SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to ___________
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number: 0-19415
MAGIC SOFTWARE ENTERPRISES LTD.
(Exact name of Registrant as specified in its charter
and translation of Registrant’s name into English)
Israel
(Jurisdiction of incorporation or organization)
Yahadut Canada 1 Street, Or Yehuda 6037501, Israel
(Address of principal executive offices)
Asaf Berenstin; +972 (3) 538 9243; asafb@magicsoftware.com
Yahadut Canada 1 Street, Or Yehuda 6037501, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares, NIS 0.1 Par Value
Trading Symbol(s)
MGIC
Name of each exchange on which registered
Nasdaq Global Select Market
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual
report: 49,035,055 Ordinary Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Yes ☐ No ☒
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer: ☐
Accelerated filer: ☒
Non-accelerated filer: ☐
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected
not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the
Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☒ U.S. GAAP
☐ International Financial Reporting Standards as issued
☐ Other by the International Accounting Standards Board
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to
follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Item 17 ☐ Item 18 ☐
This annual report on Form 20-F is incorporated by reference into the registrant’s Registration Statements on Form S-8, File Nos. 333-113552, 333-
132221 and 333-149553.
Yes ☐ No ☒
INTRODUCTION
We are a global provider of: (i) proprietary application development and business process integration platforms; (ii) selected packaged vertical software
solutions; as well as (iii) software services and Information Technologies (“IT”) outsourcing software services. Our software technology is used by
customers to develop, deploy and integrate on-premise, mobile and cloud-based business applications quickly and cost effectively. In addition, our
technology enables enterprises to accelerate the process of delivering business solutions that meet current and future needs and allow customers to
dramatically improve their business performance and return on investment. With respect to software services and IT outsourcing services, we offer an
extensive portfolio of professional services in the areas of infrastructure design and delivery, application development, technology consulting planning
and implementation services, integration projects, project management, software testing and quality assurance, engineering consulting (including
supervision of engineering projects), support services, cloud computing for deployment of highly available and massively-scalable applications and API’s
and supplemental outsourcing services, all according to the specific needs of the customer, and in accordance with the professional expertise required in
each case. In addition, we offer a variety of proprietary comprehensive packaged software solutions through certain of our subsidiaries for (i) enterprise-
wide and fully integrated medical platform )“Clicks”), specializing in the design and management of patient-file oriented software solutions for managed
care and large-scale health care providers. This platform aims to allow providers to securely access an individual’s electronic health record at the point of
care, and it organizes and proactively delivers information with potentially real time feedback to meet the specific needs of physicians, nurses, laboratory
technicians, pharmacists, front- and back-office professionals and consumers; (ii) enterprise management systems for both hubs and traditional air cargo
ground handling operations from physical handling and cargo documentation through customs, seamless electronic data interchange, or EDI
communications, dangerous goods, special handling, track and trace, security to billing (“Hermes”); (iii) enterprise human capital management, or HCM,
solutions, to facilitate the collection, analysis and interpretation of quality data about people, their jobs and their performance, to enhance HCM decision
making (“HR Pulse”); (iv) revenue management and monetization solutions in mobile, wireline, broadband and mobile virtual network operator/enabler,
or MVNO/E (“Leap”); and (v) comprehensive systems for managing broadcast channels in the area of TV broadcast management through cloud-based
on-demand service or on-premise solutions;
Based on our technological capabilities, our software solutions enable customers to respond to rapidly-evolving market needs and regulatory changes,
while improving the efficiency of their core operations. We have approximately 3,040 employees and operate through a network of over 3,000
independent software vendors, or ISVs, who we refer to as Magic Software Providers, or MSPs, and hundreds of system integrators, distributors,
resellers, and consulting and OEM partners. Thousands of enterprises in approximately 50 countries use our products and services.
Our application development and business process integration platforms consist of:
● Magic xpa – a proprietary application platform for developing and deploying business applications.
● AppBuilder – a proprietary application platform for building, deploying, and maintaining high-end, mainframe-grade business applications.
● Magic xpi – a proprietary platform for application integration.
● Magic xpc – hybrid integration platform as a service (iPaaS).
● Magic SmartUX - a proprietary low-code enterprise mobile development application platform for citizen to professional developers to rapidly
design, build, analyze, and run cross-platform mobile business applications.
● FactoryEye - a proprietary high performance, low-code, flexible, hybrid platform for manufacturers based on existing infrastructure enabling
real-time virtualizations of all production data and advanced analytics (based on machine learning) for improved productivity and competitive
advantage.
i
These software solutions enable our customers to improve their business performance and return on investment by supporting cost-effective and rapid
delivery integration of business applications, systems and databases. Using our products and our specialists, enterprises and MSPs can achieve fast time-
to-market by rapidly building integrated solutions and deploy them in multiple environments while leveraging existing IT resources. In addition, our
software solutions are scalable and platform-agnostic, enabling our customers to build software applications by specifying their business logic
requirements in a high-level language rather than in computer code, and to benefit from seamless platform upgrades and cross-platform functionality
without the need to re-write their applications. Our platforms also support the development of mobile applications that can be deployed on a variety of
mobile devices, and in a cloud environment. In addition, we continuously evolve our platforms to include the latest technologies to meet the demands of
our customers and the markets in which they operate.
We sell our platforms and software services globally through a broad channel network, including our own direct sales representatives and offices,
independent country distributors, MSPs that use our technology to develop and sell solutions to their customers, and system integrators. We also offer
software maintenance, support, training and consulting services to supplement with our products, thus aiding in the successful implementation of Magic
xpa, AppBuilder, Magic xpi, Magic xpc, Magic Smart UX and FactoryEye projects, and assuring successful operation of the platforms once installed.
Our vertical packaged software solutions include:
● Clicks – a proprietary comprehensive core software solution for medical record information management system, used in the design and
management of patient-files for managed care and large-scale healthcare providers. The platform is connected to each provider’s clinical,
administrative and financial data base system, residing at the provider’s central computer, and allows immediate analysis of complex data with
potentially real-time feedback to meet the specific needs of physicians, nurses, laboratory technicians, pharmacists, front- and back-office
professionals and consumers.
● Leap™ – a proprietary comprehensive core software solution for Business Support Systems, or BSS, including convergent charging, billing,
customer management, policy control, mobile money and payment software solutions for the telecommunications, content, Machine to
Machine/Internet of Things or M2M/IoT, payment and other industries.
● Hermes Solution – Hermes Air Cargo Management System is a proprietary, state-of-the-art, packaged software solution for managing air cargo
ground handling. Our Hermes Solution covers all aspects of cargo handling, from physical handling and cargo documentation through customs,
seamless EDI communications, dangerous goods and special handling, tracking and tracing, security and billing. Customers benefit through
faster processing and more accurate billing, reporting and ultimately enhanced revenue. the system also features the Hermes Business
Intelligence (HBI) solution, adding unprecedented data analysis capabilities and management-decision support tools. The Hermes Solution is
delivered on a licensed or fully hosted basis.
● HR Pulse – A customizable single-tenant SaaS tool that helps organizations to monitor employee performance, progress and potential through a
menu of templates that can create new HCM solutions, complement existing processes, and/or integrate with legacy HR systems already in use
by organizations.
● MBS Solution – a proprietary comprehensive core system for TV broadcast management for use in managing broadcast channels.
In addition, we provide on an increasingly global basis a broad range of advanced software professional services and IT outsourcing services in the areas
of infrastructure design and delivery, end-to-end application development, technology planning and implementation services, as well as outsourcing
services to a wide variety of companies, including Fortune 1000 companies. The technical personnel we provide generally supplement in-house
capabilities of our customers. We have extensive and proven experience with virtually all types of telecom infrastructure technologies in wireless and
wire-line as well as in the areas of infrastructure design and delivery, application development, project management, technology planning and
implementation services.
We have substantial experience in end-to-end development of high-end software solutions, beginning with collection and analysis of system
requirements, continuing with architecture specifications and setup, to software implementation, component integration and testing. From concept to
implementation, from application of the ideas of startups requiring the early development of an application or a device, to somewhat larger, more
established enterprises, vendors or system houses who need our team of experts to take full responsibility for the development of their systems and
products. With our ability to draw on our pool of resources, comprised of hundreds of highly trained, skilled, educated and flexible engineers, we adhere
to timelines and budget and work in full transparency with our customers every step of the way to create a tailor-made and cost-effective solution to
answer our customers’ unique needs.
ii
Our consolidated financial statements appearing in this annual report are prepared in U.S. dollars and in accordance with United States generally accepted
accounting principles, or U.S. GAAP.
We have obtained trademark registrations for SmartUX® in the United States and for Magic® in the United States, Canada, Israel, the Netherlands
(Benelux), Switzerland, Thailand and the United Kingdom. All other trademarks and trade names appearing in this annual report are owned by their
respective holders.
Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements
or documents and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this annual report or to any
previous filling with the Securities and Exchange Commission, or the SEC, you may read the document itself for a complete recitation of its terms.
Definitions
In this annual report, unless the context otherwise requires:
● References to “Magic,” the “Company,” the “Registrant,” “our company,” “us,” “we” and “our” refer to Magic Software Enterprises Ltd. and its
consolidated subsidiaries;
● References to “our shares,” “Ordinary Shares” and similar expressions refer to Magic’s Ordinary Shares, par value NIS 0. 1 per share;
● References to “dollars”, “U.S. dollars”, “U.S. $” and “$” are to United States Dollars;
● References to “Euro” or “€” are to the Euro, the official currency of the Eurozone in the European Union;
● References to “shekels” and “NIS” are to New Israeli Shekels, the Israeli currency;
● References to the “Articles” are to our Amended Articles of Association, as currently in effect;
● References to the “Securities Act” are to the Securities Act of 1933, as amended;
● References to the “Exchange Act” are to the Securities Exchange Act of 1934, as amended;
● References to “NASDAQ” are to the NASDAQ Stock Market;
● References to the “TASE” are to the Tel Aviv Stock Exchange; and
● References to the “SEC” are to the United States Securities and Exchange Commission.
iii
Cautionary Note Regarding Forward-Looking Statements
Except for the historical information contained in this annual report, the statements contained in this annual report are “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, and the Private Securities Litigation Reform Act of 1995, as amended, with respect to our business, financial condition and results of
operations. Such forward-looking statements reflect our current view with respect to future events and financial results. We urge you to consider that
statements which use the terms “anticipate,” “believe,” “do not believe,” “expect,” “plan,” “intend,” “estimate,” and similar expressions are intended
to identify forward-looking statements. We remind readers that forward-looking statements are merely predictions and therefore inherently subject to
uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our
achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements expressed or
implied by such forward-looking statements. Such forward-looking statements are also included in Item 4 – “Information on the Company” and Item 5 –
“Operating and Financial Review and Prospects.” Readers are cautioned not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly
release any update or revision to any forward-looking statements to reflect new information, future events or circumstances, or otherwise after the date
hereof. We have attempted to identify significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section that
appears in Item 3D. “Key Information - Risk Factors.”
iv
TABLE OF CONTENTS
ITEM 1.
ITEM 2.
ITEM 3.
A.
B.
C.
D.
ITEM 4.
A.
B.
C.
D.
ITEM 4 A.
ITEM 5.
A.
B.
C.
D.
E.
F.
A.
B.
C.
D.
E.
ITEM 6.
ITEM 7.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
Selected Financial Data
Capitalization and Indebtedness
Reasons for the Offer and Use of Proceeds
Risk Factors
INFORMATION ON THE COMPANY
History and Development of the Company
Business Overview
Organizational Structure
Property, Plants and Equipment
UNRESOLVED STAFF COMMENTS
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Operating Results
Liquidity and Capital Resources
Research and Development
Trend Information
Off-Balance Sheet Arrangements
Tabular Disclosure of Contractual Obligations
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
Compensation
Board Practices
Employees
Share Ownership
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8.
ITEM 9.
A.
B.
A. Major Shareholders
B.
C.
Related Party Transactions
Interests of Experts and Counsel
FINANCIAL INFORMATION
Consolidated Statements and Other Financial Information
Significant Changes
THE OFFER AND LISTING
Offer and Listing Details
Plan of Distribution
A.
B.
C. Markets
D.
E.
F.
ITEM 10.
Selling Shareholders
Dilution
Expenses of the Issue
ADDITIONAL INFORMATION
Share Capital
A.
B. Memorandum and Articles of Association
C. Material Contracts
Exchange Controls
D.
Taxation
E.
Dividends and Paying Agents
F.
Statement by Experts
G.
Documents on Display
H.
Subsidiary Information
I.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
ITEM 11.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
ITEM 12.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 13.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 14.
CONTROLS AND PROCEDURES
ITEM 15.
RESERVED
ITEM 16.
AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16A.
CODE OF ETHICS
ITEM 16B.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16C.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16E.
CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16F.
CORPORATE GOVERNANCE
ITEM 16G.
ITEM 16H. MINE SAFETY DISCLOSURE
ITEM 17.
ITEM 18.
ITEM 19.
S I G N A T U R E S
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
v
1
1
1
1
2
2
3
25
25
26
47
48
48
49
49
56
66
67
67
67
68
68
70
72
80
81
83
83
85
85
85
85
86
86
86
86
86
86
87
87
87
87
87
87
88
88
98
98
98
99
99
100
101
101
101
102
102
102
102
102
102
103
103
103
104
104
105
106
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
PART I
Not applicable.
ITEM 3.
KEY INFORMATION
A.
SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data for the periods and as of the dates indicated. The selected consolidated
financial data set forth below should be read in conjunction with and are qualified entirely by reference to Item 5. “Operating and Financial Review and
Prospects” and our consolidated financial statements and notes thereto included elsewhere in this annual report.
We derived the following consolidated statement of income data for the years ended December 31, 2018, 2019 and 2020 and the consolidated balance
sheet data as of December 31, 2019 and 2020 from our audited consolidated financial statements included elsewhere in this annual report. The selected
consolidated statement of income data for the year ended December 31, 2016 and 2017 and the consolidated balance sheet data as of December 31, 2016,
2017 and 2018 are derived from our audited consolidated financial statements not included in this annual report. Our historical consolidated financial
statements are prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and presented in U.S. dollars.
Statement of Income Data:
Revenues:
Software
Maintenance and technical support
Consulting services
Total revenues
Cost of revenues:
Software
Maintenance and technical support
Consulting services
Total cost of revenues
Gross profit
Operating costs and expenses:
Research and development, net
Selling and marketing
General and administrative
Change in valuation of contingent consideration related to
acquisitions
Operating income
Financial income (expense), net
Increase in valuation of consideration related to acquisitions
Income before taxes on income
Taxes on income
Net income
Net income attributable to redeemable non-controlling
interests
Net income attributable to non-controlling interests
Net income attributable to Magic’s Shareholders
Basic and diluted earnings per share (1)
Shares used to compute basic earnings per share (2), (3)
Shares used to compute diluted earnings per share
Dividends
Cash dividend declared per ordinary share (1)
2020
2019
Year ended December 31,
2018
(U.S. dollars in thousands)
2017
2016
28,084
30,996
266,550
325,630
10,220
4,167
209,114
223,501
102,129
8,239
30,454
29,529
255
33,652
(1,169)
(11)
32,472
(6,874)
25,598
3,111
2,221
20,266
0.26
48,896
48,994
14,963
0.31
$
$
$
$
$
25,454
30,951
227,970
284,375
9,960
4,120
181,477
195,557
88,818
5,696
27,197
24,265
(38)
31,698
153
(4)
31,847
(7,071)
24,776
3,383
1,510
19,883
0.39
46,665
46,797
13,348
0.29
$
$
$
$
21,644
30,386
206,110
258,140
9,564
3,888
161,709
175,161
82,979
6,942
27,244
22,172
665
25,956
(1,649)
(62)
24,245
(6,331)
17,914
1,536
936
15,442
0.35
44,436
44,597
9,554
0.22
$
$
$
$
19,626
25,885
156,135
201,646
8,674
2,952
121,756
133,382
68,264
5,839
23,776
17,262
300
21,087
(173)
(257)
20,657
(3,949)
16,708
2,258
281
14,169
0.27
44,347
44,516
7,761
0.18
$
$
$
$
$
$
$
$
$
$
24,272
33,181
313,741
371,194
10,487
3,598
247,517
261,602
109,592
8,789
31,160
27,967
1,088
40,588
(917)
(2,268)
37,403
(7,286)
30,117
2,526
2,405
25,186
0.49
49,029
49,048
12,503
0.25
1
Balance Sheet Data:
Working capital
Cash, cash equivalents, short term deposits and marketable
securities
Total assets
Total equity
2020
2019
December 31,
2018
(U.S. dollars in thousands)
2017
2016
$
126,397
$
138,167
$
158,301
$
122,403
$
113,668
89,654
447,386
269,006
95,511
404,606
264,697
113,920
362,285
248,369
90,946
342,539
213,563
87,822
316,399
196,641
(1) On February 5, 2015, we declared a dividend distribution of $0.081 per share ($3,582 in the aggregate) which was paid on March 11, 2015. On
August 12, 2015, we declared a dividend distribution of $0.095 per share ($ 4,204 in the aggregate) which was paid on September 10, 2015. On
February 21, 2016, we declared a dividend distribution of $0.09 per share ($3,991 in the aggregate) which was paid on March 17, 2016. On August
14, 2016, we declared a dividend distribution of $0.085 per share ($3,770 in the aggregate) which was paid on September 22, 2016. On February 22,
2017, we declared a dividend distribution of $0.085 per share ($3,774 in the aggregate) which was paid on April 5, 2017. On August 13, 2017, we
declared a dividend distribution of $0.13 per share ($5,779 in the aggregate) which was paid on September 13, 2017. On February 28, 2018, we
declared a dividend distribution of $0.13 per share ($5,785 in the aggregate) which was paid on March 26, 2018. On August 8, 2018, we declared a
dividend distribution of $0.155 per share ($7,563 in the aggregate) which was paid on September 5, 2018. On March 4, 2019, we declared a dividend
distribution of $0.15 per share ($7,335 in the aggregate) which was paid on March 25, 2019. On August 13, 2019, we declared a dividend
distribution of $ 0.156 per share ($7,628 in the aggregate) which was paid on September 12, 2019. On May 26, 2020, the Company declared a
dividend distribution of $ 0.08 per share ($ 3,918 in the aggregate) which was paid on June 25, 2020. On August 13, 2020, the Company declared a
dividend distribution of $ 0.175 per share ($ 8,585 in the aggregate) which was paid on September 10, 2020.
(2) On July 12, 2018, we completed a private placement of 3,150,559 of our Ordinary Shares to several leading Israeli institutional investors and
1,117,734 Ordinary Shares to our principal shareholder, Formula Systems (1985) Ltd., under the same terms based on a price of $8.20 per share.
B.
CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
2
D.
RISK FACTORS
Investing in our ordinary shares involves a high degree of risk and uncertainty. You should carefully consider the risks and uncertainties described below
before investing in our ordinary shares. Our business, prospects, financial condition and results of operations could be adversely affected due to any of
the following risks. In that case, the value of our ordinary shares could decline, and you could lose all or part of your investment.
[as discussed, we need to delete some of the risk factors to make it shorter]
Risks Related to Our Business and Our Industry
● The ongoing COVID-19 pandemic, including the resulting global economic uncertainty and measures taken in response to the pandemic, could
materially impact our business and future results of operations and financial condition..
● The implementation of our M&A growth strategy, which requires the integration of our multiple acquired companies and their respective
businesses, operations and employees with our own, involves significant risks.
● We may encounter difficulties in realizing the potential financial or strategic benefits of recent business acquisitions.
● We are dependent on a limited number of core product families and services and a decrease in revenues from these products and services would
adversely affect our business, results of operations and financial condition; our future success will be largely dependent on the acceptance of
future releases of our core product families and service offerings.
● Adapting to evolving technologies can require substantial financial investments, distract management and adversely affect the demand for our
existing products and services.
● Our products have a lengthy sales cycle that could adversely affect our revenues.
● We may fail to attract and retain highly skilled IT professionals and we may not have the necessary resources to properly staff projects and
competition for such professionals.
● Our existing customers may not be satisfied with our solutions and services and might not make subsequent purchases from us.
● If we fail to meet our customers’ performance expectations, our reputation may be harmed, causing us to lose customers or exposing us to legal
liability.
● Our customers may terminate contracted projects or choose not to retain us for additional projects, our revenues and profitability may be
negatively affected.
● We enter from time to time into fixed-price contracts that could subject us to losses in the event we fail to properly estimate our costs.
● If our technical support or professional services are not satisfactory to our customers, they may not renew their maintenance and support
agreements or buy future products, which could adversely affect our future results of operations.
● We face intense competition in the markets in which we operate. This competition could adversely affect our business, results of operations and
financial condition.
3
● Other unfavorable national and global economic conditions could adversely affect our business, operating results and financial condition.
● We are exposed to economic and market conditions that impact the communications industry.
● As some of our revenues are derived from the Israeli government sector, a reduction of government spending in Israel on IT services may reduce
our revenues and profitability; and any delay in the annual budget approval process may negatively impact our cash flows.
● The increasing amount of identifiable intangible assets and goodwill recorded on our balance sheet may lead to significant impairment charges
in the future.
● If we fail to manage our growth, our business could be disrupted and our profitability will likely decline.
● We have a history of quarterly fluctuations in our results of operations and expect these fluctuations to continue.
● We derive a significant portion of our revenues from independent distributors who are under no obligation to purchase our products and the loss
of such independent distributors could adversely affect our business, results of operations and financial condition.
● Changes in the ratio of our revenues generated from different revenue elements may adversely affect our gross profit margins.
● Our success depends in part upon the senior members of our management and research and development teams, and our inability to attract and
retain them or attract suitable replacements could have a negative effect on our ability to operate our business.
● We may encounter difficulties with our international operations and sales that could adversely affect our business, results of operations and
financial condition.
● Our international operations expose us to risks associated with fluctuations in currency exchange rates that could adversely affect our business.
● Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
● Regulation of the internet and telecommunications, privacy and data security may adversely affect sales of our products and result in increased
compliance costs.
● Errors or defects in our software solutions could inevitably arise and would harm our profitability and our reputation with customers, and could
even give rise to claims against us.
● Third parties have in the past, and may in the future, claim that we infringe upon their intellectual property rights and such claims could harm
our business.
● Although we apply measures to protect our intellectual property rights and our source code, there can be no assurance that the measures that we
employ to do so will be successful.
● Our customers and we rely on technology and intellectual property of third-parties, the loss of which could limit the functionality of our products
and disrupt our business.
● We could be required to provide the source code of our products to our customers.
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● Some of our services and technologies may use “open source” software, which may restrict how we use or distribute our services or require that
we release the source code of certain products subject to those licenses.
● Any unauthorized, and potentially improper, actions of our personnel could adversely affect our business, operating results and financial
condition.
● Under applicable employment laws, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our
competitors from benefiting from the expertise of some of our former employees.
● Our business may be materially affected by changes to fiscal and tax policies. Potentially negative or unexpected tax consequences of these
policies, or the uncertainty surrounding their potential effects, could adversely affect our results of operations and share price.
● Certain of our credit facility agreements with banks and other financial institutions are subject to a number of restrictive covenants that, if
breached, could result in acceleration of our obligation to repay our debt.
● Increasing scrutiny and changing expectations from investors, lenders, customers and other market participants with respect to our
Environmental, Social and Governance, or ESG, policies may impose additional costs on us or expose us to additional risks.
● If we are unable to maintain effective internal control over financial reporting in accordance with Sections 302 and 404(a) of the Sarbanes-Oxley
Act of 2002, the reliability of our financial statements may be questioned and our share price may suffer.
Risk Related to Our Ordinary Shares
● Our Ordinary Shares are traded on more than one market and this may result in price variations.
● There is relatively limited trading volume for our shares, which reduces liquidity for our shareholders, and may cause the share price to be
volatile, all of which may lead to losses by investors.
● We are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a number of rules under the Exchange
Act and are permitted to file less information with the SEC than a domestic U.S. reporting company, which reduces the level and amount of
disclosure that you receive.
● Our controlling shareholder, Formula Systems (1985) Ltd., beneficially owns approximately 45.53% of our outstanding Ordinary Shares and
therefore has a controlling influence over matters requiring shareholder approval, which could delay or prevent a change of control that may
benefit our public shareholders.
● Our U.S. shareholders may suffer adverse tax consequences if we are classified as a passive foreign investment company or as a “controlled
foreign corporation.”
Risks Related to Our Location in Israel
● Political, economic and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our results of
operations and adversely affect our share price.
● Our results of operations may be adversely affected by the obligation of our personnel to perform military service.
● We currently have the ability to benefit from certain government tax benefits, which may be cancelled or reduced in the future.
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● Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
● Provisions of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and therefore depress
the price of our shares.
● The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of
shareholders under U.S. law.
Risks Related to Our Business and Our Industry
The ongoing COVID-19 pandemic, including the resulting global economic uncertainty and measures taken in response to the pandemic, could
materially impact our business and future results of operations and financial condition.
The COVID-19 pandemic has disrupted the economy and put unprecedented strains on governments, IT systems, businesses and individuals around the
world. The pandemic has resulted in authorities implementing numerous measures to try to contain the COVID-19 pandemic, such as travel bans and
restrictions, quarantines, shelter in place or total lock-down orders, and business limitations and shutdowns. Such measures have significantly contributed
to rising unemployment and negatively impacted consumer and business spending. The extent to which COVID-19 impacts our financial results will
depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity
of COVID-19 and the actions taken by governments to curtail or treat its impact, including vaccination policies, shelter in place directives, business
limitations and shutdowns, travel bans and restrictions, loan payment deferrals (whether government-mandated or voluntary), moratoriums on debt
collection activities and other actions, which, if imposed or extended, may impact the economies in which we now or in the future operates in. Adverse
market conditions resulting from the spread of COVID-19 could materially adversely affect our business and the value of our shares.
Further, the COVID-19 pandemic has resulted in our employees and those of many of our customers working from home and conducting work via the
internet, and if the network and infrastructure of internet providers becomes overburdened by increased usage or is otherwise unreliable or unavailable,
our employees’ and our customers’ employees’ access to the internet to conduct business could be negatively impacted. Limitations on access or
disruptions to services or goods provided by or to some of our suppliers upon which our platforms and business operations rely could interrupt our ability
to provide our platforms, decrease the productivity of our workforce and significantly harm our business operations, financial condition and results of
operations. In addition, our technology platforms and the other systems or networks used in our business may experience an increase in attempted cyber-
attacks, targeted intrusions, ransomware and phishing campaigns seeking to take advantage of shifts to employees working remotely using their
household or personal internet networks as a result of the COVID-19 pandemic. The success of any of these unauthorized attempts could substantially
impact our technology platforms, the proprietary and other confidential data contained therein or otherwise stored or processed in our operations, and
ultimately our business. Any actual or perceived security incident also may cause us to incur increased expenses to improve our security controls and to
remediate security vulnerabilities. Additionally, we may experience an increased volume of unanticipated customer requests for support (resulting in an
increased volume of calls to our customer support and operations centers) and regulatory requests for information and support or additional regulatory
requirements, which could require additional resources and costs to address.
The spread of COVID-19 has caused us to modify our business practices to help minimize the risk of the pandemic to our employees, our partners and
customers, and the communities in which we participate, which could negatively impact our business. In response to the COVID-19 pandemic, we have
enabled our employees to work remotely, implemented travel restrictions for all non-essential business and shifted company events to virtual-only
experiences, and we may deem it advisable to similarly alter, postpone or cancel additional events in the future. There is no certainty that the measures we
have taken will be sufficient to mitigate the risks posed by the pandemic. If the COVID-19 pandemic worsens, especially in regions where we have
offices, our business activities originating from affected areas could be adversely affected. Disruptive activities could include additional business closures
in impacted areas, further restrictions on our employees’ and service providers’ ability to travel, impacts to productivity if our employees or their family
members experience health issues and potential delays in hiring and onboarding of new employees. We may take further actions that alter our business
operations as may be required by local, provincial, state or federal authorities or that we determine are in the best interests of our employees. Such
measures could negatively affect our sales and marketing efforts, sales cycles, employee productivity or customer retention, any of which could harm our
financial condition and business operations.
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Additionally, diversion of management focus to address the impacts of the COVID-19 pandemic could potentially disrupt our operating plans. The extent
and continued impact of the COVID-19 pandemic on our business will depend on certain developments, including: the duration and spread of the
outbreak; government responses to the pandemic; the impact on our customers and our sales cycles; the impact on customer, industry or employee events;
and the effect on our partners, merchants and their customers, third-party service providers, customers and supply chains, all of which are uncertain and
cannot be predicted. Because of our largely subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our
results of operations and overall financial condition until future periods, if at all.
To the extent that the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the
other risks described in this “Risk Factors” section.
Our business depends on our current and prospective customers’ ability and willingness to invest money in IT systems and services, which in turn is
dependent upon their overall economic health. Negative economic conditions in the global economy or certain regions especially in the United States and
Israel, including conditions resulting from financial and credit market fluctuations, could cause a decrease in corporate spending on products and services
that we sell. Wide-spread viruses and epidemics like the recent novel coronavirus outbreak, could also negatively affect our customers’ spending on our
products and services. In 2020, 48% of our revenues were generated from North America, 40% of our revenues generated from Israel, and 12% from the
rest of the world. Negative economic conditions may cause customers in general to reduce their IT spending. Customers may delay or cancel projects,
choose to focus on in-house development efforts or seek to lower their costs by renegotiating maintenance and support agreements. Additionally,
customers may be more likely to make late payments in worsening economic conditions, which could require us to increase our collection efforts and
require us to incur additional associated costs to collect expected revenues. To the extent purchases of licenses for our software are perceived by
customers and potential customers to be discretionary, our revenues may be disproportionately affected by delays or reductions in general IT spending.
The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including
new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.
The implementation of our M&A growth strategy, which requires the integration of our multiple acquired companies and their respective businesses,
operations and employees with our own, involves significant risks, and the failure to integrate successfully may adversely affect our future results.
In the past decade we have completed more than 25 acquisitions. Most recently, during 2020, we acquired both Aptonet Inc and Stockell Information
Systems, Inc together with two small acquisitions. These acquisitions are part of our integrated M&A growth strategy, which is centered on three key
factors: growing our customer base, expanding geographically and adding complementary solutions and services to our portfolio— all while we seek to
ensure our continued high quality of services and product delivery. Any failure to successfully integrate the business, operations and employees of our
acquired companies, or to otherwise realize the anticipated benefits of these acquisitions, could harm our results of operations. Our ability to realize these
benefits will depend on the timely integration and consolidation of organizations, operations, facilities, procedures, policies and technologies, and the
harmonization of differences in the business cultures between these companies and their personnel. Integration of these businesses will be complex and
time consuming, will involve additional expense and could disrupt our business and divert management’s attention from ongoing business concerns. The
challenges involved in integrating Aptonet inc, Stockell Information Systems, Inc and other former acquisitions include:
● Preserving customer, supplier and other important relationships
● Integrating complex, core products and services that we acquire with our existing products and services
● Integrating financial forecasting and controls, procedures and reporting cycles
● Combining and integrating information technology, or IT, systems
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● Integrating employees and related HR systems and benefits, maintaining employee morale and retaining key employees
● Potential confusion that we may have in our dealings with customers and prospective customers as to the products we are offering to them and
potential overlap among those products
The benefits we expect to realize from these acquisitions are, necessarily, based on projections and assumptions about the combined businesses of our
company, and assume, among other things, the successful integration of these acquired entities into our business and operations. Our projections and
assumptions concerning our acquisitions may be inaccurate, however, and we may not successfully integrate the acquired companies and our operations
in a timely manner, or at all. We may also be exposed to unexpected contingencies or liabilities of the acquired companies. If we do not realize the
anticipated benefits of these transactions, our growth strategy and future profitability could be adversely affected.
We may encounter difficulties in realizing the potential financial or strategic benefits of recent business acquisitions. We expect to make additional
acquisitions in the future that could disrupt our operations and harm our operating results.
A significant part of our business strategy is to pursue acquisitions and other initiatives based on strategy centered on three key factors: growing our
customer base, expanding geographically and adding complementary solutions to our portfolio— all while we seek to ensure our continued high quality
of services and product delivery. In the past five years we made numerous acquisitions.
Mergers and acquisitions of companies are inherently risky and subject to many factors outside of our control and no assurance can be given that our
future acquisitions will be successful and will not adversely affect our business, operating results, or financial condition. In the future, we may seek to
acquire or make strategic investments in complementary businesses, technologies, services or products, or enter into strategic partnerships or alliances
with third parties in order to expand our business. Failure to manage and successfully integrate such acquisitions could materially harm our business and
operating results. Prior acquisitions have resulted in a wide range of outcomes, from successful introduction of new products technologies and
professional services to a failure to do so. Even when an acquired company has previously developed and marketed products, there can be no assurance
that new product enhancements will be made in a timely manner or that pre-acquisition due diligence will have identified all possible issues that might
arise with respect to such products. If we acquire other businesses, we may face difficulties, including:
● Difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired businesses or enterprises;
● Diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread
operations resulting from acquisitions;
● Integrating financial forecasting and controls, procedures and reporting cycles;
● Potential difficulties in completing projects associated with in-process research and development;
● Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger
market positions;
● Insufficient revenue to offset increased expenses associated with acquisitions; and
● The potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and
continuing after announcement of acquisition plans.
