective customers. Accordingly, new competitors or alliances among competitors may emerge and rapidly
acquire significant market share and their solutions could achieve greater market acceptance than our solutions.
Enterprise
Software
Our
competitors in the market for enterprise software products are mainly local companies. To compete effectively, companies must
be able to offer adequate technical support and ongoing product development. In addition, multinational companies prefer call
accounting systems that can be installed at their various offices throughout the world, and therefore require call accounting
products that are multilingual and support the local telecommunication requirements. The principal factors upon which we compete
are scalability, ease of use, being certified by major IP switch vendors and the multi-lingual and multi-currency nature of our
system.
C.
|
Organizational
Structure
|
Set
forth below is a list of our significant subsidiaries:
|
●
|
MIND
Software Limited, a wholly owned subsidiary, incorporated in the United Kingdom;
|
|
●
|
MIND
Software Inc. (formerly Sentori Inc.), a wholly owned subsidiary, incorporated in the
State of Delaware; and
|
|
●
|
MIND
Software
SRL., a wholly owned subsidiary of MIND Software
Limi
ted, incorporated in Romania.
|
In
2017, we sold Dirot Comp SRL, a wholly-owned subsidiary of ours incorporated in Romania, for approximately $1.2 million, and we
recorded a net one-time capital gain of $0.9 million. We sold the subsidiary because the sole asset owned by it was a plot of
land in Romania on which we had planned to build our own office building, and we came to the conclusion that it would be preferable
to rent office space instead.
D.
|
Property,
Plant and Equipment
|
Our
headquarters are located in Yoqneam, Israel, approximately 50 miles north of Tel Aviv. We lease approximately 10,000 square feet
at our Yoqneam headquarters. We also lease approximately 2,100 square feet of office space in Silver Spring, Maryland, approximately
24,000 square feet in Iasi, Romania and approximately 7,400 square feet in Suceava, Romania. The office in Maryland is used primarily
for supporting our customers in the United States, while the offices in Iasi and Suceava are used primarily for software development
and for customer support. The office in Maryland is the group’s headquarters in the Americas.
Item
4A.
|
Unresolved
Staff Comments
|
Not
applicable.
|
Item
5.
|
Operating
and Financial Review and Prospects
|
The
following discussion of our results of operations should be read together with our audited consolidated financial statements and
the related notes, which appear elsewhere in this annual report. The following discussion contains forward-looking statements
that reflect our current plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ materially
from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those
discussed below and elsewhere in this annual report.
Overview
We
were incorporated in Israel in 1995 and started providing our enterprise software products in that year. In 1997, we introduced
our billing and customer care software for Voice over IP. We have enhanced our billing solutions since then to support multiple
IP services, wireless and wireline carriers and triple play (voice, data and content) service providers. In 2017, 82% of our revenues
were derived from providing our billing and customer care software and 18% were derived from providing our enterprise software.
In 2017, license fees represented 14% of our revenues and services represented 86%. In 2017, two customers accounted for approximately
16% and 12% of total revenues. In 2016, one customer accounted for approximately 14% of total revenues. In 2015, two customers
accounted for approximately 10% and 13% of total revenues. We expect to continue to derive sizeable revenues from a small number
of changing customers.
The
telecom carriers compete mainly on price. Our customers encounter profitability challenges and continually aim to reduce both
operating and capital expenditures. We believe that our up-to-date, versatile, comprehensive product-based billing platform and
agile delivery fit perfectly with multi-play service providers and address their challenge of reducing operational cost. While
the markets appear to be still active, showing ongoing demand for our products and services, extensive pre-sales efforts are required
and many processes are extended or constantly delayed. Consolidation in the telecom markets was not favorable to us in the last
years, and we closed fewer deals than in previous years. Accordingly, we expect challenges in maintaining our revenues level in
the near term. During the last two years we invested significantly in the new version of MINDBill, which was released in 2017,
installed at one customer and acquired by three others, and we intend to continue to promote the sales of upgrades. We plan to
continue investing in technology, cloud solutions and seeking to enter new markets, as we continue to focus on our profitability
targets.
In
August 2005, we acquired Sentori Inc., a leading provider of billing and customer care solutions to tier 3 and tier 2 wireless
carriers and mobile virtual network operators, or MVNO’s, mainly in the United States and the Caribbean. In October 2007, we acquired
the U.K.-based Omni Consulting Company Limited, which provides billing and customer care software solutions in a service bureau
mode, mainly to European carriers.
In
July 2003, we adopted a dividend policy, according to which we declare, subject to specific board approval and applicable law,
a dividend distribution once per year, in the amount of our net income from the previous year. In October 2010, our board of directors
updated this policy slightly. The new policy changes only the amount to be distributed, the new amount being equal to our EBITDA
plus financial income (expenses) minus taxes on income. Additionally, the board approved dividend distributions in 2003, 2007,
2008, 2009, 2010, 2011 and 2014 that were subject to approvals from an Israeli Court in accordance with Section 303 of the Israeli
Companies Law due to the fact that we did not have sufficient retained earnings, which court approvals were received. Since 2003,
we have distributed aggregate cash dividends of approximately $4.28 per share to our shareholders. The amount per share that we
distributed in 2015, 2016, and 2017 was $0.30, $0.27 and $0.32, respectively, and $0.30 per share in March 2018. The board decision
to approve the annual distribution is based, among other factors, on our cash position at that time, potential acquisitions and
future cash needs. The board may decide to discontinue the dividend distribution in whole or in part at any time.
Revenues
.
We are paid license fees by our customers for the right to use our products, based on (1) traffic volume, which is measured by
factors such as number of subscribers, and (2) the functionality of the system based on application modules that are added to
the software. In relation to our professional services, other than maintenance services and managed services, we mainly quote
a fixed price based on the type of service offered, estimated direct labor costs and the expenses that we will incur to provide
these services. Fees for maintenance services are based on a percentage of the solution fee and are paid annually, quarterly or
monthly. Fees for managed services are primarily based on the number of subscribers or customers business volume and are paid
monthly.
We
primarily use two business models when we sell our solutions, the license model and the managed services model. In the license
model, the customer pays a one-time implementation fee, a one-time license fee for a perpetual license limited by the traffic
metrics chosen by the customer, and additional fees to expand the chosen traffic metrics limitation. In addition, we are paid
maintenance fees to renew periodically the maintenance agreement at the customer discretion. In the managed services model, the
customer pays a one-time implementation fee, a monthly fee that includes a periodic license (right to use), maintenance and services
fees, calculated by the metrics chosen by the customer (mainly, number of subscribers).
We
provide a revenue breakdown for our billing and customer care software and our enterprise call management software. We believe
that this information provides a better understanding of our performance and allows investors to make a more informed judgment
about our business.
Cost
of Revenues
. The cost of revenues consists primarily of direct labor costs and overhead expenses related to software installation
and maintenance. Cost of revenues also includes, among other things, software license fees to third parties, primarily Oracle,
hardware, travel expenses, packaging and shipping costs.
Research
and Development Expenses
. Our research and development expenses consist primarily of compensation, overhead and related costs
for research and development personnel and depreciation of testing and other equipment. Research and development costs related
to software products are expensed as incurred until the “technological feasibility” of the product has been established.
Because of the relatively short time period between “technological feasibility” and product release, no software development
costs have been capitalized. We expect to continue to make investments in research and development.
Selling
and Marketing Expenses
. Our selling and marketing expenses consist primarily of compensation, overhead and related costs for
sales and marketing personnel, the operation of international sales offices, sales commissions, marketing programs, public relations,
promotional materials, travel expenses, trade shows and exhibition expenses.
General
and Administrative Expenses
. Our general and administrative expenses consist primarily of compensation, overhead and related
costs for executives and administrative personnel, professional fees, insurance, provisions for doubtful accounts and other general
corporate expenses.
Financial
Income (Expenses), Net
. Our financial income (expenses), net consists mainly of interest earned on bank deposits and short-term
investments, gains and losses from the conversion of monetary balance sheet items denominated in non-dollar currencies into U.S.
dollars, net of financing costs, and bank charges.
Taxes
on Income.
See “—Corporate Tax Rate” below.
The
following discussion of our results of operations for 2015, 2016 and 2017, including the percentage data in the following table,
is based upon our statements of operations contained in our financial statements for those periods, and the related notes thereto,
contained in Item 18:
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
(% of revenues)
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
41.2
|
|
|
|
37.8
|
|
|
|
38.9
|
|
Gross profit
|
|
|
58.8
|
|
|
|
62.2
|
|
|
|
61.1
|
|
Research and development expenses
|
|
|
14.1
|
|
|
|
19.5
|
|
|
|
18.9
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
5.6
|
|
|
|
6.1
|
|
|
|
6.9
|
|
General and administrative expenses
|
|
|
8.4
|
|
|
|
7.7
|
|
|
|
9.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
30.7
|
|
|
|
28.9
|
|
|
|
26.0
|
|
Gain on disposal of a subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
4.9
|
|
Financial income (expenses) – net
|
|
|
(0.6
|
)
|
|
|
0.9
|
|
|
|
3.5
|
|
Income before taxes on income
|
|
|
30.1
|
|
|
|
29.8
|
|
|
|
34.4
|
|
Income tax expense
|
|
|
6.1
|
|
|
|
6.5
|
|
|
|
3.3
|
|
Net income
|
|
|
24.0
|
|
|
|
23.3
|
|
|
|
31.1
|
|
Comparison
of 2014, 2015 and 2016
Revenues
|
|
Years ended December 31,
|
|
|
% Change
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2016 vs.
2015
|
|
|
2017 vs.
2016
|
|
|
|
($ in millions)
|
|
|
|
|
|
|
|
License sales
|
|
|
3.9
|
|
|
|
3.9
|
|
|
|
2.5
|
|
|
|
-
|
|
|
|
(35.9
|
)
|
Professional services
|
|
|
17.0
|
|
|
|
14.2
|
|
|
|
15.6
|
|
|
|
(16.5
|
)
|
|
|
9.9
|
|
Total revenues
|
|
|
20.9
|
|
|
|
18.1
|
|
|
|
18.1
|
|
|
|
(13.4
|
)
|
|
|
-
|
|
Revenues
in 2016 decreased in comparison to 2015 by 13.4%. The decrease was primarily attributed to the total value of the deals we signed
both in 2014 and 2015, in comparison to the large deals we signed in 2013, for which the revenues were recognized mainly in 2014
but also in 2015, and a decrease in our volume of sales in Europe, reflecting also the lower Euro to U.S. dollar exchange rate.
Revenues in 2017 remained the same compared to 2016.
Revenues
from our billing and customer care product solutions for service providers decreased from $16.6 million in 2015 to $14.6 million
in 2016 and slightly increased to $14.7 million in 2017. The increase was primarily attributed to a large deal we signed in 2016,
for which the revenues were recognized mainly in 2017.
Revenues from our enterprise products decreased
from $4.3 million in 2015 to $3.5 million in 2016. The decrease was primarily attributed to a significant decrease in our volume
of sales in Europe, reflecting also the lower Euro to U.S. dollar exchange rate. Revenues from professional services decreased
from $17.0 in 2015 to $14.1 in 2016. The decrease in 2016 was due to the aforementioned reasons for the changes in total revenues.
Revenues from our enterprise products decreased from $3.5 million in 2016 to $3.4 million in 2017. The decrease was primarily attributed
to a significant decrease in our volume of sales of our enterprise products in the United States of America. Revenues from professional
services increased from $14.1 in 2016 to $15.6 in 2017. The increase in 2017 was primarily attributed to a large deal we signed
in 2016 that includes ample professional services and to the increase in sales of consulting services, on-site technical support
and customizations to existing customers.
The
following table presents the geographic distribution of our revenues:
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
(% of revenues)
|
|
The Americas
|
|
|
54.0
|
|
|
|
70.4
|
|
|
|
71.9
|
|
Asia Pacific and Africa
|
|
|
7.3
|
|
|
|
6.2
|
|
|
|
5.0
|
|
Europe
|
|
|
32.0
|
|
|
|
18.5
|
|
|
|
17.7
|
|
Israel
|
|
|
6.7
|
|
|
|
4.9
|
|
|
|
5.4
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Our revenues in the Americas increased from
$11.3 million in 2015 to $12.7 million in 2016 and further increased to $13.0 million in 2017 and as a percentage of total revenues
increased from 54.0% in 2015 to 70.4% in 2016 and to 71.9% in 2017. The increase in 2016 was due to two new customers and three
large follow-on orders from existing customers in this area. The increase in 2017 was primarily attributed to the above-mentioned
large deal we signed in 2016, for which the revenues were recognized mainly in 2017. Our revenues in Europe decreased from $6.7
million in 2015 to $3.3 million in 2016 and further decreased to $3.2 million in 2017 and as a percentage of total revenues decreased
from 32.0% in 2015 to 18.5% in 2016 and to 17.7% in 2017, mainly due to lower revenue recognition of the large deal we signed in
late 2013, that approaches completion. Our revenues in Israel decreased from $1.4 million in 2015 to $0.9 million in 2016, and
as a percentage of total revenues decreased from 6.7% in 2015 to 4.9% in 2016, mainly due to completion of a large billing project
in Israel during the second quarter of 2015 and a continual decrease in call accounting revenues. Our revenues in Israel increased
from $0.9 million in 2016 to $1.0 million in 2017 and as a percentage of total revenues increased from 4.9% in 2016 to 5.4% in
2017, mainly due to an increase in the services we provide to our MVNE customer in Israel.
Cost
of Revenues
|
|
Years ended December 31,
|
|
|
% Change
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2016 vs.
2015
|
|
|
2017 vs.
2016
|
|
|
|
($ in millions)
|
|
|
|
|
|
|
|
Cost of sales of licenses
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
(25.0
|
)
|
|
|
(33.3
|
)
|
Cost of services
|
|
|
8.2
|
|
|
|
6.5
|
|
|
|
6.8
|
|
|
|
(20.7
|
)
|
|
|
4.6
|
|
Total cost of revenues
|
|
|
8.6
|
|
|
|
6.8
|
|
|
|
7.0
|
|
|
|
(20.9
|
)
|
|
|
2.9
|
|
The
total cost of revenues in 2016 decreased by $1.8 million compared with 2015 mainly due to a decrease in labor-related costs of
$1.6 million as a result of a decrease in the total number of employees engaged in deployment or professional services and the
appreciation of the U.S. dollar in relation to the Euro. The total cost of revenues in 2017 increased by $0.2 million compared
with 2016 due to an increase in cost of services by $0.3 million, mainly due to an increase in purchases of equipment and deferred
charges of $0.4 million, an increase in travel expenses of $0.1 million and a decrease in labor-related costs of $0.2 million,
offset by the decrease in cost of licenses by $0.1 million that occurred due to the decrease in revenue from licenses.