We are dependent on a limited number of core product families and services and a decrease in revenues from these products and services would
adversely affect our business, results of operations and financial condition; our future success will be largely dependent on the acceptance of future
releases of our core product families and service offerings and if we are unsuccessful with these efforts, our business, results of operations and
financial condition will be adversely affected.
We derive a significant portion of our revenues from sales of application and integration platforms and vertical software solutions and from related
professional services, software maintenance and technical support as well as from other IT professional services, which include IT consulting and
outsourcing services. Our future growth depends heavily on our ability to effectively develop and sell new products developed by us or acquired from
third parties as well as add new features to existing products and new software service offerings. A decrease in revenues from our principal products and
services would adversely affect our business, results of operations and financial condition.
Our future success depends in part on the continued acceptance of our application platforms and integration products primarily under our Magic xpa,
Magic xpi, AppBuilder Magic xpc, FactoryEye and Magic SmartUX brands and our vertical packaged software solutions, primarily Clicks, Leap™, the
Hermes solution and HR Pulse. The continued acceptance of these platforms and software solutions will be dependent in part on the continued acceptance
and growth of the cloud market, including rich internet applications, or RIAs, mobile and software as a service, or SaaS, for which certain of them are
particularly useful and advantageous. We will need to continue to enhance our products to meet evolving requirements and if new versions of such
products are not accepted, our business, results of operations and financial condition may be adversely affected.
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Rapid technological changes may adversely affect the market acceptance of our products and services, and our business, results of operations and
financial condition could be adversely affected.
We compete in a market that is characterized by rapid technological changes. Other companies are also seeking to offer integration solutions, low-code
development solutions, enterprise mobility solutions, internet-related solutions, such as cloud computing, and complementary services to generate
growth. These companies may develop technological or business model innovations or offer services in the markets that we seek to address that are, or
are perceived to be, equivalent or superior to our software solutions and services. In addition, our customers’ business models may change in ways that
we do not anticipate and these changes could reduce or eliminate our customers’ needs for our products and services. Our operating results depend on our
ability to adapt to market changes and develop and introduce new products and services into existing and emerging markets.
The introduction of new technologies and devices could render existing products and services obsolete and unmarketable and could exert price pressures
on our products and services. Our future success will depend upon our ability to address the increasingly sophisticated needs of our customers by:
● Supporting existing and emerging hardware, software, databases and networking platforms; and
● Developing and introducing new and enhanced software development technology and applications that keeps pace with such technological
developments, emerging new product markets and changing customer requirements.
Adapting to evolving technologies can require substantial financial investments, distract management and adversely affect the demand for our
existing products and services.
Because our solutions are complex and require rigorous testing, development cycles can be lengthy, taking us up to two years to develop and introduce
new, enhanced or modified solutions. Moreover, development projects can be technically challenging and expensive. The nature of these development
cycles may cause us to experience delays between the time we incur expenses associated with research and development and the time we generate
revenues, if any, from such expenses. In addition, adapting to evolving technologies may require us to invest a significant amount of resources, time and
attention into the development, integration, support and marketing of those technologies. The acceptance and growth of cloud computing and enterprise
mobility are examples of rapidly changing technologies, which we have adapted into our products, packaged software solution and software service
offerings. This required us to make a substantial financial investment to develop and implement cloud computing and enterprise mobility into our
software solution models and has required significant attention from our management to refine our business strategies to include the delivery of these
solutions. As the market continues to adopt these new technologies, we expect to continue to make substantial investments in our software solutions,
system integrations and professional services related to these changing technologies. Even if we succeed in adapting to a new technology by developing
attractive products and services and successfully bringing them to market, there is no assurance that the new product or service will have a positive
impact on our financial performance and could even result in lower revenue, lower margins and higher costs and therefore could negatively impact our
financial performance. If release dates of any future products or enhancements are delayed our business, financial condition and results of operations
could be adversely affected.
Our products have a lengthy sales cycle that could adversely affect our revenues.
The typical sales cycle for our solutions and services is lengthy and unpredictable, sometimes requires pre-purchase evaluation by a significant number of
persons in our customers’ organizations, and often involves a significant operational decision by our customers as they typically use our software
solutions and services to develop and deploy as well as to integrate applications that are critical to their businesses. Our sales efforts involve educating
our customers and consultants about the use and benefits of our solutions, including the technical capabilities of our solutions and the efficiencies
achievable by organizations deploying our solutions. Because of the long approval process that typically accompanies strategic initiatives or capital
expenditures by companies, our sales process is often delayed, with little or no control over any delays encountered by us. Our sales cycle, which
generally ranges from three to twelve months, can be further extended for sales made through third party distributors. We spend substantial time, effort
and money in our sales efforts without any assurance that such efforts will produce any sales.
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If we fail to attract and retain highly skilled IT professionals, we may not have the necessary resources to properly staff projects and competition for
such professionals may adversely affect our business, results of operations and financial condition.
Our success depends largely on the contributions of our employees and our ability to attract and retain qualified personnel, including technology,
consulting, engineering, marketing and management professionals and upon our ability to attract and retain qualified computer professionals to serve as
temporary IT personnel. Competition for the limited number of qualified professionals with a working knowledge of certain sophisticated computer
languages is intense. We compete for technical personnel with other providers of technical IT consulting and outsourcing services, systems integrators,
providers of outsourcing services, computer systems consultants, customers and, to a lesser extent, temporary personnel agencies, and competition may
be amplified by evolving restrictions on immigration, travel, or availability of visas for skilled technology workers. A shortage of, and significant
competition for software professionals with the skills and experience necessary to perform the required services, may require us to forego projects for
lack of resources and may adversely affect our business, results of operations and financial condition. In addition, our ability to maintain and renew
existing engagements and obtain new business for our contract IT professional services operations depends, in large part, on our ability to hire and retain
technical personnel with the IT skills that keep pace with continuing changes in software evolution, industry standards and technologies, and customer
preferences. Demand for qualified professionals conversant with certain technologies may exceed supply as new and additional skills are required to keep
pace with evolving computer technology or as competition for technical personnel increases. Increasing demand for qualified personnel could also result
in increased expenses to hire and retain qualified technical personnel and could adversely affect our profit margins
If we fail to meet our customers’ performance expectations, our reputation may be harmed, causing us to lose customers or exposing us to legal
liability.
We depend heavily on repeat software and service revenues from our base of existing customers. Two of our customers accounted for 15.8% and 19.0%
of our revenues in the years ended December 31, 2019 and 2020, respectively and five of our customers accounted for 23.3% and 26.0% of our revenues
in the years ended December 31, 2019 and 2020, respectively. If our existing customers are not satisfied with our solutions and services, they may not
enter into new project contracts with us or continue using our services. A significant decline in our revenue stream from existing customers, including due
to termination of agreement(s), would have a material adverse effect on our business, results of operations and financial condition.
Our ability to attract and retain customers depends to a large extent on our relationships with our customers and our reputation for high quality solutions,
professional services and integrity. As a result, if a customer is not satisfied with our services or solutions, including those of subcontractors we engage,
our reputation may be damaged. Our failure to meet these goals or a customer’s expectations may result in a less profitable or an unprofitable
engagement. Moreover, if we fail to meet our customers’ expectations, we may lose customers and be subject to legal liability, particularly if such failure
adversely affects our customers’ businesses.
In addition, a portion of our projects may be considered critical to the operations of our customers’ businesses. Our exposure to legal liability may be
increased in the case of contracts in which we become more involved in our customers’ operations. While we typically strive to include provisions
designed to limit our exposure to legal claims relating to our services and the solutions we develop, these provisions may not adequately protect us or
may not be enforceable in all cases. The general liability insurance coverage that we maintain, including coverage for errors and omissions, is subject to
important exclusions and limitations. We cannot be certain that this coverage will continue to be available on reasonable terms or will be available in
sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. A successful assertion of one or
more large claims against us that exceeds our available insurance coverage or changes in our insurance policies, including premium increases or the
imposition of large deductible or co-insurance requirements, could adversely affect our profitability.
If our customers terminate contracted projects or choose not to retain us for additional projects, our revenues and profitability may be negatively
affected.
Our IT professional services customers typically retain us on a non-exclusive basis. Many of our customer contracts, including those that are on a fixed
price and timeframe basis, can be terminated by the customer with or without cause upon 90 days’ notice or less, and generally without termination-
related penalties. Additionally, our contracts with customers are typically limited to discrete projects without any commitment to a specific volume of
business or future work and may involve multiple stages. Furthermore, the increased breadth of our service offerings may result in larger and more
complex projects for our customers that require us to devote resources to more thoroughly understand their operations. Despite these efforts, our
customers may choose not to retain us for additional stages or may cancel or delay planned or existing engagements due to any number of factors,
including:
● a customer’s financial difficulties;
● a change in a customer’s strategic priorities;
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● a customer’s demand for price reductions; and
● a decision by a customer to utilize its in-house IT capacity or work with our competitors.
These potential terminations, cancellations or delays in planned or existing engagements could make it difficult for us to use our personnel efficiently and
may negatively affect our revenues and profitability.
We enter from time to time into fixed-price contracts that could subject us to losses in the event we fail to properly estimate our costs.
We enter from time to time into firm fixed-price contracts where our delivery requirements sometimes span more than one year. If our initial cost
estimates are incorrect, it may cause losses on these contracts. Because many of these contracts involve new technologies and applications, unforeseen
events, such as technological difficulties and other cost overruns, can result in the contract pricing becoming less favorable or even unprofitable to us and
have an adverse impact on our financial results.
Similarly, delays in implementation projects (whether fixed price or not) may affect our revenue and cause our operating results to vary widely. Payment
terms are generally based on periodic payments or on the achievement of milestones. Any delays in payment or in the achievement of milestones may
have a material adverse effect on our results of operations, financial position or cash flows.
For non-fixed price contracts, we generally provide our customers with up-front estimates regarding the duration, budget and costs associated with the
implementation of our services. However, we may not meet those upfront estimates and/or the expectations of our customers, which could lead to a
dispute with a client.
If our technical support or professional services are not satisfactory to our customers, they may not renew their maintenance and support agreements
or buy future products, which could adversely affect our future results of operations.
Our business relies on our customers’ satisfaction with the technical support and professional services we provide to support our products. If we fail to
provide technical support services that are responsive, satisfy our customers’ expectations and resolve issues that they encounter with our products and
services, then they may elect not to purchase or renew annual maintenance and support contracts and they may choose not to purchase additional products
and services from us. Accordingly, our failure to provide satisfactory technical support or professional services could lead our customers not to renew
their agreements with us or renew on terms less favorable to us, and therefore have a material and adverse effect on our business and results of operations.
We face intense competition in the markets in which we operate. This competition could adversely affect our business, results of operations and
financial condition.
We compete with other companies in the areas of application development platforms, business integration and business process management, or BPM,
tools, and in the applications, mobile solutions, vertical solutions and professional services markets in which we operate. The growth of the cloud
computing market has increased the competition in these areas. We expect that such competition will continue to increase in the future with respect to our
technology, applications and professional services that we currently offer and applications, and with respect to our services that we and other vendors are
developing. Increased competition, direct and indirect, could adversely affect our business, financial condition and results of operations.
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As we also compete with other companies in the technical IT consulting and outsourcing services industry, this industry is highly competitive and
fragmented and has low entry barriers. We compete for potential customers with providers of outsourcing services, systems integrators, computer systems
consultants, other providers of technical IT consulting services and, to a lesser extent, temporary personnel agencies. We expect competition to increase,
and we may not be able to remain competitive.
Some of our existing and potential competitors are larger companies, have substantially greater resources than us, including financial, technological,
marketing, skilled human resources and distribution capabilities, and enjoy greater market recognition than us. We may not be able to differentiate our
products and services from those of our competitors, offer our products as part of integrated systems or solutions to the same extent as our competitors, or
successfully develop or introduce new products that are more cost-effective, or offer better performance than our competitors. Failure to do so could
adversely affect our business, financial condition and results of operations.
Other unfavorable national and global economic conditions could adversely affect our business, operating results and financial condition.
During periods of slowing economic activity, our customers may reduce their demand for our products, technology and professional services, which
would reduce our sales, and our business, operating results and financial condition may be adversely affected. Economic challenges may develop,
including threatened sovereign defaults, credit downgrades, restricted credit for businesses and consumers and potentially falling demand for a variety of
products and services. These developments, or the perception that any of them could occur, could result in longer sales cycles, slower adoption of new
technologies and increased price competition for our products and services. We could also be exposed to credit risk and payment delinquencies on our
accounts receivable, which are not covered by collateral. In particular, there is currently significant uncertainty about the future relationship between the
U.S. and various other countries, with respect to trade policies, treaties, government regulations, and tariffs. For example, the recent imposition of tariffs
and/or changes in tariffs on various products by the U.S. and other countries, including China and Canada, have introduced greater uncertainty with
respect to trade policies and government regulations affecting trade between the U.S. and other countries, and new and/or increased tariffs have subjected,
and may in the future subject, us to additional costs and expenditure of resources. Major developments in trade relations, including the imposition of new
or increased tariffs by the U.S. and/or other countries, and any emerging nationalist trends in specific countries could alter the trade environment and
consumer purchasing behavior which, in turn, could have a material effect on our financial condition and results of operations. While the U.S. and China
recently signed a “phase one” trade deal on January 15, 2020 to reduce planned increases to tariffs, concerns over the stability of bilateral trade relations
remain. In addition, the UK’s exit from the European Union on January 31, 2020, known as Brexit, and the ongoing negotiations of the future trading
relationship between the UK and the European Union during the transition period set to end December 31, 2020 have yet to provide clarity on what the
outcome will be for the UK or Europe. Changes related to Brexit could subject us to heightened risks in that region, including disruptions to trade and
free movement of goods, services and people to and from the UK, disruptions to the workforce of our business partners, increased foreign exchange
volatility with respect to the British pound and additional legal, political and economic uncertainty. If these actions impacting our international
distribution and sales channels result in increased costs for us or our international partners, such changes could result in higher costs to us, adversely
affecting our operations, particularly as we expand our international presence.
If global economic and market conditions, or economic conditions in the United States, Europe or Asia or other key markets, remain uncertain or weaken,
our business, operating results and financial condition may be adversely affected.
We are exposed to economic and market conditions that impact the communications industry.
We provide packaged software and software services to service providers in the telecom industry, and our business may therefore be highly dependent
upon conditions in that industry. Developments in the telecom industry, such as the impact of global economic conditions, industry consolidation,
emergence of new competitors, commoditization of voice, video and data services and changes in the regulatory environment, at times have had, and
could continue to have, a material adverse effect on our existing or potential customers. In the past, these conditions reduced the high growth rates that
the communications industry had previously experienced and caused the market value, financial results and prospects and capital spending levels of many
telecom companies to decline or degrade. Industry consolidation involving our customers may place us at risk of losing business to the incumbent
provider to one of the parties to the consolidation or to new competitors. During previous economic downturns, the telecom industry experienced
significant financial pressures that caused many in the industry to cut expenses and limit investment in capital intensive projects and, in some cases, led to
restructurings and bankruptcies. Continuing uncertainty as to economic recovery in recent years may have adverse consequences for our customers and
our business.
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Downturns in the business climate for telecom companies have previously resulted in slower customer buying decisions and price pressures that
adversely affected our ability to generate revenue. Adverse market conditions may have a negative impact on our business by decreasing our new
customer engagements and the size of initial spending commitments under those engagements, as well as decreasing the level of discretionary spending
by existing customers. In addition, a slowdown in buying decisions may extend our sales cycle period and may limit our ability to forecast our flow of
new contracts. If such adverse business conditions arise in the future, our business may be harmed.
As some of our revenues are derived from the Israeli government sector, a reduction of government spending in Israel on IT services may reduce our
revenues and profitability; and any delay in the annual budget approval process may negatively impact our cash flows.
We perform work for a wide range of Israeli governmental agencies and related subcontractors. Any reduction in total Israeli government spending for
political or economic reasons (such as in the case of COVID-19) may reduce our revenues and profitability. In addition, the Government of Israel has
experienced significant delays in the approval of its annual budget in recent years. Such delays in the future could negatively affect our cash flows by
delaying the receipt of payments from the government of Israel for services performed.
The increasing amount of identifiable intangible assets and goodwill recorded on our balance sheet may lead to significant impairment charges in the
future.
The amount of goodwill and identifiable intangible assets on our consolidated balance sheet has increased significantly from approximately $88 million
as of December 31, 2014 to $189 million as of December 31, 2020 because of our acquisitions and may increase further following future acquisitions. We
regularly review our long-lived assets, including identifiable intangible assets and goodwill, for impairment. Goodwill and indefinite life intangible assets
are subject to impairment review at least annually. Other long-lived assets are reviewed when there is an indication that impairment may have occurred.
Impairment testing under U.S. GAAP, subject to downturns in our operating results and financial condition, may lead to impairment charges in the future.
Any significant impairment charges could have a material adverse effect on our results of operations.
If we fail to manage our growth, our business could be disrupted and our profitability will likely decline.
We have experienced rapid growth during recent years, through both acquisitions and organically. The number of our employees over the last five years
increased from 1,181 as of December 31, 2014 to 3,039 as of December 31, 2020 and may increase further as we aim to enhance our businesses. This
increase may significantly strain our management and other operational and financial resources. In particular, continued headcount growth increases the
integration challenges involved in:
● Recruiting, training and retaining skilled technical, marketing and management personnel;
● Maintaining high quality standards;
● Preserving our corporate culture, values and entrepreneurial environment;
● Developing and improving our internal administrative infrastructure, particularly our financial, operational, communications and other internal
controls; and
● Maintaining high levels of customer satisfaction;
The rapid execution necessary to exploit the market for our business model requires an effective planning and management process. Our systems,
procedures or controls may not be adequate to support the growth in our operations, and our management may not be able to achieve the rapid execution
necessary to exploit the market for our business model. Our future operating results will also depend on our ability to expand our development, sales and
marketing organizations. If we are unable to manage growth effectively, our profitability will likely decline.
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We derive a significant portion of our revenues from independent distributors who are under no obligation to purchase our products and the loss of
such independent distributors could adversely affect our business, results of operations and financial condition.
We sell our products and packaged software solutions through our own direct sales representatives and offices, as well as through third parties that in the
case of our development platforms (Magic xpa, AppBuilder and Magic SmartUX) use our technology to develop and sell solutions to their customers
(ISVs) and through system integrators. The ISVs then sell the applications they develop on the Magic xpa, AppBuilder or Magic SmartUX application
platforms to end-users. In some regions, especially in Asia and Asia-Pacific, Central and Eastern Europe, Spain, Italy, South America, Africa and a few
countries in the Mediterranean area, we also sell our products and packaged software solutions through a broad distribution and sales network, including
independent regional distributers. We are dependent upon the acceptance of our products by our ISVs and independent distributors and their active
marketing and sales efforts. Typically, our arrangements with our independent distributors do not require them to purchase specified amounts of products
or prevent them from selling competitive products. Our ISVs may stop using our technology to develop and sell solutions to end-users. Similarly, our
independent distributors may not continue, or may not give a high priority to, marketing and supporting our products. Our results of operations could be
adversely affected by a decline in the number of ISVs utilizing our technology and by changes in the financial condition, business, marketing strategies,
local and global economic conditions, or results of our independent distributors. If any of our distribution relationships are terminated, we may not be
successful in replacing them on a timely basis, or at all. In addition, we will need to develop new sales channels for new products, and we may not
succeed in doing so. Any changes in our distribution and sales channels, or our inability to establish effective distribution and sales channels for new
markets, could adversely impact our ability to sell our products and result in a loss of revenues and profits.
Changes in the ratio of our revenues generated from different revenue elements may adversely affect our gross profit margins.
We derive our revenues from the sale of software licenses, related professional services, maintenance and technical support as well as from other IT
professional services. In recent years the decline in our gross margin was affected by the change in proportion of our revenues generated from the sale of
each of those elements of our revenues. Our revenues from the sale of our software licenses, related professional services, maintenance and technical
support have higher gross margins than our revenues from IT professional and outsourcing services. Our software licenses revenues also include the sale
of third-party software licenses, which have a lower gross margin than sales of our proprietary software products. Any increase in the portion of third-
party software license sales out of total license sales will decrease our gross profit margin. If the relative proportion of our revenues from the sale of IT
professional services continues to increase as a percentage of our total revenues, our gross profit margins may continue to decline in the future.
Our success depends in part upon the senior members of our management and research and development teams, and our inability to attract and
retain them or attract suitable replacements could have a negative effect on our ability to operate our business.
We are dependent on the senior members of our management and research and development teams. We do not maintain key man life insurance for any of
the senior members of our management and research and development teams. Competition for senior management in our industry is intense, and we may
not be able to retain our senior management personnel or attract and retain new senior management personnel in the future. The loss of one or more
members of our senior management and research and development teams could have a negative effect on our ability to attract and retain customers,
execute our business strategy and otherwise operate our business, which could reduce our revenues, increase our expenses and reduce our profitability.
14
We may encounter difficulties with our international operations and sales that could adversely affect our business, results of operations and financial
condition.
While our principal executive offices are located in Israel, 63%, 62% and 60% of our sales in the years ended December 31, 2018, 2019 and 2020,
respectively, were generated in other regions and countries including, but not limited to the Americas, Europe, Japan, Asia-Pacific, India, and Africa. Our
success in becoming a stronger competitor in the sale of development application platforms, integration solutions, packaged software solutions and
professional services is dependent upon our ability to increase our sales in all our markets. Our efforts to increase our penetration into these markets are
subject to risks inherent to such markets, including the high cost of doing business in such locations. Our efforts may be costly and they may not result in
profits, which could adversely affect our business, results of operations and financial condition.
Our current international operation and our plans to further expand our international operations subjects us to many risks inherent to international
business activities, including:
● Limitations and disruptions resulting from the imposition of government controls;
● Compliance with a wide variety of foreign regulatory standards;
● Compliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, particularly in emerging market countries;
● Import and export license requirements, tariffs, taxes and other trade barriers;
● Political, social and economic instability abroad, terrorist attacks and security concerns in general. For example, our operations in India may be
adversely affected by future political and other events in the region;
● Trade restrictions;
● Changes in tariffs;
● Increased exposure to fluctuations in foreign currency exchange rates;
● Complexity in our tax planning, and increased exposure to changes in tax regulations in various jurisdictions in which we operate, which could
adversely affect our operating results and limit our ability to conduct effective tax planning;
● Increased financial accounting and reporting requirements and complexities;
● Weaker protection of intellectual property rights in some countries;
● Greater difficulty in safeguarding intellectual property;
● Increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations;
● Longer payment cycles and difficulties in enforcing contracts and collecting accounts receivable;
● The need to localize our products and licensing programs for international customers;
● Lack of familiarity with and unexpected changes in foreign regulatory requirements;
● The burden of complying with a wide variety of foreign laws and legal standards;
● The potential worsening of the coronavirus outbreak on a global scale, which may cause customers to cancel projects with us, prevent potential
future opportunities for our business and harm our ability to maintain a healthy workforce that can implement our services and solutions
offerings; and
● Multiple and possibly overlapping tax regimes.
As we continue to expand our business globally, our success will depend, largely, on our ability to anticipate and effectively manage these and other risks
associated with our international operations. Any of these risks could harm our international operations and reduce our international sales, adversely
affecting our business, results of operations, financial condition and growth prospects.
15
Our international operations expose us to risks associated with fluctuations in currency exchange rates that could adversely affect our business.
Our financial statements are stated in U.S. dollars, our functional currency. However, in the years ended December 31, 2018, 2019 and 2020,
approximately 52%, 51% and 52% of our revenues, respectively, were derived from sales outside the United States, particularly, Israel, Europe, Japan
and Asia-Pacific, and Africa. We also maintain substantial non-U.S. dollar balances of assets, including cash and accounts receivable, and liabilities,
including accounts payable and debts to banks and financial institutions. Similarly, a significant portion of our expenses, primarily salaries, related
personnel expenses, subcontractors expenses, interest expenses and the leases of our offices and related administrative expenses, were incurred outside
the United States. Therefore, fluctuations in the value of the currencies in which we do business relative to the U.S. dollar, primarily NIS, euros and
Japanese yen, may adversely affect our business, results of operations and financial condition, by decreasing the U.S. dollar value of assets held in other
currencies and increasing the U.S. dollar amount of liabilities payable in other currencies, or by decreasing the U.S. dollar value of our revenues in other
currencies and increasing the U.S. dollar amount of our expenses in other currencies. Even if we use derivatives or engage in any currency-hedging
transactions intended to reduce the effect of fluctuations of foreign currency exchange rates on our financial position and results of operations, there can
be no assurance that any such hedging transactions will materially reduce the effect of fluctuation in foreign currency exchange rates on such results. In
addition, if for any reason exchange or price controls or other restrictions on the conversion of foreign currencies were imposed, our financial position
and results of operations could be adversely affected.
Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
Cyber-attacks or other breaches of network or IT security, natural disasters, terrorist acts or acts of war may cause equipment failures or disrupt our
systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber-attack, malware,
computer viruses and other means of unauthorized access, which could also impact the operation of our products and services. The potential liabilities
associated with these events could exceed the insurance coverage we maintain. Our inability to operate our facilities as a result of such events, even for a
limited period of time, may result in significant expenses or loss of market share to other competitors in the defense electronics market. In addition, a
failure to protect the privacy of customer and employee confidential data against breaches of network or IT security could result in damage to our
reputation. We have experienced and defended against certain threats to our systems and security (such as fishing attempts), none of which have had a
material adverse effect on our business or operations to date. However, we could incur significant costs in order to investigate and respond to future
attacks, to respond to evolving regulatory oversight requirements, to upgrade our cybersecurity systems and controls, and to remediate security
compromise or damage. In response to past threats and attacks, we have implemented further controls and planned for other preventative actions to
further strengthen our systems against future attacks. However, we cannot assure you that such measures will provide absolute security, that we will be
able to react in a timely manner, or that our remediation efforts following past or future attacks will be successful. Consequently, our financial
performance and results of operations would be materially adversely affected.
Maintaining the security of our products, computers and networks is a critical issue for our customers and us. Security researchers, criminal hackers and
other third parties regularly develop new techniques to penetrate computer and network security measures. In addition, hackers also develop and deploy
viruses, worms and other malicious software programs, some of which may be specifically designed to attack our products, systems, computers or
networks. Additionally, outside parties may attempt to fraudulently induce our employees or users of our products to disclose sensitive information in
order to gain access to our data or our customers’ data. These potential breaches of our security measures and the accidental loss, inadvertent disclosure
or unauthorized dissemination of proprietary information or sensitive, personal or confidential data about us, our employees or our customers, including
the potential loss or disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our
employees, our customers or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability or fines for
us, damage our brand and reputation or otherwise harm our business. These risks are persistent and likely will increase as we continue to grow our cloud
offerings and services and store and process increasingly large amounts of our customers’ confidential information and data. We also may acquire
companies, products, services and technologies and inherit such risks when we integrate these acquisitions within our company. Further, as regulatory
focus on privacy issues continues to increase and become more complex, these potential risks to our business will intensify. Changes in laws or
regulations associated with the enhanced protection of certain types of sensitive data could greatly increase our cost of providing our products and
services.
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Regulation of the internet and telecommunications, privacy and data security may adversely affect sales of our products and result in increased
compliance costs.
As internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies and industry groups becomes more likely. For
example, we believe increased regulation is likely with respect to the solicitation, collection, processing or use of personal, financial and consumer
information as regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning data protection,
privacy and data security. In addition, the interpretation and application of consumer and data protection laws and industry standards in the United States,
Europe and elsewhere are often uncertain and in flux.
Many jurisdictions continue to consider the need for greater regulation or reform to the existing regulatory framework. In the U.S., all 50 states have now
passed laws to regulate the actions that a business must take in the event of a data breach, such as prompt disclosure and notification to affected users and
regulatory authorities. In addition to the data breach notification laws, some states have also enacted statutes and rules requiring businesses to reasonably
protect certain types of personal information they hold or to otherwise comply with certain specified data security requirements for personal information.
The U.S. federal and state governments will likely continue to consider the need for greater regulation aimed at restricting certain uses of personal data
for targeted advertising. Additionally, California recently enacted the California Consumer Privacy Act, or CCPA, it creates new individual privacy rights
for consumers (as that word is broadly defined in the law) and places increased privacy and security obligations on entities handling personal data of
consumers or households. The CCPA, which went into effect on January 1, 2020, requires covered companies to provide new disclosures to California
consumers, and provides such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for
violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance
costs and potential liability. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in
the U.S., which could increase our potential liability and adversely affect our business.
In particular, our European activities are subject to the European Union General Data Protection Regulation, or GDPR, which create additional
compliance requirements for us. GDPR broadens the scope of personal privacy laws to protect the rights of European Union citizens and requires
organizations to report on data breaches within 72 hours and be bound by more stringent rules for obtaining the consent of individuals on how their data
can be used. GDPR took effect on May 25, 2018 and non-compliance may expose entities such as our company to significant fines or other regulatory
claims. While we have invested in, and intend to continue to invest in, reasonably necessary resources to comply with these new standards, to the extent
that we fail to adequately comply, that failure could have an adverse effect on our business, financial conditions, results of operations and cash flows.
In China, the PRC Cybersecurity Law, which became effective in June 2017, leaves substantial uncertainty as to the circumstances and standard under
which the law would apply and violations would be found.
The application of existing laws to cloud-based solutions is particularly uncertain and cloud-based solutions may be subject to further regulation, the
impact of which cannot be fully understood at this time. Moreover, these laws may be interpreted and applied in a manner that is inconsistent with our
data and privacy practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data and privacy
practices, which could have an adverse effect on our business and results of operations. Complying with these various laws could cause us to incur
substantial costs or require us to change our business practices in a manner adverse to our business. In addition, any new regulation, or interpretation of
existing regulation, imposing greater fees or taxes on internet-based services, or restricting information exchange over the Web, could result in a decline
in the use and adversely affect sales of our products and our results of operations.
Errors or defects in our software solutions could inevitably arise and would harm our profitability and our reputation with customers, and could even
give rise to claims against us.
The quality of our solutions, including new, modified or enhanced versions thereof, is critical to our success. Since our software solutions are complex,
they may contain errors that cannot be detected at any point in their testing phase. While we continually test our solutions for errors or defects and work
with customers to identify and correct them, errors in our technology may be found in the future. Testing for errors or defects is complicated because it is
difficult to simulate the breadth of operating systems, user applications and computing environments that our customers use, and our solutions themselves
are increasingly complex. Errors or defects in our technology have resulted in terminated work orders and could result in delayed or lost revenue,
diversion of development resources and increased services, termination of work orders, damage to our brand and warranty and insurance costs in the
future. In addition, time-consuming implementations may also increase the number of services personnel we must allocate to each customer, thereby
increasing our costs and adversely affecting our business, results of operations and financial condition.
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In addition, since our customers rely on our solutions to operate, monitor and improve the performance of their business processes, they are sensitive to
potential disruptions that may be caused by the use of, or any defects in, our software. As a result, we may be subject to claims for damages related to
software errors in the future. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. Regardless
of whether we prevail, diversion of key employees’ time and attention from our business, the incurrence of substantial expenses and potential damage to
our reputation might result. While the terms of our sales contracts typically limit our exposure to potential liability claims and we carry errors and
omissions insurance against such claims, there can be no assurance that such insurance will continue to be available on acceptable terms, if at all, or that
such insurance will provide us with adequate protection against any such claims. A significant liability claim against us could have a material adverse
effect on our business, results of operations and financial position. Our standard license agreement with our customers contains provisions designed to
limit our exposure to potential product liability claims that may not be effective or enforceable under the laws of some jurisdictions. In addition, the
professional liability insurance that we maintain may not be sufficient against potential claims. Accordingly, we could fail to realize revenues and suffer
damage to our reputation as a result of, or in defense of, a substantial claim.
Third parties have in the past, and may in the future, claim that we infringe upon their intellectual property rights and such claims could harm our
business.
The software industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and other
intellectual property rights. In particular, leading companies in the software industry own large numbers of patents, copyrights, trademarks and trade
secrets, which they may use to assert claims against us. From time to time, third parties, including certain of these leading companies, may assert patent,
copyright, trademark or other intellectual property claims against us, our customers and partners, and those from whom we license technology and
intellectual property.
Although we believe that our products and services do not infringe upon the intellectual property rights of third parties, we cannot assure you that third
parties will not assert infringement or misappropriation claims against us with respect to current or future products or services, or that any such assertions
will not require us to enter into royalty arrangements or result in costly litigation, or result in us being unable to use certain intellectual property. We
cannot assure you that we are not infringing or otherwise violating any third-party intellectual property rights. Infringement assertions from third parties
may involve patent holding companies or other patent owners who have no relevant product revenues, and therefore our own issued and pending patents
may provide little or no deterrence to these patent owners in bringing intellectual property rights claims against us.
Any intellectual property infringement or misappropriation claim or assertion against us, our customers or partners, and those from whom we license
technology and intellectual property could have a material adverse effect on our business, financial condition, reputation and competitive position
regardless of the validity or outcome. If we are forced to defend against any infringement or misappropriation claims, whether they are with or without
merit, are settled out of court, or are determined in our favor, we may be required to expend significant time and financial resources on the defense of
such claims. Furthermore, an adverse outcome of a dispute may require us to pay damages, potentially including treble damages and attorneys’ fees, if we
are found to have willfully infringed on a party’s intellectual property; cease making, licensing or using our products or services that are alleged to
infringe or misappropriate the intellectual property of others; expend additional development resources to redesign our products or services; enter into
potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or works; and to indemnify our partners,
customers, and other third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and
may require significant royalty payments and other expenditures. Any of these events could seriously harm our business, results of operations and
financial condition. In addition, any lawsuits regarding intellectual property rights, regardless of their success, could be expensive to resolve and divert
the time and attention of our management and technical personnel.
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Although we apply measures to protect our intellectual property rights and our source code, there can be no assurance that the measures that we
employ to do so will be successful.
In accordance with industry practice, since we have no registered patents on our software solution technologies, we rely on a combination of contractual
provisions and intellectual property law to protect our proprietary technology. We believe that due to the dynamic nature of the computer and software
industries, copyright protection is less significant than factors such as the knowledge and experience of our management and personnel, the frequency of
product enhancements and the timeliness and quality of our support services. We seek to protect the source code of our products as trade secret
information and as unpublished copyright works. We also rely on security and copy protection features in our proprietary software. We distribute our
products under software license agreements that grant customers a personal, non-transferable license to use our products and contain terms and conditions
prohibiting the unauthorized reproduction or transfer of our products. In addition, while we attempt to protect trade secrets and other proprietary
information through non-disclosure agreements with employees, consultants and distributors, not all of our employees have signed invention assignment
agreements. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful. Our failure to protect
our rights, or the improper use of our products by others without licensing them from us could have a material adverse effect on our results of operations
and financial condition.
Our customers and we rely on technology and intellectual property of third-parties, the loss of which could limit the functionality of our products and
disrupt our business.
We use technology and intellectual property licensed from unaffiliated third-parties in certain of our products, and we may license additional third-party
technology and intellectual property in the future. Any errors or defects in this third-party technology and intellectual property could result in errors that
could harm our brand and business. In addition, licensed technology and intellectual property may not continue to be available on commercially
reasonable terms, or at all. The loss of the right to license and distribute this third-party technology could limit the functionality of our products and might
require us to redesign our products.
Further, although we believe that there are currently adequate replacements for the third-party technology and intellectual property we presently use and
distribute, the loss of our right to use any of this technology and intellectual property could result in delays in producing or delivering affected products
until equivalent technology or intellectual property is identified, licensed or otherwise procured, and integrated. Our business would be disrupted if any
technology and intellectual property we license from others or functional equivalents of this software were either no longer available to us or no longer
offered to us on commercially reasonable terms. In either case, we would be required either to attempt to redesign our products to function with
technology and intellectual property available from other parties or to develop these components ourselves, which would result in increased costs and
could result in delays in product sales and the release of new product offerings. Alternatively, we might be forced to limit the features available in
affected products. Any of these results could harm our business and impact our results of operations.
We could be required to provide the source code of our products to our customers.
Some of our customers have the right to require the source code of our products to be deposited into a source code escrow. Under certain circumstances,
our source code could be released to our customers. The conditions triggering the release of our source code vary by customer. A release of our source
code would give our customers access to our trade secrets and other proprietary and confidential information that could harm our business, results of
operations and financial condition. A few of our customers have the right to use the source code of some of our products based on the license agreements
signed with such clients (mostly with respect to older versions of our solutions), although such use is limited for specific matters and cases, these clients
are exposed to some of our trade secrets and other proprietary and confidential information which could harm us.
19
Some of our services and technologies may use “open source” software, which may restrict how we use or distribute our services or require that we
release the source code of certain products subject to those licenses.
Some of our services and technologies may incorporate software licensed under so-called “open source” licenses, including, but not limited to, the GNU
General Public License and the GNU Lesser General Public License. In addition to risks related to license requirements, usage of open source software
can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on origin of
the software. Additionally, open source licenses typically require that source code subject to the license be made available to the public and that any
modifications or derivative works to open source software continue to be licensed under open source licenses. These open source licenses typically
mandate that proprietary software, when combined in specific ways with open source software, become subject to the open source license. If we combine
our proprietary software with open source software, we could be required to release the source code of our proprietary software.
We take steps to ensure that our proprietary software is not combined with, and does not incorporate, open source software in ways that would require our
proprietary software to be subject to an open source license. However, few courts have interpreted open source licenses, and the manner in which these
licenses may be interpreted and enforced is therefore subject to some uncertainty. Additionally, we rely on multiple software programmers to design our
proprietary technologies, and although we take steps to prevent our programmers from including open source software in the technologies and software
code that they design, write and modify, we do not exercise complete control over the development efforts of our programmers and we cannot be certain
that our programmers have not incorporated open source software into our proprietary products and technologies or that they will not do so in the future.
In the event that portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly release
the affected portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each
of which could reduce or eliminate the value of our services and technologies and materially and adversely affect our business, results of operations and
prospects.
Under applicable employment laws, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors
from benefiting from the expertise of some of our former employees.
We generally enter into non-competition agreements with our employees. These agreements prohibit our employees from competing directly with us or
working for our competitors or clients for a limited period after they cease working for us. We may be unable to enforce these agreements under the laws
of the jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefiting from the expertise that our
former employees or consultants developed while working for us. For example, Israeli courts have required employers seeking to enforce non-compete
undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material
interests of the employer that have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or the
protection of its intellectual property. If we cannot demonstrate that such interests will be harmed, we may be unable to prevent our competitors from
benefiting from the expertise of our former employees or consultants and our ability to remain competitive may be diminished.
Our business may be materially affected by changes to fiscal and tax policies. Potentially negative or unexpected tax consequences of these policies,
or the uncertainty surrounding their potential effects, could adversely affect our results of operations and share price.
As a multinational corporation, we are subject to income taxes, withholding taxes and indirect taxes in numerous jurisdictions worldwide. Significant
judgment and management attention and resources are required in evaluating our tax positions and our worldwide provision for taxes. In the ordinary
course of business, there are many activities and transactions for which the ultimate tax determination is uncertain. In addition, our tax obligations and
effective tax rates could be adversely affected by changes in the relevant tax, accounting, and other laws, regulations, principles and interpretations. This
may include recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory rates and higher than anticipated
earnings in jurisdictions where we have higher statutory rates, changes in foreign currency exchange rates, or changes in the valuation of our deferred tax
assets and liabilities.
We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes against us. If we experience unfavorable results from one
or more such tax audits, there could be an adverse effect on our tax rate and therefore on our net income. Although we believe our tax estimates are
reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could
have a material adverse effect on our operating results or cash flows in the period or periods for which a determination is made. Additionally, we are
subject to transfer pricing rules and regulations, including those relating to the flow of funds between us and our affiliates, which are designed to ensure
that appropriate levels of income are reported in each jurisdiction in which we operate.
Certain of our credit facility agreements with banks and other financial institutions are subject to a number of restrictive covenants that, if breached,
could result in acceleration of our obligation to repay our debt.
In the context of our engagements with banks and other financial institutions for receiving various credit facilities, we have undertaken to maintain a
number of conditions and limitations on the manner in which we can operate our business, including a negative pledge and limitations on our ability to
distribute dividends. These credit facilities agreements also contain various financial covenants that require us to maintain certain financial ratios related
to shareholders’ equity, total rate of financial liabilities and minimum outstanding balance of total cash and short-term investments. These limitations and
covenants may force us to pursue less than optimal business strategies or forego business arrangements that could have been financially advantageous to
us and, by extension, to our shareholders. A breach of the restrictive covenants could result in the acceleration of our obligations to repay our debt. As of
December 31, 2020, we were in compliance with all of our financial covenants to banks and other financial institutions. See Note 12 to our consolidated
financial statements for additional information on liabilities to banks and other financial institutions.
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Increasing scrutiny and changing expectations from investors, lenders, customers and other market participants with respect to our Environmental,
Social and Governance, or ESG, policies may impose additional costs on us or expose us to additional risks.
Companies across all industries are facing increasing scrutiny relating to their ESG policies. Investors, lenders and other market participants are
increasingly focused on ESG practices and in recent years have placed increasing importance on the implications and social cost of their investments. The
increased focus and activism related to ESG may hinder our access to capital, as investors and lenders may reconsider their capital investment allocation
as a result of their assessment of our ESG practices. If we do not adapt to or comply with investor, lender or other industry shareholder expectations and
standards, which are evolving, or if we are perceived to have not responded appropriately to the growing concern for ESG issues, regardless of whether
there is a legal requirement to do so, we may suffer from reputational damage and the business, financial condition and the price of our company’s shares
could be materially and adversely affected.
If we are unable to maintain effective internal control over financial reporting in accordance with Sections 302 and 404(a) of the Sarbanes-Oxley Act
of 2002, the reliability of our financial statements may be questioned and our share price may suffer.
The Sarbanes-Oxley Act of 2002 imposes certain duties on us and on our executives and directors. To comply with this statute, we are required to
document and test our internal control over financial reporting, and our independent registered public accounting firm must issue an attestation report on
our internal control procedures, and our management is required to assess and issue a report concerning our internal control over financial reporting. Our
efforts to comply with these requirements have resulted in increased general and administrative expenses and a diversion of management time and
attention, and we expect these efforts to require the continued commitment of significant resources. We may identify material weaknesses or significant
deficiencies in our assessments of our internal controls over financial reporting. Failure to maintain effective internal control over financial reporting
could result in investigation or sanctions by regulatory authorities, and could adversely affect our operating results, investor confidence in our reported
financial information and the market price of our Ordinary Shares.
Risks Related to Our Ordinary Shares
Our Ordinary Shares are traded on more than one market and this may result in price variations.
Our Ordinary Shares are traded primarily on the NASDAQ Global Select Market and on the TASE. Trading of our Ordinary Shares on these markets is
made in different currencies (U.S. dollars on the NASDAQ Global Select Market and NIS on the TASE) and at different times (resulting from different
time zones, different trading days and different public holidays in the United States and Israel). Consequently, the trading prices of our Ordinary Shares
on these two markets may differ. Any decrease in the trading price of our Ordinary Shares on one of these markets could cause a decrease in the trading
price of our Ordinary Shares on the other market.
There is relatively limited trading volume for our shares, which reduces liquidity for our shareholders, and may cause the share price to be volatile,
all of which may lead to losses by investors.
There has historically been limited trading volume in our Ordinary Shares, both on the NASDAQ Global Select Market and the TASE, which results in
reduced liquidity for our shareholders. As a further result of the limited volume, our Ordinary Shares have experienced significant market price volatility
in the past and may experience significant market price and volume fluctuations in the future, in response to factors such as announcements of
developments related to our business, announcements by competitors, quarterly fluctuations in our financial results and general conditions in the industry
in which we compete.
We are a foreign private issuer under the rules and regulations of the SEC and are therefore exempt from a number of rules under the Exchange Act
and are permitted to file less information with the SEC than a domestic U.S. reporting company, which reduces the level and amount of disclosure
that you receive.
As a foreign private issuer under the Exchange Act, we are exempt from certain rules under the Exchange Act, including the proxy rules, which impose
certain disclosure and procedural requirements for proxy solicitations. Moreover, we are not required to file periodic reports and financial statements with
the SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act; and are not required to comply with
Regulation FD, which imposes certain restrictions on the selective disclosure of material information. In addition, our officers, directors and principal
shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the
Exchange Act with respect to their purchases and sales of our Ordinary Shares. Accordingly, you receive less information about our company than you
would receive about a domestic U.S. company, and are afforded less protection under the U.S. federal securities laws than you would be afforded in
holding securities of a domestic U.S. company.
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As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we are permitted to follow certain home country corporate
governance practices instead of certain requirements of the NASDAQ Stock Market Rules. Among other things, as a foreign private issuer we may also
follow home country practice with regard to, the composition of the board of directors, director nomination procedure, compensation of officers and
quorum at shareholders’ meetings. In addition, we may follow our home country law, instead of the NASDAQ Stock Market Rules, which require that we
obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans, an
issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more
interest in the company and certain acquisitions of the stock or assets of another company. Accordingly, our shareholders may not be afforded the same
protection as provided under NASDAQ’s corporate governance rules. In addition, as foreign private issuer, we are not required to file quarterly reviewed
financial statements. A foreign private issuer that elects to follow a home country practice instead of such requirements must submit to NASDAQ in
advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the
home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC each such requirement that it does not
follow and describe the home country practice followed by the issuer instead of any such requirement.
Our controlling shareholder, Formula Systems (1985) Ltd., beneficially owns approximately 45.53% of our outstanding Ordinary Shares and
therefore has a controlling influence over matters requiring shareholder approval, which could delay or prevent a change of control that may benefit
our public shareholders.
Formula Systems (1985) Ltd., or Formula Systems (symbol: FORTY), an Israeli company whose shares trade on the NASDAQ Global Select Market and
the TASE, directly owned 22,324,434 or 45.54%, of our outstanding Ordinary Shares as of December 31, 2020. Asseco Poland S.A., or Asseco, a Polish
company listed on Warsaw Stock Exchange, owns 25.60% of the outstanding shares of Formula Systems as of December 31, 2020. Guy Bernstein, our
Chief Executive Officer who is also the Chief Executive Officer of Formula Systems, owns 11.89% of the outstanding shares of Formula Systems, as of
December 31, 2020. In addition, on October 4, 2017 Asseco entered into a shareholders agreement, which was amended on September 7, 2020, with Mr.
Bernstein, under which agreement Asseco has been granted an irrecoverable proxy to vote an additional 1,817,973 Ordinary Shares of Formula, thereby
effectively giving Asseco beneficial ownership (voting power) over an aggregate of 37.49% of Formula’s outstanding ordinary share. Therefore, based on
the foregoing beneficial ownership by each of Formula and Asseco, each of Formula and Asseco may be deemed to directly or indirectly (as appropriate)
control us.
Although transactions between us and our controlling shareholders are subject to special approvals under Israeli law, Formula and Asseco may exercise
their controlling influence over our operations and business strategy and use their sufficient voting power to control the outcome of various matters
requiring shareholder approval. These matters may include:
● The composition of our board of directors, which has the authority to direct our business and to appoint and remove our officers;
● Approving or rejecting a merger, consolidation or other business combination;
● Raising future capital; and
● Amending our Articles, which govern the rights attached to our Ordinary Shares.
This concentration of ownership of our Ordinary Shares could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or
other purchases of our Ordinary Shares that might otherwise give one the opportunity to realize a premium over the then-prevailing market price of our
Ordinary Shares. This concentration of ownership may also adversely affect our share price.
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We may be classified as a passive foreign investment company, or PFIC, which would subject our U.S. investors to adverse tax rules .
U.S. holders of our Ordinary Shares may face income tax risks. Based on the composition of our income, assets (including the value of our goodwill,
going-concern value or any other unbooked intangibles, which may be determined based on the price of the ordinary shares), and operations, we believe
we will not be classified as a “passive foreign investment company”, or PFIC, for the 2020 taxable year. However, because PFIC status is based on our
income, assets and activities for the entire taxable year, it is not possible to determine whether we will be characterized as a PFIC for our current taxable
year or future taxable years until after the close of the applicable taxable year. Moreover, we must determine our PFIC status annually based on tests that
are factual in nature, and our status in the current year and future years will depend on our income, assets and activities in each of those years and, as a
result, cannot be predicted with certainty as of the date hereof. Furthermore, fluctuations in the market price of our ordinary shares may cause our
classification as a PFIC for the current or future taxable years to change because the aggregate value of our assets for purposes of the asset test, including
the value of our goodwill and unbooked intangibles, generally will be determined by reference to the market price of our shares from time to time (which
may be volatile). The IRS or a court may disagree with our determinations, including the manner in which we determine the value of our assets and the
percentage of our assets that are passive assets under the PFIC rules. Therefore, there can be no assurance that we will not be a PFIC for the current
taxable year or for any future taxable year. Our treatment as a PFIC could result in a reduction in the after-tax return to U.S. Holders (as defined below
under Item 10E. “Additional Information – Taxation”) of our Ordinary Shares and would likely cause a reduction in the value of such shares. A foreign
corporation will be treated as a PFIC for U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of
certain types of “passive income,” or (2) at least 50% of the average value of the corporation’s gross assets produce, or are held for the production of,
such “passive income.” For purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment property
and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business.
If we are treated as a PFIC, U.S. Holders of Ordinary Shares would be subject to a special adverse U.S. federal income tax regime with respect to the
income derived by us, the distributions they receive from us, and the gain, if any, they derive from the sale or other disposition of their Ordinary Shares.
U.S. Holders should carefully read Item 10E. “Additional Information – Taxation” for a more complete discussion of the U.S. federal income tax risks
related to owning and disposing of our Ordinary Shares.
We have a history of quarterly fluctuations in our results of operations and expect these fluctuations to continue.
We have experienced, and in the future may continue to experience, significant fluctuations in our quarterly results of operations. Factors that may
contribute to fluctuations in our quarterly results of operations include:
● The size and timing of orders;
● The high level of competition that we encounter;
● The timing of our products introductions or enhancements or those of our competitors or of providers of complementary products;
● Market acceptance of our new products, applications and services;
● The purchasing patterns and budget cycles of our customers and end-users;
● The mix of product sales;
● Fluctuations in currency exchange rates;
● General economic conditions; and
● The integration of newly acquired businesses.
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Our customers ordinarily require the delivery of our license software solutions promptly after we accept their orders. With the exception of contracts for
services and packaged software solution projects, which normally would extend between nine to eighteen months, we usually do not have a backlog of
orders for our products. Consequently, revenues from our products in any quarter depend on orders received and products provided by us and accepted by
the customers in that quarter. A deferral in the placement and acceptance of any large order from one quarter to another or from one year to another could
adversely affect our results of operations for the respective quarter or year. Our customers sometimes require an acceptance test for services and packaged
software solutions projects we provide and as a result, we may have a significant backlog of orders arising from those services and projects. Our revenues
from services depend on orders received and services provided by us and accepted by our customers in that quarter. If sales in any quarter or year do not
increase correspondingly or if we do not reduce our expenses in response to level or declining revenues in a timely fashion, our financial results for that
period may be adversely affected. For these reasons, quarter-to-quarter comparisons of our results of operations are not necessarily meaningful and you
should not rely on the results of our operations in any particular quarter as an indication of future performance.
Risks Related to Our Location in Israel
Political, economic and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our results of
operations and adversely affect our share price.
We are organized under the laws of the State of Israel, and our principal executive offices and manufacturing and research and development facilities are
located in Israel. As a result, political, economic and military conditions affecting Israel directly influence us. Any major hostilities involving Israel, a
full or partial mobilization of the reserve forces of the Israeli army, the interruption or curtailment of trade between Israel and its present trading partners,
or a significant downturn in the economic or financial condition of Israel could adversely affect our business, financial condition and results of
operations.
Conflicts in North Africa and the Middle East, including in Egypt and Syria that border Israel, have resulted in continued political uncertainty and
violence in the region. Efforts to improve Israel’s relationship with the Palestinian Authority have failed to result in a permanent solution, and there have
been numerous periods of hostility in recent years. In addition, relations between Israel and Iran continue to be seriously strained, especially with regard
to Iran’s nuclear program. Such instability may affect the economy, could negatively affect business conditions and, therefore, could adversely affect our
operations. To date, these matters have not had any material effect on our business and results of operations; however, the regional security situation and
worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect our business, financial
condition and results of operations in the future.
Furthermore, there are a number of countries, primarily in the Middle East, as well as Malaysia and Indonesia, that restrict business with Israel or Israeli
companies, and we are precluded from marketing our products to these countries. Restrictive laws or policies directed towards Israel or Israeli businesses
may have an adverse impact on our operations, our financial results or the expansion of our business.
Our results of operations may be adversely affected by the obligation of our personnel to perform military service.
Many of our executive officers and employees in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and may be called for
active duty under emergency circumstances at any time. If a military conflict or war arises, these individuals could be required to serve in the military for
extended periods of time. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key
employees or a significant number of other employees due to military service. Any disruption in our operations could adversely affect our business.
We currently have the ability to benefit from certain government tax benefits, which may be cancelled or reduced in the future.
We are currently eligible to receive certain tax benefits under programs of the Government of Israel. In order to maintain our eligibility for these tax
benefits, we must continue to meet specific requirements. If we fail to comply with these requirements in the future, such tax benefits may be cancelled.
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Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.
We are organized in Israel and some of our directors and executive officers reside outside the United States. Service of process upon them may be
difficult to effect within the United States. Furthermore, most of our assets and the assets of some of our executive officers are located outside the United
States. Therefore, a judgment obtained against us or any of them in the United States, including one based on the civil liability provisions of the U.S.
federal securities laws may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to assert
U.S. securities law claims in original actions instituted in Israel.
Provisions of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and therefore depress the
price of our shares.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for
transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. These provisions of Israeli
corporate and tax law may have the effect of delaying, preventing or complicating a merger with, or other acquisition of, us. This could cause our
Ordinary Shares to trade at prices below the price for which third parties might be willing to pay to gain control of us. Third parties who are otherwise
willing to pay a premium over prevailing market prices to gain control of us may be unable or unwilling to do so because of these provisions of Israeli
law.
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of
shareholders under U.S. law.
We are organized under Israeli law. The rights and responsibilities of holders of our Ordinary Shares are governed by our memorandum of association,
articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in
typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith in exercising his or her rights and fulfilling his
or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in
voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder votes at the general
meeting with respect to, among other things, amendments to a company’s articles of association, compensation policy, increases in a company’s
authorized share capital, mergers and actions and transactions involving interests of officers, directors or other interested parties which require the
shareholders’ general meeting’s approval. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that he or she
possesses the power to determine the outcome of a vote at a meeting of our shareholders, or who has, by virtue of the company’s articles of association,
the power to appoint or prevent the appointment of an office holder in the company, or any other power with respect to the company, has a duty of
fairness toward the company. The Israeli Companies Law does not establish criteria for determining whether or not a shareholder has acted in good faith.
ITEM 4.
INFORMATION ON THE COMPANY
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
Corporate details
Our legal and commercial name is Magic Software Enterprises Ltd. We were organized and registered in Israel on February 10, 1983 and began
operations in 1986. We are a public limited liability company and operate under the provisions of the state of Israel. Our Ordinary Shares have been listed
on the NASDAQ Global Stock Market (symbol: MGIC) since our initial public offering in the United States on August 16, 1991. On January 3, 2011, our
shares were transferred to the NASDAQ Global Select Market. Since November 16, 2000, our Ordinary Shares have also traded on the Tel Aviv Stock
Exchange, or the TASE, and since December 15, 2011, our shares have been included in the TASE TA-125 Index.
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Capital Transactions since January 1, 2018
On July 12, 2018, we issued 4,268,293 ordinary shares at a price of $8.20 per share for a total of $34.6 million net of issuance expenses. 3,150,559 of the
shares were issued to Israeli institutional investors and 1,117,734 shares were issued to our controlling shareholder, Formula Systems (1985) Ltd.
On February 28, 2019, we acquired OnTarget Group Inc. (“OnTarget”), a U.S. based full-services provider of software development services, for a total
consideration of $12,456,000 of which $6 million was paid upon closing and the remaining amount constitutes a contingent payment depending on the
future operating results achieved by OnTarget between 2019 and 2022.
On April 1, 2019 we acquired PowWow Inc (“PowWow”), creator of SmartUX™, a leading Low-Code development platform for mobilizing and
modernizing enterprise business applications, for a total consideration of $8.4 million, out of which $2 million is contingent on the future revenues
achieved by PowWow between 2020 and 2023.
On June 30, 2019, we acquired NetEffects Inc (“NetEffects”), a U.S. based full-services company, specializes in IT staffing and recruiting, for a total
consideration of $12.5 million, of which $9.4 million was paid upon closing and the remaining $3.1 million will be paid in three installments following
the first, second and third year anniversary.
On January 1, 2020, we acquired an additional stake of 20.05% in our subsidiary, Roshtov Software Industries Ltd (“Roshtov”), an Israeli-based software
company that is a market leader in Israel in patient record information systems, for a total cash consideration of approximately $15 million, which was
paid upon closing. We currently hold 80.05% of Roshtov. We and Roshtov hold mutual call and put options for the remaining 19.95% interest in
Roshtov.
On April 15, 2020, we acquired an additional stake of 10.17% in our subsidiary Comblack IT Ltd. (“Comblack”), an Israeli-based company that
specializes in software professional and outsource management services for mainframes and complex large-scale environments, for a total cash
consideration of approximately $ 3.6 million, of which $3 mllion was paid upon closing and the remaining is being paid over a period of up to 18 months.
In addition to the cash consideration, we have in place a contingent consideration mechanism according to which an additional amount may be paid in the
event Comblack meets certain income thresholds. If Comblack will not meet these milestones it will be required to pay back part of the cash
consideration. We currently hold an 80.2% stake in Comblack. Comblack holds a put option in respect to its remaining 19.8% holding.
On May 7, 2020, we acquired Aptonet Inc (“Aptonet”), a U.S.-based services company, specializes in IT staffing and recruiting, for a total consideration
of $ 4,663,000 of which $ 3,663,000 was paid upon closing and the remaining $ 1 millionwill be paid in two installments, six and twelve months
following the closing date.
On September 2, 2020, we acquired Stockell Information Systems, Inc (“Stockell”), a U.S.-based services company, specializes in IT staffing and
recruiting, for a total consideration of $ 7,714,000, of which $ 6,265,000 was paid upon closing and the remaining $ 1,449,000 will be paid twelve
months following the closing date.
Our fixed assets capital expenditures for the years ended December 31, 2018, 2019 and 2020 were approximately $ 0.9 million, $ 1.4 million, and $ 2.8
million, respectively. These expenditures were principally for network equipment and computer hardware, as well as for vehicles, furniture, office
equipment and leasehold improvements.
B.
BUSINESS OVERVIEW
We are a global provider of: (i) proprietary application development and business process integration platforms, (ii) selected packaged vertical software
solutions, as well as (iii) a vendor of software services and IT outsourcing software services. We report our results on the basis of two reportable business
segments: software solutions (which include proprietary and non-proprietary software technology, maintenance and support and complementary services)
and IT professional services.
Our software solutions are used by customers to develop, deploy and integrate on-premise, mobile and cloud-based business applications quickly and cost
effectively. In addition, our technology enables enterprises to accelerate the process of delivering business solutions that meet current and future needs
and allow customers to dramatically improve their business performance and return on investment. We also provide selected verticals with a complete
software solution.
We and our subsidiaries employ approximately 3,039 persons and operate through a network of over 3,000 independent software vendors, who we refer
to as Magic Software Providers, or MSP’s, and hundreds of system integrators, distributors, resellers, and consulting and OEM partners. Thousands of
enterprises in approximately 50 countries use our products and services.
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Our software technology platforms
Throughout our history, we have traditionally maintained two major lines of products, one is our application development platform, which today is
known as Magic xpa Application Platform, an evolution of our original metadata-based development platform; and the second is our application
integration platform, Magic xpi Integration Platform, originally introduced in 2003 under the name iBOLT. In December 2011, we acquired the
AppBuilder development platform of BluePhoenix Solutions Ltd., a leading provider of value-driven legacy IT modernization solutions. AppBuilder is a
comprehensive application development infrastructure used by many Fortune 1000 enterprises around the world. This enterprise application development
environment is a powerful, model-driven tool that enables development teams to build, deploy, and maintain large-scale, custom-built business
applications. On April 2019, we acquired the SmartUX development platform of PowWow Inc., a leading Low-Code enterprise mobile development
application platform for citizen to professional developers to rapidly design, build, analyze, and run cross-platform mobile business applications.
Our software technology platforms consist of:
o Magic xpa Application Platform - a proprietary application platform for developing and deploying Client Server/Mobile/Web business
applications.
o AppBuilder Application Platform - a proprietary application platform for building, deploying, and maintaining high-end, mainframe-
grade business applications.
o Magic xpi Integration Platform - a proprietary platform for application integration
o Magic xpc Integration Platform - hybrid integration platform as a service (iPaaS).
o Magic SmartUX - a proprietary low-code enterprise mobile development application platform for citizen to professional developers to
rapidly design, build, analyze, and run cross-platform mobile business applications.
o
FactoryEye - a proprietary high performance, low-code, flexible, hybrid platform for manufacturers based on existing infrastructure
enabling real-time virtualizations of all production data and advanced analytics (based on machine learning) for improved productivity
and competitive advantage.
Our vertical software packages
o Clicks™ – offered by our Roshtov subsidiary, is a proprietary comprehensive core software solution for medical record information
management systems, used in the design and management of patient-file for managed care and large-scale healthcare providers. The
platform is connected to each provider clinical, administrative and financial data base system, residing at the provider’s central
computer, and allows immediate analysis of complex data with potentially real-time feedback to meet the specific needs of physicians,
nurses, laboratory technicians, pharmacists, front- and back-office professionals and consumers.
o Leap™ – offered by our FTS subsidiary, is a proprietary comprehensive core software solution for BSS, including convergent
charging, billing, customer management, policy control, mobile money and payment software solutions for the telecommunications,
content, Machine to Machine/Internet of Things or M2M/IoT, payment and other industries.
o Hermes Solution – offered by our Hermes Logistics Technologies Ltd. subsidiary, the Hermes Air Cargo Management System is a
proprietary, state-of-the-art, packaged software solution for managing air cargo ground handling. Our Hermes Solution covers all
aspects of cargo handling, from physical handling and cargo documentation through customs, seamless EDI communications,
dangerous goods and special handling, tracking and tracing, security and billing. Customers benefit through faster processing and more
accurate billing, reporting and ultimately enhanced revenue. The Hermes Solution is delivered on a licensed or fully hosted basis.
Hermes recently supplemented its offering with the Hermes Business Intelligence (HBI) solution, adding unprecedented data analysis
capabilities and management-decision support tools.
o HR Pulse – Offered by our Pilat NAI, Inc. and Pilat Europe Ltd. subsidiaries, Pulse (now in its 10th release) is a proprietary tool for the
creation of customizable HCM solutions quickly and affordably. It has been used by Pilat to create products, such as Pilat Frist and
Pilat Professional, that provide “out of the box” SaaS solutions for organizations that implement Continuous Performance and/or Talent
Management.
o MBS Solution – offered by our Complete Business Solutions Ltd. subsidiary, is a proprietary comprehensive core system for managing
TV broadcast channels.
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Our professional software and IT services
Our software professional services offerings include a vast portfolio of professional services in the areas of infrastructure design and delivery, application
development, technology consulting planning and implementation services, support services, DevOps (Development & Operations), Mobile, Big Data
and Analytical BI, M/F, cloud computing for deployment of highly available and massively-scalable applications and APIs and supplemental IT
outsourcing services to a wide variety of companies, including Fortune 1000 companies. The technical personnel we provide generally supplement in-
house capabilities of our customers. We have extensive and proven experience with virtually all types of telecom infrastructure technologies in wireless
and wire-line as well as in the areas of infrastructure design and delivery, application development, project management, technology planning and
implementation services.
We have substantial experience in end-to-end development of high-end software solutions, beginning with collection and analysis of system
requirements, continuing with architecture specifications and setup, to software implementation, component integration and testing. From concept to
implementation, from application of the ideas of startups requiring the early development of an application or a device, to somewhat larger, more
established enterprises, vendors or system houses who need our team of experts to take full responsibility for the development of their systems and
products. With our ability to draw on our pool of resources, comprised of hundreds of highly trained, skilled, educated and flexible engineers, we adhere
to timelines and budget and work in full transparency with our customers every step of the way to create a tailor-made and cost-effective solution to
answer all of our customers’ unique needs.
Our IT services subsidiaries consist of:
● Coretech Consulting Group LLC
● Fusion Solutions LLC
● Xsell Resources Inc.
● AllStates Consulting Services LLC
● Futurewave Systems, Inc.
● NetEffects, Inc.
● CommIT Group
● Comblack Ltd
● Infinigy Solutions
● Shavit Software Ltd.
● OnTarget Group Inc
● Aptonet Inc
● Stockell information systems Inc
Partnerships and Alliances:
We continue to build on our existing strategic partnerships that include partnerships with Oracle, JD Edwards, SAP, Salesforce.com, Microsoft, IBM and
SugarCRM to enhance our mobile, integration and cloud offerings.
In March 2018, following an extension of our partnership with Salesforce, we included new features in our Magic xpi 4.7 to make the integration between
Salesforce and other systems even easier. By collaborating with Salesforce, we are significantly expanding our partners’ network and maximizing our
service offering to customers around the world, enabling them to better serve their customers via all channels by connecting to back-office ERP and
finance applications, and streamlining business processes across numerous applications. We have reached the status of Salesforce Premier ISV partner,
showing our high competence expert level, ensuring that all of our customers enterprise software is faultlessly integrated.