Gross
profit as a percentage of revenues increased from 58.8% in 2015 to 62.2% in 2016 mainly due to the above-mentioned decrease in
labor related cost and due to increased efficiency in project implementation. Gross profit as a percentage of revenues slightly
decreased from 62.2% in 2016 to 61.1% in 2017 mainly due to the increase in cost of services while the revenues remained substantially
the same.
Operating
Expenses
|
|
Years ended December 31,
|
|
|
% Change
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2016 vs.
2015
|
|
|
2017 vs.
2016
|
|
|
|
($ in millions)
|
|
|
|
|
|
|
|
Research and development
|
|
|
2.9
|
|
|
|
3.5
|
|
|
|
3.4
|
|
|
|
20.7
|
|
|
|
(2.9
|
)
|
Selling and marketing
|
|
|
1.2
|
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
(8.3
|
)
|
|
|
0.1
|
|
General and administrative
|
|
|
1.8
|
|
|
|
1.4
|
|
|
|
1.7
|
|
|
|
(22.2
|
)
|
|
|
21.4
|
|
Total operating expenses
|
|
|
5.9
|
|
|
|
6.0
|
|
|
|
6.3
|
|
|
|
1.7
|
|
|
|
5.0
|
|
Research
and Development
. We have made substantial investment in research and development to maintain our advanced technology, to add
functionality to our products and to develop Version 8, the latest version of our MINDBill platform. The increase in our research
and development expenses by 20.7% in 2016, compared to 2015, was primarily due to an increase in research and development related
payroll expenses by $0.5 million and an increase in subcontracting expenses by $0.1 million. The increase in payroll and subcontracting
expenses reflects the expansion in R&D personnel required to improve and expand our product offering. The decrease in our
research and development expenses by 2.9% in 2017, compared to 2016, was primarily due to a decrease in subcontracting expenses.
Research and development expenses as a percentage of revenues increased from 14.1% in 2015 to 19.5% in 2016 as the result of the
above-mentioned decrease in our revenues and the increase in the research and development-related payroll expenses. Research and
development expenses as a percentage of revenues slightly decreased from 19.5% in 2016 to 18.9% in 2017 primarily due to the increase
in research and development expenses while the revenues remained substantially the same. We expect cost of employment per employee
to be significantly higher in the future, as the global need for software engineers constantly grows and more European companies
adopt near-shore outsourcing. The cost of employment may also be negatively affected by fluctuations in the exchange rates between
the Euro or the NIS and the U.S. dollar.
Selling
and Marketing Expenses
. Selling and marketing expenses decreased from $1.2 million in 2015 to $1.1 million in 2016 mainly
due to a decrease in sales commission expenses and a decrease in travel expenses. Selling and marketing expenses increased from
$1.1 million in 2016 to $1.2 million in 2017 mainly due to an increase in selling and marketing related payroll expenses and an
increase in participating in conventions. Selling and marketing expenses as a percentage of revenues increased from 5.6% in 2015
to 6.1% in 2016 mainly due to the decreased overall revenues and due to the above-mentioned slight decrease in selling and marketing
expenses. Selling and marketing expenses as a percentage of revenues increased from 6.1% in 2016 to 6.9% in 2017 mainly due to
the above-mentioned slight increase in selling and marketing expenses while the revenues remained substantially the same.
General
and Administrative Expenses
. General and administrative expenses decreased from $1.8 million in 2015 to $1.4 million in 2016
mainly as a result of a successful collection of one customer’s debt in 2016 which was recorded as a doubtful account in 2015.
General and administrative expenses increased from $1.4 million in 2016 to $1.7 million in 2017 mainly due to the mentioned above
decrease in allowance for doubtful accounts in 2016 and an increase in general and administrative related payroll expenses as
a result of the devaluation of the U.S. dollar in relation to the NIS. General and administrative expenses as a percentage of
revenues decreased from 8.4% in 2015 to 7.7% in 2016. The decrease in 2016 compared to 2015 resulted from the recovery in doubtful
account expense, offset by a decrease of revenue in a lower rate than the abovementioned decrease in the expense. General and
administrative expenses as a percentage of revenues increased from 7.7% in 2016 to 9.3% in 2017 mainly due to the above-mentioned
increase in general and administrative expenses while the revenues remained substantially the same.
Impairment
of Goodwill
. No impairment of goodwill was required following the impairment test performed during 2015, 2016 and 2017.
Financial
Income (Expenses).
In 2015, financial expenses consisted of negative currency exchange rate fluctuations and bank charges
in the aggregate amount of approximately $329,000, offset by interest income incurred mainly on short-term bank deposits and marketable
and available-for-sale securities in the aggregate amount of approximately $215,000. In 2016, financial income consisted of interest
income incurred mainly on short-term bank deposits and marketable and available-for-sale securities in the aggregate amount of
approximately $319,000, offset by bank charges and a realized loss from sale of available-for-sale securities in the aggregate
amount of approximately $153,000. In 2017, financial income consisted of interest income incurred mainly on short-term bank deposits
and marketable and available-for-sale securities and currency exchange rate fluctuations in the aggregate amount of approximately
$672,000, offset by bank charges and a realized loss from sale of available-for-sale securities in the aggregate amount of approximately
$42,000.
Income Tax Expenses.
Income
tax expenses are comprised of current tax expenses and deferred tax expenses/income. On a regular basis, we estimate our actual
current tax exposures and assess temporary differences resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred taxes, which are included on our consolidated balance sheet. In 2015, our income tax expenses
in the amount of $1.3 million were comprised of current tax expenses in the amount of $1.4 million, offset by taxes in respect
of previous years in the amount of $52,000 and an increase in deferred taxes in the amount of $46,000. In 2016, our income tax
expenses in the amount of $1.2 million included mainly taxes on income in the amount of $1.0 million ($0.9 million in Israel) and
a decrease in deferred taxes in the amount of $146,000. In 2017,
we have derived tax benefits relating to the “Preferred
Technological Enterprise” program under the Israel Law for the Encouragement of Capital Investment, 1959 and
our
income tax expenses in the amount of $0.6 million included mainly taxes on income in Israel in the amount of $0.5 million and a
decrease in deferred taxes in the amount of $63,000.
Critical
Accounting Policies
To
improve understanding of our financial statements, it is important to obtain some degree of familiarity with our critical or principal
accounting policies. These policies are described in Note 1 to the consolidated financial statements contained in Item 18. We
review our accounting policies annually to ensure that the financial statements developed, in part, on the basis of these accounting
policies provide complete, accurate and transparent information concerning the financial condition of our company. As part of
this process, we reviewed the selection and application of our critical accounting policies and financial disclosures as of December
31, 2017, and we believe that the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of our company as of that date.
In
preparing our financial statements in accordance with generally accepted accounting policies in the United States of America,
our management must often make estimates and assumptions which may affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures as of the date of the financial statements and during the reporting period. Some of those judgments
can be subjective and complex, and consequently actual results may differ from those estimates. For any given individual estimate
or assumption made by our management, there may be alternative estimates or assumptions which are also reasonable. However, we
believe that given the facts and circumstances before our management at the time of making the relevant judgments, estimates or
assumptions, it is unlikely that applying any such other reasonable judgment would cause a material adverse effect on the consolidated
results of operations, financial position or liquidity for the periods presented in the consolidated financial statements.
We
are also subject to risks and uncertainties that may cause actual results to differ from estimates and assumptions, such as changes
in the economic environment, competition, customer claims, foreign exchange, taxation and governmental programs. Certain of these
risks, uncertainties and assumptions are discussed under the heading “Forward-Looking Statements” and in Item 3.D
“Risk Factors.”
We
consider our most significant accounting policies to be those discussed below:
Revenue
Recognition
. We apply the provisions of Statement of ASC 985-605, “Revenue Recognition” (formerly SOP No. 97-2)
and ASC 605-35, “Construction-Type and Production-Type Contracts” (formerly SOP No. 81-1), as follows:
i)
Sales of licenses
: Revenue from sale of products is recognized when delivery has occurred, persuasive evidence of an arrangement
exists, the sales price is fixed or determinable and collection is probable. If collection is not considered probable, revenue
is recognized when the fee is collected. We generally do not grant a right of return on products sold to customers.
ii)
Services
: The services we provide consist of implementation, training, hardware installation, maintenance, support and project
management. All services are priced on a fixed price basis and are recognized ratably over the period in which the services are
provided except services which are recognized under the percentage-of-completion method as described below.
Products
are mainly supplied with maintenance for a period of one year from delivery. When revenue on sale of the products is recognized,
we defer a portion of the sales price and recognize it as maintenance revenue ratably over the above period. The portion of the
sales price that is deferred is determined based on the fair value of the service as priced in transactions in which we render
maintenance solely. Where vendor specific objective evidence for fair value cannot be determined, the entire sale is being recognized
over the maintenance period. Where the services are considered essential to the functionality of the software products, both the
software product revenue and the revenue related to the integration and implementation services are recognized under the percentage-of-completion
method in accordance with ASC 605-35. We generally determine the percentage-of-completion by comparing the labor performed to
date to the estimated total labor required to complete the project. When the estimate indicates that a loss will be incurred,
such loss is recorded in the period identified. Significant judgments and estimates are involved in determining the percent complete
of each contract. Different assumptions could yield materially different results.
iii)
Managed Services
: Revenues from managed services include a monthly fee for services and for right of use and are recorded
as service revenues and license revenues, respectively. The monthly fee is based mainly on number of subscribers or customer’s
business volume and the agreements include a minimum monthly charge. These revenues are recognized on a monthly basis. Where installation
services are sold together with a managed services contract, the installation services are recognized over the entire contract
term, commencing with the deployment finalization.
Impairment
of Goodwill.
Goodwill represents the excess of the aggregate purchase price paid over the fair value of the net assets acquired
in our business combinations. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes
in circumstances indicate that the carrying value may not be recoverable. Events or changes in circumstances that could trigger
an impairment review include a significant adverse change in business climate, an adverse action or assessment by a regulator,
unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the
strategy for our overall business, significant negative industry or economic trends, or significant underperformance relative
to expected historical or projected future results of operations. The Company has the option to first assess qualitative factors
to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the
fair value of a reporting unit is less than its carrying value, including goodwill. If, after assessing the totality of events
or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than
its carrying amount, additional impairment testing is not required. However, if the Company concludes otherwise, the Company is
required to perform the first step of a two-step impairment test. Alternatively, the Company may elect to proceed directly to
the first step of the two-step impairment test and bypass the qualitative assessment. The first step of the impairment test involves
comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds
book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the
reporting unit is less than book value, the carrying amount of the goodwill is compared to its implied fair value. The estimate
of implied fair value of goodwill may require valuations of certain internally generated and unrecognized intangible assets. If
the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount
equal to the excess.
The
Company has a single reporting unit and consequently evaluates goodwill for impairment based on an evaluation of the fair value
of the Company as a whole.
We
perform annual testing for impairment of the goodwill during the third quarter of each year. As of September 30, 2017, the fair
value of the reporting unit exceeded its carrying value.
Recently
Issued Accounting Pronouncements
Recently
issued accounting pronouncements are described in Note 1 to the consolidated financial statements.
Our
Functional Currency
The
currency of the primary economic environment in which we operate is the U.S. dollar. In 2017, the majority of our revenues were
denominated in U.S. dollars. In addition, most of our marketing costs are incurred outside Israel, primarily in U.S. dollars.
Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Balances in non-dollar
currencies are remeasured into U.S. dollars using historical and current exchange rates for non-monetary and monetary balances,
respectively. For non-dollar transactions and other items reflected in our income statements, the following exchange rates are
used:
|
●
|
for
transactions, exchange rates at the transaction dates or average rates; and
|
|
●
|
for
other items (derived from non-monetary balance sheet items such as depreciation and amortization
or similar items), historical exchange rates.
|
The
resulting currency transaction gains or losses are reported as financial income or expenses as appropriate.
Impact
of Foreign Currency Fluctuations on Results of Operations
The
U.S. dollar cost of our operations may be significantly influenced by currency fluctuations.
The
weakening of the U.S. dollar in global markets will have a negative effect on our profitability as we receive payment in U.S.
dollars for most of our sales while we incur a significant portion of our expenses, principally salaries and related personnel
expenses, in NIS and Euro.
A
devaluation of the NIS in relation to the U.S. dollar has the effect of reducing the U.S. dollar amount of any of our expenses
or liabilities which are payable in NIS, unless these expenses or payables are linked to the U.S. dollar. This devaluation also
has the effect of decreasing the U.S. dollar value of any asset, which consists of NIS or receivables payable in NIS, unless the
receivables are linked to the U.S. dollar.
Any
increase in the value of the NIS and/or Euro in relation to the U.S. dollar has the effect of increasing the U.S. dollar value
of our expenses. Because exchange rates between the NIS and Euro to the U.S. dollar fluctuate continuously, exchange rate fluctuations
and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons of our results.
The effects of foreign currency re-measurements are reported in our consolidated financial statements in current operations.
B.
|
Liquidity
and Capital Resources
|
Since
our inception, we have financed our operations mainly through cash generated by operations. We supplemented this source by two
private rounds of equity financing, the first in 1997 (with a follow-on in 1999) and the second in 2000 and our initial public
offering in 2000, which raised total net proceeds in the amount of $44.3 million.
As
of December 31, 2017, we had approximately $5.0 million in cash and cash equivalents, and our working capital was $14.9 million.
In our opinion, our working capital is sufficient for our requirements for the foreseeable future.
The
majority of our cash and cash equivalents and our deposits are nominated in U.S. dollars.