We are an Oracle Platinum Partner holding an Oracle Validated Integration status, a SAP Channel Gold Partner holding SAP Certified Integration status,
an IBM Server Proven, and a SYSPRO business partner, among others. We appear on the Salesforce AppExchange and are a featured partner on
SugarCRM’s Sugar Exchange, marketplaces for apps provided by partners. We continue to update and strengthen our relationships with these major IT
partners by attending partner events and by updating and certifying our Magic xpi connectors for each specific ecosystem.
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In December 2018 we achieved Microsoft Gold Competency and have maintained this elite status since then. Gold Competency is Microsoft’s highest
level of partner certification reserved for the top one percent of Microsoft elite partners worldwide who have demonstrated expertise and proven skills
with a particular Microsoft technology or service. In addition to that, we earned the Co-Sell Ready Status as a member in the Microsoft One Commercial
Partner (OCP) Program, Magic xpi, which maps data, automates business processes and connects apps, databases, APIs with built-in Microsoft
connectors, and Magic xpc, a 100% cloud-native, microservices-based integration platform are available on the Microsoft AppSource app store and are
listed on the Microsoft Azure Marketplace.
In May 2020, our CommIT Group, achieved AmazonAWS SaaS Competency status. AWS SaaS Competency is designated to help customers find top
AWS consulting partners with deep specialization and experience in designing and building software-as-a-service solutions on AWS. Organizations are
interested in software that is easy to use, implement, and operate. They are looking to reduce time-to-value and obtain access to innovative product
features and flexible software procurement on a consumption or contractual basis. AWS SaaS Competency Partners follow Amazon Web Services
(AWS) best practices for designing and building SaaS solutions through their professional services practices. To qualify for the AWS SaaS Competency
designation, organizations have undergone rigorous technical validation by AWS Partner Solutions Architects and demonstrated proven customer
success. In recent years, Comm-IT has successfully led, developed and produced many SaaS solutions on AWS for companies across many business
sectors, including high-tech and startups, industrial and retail, and insurance and finance. Comm-IT’s unique, flexible R&D model, which provides
complete flexibility in determining the mix of experts, allows for full control of budgets and schedules throughout the development project. In this
framework, We accompany our clients in their digital journey and in their entry into the SaaS world, providing design and build services for application
environments or migration services for applications from existing models to cloud SaaS models. These processes require software architecture,
construction, and software development from both Digital and SaaS, all of which take into account performance aspects, information security, scalability,
infrastructure monitoring, customer experience and billing. Achieving AWS SaaS Competency status allows us to expand our business offering and even
accompany the organizational change for customers who are in the process of transitioning to SaaS.
Industry Overview
In recent years, the number of available enterprise applications has grown significantly which has led information system complexity within many
organizations to a level that has obstructed business progress and evolution, reduced business agility and led to significantly higher costs. We believe this
complexity will continue to increase in the future. Although it is not unusual for organizations to operate multiple applications, systems and platforms that
were created utilizing disparate programming languages, the complexity of these environments typically reduces an organization’s operating flexibility,
hinders decision-making processes and leads to costly inefficiencies and redundancies. When organizations seek to swiftly change, update and upgrade IT
assets to support new business processes or to cope with changes in business and regulatory environments, they often find that the introduction and
integration of new or upgraded business applications is more complex than expected, requires significant implementation resources, takes a long time to
implement and is costly. The proliferation of smartphones and mobile platforms necessitates device-independent and future-proof business solutions for
fast, simple, and cost-effective mobile deployment. In addition, new cloud computing technologies present enterprises with an opportunity to realize
greater agility and meaningful cost savings to businesses, creating a growing need for further changes to enterprises’ IT applications and systems.
The pace of digital transformation is also accelerating at companies all around the world. Customers are increasingly demanding an all-digital experience
from the companies they do business with. They seek instant gratification through real-time updates or instant customer service without having to talk to
or wait for other human beings. Employees are also pushing for a more digital experience in their workplaces. The confluence of these internal and
external forces is causing companies of all sizes to put digital transformation goals at the top of the agenda. It is becoming clearer that companies will
need to embrace and prioritize the creation of a digital operating environment to gain a competitive edge and be able to recruit and maintain a talented
employee base.
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Manual coding and application development is a complex and time-consuming process with an end result that is not guaranteed. The process requires
constant iteration as bugs are discovered and new features are integrated. In addition, the communication gap and general disconnect between developers
and end-users are critical shortcomings of manual coding that results in business applications that are less than ideally designed. Many of these problems
can be addressed by low-code and no-code development platforms. The enterprise application development software market consists of several
application development sub-segments and includes large dominant players such as IBM, Microsoft, Oracle, Salesforce, HP, CA Technologies and
Compuware as well as a large number of highly specialized vendors, with focused capabilities for specific vertical markets. Huge backlogs of enterprise
app development work and growing demand for apps coupled with shortage and expense of skilled programmers, is increasingly leading enterprises to
turn to low-code/no-code application development platforms that democratize the development process and give business users the ability to develop
applications themselves with minimal or no assistance from IT. Through the adoption of business applications, these business users are increasingly
looking for ways to automate manual workflows and become more efficient and effective by reallocating their time to solving more complex business
problems. Even IT resources and developers are using low-code development tools to increase their development speed and reduce backlog. a growing
market for low-code/no-code development platforms.
Although the market for low-code development platforms is not new by any means, it has certainly started to gain more traction over the past couple of
years and is expected to continue its strong growth due to continued demand for applications and a shortage of skilled developers. Low-code development
is a natural evolution of rising abstraction levels in application development, which will eventually lead to viable cross-enterprise, highly scalable citizen
development and composition of applications. According to the Low-Code Development Platform Market Research Report published by Prescient&
Strategic Intelligence in August 2019, the market for low-code development platforms was valued at $5.6 billion in 2018 and is expected to grow at a
45% compound annual growth rate to $52.3 billion in 2024. Based on Gartner’s, Magic Quadrant for Enterprise Low Code Application Platforms, 8
August 2019, by 2024 low-code application platforms will be responsible for more than 65 percent of all application development activity and three-
quarters of large enterprises will be using at least four low-code development tools for both IT application development and citizen development
initiatives. Forester, in their Q1 2019 report on low-code platforms expects low-code market to represent $21 billion in spending by 2022. The increasing
need of digitalization and maturity of agile DevOps practices are expected to enhance the use of low-code development platform market across the globe.
Web application is considered as a face of an organization and by using the low-code development platform organizations can roll out user-defined web-
based applications quickly. Instead of writing the programming language for the development of web-based applications, employees with less
development experience can also create sophisticated applications. For those who has relevant experience, this platform can ease out the daily work
chores and can even help them create more custom web-based applications by integrating already existing digital ecosystems. North America has the
presence of several prominent market players delivering low-code development platform and services to all end users in the region. The US and Canada
both have strong economic conditions and are expected to be major contributors to the growth of the low-code development platform market. The
geographical presence, significant research and development (R&D) activities, partnerships, and acquisitions and mergers are the major factors for the
deployment of low-code development platform and services.
The IT services segment of the market is comprised of a broad array of specific segments such as infrastructure design and delivery, application
development, technology consulting planning and implementation services, support services and supplemental outsourcing services. In addition, IT
professional services include quality assurance, product engineering services and process consulting. The IT services segment is also undergoing a
profound transition, with some key trends that have accelerated recently. Growing demand for mobile and cloud-based applications as well as Big Data
solutions also entails more complex IT development and integration projects which management and implementation require a higher level of expertise,
In addition, the typical software-based projects of IT consulting have been gradually shifting towards software and technology-driven solutions that can
be embedded into clients’ systems, providing ongoing engagement services. This transition has been accentuated by an underlying change in IT services
sourcing processes: the need for a faster go-to-market process as well as constrained resources in IT departments is resulting in greater influence by
specific business units on the purchasing decision as opposed to the traditional sourcing process. The traditional outsourcing business model of capacity
on demand is also transitioning towards a model of capability on demand. Information technology service buyers are increasingly looking at outcome-
driven managed services with a tighter integration between software, service and infrastructure.
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We have identified the following trends that are relevant to the markets we operate in:
● Increasingly complex business integration: In recent years, enterprises operate multiple applications and platforms, using various
programming languages, resulting in complex enterprise information systems. Such systems and the ability to swiftly change, update, and
upgrade them to support new business processes are crucial to the enterprise’s ability to cope with changes in the business, economic and
regulatory environment. However, the introduction and integration of new business applications is complex, requires significant time and human
resources and entails significant and often unpredicted costs. Therefore, enterprises are in need of solutions that will facilitate the rapid and
seamless deployment of business applications.
● Reusing IT assets/enterprise applications: In an increasingly dynamic technology, business and economic environment, organizations face
mounting pressure to continue to leverage their large IT investments in enterprise applications, such as ERP and CRM, while increasing their
ability to change business processes and support new ones. Tools to support lightweight yet rapid, iterative and modular development
methodologies, reusable architectures and application life-cycle management are primary drivers for spending on application development
worldwide.
● Enterprise mobility: With the proliferation of smartphones and mobile platforms that support enterprise mobility, enterprise users now expect
instant access to real-time information, a rich user experience, seamless integration with various enterprise systems and support to multiple
mobile devices. As such, enterprises need to be able to develop device-independent and robust business solutions for fast and cost-effective
mobile deployment.
● Cloud, Platform-as-a-Service and Software-as-a-Service: Cloud, Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS) are each
becoming a well-established phenomenon in some areas of enterprise IT. Cloud-hosted applications continue to grow as alternatives to internally
managed systems as they deliver greater agility and meaningful cost savings to businesses. In addition, fast time-to-deployment, low cost-of-
entry, and adoption of pay-as-you-go models drive growing adoption of SaaS applications. In turn, SaaS applications enable the rapid
construction, deployment and management of some custom-built applications accessed as a service in the cloud. With more SaaS deployments,
the need for integration tools that bridge the cloud apps with on-premise application increases.
● Big Data: The amount of digital information that is being generated by enterprises each year, across a number of diverse data sources and
formats, is growing rapidly. Enterprises are required to retain, process and analyze data to attain meaningful insights and gain competitive
advantages, and therefore require versatile and flexible tools in order to quickly and reliably process these increasingly large amounts of data.
● IT Consulting: The typical software-based projects of IT consulting have been gradually shifting towards software and technology-driven
solutions that can be embedded into clients’ systems, providing ongoing engagement services.
● Sourcing processes: The need for a faster go-to-market process as well as constrained resources in IT departments is resulting in greater
influence by specific business units on the purchasing decision as opposed to the traditional sourcing process. The traditional outsourcing
business model of capacity on demand is also transitioning towards a model of capability on demand. Information technology service buyers are
increasingly looking at outcome-driven managed services with a tighter integration between software, service and infrastructure.
● Mobility & IT skills shortage: Growth in mobility skills demand is outpacing organizations’ ability to keep up, resulting in mobile strategists
facing a skills shortage across the entire mobility ecosystem, with mobile application development skills in greatest demand. Poor availability of
skilled staff is driving mobile strategists to outsource many functions across the mobility ecosystem, including application development and
testing services. The increasing mobility skills gap will force mobile strategists to use a multifaceted application development and delivery
approach.
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Magic’s Software Solutions
Our software solutions enable enterprises to accelerate the planning, development, deployment and integration of on-premise, mobile and cloud business
applications that can be rapidly customized to meet current and future needs. Our software solutions and complementary professional services empower
customers to dramatically improve their business performance and return on investment by enabling the cost-effective and rapid delivery, integration and
mobilization of business applications, systems and databases. Our technology and solutions are especially in demand when time-to-market considerations
are critical, budgets are tight, and integration is required with multiple platforms or applications, databases or existing systems and business processes, as
well as for RIA and SaaS applications. Our technology also provides the option to deploy our software capabilities in the cloud, hosted in a web services
cloud computing environment. We believe these capabilities provide organizations with a faster deployment path and lower total cost of ownership. Our
technology also allows developers to stage multiple applications before going live in production.
Development communities are facing high complexity, cost and extended pay-back periods in order to deliver cloud, RIAs, mobile and SaaS applications.
Magic xpa, AppBuilder, Magic SmartUX, Magic xpi and Magic xpc provide MSPs with the ability to rapidly build integrated applications in a more
productive manner, deploy them in multiple modes and architectures as needed, lower IT maintenance costs and speed time-to-market. Our solutions are
comprehensive and industry proven. These technologies can be applied to the entire software development market, from the implementation of micro-
vertical solutions, through tactical application modernization and process automation solutions, to enterprise spanning service-oriented architecture, or
SOA, migrations and composite applications initiatives. Unlike most competing platforms, we offer a coherent and unified toolset based on the same
proven metadata driven and rules-based declarative technology. Our low-code, metadata platforms consist of pre-compiled and pre-written technical and
administrative functions, which are essentially ready-made business application coding that enables developers to bypass the intensive technical code-
writing stage of application development and integration, concentrate on building the correct logic for their apps and move quickly and efficiently to
deployment. Through the use of metadata-driven platforms such as Magic xpa, AppBuilder, Magic SmartUX, Magic xpi and Magic xpc, software
vendors and enterprise customers can experience unprecedented cost savings through fast and easy implementation and reduced project risk.
Our software technology solutions include application platforms for developing and deploying specialized and high-end large-scale business applications
and integration platforms that allow the integration and interoperability of diverse solutions, applications and systems in a quick and efficient manner.
These solutions enable our customers to improve their business performance and return on investment by supporting the affordable and rapid delivery and
integration of business applications, systems and databases. Using our software solutions, enterprises and ISVs can accelerate time-to-market by rapidly
building integrated solutions, deploying them in multiple environments while leveraging existing IT resources. In addition, our solutions are scalable and
platform-agnostic, enabling our customers to build solutions by specifying their business logic requirements in a commonly used language rather than in
computer code, and to benefit from seamless platform upgrades and cross-platform functionality without the need to re-write applications. Our
technology also enables future-proof protection and supports current market trends such as the development of mobile applications that can be deployed
on a variety of smartphones and tablets, and cloud environments. In addition, we also offer a variety of vertical-targeted products that are focused on the
needs and requirements of specific growing markets. Certain of these products were developed utilizing our application development platform.
We sell our solutions globally through our own direct sales representatives and offices and through a broad sales distribution network, including
independent country distributors, independent service vendors that use our technology to develop and sell solutions to their customers, and system
integrators. We also offer software maintenance, support, training, and consulting services in connection with our products, thus aiding the successful
implementation of projects and assuring successful operation of the platforms once installed. We sell our integration solutions to customers using specific
popular software applications, such as SAP, Salesforce.com, IBM i (AS/400), Oracle JD Edwards, Microsoft SharePoint, Microsoft Dynamics,
SugarCRM and other eco-systems. As such, we enjoy a well-diversified client base across geographies and industries including oil & gas companies,
telecommunications groups, financial institutions, healthcare providers, industrial companies, public institutions and international agencies.
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The underlying principles and purpose of our technology are to provide:
● Simplicity – the use of code-free/low code development tools instead of hard coding and multiple programming languages to solve critical
and complex challenges;
● Business focus – the use of pre-compiled business logic and components eliminates repetitive, low level technical and coding tasks;
● Comprehensiveness – the use of a comprehensive development and deployment platform offers a full end-to-end development, deployment
and integration capability;
● Automation of mundane tasks – to accelerate development and maintenance and reduce risk; and
● Interoperability – to support business logic across multiple hardware and software platforms, operating systems and geographies.
We offer three complementary application platforms that address the wide spectrum of composite applications, Magic xpa, Magic SmartUX and
AppBuilder. Our Magic xpi integration platform and Magic xpc iPaaS solution delivers fast and simple integration and orchestration of business
processes and applications. We gained over 160 new customers in 2020 operating in a wide variety of industries, including financial services, life
sciences, government, telecommunications, energy and manufacturing.
Magic xpa Application Platform
Magic xpa Application Platform, our metadata driven application platform, provides a simple, low code and cost-effective development and deployment
environment that lets organizations and MSPs quickly create user-friendly, enterprise-grade, multi-channel mobile and desktop business app that employ
the latest advanced functionalities and technologies. The Magic xpa Application Platform, formerly named uniPaaS, was first released in 2008 and is an
evolution of our original eDeveloper product, a graphical, rules-based and event-driven framework that offered a pre-compiled engine for database
business tasks and a wide variety of generic runtime services and functions which was released in 2001.
We have continually enhanced our Magic xpa application platform to respond to major market trends such as the growing demand for cloud-based
offerings including Rich Internet Applications (RIA), mobile applications and SaaS. Accordingly, we have added new functionalities and extensions to
our application platform, with the objective of enabling the development of RIA, SaaS, mobile and cloud-enabled applications. SaaS is a business and
technical model for delivering software applications, similar to a phone or cable TV model, in which the software applications are installed and hosted in
dedicated data centers and users subscribe to these centers and use the applications over an internet connection. This model requires the ability to deliver
RIA. Magic xpa is a comprehensive RIA platform. It uses a single development paradigm that handles all ends of the application development and
deployment process including client and server partitioning and the inter-communicating layers.
Magic xpa offers customers the power to choose how they deploy their applications, whether full client or web; on-premise or on-demand; in the cloud or
behind the corporate firewall; software or mobile or SaaS; global or local. Our Magic xpa Application Platform complies with event driven and service
oriented architectural principles. By offering technology transparency, this product allows customers to focus on their business requirements rather than
technological means. The Magic xpa single development paradigm significantly reduces the time and costs associated with the development and
deployment of cloud-based applications, including RIAs, mobile and SaaS. In addition, application owners can leverage their initial investment when
moving from full client mode to cloud mode, and modify these choices as the situation requires. Enterprises can use cloud-based Magic xpa applications
in a SaaS model and still maintain their databases in the privacy of their own data centers. It also supports most hardware and operating system
environments such as Windows, Unix, Linux and AS/400, as well as multiple databases and is interoperable with .NET and Java technologies.
Magic xpa can be applied to the full range of software development, from the implementation of micro-vertical solutions, through tactical application
modernization and process automation solutions, to enterprise spanning SOA migrations and composite applications initiatives. Unlike most competing
platforms, we offer a coherent and unified toolset based on the same proven metadata driven and rules based declarative technology, resulting in
increased cost savings through fast and easy implementation and reduced project risk.
Magic xpa enables organizations to differentiate themselves from their competition through software-enabled digital transformation. With our platform,
organizations can rapidly and easily design, build and implement powerful, enterprise-grade custom applications through our intuitive, visual interface,
with little or no coding required. Our Solution ensures that applications developed on our platform can be immediately and natively deployed across a full
range of mobile and desktop devices with no additional customization, including desktop web browsers, tablets and mobile phones. We also enable
organizations to easily modify and enhance applications and automatically disseminate these updates across device types to ensure that all users benefit
from the most up-to-date functionality.
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Key benefits of our platform include:
● Powerful applications to solve critical and complex challenges. At the core of our platform is an advanced engine that enables the modeling,
modification and management of complex processes and business rules. Our heritage provides us with this differentiated understanding of
complex processes, and we have incorporated that expertise into our platform to enable the development of powerful applications. Organizations
have used our platform to launch new business lines, build large procurement systems, manage retail store layouts, conduct predictive
maintenance on field equipment and manage trading platforms, among a range of other use cases.
● Rapid and simple innovation through our powerful platform. Our platform employs a low-code, intuitive, visual interface and pre-built
development modules that reduce the time required to build powerful and unique applications. Our platform automates the creation of forms,
data flows, records, reports and other software elements that would otherwise need to be manually coded or configured. This functionality
greatly reduces the iterative development process, allowing for real-time application optimization and ultimately shortening the time from idea to
deployment. In turn, organizations can better leverage scarce and costly developer talent to accomplish more digital transformation objectives.
● Build once, deploy everywhere. Our technology allows developers to build an application once and use it everywhere with the consistency of
experience and optimal performance levels that users expect. Applications developed on our platform can be immediately and natively deployed
across a full range of mobile and desktop devices with no additional customization, including desktop web browsers, tablets and mobile phones.
● Deployment flexibility to serve customer needs. Our platform can be installed in any cloud or on-premises, with organizations able to access
the same functionality and data sources in all cases. Our flexible deployment model also preserves a seamless path to future cloud deployments
for organizations initially choosing on-premises for their most sensitive workloads.
Our approach to digital transformation goes beyond simply enabling organizations to build custom applications fast. We empower decision makers to
reimagine their products, services, processes and customer interactions with software by removing much of the complexity and many of the challenges
associated with traditional approaches to software development. Because we make application development easy, organizations can build specific and
competitively differentiated functionality into applications to deliver enhanced user experiences and streamlined business operations.
In February 2018, we released Magic xpa 3.3 with a more seamless and easier integration with Java, similar to the already existing integration with .NET,
making the Magic xpa platform even more robust. Along with that, we provided a new WS provider mechanism, built on Apache Axis2, enhancing our
current WCF based capabilities.
In April 2018 and for the third consecutive year, Magic Software’s Magic xpa application development platform gained top market share in license sales
in the Japanese market. According to the “Market Research for Next Generation Extra-Rapid Development Tools in 2018” published by MIC Research
Institute Ltd., the Magic xpa Application Platform grew 2% achieving a 41% share of the Japanese market.
In August 2018, we released Magic xpa 4.0 with its new Angular-based Web application framework that provides developers and Angular developers
with the power to develop device-agnostic and feature-packed Web applications. Magic xpa 4.0 decouples the business logic from the presentation of the
apps providing developers with the flexibility to use the Angular open-source platform with industry-standard state-of-the-art technologies, including
HTML5, CSS, and JavaScript for designer-quality screens, while benefiting from the productivity, security, and scalability capabilities provided by our
low-code development platform.
In addition, we further modernized our Integrated Development Environment (IDE) by moving toward a full-fledged Visual Studio-based studio, offering
our users an even more intuitive and user-friendly experience.
During 2018, Magic xpa was listed in Gartner’s Market Guide for Application Platforms report. In addition, Magic xpa was listed in the Forrester
Wave™ for Mobile Low-Code Development Platforms.
In 2020, Magic Software significantly enhanced its new Angular based web client capabilities, provided GIT version control capability as an integral part
of expanding its CI/CD overall capabilities, as well as enhanced compare and merge functionality under its xpa 4.7 release.
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AppBuilder Application Platform
AppBuilder, a platform we acquired in December 2011, is a proprietary development environment used for managing, maintaining and reusing
complicated applications needed by large businesses. It provides the infrastructure for enterprises worldwide, across several industries, with applications
running millions of transactions daily on legacy systems. Enterprises using AppBuilder can build, deploy and maintain large-scale custom-built business
applications for years without being dependent on any particular technology. The AppBuilder deployment environments include IBM mainframe, Unix,
Linux and Windows. AppBuilder is intended to increase productivity and agility in the creation and deployment of enterprise class computing.
AppBuilder follows the 4GL development paradigm to help enterprises focus on the business needs and definition and overlook technical hurdles.
AppBuilder developers define the business roles and prior to deployment the code is generated from the development environment to the required run
time environment. Several large MSPs have utilized AppBuilder to build state of the art applications that are deployed through many large customers.
AppBuilder implements a model driven architecture approach to application development. It provides the ability to design an application at the business
modeling level and generate forward to an application. AppBuilder has a platform-independent, business-rules language that enables generation to
multiple platforms. It is possible to generate the client part of an application as Java and the server part as COBOL. As businesses change, the server part
can be generated as Java without changing the application logic. Only a simple configuration option needs to be changed.
AppBuilder contains everything a development environment needs to create any type of simple or complex business application with platform-
independent functionality, including:
● System administration security controls for scope and permissions;
● Migration, testing, and deployment functions;
● Architecture-independent development;
● An integrated toolset for designing, developing, and deploying applications;
● Object-based components managed from host, server, or client repositories;
● Support for Java/J2EE, COBOL, C#, and C programming languages;
● An efficient, cross-platform code generation facility;
● Ready-to-use business logic and libraries;
● A remote prepare facility for mainframe development;
● Multiple language user interface support; and
● DBCS support.
Magic xpi Integration Platform
Our Magic xpi integration platform (an evolution of our original and formerly branded iBOLT platform, launched in 2003) is a graphical, wizard-based
code-free solution delivering fast and simple integration and orchestration of business processes and applications. Magic xpi allows businesses to more
easily view, access, and leverage their mission-critical information, delivering true enterprise application integration, or EAI, business process
management, or BPM, and SOA infrastructure. Increasing the usability and life span of existing legacy and other IT systems, Magic xpi allows fast EAI,
development and customization of diverse applications, systems and databases, assuring rapid return on invested capital and time-to-market, increased
profitability and customer satisfaction.
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Magic xpi allows the integration and interoperability of diverse solutions, including legacy applications, in a quick and efficient manner. In January 2010,
we released Magic xpi 3.2 and since then we have continued to develop the Magic xpi channel. We entered into agreements with additional system
integrators, consultancies and service providers, who acquired Magic xpi skills and offer Magic xpi licenses and related services to their customers. We
also offer special editions of Magic xpi with optimized and certified connectors for specific enterprise application vendor ecosystems, such as SAP,
Oracle JD Edwards, Microsoft SharePoint and Salesforce.com. These special editions contain specific features and pricing tailored for these market
sectors.
Our heritage as a veteran player in the integration market provides us with a differentiated understanding and ability to automate complex processes, and
we have incorporated that expertise into our platform to enable the development of powerful business software. Magic xpi can leverage a complete stack
of automation technologies, applying the right automation approach for each specific use case.
Key benefits of our platform include:
● Business Process Management. At the core of our platform is an advanced engine that enables the modeling, modification and management of
complex processes. This engine enables orchestration of any business workflow.
● Decision Rules. Appian includes a declarative environment for defining and executing business logic or rules. These rules can be highly
complex and can be applied within the Appian platform to many use cases, ranging from automated decision making to user experience
personalization.
● Seamless integration with existing systems and data. In contrast to typical enterprise software, our platform does not require that data reside
within it in order to enable robust data analysis and cross-department and cross-application insight. Our platform seamlessly integrates with
many of the most popular enterprise software applications and data repositories and can be used within many legacy environments. For example,
organizations frequently use our platform to extend the life and enhance the functionality of legacy systems of record, such as those used for
enterprise resource planning, human capital management and customer relationship management, by building new applications that enhance the
functionality of those systems and by leveraging the data within those systems to further optimize and automate operations.
● Deployment flexibility to serve customer needs. Our platform can be installed in any cloud or on-premises, with organizations able to access
the same functionality and data sources in all cases. Our flexible deployment model also preserves a seamless path to future cloud deployments
for organizations initially choosing on-premises for their most sensitive workloads.
In the aggregate, these core capabilities enable Magic to automate and govern end-to-end processes. Magic complements these automation technologies
with related features like process reporting, analytics and management, which make it simple for organizations to quickly improve and upgrade their
automations as business needs change.
In March 2018, we released Magic xpi version 4.7 with a new OData Provider connector, Active Directory Federation Services (ADFS) support for the
SharePoint Online (MOSS) connector, ability to write new connectors based on Magic xpa Application Platform’s runtime technology and multiple
features to improve programming productivity, such as visual indicators of data flow status and an enhanced monitor to provide an even more accurate
bird’s eye view of all running projects.
In October 2018, we announced that Magic xpi Integration Platform 4 achieved SAP-certified integration with SAP S/4HANA, enabling our customers to
optimize business processes through automation across leading ERP, CRM, finance, and other enterprise systems using a single platform.
In February 2019, we released Magic xpi version 4.9 with a new REST client connector, ODATA connector enhancements, inherent UPSERT support in
the data mapper, and built-in cloud support.
In August 2019, we released Magic xpi version 4.11, enabling access to remote connectors residing at another site, without the need for a VPN (aka
‘Local Agent’ capability). In addition, in the beginning of 2020 we released the major released Magic xpi 4.12, which includes 64-bit support for our
Run-Time engine as-well as integration with one of the industry’s API management solutions suites. During 2019, we also released additional features
pursuant to customer requests.
In 2020, Magic Software enhanced the above Local Agent capability with more functionality, added additional connectors (e.g., OPC for manufacturing)
and invested more resources in the overall product stability. In addition, Magic Software has added various features to the platform to expand its product
offering, per customer requests.
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In 2021, we plan to enhance the above Local Agent capability with more functionality, add additional connectors (e.g., OPC for manufacturing) and
invest more resources in the overall product stability. In addition, we plan to continue to expand our product offering with additional features, per
customer requests.
Powerful applications to solve critical and complex challenges. At the core of our platform is an advanced engine that enables the modeling,
modification and management of complex processes and business rules. Our heritage as a business process management, or BPM, company provides us
with this differentiated understanding of complex processes, and we have incorporated that expertise into our platform to enable the development of
powerful applications. Organizations have used our platform to launch new business lines and build large procurement systems.
Magic xpc Integration Platform
In November 2017, we announced the expansion of our integration offering with the launch of Magic xpc, a hybrid integration platform as a service
(IPaaS), which enable customers to accelerate digital transformation on the cloud, on-premises or on both.
Magic xpc is powered by its out-of-the-box integration connectors for mainstream business applications, databases, protocols and tools for building
custom integrations. Magic’s iPaaS platform was built using node.JS and docker technology. Magic xpc users can monitor their integration flows and
create and manage alerts from a single interface. Built on top of open-source components with no cloud vendor lock-in, Magic xpc is available on both
public and private cloud platforms including, Amazon Web Services, Azure, and Google Cloud.
Magic SmartUX
Magic SmartUX, a platform we acquired in April 2019, is a low-code development platform for mobilizing and modernizing enterprise business
application designed for citizen to professional developers to rapidly design, build, analyze, and run cross-platform mobile business applications.
The Magic SmartUX platform addresses the three biggest challenges enterprises are facing in the road to Digital Transformation:
● Multi-platform: end client devices are abundant and diverse, we provide an omni-channel solution.
● Many Systems of Record: over the years enterprise adopted (home grown and third party) solutions that scattered the business flow over many
different system, Magic SmartUX enable the enterprise to expose complex business flows to modern technology with now changes and overhead
to the existing working applications.
● Talent Gap: Mobile and integration are the hardest skillsets for IT orgs to find, with the Magic SmartUX platform addressing Citizens
Developers, we allow any intern tech savvy individual to deliver complex and robust Mobile business application.
FactoryEye
On May 2019 Magic Software launched the releases of FactoryEye, a proprietary high performance, low-code, flexible, hybrid platform built specially
for manufacturers based on existing infrastructure enabling real-time virtualizations of all production data and advanced analytics (based on machine
learning) for improved productivity and competitive advantage. Magic Software has hundreds of manufacturing customers, and drew on over 35 years of
manufacturing experience to develop FactoryEye. The product’s intuitive and user-friendly dashboards empower manufacturers by providing all the
analysis they need in order to make faster and smarter decisions based on real time data and analytics. This translates into improved productivity, faster
delivery times, and better control over the manufacturing processes, leading to increased customer satisfaction and higher profit margins. FactoryEye
offers dozens of prebuilt connectors to a range of enterprise applications and MRP systems, such as SAP, JD Edwards, and Infor, as well as MES, CRM,
and PLM systems.
FactoryEye collects real-time data from existing machinery and operational systems and transforms it into actionable intelligence for immediate results
and continuous improvement in the manufacturing process. The solution brings the benefits of Industry 4.0 connectivity to mid-sized manufacturers in
several industry verticals, including automotive parts, food & beverage, medical devices, metal processing, packaging, plastics & rubber and specialty
manufacturing.
The addition of FactoryEye to Magic Software’s software portfolio allows Magic Software to provide to its new and existing manufacturing clients, with
a comprehensive Industry 4.0 solution and aligns with Magic Software strategy of enhancing its portfolio with enterprise grade technologies.
FactoryEye’s end-to-end solution incorporates several key features:
● Powered by Magic Software plug and play IIoT Integration platform.
● Incorporates advanced analytics and AI into decision support
● Customer KPIs are used to measure and qualify results
● Leverages investments by integrating existing systems
● Collects data from automated and semi-automated machines
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In addition to offering a dynamic cloud-based software solution, FactoryEye manufacturing consultants work with customers to harmonize their systems
and fit the right tools for their needs. Consultants analyze business processes for what is working, formulate a plan to add what is missing from existing
systems and create sprints to deliver immediate results. A dynamic cycle of data collection and analysis allows for continuous improvement and
flexibility in the optimization process.
Since its launch, Magic Software made a targeted effort to reach mid-sized manufacturers who are looking to improve the efficiency of their factories.
Our goal is to position FactoryEye as a solution that offers more than mere factory floor visibility through IIoT connectivity, while remaining more cost
effective and customizable than offerings from “Tier 1” companies. To that end, Magic Software has created a new website for FactoryEye which will
launch by the end of the first half of 2020, as well as blogs, whitepapers, e-books and email campaigns to spread awareness of this new offering and
benefits for mid-sized manufacturers.
As an Oracle Platinum Partner, FactoryEye brings the benefits of Industry 4.0 to mid-sized manufacturing companies, with an easy, affordable, and
flexible approach that does not require changing existing systems and infrastructure. This Industry 4.0 solution captures vast amounts of production data,
transforms it into actionable intelligence, and empowers workers, managers and executives to make informed decisions in real-time.
In April 2021 Magic Software announced its partnership with JDEMart, which is the largest online marketplace of JD Edwards solutions from vendors all
over the world. Adding Magic Software’s FactoryEye solution to JDEMart’s marketplace provides manufacturers using JD Edwards with real-time,
actionable intelligence to decision makers at all levels of the company.
In addition, we continue to market Magic Software’s application and integration products. These products continue to provide value and convenience for
our customers as low code options to integrate their disparate systems.
Vertical software solutions
Clicks™
Our Roshtov subsidiary has approximately three decades of proven experience based on its proprietary comprehensive core software solution for medical
record information management systems, using in the design and management of patient-file for managed care and large-scale healthcare providers. The
platform, which can be tailor-made to the specific needs of the healthcare provider, is connected to the clinical, administrative and financial data base
system, residing at the provider’s central computer, and allows immediate analysis of complex data with potentially real-time feedback to meet the
specific needs of physicians, nurses, laboratory technicians, pharmacists, front- and back-office professionals and consumers.
All of our clients that buy or subscribe to our Clicks software solution also enter into software support agreements with us for maintenance and support of
their medical record management systems. In addition to immediate software support in the event of problems, these agreements allow clients to access
new releases covered by support agreements. In addition, each client has 12-hour access, six days a week (6 hours on Friday) to the applicable call-center
support teams.
We employ a team of 30 research and development specialists that together with our clients create a future where the health care system works to improve
the well-being of individuals and communities. Roshtov’s proven ability to innovate has led to what we believe to be an industry leading architectures
and a breadth and depth of solutions and services.
There are four healthcare service providers in Israel, of which, Maccabi Healthcare Services and Clalit, which are the two largest healthcare providers in
Israel accounting for 78% of the Israeli market, have been our customers since the early 1990’s.
Leap™
Our FTS subsidiary has over 20 years of BSS experience, based on dozens of projects delivered to customers worldwide. We implement revenue
management and monetization solutions in mobile, wireline, broadband, MVNO/E, payments, e-commerce, M2M / Internet of Things, mobile money,
cable, cloud and content markets under the brand name of Leap™. Our Leap™ solutions lower the total cost of ownership (TCO) for telecom, content
and payment service providers.
FTS works with telecommunications, content and payment service providers globally to help them manage complex transactions and relationships with
greater flexibility and independence. Analyzing transactions from a business standpoint, FTS offers end-to-end and add-on telecom billing, charging,
policy control and payments solutions to customers worldwide, and services both growing and major providers.
38
FTS targets mid to lower level tier service providers, supporting their BSS needs with end-to-end, turnkey billing and other BSS projects. In addition,
FTS offers upper-tiers of service providers with BSS and monetization solutions for specific needs, including policy control and charging solutions, M2M
billing, billing for content services, MVNE/MVNO billing, mobile money software solutions, payment and mobile financial services solutions and others.
Our Leap™ offering is comprised of:
Leap™ BCCF (Business Control and Charging Function) – a proprietary packaged software solution which serves as the underlying foundation of our
Leap™ products and solutions. Leap BCCF enables service providers to handle the aspects of event processing, from defining the system’s business
logic, through importing events and formatting, to charging and executing business rules. With Leap BCCF, new services are deployed on the fly, and
strategic business rules are formulated more easily, ensuring real-time responses to both service and customer-related events and providing a baseline for
policy control.
Leap™ Billing 6.3 – a convergent charging, billing and customer care solution that realizes substantial reductions in OPEX and CAPEX while increasing
customer satisfaction and retention. Leap Billing software’s flexibility and ease of use enables the service providers’ billing platform to work more at the
speed of marketing by offering new marketing plans or services in a rapid time-to-market.
Leap™ Policy Control - Leap Policy Control is an integrated charging and policy control solution (a full PCC solution based on PCRF & online/offline
charging). Compliant with the 3GPP’s Diameter policy control standard, Leap Policy Control provides traffic and subscriber management strategies.
Leap Policy Control gives operators the power to monitor usage in real time and, using fully configurable business rules, define how they manage
network resources, applications, and subscribers – in real time – while generating revenue from personalized mobile applications, content and services.
Leap Policy Control can be implemented as a stand-alone solution or as part of a larger BSS project implementation.
FTS Express™ - FTS express™ is an all-in-one software appliance for online charging, billing, AAA, balance management, customer care, policy control
and interconnect, designed for entry-level operations of MVNOs, LTE, VoIP, ISP, broadband, IPTV and more.
The following is a sample of the monetization solutions offered by FTS:
● End-to-end, turnkey billing and customer care solutions;
● Convergent, online charging and billing;
● Policy control and charging;
● MVNO/E billing;
● Billing for content;
● Interconnect billing;
● M2M / IoT billing;
● Broadband and multi-play billing;
● Mobile money solutions;
● E-commerce and M-commerce solutions;
● Payments and mobile payments solutions;
● Smart revenue sharing and partner management solutions; and
● Billing service bureau.
FTS’s solutions are delivered via cloud, on-premises or in a fully managed-services mode and are backed by our Israel and Bulgaria-based experienced
professional services support team.
39
HR Pulse
Now in its 10th release, HR Pulse is a proprietary platform that creates and customizes software applications for HCM, with the goal to combine
technology with effective processes, to facilitate the collection, analysis and interpretation of quality data about people, their jobs and their performance,
to enhance HCM decision making, resulting in increased organizational efficiency and effectiveness. HR Pulse addresses four distinct functional areas
with the ability to also work as one consolidated system:
● Performance and goal management:
● Development management;
● Talent management and succession planning; and
● Compensation and merit review.
Our offering includes customizable “out of the box” HCM SaaS Solutions, such as Pilat Frist and Pilat Professional, that provides a menu of templates
that can be used to affordably and expeditiously create customized HCM solutions for companies. The HR Pulse platform promotes the building and
implementation of solutions that address broader business challenges as well. Such offerings include 360-degree feedback, employee surveys, leadership
and management development, coaching and job evaluation.
Hermes
Hermes has been developing and evolving cargo management systems for the air cargo industry since 2002. Hermes Air Cargo Management System is a
proprietary, state-of-the-art, packaged software solution for managing air cargo ground handling. Our Hermes Solution covers all aspects of cargo
handling, from physical handling and cargo documentation through customs, seamless EDI communications, dangerous goods and special handling,
tracking and tracing, security and billing. Over the last 10 years Hermes systems have been implemented in over 70 terminals on five continents,
providing efficient and accurate handling of more than 5 million tons of freight annually. Customers benefit through faster processing and more accurate
billing, reporting and ultimately enhanced revenue. Customers include independent ground handlers, airlines with a cargo arm, hubs belonging to an
individual airline or those catering to a number of airlines transiting cargo to additional destinations. The Hermes Solution is delivered on a licensed or
fully hosted basis.
Our Value Proposition
Hermes systems are built with the specific needs of air cargo handlers and airlines in mind and are amongst the most versatile and sophisticated around.
Hermes Solutions are focused on maximizing customer profits by streamlining ground handling processes and employing built-in best practices to reduce
handling errors. Hermes team of cargo experts carry out a full business analysis, listen to our customers’ requirements, suggest additional functionality
and work with them to deliver an air cargo management solution that is streamlined around their processes and customized to their needs. Hermes works
with everyone from smaller cargo handlers to large airlines all over the world and counts Menzies Aviation, WFS (FRA), Luxair, Etihad Airport Services
and Frankfurt Cargo Services among their customers.
Strategy
Our goal is to continue our profitable and cash generative growth within our software solutions and professional services markets. We plan to achieve this
goal by focusing on the following principles:
● Expand sales to existing customers. We intend to capitalize on the opportunity to more effectively cross-sell solutions and services across our
existing customer base. In addition to selling complementary software solutions to customers that already use our development application
solutions or packaged software solutions, we believe our strong customer, MSP and partner relationships and execution track record position us
to successfully grow our revenues by delivering complementary development and integration tools from our product offering to our existing IT
services customers and by delivering IT services to our existing application development customer base.
40
● Capitalize on opportunities created by new technological trends. We believe that emerging industry trends such as mobile applications,
cloud applications, SaaS and big data will require our enterprise customers and partners to continue and upgrade existing systems and to
integrate their current infrastructure with new mobile and cloud applications or with new big data management solutions. We intend to market
the capabilities of our software solutions and professional services offerings to customers that are currently impacted or will potentially be
impacted by the increased complexity resulting from these trends. For instance, we intend to promote Magic xpa through Rich Internet
Applications (RIAs).
● Grow our customer base through new offerings. We plan to grow our business by attracting new ISV enterprise customers with new
technology offerings and new professional services through our already established expertise in the areas of mobile technologies and projects,
cloud applications, SaaS and Big Data solutions, and integration solutions. Due to our track record in these industry segments, we believe we are
well positioned to develop and offer new application development and integration solutions that will enable us to attract new customers. In
addition, we believe our familiarity with these verticals will allow us to differentiate our IT services offering and grow our market share in this
vertical as well.
● Provide new solutions to new ecosystems. We expect the same industry trends of mobile, cloud, SaaS and big data to lead to the creation of
additional enterprise applications ecosystems. We intend to continue to develop new solutions that will allow us to form new partnerships, which
in turn will grow our revenues. We also intend to focus on recruiting OEM partners that will incorporate our Magic xpi integration technology
into their product offerings.
● Acquire complementary businesses. As part of our growth strategy, we will continue to seek and evaluate opportunities to grow through
acquisitions of companies and operations with complementary software solutions, technologies and related intellectual property, packaged
software solutions, augmenting integration and services capabilities, additional distribution channels or market share. We have a strict
acquisition policy pursuant to which we only pursue acquisitions in cases we identify as having a clear business opportunity and a clear path to
revenue growth. In addition, we only pursue acquisitions which we believe entail low integration and operational risk as a result of our internal
familiarity with the target or the industry in which it operates, through our network of MSPs, system integrators, distributors, resellers, and
consulting and OEM partners. We intend to balance any investments in such acquisitions with investments in our existing business and our
policy of returning value to shareholders in the form of dividends.
Product Development
We place considerable emphasis on research and development in order to improve and expand the functionality of our technologies and to develop new
applications. We believe that our future success depends upon our ability to maintain our technological leadership, to enhance our existing products and
to introduce new commercially viable products addressing the needs of our customers on a timely basis. We also intend to support emerging technologies
as they are introduced in the same way we have supported new technologies in the past. We will continue to devote a significant portion of our resources
to research and development. We believe that internal development of our technology is the most effective means of achieving our strategic objective of
providing an extensive, integrated and feature-rich development technology. For significant version release see “Magic’s Software Solutions” discussed
above.
Product Related Services
Professional Services. We offer fee-based consulting services in connection with installation assurance, application audits and performance enhancement,
application migration and application prototyping and design. Consulting services are aimed at generating both additional revenues and ensuring
successful implementation of Magic xpa, Appbuilder, Magic xpi Magic xpc, SmartUX and FactoryEye projects through knowledge transfer. As part of
management efforts to focus on license sales, our goal is to provide such activities as a complementary service to our customers and partners. We believe
that the availability of effective consulting services is an important factor in achieving widespread market acceptance.
Services are offered as separately purchased add-on packages or as part of an overall software development and deployment technology framework. Over
the last several years, we have built upon our established global presence to form business alliances with our MSPs that use our technology to develop
solutions for their customers, and distributors to deliver successful solutions in focused market sectors.
41
Maintenance. We offer our customers annual maintenance contracts providing for unspecified upgrades and new versions and enhancements for our
products on a when-and-if-available basis for an annual fee.
Customer Support. We believe that a high level of customer support is important to the successful marketing and sale of our products. Our in-house
technical support group provides training and post-sale support. We believe that effective technical support during product evaluation as well as after the
sale has substantially contributed to product acceptance and customer satisfaction and will continue to do so in the future.
We offer online support systems for our MSPs and end users, providing them with the ability to instantaneously enter, confirm and track support requests
through the Internet. These systems support MSPs and end-users worldwide. As part of this online support, we offer Support Knowledge Base tools
providing the full range of technical notes and other documentation including technical papers, product information, and answers to most common
customer queries and known issues that have already been reported.
Training. We conduct formal and organized training on our development tools and packaged software solutions. We develop courses, pertaining to our
principal products and provide trainer and student guidebooks. Course materials are available both in traditional, classroom courses and as web-based
training modules, which can be downloaded and studied at the student’s own pace and location. The courses and course materials are designed to
accelerate the learning process, using an intensive technical curriculum in an atmosphere conducive to productive training.
IT Services
Background
Our IT services offerings consist of a variety of professional services that can be grouped into integration and other IT services. Our integration services
include:
● Infrastructure analysis, design and delivery - management of complex, tailor-made projects and telecom infrastructure projects in wireless
and wire-line as well as IT consulting services, mainly for the defense and public sectors.
● Technology consulting and implementation services - planning and execution of end-to-end, large-scale, complex solutions in networking,
cyber security, command & control and high performance transaction systems.
● Application development - We specialize in end-to-end projects that feature an array of technologies, from development and implementation of
concepts for startups to overall responsibility for the development of systems for large enterprises. Our development services include
development of on-premise, mobile and cloud applications as well as Embedded and real time software development.
With more than 1,700 experts and hundreds of projects gone live in a variety of advanced technologies in the U.S., Europe and Israel, we have developed
significant expertise and accumulated vast experience in integration projects. Such projects are typically more complex and require a high level of
industry knowledge and highly skilled professionals. Our integration expertise, as well as our global reach allows us to deliver comprehensive, value
added services to our customers. Our IT services customers include major global telecoms, OEMs and engineering, furnish and installation service
companies.
Strategic Consulting and Outsourcing Services
We provide a broad range of IT consulting services in the areas of infrastructure design and delivery, application development, technology planning and
implementation services, cloud computing, as well as supplemental outsourcing services. Our wholly-owned subsidiaries, Fusion Solutions LLC, Xsell
Resources Inc., Allstates Consulting Services LLC, Futurewave Systems, Inc., NetEffects, Inc, OnTarget Group, Inc, the Comm-IT Group, Infinigy
Solutions LLC., Comblack Ltd. and Shavit Software (2009) Ltd. provide advanced IT consulting and outsourcing services to a wide variety of companies
including Fortune 1000 companies. Our technical personnel generally supplement the in-house capabilities of our customers. Our approach is to make
available a broad range of technical personnel to meet the requirements of our customers rather than focusing on specific specialized areas. We have
extensive knowledge of and have worked with virtually all types of wireless and wireline telecom infrastructure technologies as well as in the areas of
infrastructure design and delivery, application development, project management, technology planning and implementation services. Our consulting
partners come from a wide range of industries, including finance, insurance, government, health care, logistics, manufacturing, media, retail and
telecommunications. With an experienced team of recruiters in the telecom and IT areas and with a substantial and a growing database of telecom talent,
we can rapidly respond to a wide range of requirements with well qualified candidates. Our customer list includes major global telecoms, OEMs and
engineering, furnish and installation service companies. We have built long-term relationships with our customers by providing expert telecom talent. We
provide individual consultants for contract and contract-to-hire assignments as well as candidates for full time placement. In addition, we configure teams
of technical consultants for assigned projects at our customers’ sites.
42
Customers, End-Users and Markets
We market and sell our products and services in more than 50 countries worldwide. The following tables present our revenues by revenue type and
geographical market for the periods indicated:
Software sales
Maintenance and technical support
Consulting services
Total revenues
United States
Israel
Europe
Japan
Other
Total revenues
$
$
$
$
2020
Year ended December 31,
2019
(in thousands)
28,084
$
30,996
266,550
325,630
$
$
$
24,272
33,181
313,741
371,194
2020
Year ended December 31,
2019
(in thousands)
158,095
$
124,523
25,788
12,499
4,725
325,630
$
$
$
177,882
149,094
26,947
12,643
4,628
371,194
2018
25,454
30,951
227,970
284,375
2018
137,066
103,850
28,257
9,797
5,405
284,375
Our Magic xpa, Magic xpi, Magic xpc, Magic SmartUX, FactoryEye, and AppBuilder technologies are used by a wide variety of developers, integrators
and solution providers, that can generally be divided into two sectors (i) those performing in-house development (corporate IT departments), and (ii)
MSPs, including large system integrators and smaller independent developers, and VARs that use our technology to develop or provide solutions to their
customers. MSPs who are packaged software publishers use our technology to write standard packaged software products that are sold to multiple
customers, typically within a vertical industry sector or a horizontal business function.
Among the thousands of customers running their business systems with our technology are the following:
ABB Group
Able B.V.
ADD
Adidas Canada
Adecco Nederland
Agricultural Bank of China
Allstate Life Insurance
ATLAS Grupo Financiero
Seguros y Fianzas
Auchan
AutoScout24
Axesor Powers
Bank Leumi
BNP Paribas
Boston Medical Center
CBIA
Çelebi Ground Handling Inc.
Centric
Christie Digital
Club Med
Coca Cola
Crane & Co.
Datenlotsen
Eco-Emballages
Electra
Export-Import Bank of Thailand
Ekro
Euroclear
Farm Mutual Reinsurance Plan
Finanz Informatik
Fiskars
Franken Brunnen
Fujitsu Marketing
Fujitsu-Ten
Fukushima Bank
Gakken
GE Capital
GGD Amsterdam
Grange Company
Groupe Flo
Grupo Inversionistas en
Autotransportes Mexicanos
Guardian Life Insurance
Hebrew University of Jerusalem
Hitachi Systems
IDF
ING Commercial Finance BV
ISS
Japan Chamber of Commerce
Korea Development Bank (KDB)
Lekkerland Nederland BV
Lloyds Bank
L’Occitane
Loxam
MatrixCare
Mahindra & Mahindra
Moose Toys
Morgan Advanced Materials
Mundipharma
Nagarjuna Fertilizers & Chemicals Ltd.
Nespresso
NextiraOne
NHS Trust
Nihon UNISYS
Nintendo
Orangina Schweppes
Pacific Steel & Recycling
Parrot
43
Petzl
PGG Wrightson
PTT
QboCel Mexico
Rosenbauer
Segafredo France
Sennheiser
Sony DADC
Staff Development Management Systems (SDMS
Ltd)
SECOM Trust Systems
Sodiaal
Stallergenes
State of Washington Courts
Sterling Crane
Sun Life Insurance
Synbra Holding BV
Telenet Belgium
TelOne Zimbabwe
The Himalaya Drug Company
TOA
TOTO
UPS
Valeo services
Veolia Waters
Viparis
Vishay Intertechnology
Vodafone Iceland
Volvo Brazil
WellMark
Worldwide Flight Services (WFS)
ZF Lemforder
Sales, Marketing and Distribution
We market, sell and support our products through our own global offices and marketing department, as well as through a broad global channel-network of
MSPs, system integrators, value-added distributors and resellers, and OEM and consulting partners. Our sales force is based in our regional offices in the
United States, Japan, Germany, United Kingdom, Netherlands, France, Hungary, South Africa, India and Israel, and through regional distributors
elsewhere. Our sales network is present in about 50 countries worldwide.
Direct Sales. For Magic xpa and AppBuilder, our direct sales force pursues software solution providers and enterprise accounts. Our sales personnel carry
out strategic sales with a direct approach to decision makers, managing a constantly monitored consultative type of sales cycle. Magic xpi, FacrotyEye
and Magic xpc are mostly sold through indirect channels and through our ecosystem business relationships, but we have some direct customers with
integration needs.
As of December 31, 2020, we employed approximately 161 sales and marketing personnel including, a team of sales engineers who provide pre-sale
technical support, presentations and demonstrations in order to support our sales force.
Indirect Sales. We maintain an indirect sales channel, through our ecosystem business relationships, as well as through system integrators, value added
distributors and resellers, OEM partners, as well as consultancies and service providers. We maintain an indirect sales channel for Magic xpa through
MSPs and system integrators, who use our application and integration platforms to develop and deploy different applications for sale to their end-user
customers.
Distributors. In general, we distribute our products through regional non-exclusive distributors in those countries where we do not have a sales office. A
regional distributor is typically a software marketing organization with the capability to add value with consulting, training and support. Distributors that
are also MSPs are generally responsible for the implementation of both our application platform and business and process integration suite and
localization into their native languages. The distributors also translate our marketing literature and technical documentation. Distributors must undergo
our program of sales and technical training. Marketing, sales, training, consulting, product and customer support are provided by the local distributor. We
are available for backup support for the distributor and for end-users. In coordination with the local subsidiaries and distributors, we also provide sales
support for large and multinational accounts. We have 44 distributors in Europe, Latin America and Asia, many of whom are also MSPs.
VARs. In general, we resell our products through VARs that extend their capabilities with our offerings. These include SAP VARs.
Global Marketing Activities. We carry out a wide range of marketing activities aimed at generating awareness of our solutions offerings and to promote
sales. Among our activities, we focus both on both outbound and inbound marketing, including a content-rich website available in eight foreign
languages, social networks communication, search engine optimization, on-line advertising, lead generation campaigns, public relations, case studies,
blogs, industry analyst relations, attendance at conferences and trade shows and lead generation campaigns around key professional white papers and
webinars. We conduct distributor and user conferences to update our worldwide affiliates and user base on our new product offerings, marketing and
promotional activities, pricing, best practices, technical information and other information.
In light of the increased impact of cloud and enterprise mobility technologies on the IT landscape, in 2011 we commenced a strategic marketing
repositioning initiative that led to a complete rebranding of certain of our products’ look, feel and naming (to emphasize that our products belong to the
same technology stack), messaging, as well as a refined definition of our market positioning, value proposition and corporate values. In June 2012, we
launched the new branding after we completed the strategic repositioning and designed a fresh and dynamic new logo, a new corporate tagline as well as
fully re-written web site in English and seven other languages. To expand our community of developers and reach out to new audiences around the world,
we run an ongoing introductory campaign, which offers Magic xpa Single User Edition as a freely downloadable product. Magic xpa Single User Edition
is an ideal gateway for new developers who want to join Magic Software’s global community and take advantage of new opportunities as their businesses
grow. Thousands of developers around the world have downloaded, learned and used Magic xpa Single User Edition, and we are confident that this
campaign will increase their understanding, awareness and adoption of our application platform.
We use the Salesforce.com CRM platform and the Hubsopt marketing automation tool globally to connect all our lead generation campaigns with our
sales pipeline management. We have aligned all our local offices to work according to the same global sales and marketing processes. We have also used
our own Magic xpi Integration Platform to automate processes between our Salesforce and SAP systems to increase efficiency.
Our sales cycle varies by size of the customer, the number of products purchased and the complexity of the customer’s infrastructure, ranging from
several weeks for incremental sales to existing customers to several months for large deployments.
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Competition
The markets for our Enterprise Mobility Solution, and Magic xpa and Magic xpi platforms are characterized by rapidly changing technology, evolving
industry standards, frequent new product introductions, mergers and acquisitions, and rapidly changing customer requirements. These markets are
therefore highly competitive, and we expect competition to continue to intensify. The growth of the cloud adoption and mobile markets increases the
competition in these areas. We constantly follow and analyze the market trends and our competitors in order to effectively compete in these markets and
avoid losing market share to our direct competitors and other players.
With Magic xpa, we compete in the low-code application platform, SOA architecture and enterprise mobility markets. Among our current competitors
are OutSystems, Appien, Mendix, Kony, Microsoft, and Pegasystems. With Magic xpi, we compete in the integration platform market. Among our
current competitors are IBM, Informatica, TIBCO, MuleSoft, Jitterbit, Talend, Dell–Boomi, Scribe and Software AG.
More and more enterprises prefer to integrate their applications using integration platform as a service (iPaaS) technology and for this purpose we
launched our new Magic xpc, a hybrid iPaaS solution.
There are several similar products in the market utilizing the model driven architecture, or MDA, approach utilized by AppBuilder. The market for this
type of platform is highly competitive. Companies such as CA and IBM have tools that compete directly with AppBuilder. Furthermore, new
development paradigms have become very popular in IT software development and developers today have many alternatives.
As our market grows, we expect that it will attract more highly specialized vendors as well as larger vendors that may continue to acquire or bundle their
products more effectively. The principal competitive factors in our market include:
● platform features, reliability, performance and effectiveness;
● ease of use and speed;
● platform extensibility and ability to integrate with other technology infrastructures;
● deployment flexibility;
● robustness of professional services and customer support;
● price and total cost of ownership;
● strength of platform security and adherence to industry standards and certifications; and
● strength of sales and marketing efforts.
We believe we generally compete favorably with our competitors with respect to the features, security and performance of our platform, the ease of
integration of our applications and the relatively low total cost of ownership of our applications. However, many of our competitors have substantially
greater financial, technical and other resources, greater name recognition, larger sales and marketing budgets, broader distribution, more diversified
product lines and larger and more mature intellectual property portfolios.
The telecom BSS domain in which we operate through our FTS subsidiary is a highly competitive market in which we compete based on product quality,
service quality, timeliness in delivery and pricing. Within the global billing, charging and policy control market, FTS principally competes against global
IT providers and the in-house IT departments of telecommunications operators. Among the competitors focused on this market are Amdocs, Ericsson,
Comverse, NetCracker Technology, CSG Systems, Redknee Solutions and Oracle Communications.
There are also a number of smaller or regional telecom BSS competitors who compete on a regional or domestic market level. These tend to be smaller
players, and may include companies such as Comarch, Mind CTI, Tecnotree, Cerillion, Openet and Elitcore, among others.
Additional competitors may enter each of our markets at any time. Moreover, our customers may choose to develop internally the functionality and
capabilities our current product line offers them and therefore they may also compete with us.
Our goal is to maintain our technological advantages, time to market and worldwide sales and distribution network. We believe that the principal
competitive factors affecting the market for our products include developer productivity, rapid results, product functionality, performance, reliability,
scalability, portability, interoperability, ease-of-use, demonstrable economic benefits for developers and users relative to cost, quality of customer support
and documentation, ease of installation, vendor reputation and experience, financial stability as well as intuitive and out-of-the-box solutions to extend
the capabilities of ERP, CRM and other application vendors for enterprise integration.
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Intellectual Property
In accordance with industry practice, since we have no registered patents on our software solution technologies, we rely upon a combination of copyright,
trademark, trade secret laws and contractual restrictions to protect our rights in our software products. Our policy has been to pursue copyright protection
for our software and related documentation and trademark registration of our product names. In addition, our key employees and independent contractors
and distributors are required to sign non-disclosure and secrecy agreements.
We provide our products to customers under a non-exclusive, non-transferable license. Usually, we have not required end-users of our products to sign
license agreements. Generally, a “shrink wrap” license agreement is included in the product packaging, which explains that by opening the package seal,
the user is agreeing to the terms contained therein. It is uncertain whether license agreements of this type are legally enforceable in all of the countries in
which the software is marketed.
We do not believe that patent laws are a significant source of protection for our products since the software industry is characterized by rapid
technological changes, the policing of unauthorized use of software is a difficult task and software piracy is expected to continue to be a persistent
problem for the packaged software industry. As there can be no assurance that the above-mentioned means of legal protection will be effective against
piracy of our products, and since policing unauthorized use of software is difficult, software piracy can be expected to be a persistent potential problem.
We believe that because of the rapid pace of technological change in the software industry, the legal protections for our products are less significant
factors in our success than the knowledge, ability and experience of our employees, the frequency of product enhancements and the timeliness and quality
of our support services.
Our trademark rights include rights associated with our use of our trademarks and rights obtained by registration of our trademarks. We have obtained
trademark registrations in South Africa, Canada, China, Israel, the Netherlands (Benelux), Switzerland, Thailand, Japan, the United Kingdom and the
United States. The initial terms of the registration of our trademarks range from 10 to 20 years and are renewable thereafter. Our use and registration of
our trademarks do not ensure that we have superior rights to others that may have registered or used identical or related marks on related goods or
services. We have registered a copyright for our software in the United States and Japan. In addition, we have registered copyrights for some of our
manuals in the United States and have acquired an International Standard Book Number (ISBN) for some of our manuals. Our copyrights expire 70 years
from date of first publication.
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C.
ORGANIZATIONAL STRUCTURE
The following table sets forth the legal name, location and country or state of incorporation and percentage ownership of our subsidiaries as of December
31, 2020:
Subsidiary Name
Magic Software Japan K.K
Magic Software Enterprises Inc.
Magic Software Enterprises (UK) Ltd
Hermes Logistics Technologies Limited
Magic Software Enterprises Spain Ltd
Coretech Consulting Group, Inc.
Coretech Consulting Group LLC
Fusion Solutions LLC.
Fusion Technical Solutions LLC.
Xsell Resources Inc.
Magic Software Enterprises (Israel) Ltd
Magic Software Enterprises Netherlands B.V.
Magic Software Enterprises France
Magic Beheer B.V.
Magic Benelux B.V.
Magic Software Enterprises GMBH
Magic Software Enterprises India Pvt. Ltd
Onyx Magyarorszag Szsoftverhaz
Magix Integration (Proprietary) Ltd
AppBuilder Solutions Ltd
Complete Business Solutions Ltd
Datamind Technologies Ltd
CommIT Technology Solutions Ltd
CommIT Software Ltd (shares held by Comm-IT Technology Solutions Ltd.)
CommIT Embedded Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Valinor Ltd. (shares held by Comm-IT Technology Solutions Ltd.)
Dario Solutions IT Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Quickode Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Twingo Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Pilat Europe Ltd.
Pilat (North America), Inc.
Roshtov Software Industries Ltd
BridgeQuest Labs, Inc..
BridgeQuest, Inc.
Allstates Consulting Services LLC
F.T.S. - Formula Telecom Solutions Ltd.
FTS Bulgaria Ltd. (FTS Global Ltd.)
Comblack IT Ltd
Yes-IT Ltd. (shares held by Comblack IT Ltd)
Shavit Software (2009) Ltd. (shares held by Comblack Ltd)
Infinigy (UK) Holdings Limited
Infinigy (US) Holding Inc
Infinigy Solutions LLC.
Infinigy Engineering LLP (shares held by Infinigy Solutions LLC.).
Skysoft Solutions Ltd.
Futurewave Systems, Inc.
OnTarget Group, Inc
NetEffects, Inc.
47
Country of
Incorporation
Japan
Delaware
United Kingdom
United Kingdom
Spain
Pennsylvania
Delaware
Delaware
Delaware
Pennsylvania
Israel
Netherlands
France
Netherlands
Netherlands
Germany
India
Hungary
South Africa
United Kingdom
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
United Kingdom
New Jersey
Israel
North Carolina
North Carolina
Delaware
Israel
Bulgaria
Israel
Israel
Israel
United Kingdom
Georgia
Georgia
Georgia
Israel
Georgia
North Carolina
Missouri
Ownership
Percentage
100%
100%
100%
100%
100%
100%
100%
100%
49%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
77.8%
100%
75%
100%
100%
100%
60%
100%
100%
80%
100%
100%
100%
100%
100%
80%
100%
100%
100%
100%
100%
99.9%
75%
100%
100%
100%
Subsidiary Name
PowWow Inc.
BA Microwaves Ltd.
Stockell Information Systems Inc.
Mobisoft Ltd.
Magic Hands B.V.
Knowledge & Solutions Software B.V.
Aptonet, Inc.
Comm-IT USA, Inc.
Comblack Municipal Services Ltd.
Shavit Human resource Ltd.
D.
PROPERTY, PLANTS AND EQUIPMENT
Country of
Incorporation
California
Israel
Missouri
Israel
Netherlands
Netherlands
Georgia
Delaware
Israel
Israel
Ownership
Percentage
100%
56.67%
100%
70%
100%
100%
100%
100%
70%
100%
Our headquarters and principal administrative, finance, sales, marketing and research and development office is located in a 32,404 square foot office
facility that we lease in Or Yehuda, Israel, a suburb of Tel Aviv. In 2020, we paid $0.4 million in annual rent for the Or Yehuda facilities under a lease
agreement expiring in June 2033.
Our subsidiaries lease office space in Laguna Hills, California; King of Prussia, Pennsylvania; Dallas, Texas; Houston, Texas; New Jersey; Atlanta,
Georgia; Paris, France; Munich, Germany; Pune, India; Bangalore, India; Tokyo, Japan; Budapest, Hungary; Houten, the Netherlands; Johannesburg,
South Africa; Bracknell, the United Kingdom; Saint Petersburg, Russia and various locations in Israel. The aggregate annual cost for such facilities was
$3.3 million during the year ended December 31, 2020.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
48
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A.
OPERATING RESULTS
The following discussion of our results of operations should be read together with our consolidated financial statements and the related notes, which
appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs
and involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include those discussed below and elsewhere in this annual report.
Background
We were organized under the laws of Israel on February 10, 1983 and began operations in 1986. Our Ordinary Shares have been listed on the NASDAQ
Stock Market (symbol: MGIC) since our initial public offering in the United States on August 16, 1991. On January 3, 2011, our shares were transferred
to the NASDAQ Global Select Market. Since November 16, 2000, our Ordinary Shares have also traded on the Tel Aviv Stock Exchange, or the TASE,
and since December 15, 2011, our shares have been included in the TASE’s TA-125 Index.