Net Cash Provided by/Used in Operating
Activities
. Net cash provided by operating activities in 2015 was $6.3 million, attributable to our net income of $5.0 million,
non-cash related items, net, in the amount of $0.5 million, a net decrease in operating assets items in the amount of $0.5 million
and a net increase in operating liabilities items in the amount of $0.3 million. Net cash provided by operating activities in 2016
was $5.2 million, attributable to our net income of $4.2 million, non-cash related items, net, in the amount of $0.4 million, a
net decrease in operating assets items in the amount of $1.2 million and a net decrease in operating liabilities items in the amount
of $0.6 million. Net cash provided by operating activities in 2017 was $2.7 million, attributable to our net income of $5.6 million,
non-cash related items, net, in the amount of $0.3 million, gain on disposal of subsidiary in the amount of $0.9 million, a net
increase in operating assets items in the amount of $0.8 million and a net decrease in operating liabilities items in the amount
of $1.4 million.
The decrease in net cash provided by operating
activities of $1.1 million from 2015 to 2016 reflects mainly a decrease in our net income of $0.8 million, a decrease in accounts
receivable of $1.2 million in 2016, compared with a decrease of $0.4 million in 2015, a decrease of $1.2 million in accounts payable
and accruals in 2016, compared with an increase of $0.1 million in 2015, and an increase of $0.7 million in deferred revenues in
2016, compared with an increase of $0.3 million in 2015. The decrease in net cash provided by operating activities of $2.5 million
from 2016 to 2017 reflects mainly an increase in our net income of $1.4 million (including a one-time gain on disposal of subsidiary
in the amount of $0.9 million), an increase in accounts receivable of $0.8 million in 2017, compared with a decrease of $1.2 million
in 2016, a decrease of $0.3 million in accounts payable and accruals in 2017, compared with a decrease of $1.2 million in 2016,
and a decrease of $1.1 million in deferred revenues in 2017, compared with an increase of $0.7 million in 2016.
Net Operating Working Capital
As of December 31, 2016, net operating working
capital was $15.2 million, compared with $14.7 million as of December 31, 2015. The increase of $0.5 million
is
mainly due to an increase in
short term investments in the amount of $3.2 million
,
offset by
a decrease in cash and cash equivalents in the amount of $2.3 million, a decrease of $1.2 million in accounts
receivables, a decrease of $1.2 million in accounts payables and an increase of $0.4 million in deferred revenues. As of December
31, 2017, net operating working capital was $14.9 million, compared with $15.2 million as of December 31, 2016. The decrease of
$0.3 million
is due to
an increase in short-term investments in
the amount of $2.2 million, an increase of $0.8 million in accounts receivables, a decrease of $0.4 million in accounts payables,
a decrease of $0.5 million in deferred revenues
, offset by
a decrease
in cash and cash equivalents in the amount of $4.2 million.
Cash
Deposits
As
of December 31, 2017, we had approximately $6.1 million in bank deposits with maturities of between three and twelve months.
Marketable
Securities
As
of December 31, 2017, we held marketable securities of approximately $5.9 million (consisting mainly of municipal bonds which
are held for trading).
Net
Cash Provided by/Used in Investing Activities
. In 2015, we decreased our investments in short-term bank deposits by $3.1 million,
we used $0.1 million for capital expenditures and we increased our investments in marketable securities by $0.2 million. In 2016,
we increased our investments in short-term bank deposits by $3.5 million, we used $0.1 million for capital expenditures and we
decreased our investments in marketable securities by $1.1 million. In 2017, we increased our investments in short-term bank deposits
by $1.2 million, we used $0.1 million for capital expenditures and we increased our investments in marketable securities by $1.1
million and we received proceeds from sale of subsidiary of approximately $1.2 million (1.1 million Euro).
Net
Cash Provided by/Used in Financing Activities
. In 2015, our financing activities used $5.6 million due to a cash dividend
of $5.8 million, offset by $0.2 million in proceeds from the exercise of employee stock options. In 2016, our financing activities
used $5.1 million due to a cash dividend of $5.2 million, offset by $0.1 million in proceeds from the exercise of employee stock
options. In 2017, our financing activities used $6.1 million due to a cash dividend of $6.2 million, offset by $0.1 million in
proceeds from the exercise of employee stock options.
Capital
Expenditures
. The aggregate cash amount of our capital expenditures was $146,000, $68,000 and $71,000 in 2015, 2016 and 2017,
respectively. These expenditures were principally for the purchase of equipment, mainly for our engineering teams. Although we
have no material commitments for capital expenditures, we anticipate an increase in capital expenditures if we purchase or merge
with companies or purchase assets in order to obtain complementary technology and to expand our product offerings, customer base
and geographical presence.
Cash
Dividends
. Since 2003, we distributed aggregate cash dividends of approximately $4.28 per share to our shareholders, including
$0.30 per share in 2015, $0.27 per share in 2016, $0.32 per share in 2017 and $0.30 per share in March 2018. For information about
our dividend policy, please see Item 8 “Financial Information - Dividend Policy.”
C.
|
Research
and Development, Patents and Licenses, etc.
|
We
believe that investment in research and development is essential for maintaining and expanding our technological expertise in
the market for billing and customer care software and to our strategy of being a leading provider of new and innovative convergent
billing products. Our customers provide significant feedback for product development and innovation.
We
have invested significant time and resources to create a structured process for undertaking research and product development.
We believe that the method that we use for our product development and testing is well suited for identifying market needs, addressing
the activities required to release new products, and bringing development projects to market successfully. Our product development
activities also include the release of new versions of our products. Although we expect to develop new products internally, we
may, based upon timing and cost considerations, acquire or license technologies or products from third parties.
We
invested in research and development $2.9 million (or 14.1% of revenues) in 2015, $3.5 million (or 19.5% of revenues) in 2016
and $3.4 million (or 18.9% of revenues) in 2017. The minor percentage decrease in 2017 was mainly the result of a decrease in
R&D subcontracting. Our engineering department comprised approximately 151 employees at the end of 2017.
Our
billing and customer care solutions target tier 2 and tier 3 service providers. The trend that we believe is currently driving
the market is eliminating niche solutions and replacing multiple platforms with one convergent real time billing solution. The
need for comprehensive billing solutions is also driven by the market trend that requires service providers to introduce new services
more rapidly, to be innovative in creating new product offers and to optimize business processes for maximum efficiency by enabling
consumers to purchase services on-line. The self-service trend requires advanced subscriber management capabilities and supporting
omni-channel models. This type of new required functionality is more likely to be implemented with cloud-based solutions.
Another
trend that we expect will have an impact on our business is the build-up and launch of commercially operating 4G LTE networks.
The carriers that implement LTE technologies require new real time billing systems that will enable them to introduce new products
including 4G data sharing within families and companies, prepaid 4G services, high definition voice (VoLTE), and the range of
mobile broadband services.
Another
trend that we expect will have an impact on our business is the growing acceptance of Software as a Service (SaaS) model, as both
carriers and enterprises are looking at different options of leveraging cloud solutions to fulfill their business needs.
Unified
communications (UC) is an increasingly important investment for organizations looking to improve productivity and responsiveness
while reducing their IT costs. The convergence of voice, video, and data communications around a shared IP-based infrastructure
- allowing users to easily make a call, send a message, or join an audio or video conference - is bringing benefits to businesses
of various sizes, industries and geography.
The
new business models include Unified Communications as a Service (UCaaS) or Billing as a Service (BaaS) along the Managed Services
model we support already.
Our
goal is to develop marketing and sales relationships with the vendors of UCaaS under which our UC solutions (enterprise software)
will be sold as part of these vendors’ offering. This requires us to develop new sales channels, and this process is time
consuming and requires the investment of some resources to conclude the necessary agreements and to certify and train these new
channel partners.
E.
|
Off-balance
Sheet Arrangements
|
We
do not have any off-balance sheet arrangements.
F.
|
Tabular
Disclosure of Contractual Obligations
|
|
|
Payment due by period
($ in thousands)
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5 years
|
|
Operating Lease Obligations
|
|
$
|
1,428
|
|
|
$
|
503
|
|
|
$
|
717
|
|
|
$
|
101
|
|
|
$
|
107
|
|
Item
6.
|
Directors,
Senior Management and Employees
|
A.
|
Directors
and Senior Management
|
The
following table sets forth certain information regarding our directors and executive officers as of the date of filing of this
Annual Report:
Name
|
|
Age
|
|
Position
|
Monica
Iancu
|
|
60
|
|
President
and Chief Executive Officer, Director
|
Aviram
Cohen
|
|
41
|
|
Chief
Financial Officer
|
Oren
Tanhum
|
|
47
|
|
Vice
President, Professional Services
|
Revital
Libfrand
|
|
46
|
|
Vice
President, Cloud Solutions
|
Shoval
Cohen Nissan
|
|
43
|
|
Vice
President, Information Technology
|
Gilad
Parness
|
|
49
|
|
Vice
President, Enterprise Solutions
|
Liviu
Serea
|
|
63
|
|
General
Manager, MIND Romania
|
Iulian
Dimitriu
|
|
46
|
|
Vice
President, Engineering
|
Danny
Engle
|
|
49
|
|
Vice
President, Sales for North America
|
Mihail
Rotenberg
|
|
66
|
|
Chairman
of the Board
|
Meir
Nissensohn
|
|
74
|
|
Director
|
Joseph
Tenne
|
|
62
|
|
Director
|
The
background of each of our directors and executive officers is as follows:
Monica
Iancu.
Ms. Iancu founded MIND and has been President and Chief Executive Officer of our company since inception and, until
April 6, 2012, also served as the Chairperson. Ms. Iancu holds a B.Sc. degree in Computer Science and a Masters Degree in
Telecommunications (with expertise in Voice and Data Integration over the Ethernet) from the Technion, Israel Institute of Technology.
Aviram
Cohen.
Mr. Cohen joined MIND as Controller in June 2006 and was promoted to Chief Financial Officer in 2010. Before joining
us, he served as an auditor and accountant at Ernst & Young (Haifa, Israel) from 2002. Mr. Cohen is a Certified Public Accountant
and holds a B.A. degree in Accounting and Economics and an M.B.A. degree (Cum Laude), both from Haifa University.
Shoval
Cohen Nissan
. Mr. Cohen Nissan has served as our IT Manager since December 1998 and was promoted to Vice President of IT in
2016. Mr. Cohen Nissan leads the planning and management of the supporting infrastructure company-wide and the implementation
of network security at the corporate level. He also acts as Purchasing Manager for our internal needs and customer solutions.
Mr. Cohen Nissan holds a Practical Engineering degree from Braude College.
Gilad
Parness
. Mr. Parness joined MIND in 2004 as a team leader in MINDBill Support. He was promoted to Support Manager and later
to Director of Professional Services leading the Sentori support team in 2007 and in 2009 joined our Sales and Account Management.
Mr. Parness was promoted to Vice President of Enterprise Solutions in 2014 and leads the engineering, the support and the sales
teams. Mr. Parness holds a Practical Engineer degree from Tel Chai College.
Oren
Tanhum.
Mr. Tanhum joined MIND in July 1997 as a software engineer and was involved in the development of all versions of
our billing platform. Throughout his almost 20 years with us, he has been promoted in the R&D organization, filling leadership
roles at all levels. He has also served as a Project Manager, responsible for planning of projects through their successful delivery.
He was promoted to R&D Director in October 2006 and to Vice President of Professional Services in October 2016. Mr. Tanhum
holds a B.A. degree in Mathematics and Computer Science from Haifa University.
Revital
Libfrand.
Ms. Libfrand rejoined MIND to serve as Vice President of Cloud Solutions in September 2016. In the last few years,
Revital served as a Business & Marketing Consultant helping SaaS companies grow their business. Prior to that, she held various
positions in the areas of Sales, Marketing and Business Development at Ness-Gilon and Xeround as well as MIND (since inception
until 2006). Ms. Libfrand holds a B.A. degree in Economics from Haifa University and an M.B.A. degree from Netanya Academic College.
Liviu
Serea
. Mr. Serea has served as General Manager of our Romania office since January 2001. Before joining MIND, for over five
years Mr. Serea managed a local company involved in hardware assembly, distribution and support. Mr. Serea holds a M.Sc. degree
in Electronics and Telecommunications from the Politechnic Institute, Iasi, Romania.
Iulian
Dimitriu.
Mr. Dimitriu joined us as a software testing engineer in June 2001 and was promoted to Director of Quality Assurance
in June 2012. Before joining MIND he held different programming positions in local software companies. Mr. Dimitriu was promoted
to Vice President of Engineering in July 2016. Mr. Dimitriu holds a B.Sc. degree in Computer Science from Asachi University in
Iasi, Romania.
Danny
Engle
. Mr. Engle is Vice President of North American Sales for MIND Software Inc. (formerly Sentori Inc.). Mr. Engle joined
Sentori in 2003 as Director of Sales, and in 2005 was promoted to Sentori’s Vice President of North American Sales. Mr.
Engle is responsible for Sales, Customer Account Management and Partner Relationship Management. Prior to joining Sentori, Mr.
Engle was District Manager at Siebel Systems, a leading CRM solutions provider. Mr. Engle holds a B.S. degree in Business Administration
from the University of Texas.
Mihail
Rotenberg
. Mr. Rotenberg, has served as an independent director of our company since May 2008 and as our Chairman since May
2012. He is the founder of BreezeCOM Ltd., which merged to become Alvarion Ltd. Mr. Rotenberg served as the Chief Executive Officer
of BreezeCOM from 1993 to 2000. From 2000 to 2005, Mr. Rotenberg served as President and CEO of Accessnet SA, a wireless internet
service provider in Romania, which was sold in 2005 to Clearwire Inc. Mr. Rotenberg holds a Ph.D. degree from Polytechnic University,
Bucharest, Romania.
Meir
Nissensohn.
Mr. Nissensohn has served as an independent and external director of our company since August 2014. Mr. Nissensohn
served as the Chairman of the Board of Directors and Chief Executive Officer of IBM Israel Ltd. from 1996 to 2012, having joined
IBM Israel as a computer programmer in 1969. Since his retirement from IBM, he is involved in various business initiatives with
venture capital funds and serves as a director at several companies, including O.R.T. Technologies and Top Ramdor Systems, both
companies listed on the Tel Aviv Stock Exchange. Mr. Nissensohn holds a B.Sc. degree in Industrial Engineering from the Technion,
Israeli Institute of Technology, and a post graduate degree in Business Administration (Finance) and an M.B.A. degree, both from
Tel Aviv University.