Overview
We develop market, sell and support application platforms, business and process integration and selected vertical comprehensive software solutions
packages. We have 40 active wholly-owned subsidiaries in the United States, Israel Europe, Asia and South Africa. Of such subsidiaries, 21 are engaged
in developing, marketing and supporting vertical applications, as well as in selling and supporting our products, and 19 subsidiaries specialize in
providing broad range of IT consulting and outsourcing services in the areas of infrastructure design and delivery, application development, technology
planning and implementation services, as well as supplemental outsourcing services.
As an IT technology innovator, we have many years of experience in assisting software companies and enterprises worldwide to produce and integrate
their business applications. Our application platforms, Magic xpa and AppBuilder, are used by thousands of enterprises and MSPs to develop solutions
for their users and customers in approximately 50 countries. We also provide maintenance and technical support as well as professional services to our
enterprise customers and to MSPs. In addition, we sell our Magic xpi and magic xpc technologies for business integration to enterprises using specific
popular software applications, such as SAP, Salesforce.com, IBM i (AS/400) or Oracle JD Edwards and other business applications. We refer to these
vendor-centered market sectors as ecosystems.
Vision and Focus Areas
Our vision of how the industry will evolve is being driven by the change in enterprise mobility, cloud computing and Big Data. We believe that our
technology and extensive services will allow us to expand our offerings into the cloud and mobile enterprise markets with speed, scale and flexibility. We
intend to remain focused on both the technology and business architectures that will enable our customers to take advantage of the cost efficiencies and
competitive advantages conveyed by these technologies. We intend to continue to prudently take advantage of opportunities to capture market transitions
and to put our assets to use in existing and new markets as the recovery continues. We believe that our strategy and our ability to innovate and execute
may enable us to improve our competitive position in difficult business conditions and may continue to provide us with long-term growth opportunities.
Key Factors Affecting our Business
Our operations and the operating metrics discussed below have been and will likely continue to be affected by certain key factors as well as certain
historical events and actions. The key factors affecting our business and results of operations include among others, dependence on a limited number of
core product families, selected vertical software solutions and services, competition, ability to realize benefits from business acquisitions, dependence on
a key customer for a significant percentage of our revenues and changes in the mix of revenues generated by different revenue elements affect our gross
margins and profitability. For further discussion of the factors affecting our results of operations, see “Risk Factors.”
49
Dependence on a limited number of core product families and services
We derive a significant portion of our revenues from sales of application and integration platforms primarily under our Magic xpa, Magic xpi, Magic xpc,
Magic SmartUX and AppBuilder brands and from related professional services, software maintenance and technical support as well as from packaged
software solutions in several business verticals (mainly human recourses, cargo handling, patient medical records and billing), and from other IT
professional services, which include IT consulting and outsourcing services. Our future growth depends heavily on our ability to effectively develop and
sell new products developed by us or acquired from third parties as well as add new features to existing products. A decrease in revenues from our
principal products and services would adversely affect our business, results of operations and financial condition.
Competition
We compete with other companies in the areas of application platforms, business integration and business process management, and in the applications
and services markets in which we operate. The growth of the SaaS and Enterprise Mobility market has increased the competition in these areas. We
expect that such competition will continue to increase in the future, both with respect to our technology, applications and services which we currently
offer and applications and services which we and other vendors are developing. Increased competition, direct and indirect, could adversely affect our
business, financial condition and results of operations.
We also compete with other companies in the technical IT consulting and outsourcing services industry. This industry is highly competitive and
fragmented and has low entry barriers. We, through five of our subsidiaries in the United States and five of our subsidiaries in Israel, compete for
potential customers with providers of outsourcing services, systems integrators, computer systems consultants, other providers of technical IT consulting
services and, to a lesser extent, temporary personnel agencies. We expect competition to increase, and we may not be able to remain competitive.
Some of our existing and potential competitors are larger companies, have substantially greater resources than us, including financial, technological,
marketing, skilled human resources and distribution capabilities, and enjoy greater market recognition than us. We may not be able to differentiate our
products and services from those of our competitors, offer our products as part of integrated systems or solutions to the same extent as our competitors, or
successfully develop or introduce new products that are more cost-effective, or offer better performance than our competitors. Failure to do so could
adversely affect our business, financial condition and results of operations.
Dependence on key customers
We depend on repeat product and professional services revenues from a certain base of existing customers. Our two largest customers accounted for
15.8% and 19.0% of our revenues in the years ended December 31, 2019 and 2020, respectively and our five largest customers accounted for 23.3% and
26.0% of our revenues in the years ended December 31, 2019 and 2020, respectively. If these existing customers decide not to continue utilizing our
professional services, not to renew their existing engagements, not to continue using our products, or decide to significantly decrease their total
expenditures with us, it may adversely affect our business, results of operations and financial condition. While one of these five customers is under a
contract until December 31, 2027, under their master services agreements, the other customers may terminate their agreements with us upon only a 30-
days’ notice and without any penalty.
Revenue Mix
We derive our revenues from the sale of proprietary and third-party software licenses, related professional services, maintenance and technical support as
well as from other IT professional services. In recent years the decline in our gross margin was primarily affected by the change in proportion of our
revenues generated from the sale of each of those elements of our revenues. Our revenues from the sale of our proprietary software licenses, related
professional services, maintenance and technical support have higher gross margins than our revenues from third party software licenses and IT
professional and outsourcing services. Any increase in the portion of third-party software license sales out of total license sales will decrease our gross
profit margin. If the relative proportion of our revenues from the sale of IT professional services continues to increase as a percentage of our total
revenues, our gross profit margins may continue to decline in the future.
50
We may encounter difficulties in realizing the potential financial or strategic benefits of recent and future business acquisitions.
A significant part of our business strategy is to pursue acquisitions and other initiatives based on strategy centered on three key factors: growing our
customer base, expanding geographically and adding complementary solutions to our portfolio— all while we seek to ensure our continued high quality
of services and product delivery. As such, in recent years we made numerous of acquisitions. Mergers and acquisitions of companies are inherently risky
and subject to many factors outside of our control and no assurance can be given that our future acquisitions will be successful and will not adversely
affect our business, operating results, or financial condition. In the future, we may seek to acquire or make strategic investments in complementary
businesses, technologies, services or products, or enter into strategic partnerships or alliances with third parties in the future in order to expand our
business. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results. Prior acquisitions have
resulted in a wide range of outcomes, from successful introduction of new products and technologies to a failure to do so. Even when an acquired
company has previously developed and marketed products, there can be no assurance that new product enhancements will be made in a timely manner or
that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products.
If we acquire another business, we may face difficulties, including:
● Difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired businesses or enterprises;
● Diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread
operations resulting from acquisitions;
● Potential difficulties in completing projects associated with in-process research and development;
● Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger
market positions;
● Insufficient revenue to offset increased expenses associated with acquisitions; and
● The potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and
continuing after announcement of acquisition plans.
Impact of Currency Fluctuations and of Inflation
Our financial statements are stated in U.S. dollars, our functional currency. However, a substantial portion of our revenues and costs are incurred in other
currencies, particularly NIS, Euros, Japanese yen, and the British pound. We also maintain substantial non-U.S. dollar balances of assets, including cash,
accounts receivable, and liabilities, including accounts payable and debts to banks and financial institutions. Therefore, fluctuations in the value of the
currencies in which we do business relative to the U.S. dollar may adversely affect our business, results of operations and financial condition. The
depreciation of such other currencies in relation to the U.S. dollar has the effect of reducing the U.S. dollar value of any of our liabilities which are
payable in those other currencies (unless such costs or payables are linked to the U.S. dollar). Such depreciation also has the effect of decreasing the U.S.
dollar value of any asset that is denominated in such other currencies or receivables payable in such other currencies (unless such receivables are linked to
the U.S. dollar). In addition, the U.S. dollar value of revenues and expenses denominated in such other currencies would decrease. Conversely, the
appreciation of any currency in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of any unlinked assets and the U.S. dollar
amounts of any unlinked liabilities and increasing the U.S. dollar value of revenues and expenses denominated in other currencies.
In addition, while we incur a portion of our costs in NIS, the U.S. dollar cost of our operations in Israel is influenced by the extent to which any increase
in the rate of inflation in Israel is (or is not) offset, or is offset on a lagging basis, by a devaluation of the NIS in relation to the U.S. dollar.
Because exchange rates between the NIS, euro, Japanese Yen and the British pound and the U.S. dollar fluctuate continuously, exchange rate fluctuations
and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons of our results. We cannot assure you
that in the future our results of operations may not be adversely affected by currency fluctuations.
51
The following table sets forth for the periods indicated, (depreciation) or appreciation of the U.S. dollar against the most important currencies for our
business and the Israeli consumer price index:
New Israeli Shekel
Euro
Japanese Yen
British Pound
Israeli Consumer Price Index
Segments
2020
Year Ended December 31,
2018
2019
2017
2016
(7.0)%
(8.5)%
(5.0)%
(3.4)%
(0.7)%
(7.8)%
2.0%
(1.2)%
(3.1)%
0.6%
8.1%
4.6%
(2.4)%
5.6%
0.8%
(9.8)%
(12.2)%
(3.8)%
(9)%
0.4%
(1.5)%
3.5%
(2.8)%
20.6%
(0.2)%
We report our results on the basis of two reportable business segments: software services (which include proprietary and non-proprietary software
technology and complementary services) and IT professional services. Set forth below is segment information for the years ended December 31, 2018,
2019 and 2020.
2018
Total revenues
Expenses
Operating income (loss)
Depreciation, amortization and stock-based compensation expenses
Capitalized software development costs
EBITDA
2019
Total revenues
Expenses
Operating income (loss)
Depreciation, amortization and stock-based compensation expenses
Capitalized software development costs
EBITDA
2020
Total revenues
Expenses
Operating income (loss)
Depreciation, amortization and stock-based compensation expenses
Capitalized software development costs
EBITDA
Software
services
Unallocated
IT professional
services
expense
(U.S. dollars in thousands)
Total
81,332
63,902
17,430
8,727
(3,666)
22,491
86,140
71,825
14,315
8,799
(4,143)
18,971
86,025
64,498
21,527
10,329
(3,302)
28,554
$
$
$
$
$
$
$
$
$
203,043
183,985
19,058
3,611
-
22,669
239,490
216,842
22,648
5,059
-
27,707
285,169
258,907
26,262
3,347
-
29,609
$
$
$
$
$
$
$
$
$
$
-
4,790
(4,790) $
420
-
(4,370) $
$
-
3,311
(3,311) $
241
-
(3,070) $
$
-
7,201
(7,201) $
263
-
(6,938) $
284,375
252,677
31,698
12,758
(3,666)
40,790
325,630
291,978
33,652
14,099
(4,143)
43,608
371,194
330,606
40,588
13,939
(3,302)
51,225
$
$
$
$
$
$
$
$
$
52
Explanation of Key Income Statement Items
Revenues. Revenues are derived from sales of software licenses (proprietary and non-proprietary), related professional services, maintenance and
technical support and other IT professional services, which include, cloud computing and IT consulting and outsourcing services. Revenues may continue
to be affected by factors including market uncertainty, which can result in cautious spending in our global markets; changes in the geopolitical
environment; sales cycles; fluctuation of exchange rates; changes in the mix of direct sales and indirect sales and variations in sales channels.
Cost of Revenues. Cost of revenues for software sales consist primarily of software production costs, royalties and licenses payable to third parties, as
well as amortization of capitalized and acquired software costs. Cost of revenues for maintenance and technical support and professional services consists
primarily of personnel expenses, subcontracting and other related costs. Cost of revenues for software sales is affected by changes in the mix of products
sold; price competition; sales discounts; fluctuation of exchange rates; and increases in labor costs. Service gross margin may be impacted by various
factors such as the change in mix between technical support services and advanced IT professional services, the timing of technical support service
contract initiations and renewals and the timing of our strategic investments in headcount and resources to support this business.
Research and Development Expenses, Net. Research and development costs consist primarily of personnel expenses of employees engaged in on-going
research and development activities, subcontracting, development tools and other related expenses. The capitalization of software development costs is
applied as reductions to gross research and development costs to calculate net research and development expenses.
The following table sets forth the gross research and development costs, capitalized software development costs, and the net research and development
expenses for the periods indicated:
Gross research and development costs
Less capitalized software development costs
Research and development expenses, net
2020
Year ended December 31,
2019
(U.S. dollars in thousands)
2018
$
$
12,091
(3,302)
8,789
$
$
12,382
(4,143)
8,239
$
$
9,362
(3,666)
5,696
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related expenses for sales and marketing personnel,
sales commissions, third party royalties, marketing programs and campaigns, website related expenses, public relations, on-line advertising, industry
analyst relations, promotional materials, travel expenses and conferences and trade shows exhibit expenses, as well as amortization of acquired customer
relationships recorded as a result of business combinations.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related expenses for executive, accounting,
human resources and administrative personnel, professional fees, legal expenses, provisions for credit losses, and other general and administrative
corporate expenses.
Financial income (expenses), net. Net financial income (expenses) consists primarily of interest earned on cash equivalents deposits and marketable
securities, bank fees and interest paid on loans received, interest expenses related to liabilities in connection with acquisitions and impact of foreign
currency exchange rates fluctuations.
53
Results of Operations
The following table presents selected consolidated statement of operations data for the periods indicated as a percentage of total revenues:
Revenues:
Software
Maintenance and technical support
Consulting services
Total revenues
Cost of revenues:
Software
Maintenance and technical support
Consulting services
Total cost of revenues
Gross profit
Operating costs and expenses:
Research and development, net
Selling and marketing,
General and administrative
Change in valuation of contingent consideration related to acquisitions
Total operating expenses, net
Operating income
Financial income (expenses), net
Increase in valuation of contingent consideration related to acquisitions
Income before taxes on income
Tax on income
Net income attributable to redeemable non-controlling interests
Net income attributable to non-controlling interests
Net income attributable to Magic’s shareholders
Year ended December 31,
2019
2018
2020
6.6%
8.9
84.5
100.0%
8.6%
9.5
81.9
100.0%
9.0%
10.8
80.2
100.0%
2.8
1.0
66.7
70.5
29.5
2.4
8.4
7.5
0.3
18.6
10.9
(0.3)
(0.6)
10.0
(1.9)
(0.8)
(0.5)
6.8
3.1
1.3
64.2
68.6
31.4
2.5
9.4
9.1
0.1
21.1
10.3
(0.3)
-
10.0
(2.1)
(1.0)
(0.7)
6.2
3.5
1.4
63.9
68.8
31.2
2.0
9.6
8.5
-
20.1
11.1
0.1
-
11.2
(2.5)
(1.2)
(0.5)
7.0
Year Ended December 31, 2020 Compared with Year Ended December 31, 2019
Revenues. Revenues in 2020 increased by 14% from $325.6 million in 2019 to $371.2 million in 2020.
Revenues from the software services business segment remained stagnant with a slight decrease from $86.1 million in 2019 to $86.0 million in 2020.
Revenues from the IT professional services business segment increased by 19% from $239.5 million in 2019 to $285.2 million in 2020, primarily
attributable to the inclusion of NetEffects revenues on a full year basis, acquisition of Stockell and Aptonet and increased revenues recorded by
Comblack and due to increased demand for IT software services in the financial services and healthcare sectors.
Revenues from sales of proprietary technology software licenses decreased by 24% from $16.4 million in 2019 to $12.4 million in 2020. The decrease is
primarily attributed to a multiyear transaction which began and recognized in 2019 with a few key customers.
Revenues from sales of proprietary packaged and third-party software solutions increased by 2% from $11.6 million in 2019 to $11.8 million in 2020.
Revenues from maintenance and technical support increased by 7% from $31.0 million in 2019 to $33.2 million in 2020. The increase is primarily
attributable to the increase in our customer base.
Revenues from IT consulting services increased by 18% from $266.6 million in 2019 to $313.7 million in 2020. The increase was primarily attributable
to the acquisitions of Aptonet and Stockell and the full year consolidation of NetEffects and increased revenues from two key customers.
54
The following table summarizes our revenues by geographical market for the years ended December 31, 2019 and 2020:
United States
Israel
Europe
Japan
Other
Total revenues
Year ended December 31,
2020
2019
(U.S. dollars in thousands)
$
$
177,882
149,094
26,947
12,643
4,628
371,194
$
$
158,095
124,523
25,788
12,499
4,725
325,630
Cost of Revenues. Cost of revenues increased by 17% from $223.5 million in 2019 to $261.6 million in 2020.
Cost of revenues for software increased by 3% from $10.2 million in 2019 to $10.5 million in 2020.
Cost of revenues for maintenance and technical support decreased by 14% from $4.2 million in 2019 to $3.6 million in 2020.
Cost of revenues for IT consulting services increased by 18% from $209.1 million in 2019 to $247.5 million in 2020. The increase in cost of revenues for
IT consulting services is consistent with the increase in revenues from the same segment.
Gross Margin. Gross margin declined by 1.9% from 31.4% in 2019 to 29.5% in 2020. The decrease in our gross margin is mainly attributable to the
change of our revenue mix related to our software services which remained unchanged between the years while our IT professional services revenues
increased by $46 million.
Research and Development Expenses, Net. Gross research and development costs decreased by 2% from $12.4 million in 2019 to $12.1 million in 2020.
Net research and development costs increased by 7% from $8.2 million in 2019 to $8.8 million in 2020. In 2020, we capitalized $3.3 million of software
development costs compared to $4.1 million in 2019. Net research and development costs as a percentage of revenues was 2.4% in 2020 compared to
2.5% in 2019. Gross (net) research and development costs as a percentage of revenues of our software services business segment remained consistent and
was approximately 14% (10%) in 2020 and in 2019.
Selling and Marketing Expenses. Selling and marketing expenses increased by 2% from $30.5 million in 2019 to $31.2 million in 2020. Selling and
marketing expenses as a percentage of revenues decreased from 9.4% in 2019 to 8.4% in 2020. The increase is in line with the increase in sales. Selling
and marketing expenses for the year ended December 31, 2019 include $74,000 of stock-based compensation recorded under ASC 718. We incurred no
stock-based compensation expenses in 2020.
General and Administrative Expenses. General and administrative expenses decreased by 5.0% from $29.5 million in 2019 to $28.0 million in 2020.
General and administrative expenses as a percentage of revenues decreased from 9.1% in 2019 to 7.5% in 2020. The decrease in expenses is attributable
mainly to cost savings measures taken with respect to the COVID-19 business disruption.
55
Financial Expenses, Net. We recorded net financial expenses of $1.2 million in 2019 and $0.9 million in 2020. Taxes on Income. We recorded taxes on
income of $6.9 million in 2019 compared to $7.3 million in 2020.
Net Income Attributable to Our Shareholders. Our net income increased from $20.3 million in 2019 to $25.2 million in 2020, primarily attributable to
an increase in gross profit of $7.5 offset by a revaluation of $3.4 million related to contingent consideration out of which $1.1 million was recorded as
part of the operating expenses.
Impact of the COVID-19 Pandemic on Our Operations
The impact of the COVID-19 pandemic has resulted in and will likely continue to result in significant disruptions to the global economy, as well as
businesses and capital markets around the world. In an effort to halt the outbreak of COVID-19, a number of countries, including the United States and
Israel where we have key operations, placed significant restrictions on travel, and many businesses announced extended closures. It is unclear how long
total or partial shutdowns may last and whether additional shutdowns will be necessary to the extent future outbreaks occur.
We have taken various steps to safeguard employees that have had the effect of curtailing direct sales activities. It may take an extended period after
current restrictions end for us to engage potential new customers. We continue to monitor our sales pipeline on a day-to-day basis in order to assess the
effect of these limitations on our current sales and our future pipeline development.
COVID-19 may impact the health of our employees, management, or customers, reduce the availability of our workforce or those of companies with
which we do business, or create disruptions in our supply networks. The adverse effects of such events on us may include disruption to our operations, or
demand for our products in the short and/or long term.
Year Ended December 31, 2019 Compared with Year Ended December 31, 2018
Please see Item 5A of our Form 20-F for the Year ended December 31, 2019 filed on May 14, 2020 for this comparison.
B.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations through income generated by operations, proceeds from our public offerings in 1991 (approximately $8.5
million), 1996 (approximately $5.0 million), 2000 (approximately $79.6 million) and 2014 (approximately $54.7 million), private equity investments in
1998 (approximately $12.2 million), 2010 (approximately $20.3 million) and 2018 (approximately $34.6 million), loans and research and development
and marketing grants primarily from the Government of Israel. In addition, we have also financed our operations through short-term loans, long-term
loans and borrowings under available credit facilities.
In November 2016, we obtained a NIS 120 million loan linked to the New Israel Shekel from an Israeli financial institution. We intended to use the
proceeds from this loan for our general corporate purposes, which may include the funding of our working capital needs and the funding of potential
acquisitions. The principal amount of the loan is payable in seven equal annual payments with the final payment due on November 2, 2023 and bears a
fixed interest rate of 2.60% per annum, payable in two semi-annually payments. The loan, which may be prepaid under certain circumstances (in any
event for not less than NIS 5.0 million and thereon for amounts which are a multiple of NIS 5.0 million), is subject to various financial covenants which
mainly consist of the following:
a. Our equity will not be lower than $100 million (one hundred million U.S. Dollars) at all times;
b. Our cash and cash equivalent and marketable securities available for sales will not be less than $10 million (ten million U.S. Dollars);
c. The ratio of our total financial debts to total assets will not exceed 50%;
d. The ratio of our total financial debts less cash, short-term deposits and short-term marketable securities to the annual EBITDA will not
exceed 3.25 to 1;
e. Cross default, including following an immediate repayment initiated in relation to other financial indebtedness in an amount that exceeds $5
million;
f.
g.
Suspension of trading of the debentures on the TASE over a period of 60 days, or the delisting of the debentures from the TASE;
If there is a change in control without consent of the lender (a change of control is deemed to occur if Formula ceases to be the controlling
shareholder of our company, whether directly or indirectly. Formula will be considered a controlling shareholder for so long as it continues
to hold at least 30% of the means of control of our company (within the meaning of the Israeli Securities Law) and there is no other person
or entity holding a higher percentage. To the extent that Formula holds such controlling interest jointly with others, it will be deemed to
remain our controlling shareholder if it maintains the highest percentage ownership among such other shareholders);
h. The existence and continuation of a bankruptcy event involving our company, or the liquidation of our company or writing off of our assets;
i.
There has been a material adverse change in the business of our company compared to the position of our company shortly before the
issuance of the loan and there is a material concern that we will not be able to pay our obligations under the loan agreement on time; and
j.
Failure to comply with the negative pledge covenant.
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To date, we are in full compliance with the financial covenants of the loan.
On July 12, 2018, we issued 4,268,293 ordinary shares at a price of $8.20 per share for a total of $34.6 million net of issuance expenses. The shares were
issued to Israeli institutional investors and to our controlling shareholder, Formula Systems (1985) Ltd.
As of December 31, 2020, we had $89.7 million in cash and cash equivalents and available-for-sale marketable securities, with net working capital of
approximately $126.4 million and long term debts to banks and others of approximately $13.4 million compared to $95.5 million in cash and cash
equivalents and available-for-sale marketable securities, with net working capital of $138.2 million and long term debts to banks and others of $15.5
million, as of December 31, 2019.
As of December 31, 2019, and 2020, our long-term and short-term debt amounted to $22.6 million and $24.9 million, respectively and our redeemable
non-controlling interests as of December 31, 2019 and 2020 amounted to $21.9 million and $25.0 million, respectively.
Based on our current operating forecast, we believe that our cash and cash equivalents (including available-for-sale marketable securities and existing
working capital), will be sufficient to meet our cash requirements for working capital and capital expenditures for at least the next 12 months. We assume
that our cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating
results, accounts receivable collections, payments of loans and the timing and amount of tax and other payments.
We believe the overall credit quality of our portfolio is strong, with our cash equivalents and fixed income portfolio invested in securities with a
weighted-average credit rating exceeding A. Our fixed income and publicly traded equity securities are classified as Level 2 investments, as measured
under ASC 820, “Fair Value Measurements and Disclosures,” as these vendors either provide a quoted market price in an active market or use observable
inputs.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Net income from operations
Adjustments to reconcile net income to net cash provided by operating activities
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents from operations
2020
Year ended December 31,
2019
(U.S. dollars in thousands)
2018
30,117
22,179
52,296
(9,604)
(39,647)
3,167
6,212
$
$
$
25,598
20,350
45,948
(15,440)
(36,980)
1,261
(5,211) $
24,776
(726)
24,050
(19,554)
8,426
(1,872)
11,050
$
$
Net cash provided by operating activities was $52.3 million for the year ended December 31, 2020, compared to $45.9 million and $24.1 million for the
years ended December 31, 2019 and 2018, respectively.
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Net cash provided by operations in 2020 consisted primarily of $30.1 million of net income adjusted for non-cash activities, including $13.9 million of
depreciation and amortization expenses, net, a $3.4 million decrease in other long term and short term accounts receivable and prepaid expenses, a $1.9
million increase in trade payables, a $8.2 million increase in accrued expenses and other accounts payable, and a $1.4 million increase in value of loans
which are denominated in NIS as a result of the appreciation of the NIS in relation to the U.S. dollar, offset by a $1.7 million change in deferred taxes,
net, a $3.9 million increase in trade receivables, and a $0.9 million decrease in deferred revenues,.
Net cash provided by operations in 2019 consisted primarily of $25.6 million of net income adjusted for non-cash activities, including $14.0 million of
depreciation and amortization expenses, $0.1 million of stock compensation expenses, a $6.5 million decrease in trade receivables, net, a $9.6 million
decrease in other long term and short term accounts receivable and prepaid expenses, a $0.1 million of amortization of marketable securities premium, a
$2.9 million increase in deferred revenues, and a $1.9 million increase in value of loans which are denominated in NIS as a result of the appreciation of
the NIS in relation to the U.S. dollar, offset by a $1.9 million change in deferred taxes, net, a $5.3 million decrease in trade payables, and a $7.7 million
decrease in accrued expenses and other accounts payable.
Net cash provided by operations in 2018 consisted primarily of $24.8 million of net income adjusted for non-cash activities, including $12.6 million of
depreciation and amortization expenses, $0.2 million of stock compensation expenses, a $2.2 million increase in trade payables, a $0.2 million of
amortization of marketable securities premium, a $1.8 million increase in accrued expenses and other accounts payable, a $0.4 million decrease in
deferred revenues, and a $2.1 million decrease in value of loans which are denominated in NIS as a result of the devaluation of the NIS in relation to the
U.S. dollar, offset by a $0.5 million change in deferred taxes, net, a $4.4 million increase in in other long term and short term accounts receivable and
prepaid expenses, and a $11.4 million increase in trade receivables, net.
Net cash used in investing activities was approximately $9.6 million for the year ended December 31, 2020, compared to net cash used in investing
activities of approximately $15.4 million for the year ended December 31, 2019 and net cash used in investing activities of approximately $19.6 million
for the year ended December 31, 2018.
Net cash used in investing activities in 2020 is primarily attributable to $16.5 million used in business combinations, $2.8 million used to purchase
property and equipment and $3.3 million of capitalized software development costs, offset by proceeds of $7.5 million from investment in short-term
bank deposits, and proceeds of $5.4 million from maturity of marketable securities.
Net cash used in investing activities in 2019 is primarily attributable to $0.7 investment in long-term bank deposits, $22.6 million used in business
combinations, $1.4 million used to purchase property and equipment and $4.1 million of capitalized software development costs, offset by $10.0 million
investment in short-term bank deposits, and $3.4 million provided by proceeds from maturity of marketable securities.
Net cash used in investing activities in 2018 is primarily attributable to $16.9 million investment in short-term bank deposits, $0.9 investment in long-
term bank deposits, $1.2 million used in business combinations, $0.9 million used to purchase property and equipment and $3.7 million of capitalized
software development costs, offset by $4 million provided by proceeds from maturity of marketable securities.
Net cash used in financing activities was approximately $39.6 million for the year ended December 31, 2020, primarily attributable to dividend
distributions of $12.5 million, dividends paid to non-controlling interests of $5.1 million, dividends paid to redeemable non-controlling interests of $4.6
million, purchase of redeemable non-controlling interests of $18.0 million, and repayment of short-term and long-term loans of $9.4 million, which were
offset by $0.1 million received from the exercise of employee options, and proceeds from short-term and long-term loans received in the amount of $9.6
million.
Net cash used in financing activities was approximately $37.0 million for the year ended December 31, 2019, primarily attributable to dividend
distributions of $15.0 million, dividends paid to non-controlling interests of $0.5 million, dividends paid to redeemable non-controlling interests of $3.4
million, purchase of redeemable non-controlling interests of $5.6 million, and repayment of short-term and long-term loans of $13.6 million, which were
offset by issuance of $0.1 million of ordinary shares, $0.1 million received from the exercise of employee options, and short-term and long-term loans
received of $0.9 million.
Net cash provided by financing activities was approximately $8.4 million for the year ended December 31, 2018, primarily attributable to the issuance of
$34.6 million of ordinary shares and $0.3 million received from the exercise of employee options, which were offset by $3.1 million used in business
combinations, dividend distributions of $13.5 million, dividends paid to redeemable non-controlling interests of $2.7 million, decrease in short-term
credit of $0.4 million and repayment of long-term loans of $6.6 million.
58
Dividends
We have paid dividends since September 2012 consistent with our Board of Directors’ dividend policy. On August 2017, our Board of Directors amended
our dividend distribution policy, whereas, each year we distribute a dividend of up to 75% of our annual distributable profits (previously 50%), subject to
applicable law. Our Board of Directors may at its discretion and at any time, change, whether as a result of a one-time decision or a change in policy, the
rate of dividend distributions or decide not to distribute a dividend.
For information about our dividend policy and distributions, see Item 8A. “Financial Information - Consolidated Statements and Other Financial
Information.”
General
Our consolidated financial statements appearing in this annual report have been prepared in U.S. dollars and in accordance with U.S. GAAP.
Transactions and balances originally denominated in dollars are presented at their original amounts. Transactions and balances in currencies other than
the U.S. dollar are converted into dollars in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or
ASC, 830 “Foreign Currency Matters.” The majority of our sales are made outside of Israel and a substantial part of them is in dollars. In addition, a
substantial portion of our costs is incurred in dollars. Since the dollar is the primary currency of the economic environment in which we and certain of our
subsidiaries operate, the dollar is our functional and reporting currency and accordingly, monetary accounts maintained in currencies other than the dollar
are remeasured into dollars using the foreign exchange rate in effect at each balance sheet date. Operational accounts and non-monetary balance sheet
accounts are measured and recorded at the exchange rate in effect at the date of the transaction. For certain foreign subsidiaries whose functional currency
is other than the U.S. dollar, all balance sheet accounts have been translated using the exchange rates in effect at each balance sheet date. Operational
accounts have been translated using the average exchange rate prevailing during each year. The resulting translation adjustments are reported as a
component of accumulated other comprehensive income (loss) in equity.
Critical Accounting Policies and Estimations
We have identified the policies below as critical to the understanding of our financial statements. The preparation of our consolidated financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions in certain circumstances that affect the amounts reported in the
accompanying financial statements and the related footnotes. Actual results may differ from these estimates. To facilitate the understanding of our
business activities, certain of our accounting policies that we believe are the most important to the portrayal of our financial condition and results of
operations and that require management’s subjective judgments are described below. We base our judgments on our experience and various assumptions
that we believe are reasonable.
Revenue Recognition
We implemented the provisions of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). See
Note 19 to our financial statements included in this annual report for further disclosures required under ASC 606.
Revenues are recognized when control of the promised goods or services are transferred to the customers, in an amount that reflects the consideration that
we expect to receive in exchange for those goods or services.
59
We determine revenue recognition through the following steps:
● identification of the contract with a customer;
● identification of the performance obligations in the contract;
● determination of the transaction price;
● allocation of the transaction price to the performance obligations in the contract; and
● recognition of revenue when, or as, we satisfy a performance obligation.
Certain of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations
separately if they are distinct.
We derive our revenues from licensing the rights to use our software (proprietary and non-proprietary), provision of related professional services,
maintenance and technical support as well as from other software and IT professional services (either fixed price or based on time and materials). We sell
our products primarily through direct sales force and indirectly through distributors and value added resellers.
Under ASC 606, an entity recognizes revenue when or as it satisfies a performance obligation by transferring software license or software services to the
customer, either at a point in time or over time. We recognize our revenues from software sales at a point in time upon delivery of a software license. The
software license is considered a distinct performance obligation, as the customer can benefit from the software on its own. Revenues from contracts that
involve significant customization to customer-specific specifications are performance obligations the we generally account for as performance obligations
satisfied over time. The underlying deliverable is owned and controlled by the customer and does not create an asset with an alternative use to us. We
recognize revenue of such contracts over time using cost inputs, which recognize revenue and gross profit as work is performed based on a ratio between
actual costs incurred compared to the total estimated costs for the contract, to measure progress toward completion of its performance obligations, which
is similar to the method prior to the adoption of ASC 606. Provisions for estimated losses on uncompleted contracts are made in the period in which such
losses are first determined, in the amount of the estimated loss for the entire contract. During the years ended December 31, 2018, 2019 and 2020, no
material estimated losses were identified. In addition, we provide professional services that do not involve significant customization to customer-specific
specifications. For contracts that do not involve significant customization to customer-specific specifications (typically staffing or consulting services)
revenue is recognized as the services are performed, either on a straight-line basis or based on the hours of services that were provided to the customer, in
accordance with the terms of the contracts.