Joseph
Tenne.
Mr. Tenne has served as an independent and external director of our company since August 2014. Since May 2017, Mr.
Tenne served as a financial consultant to Itamar Medical Ltd., a company listed on the Tel Aviv Stock Exchange. Mr. Tenne serves
as a director at AudioCodes Ltd., at Orbotech Ltd., at OPC Energy Ltd., at Ability Inc. and at Ratio Oil Explorations (Finance)
Ltd. From 2014 to 2017, Mr. Tenne served as the CFO and VP Finance of Itamar Medical Ltd. From 2005 to 2013, Mr. Tenne served
as the CFO of Ormat Technologies, Inc., a company listed on the New York Stock Exchange. From 1997 until 2003, Mr. Tenne was a
partner in Kesselman & Kesselman, Certified Public Accountants in Israel and a member of PricewaterhouseCoopers International
Limited. Mr. Tenne holds a B.A. degree in Accounting and Economics and an M.B.A. degree from Tel Aviv University. Mr. Tenne is
also a Certified Public Accountant in Israel.
To
the best of our knowledge, there are no family relationships between any of the directors or members of senior management named
above. To the best of our knowledge, there is no arrangement or understanding with major shareholders, customers, suppliers or
others, pursuant to which any person referred to above was selected as a director or member of senior management.
B.
|
Compensation
of Directors and Executive Officers
|
The
aggregate direct remuneration paid to all persons who served in the capacity of director or executive officer during 2017 was
approximately $2.0 million, including approximately $148,000 that was set aside for pension and retirement benefits. This does
not include amounts expensed by us for automobiles made available to our officers or expenses, including business, travel, professional
and business association dues and expenses, reimbursed to officers, and do not include equity based compensation expenses.
During
2017, we granted to our executive officers under our option plans options to purchase 24,000 ordinary shares at exercise price
of $2.425 per share, and options to purchase 40,000 ordinary shares, at an exercise price of the par value of $0.003. All these
options expire in 2022.
The
table below outlines the compensation granted to our five most highly compensated office holders during or with respect to the
year ended December 31, 2017. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
Summary
Compensation Table
Name of Officer
|
|
Position of
Officer
|
|
Salary
($)
|
|
|
Cash Bonus /
Commissions
($)
(1)
|
|
|
Equity-Based
Compensation
($)
(2)
|
|
|
All Other
Compensation
($)
(3)
|
|
|
Total ($)
|
|
Monica Iancu
|
|
CEO
|
|
$
|
240,000
|
|
|
$
|
210,000
|
|
|
|
-
|
|
|
$
|
52,674
|
|
|
$
|
502,674
|
|
Aviram Cohen
|
|
CFO
|
|
$
|
100,736
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
36,491
|
|
|
$
|
137,227
|
|
Danny Engle
|
|
VP of Sales, North America
|
|
$
|
130,050
|
|
|
$
|
279,902
|
|
|
$
|
4,770
|
|
|
$
|
4,800
|
|
|
$
|
419,522
|
|
Gilad Parness
|
|
VP, Enterprise Solutions
|
|
$
|
95,364
|
|
|
$
|
21,864
|
|
|
$
|
29,397
|
|
|
$
|
35,736
|
|
|
$
|
182,361
|
|
Shoval Cohen Nissan
|
|
VP, Information Technology
|
|
$
|
86,228
|
|
|
$
|
19,131
|
|
|
$
|
29,397
|
|
|
$
|
32,976
|
|
|
$
|
167,732
|
|
(1)
|
Amounts
reported in this column represent annual incentive bonuses granted to the Covered Executives
or commissions based on performance-metric formulas set forth in their respective employment
agreements.
|
(2)
|
Amounts
reported in this column represent the grant date fair value computed in accordance with
accounting guidance for stock-based compensation.
|
(3)
|
Amounts
reported in this column include personal benefits and perquisites, including those mandated
by applicable law. Such benefits and perquisites may include, to the extent applicable
to the respective Covered Executive, payments, contributions and/or allocations for savings
funds (
e.g.
, Managers Life Insurance Policy), education funds (referred to in
Hebrew as
“keren hishtalmut”
), pension, severance, vacation, car or
car allowance, medical insurance and benefits, risk insurance (
e.g.
, life insurance
or disability insurance), convalescence or recreation pay, payments for social security,
and other personal benefits and perquisites consistent with the Company’s guidelines.
All amounts reported in this column represent incremental cost of the Company.
|
On
June 24, 2013, at our 2013 annual general meeting of shareholders, our shareholders approved a new compensation policy for directors
and officers. In accordance with the Companies Law, the compensation terms of office holders of public companies are required
to be determined in accordance with a compensation policy that is reviewed and approved at least one every three years. On August
11, 2016, at our 2016 annual general meeting of shareholders, our shareholders re-approved the existing compensation policy for
directors and officers.
On May 4, 2017, our board of directors resolved
that each of our non-executive directors will be entitled to receive an annual fee of $13,200 and a participation fee of $680 per
meeting. On August 9, 2017, payment in the same amounts to each of our non-executive directors was approved by our shareholders.
At the meeting our shareholders also approved that the remuneration of those of our non-executive directors who our Board classifies
as “expert directors” (as such term is defined in the Israeli Companies Law) will be 20% more than the remuneration
of non-expert directors.
Board
of Directors
Our
board is divided into three classes of directors, denominated Class I, Class II and Class III. The term of Class III will expire
in 2018, Class I in 2019 and Class II in 2020. Monica Iancu is a member of Class I, Mihail Rotenberg and Joseph Tenne are members
of Class II and Meir Nissensohn is a member of Class III. At each annual general meeting of shareholders, directors will be elected
by a simple majority of the votes cast for a three-year term to succeed the directors whose terms then expire. There is no legal
limit on the number of terms that may be served by directors.
Pursuant
to regulations that took effect in April 2016, a Nasdaq-listed company that does not have a controlling shareholder is entitled
to opt out of the provisions of the Companies Law requiring at least two external directors and certain related requirements,
so long as the company complies with the SEC regulations and Nasdaq listing rules regarding independent directors and the composition
of the audit and compensation committees. In May 2016, our board of directors decided to adopt this relief, subject to the shareholder
approval of related amendments to our articles of association, which occurred in August 2016.
Under
the Companies Law, our board of directors must determine the minimum number of directors having financial and accounting experience,
as defined in the regulations, which our board of directors should have. In determining the number of directors required to have
such expertise, the board of directors must consider, among other things, the type and size of the company and the scope and complexity
of its operations. Our board of directors has determined that we require one director with the requisite financial and accounting
expertise.
Audit
Committee
Under
the Companies Law, our board of directors is required to appoint an audit committee, comprised of at least three directors. The
members of the audit committee must satisfy certain independence standards under the Companies Law. Our audit committee consists
of Mr. Joseph Tenne (Chairman of the audit committee), Mr. Mihail Rotenberg and Mr. Meir Nissensohn.
Under
the Companies Law, the roles of the audit committee include examining flaws in the management of the company’s business,
in consultation with the internal auditor and the company’s independent accountants, suggesting remedial measures, approving specified
related party transactions, establishing whistleblower procedures and assessing the company’s internal audit system and the performance
of its internal auditor. The approval of the audit committee is required to effect specified actions and transactions with office
holders, controlling shareholders and entities in which they have a personal interest.
The
Companies Law defines the term “office holder” of a company to include a director, the chief executive officer, the
chief business manager, a vice president and any officer that reports directly to the chief executive officer.
Under
the Nasdaq rules, our audit committee assists the board in fulfilling its responsibility for oversight of the quality
and integrity of our accounting, auditing and financial reporting practices and financial statements and the independence qualifications
and performance of our independent auditors. Our audit committee also has the authority and responsibility to oversee our
independent auditors, to recommend for shareholder approval the appointment and, where appropriate, replacement of our independent
auditors and to pre-approve audit engagement fees and all permitted non-audit services and fees. We have adopted an audit committee charter,
which sets forth the qualifications, powers and responsibilities of our audit committee.
Our
audit committee also serves as (i) our compensation committee, as described below, and (ii) our nominations committee, authorized
to recommend all director nominees for the selection of the board of directors, provided that no such recommendation is
required in cases, if any, where the right to nominate a director legally belongs to a third party. In its capacity as our compensation
committee, the audit committee is authorized to, among other things, review, approve and recommend to our board of directors base
salaries, incentive bonuses, including the specific goals and amounts, stock option grants, employment agreements, and any other
benefits, compensation or arrangements of our office holders.
Under
the Companies Law, at least once every three years our compensation committee is required to propose for shareholder approval
by a special majority, a policy governing the compensation of office holders based on specified criteria, to review, from time
to time, modifications to the compensation policy and examine its implementation and to approve the actual compensation terms
of office holders prior to approval thereof by the board of directors.
All
the members of our audit committee are “independent directors” under the Nasdaq rules and meet the additional qualifications
for membership on an audit committee and a compensation committee under applicable law.
Internal
Auditor
Under
the Companies Law, the board of directors must appoint an internal auditor proposed by the audit committee. The role of the internal
auditor is to examine, inter alia, whether the company’s actions comply with the law and orderly business procedure. The internal
auditor must satisfy certain independence standards. Dana Gottesman-Erlich C.P.A., Partner of the accounting firm of BDO Israel,
serves as our internal auditor.
Fiduciary
Duties of Office Holders
The
Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company. The duty of care requires an office
holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same
circumstances. The duty of care includes a duty to use reasonable means to obtain:
|
●
|
information
on the advisability of a given action brought for his approval or performed by him by
virtue of his position; and
|
|
●
|
all
other important information pertaining to these actions.
|
The
duty of loyalty of an office holder includes a duty to:
|
●
|
refrain
from any conflict of interest between the performance of his duties in the company and
the performance of his other duties or his personal affairs;
|
|
●
|
refrain
from any activity that is competitive with the company;
|
|
●
|
refrain
from exploiting any business opportunity of the company to receive a personal gain for
himself or others; and
|
|
●
|
disclose
to the company any information or documents relating to a company’s affairs which the
office holder has received due to his position as an office holder.
|
Disclosure
of Personal Interest of an Office Holder
The
Companies Law requires that an office holder of a company disclose to the company any personal interest that he may have and all
related material information known to him, in connection with any existing or proposed transaction by the company. The disclosure
is required to be made promptly and in any event no later than the board of directors meeting in which the transaction is first
discussed. If the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held
by:
|
●
|
the
office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants
and the spouses of any of these people; or
|
|
●
|
any
corporation in which the office holder is a 5% or greater shareholder, director or general
manager or in which he has the right to appoint at least one director or the general
manager.
|
Under
Israeli law, an extraordinary transaction is a transaction:
|
●
|
other
than in the ordinary course of business;
|
|
●
|
otherwise
than on market terms; or
|
|
●
|
that
is likely to have a material impact on the company’s profitability, assets or liabilities.
|
Approval
of Related Party Transactions
Once
an office holder complies with the above disclosure requirement, the board of directors may approve a transaction between the
company and an office holder, or a third party in which an office holder has a personal interest. A transaction that is adverse
to the company’s interest may not be approved.
If
the transaction is an extraordinary transaction, approval of both the audit committee and the board of directors is required.
Under specific circumstances, shareholder approval may also be required.
Office
Holder Compensation
In
general, all office holders’ terms of compensation – including fixed remuneration, bonuses, equity compensation, retirement
or termination payments, indemnification, liability insurance and the grant of an exemption from liability – must comply
with the company’s compensation policy. In addition, the compensation terms of directors, the chief executive officer, and any
employee or service provider who is considered a controlling shareholder generally must be approved separately by the compensation
committee, the board of directors and the shareholders of the company, in that order. The compensation terms of other officers
require the approval of the compensation committee and the board of directors.
Disclosure
of Personal Interests of a Controlling Shareholder
Under
the Companies Law, the disclosure requirements, which apply to an office holder, also apply to a controlling shareholder of a
public company. For this purpose, a controlling shareholder is a shareholder who has the ability to direct the activities of a
company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the
voting rights, but excluding a shareholder whose power derives solely from his or her position on the board of directors or any
other position with the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder
has a personal interest (other than compensation matters, which are discussed above under “Office Holder Compensation”),
require the approval of the audit committee, the board of directors and the shareholders of the company, in that order. Except
under specific circumstances, such a transaction needs to be re-approved in accordance with the foregoing procedure once in every
three years. The shareholder approval must be by a majority of the shares voted on the matter, provided that either:
|
●
|
at
least a majority of the shares of shareholders who have no personal interest in the transaction
and who vote on the matter vote in favor thereof; or
|
|
●
|
the
shareholders who have no personal interest in the transaction who vote against the transaction
do not represent more than two percent of the voting rights in the company.
|
Shareholders
generally have the right to examine any document in the company’s possession pertaining to any matter that requires shareholder
approval. If this information is made public in Israel or elsewhere, we will file the information with the Securities and Exchange
Commission in the United States.
For
information concerning the direct and indirect personal interests of an office holder and principal shareholders in specified
transactions with us, see Item 7.B “Related Party Transactions.”
Executive
Officers
Our
executive officers are appointed by our board of directors and serve at the discretion of our board of directors. We maintain
written employment agreements with our executive officers. Each agreement terminates upon 30 days’ written notice and provides
for standard terms and conditions of employment. All of our executive officers have agreed not to compete with us for 12 months
(or 24 months in the case of Monica Iancu) following the termination of their employment with us. Monica Iancu is entitled to
severance pay upon termination of her employment by either her or us (other than by us for cause) and to receive, during each
month of the six-month period following termination of her employment by us, or by her for cause, an amount of salary and benefits
equal to her former monthly salary and other benefits. Under recent Israeli case law, the non-competition undertakings of employees
may not be enforceable.