Our revenues from post contract support are derived from annual maintenance contracts providing for unspecified upgrades for new versions and
enhancements on a when-and-if-available basis for an annual fee. The right for an unspecified upgrade for new versions and enhancements on a when-
and-if-available basis do not specify the features, functionality and release date of future product enhancements for the customer to know what will be
made available and the general timeframe in which it will be delivered. We consider the post contract support performance obligation as a distinct
performance obligation that is satisfied over time, and recognized on a straight-line basis over the contractual period.
Revenue from professional services both related to software and IT professional services businesses consists of either fixed price or Time and Materials
(T&M), and are considered performance obligations that are satisfied over time, and revenues are recognized as the services are provided.
The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices of software
license are estimated using the residual approach, due to the lack of selling software licenses on a standalone basis, or the fact Company sells the license
to different customers for a broad range of amounts. Standalone selling prices of services are determined by considering several external and internal
factors including, but not limited to, transactions where the specific performance obligation is sold separately.
We generally do not grant a right of return to our customers. When a right of return exists, we defer revenue until the right of return expires, at which
time revenue is recognized provided that all other revenue recognition criteria are met.
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Deferred revenues include unearned amounts received under maintenance and support (mainly) and amounts received from customers for which revenues
have not yet been recognized.
Revenue from third-party sales is recorded at a gross or net amount according to certain indicators. The application of these indicators for gross and net
reporting of revenue depends on the relative facts and circumstances of each sale and requires significant judgment.
We pay commissions to sales and marketing and certain management personnel based on their attainment of certain predetermined sales or profit goals.
Sales commissions are considered incremental costs of obtaining a contract with a customer and are deferred and amortized. We capitalize and amortize
incremental costs of obtaining a contract, such as certain sales commission costs, on a systematic basis that is consistent with the transfer to the customer
of the performance obligations to which the asset relates. We generally expense sales commissions as they are incurred when the amortization period
would have been less than one year. In addition, generally, sales commission which are paid upon contract renewal are commensurate with the initial
commissions as the renewal amounts are substantially identical to the initial commission costs. During the year ended December 31, 2020, no costs were
capitalized.
We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between
payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
Research and development costs
Research and development costs incurred in the process of software development before establishment of technological feasibility are charged to
expenses as incurred. Costs incurred subsequent to the establishment of technological feasibility are capitalized according to the principles set forth in
ASC 985-20, “Costs of Software to be Sold, Leased or Marketed.”
We establish technological feasibility upon completion of a detailed program design or working model.
Research and development costs incurred in the process of developing product enhancements are generally charged to expenses as incurred.
ASC 985-20-35 requires that a product be amortized when the product is available for general release to customers. We consider a product to be available
for general release to customers when we complete the internal validation of the product that is necessary to establish that the product meets its design
specifications including functions, features, and technical performance requirements. Internal validation includes the completion of coding,
documentation and testing that ensure bugs are reduced to a minimum. The internal validation of the product takes place a few weeks before the product
is made available to the market. In certain instances, we enter into a short pre-release stage, during which the product is made available to a selected
number of customers as a beta program for their own review and familiarization. Subsequently, the release is made generally available to customers from
our download area. Once a product is considered available for general release to customers, the capitalization of costs ceases and amortization of such
costs to “cost of sales” begins.
Capitalized software costs are amortized on a product by product basis by the straight-line method over the estimated useful life of the software product
(approximately 5 years, due to their high rates of acceptance, the continued reliance on these products by existing customers, and the demand for such
products from prospective customers, all of which validate our expectations) which provides greater amortization expense compared to the revenue-curve
method.
We assess the recoverability of these intangible assets on a regular basis by assessing the net realizable value of these intangible assets based on the
estimated future gross revenues from each product reduced by the estimated future costs of completing and disposing of it, including the estimated costs
of performing maintenance and customer support over its remaining economical useful life using internally generated projections of future revenues
generated by the products, cost of completion of products and cost of delivery to customers over its remaining economical useful life. During the years
ended December 31, 2018, 2019 and 2020, no such unrecoverable amounts were identified.
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Research and development costs incurred in the process of developing product enhancements are generally charged to expenses as incurred.
Business Combinations
We account for business combinations under ASC 805 “Business Combinations,” which requires that we allocate the purchase price of acquired
businesses to assets acquired, liabilities assumed, non-controlling interest and redeemable non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date. We expense any excess of the fair value of net assets acquired over purchase price and any subsequent
changes in estimated contingencies as they are incurred. In addition, changes in valuation allowance related to acquired deferred tax assets and in
acquired income tax position are to be recognized in earnings. We engage third-party appraisal firms to assist management in determining the fair values
of certain assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with
respect to intangible assets.
We make estimates of fair value based upon assumptions and judgments a marketplace participant would consider and which we believe to be reasonable.
These estimates are based on historical experience and information obtained from the management of the acquired businesses and relevant market and
industry data and are, inherently, uncertain. Critical estimates made in valuing certain of the intangible assets include, among other things, the following:
(i) future expected cash flows from license sales, maintenance agreements, customer contracts and acquired developed technologies and patents; (ii)
expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when
completed; (iii) the acquired company’s brand and market position as well as assumptions about the period of time the acquired brand will continue to be
used in the combined company’s product portfolio; and (iv) discount rates. Unanticipated events and circumstances may occur which may affect the
accuracy or validity of such assumptions, estimates or actual results. Changes to these estimates, relating to circumstances that existed at the acquisition
date, are recorded as an adjustment to goodwill during the purchase price allocation period (generally within one year of the acquisition date) and as
operating expenses, if otherwise.
In connection with purchase price allocations, we estimate the fair value of the support obligations assumed in connection with acquisitions. The
estimated fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair value by
estimating the costs related to fulfilling the obligations plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the
amount that we would be required to pay a third party to assume the support obligation. See Note 3 to our consolidated financial statements for additional
information on accounting for our recent acquisitions.
During the years ended December 31, 2019 and 2020 we recorded $0.3 million and $3.4 million, with respect to changes in the fair value of contingent
consideration liability, respectively.
Goodwill
As a result of our acquisitions, our goodwill represents the excess of the consideration paid or transferred plus the fair value of contingent consideration
and any non-controlling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. Under ASC 350,
“Intangibles - Goodwill and Other”, goodwill is subject to an annual impairment test or more frequently if impairment indicators are present. Goodwill
impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. As of December 31, 2020, we operate in four
reporting units within its operating segments.
ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment
test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If it does
result in a more likely than not indication of impairment, the two-step impairment test is performed. Alternatively, ASC 350 permits an entity to bypass
the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test.
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The provisions of ASC 350 require that the quantitative two-step impairment test will be performed on goodwill at the level of the reporting units. In the
first step, or “Step one”, we compare the fair value of each reporting unit to its carrying value. If the fair value exceeds the carrying value of the net
assets, goodwill is considered not impaired, and we are not required to perform further testing. If the carrying value of the net assets exceeds the fair
value, then we must perform the second step, or “Step two”, of the impairment test in order to determine the implied fair value of goodwill. To determine
the fair value used in Step one, we use discounted cash flows. If and when we are required to perform a Step two analysis, determining the fair value of
its net assets and its off-balance sheet intangibles, then we would be required to make judgments that involve the use of significant estimates and
assumptions.
We determine the fair value of each reporting unit by using the income approach, which utilizes a discounted cash flow model, as it believes that this
approach best approximates the reporting unit’s fair value. Judgments and assumptions related to revenue, operating income, future short-term and long-
term growth rates, weighted average cost of capital, interest, capital expenditures, cash flows, and market conditions are inherent in developing the
discounted cash flow model. We consider historical rates and current market conditions when determining the discount and growth rates to use in its
analyses. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for its goodwill.
We performed annual impairment tests during the fourth quarter in each of the years ended December 31, 2018, 2019 and 2020 and did not identify any
impairment losses. See Note 9 to our financial statements included in this annual report for further disclosures required under ASC 350.
Impairment of long-lived assets, right of use assets and intangible assets subject to amortization
We review our long-lived assets to be held or used, including right of use assets and intangible assets that are subject to amortization long-lived assets for
impairment in accordance with ASC 360, “Property, Plant and Equipment,” or ASC 360, whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an
asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets.
As required by ASC 820, “Fair Value Measurements and disclosures” we apply assumptions, judgments and estimates that marketplace participants
would consider in determining the fair value of long-lived assets (or asset groups).
Intangible assets with finite lives are comprised of distribution rights, acquired technology, customer relationships, backlog and non-compete agreements
and are amortized over their economic useful life using a method of amortization that reflects the pattern in which the economic benefits of the intangible
assets are consumed or otherwise used up. Distribution rights, acquired technology and non-compete agreements were amortized on a straight line basis
and customer relationships and backlog were amortized on an accelerated method basis over a period between 1 and 15 years based on the customer
relationships identified.
During the years ended December 31, 2018, 2019 and 2020, no impairment indicators were identified.
Marketable Securities
We account for all our investments in marketable securities in accordance with ASC 320 “Investments – Debt and Equity Securities,” or ASC 320. Our
marketable securities consist solely of debt securities which are designated as available-for-sale and are stated at fair value, with unrealized gains and
losses reported in accumulated other comprehensive income (loss), a separate component of shareholders’ equity. Realized gains and losses on sales of
investments, as determined on a specific identification basis, are included in financial income, net, together with accretion (amortization) of discount
(premium), and interest or dividends. Other debt securities are held as trading securities and are measured at fair value through profit or loss.
We recognize an impairment charge when a decline in the fair value of an investment that falls below its cost basis is determined to be other-than-
temporary.
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Declines in fair value of available-for-sale equity securities that are considered other-than-temporary, based on criteria described in SAB Topic 5M,
“Other Than Temporary Impairment of Certain Investments in Equity Securities,” are charged to earnings (based on the entire difference between fair
value and amortized cost). Factors considered in making such a determination include the duration and severity of the impairment, the financial condition
and near-term prospects of the issuer, and the intent and ability of the company to retain its investment for a period of time sufficient to allow for any
anticipated recovery in market value.
For declines in value of debt securities we apply an amendment to ASC 320. Under the amended impairment model, an other-than-temporary impairment
loss is deemed to exist and recognized in earnings if management intends to sell or if it is more likely than not that it will be required to sell, a debt
security, before recovery of its amortized cost basis. If the criteria mentioned above, does not exist, we evaluate the collectability of the security in order
to determine if the security is other than temporary impaired.
For debt securities that are deemed other-than-temporary impaired, the amount of impairment recognized in the statement of operations is limited to the
amount related to “credit losses” (the difference between the amortized cost of the security and the present value of the cash flows expected to be
collected), while impairment related to other factors is recognized in other comprehensive income.
We did not record any impairment in the value of marketable securities during the years ended December 31, 2018, 2019 and 2020.
Stock-based Compensation
We account for stock-based compensation in accordance with ASC 718 “Compensation – Stock Compensation,” or ASC 718 which requires registrants
to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated statement of income. We recognize
compensation expenses for the value of our awards, which have graded vesting based on the accelerated method over the requisite service period of each
of the awards, net of estimated forfeitures. To measure and recognize compensation expense for share-based awards we use the Binomial option-pricing
model. The Binomial model for option pricing requires a number of assumptions such as volatility, dividend yield rate, and risk-free interest rate and also
allows for the use of dynamic assumptions and considers the contractual term of the option, the probability that the option will be exercised prior to the
end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option.
The fair value of each option granted using the Binomial model, was estimated on the date of grant with the following assumptions: expected volatility
was based upon actual historical stock price movements and was calculated as of the grant dates for different periods, since the Binomial model can be
used for different expected volatilities for different periods. The risk-free interest rate was based on the yield from U.S. Treasury zero-coupon bonds with
an equivalent term to the contractual term of the options. The expected term of options granted was derived from the output of the option valuation model
and represented the period of time that options granted were expected to be outstanding. Estimated forfeitures were based on actual historical pre-vesting
forfeitures. Since dividend payments are applied to reduce the exercise price of the option, the effect of the dividend protection was reflected by using an
expected dividend assumption of zero.
For awards with performance conditions, compensation cost is recognized over the requisite service period if it is ‘probable’ that the performance
conditions will be satisfied.
During the years ended December 31, 2018, 2019, we recognized stock-based compensation expense related to employee stock options in the amount of
$0.2 million, $0.1 million, respectively. We did not recognize stock-based compensation expenses in connection with employee stock options in 2020.
Contingencies
From time to time, we are subject to legal, administrative and regulatory proceedings, claims, demands and investigations in the ordinary course of
business, including claims with respect to intellectual property, contracts, employment and other matters. We accrue a liability when it is both probable
that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of
probability and the determination as to whether a loss is reasonably estimable. These accruals are reviewed and adjusted to reflect the impact of
negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter.
64
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions, including profit
from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation.
Changes in the parent’s ownership interest in a subsidiary with no change of control are treated as equity transactions, with any difference between the
amount of consideration paid and the change in the carrying amount of the non-controlling interest, recognized in equity.
Non-controlling interests of subsidiaries represent the non-controlling share of the total comprehensive income (loss) of the subsidiaries and fair value of
the net assets upon the acquisition of the subsidiaries. The non-controlling interests are presented in equity separately from the equity attributable to the
equity holders of the Company. Redeemable non-controlling interests are classified as mezzanine equity, separate from permanent equity, on the
consolidated balance sheets and measured at each reporting period at the higher of their redemption amount or the non-controlling interest book value, in
accordance with the requirements of ASC 810 “Consolidation” and ASC 480-10-S99-3A, “Distinguishing Liabilities from Equity.”
Fair Value Measurements
We account for certain assets and liabilities at fair value under ASC 820. Fair value is an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should
be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions,
ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Significant other observable inputs based on market data obtained from sources independent of the reporting entity.
Level 3 - Unobservable inputs which are supported by little or no market activity (for example cash flow modeling inputs based on
assumptions).
Assets and liabilities measured at fair value on a recurring basis are comprised of marketable securities, foreign currency forward contracts and
contingent consideration of acquisitions (See Note 5 to the consolidated financial statements).
The carrying amounts reported in the balance sheet for cash and cash equivalents, short term bank deposits, trade receivables, other accounts receivable,
short-term bank credit, trade payables and other accounts payable approximate their fair values due to the short-term maturities of such instruments.
65
Income Tax
We account for income taxes in accordance with ASC 740, “Income Taxes,” or ASC 740. ASC 740 prescribes the use of the “asset and liability” method
whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation
allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. Deferred tax assets and liabilities are classified as non-current.
Taxes that would apply in the event of disposal of investments in subsidiaries have not been taken into account in computing deferred taxes, as it is our
intention to hold these investments, rather than realize them. We do not expect our non-Israeli subsidiaries to distribute taxable dividends in the
foreseeable future, as their earnings are needed to fund their growth while we expect to have sufficient resources in the Israeli companies to fund our cash
needs in Israel.
Our non-Israeli subsidiaries are taxed according to the tax laws in their respective domiciles of residence. If earnings are distributed to Israel in the form
of dividends or otherwise, the Company may be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and foreign
withholding tax rates.
Neither Israeli income taxes, foreign withholding taxes nor deferred income taxes were provided in relation to undistributed earnings of the non-Israeli
subsidiaries. This is because we intend to permanently reinvest undistributed earnings in the foreign subsidiaries in which those earnings arose. If these
earnings were distributed in the form of dividends or otherwise, we would be subject to additional Israeli income taxes (subject to an adjustment for
foreign tax credits) and non-Israeli withholding taxes.
The amount of cash and cash equivalents that are currently held outside of Israel that would be subject to income taxes if distributed as dividends is $14.2
million. However, a determination of the amount of the unrecognized deferred tax liability for temporary difference related to those undistributed
earnings of foreign subsidiaries is not practicable due to the complexity of the structure of our group of subsidiaries for tax purposes and the difficulty of
projecting the amount of future tax liability.
We utilize a two-step approach in recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. Under the first step we
evaluate a tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than
not that, based on technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The
second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement with the tax
authorities. We have accrued interest and penalties related to unrecognized tax benefits in our provisions for income taxes.
Recently Issued Accounting Standards
For a description of recently issued and recently adopted accounting standards, see Note 2 to our consolidated financial statements appearing elsewhere in
this annual report.
C.
RESEARCH AND DEVELOPMENT
Our research and development and support personnel work closely with our customers, our prospective customers and relevant market analysts to
determine our requirements and to design enhancements and new releases to meet market needs. We periodically release enhancements and upgrades to
our core products. In the years ended December 31, 2018, 2019 and 2020, we invested $9.4 million, $12.4 million and $12.1 million in research and
development, respectively. Research and development activities take place in our facilities in Israel, India, Russia and Japan.
As of December 31, 2020, we employed 233 employees in research and development activities, of which 78 persons were located in Israel, 129 persons
in India, 20 persons in Russia, 5 persons in Japan (when measured on a full time basis) and 1 person in the US. Our product development team includes
technical writers who prepare user documentation for our products. In addition, we have also entered into arrangements with subcontractors for the
preparation of product user documentation and certain product development work.
For additional information regarding product development see Item 4. “Information on the Company - Business Overview - Product Development.”
66
D.
TREND INFORMATION
For information see discussion in Item 4. “Information on the Company-Business Overview-Industry Background and Trends” and Item 5. “Operating
and Financial Review and Prospects - Results of Operations.”
E.
OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that
are likely to create material contingent obligations.
F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our minimum contractual obligations as of December 31, 2020 and the effect we expect them to have on our liquidity
and cash flow in future periods.
Contractual Obligations
Operating lease obligations
Liabilities due to acquisition activities
Severance payments, net*
Uncertainties in income taxes (ASC 740) **
Short and Long term debt
Total contractual obligations
Total
29,176,000
22,637,000
5,545,000
1,103,000
24,881,000
83,342,000
$
$
$
$
$
1-3 years
Payments due by period
less than
1 year
3,853,000
4,998,000
-
-
11,529,000
20,380,000
5,987,000
17,639,000
-
-
13,056,000
36,682,000
$
over
3 years
19,336,000
-
-
-
296,000
19,632,000
$
$
*
Severance payments relate to accrued severance obligations and notice obligations mainly to our Israeli employees as required under Israeli labor law
or personal employment agreements. We are legally required to pay severance upon certain circumstances, primarily upon termination of
employment by our company, retirement or death of the respective employee. Our liability for all of our Israeli employees is fully provided for by
monthly deposits with insurance policies and by an accrual.
** Payment of uncertain tax benefits would result from settlements with taxing authorities. Due to the difficulty in determining the timing of
settlements, this information is not included in the above table. We do not expect to make any significant payments for these uncertain tax positions
within the next 12 months.
67
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
DIRECTORS AND SENIOR MANAGEMENT
Set forth below are the name, age, principal position and a biographical description of each of our directors and executive officers:
Name
Guy Bernstein
Sagi Schliesser (1)
Ron Ettlinger (1)
Naamit Salomon
Avi Zakay (1)
Asaf Berenstin
Arik Kilman
Yakov Tsaroya
Uzi Yaari
Arik Faingold
Yuval Baruch
Hanan Shahaf
Yuval Lavi
Age
53
49
54
56
42
43
68
51
47
44
54
69
52
Position
Chief Executive Officer and Director
External Director
External Director
Director
Director
Chief Financial Officer
Chairman, Software Solutions division
Chief Executive Officer of Coretech Consulting Services and Fusion Solutions
Chief Executivee Officer of Complete Business Solutions
President, Integration Solutions division
Chief Executive Officer of Hermes Logistics
Chief Executive Officer of Roshtov Software Industries Ltd
Vice President Technology and innovation of Software Solutions division
(1) Member of our Audit and Compensation Committees
Messrs. Guy Bernstein, Avi Zakay and Ms. Naamit Salomon were re-elected as directors at our 2020 annual general meeting of shareholders to serve as
directors until our 2021 annual general meeting of shareholders.
Messrs. Sagi Schliesser and Ron Ettlinger are serving as external directors pursuant to the provisions of the Israeli Companies Law for their second three-
year terms.
Mr. Guy Bernstein and Mr. Asaf Berenstin are first cousins. Mr. Arik Faingold is the brother of Mr. Idan Faingold who is an executive officer of the
Comm-IT Group and the two brothers are the owners of the 13.6% minority interest in that company. Other than such relationships, there are no family
relationships among our directors and senior executives.
Guy Bernstein has served as our chief executive officer since April 2010 and has served as a director of our company since January 2007 and served as
the chairman of our board of directors from April 2008 to April 2010. Mr. Bernstein has served as the chief executive officer of Formula Systems, our
parent company, since January 2008. From December 2006 to November 2010, Mr. Bernstein served as a director and the chief executive officer of
Emblaze Ltd. or Emblaze, our former controlling shareholder. Mr. Bernstein also serves as the chairman of the board of directors of Sapiens International
Corporation N.V., or Sapiens, and is the chairman of the board of directors of Matrix IT Ltd., both of which are subsidiaries of Formula Systems. From
April 2004 to December 2006, Mr. Bernstein served as the chief financial officer of Emblaze and he has served as a director of Emblaze since April 2004.
Prior to that and from 1999, Mr. Bernstein served as our chief financial and operations officer. Prior to joining our company, Mr. Bernstein was senior
manager at Kost Forer Gabbay & Kasierer, a member of Ernst& Young Global, from 1994 to 1997. Mr. Bernstein holds a B.A. degree in accounting and
economics from Tel Aviv University and is a certified public accountant (CPA) in Israel.
68
Sagi Schliesser has served as an external director of our company since November 2015 and is a member of our audit committee. Mr. Schliesser has been
the co-founder and chief executive officer of TabTale, a creator of innovative games, interactive books and educational apps since 2010. Prior to
founding TabTale, Mr. Schliesser was the CTO of Sapiens International Corporation (NASDAQ and TASE: SPNS), managing Sapiens Technologies.
Previously Mr. Schliesser served for seven years as VP of R&D and CTO of IDIT Technologies Ltd., a global provider of insurance software solutions.
Before that Mr. Schliesser was one of the founders of WWCOM, a B2B enablement software startup. Mr. Schliesser holds a B.Sc. degree with honors in
Computer Science and Psychology from Tel Aviv University, as well as a Master’s degree in Computer Science from the Interdisciplinary Center in
Herzliya and an M.B.A. degree with honors in Business Psychology from Hamaslool Ha’akademi Shel Hamichlala Leminhal.
Ron Ettlinger has served as a director of our company since December 2014 and is a member of our audit committee. Mr. Ettlinger is the founder and has
been the chief executive officer of “Nippon Europe Israel Ltd.,” a leading provider of car multimedia advanced systems, since October 2000. Prior to that,
Mr. Ettlinger was the owner and general manager of Universal Ltd., a car service. Mr. Ettlinger is the founder and since July 2014 has served as chief
executive officer of Nippon Lights Ltd., a leading provider of LED lights and panels. Mr. Ettlinger holds a B.A. degree in Business, with a major in
finance and marketing from Tel-Aviv College of Management.
Naamit Salomon has served as director of our company since March 2003. Since January 2010, Ms. Salomon has served as a partner in an investment
company. Ms. Salomon also serves as a director of Sapiens, which is part of the Formula group. Ms. Salomon served as the chief financial officer of
Formula Systems from August 1997 until December 2009. From 1990 through August 1997, Ms. Salomon served as the controller of two large privately
held companies in the Formula group. Ms. Salomon holds a B.A. degree in Economics and Business administration from Ben Gurion University and an
LL.M. degree from Bar-Ilan University.
Avi Zakay has served as director of our company since February 2018. Mr. Zakay has been the sales manager of the Volkswagen dealership and
showroom in Rishon Letzion (Champion Motors) since 2014. In 2013, he served as the sales manager of the showroom of Mitsubishi Motors in Netanya,
and from 2007 to 2013, he served as a sales manager of BMW and Mercedes-Benz in Tel Aviv. Mr. Zakay holds a B.A. degree in Business
Administration and studied for an M.B.A. degree, both from Michlala Le-minhal College in Tel-Aviv.
Asaf Berenstin has served as our chief financial officer since April 2010. In November 2011, Mr. Berenstin was appointed as Chief Financial Officer of
our parent company Formula Systems (1985) Ltd. in addition to his position as chief financial officer of our company. Prior to that and from August
2008, Mr. Berenstin served as our corporate controller. Mr. Berenstin also serves as a director of Michpal Micro Computers (1983) Ltd., a director at
TSG IT Advanced Systems Ltd., and is a director at InSync staffing, all of them are subsidiaries of Formula Systems. Prior to joining our company and
from July 2007, Mr. Berenstin served as a controller at Gilat Satellite Networks Ltd. (NASDAQ: GILT). From October 2003 to July 2008, Mr. Berenstin
was a certified public accountant at Kesselman & Kesselman, a member of PriceWaterhouseCoopers. Mr. Berenstin holds a B.A. degree in Accounting
and Economics and an M.B.A. degree, both from Tel Aviv University, and is a certified public accountant (CPA) in Israel.
Yuval Lavi has served as Vice President Technology and Innovation since 2017. Prior to that and from April 2013, Mr. Lavi served as vice president,
Corporate Professional Services& Support,. Mr. Lavi joined our company in 2013,. Before joining our company, Mr. Lavi served for 18 years as the
Chief Technology Officer and joint founder of Kopel Reem Ltd.
69
Arik Kilman has served as chairman of our Software Solutions division since January 2017 and president of AppBuilder Software Solutions division
since January 2012, following our acquisition of AppBuilder Solutions Ltd. at which time he was named Chief Executive Officer of AppBuilder. Prior to
joining our company, Mr. Kilman served as Chief Executive Officer of BluePhoenix Solutions Ltd., the former parent of AppBuilder from May 2003 to
January 2009 and from April 2010 to December 2011. Mr. Kilman holds a B.A. degree in Economics and Computer Science from New York City
College of Technology.
Yakov Tsaroya has served as chief executive officer of our subsidiary, CoreTech Consulting Group LLC, since 2006. Mr. Tsaroya has also served as
Chief Executive Officer of Fusion Solution LLC and Xsell Resources Inc. since our acquisition of these companies in 2010. Mr. Tsaroya holds a B.A.
degree in Accounting and Finance from the College of Administration in Israel and is a certified public accountant (CPA) in Israel.
Uzi Yaari joined Complete Business Solutions as CEO in 2015 after spending seven years as CEO at leading ERP implementer, Intentia
Advanced Solutions. Having served in various positions during his 15 years at Intentia, Uzi brings a rich history of ERP experience and expertise in
various ERP ecosystems and in various countries having lead many ERP projects both in the country and abroad. Uzi is an industrial engineer.
Arik Faingold has served as president of our Integration Solutions division since July 2012. Mr. Faingold has served as chairman of Comm-IT Group
since 2009. Mr. Faingold was General Manager of Open TV Israel, part of OpenTV Global, from 2003 to 2009. Mr. Faingold served as Co-founder and
CTO of Betting Corp from 1999 to 2003. Mr. Faingold holds a B.A. degree in Computer Science from the Interdisciplinary Center in Herzliya and an
M.B.A. from Tel Aviv University.
Yuval Baruch has served as an officer of our company since his appointment in September 2012 as the chief executive officer of Hermes Logistics
Technologies (HLT). Mr. Baruch has also served as the chief executive officer of Pilat HR solutions since April 2013. Mr. Baruch was chief executive
officer of J.R. Holdings & Development from November 2007 to January 2012. Mr. Baruch has served as an external director of Matrix IT, a publicly
traded company in Israel, since 2011. Between 2004 and 2008 Mr. Baruch launched, managed and divested a chain of fitness centers in Israel. Mr.
Baruch holds a B.A. degree in Marketing and Finance from The College of Management in Israel and an M.B.A. degree from the Stanford Graduate
School of Business.
Hanan Shahaf became an officer of our company in July 2016, as part of the Roshtov Software Industries Ltd. acquisition. Mr. Shahaf was one of
Roshtov’s founders in 1989 and has served as its Chief Executive Officer and a director since its inception. He also served as a director and chairman on
several private companies’ boards. Mr. Shahaf holds a B.sc in Industrial engineering and Management and an M.B.A. from Northwestern University
(Kellogg School of Management) and Tel Aviv university (Recanati Graduate School of BA).
B.
COMPENSATION
The following table sets forth all compensation we paid with respect to all of our directors and executive officers as a group for the year ended December
31, 2020.
All directors and executive officers as a group (13 persons)
Salaries,
fees,
commissions
and bonuses
3,361,141
$
Pension,
retirement
and similar
benefits
$
87,971
For so long as we qualify as a foreign private issuer, we are not required to comply with the proxy rules applicable to U.S. domestic companies, including
the requirement to disclose information concerning the amount and type of compensation paid to our chief executive officer, chief financial officer and
the three other most highly compensated executive officers, rather than on an aggregate basis. Nevertheless, a recent amendment to the regulations
promulgated under the Israeli Companies Law requires us to disclose the annual compensation of our five most highly compensated officers on an
individual basis, rather than on an aggregate basis, as was previously permitted for Israeli public companies listed overseas. Under the Companies Law
regulations, this disclosure is required to be included in the annual proxy statement for our annual meeting of shareholders each year, which we furnish to
the SEC under cover of a Report of Foreign Private Issuer on Form 6-K. Because of that disclosure requirement under Israeli law, we are also including
such information in this annual report, pursuant to the disclosure requirements of Form 20-F.
70
The table below reflects the compensation granted to our five most highly compensated officers during or with respect to the year ended December 31,
2020. All amounts reported in the table reflect the cost to our company, as recognized in our financial statements for the year ended December 31, 2020.
2020 Summary Compensation Table
Name and Position
Yakov Tsaroya, President, Coretech Consulting Group LLC
Arik Faingold, President, Integration Solutions division
Arik Kilman, Chairman, Software Group
Yuval Baruch, Chief Executive Officer of Hermes Logistics
Hanan Shahaf, Chief Executive Officer of Roshtov Software Industries Ltd
Salary
Bonus (1)
$
$
234,000
379,593
418,361
207,160
297,978
612,000
184,844
92,969
112,310
All Other
Compensation
(3)
$
9,000
$
12,631
Total
855,000
564,437
511,330
319,470
310,609
(1) Amounts reported in this column represent annual incentive bonuses granted to the covered executives based on performance-metric based formulas
set forth in their respective employment agreements.
(2) Amounts reported in this column represent the grant date fair value computed in accordance with accounting guidance for share-based compensation.
(3) Amounts reported in this column include personal benefits and perquisites, including those mandated by applicable law. Such benefits and
perquisites may include, to the extent applicable to the respective covered executive, payments, contributions and/or allocations for savings funds
(e.g., Managers Life Insurance Policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance, vacation, car or car
allowance, medical insurances and benefits, risk insurance (e.g., life insurance or work disability insurance), telephone expense reimbursement,
convalescence or recreation pay, relocation reimbursement, payments for social security, and other personal benefits and perquisites consistent with
our company’s guidelines. All amounts reported in the table represent incremental cost to our company.
During the year ended December 31, 2020, we paid to each of our outside and independent directors an annual fee of $27,789 and a per-meeting
attendance fee of $750. Such fees are paid based on the fees detailed in a schedule published semi-annually by the Committee for Public Directors under
the Israeli Securities Law. The above compensation excludes stock- based compensation costs in accordance with ASC 718.
As of December 31, 2020, our directors and executive officers as a group, then consisting of 13 persons, held options to purchase an aggregate of 15,000
ordinary shares, at exercise prices of $2.93 per share. All of these options will expire in 2021. All such options were granted under our 2007 Incentive
Compensation Plan. See Item 6E “Directors, Senior Management and Employees - Share Ownership - Stock-Based Compensation Plans.”
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C.
BOARD PRACTICES
Introduction
According to the Israeli Companies Law and our Articles of Association, the management of our business is vested in our board of directors. The board
of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders. Our executive officers are responsible
for our day-to-day management. The executive officers have individual responsibilities established by our board of directors. Executive officers are
appointed by and serve at the discretion of the board of directors, subject to any applicable agreements.
Election of Directors
Our articles of association provide for a board of directors consisting of no less than three and no more than eleven members or such other number as may
be determined from time to time at a general meeting of shareholders. Our board of directors is currently composed of five directors.
Pursuant to our articles of association, all of our directors are elected at our annual general meeting of shareholders, which are required to be held at least
once during every calendar year and not more than 15 months after the last preceding meeting. Except for our external directors (as described below), our
directors are elected by a vote of the holders of a majority of the voting power represented and voting at such meeting and hold office until the next
annual meeting of shareholders following the annual meeting at which they were appointed. Directors (other than external directors) may be removed
earlier from office by resolution passed at a general meeting of our shareholders. Our board of directors may temporarily fill vacancies in the board until
the next annual meeting of shareholders, provided that the total number of directors will not exceed the maximum number permitted under our articles of
association.