The numbers and breakdowns of our employees
as of the end of the past three years are set forth in the following table:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Approximate numbers of employees by geographic location
|
|
|
|
|
|
|
|
|
|
Israel
|
|
|
47
|
|
|
|
42
|
|
|
|
41
|
|
Romania
|
|
|
287
|
|
|
|
217
|
|
|
|
197
|
|
United States
|
|
|
3
|
|
|
|
3
|
|
|
|
2
|
|
Total workforce
|
|
|
337
|
|
|
|
262
|
|
|
|
240
|
|
Approximate numbers of employees by category of activity
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administration
|
|
|
16
|
|
|
|
15
|
|
|
|
19
|
|
Research and development
|
|
|
224
|
|
|
|
161
|
|
|
|
151
|
|
Professional services and customer support
|
|
|
88
|
|
|
|
79
|
|
|
|
62
|
|
Sales and marketing
|
|
|
9
|
|
|
|
7
|
|
|
|
8
|
|
Total workforce
|
|
|
337
|
|
|
|
262
|
|
|
|
240
|
|
We are subject to Israeli labor laws and
regulations with respect to our Israeli employees. These laws principally concern matters such as paid annual vacation, paid sick
days, length of the work day and work week, minimum wages, pay for overtime, insurance for work-related accidents, pension plans
and severance payments upon the retirement or death of an employee or termination of employment under specified circumstances.
The severance payments may be funded, in whole or in part, through Managers’ Insurance or a Pension Fund, as described below.
The payments to the Managers’ Insurance fund or Pension Fund toward severance amount to 6% or 8.33% of base salaries. Furthermore,
Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to
the U.S. Social Security Administration. Since January 1, 1995, these amounts also include payments for health insurance. The payments
to the National Insurance Institute equal up to approximately 19.5% of base salaries, of which the employee contributes approximately
two-thirds and the employer contributes approximately one-third. Our general practice in Israel is to contribute funds on behalf
of all of our employees to Managers’ Insurance or a Pension Fund. Each employee who agrees to participate in the Managers’
Insurance plan contributes 6.0% of his or her base salary and we contribute 14.8% (and such contributions include contributions
towards the severance component). Each employee who agrees to participate in the Pension Fund contributes 6.0% or 7.0% of his or
her base salary and we contribute 14.8% or 15.8% (and such contributions include contributions towards the severance component).
Another savings plan we offer some of our employees, although not legally required, is known as the Advanced Studies Fund. Each
employee who agrees to participate in the Advanced Studies fund contributes up to 2.5% of base salary and we contribute up to 7.5%.
Furthermore, by order of the Israeli Ministry
of Industry, Trade and Labor, all employers and employees are subject to provisions of collective bargaining agreements between
the Histadrut, Federation of Labor, and the Coordination Bureau of Economic Organizations in Israel. These provisions principally
concern cost of living increases, recreation pay, commuting expenses and other conditions of employment. We provide our employees
with benefits and working conditions above the required minimums. Our employees are not represented by a labor union. To date,
we have not experienced any work stoppages and our relationships with our employees are good.
As of April 1, 2018, Monica Iancu beneficially
owned 3,316,265, or 17.16% of our ordinary shares. None of our other directors or members of senior management beneficially owns
1% or more of our ordinary shares.
We have established stock option plans to
provide for the issuance of options to our directors, officers and employees. As these plans expired on December 31, 2010, a new
share incentive plan was adopted by our shareholders at our 2011 annual general meeting (the “2011 Share Incentive Plan”).
Under the 2011 Share Incentive Plan, our ordinary shares and/or options to purchase our ordinary shares may be issued from time
to time to our directors, officers, employees, consultants and contractors at exercise prices and on other terms and conditions
as determined by our board of directors. Our board of directors determines the exercise price and the vesting period of options
granted. Unless otherwise is determined by our Board, any award granted under the 2011 Share Incentive Plan will have a four-year
vesting schedule, such that 50% of the award will vest on the second anniversary of the commencement date and 25% of the award
will vest on each of the third and fourth anniversaries of the commencement date, and the exercise price will be equal to the average
closing price per share of our ordinary shares on the stock market during the 30 trading day period immediately preceding the date
of grant of such award. The total pool of shares reserved for the 2011 Share Incentive Plan permits the issuance of shares and/or
options to acquire up to 1,800,000 ordinary shares.
As of April 1, 2018, options to purchase
766,100 ordinary shares were outstanding and options for 1,880,290 ordinary shares had been exercised. The options vest over three
to five years, primarily commencing on the date of grant. Generally, options not previously exercised will expire approximately
five to seven years after they are granted. Our board of directors elected the capital gains treatment afforded under Section 102
of the Israeli Income Tax Ordinance [New Version], 1961, or the Tax Ordinance, in respect of options and ordinary shares awarded
to our Israeli employees under our option or share incentive plans after January 1, 2003. Accordingly, gains derived from options
awarded to our Israeli employees and held by a trustee for two years from the date of grant, will generally be taxed as capital
gains at a rate of 25%, and we will generally not be entitled to recognize an expense for the award of such options.
On September 15, 2014, Ms. Iancu adopted
a Rule 10b5-1 Sales Plan in order to establish a systematic program by which Oppenheimer & Co. Inc. is instructed to sell on
Nasdaq up to 2,600,000 ordinary shares held by her pursuant to the guidelines set forth therein. As of April 1, 2018, Ms. Iancu
had sold 537,735 ordinary shares under the new plan.
|
Item 7.
|
Major Shareholders and Related Party Transactions
|
The following table sets forth certain information
regarding the beneficial ownership of our ordinary shares as of April 1, 2018, unless otherwise specified, by each person who is
known to own beneficially more than 5% of the outstanding ordinary shares.
Name
of Beneficial Owners
|
|
Total Shares
Beneficially Owned
|
|
|
Percentage of
Ordinary
Shares
(1)
|
|
Monica Iancu
|
|
|
3,316,265
|
(2)
|
|
|
17.16
|
%
|
Invesco Ltd. and affiliates
|
|
|
1,200,000
|
(3)
|
|
|
6.21
|
%
|
Morgan Stanley
|
|
|
964,683
|
(4)
|
|
|
5.00
|
%
|
|
(1)
|
Based on 19,329,418 ordinary
shares outstanding on April 1, 2018.
|
|
(2)
|
Based on a Schedule 13G/A
filed with the SEC on March 5, 2015.
|
|
(3)
|
Based on a Schedule 13G filed with the SEC on February 14, 2017
,
Invesco
Advisers, Inc. is a subsidiary of Invesco Ltd. and advises the Invesco European Small Company Fund, which owns the foregoing shares.
|
|
(4)
|
Based on a Schedule 13G filed with the SEC on January 31,
2018.
|
As of April 1, 2018, there were seven holders
of record of our ordinary shares in the United States who collectively held less than 1% of our outstanding ordinary shares. In
addition to this amount, there were also 16,388,512 shares held by the Depositary Trust Company in the United States. The number
of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where
such beneficial holders are resident since many of these ordinary shares were held of record by brokers or other nominees.
B.
|
Related Party Transactions
|
None.
C.
|
Interests of Experts and Counsel
|
Not applicable.
Item 8.
|
Financial Information
|
A.
|
Consolidated Statements and Other Financial Information
|
Financial Statements
See Item 18.
Export Sales
We conduct our sales activities primarily
directly, by our sales force located in the MIND offices in the United States and Israel. For information regarding our revenues
by geographic market, see Item 5 — “Operating and Financial Review and Prospects.”
Legal Proceedings
We are, or may be, from time to time named
as a defendant in certain routine litigation incidental to our business. However, we are currently not a party to any legal proceedings
which may have or have had in the recent past significant effects on our financial position or profitability.
Dividend Policy
Our dividend policy was adopted in 2003,
and in October 2010 our board of directors updated this policy slightly. The original policy called for us to distribute a cash
dividend once in each calendar year, in the amount of our net income from the previous year. This policy commenced in 2004 with
respect to our net income for 2003. The new policy changes only the amount to be distributed, the new amount being equal to our
EBITDA plus financial income (expenses) minus taxes on income. Each dividend under the policy is subject to board approval and
the requirements of applicable law. Our board of directors plans to declare the annual dividend when it approves the applicable
year-end financial statements.
Except as otherwise disclosed in this annual
report, no significant change has occurred since December 31, 2017.
Item 9.
|
The Offer and Listing
|
A.
|
Offer and Listing Details
|
Our ordinary shares have been listed on
the Nasdaq Global Market under the symbol MNDO since August 8, 2000. They were also listed on the Tel Aviv Stock Exchange, under
the symbol MIND, from July 11, 2002 until February 7, 2010, when they were delisted at our request.
The following table sets forth, for the
periods indicated, the high and low closing prices of our ordinary shares as reported on the Nasdaq Global Market. The table contains
actual prices in U.S. dollars, without adjustment for dividends paid on our ordinary shares.
Period
|
|
High
|
|
|
Low
|
|
Last six months:
|
|
|
|
|
|
|
March 2018
|
|
|
2.73
|
|
|
|
2.21
|
|
February 2018
|
|
|
2.81
|
|
|
|
2.62
|
|
January 2018
|
|
|
2.84
|
|
|
|
2.68
|
|
December 2017
|
|
|
2.84
|
|
|
|
2.61
|
|
November 2017
|
|
|
2.75
|
|
|
|
2.63
|
|
October 2017
|
|
|
2.81
|
|
|
|
2.62
|
|
|
|
|
|
|
|
|
|
|
Last nine quarters:
|
|
|
|
|
|
|
|
|
Q1 2018
|
|
|
2.84
|
|
|
|
2.21
|
|
Q4 2017
|
|
|
2.84
|
|
|
|
2.61
|
|
Q3 2017
|
|
|
2.59
|
|
|
|
2.43
|
|
Q2 2017
|
|
|
2.58
|
|
|
|
2.36
|
|
Q1 2017
|
|
|
2.90
|
|
|
|
2.30
|
|
Q4 2016
|
|
|
2.68
|
|
|
|
2.16
|
|
Q3 2016
|
|
|
2.28
|
|
|
|
2.06
|
|
Q2 2016
|
|
|
2.14
|
|
|
|
2.00
|
|
Q1 2016
|
|
|
2.53
|
|
|
|
2.02
|
|
|
|
|
|
|
|
|
|
|
Last five years:
|
|
|
|
|
|
|
|
|
2017
|
|
|
2.90
|
|
|
|
2.30
|
|
2016
|
|
|
2.68
|
|
|
|
2.00
|
|
2015
|
|
|
3.99
|
|
|
|
2.36
|
|
2014
|
|
|
4.20
|
|
|
|
1.87
|
|
2013
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2.26
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1.65
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Not applicable.
Our ordinary shares are quoted on the Nasdaq
Global Market under the symbol MNDO.
Not applicable.
Not applicable.
Not applicable.
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Item 10.
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Additional Information
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Not applicable.
B.
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Memorandum and Articles of Associations
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Objects and Purposes
We were first registered under Israeli law
on April 6, 1995 as a private company, and on August 8, 2000 became a public company. Our registration number with the Israeli
registrar of companies is 51-213448-7. The full details of our objects and purposes can be found in Section 2 of our Memorandum
of Association filed with the Israeli registrar of companies. Among the objects and purposes stipulated are the following: “to
engage in any kind of commercial and/or productive business and to engage in any action or endeavor which the company’s managers
consider to be beneficial to the company.”
Transfer of Shares and Notices
Fully paid ordinary shares are issued in
registered form and may be freely transferred pursuant to our articles of association unless such transfer is restricted or prohibited
by another instrument. Unless otherwise prescribed by law, we will provide at least 21 calendar days’ prior notice of any general
shareholders meeting.
Election of Directors
The ordinary shares do not have cumulative
voting rights in the election of directors. Thus, the holders of ordinary shares conferring more than 50% of the voting power have
the power to elect all the directors, to the exclusion of the remaining shareholders. Our board is divided into three classes of
directors serving staggered three-year terms.
Dividend and Liquidation Rights
Dividends on our ordinary shares may be
paid only out of profits and other surplus, as defined in the Companies Law, as of our most recent financial statements or as accrued
over a period of two years, whichever is higher, unless otherwise approved by a court order. Our board of directors is authorized
to declare dividends, provided that there is no reasonable concern that the dividend will prevent us from satisfying our existing
and foreseeable obligations as they become due. In the event of our liquidation, after satisfaction of liabilities to creditors,
our assets will be distributed to the holders of ordinary shares in proportion to their respective holdings. Dividend or liquidation
right may be affected by the grant of preferential dividends or distribution rights to the holders of a class of shares with preferential
rights that may be authorized in the future.
Voting, Shareholders’ Meetings and Resolutions
Holders of ordinary shares have one vote
for each ordinary share held on all matters submitted to a vote of shareholders.
These voting rights may be affected by the
grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.
We have two types of general shareholders
meetings: the annual general meetings and extraordinary general meetings. These meetings may be held either in Israel or in any
other place the board of directors determines. An annual general meeting must be held in each calendar year, but not more than
15 months after the last annual general meeting. Our board of directors may convene an extraordinary meeting, from time to time,
at its discretion and is required to do so upon the request of shareholders holding at least 5% of our ordinary shares.
The quorum required for an ordinary meeting
of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least
25% of the outstanding voting shares, unless otherwise required by applicable rules. Nasdaq generally requires a quorum of 33-1/3%,
but we have an exemption from that requirement and instead follow the generally accepted business practice for companies in Israel.
A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place
or any time and place as the Chairman may designate with the consent of the shareholders voting on the matter adjourned. At such
reconvened meeting, the required quorum consists of any two members present in person or by proxy, unless otherwise required by
applicable rules.
Under the Companies Law, unless otherwise
provided in the articles of association or applicable law, all resolutions of the shareholders require a simple majority of the
shares present, in person or by proxy, and voting on the matter. However, our articles of association require approval of 75% of
the shares present and voting to remove directors or change the structure of our staggered board of directors.
We file annual reports on Form 20-F electronically
with the SEC and post a copy on our website.
Duties of Shareholders
Under the Companies Law, each and every
shareholder has a duty to act in good faith in exercising his rights and fulfilling his obligations towards the company and other
shareholders and to refrain from abusing his power in the company, such as in voting in the general meeting of shareholders on
the following matters:
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any amendment to the articles of association;
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an increase of the company’s authorized share capital;
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approval of certain actions and transactions which require shareholder approval.
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In addition, each and every shareholder
has the general duty to refrain from depriving rights of other shareholders. Furthermore, any controlling shareholder, any shareholder
who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder that, pursuant to the
provisions of the articles of association, has the power to appoint or to prevent the appointment of an office holder in the company
or any other power toward the company is under a duty to act in fairness towards the company. The Companies Law does not describe
the substance of this duty of fairness. These various shareholder duties, which typically do not apply to shareholders of U.S.
companies, may restrict the ability of a shareholder to act in what the shareholder perceives to be its own best interests.
Restrictions on Non-Israeli Residents
The ownership or voting of our ordinary
shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war with Israel, is not
restricted in any way by our memorandum of association or articles of association or by the laws of the State of Israel.
Mergers and Acquisitions under Israeli Law
The Companies Law includes provisions that
allow a merger transaction and requires that each company that is party to a merger approve the transaction by its board of directors
and a vote of the majority of its shares, voting on the proposed merger at a shareholders’ meeting. For purposes of the shareholder
vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the shares held by parties other
than the other party to the merger, or by any person who holds 25% or more of the shares or the right to appoint 25% or more of
the directors of the other party, vote against the merger. Upon the request of a creditor of either party of the proposed merger,
the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger,
the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may
not be completed unless at least (i) 50 days have passed from the time that a proposal of the merger has been filed by each party
with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each
party.
The Companies Law also provides that an
acquisition of shares of public company must be made by means of tender offer if as a result of the acquisition the purchaser would
become a 25% or more shareholder of the company and there is no 25% or more shareholder in the company. In addition, an acquisition
of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become
a 45% or more shareholder of the company and there is no 45% or more shareholder in the company. These requirements do not apply
if the acquisition (i) is made in a private placement that received shareholder approval, (ii) was from a 25% shareholder of the
company and resulted in the acquirer becoming a 25% shareholder of the company or (iii) was from a 45% shareholder of the company
and resulted in the acquirer becoming a 45% shareholder of the company. The tender offer must be extended to all shareholders,
but the offer or is not required to purchase more than 5% of the company’s outstanding shares, regardless of how many shares are
tendered by shareholders. The tender offer may be consummated only if (i) at least 5% of the company’s outstanding shares
will be acquired by the offer and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected
to the offer.
If as a result of an acquisition of shares
the acquirer will hold more than 90% of a company’s outstanding shares, the Companies Law requires that the acquisition be
made by means of a tender offer for all of the outstanding shares. If as a result of a full tender offer the acquirer would own
more than 95% of the outstanding shares, then all the shares that the acquirer offered to purchase will be transferred to it. The
law provides for appraisal rights if any shareholder files a request in court within six months following the consummation of a
full tender offer, although the acquirer may stipulate that any tendering shareholders forfeit their appraisal rights. If as a
result of a full tender offer the acquirer would own 95% or less of the outstanding shares, then the acquirer may not acquire shares
that will cause his shareholding to exceed 90% of the outstanding shares.
Finally, Israeli tax law treats stock-for-stock
acquisitions between an Israeli company and a foreign company less favorably than does U.S. tax law. For example, Israeli tax law
subjects a shareholder who exchanges his ordinary shares for shares in another corporation to taxation prior to the sale of the
shares received in such stock-for-stock swap.
Modification of Class Rights
Our articles of association provide that
the rights attached to any class (unless otherwise provided by the terms of such class), such as voting, rights to dividends and
the like, may be varied by a shareholders resolution, subject to the approval of the holders of a majority of the issued shares
of that class.
Board of Directors
According to the Companies Law and our articles
of association, the oversight of the management of our business is vested in our board of directors. The board of directors may
exercise all such powers and may take all such actions that are not specifically granted to our shareholders. As part of its powers,
our board of directors may cause the company to borrow or secure payment of any sum or sums of money, at such times and upon such
terms and conditions as it thinks fit, including the grants of security interests on all or any part of the property of the company.
A resolution proposed at any meeting of
the board of directors shall be deemed adopted if approved by a majority of the directors present and voting on the matter. For
additional information, please see Item 6.C “Board Practices.”
Exculpation of Office Holders
Under the Companies Law, an Israeli company
may not exempt an office holder from liability for a breach of his duty of loyalty, but may exempt in advance an office holder
from his liability to the company, in whole or in part, for a breach of his duty of care (except in connection with distributions)
provided the articles of association of the company allow it to do so. Our articles allow us to exempt our office holders to the
fullest extent permitted by law.
Insurance of Office Holders
Our articles of association provide that,
subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our office
holders, with respect to an act performed in the capacity of an office holder for:
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a breach of his duty of care to us or to another person;
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a breach of his duty of loyalty to us, provided that the
office holder acted in good faith and had reasonable cause to assume that his act would not prejudice our interests; or
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a financial liability imposed upon him in favor of another
person.
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Indemnification of Office Holders
Our articles of association provide that
we may indemnify an office holder against the following obligations and expenses imposed on or incurred by the office holder with
respect to an act performed in the capacity of an office holder:
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a financial obligation imposed on him in favor of another person by a court judgment, including
a settlement or an arbitrator’s award approved by the court; such indemnification may be approved (i) after the liability
has been incurred or (ii) in advance, provided that our undertaking to indemnify is limited to events that our board of directors
believes are foreseeable in light of our actual operations at the time of providing the undertaking and to a sum or criterion that
our board of directors determines to be reasonable under the circumstances;
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reasonable litigation expenses, including attorneys’ fees, expended by the office holder
as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation
or proceeding concluded without the filing of an indictment against him and either (A) concluded without the imposition of any
financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal
proceedings but relates to a criminal offense that does not require proof of criminal intent or in connection with a financial
sanction;
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reasonable litigation expenses, including attorneys’ fees, expended by the office holder or charged
to him by a court in connection with: (A) proceedings we institute against him or instituted on our behalf or by another person;
or (B) a criminal charge from which he was acquitted; or (C) a criminal proceeding in which he was convicted of an offense that
does not require proof of criminal intent; and
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a financial obligation imposed upon an office holder and reasonable litigation expenses, including
attorney fees, expended by the office holder as a result of an administrative proceeding instituted against him. Without derogating
from the generality of the foregoing, such obligation or expense will include a payment which the office holder is obligated to
make to an injured party as set forth in Section 52(54)(a)(1)(a) of the Israeli Securities Law, 1968 – 5728 (the “Securities
Law”) and expenses that the office holder incurred in connection with a proceeding under Chapters H’3, H’4 or I’1 of the Securities
Law, including reasonable legal expenses, which term includes attorney fees.
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Limitations on Exculpation, Insurance and Indemnification
The Companies Law provides that a company
may not exculpate or indemnify an office holder, or enter into an insurance contract, which would provide coverage for any monetary
liability incurred as a result of any of the following:
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a breach by the office holder of his duty of loyalty unless, with respect to indemnification
or insurance coverage, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice
the company;
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a breach by the office holder of his duty of care if the breach was done intentionally or recklessly;
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any act or omission done with the intent to derive an illegal personal benefit; or
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any fine levied against the office holder.
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In addition, under the Companies Law, indemnification
of, and procurement of insurance coverage for, our office holders must be approved by our audit committee and our board of directors
and, if the beneficiary is a director, by our shareholders.
We have agreed to exempt from liability
and indemnify our office holders to the fullest extent permitted under the Companies Law. We have obtained directors and officers
liability insurance for the benefit of our office holders.
None.
There are currently no Israeli currency
control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the
sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions.
However, legislation remains in effect, pursuant to which currency controls can be imposed by administrative action at any time.
Israeli Tax Considerations
The following is a summary of the current
tax structure applicable to companies in Israel, with special reference to its effect on us. Note that this tax structure and any
resulting benefit may not apply for any income derived by our foreign subsidiaries, which subsidiaries may be taxed according to
tax laws applicable to their country of residence. The following also contains a discussion of the material Israeli tax consequences
to persons purchasing our ordinary shares. To the extent that the discussion is based on tax legislation, which has not been subject
to judicial or administrative interpretation, we cannot assure you that the tax authorities or courts will accept the views expressed
in the discussion in question.
Prospective purchasers of our ordinary shares
should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and
disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.
General Corporate Tax Structure
The general rate of corporate tax in Israel
to which Israeli companies are subject is 24% for the 2017 tax year. Under an amendment to the Israeli Income Tax Ordinance enacted
in December 2016, the corporate tax rate decreased to 23% for 2018 and thereafter. The general rate of capital gains tax in Israel
to which Israeli companies are subject is the corporate tax rate. However, the effective tax rate payable by a company which derives
income from a “Preferred Enterprise” (as defined below) may be considerably less, as further discussed below.
Law for the Encouragement of Capital Investments, 1959
General
The Law for Encouragement of Capital Investments,
1959, or the Investments Law, as in effect until 2005, provided that upon application to the Investment Center of the Ministry
of Industry and Trade of the State of Israel, a proposed capital investment in eligible facilities may be designated as an “Approved
Enterprise.” Please see discussion below regarding a reform of the Investments Law that came into effect in 2011.
Our Approved and Preferred Enterprises
Most of our manufacturing facilities in
Yoqneam have been granted the status of Approved Enterprise. The period of tax benefits of the first approved enterprise, which
commenced operations in 1995, expired at the end of 2004. The period of tax benefits in respect of the second approved enterprise
entitled to the said benefits commenced in 2000 and expired at the end of 2009.
During 2011 we decided to implement the
new legislation amending the Investment Law, while waiving future benefits provided from the Approved Enterprise program under
the Investment Law (see more details hereinafter).
Further information with regard to our Approved
and Preferred Enterprise programs can be found in Item 3, “Risk Factors” under the caption “We currently benefit
from local tax benefits that may be discontinued or reduced” and in Note 8 of our Consolidated Financial Statements under
the caption “Taxes on Income.”
Dividends Taxation
When dividends are distributed from the
Preferred Enterprise, they are generally considered to be attributable to the entire enterprise and their effective tax rate is
a result of a weighted combination of the applicable tax rates. Further information with regard to taxation of dividends can be
found in Note 8 of our Consolidated Financial Statements under the caption “Taxes on Income.”
We paid dividends to our shareholders in
the amount of $5.8 million in 2015, $5.2 million in 2016 and $6.2 million in 2017. In March 2018, we distributed to our shareholders
approximately $5.8 million and tax was withheld at a rate of 20%.
Reform of the Investments Law - 2011
On December 29, 2010, the Israeli parliament
approved an amendment to the Investments Law, effective as of January 1, 2011, which constitutes a reform of the incentives regime
under such law. This amendment revises the objectives of the Investments Law to focus on achieving enhanced growth in the business
sector, improving the Israeli industry’s competitiveness in international markets and creating employment and development
opportunities in remote areas of Israel. The amendment allows enterprises meeting certain required criteria to enjoy grants as
well as tax benefits. The amendment also introduces certain changes to the map of geographic development areas for purposes of
the Investments Law, which will take effect in future years.
The amendment generally abolishes the previous
tax benefit routes that were afforded under the Investments Law, specifically the tax-exemption periods previously allowed, and
introduces new tax benefits for industrial enterprises meeting the criteria of the law, which include the following:
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A reduced corporate tax rate for industrial enterprises, provided that more than 25% of their
annual income is derived from export, which will apply to the enterprise’s entire preferred income the reduced tax rate in
recent years is 9% for development area A and 16% for the rest of Israel. Under an amendment to the Investment Law enacted in December
2016, the reduced tax rate of 9% will decrease to 7.5% for 2017 and thereafter.
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The reduced tax rates will no longer be contingent upon making a minimum qualifying investment
in productive assets.
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A definition of “preferred income” was introduced into the Investments Law to include
certain types of income that are generated by the Israeli production activity of a Preferred Enterprise.
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A reduced dividend withholding tax rate of 15% will apply to dividends paid from preferred income
to both Israeli and non-Israeli investors, with an exemption from such withholding tax applying to dividends paid to an Israeli
company. Under a later amendment of the Investments Law, the dividend withholding tax rate of 15% was increased to 20% for dividends
paid from preferred income that accrued from the tax year 2014 and onwards.
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The amendment will generally apply to preferred
income produced or generated by a Preferred Company (as defined in the Investments Law) commencing from January 1, 2011. The amendment
contains various transition provisions which allow, under certain circumstances, to apply the new regime to investment programs
previously approved or elected under the Investments Law in its previous form. Although this recent amendment took effect on January
1, 2011, the transitional provisions of its adoption also allow the company to defer its adoption to future years.
Following our 2011 request to the Israeli
tax authorities for applying the new benefits under the 2011 Amendment, we applied in 2013 for a tax ruling with respect to 2012
and future years. At the beginning of 2014, we obtained the ruling that applied to financial years 2012 to 2016, which provided
that the portion of our income attributed to the Preferred Enterprise (and thereby subject to lower tax rates) was calculated each
year based on, among other things, the ratio between the number of our employees in Israel and abroad. According to the ruling,
our tax rate on income in Israel in 2016 was approximately 22%.
The 2017 amendment (“Preferred Technological
Enterprises”)
Amendment 73 to the Investment Law, which
came into effect on January 1, 2017, provides a new tax incentive regime and stipulates that regulations are to be promulgated
by no later than March 31, 2017 to implement the “Nexus Principles,” based on OECD guidelines recently published as part
of the Base Erosion and Profit Shifting (BEPS) project.
The new incentive regime will apply to “Preferred
Technological Enterprises” that meet certain conditions, including all of the following:
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The company’s average R&D expenses in the three years prior to the current tax year must be greater than or equal to 7%
of its total revenue or exceed NIS 75 million (approximately $19 million) per year; and
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The company must satisfy one of the following conditions:
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at least 20% of the workforce (or at least 200 employees) are employed in R&D;
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a venture capital investment in an amount approximately equivalent to at least $2 million was previously made in the company;
or
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growth in sales or workforce by an average of 25% over the three years preceding the applicable tax year.
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A Preferred Technological Enterprises will
be subject to a corporate tax rate of 12% unless it is located in a specified development zone, in which case the rate will be
7.5% with respect to the portion of income derived from intellectual property developed in Israel. The withholding tax on dividends
from such enterprises will be 4% for dividends paid to a foreign parent company holding at least 90% of the shares of the distributing
company. For other dividend distributions, the withholding tax rate will be 20% (or a lower rate under a tax treaty, if applicable).
On February 18, 2018, the Israeli Tax Authority
issued a tax ruling granting us “Preferred Technological Enterprise” status, subject to the conditions and terms of the
tax ruling. The grant of the status means that starting January 1, 2017 we are subject to a reduced Israeli corporate tax
rate of 7.5% on any future taxable “technological income”.
The tax ruling applies for five years until
2021 and may be extended for further periods subject to receipt of an additional ruling from the Israeli Tax Authority.
Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry
(Taxes), 1969, or the Industry Encouragement Law, a company qualifies as an “Industrial Company” if it is resident
in Israel and at least 90% of its income in a given tax year, determined in NIS, exclusive of income from capital gains, interest
and dividends, is derived from Industrial Enterprises owned by that company. An “Industrial Enterprise” is defined
as an enterprise whose major activity in a particular tax year is industrial production activity.
Industrial Companies qualify (based on tax
regulations) for accelerated depreciation rates for machinery, equipment and buildings used by an Industrial Enterprise. An Industrial
Company owning an Approved Enterprise, as described above, may choose between the above depreciation rates and the depreciation
rates available to Approved Enterprises.
Pursuant to the Industry Encouragement Law,
an Industrial Company is also entitled to amortize the purchase price of know-how and patents over a period of eight years beginning
with the year in which such rights were first used.
In addition, an Industrial Company is entitled
to deduct over a three-year period expenses involved with the issuance and listing of shares on a stock exchange and has the right,
under certain conditions, to elect to file a consolidated tax return with related Israeli Industrial Companies that satisfy conditions
set forth in the law.
Eligibility for the benefits under the law
is not subject to receipt of prior approval from any governmental authority. We believe that we currently qualify as an Industrial
Company within the definition of the Industry Encouragement Law. However, the definition may be amended from time to time and the
Israeli tax authorities, which reassess our qualifications annually, may determine that we no longer qualify as an Industrial Company.
As a result of either of the foregoing, the benefits described above might not be available in the future.
Israeli Transfer Pricing Regulations
On November 29, 2006, Income Tax Regulations
(Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came into force (the “Transfer
Pricing Regulations”). Section 85A of the Tax Ordinance and the Transfer Pricing Regulations generally require that all cross-border
transactions carried out between related parties will be conducted on an arm’s length principle basis and will be taxed accordingly.
Capital Gains Tax on the Sale of our Ordinary Shares
General
Israeli law generally imposes a capital
gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets
located in Israel, including shares in Israeli companies, by non-residents of Israel, unless a specific exemption is available
or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes
between real gain and inflationary surplus. The inflationary surplus is equal to the increase in the purchase price of the relevant
asset attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange
rate, between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary
surplus.
Israeli Residents
Generally, as of January 1, 2012, the tax
rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 25% for Israeli individuals,
unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally
be taxed at a rate of 30%. Additionally, if such shareholder is considered a “significant shareholder” at any time
during the 12-month period preceding such sale,
i.e.
, such shareholder holds directly or indirectly, including with others,
at least 10% of any means of control in the company, the tax rate will be 30%. However, the foregoing tax rates will not apply
to individuals: (i) who are dealers in securities; or (ii) who acquired their shares prior to an initial public offering (that
may be subject to a different tax arrangement). Israeli companies are subject to the corporate tax rate on capital gains derived
from the sale of listed shares.
The tax basis of shares acquired prior to
January 1, 2003 will be determined in accordance with the average closing share price in the three trading days preceding January
1, 2003. However, a taxpayer may elect the actual adjusted cost of the shares as the tax basis provided he can provide sufficient
proof of such adjusted cost.
As of January 1, 2013,
shareholders that are individuals who have taxable income that exceeds NIS 800,000 in a tax year (linked to the CPI each year (NIS
803,520 in the 2016 tax year)), will be subject to an additional tax, referred to as High Income Tax, at the rate of 2% on their
taxable income for such tax year which is in excess of such threshold. For this purpose, taxable income will include taxable capital
gains from the sale of our shares and taxable income from dividend distributions. Under an amendment to the Israeli Income Tax
Ordinance enacted in December 2016, for 2017 and thereafter the rate of High Income Tax will increase to 3% and will be applicable
to annual income exceeding NIS 640,000 (linked to the CPI each year, which amounts to NIS 641,880 in the 2018 year).
Non-Residents of Israel
Non-Israeli residents are exempt from Israeli
capital gains tax on any gains derived from the sale of shares publicly traded on a recognized stock market outside of Israel,
provided that such capital gains are not derived from a permanent establishment in Israel and that such shareholders did not acquire
their shares prior to the issuer’s initial public offering. However, non-Israeli corporations will not be entitled to such
exemption if Israeli residents (i) have a controlling interest of more than 25% in such non-Israeli corporation, or (ii) are the
beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or
indirectly.
In some instances where our shareholders
may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding
of Israeli tax at the source.
Pursuant to the Convention between the Government
of the United States of America and the Government of Israel with Respect to Taxes on Income, as amended (the “U.S.- Israel
Tax Treaty”), the sale, exchange or disposition of our ordinary shares by a person who qualifies as a resident of the United
States and is entitled to claim the benefits afforded to a resident, or a Treaty U.S. Resident, will not be subject to Israeli
capital gains tax unless (i) that Treaty U.S. Resident held, directly or indirectly, shares representing 10% or more of our voting
power during any part of the 12-month period preceding the sale, exchange or disposition or (ii) the capital gains from such sale
can be allocated to a permanent establishment in Israel. A sale, exchange or disposition of our ordinary shares by a Treaty U.S.
Resident who held, directly or indirectly, shares representing 10% or more of our voting power at any time during the 12-month
period preceding the sale, exchange or disposition will be subject to Israeli capital gains tax, to the extent applicable. However,
under the U.S.-Israel Tax Treaty, this Treaty U.S. Resident would be permitted to claim a credit for such taxes against U.S. federal
income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign
tax credits. The U.S.-Israel Tax Treaty does not relate to state or local taxes.
A non-resident of Israel who receives dividend
income or that realizes capital gains derived from the sale of our ordinary shares, from which tax was withheld at the source,
is generally exempted from the duty to file tax returns in Israel with respect to such income, provided such income was not derived
from a business conducted in Israel by the taxpayer and the taxpayer has no other taxable sources of income in Israel.
Dividend Taxation
Income Taxes on Dividends Distributed by the Company to Israeli
Residents
As of January 1, 2012, the distribution
of dividend income to Israeli residents will generally be subject to income tax at a rate of 25% for individuals and will be exempt
from income tax for corporations. The portion of dividends paid out of profits earned under a Preferred Enterprise tax status of
the Company to individuals is subject to withholding tax at the rate of 20%.
In addition, if an Individual Israeli shareholder
is considered a “significant shareholder” at any time during the 12-month period preceding such distribution, i.e.,
such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the company, the
tax rate on the dividend (not sourced from Preferred Enterprise income) will be 30%.
For
information with respect to the applicability of High Income Tax on distribution of dividends, see “Capital Gains Tax on Sales
of Our Ordinary Shares - Taxation of Israeli Residents.”
Income Taxes on Dividends Distributed by the Company to Non-Israeli
Residents
Subject to the provisions of applicable
tax treaties, dividend distributions from regular profits (non-Preferred Enterprise) by the Company to a non-resident shareholder
are generally subject to withholding tax of 25%. The portion of dividends paid out of profits earned under a Preferred Enterprise
tax status of the Company is subject to withholding tax at the rate of 20%.
Generally, under the U.S-Israel Tax Treaty
the maximum rate of withholding tax on dividends paid to a shareholder who is a resident of the United States (as defined in the
U.S. – Israel Tax Treaty) will be 25%. However, when a U.S. tax resident corporation is the recipient of the dividend, the
withholding tax rate on a dividend out of regular (non-Approved/Preferred Enterprise) profits may be reduced to 12.5% under the
U.S-Israel Tax Treaty, where the following conditions are met:
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(a)
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the recipient corporation owns at least 10% of the outstanding voting rights of the Company for
all of the period preceding the dividend during the Company’s current and prior taxable year; and
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(b)
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generally not more than 25% of the gross income of the paying corporation for its prior tax year
consists of certain interest and dividend income.
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Otherwise, the usual rates apply. Dividends paid to such U.S.
corporation from income derived during any period for which the Israeli company is entitled to the reduced tax rate applicable
to an Approved or Preferred Enterprise will be subject to a 15% tax rate, provided that the conditions in clauses (a) and (b) above
are met.
U.S. Federal Income Taxation
Subject to the limitations described in
the next paragraph, the following discussion summarizes the material U.S. federal income tax consequences to a “U.S. Holder”
arising from the purchase, ownership and sale of the Ordinary Shares. For this purpose, a “U.S. Holder” is a holder of
Ordinary Shares that is: (1) an individual citizen or resident of the United States, including an alien individual who is a lawful
permanent resident of the United States or meets the substantial presence residency test under U.S. federal income tax laws; (2)
a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) or a partnership (other than a partnership
that is not treated as a U.S. person under any applicable U.S. Treasury Regulations) created or organized in or under the laws
of the United States or the District of Columbia or any political subdivision thereof; (3) an estate, the income of which is subject
to U.S. federal income tax regardless of source; (4) a trust if a court within the United States is able to exercise primary supervision
over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust;
(5) a trust that has a valid election in effect to be treated as a U.S. person to the extent provided in U.S. Treasury regulations;
or (6) any person otherwise subject to U.S. federal income tax on a net income basis in respect of the Ordinary Shares, if such
status as a U.S. Holder is not overridden pursuant to the provisions of an applicable tax treaty.
This summary is for general information
purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that
may be relevant to a decision to purchase or hold our Ordinary Shares. This summary generally considers only U.S. Holders that
will own our Ordinary Shares as capital assets. Except to the limited extent discussed below, this summary does not consider the
U.S. federal tax consequences to a person that is not a U.S. Holder, nor does it describe the rules applicable to determine a taxpayer’s
status as a U.S. Holder. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, or the Code,
final, temporary and proposed U.S. Treasury Regulations promulgated thereunder, administrative and judicial interpretations thereof,
and the U.S./Israel Income Tax Treaty, all as in effect as of the date hereof and all of which are subject to change, possibly
on a retroactive basis, and all of which are open to differing interpretations. The Company will not seek a ruling from the U.S.
Internal Revenue Service, or the IRS, with regard to the U.S. federal income tax treatment of an investment in our Ordinary Shares
by U.S. Holders and, therefore, can provide no assurances that the IRS will agree with the conclusions set forth below.
This discussion does not address all of
the aspects of U.S. federal income taxation that may be relevant to a particular shareholder based on such shareholder’s particular
circumstances and in particular does not discuss any estate, gift, generation-skipping, transfer, state, local or foreign tax considerations.
In addition, this discussion does not address the U.S. federal income tax treatment of a U.S. Holder who is: (1) a bank, life insurance
company, regulated investment company, or other financial institution or “financial services entity”; (2) a broker or
dealer in securities or foreign currency; (3) a person who acquired our Ordinary Shares in connection with employment or other
performance of services; (4) a U.S. Holder that is subject to the U.S. alternative minimum tax; (5) a U.S. Holder that holds our
Ordinary Shares as a hedge or as part of a hedging, straddle, conversion or constructive sale transaction or other risk-reduction
transaction for U.S. federal income tax purposes; (6) a tax-exempt entity; (7) real estate investment trusts; (8) a U.S. Holder
that expatriates out of the United States or a former long-term resident of the United States; or (9) a person having a functional
currency other than the U.S. dollar. This discussion does not address the U.S. federal income tax treatment of a U.S. Holder that
owns, directly or constructively, at any time, Ordinary Shares representing 10% or more of our voting power. Additionally, the
U.S. federal income tax treatment of persons who hold Ordinary Shares through a partnership or other pass-through entity are not
considered.
You are encouraged to consult your own
tax advisor with respect to the specific U.S. federal and state income tax consequences to you of purchasing, holding or disposing
of our Ordinary Shares, including the effects of applicable state, local, foreign or other tax laws and possible changes in the
tax laws.
Distributions on Ordinary Shares
Subject to the discussion under the heading
“Passive Foreign Investment Companies” below, a U.S. Holder will be required to include in gross income as ordinary income
the amount of any distribution paid on Ordinary Shares (including the amount of any Israeli tax withheld on the date of the distribution),
to the extent that such distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal
income tax purposes. The amount of a distribution which exceeds our earnings and profits will be treated first as a non-taxable
return of capital, reducing the U.S. Holder’s tax basis for the Ordinary Shares to the extent thereof, and then capital gain. Corporate
holders generally will not be allowed a deduction for dividends received. For noncorporate U.S. Holders, to the extent that their
total adjusted income does not exceed applicable thresholds, the maximum federal income tax rate for “qualified dividend income”
and long-term capital gains is generally 15%. For those noncorporate U.S. Holders whose total adjusted income exceeds such income
thresholds, the maximum federal income tax rate for “qualified dividend income” and long-term capital gains is generally
20%. For this purpose, “qualified dividend income” means,
inter alia
, dividends received from a “qualified
foreign corporation.” A “qualified foreign corporation” is a corporation that is entitled to the benefits of a comprehensive
tax treaty with the United States which includes an exchange of information program. The IRS has stated that the Israel/U.S. Tax
Treaty satisfies this requirement and we believe we are eligible for the benefits of that treaty.
In addition, our dividends will be qualified
dividend income if our Ordinary Shares are readily tradable on Nasdaq or another established securities market in the United States.
Dividends will not qualify for the preferential rate if we are treated, in the year the dividend is paid or in the prior year,
as a passive foreign investment company, or PFIC. A U.S. Holder will not be entitled to the preferential rate: (1) if the U.S.
Holder has not held our Ordinary Shares or ADRs for at least 61 days of the 121-day period beginning on the date which is 60 days
before the ex-dividend date, or (2) to the extent the U.S. Holder is under an obligation to make related payments on substantially
similar property. Any days during which the U.S. Holder has diminished its risk of loss on our Ordinary Shares are not counted
towards meeting the 61-day holding period. Finally, U.S. Holders who elect to treat the dividend income as “investment income”
pursuant to Code section 163(d)(4) will not be eligible for the preferential rate of taxation.
The amount of a distribution with respect
to our Ordinary Shares will be measured by the amount of the fair market value of any property distributed, and for U.S. federal
income tax purposes, the amount of any Israeli taxes withheld therefrom. (See discussion above under “Israeli Taxation Considerations
- Taxation of Our Shareholders - Dividends.”) Cash distributions paid by us in NIS will be included in the income of U.S.
Holders at a U.S. dollar amount based upon the spot rate of exchange in effect on the date the dividend is includible in the income
of the U.S. Holder, and U.S. Holders will have a tax basis in such NIS for U.S. federal income tax purposes equal to such U.S.
dollar value. If the U.S. Holder subsequently converts the NIS, any subsequent gain or loss in respect of such NIS arising from
exchange rate fluctuations will be U.S. source ordinary exchange gain or loss.
Distributions paid by us will generally
be foreign source income for U.S. foreign tax credit purposes. Subject to the limitations set forth in the Code, U.S. Holders may
elect to claim a foreign tax credit against their U.S. income tax liability for Israeli income tax withheld from distributions
received in respect of the Ordinary Shares. In general, these rules limit the amount allowable as a foreign tax credit in any year
to the amount of regular U.S. tax for the year attributable to foreign source taxable income. This limitation on the use of foreign
tax credits generally will not apply to an electing individual U.S. Holder whose creditable foreign taxes during the year do not
exceed $300, or $600 for joint filers, if such individual’s gross income for the taxable year from non-U.S. sources consists solely
of certain passive income. A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends
received with respect to the Ordinary Shares if such U.S. Holder has not held the Ordinary Shares for at least 16 days out of the
31-day period beginning on the date that is 15 days before the ex-dividend date or to the extent that such U.S. Holder is under
an obligation to make certain related payments with respect to substantially similar or related property. Any day during which
a U.S. Holder has substantially diminished his or her risk of loss with respect to the Ordinary Shares will not count toward meeting
the 16-day holding period. A U.S. Holder will also be denied a foreign tax credit if the U.S. Holder holds the Ordinary Shares
in an arrangement in which the U.S. Holder’s reasonably expected economic profit is insubstantial compared to the foreign taxes
expected to be paid or accrued. The rules relating to the determination of the U.S. foreign tax credit are complex, and U.S. Holders
should consult with their own tax advisors to determine whether, and to what extent, they are entitled to such credit. U.S. Holders
that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income taxes withheld, provided such
U.S. Holders itemize their deductions.
Disposition of Shares
Except as provided under the PFIC rules
described below, upon the sale, exchange or other disposition of our Ordinary Shares, a U.S. Holder will recognize capital gain
or loss in an amount equal to the difference between such U.S. Holder’s tax basis in the sold Ordinary Shares and the amount realized
on the disposition of such Ordinary Shares (or its U.S. dollar equivalent determined by reference to the spot rate of exchange
on the date of disposition, if the amount realized is denominated in a foreign currency). The gain or loss realized on the sale
or exchange or other disposition of Ordinary Shares will be long-term capital gain or loss if the U.S. Holder has a holding period
of more than one year at the time of the disposition.
In general, gain realized by a U.S. Holder
on a sale, exchange or other disposition of Ordinary Shares will generally be treated as U.S. source income for U.S. foreign tax
credit purposes. A loss realized by a U.S. Holder on the sale, exchange or other disposition of Ordinary Shares is generally allocated
to U.S. source income. However, U.S. Treasury Regulations require such loss to be allocated to foreign source income to the extent
specified dividends were received by the taxpayer within the 24-month period preceding the date on which the taxpayer recognized
the loss. The deductibility of a loss realized on the sale, exchange or other disposition of Ordinary Shares is subject to limitations.
Tax on Net Investment Income
U.S. Holders who are individuals, estates
or trusts will generally be required to pay 3.8% tax on their net investment income (including dividends on and gains from the
sale or other disposition of our Ordinary Shares), or in the case of estates and trusts on their net investment income that is
not distributed. In each case, the 3.8% Medicare tax applies only to the extent the U.S. Holder’s total adjusted income exceeds
applicable thresholds.
Passive Foreign Investment Companies
Special U.S. federal income tax laws apply
to a U.S. Holder who owns shares of a corporation that was (at any time during the U.S. Holder’s holding period) a PFIC. We would
be treated as a PFIC for U.S. federal income tax purposes for any tax year if, in such tax year, either:
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●
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75% or more of our gross income (including our pro rata
share of gross income for any company, U.S. or foreign, in which we are considered to own 25% or more of the shares by value),
in a taxable year is passive (the “Income Test”); or
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●
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At least 50% of our assets, averaged over the year and
generally determined based upon value (including our pro rata share of the assets of any company in which we are considered to
own 25% or more of the shares by value), in a taxable year are held for the production of, or produce, passive income (the “Asset
Test”).
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For this purpose, passive income generally
consists of dividends, interest, rents, royalties, annuities and income from certain commodities transactions and from notional
principal contracts. Cash is treated as generating passive income.
If we are or become a PFIC, each U.S. Holder
who has not elected to treat us as a qualified electing fund by making a “QEF election”, or who has not elected to mark
the shares to market (as discussed below), would, upon receipt of certain distributions by us and upon disposition of our Ordinary
Shares at a gain, be liable to pay U.S. federal income tax at the then prevailing highest tax rates on ordinary income plus interest
on such tax, as if the distribution or gain had been recognized ratably over the taxpayer’s holding period for the Ordinary Shares.
In addition, when shares of a PFIC are acquired by reason of death from a decedent that was a U.S. Holder, the tax basis of such
shares would not receive a step-up to fair market value as of the date of the decedent’s death, but instead would be equal to the
decedent’s basis if lower, unless all gain were recognized by the decedent. Indirect investments in a PFIC may also be subject
to special U.S. federal income tax rules.
The PFIC rules would not apply to a U.S.
Holder who makes a QEF election for all taxable years that such U.S. Holder has held the Ordinary Shares while we are a PFIC, provided
that we comply with specified reporting requirements. Instead, each U.S. Holder who has made such a QEF election is required for
each taxable year that we are a PFIC to include in income such U.S. Holder’s
pro rata
share of our ordinary earnings as
ordinary income and such U.S. Holder’s
pro rata
share of our net capital gains as long-term capital gain, regardless of
whether we make any distributions of such earnings or gain. In general, a QEF election is effective only if we make available certain
required information. The QEF election is made on a shareholder-by-shareholder basis and generally may be revoked only with the
consent of the IRS. U.S. Holders should consult with their own tax advisors regarding eligibility, manner and advisability of making
a QEF election if we are treated as a PFIC.
A U.S. Holder of PFIC shares which are traded
on qualifying public markets, including the Nasdaq, can elect to mark the shares to market annually, recognizing as ordinary income
or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC
shares and the U.S. Holder’s adjusted tax basis in the PFIC shares. Losses are allowed only to the extent of net mark-to-market
gain previously included income by the U.S. Holder under the election for prior taxable years.
In light of the complexity of PFIC rules,
we cannot assure you that we have not been or are not a PFIC or will avoid becoming a PFIC in the future. U.S. Holders who hold
Ordinary Shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject
to specified exceptions for U.S. Holders who made a QEF or mark-to-market election. U.S. Holders are strongly urged to consult
their tax advisors about the PFIC rules, including tax return filing requirements and the eligibility, manner, and consequences
to them of making a QEF or mark-to-market election with respect to our Ordinary Shares in the event we that qualify as a PFIC.
Information Reporting and Withholding
A U.S. Holder may be subject to backup withholding
(at a rate of 24%) with respect to cash dividends and proceeds from a disposition of Ordinary Shares. In general, back-up withholding
will apply only if a U.S. Holder fails to comply with specified identification procedures. Backup withholding will not apply with
respect to payments made to designated exempt recipients, such as corporations and tax-exempt organizations. Backup withholding
is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. Holder, provided
that the required information is timely furnished to the IRS.
Under the Hiring Incentives to Restore Employment
Act of 2010 (the “HIRE Act”), some payments made to “foreign financial institutions” in respect of accounts
of U.S. stockholders at such financial institutions may be subject to withholding at a rate of 30%. U.S. Treasury Regulations provide
that such withholding will only apply to distributions paid on or after January 1, 2014, and to other “withholdable payments”
(including payments of gross proceeds from a sale or other disposition of our Ordinary Shares) made on or after January 1, 2017.
U.S. Holders should consult their tax advisors regarding the effect, if any, of the HIRE Act on their ownership and disposition
of our Ordinary Shares. See “Non-U.S. Holders of Ordinary Shares.”
Non-U.S. Holders of Ordinary Shares
Except as provided below, an individual,
corporation, estate or trust that is not a U.S. Holder generally will not be subject to U.S. federal income or withholding tax
on the payment of dividends on, and the proceeds from the disposition of, our Ordinary Shares.
A non-U.S. Holder may be subject to U.S.
federal income or withholding tax on a dividend paid on our Ordinary Shares or the proceeds from the disposition of our Ordinary
Shares if: (1) such item is effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United
States or, in the case of a non-U.S. Holder that is a resident of a country which has an income tax treaty with the United States,
such item is attributable to a permanent establishment or, in the case of gain realized by an individual non-U.S. Holder, a fixed
place of business in the United States; (2) in the case of a disposition of our Ordinary Shares, the individual non-U.S. Holder
is present in the United States for 183 days or more in the taxable year of the sale and other specified conditions are met; (3)
the non-U.S. Holder is subject to U.S. federal income tax pursuant to the provisions of the U.S. tax law applicable to U.S. expatriates.
In general, non-U.S. Holders will not be
subject to backup withholding with respect to the payment of dividends on our Ordinary Shares if payment is made through a paying
agent, or office of a foreign broker outside the United States. However, if payment is made in the United States or by a U.S. related
person, non-U.S. Holders may be subject to backup withholding, unless the non-U.S. Holder provides on an applicable Form W-8 (or
a substantially similar form) a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption.
A U.S. related person for these purposes is a person with one or more current relationships with the United States.
The amount of any backup withholding from
a payment to a non-U.S. Holder will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle
such holder to a refund, provided that the required information is timely furnished to the IRS.
The HIRE Act may impose withholding taxes
on some types of payments made to “foreign financial institutions” and some other non-U.S. entities. Under the HIRE Act,
the failure to comply with additional certification, information reporting and other specified requirements could result in withholding
tax being imposed on payments of dividends and sales proceeds to U.S. Holders that own Ordinary Shares through foreign accounts
or foreign intermediaries and specified non-U.S. Holders. The HIRE Act imposes a 30% withholding tax on dividends on, and gross
proceeds from the sale or other disposition of, Ordinary Shares paid from the United States to a foreign financial institution
or to a foreign nonfinancial entity, unless (1) the foreign financial institution undertakes specified diligence and reporting
obligations or (2) the foreign nonfinancial entity either certifies it does not have any substantial U.S. owners or furnishes identifying
information regarding each substantial U.S. owner. In addition, if the payee is a foreign financial institution, it generally must
enter into an agreement with the U.S. Treasury that requires, among other things, that it undertake to identify accounts held by
specified U.S. persons or U.S.-owned foreign entities, annually report certain information about such accounts, and withhold 30%
on payments to other specified account holders. U.S. Treasury Regulations provide that such withholding will only apply to distributions
paid on or after January 1, 2014, and to other “withholdable payments” (including payments of gross proceeds from a sale
or other disposition of our Ordinary Shares) made on or after January 1, 2017. You should consult your tax advisor regarding the
HIRE Act.
F.
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Dividends and paying agents
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Not applicable.
Not applicable.
We are subject to certain of the information
reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act. As a foreign private issuer, we are exempt
from the rules and regulations under the Exchange Act prescribing the content of proxy statements, and our officers, directors
and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section
16 of the Exchange Act, with respect to their purchase and sale of our shares. In addition, we are not required to file reports
and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the
Exchange Act. However, we are required to file with the SEC, within four months after the end of each fiscal year, an annual report
on Form 20-F containing financial statements audited by an independent accounting firm. We publish unaudited interim financial
information after the end of each quarter. We furnish this quarterly financial information to the SEC under cover of a Form 6-K.
We are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill the obligations with respect
to such requirements by filing reports with the Securities and Exchange Commission, or SEC. You may read and copy any document
we file, including any exhibits, with the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Washington,
D.C. 20549.Copies of such material may be obtained by mail from the Public Reference Branch of the SEC at such address, at prescribed
rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Certain of our SEC filings
are also available to the public at the SEC’s website at
http://www.sec.gov
, and on our website at
http://www.mindcti.com
.
You may request a copy of our SEC filings,
at no cost, by e-mailing to
investor@mindcti.com
and upon said request copies will be sent by e-mail. A copy of each report
submitted in accordance with applicable U.S. law is available for review at our principal executive offices.
I.
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Subsidiary Information
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Not applicable.
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Item 11.
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Quantitative and Qualitative Disclosures about Market Risk
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Market risk represents the risk of changes
in the value of our financial instruments as a result of fluctuations in foreign currency exchange rates.
The following table sets forth our consolidated
balance sheet exposure with respect to change in foreign currency exchange rates as of December 31, 2017.
Currency
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Current
Monetary Assets
(Liabilities)-net
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($ in thousands)
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NIS
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1,149
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Euro
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(52
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)
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Romanian Ron
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182
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Other non-dollar currencies
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201
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1,480
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Our annual expenses paid in NIS are approximately
$5.3 million. Accordingly, we estimate that a hypothetical increase of the value of the NIS against the U.S. dollar by 1% would
result in an increase in our operating expenses by approximately $53,000 for the year ended December 31, 2017.
We are exposed to changes in prices of various
securities in which we invest. As of December 31, 2017, we held short term investments (mainly highly-rated municipal bonds) of
approximately $5.9 million, which are held for trading and presented in the balance sheet as marketable securities. These debt
securities are exposed to potential loss in market value due to a decline in debt securities prices. The potential loss in fair
value resulting from a 10% adverse change in debt securities prices would be approximately $0.59 million.
As of December 31, 2017, we did not hold
any derivative financial instruments for either trading or non-trading purposes.
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Item 12.
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Description of Securities Other Than Equity Securities
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None.