Under the Israeli Companies Law, our board of directors is required to determine the minimum number of directors who must have “accounting and
financial expertise” (as such term is defined in regulations promulgated under the Israeli Companies Law). In determining such number, the board of
directors must consider, among other things, the type and size of the company and the scope of and complexity of its operations. Our board of directors
has determined that at least one director must have “accounting and financial expertise,” within the meaning of the regulations promulgated under the
Israeli Companies Law.
External and Independent Directors
External Directors. The Israeli Companies Law requires companies organized under the laws of the State of Israel with shares that have been offered to
the public in or outside of Israel to appoint at least two external directors. No person may be appointed as an external director if the person is a relative of
the controlling shareholder of the company or if the person or the person’s relative, partner, employer or any entity under the person’s control has or had,
on or within the two years preceding the date of the person’s appointment to serve as an external director, any affiliation with the company or the
controlling shareholder of the company or the controlling shareholder’s relative or any entity controlled by the company or by the controlling shareholder
of the company. If the company does not have a controlling shareholder or a person or entity which holds 25% of the total voting rights of the company,
an external director may also not have an affiliation with chairman of the board, the chief executive officer, beneficial owner of 5% or more of the issued
shares or the voting power of the company and the most senior executive officer of the company in the finance field. The term “affiliation” includes an
employment relationship, a business or professional relationship maintained on a regular basis (other than negligible relationships), control and service as
an “office holder” as defined in the Israeli Companies Law, however, “affiliation” does not include service as a director of a private company prior to its
first public offering if the director was appointed to such office for the purpose of serving as an external director following the company’s first public
offering. In addition, no person may serve as an external director if the person’s position or other activities create or may create a conflict of interest with
the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director. In addition, a
director in a company may not be appointed as an external director in another company if at that time, a director of the other company serves as an
external director in the first company. Moreover, a person may not be appointed as an external director, if he or she is employed by the Israeli Securities
Authority or by Tel-Aviv Stock Exchange. If, at the time external directors are to be appointed, all current members of the board of directors which are
not the controlling shareholders of the company or their relatives are of the same gender, then at least one external director must be of the other gender.
72
At least one of the external directors must have “accounting and financial expertise” and the other external directors must have “professional expertise,”
as such terms are defined by regulations promulgated under the Israeli Companies Law.
The election of the nominee for external director requires the affirmative vote of (i) the majority of the votes actually cast with respect to such proposal
including at least a majority of the voting power of the non-controlling shareholders (as such term is defined in the Israel Securities Law, 1968) or those
shareholders who do not have a personal interest in approval of the nomination except for a personal interest that is not as a result of the shareholder’s
connections with the controlling shareholder, who are present in person or by proxy and vote on such proposal, or (ii) the majority of the votes cast on
such proposal at the meeting, provided that the total votes cast in opposition to such proposal by the non-controlling shareholders or those shareholders
who do not have a personal interest in approval of the nomination except for a personal interest that is not as a result of the shareholder’s connections
with the controlling shareholder (as such term is defined in the Israel Securities Law, 1968) does not exceed 2% of all the voting power in the Company.
External directors serve for a three-year term. However, in accordance with the Israeli Companies Law regulations, external directors of a public
company whose shares are traded on the NASDAQ may be appointed for additional periods of three-year each provided that the audit committee and the
board of directors have approved that, given the external director’s expertise and contribution to the board and committee meetings, such appointment is
for the company’s benefit and provided further that the nomination to additional periods of three-year terms is approved through one of the following
mechanisms: (i) the board of directors proposed the nominee and his appointment was approved by the shareholders in the manner required to appoint
external directors for their initial term (described above); or (ii) one or more shareholders holding 1% or more of the voting rights proposed the nominee,
and the nominee is approved by the majority of the votes actually cast with respect to such proposal and all of the following conditions are met: (a) the
majority of votes does not include the votes of the controlling shareholder or votes of shareholders who have a personal interest in approval of the
nomination except for a personal interest that is not as a result of the shareholder’s connections with the controlling shareholder and (b) the total votes
cast in favor of such proposal by the non-controlling shareholders or those shareholders who do not have a personal interest in the approval of the
nomination except for a personal interest that is not as a result of the shareholder’s connections with the controlling shareholder exceed 2% of all the
voting power in the company.
External directors may be removed from office only by the same percentage of shareholders as is required for their election, or by a court, and then only
if the external directors cease to meet the statutory qualifications for their appointment, violate their duty of loyalty to the company or are found by a
court to be unable to perform his or hers duties on a full time basis. External directors may also be removed by the court if they are found guilty of
bribery, fraud, administrative offenses or use of inside information.
Each committee of the board of directors that may exercise a responsibility of the board of directors must include at least one external director. The audit
committee must be comprised of at least three directors and include all the external directors. An external director is entitled to compensation as provided
in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in
connection with such service.
Until the lapse of two years from termination of office, we may not engage an external director, or his or her spouse or child to service as an office holder
and cannot employ or receive services from that person, either directly or indirectly, including through a corporation controlled by that person.
73
Independent Directors. NASDAQ Stock Market Rules require us to establish an audit committee comprised of at least three members and only of
independent directors each of whom satisfies the respective “independence” requirements of the SEC and NASDAQ.
Pursuant to the Israeli Companies Law, a director may be qualified as an independent director if such director is either (i) an external director; or (ii) a
director that serves as a board member less than nine years and the audit committee has approved that he or she meets the independence requirements of
an external director. A majority of the members serving on the audit committee must be independent under the Israeli Companies Law. In addition, an
Israeli company whose shares are publicly traded may elect to adopt a provision in its articles of association pursuant to which a majority of its board of
directors will constitute individuals complying with certain independence criteria prescribed by the Israeli Companies Law. We have not included such a
provision in our articles of association. Pursuant to Israeli regulations adopted in January 2011, directors who comply with the independence
requirements of NASDAQ and the SEC are deemed to comply with the independence requirements of the Israeli Companies Law.
Our board of directors has determined that Mr. Sagi Schliesser and Mr. Ron Ettlinger both qualify as independent directors under the SEC and NASDAQ
requirements and as external directors under the Israeli Companies Law requirements. Our board of directors has further determined that Mr. Avi Zakay
qualifies as an independent director under the SEC, NASDAQ and Israeli Companies Law requirements.
Committees of the Board of Directors
Audit Committee. Our audit committee, established in accordance with Sections 114-117 of the Israeli Companies Law and Section 3(a)(58)(A) of the
Securities Exchange Act of 1934, assists our board of directors in overseeing the accounting and financial reporting processes of our company and audits
of our financial statements, including the integrity of our financial statements, compliance with legal and regulatory requirements, our independent public
accountants’ qualifications and independence, the performance of our internal audit function and independent public accountants, finding any
irregularities in the business management of our company for which purpose the audit committee may consult with our independent auditors and internal
auditor, proposing to the board of directors ways to correct such irregularities and such other duties as may be directed by our board of directors. The
responsibilities of the audit committee also include approving related-party transactions as required by law. The audit committee is also required to
determine whether any action is material and whether any transaction is an extraordinary transaction or non-negligible transaction, for the purpose of
approving such action or transaction as required by the Israeli Companies Law. Under Israeli law, an audit committee may not approve an action or a
transaction with a controlling shareholder, or with an office holder, unless at the time of approval two external directors are serving as members of the
audit committee and at least one of the external directors was present at the meeting in which an approval was granted.
Our audit committee is currently composed of Messrs. Ettlinger, Schliesser and Zakay, each of whom satisfies the respective “independence”
requirements of the SEC and NASDAQ. We also comply with Israeli law requirements for audit committee members. Our board of directors has
determined that Mr. Ettlinger qualifies as a financial expert. The audit committee meets at least once each quarter.
Compensation Committee. In accordance with the Israeli Companies Law, we have a compensation committee, whose role is to: (i) recommend a
compensation policy for office holders and to recommend to the board, once every three years, on the approval of the continued validity of the
compensation policy that was determined for a period exceeding three years; (ii) recommend an update the compensation policy from time to time and to
examine its implementation; (iii) determine whether to approve the terms of service and employment of office holders that require the committee’s
approval; and (iv) exempt a transaction from the requirement of shareholders’ approval in accordance with the provisions of the Israeli companies Law.
The compensation committee also has oversight authority over the actual terms of employment of directors and officers and may make recommendations
to the board of directors and the shareholders (where applicable) with respect to deviation from the compensation policy that was adopted by the
company.
Under the Israeli Companies Law, a compensation committee must consist of no less than three members, including all of the external directors (who
must constitute a majority of the members of the committee), and the remainder of the members of the compensation committee must be directors whose
terms of service and employment were determined pursuant to the applicable regulations. The same restrictions on the actions and membership in the
audit committee as discussed above under “Audit Committee,” including the requirement that an external director serve as the chairman of the committee
and the list of persons who may not serve on the committee, also apply to the compensation committee. We have established a compensation committee
that is currently composed of Messrs. Ettlinger, Schliesser and Zakay.
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Internal Auditor
The Israeli Companies Law also requires the board of directors of a public company to appoint an internal auditor proposed by the audit committee. A
person who does not satisfy the Israeli Companies Law’s independence requirements may not be appointed as an internal auditor.
The role of the internal auditor is to examine, among other things, the compliance of the company’s conduct with applicable law and orderly business
practice. Our internal auditor complies with the requirements of the Israeli Companies Law. Alkalay Monarov currently serves as our internal auditor.
Directors’ Service Contracts
There are no arrangements or understandings between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand,
providing for benefits upon termination of their employment or service as directors of our company or any of our subsidiaries.
Approval of Related Party Transactions Under Israeli Law
Fiduciary Duties of Office Holders
The Israeli Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An “office
holder” is defined in the Israeli Companies Law as a chief executive officer, chief business manager, deputy general manager, vice general manager, any
other person assuming the responsibilities of any of the foregoing positions without regard to such person’s title or a director or any other manager
directly subordinate to the general manager. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires
an office holder to act at a level of care that a reasonable office holder in the same position would employ under the same circumstances. This includes
the duty to utilize reasonable means to obtain (i) information regarding the appropriateness of a given action brought for his approval or performed by
him by virtue of his position and (ii) all other information of importance pertaining to the foregoing actions. The duty of loyalty includes (i) avoiding any
conflict of interest between the office holder’s position in the company and any other position he holds or his personal affairs, (ii) avoiding any
competition with the company’s business, (iii) avoiding exploiting any business opportunity of the company in order to receive personal gain for the
office holder or others, and (iv) disclosing to the company any information or documents relating to the company’s affairs that the office holder has
received due to his position as an office holder.
Disclosure of Personal Interests of an Office Holder
The Israeli Companies Law requires that an office holder promptly, and no later than the first board meeting at which such transaction is considered,
disclose any personal interest that he or she may have and all related material information known to him or her and any documents in their position, in
connection with any existing or proposed transaction by us. In addition, if the transaction is an extraordinary transaction, that is, a transaction other than
in the ordinary course of business, other than on market terms, or likely to have a material impact on the company’s profitability, assets or liabilities, the
office holder must also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s
descendants and the spouses of any of the foregoing, or by any corporation in which the office holder or a relative is a 5% or greater shareholder, director
or general manager or in which he or she has the right to appoint at least one director or the general manager.
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Approval of Transactions with Office Holders and Controlling Shareholders
Some transactions, actions and arrangements involving an office holder (or a third party in which an office holder has a personal interest) must be
approved by the board of directors and, in some cases, by the audit committee or the compensation committee and by the board of directors, and under
certain circumstances shareholder approval may also be required, provided, however, that such transactions are for the benefit of the company. Subject to
certain exceptions. a person who has a personal interest in the approval of a transaction by the audit committee or the Board, may not be present and take
part in the voting. An officer or a director who has a personal interest, may be present at the meeting for the purpose of presenting the transaction if the
chairman of the audit committee or the Board, as relevant, has determined that the presence of the officer or director is required. A director may be
present and vote at the meetings of the audit committee and Board if the majority of the directors have a personal interest in the approval of the
transaction. In such case, the transaction also requires approval by the general meeting. The disclosure requirements which apply to an office holder also
apply to such transaction with respect to his or her personal interest in the transaction.
The Companies Law provides for certain procedural constraints on a public company entering into a transaction in which a controlling shareholder and
other interested parties have a personal interest. More specifically, Section 275 of the Companies Law provides that an extraordinary transaction (which
is defined as a transaction that is either not in a company’s ordinary course of business; or a transaction that is not undertaken in market conditions; or a
transaction that is likely to substantially influence the profitability of a company, its property or liabilities) between a public company and its controlling
shareholder, or an extraordinary transaction of a public company with a third party in which the controlling shareholder has a personal interest, including
a transaction of a public company with a controlling shareholder, directly or indirectly, for the receipt of services therefrom (and including a transaction
concerning the compensation arrangement of a controlling shareholder in its capacity as an employee or office holder of the company) (a “Controlling
Party Transaction”), requires the approval of the audit committee (and with respect to a transaction concerning the compensation arrangement – the
compensation committee), the board of directors and the general meeting of shareholders, provided however that the majority approving the transaction
shall include at least one half of the votes of shareholders who do not have a personal interest in the transaction and are participating in the vote, or that
the aggregate number of votes against the approval of the transaction, voted by shareholders who do not have such personal interest do not exceed 2% of
the entire voting rights in the company. Section 275 of the Companies Law further provides that if the term of the Controlling Party Transaction extends
beyond three years, the above approvals are required once every three years. However, if such transaction does not relate to a compensation arrangement,
then the audit committee may approve the transaction for a longer duration, provided that the audit committee determines that such duration is reasonable
under the circumstances. In accordance with the Israeli Companies law the audit committee is responsible to determine that Controlling Party
Transactions shall be subject to a competitive procedure or other similar procedure before such transactions are approved.
During the year ended December 31, 2020, we sold approximately $2.8 million of services to affiliated companies of Formula Systems. In 2020, we also
purchased from those affiliated companies approximately $0.8 million of hardware, software and services. We also provided Formula Systems cash
management, accounting and bookkeeping services for total consideration of $0.2 million.
Approval Process of Terms of Service and Employment of Office Holders
Under the Israeli Companies Law, the method of approval of Terms of Service and Employment of office holders must be approved as follows:
● With respect to an office holder who is not the general manager, a director, a controlling shareholder or a relative of the controlling shareholder:
● In the event the transaction is in accordance with the compensation policy of the company – approval (in the following order) of: (i)
compensation committee and (ii) board of directors.
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● In the event the transaction is not in accordance with the compensation policy of the company – approval, in special cases (in the following
order), by the (i) compensation committee, (ii) board of directors and (iii) company’s shareholders, by a simple majority, provided that such
majority shall include (i) at least one half of the votes of shareholders who are participating in the vote and are not controlling shareholders or do
not have a personal interest regarding the approval of the compensation policy, or (ii) the aggregate number of the opposing votes, voted by
shareholders who do not have such personal interest or are not controlling shareholders, do not exceed two percent (2%) of the entire voting
rights in the company (the “Special Majority”). Under these circumstances, the compensation committee and board of directors are required to
approve the transaction based on certain considerations and include certain instructions in connection with the compensation policy. In the event
the company’s shareholders do not approve the compensation of the office holder, the compensation committee and board of directors may still
approve the transaction, in special cases and with detailed reasons and after discussion and examining the rejection of the company’s
shareholders.
● With respect to a company’s general manager (generally the equivalent of a CEO):
● In the event the transaction is in accordance with the compensation policy - approval (in the following order) by the: (i) compensation
committee, (ii) board of directors and (iii) company’s shareholders with the “Special Majority” described above.
● In the event the transaction is not in accordance with the compensation policy – the approval process and requirements are the same as the
approval process for such a transaction with an office holder who is not the general manager, a controlling shareholder or a relative of the
controlling shareholder.
● The Israeli Companies Law includes an exception from the shareholder approval requirement in connection with the approval of a transaction
with a general manager candidate, subject to certain conditions. In addition, in the event the company’s shareholders do not approve the
compensation of the general manager, the compensation committee and board of directors may still approve the transaction, in special cases and
with detailed reasons and after discussion and examining the rejection of the company’s shareholders.
● With respect to a director who is not a controlling shareholder or a relative of the controlling shareholder:
● In the event the transaction is in accordance with the compensation policy – approval (in the following order) by the: (i) compensation
committee, (ii) board of directors and (iii) company’s shareholders with a regular majority.
● In the event the transaction is not in accordance with the compensation policy – the approval process and requirements are the same as the
approval process for such a transaction with an office holder who is not the general manager, a controlling shareholder or a relative of the
controlling shareholder (other than the possibility to approve a transaction that was not approved by the shareholders).
● With respect to a controlling shareholder or a relative of a controlling shareholder:
● In the event the transaction is in accordance with the compensation policy - approval (in the following order) by the: (i) compensation
committee, (ii) board of directors and (iii) company’s shareholders with the “Special Majority” described above.
● In the event the transaction is not in accordance with the compensation policy: the approval process and requirements are the same as
the approval process for such a transaction with an office holder who is not the general manager, a controlling shareholder or a relative
of the controlling shareholder (other than the possibility to approve a transaction that was not approved by the shareholders).
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In accordance with the Israeli Companies Law, the audit committee is responsible to determine that Controlling Party Transactions shall be subject to a
competitive procedure or other similar procedure before such transactions are approved.
Our latest amended compensation policy was adopted on February 25, 2021.
Provisions Restricting Change in Control of Our Company
Tender Offer. In certain circumstances, an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the
acquisition, the purchaser would hold 25% or more of the voting rights in the company (unless there is already a 25% or greater shareholder of the
company) or more than 45% of the voting rights in the company (unless there is already a shareholder that holds more than 45% of the voting rights in the
company). If, as a result of an acquisition, the acquirer would hold more than 90% of a company’s shares or voting rights, the acquisition must be made
by means of a tender offer for all of the shares. A purchase by a tender offer is subject to additional requirements as specified in the Israeli Law and
regulations promulgated thereunder.
Merger. The Israeli Companies Law generally requires that a merger be approved by the board of directors and by the general meeting of the
shareholders. Upon the request of any creditor of a merging company, a court may delay or prevent the merger if it concludes that there is a reasonable
concern that, as a result of the merger, the surviving company will be unable to satisfy its obligations. In addition, a merger may generally not be
completed unless at least (i) 50 days have passed since the filing of the merger proposal with the Israeli Registrar of Companies, and (ii) 30 days have
passed since the merger was approved by the shareholders of each of the merging companies. The approval of merger by the company is also subject to
additional approval requirements as specified in the Israeli Companies Law and regulations promulgated thereunder.
Exculpation, Indemnification and Insurance of Directors and Officers
Exculpation and Indemnification of Office Holders
The Israeli Companies Law and our Articles of Association authorize us, subject to the receipt of requisite corporate approvals, to indemnify and exempt
our directors and officers, subject to certain conditions and limitations. Most recently, in November 2011 our shareholders approved a form of
indemnification and exculpation letter to ensure that our directors and officers (including any director and officer who may be deemed to be a controlling
shareholder, within the meaning of the Israeli Companies Law) are afforded protection to the fullest extent permitted by law as currently in effect. Under
the approved form of indemnification and exculpation letter, the total amount of indemnification allowed may not exceed an amount equal to 25% of our
shareholders’ equity in the aggregate, calculated with respect to each of our directors and officers.
The Israeli Companies Law provides that an Israeli company may not exculpate an office holder from liability for a breach of the duty of loyalty of the
office holder. The company may, however, approve an office holder’s act performed in breach of the duty of loyalty, provided that the office holder acted
in good faith, the act or its approval does not harm the company and the office holder discloses the nature of his or her personal interest in the act and all
material facts and documents a reasonable time before discussion of the approval. An Israeli company may exculpate an office holder in advance from
liability to the company, in whole or in part, for a breach of duty of care, but only if a provision authorizing such exculpation is inserted in its articles of
association. An Israeli company may also not exculpate a director for liability arising out of a prohibited dividend or distribution to shareholders.
The Israeli Companies Law provides that a company may, if permitted by its articles of association, indemnify an office holder for acts or omissions
performed by the office holder in such capacity for:
● A financial liability imposed on the office holder in favor of another person by any judgment, including a settlement or an arbitrator’s award
approved by a court;
● Reasonable litigation expenses, including attorney’s fees, actually incurred by the office holder as a result of an investigation or proceeding
instituted against him or her by a competent authority, provided that such investigation or proceeding concluded without the filing of an
indictment against the office holder or the imposition of any financial liability instead of criminal proceedings, or concluded without the filing of
an indictment against the office holder and a financial liability was imposed on the officer holder instead of criminal proceedings with respect to
a criminal offense that does not require proof of criminal intent;
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● Reasonable litigation expenses, including attorneys’ fees, incurred by such office holder or which were imposed on him by a court, in
proceedings the company instituted against the office holder or that were instituted on the company’s behalf or by another person, or in a
criminal charge from which the office holder was acquitted, or in a criminal proceeding in which the office holder was convicted of a crime
which does not require proof of criminal intent; and
● Expenses, including reasonable litigation expenses and legal fees, incurred by such office holder as a result of a proceeding instituted against
him in relation to (A) infringements that may result in imposition of financial sanction pursuant to the provisions of Chapter H’3 under the
Israeli Securities Law or (B) administrative infringements pursuant to the provisions of Chapter H’4 under the Israeli Securities Law or (C)
infringements pursuant to the provisions of Chapter I’1 under the Israeli Securities Law; and (e) payments to an injured party of infringement
under Section 52ND(a)(1)(a) of the Israeli Securities Law.
In accordance with the Israeli Companies Law, a company’s articles of association may permit the company to:
● Undertake in advance to indemnify an office holder, except that with respect to a financial liability imposed on the office holder by any
judgment, settlement or court-approved arbitration award, the undertaking must be limited to types of occurrences, which, in the opinion of the
company’s board of directors, are, at the time of the undertaking, foreseeable due to the company’s activities and to an amount or standard that
the board of directors has determined is reasonable under the circumstances; and
● Retroactively indemnify an office holder of the company.
Insurance for Office Holders
The Israeli Companies Law provides that a company may, if permitted by its articles of association, insure an office holder for acts or omissions
performed by the office holder in such capacity for:
● A breach of his or her duty of care to the company or to another person;
● A breach of his or her duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable cause to assume that
his act would not prejudice the company’s interests; and
● A financial liability imposed upon the office holder in favor of another person.
Subject to the provisions of the Israeli Companies Law and the Israeli Securities Law, a company may also enter into a contract to insure an office holder
for (A) expenses, including reasonable litigation expenses and legal fees, incurred by the office holder as a result of a proceeding instituted against such
office holder in relation to (1) infringements that may impose financial sanction pursuant to the provisions of Chapter H’3 under the Israeli Securities
Law or (2) administrative infringements pursuant to the provisions of Chapter H’4 under the Israeli Securities Law or (3) infringements pursuant to the
provisions of Chapter I’1 under the Israeli Securities Law and (B) payments made to the injured parties of such infringement under Section 52ND(a)(1)
(a) of the Israeli Securities Law.
Limitations on Exculpation, Insurance and Indemnification
The Israeli Companies Law provides that neither a provision of the articles of association permitting the company to enter into a contract to insure the
liability of an office holder, nor a provision in the articles of association or a resolution of the board of directors permitting the indemnification of an
office holder, nor a provision in the articles of association exempting an office holder from duty to the company shall be valid, where such insurance,
indemnification or exemption relates to any of the following:
● A breach by the office holder of his duty of loyalty, except with respect to insurance coverage or indemnification if the office holder acted in
good faith and had reasonable grounds to assume that the act would not prejudice the company;
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● A breach by the office holder of his duty of care if such breach was committed intentionally or recklessly, unless the breach was committed only
negligently;
● Any act or omission committed with intent to derive an unlawful personal gain; and
● Any fine, civil fine, financial sanction or forfeiture imposed on the office holder.
In addition, pursuant to the Israeli Companies Law, exemption of, procurement of insurance coverage for, an undertaking to indemnify or indemnification
of an office holder must be approved by the compensation committee and the board of directors and, if such office holder is a director or a controlling
shareholder or a relative of the controlling shareholder, also by the shareholders general meeting.
Our articles of association allow us to insure, indemnify and exempt our office holders to the fullest extent permitted by law, subject to the provisions of
the Israeli Companies Law.
On February 25, 2021, our shareholders approved that the coverage of our directors’ and officers’ liability insurance policy will be up to a maximum
amount of $60,000,000, both per claim and in the aggregate, plus up to $10,000,000 of Side A Difference in Conditions coverage. In addition, it was
approved that we may pay an annual premium not exceeding $2,000,000 per year (which may be increased by no more than 20% per year), and that any
renewal, extension or replacement thereof will be on terms substantially similar to or better (from the perspective of the directors and officers) than those
of the then-effective insurance policy.
D.
EMPLOYEES
The following table presents the number of our employees categorized by geographic location as of December 31, 2018, 2019 and 2020:
Israel
Asia
North America
South Africa
Europe
Total
Year ended December 31,
2019
2020
2018
1,184
204
1,513
12
126
3,039
1,133
186
1,194
14
115
2,642
999
164
933
14
116
2,226
The following table presents the number of our employees categorized by activity as of December 31, 2018, 2019 and 2020:
Technical support and consulting
Research and development
Marketing and sales
Operations and administrations
Total
Year ended December 31,
2019
2020
2018
2,506
233
161
139
3,039
2,126
212
158
146
2,642
1,761
198
140
127
2,226
We consider our employees the most valuable asset of our company. We offer competitive compensation and comprehensive benefits to attract and retain
our employees. The remuneration and rewards include retention through share-based compensation and performance-based bonuses.
We believe that an engaged workforce is key to maintaining our ability to innovate. We have steadily increased our workforce and have been successful
in integrating our new employees and keeping our employees engaged. Investing in our employees' career growth and development is an important focus
for us. We offer learning opportunities and training programs including workshops, guest speakers and various conferences to enable our employees to
advance in their chosen professional paths.
We are committed to providing a safe work environment for our employees. We have taken necessary precautions in response to the recent COVID-19
outbreak, including offering employees flexibility to work from home, mandatory social distancing requirements in the workplace (such as adding more
space between work spaces) and health monitoring for our employees, daily office disinfection and sanitization, provision of hand sanitizer and face
masks to all employees, and improvement and optimization of our telecommuting system to support remote work arrangements.
Our relationships with our employees in Israel are governed by Israeli labor legislation and regulations, extension orders of the Israeli Ministry of Labor
and personal employment agreements. Israeli labor laws and regulations are applicable to all of our employees in Israel. The laws concern various
matters, including severance pay rights at termination, notice period for termination, retirement or death, length of workday and workweek, minimum
wage, overtime payments and insurance for work-related accidents. We currently fund our ongoing legal severance pay obligations by paying monthly
premiums for our employees’ insurance policies and or pension funds. At the time of commencement of employment, our employees generally sign
written employment agreements specifying basic terms and conditions of employment as well as non-disclosure, confidentiality and non-compete
provisions.
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E.
SHARE OWNERSHIP
Beneficial Ownership of Executive Officers and Directors
The following table sets forth certain information as of December 31, 2020 regarding the beneficial ownership by each of our directors and executive
officers:
Name
Guy Bernstein
Asaf Berenstin (3)
Ron Ettlinger
Naamit Salomon
Sagi Schliesser
Avi Zakay
Arik Faingold
Yuval Baruch
Arik Kilman
Yakov Tsaroya
Yuval Lavi
*
Less than 1%
Number of
Ordinary
Shares
Beneficially
Owned (1)
150,000
38,225
--
--
--
--
--
--
38,130
20,000
--
Percentage
of
Ownership (2)
*
*
--
--
--
--
--
--
*
*
--
(1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to
securities. Ordinary Shares relating to options currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for
computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.
Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting
and investment power with respect to all shares shown as beneficially owned by them.
(2) The percentages shown are based on 49,035,055 Ordinary Shares issued and outstanding as of December 31, 2020.
(3) Includes 15,000 currently exercisable options granted under our 2007 Stock Option Plan, having an exercise price of $2.94 per share that expire in
2021 at the latest and 23,225 Ordinary Shares.
Stock-Based Compensation Plans
2007 Incentive Compensation Plan
In 2007, we adopted our 2007 Incentive Compensation Plan, or the 2007 Plan, under which we may grant options, restricted shares, restricted share units
and performance awards to employees, officers, directors and consultants of our company and its subsidiaries. The shares subject to the 2007 Plan may be
either authorized or unissued shares or previously issued shares acquired by our company or any of its subsidiaries. The total number of shares that may
be delivered pursuant to awards under the 2007 Plan shall not exceed 1,500,000 shares in the aggregate. If any award shall expire, terminate, be cancelled
or forfeited without having been fully exercised or satisfied by the issuance of shares, then the shares subject to such award shall be available again for
delivery in connection with future awards under the 2007 Plan.
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In September 2013, our shareholders approved a 1,000,000 share increase in the number of Ordinary Shares available for issuance under the 2007 Stock
Option Plan.
On December 31, 2015 our board of directors increased the amount of Ordinary Shares reserved for issuance by an additional 250,000 Ordinary Shares
and extended the plan by 10 years until August 1, 2027. As of December 31, 2020, an aggregate of 932,500 Ordinary Shares are available for future
grants under the Plan.
The 2007 Plan will terminate upon the earliest of: (i) August 31, 2027; (ii) the termination of all outstanding awards in connection with a corporate
transaction; or (iii) in connection with, and as a result of, any other relevant event, including the 2007 Plan’s termination by the Board of Directors.
Under the 2007 Plan, the option committee shall have full discretionary authority to grant or, when so restricted by applicable law, recommend the Board
of Directors to grant, pursuant to the terms of the 2007 Plan, options and restricted shares and restricted share units to those individuals who are eligible
to receive awards.
The 2007 Plan provides that each option will expire on the date stated in the award agreement, which will not be more than ten years from its date of
grant. The exercise price of an option shall be determined by the option committee of the Board of Directors and set forth in the award agreement. Unless
determined otherwise by the Board of Directors, the exercise price shall be equal to, or higher than, the fair market value of our company’s shares on the
date of grant.
Under the 2007 Plan, restricted shares and restricted share units shall not be purchased for less than the ordinary share’s par value, unless determined
otherwise by the Board of Directors.
Under the 2007 Plan in the event of any reclassification, recapitalization, merger or consolidation, reorganization, stock dividend, cash dividend,
distribution of subscription rights or other distribution in securities of the Company, stock split or reverse stock split, combination or exchange of shares,
repurchase of shares, or other similar change in corporate structure, that proportionally apply to all of our Ordinary Shares, we, shall substitute or adjust,
as applicable, the number, class and kind of securities which may be delivered under Section 4.1; the number, class and kind, and/or price (such as the
Option Price of Options) of securities subject to outstanding awards; and other value determinations applicable to outstanding awards, as determined by
our Board of Directors, in order to prevent dilution or enlargement of participants’ rights under the 2007 Plan; provided, however, that the number of
Ordinary Shares subject to any award shall always be a whole number. The Board of Directors shall also make appropriate adjustments and
modifications, in the terms of any outstanding awards to reflect such changes in our share capital, including modifications of performance goals and
changes in the length of performance periods, if applicable.
Our Board of Directors may, from time to time, alter, amend, suspend or terminate the 2007 Plan, with respect to awards that have not been granted,
subject to shareholder approval, if and to the extent required by applicable law. In addition, no such amendment, alteration, suspension or termination of
the 2007 Plan or any award theretofore granted, shall be made which would materially impair the previously accrued rights of a participant under any
outstanding award without the written consent of such participant, provided, however, that the Board of Directors may amend or alter the 2007 Plan and
the option committee may amend or alter any award, including any agreement, either retroactively or prospectively, without the consent of the applicable
participant, (i) so as to preserve or come within any exemptions from liability under any law or the rules and releases promulgated by the SEC, or (ii) if
the Board of Directors or the option committee determines in its discretion that such amendment or alteration either is (a) required or advisable for us, the
2007 Plan or the award to satisfy, comply with or meet the requirements of any law, regulation, rule or accounting standard, or (b) not reasonably likely
to significantly diminish the benefits provided under such award, or that such diminishment has been or will be adequately compensated.
During 2020, options to purchase an aggregate of 95,517 Ordinary Shares were exercised under the 2007 Plan at an average exercise price of $2.28 per
share and options to purchase 24,250 Ordinary Shares remained outstanding. As of December 31, 2020, our executive officers and directors as a group,
consisting of 13 persons, held options to purchase 15,000 Ordinary Shares under the 2007 Plan, having an exercise price of $2.94 per share.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
MAJOR SHAREHOLDERS
Formula Systems, an Israeli company traded on the NASDAQ Global Select Market and the TASE, holds 22,324,434 or 45.53% of our outstanding
Ordinary Shares. Formula Systems is controlled by Asseco, a Polish company listed on the Warsaw Stock Exchange, which holds 25.60% of the Ordinary
Shares of Formula Systems. Guy Bernstein owns 11.89% of the outstanding shares of Formula Systems. In addition, on October 4, 2017 Asseco entered
into a shareholders agreement, which was amended on September 7, 2020, with Mr. Bernstein, under which agreement Asseco has been granted an
irrecoverable proxy to vote an additional 1,817,973 Ordinary Shares of Formula, thereby effectively giving Asseco beneficial ownership (voting power)
over an aggregate of 37.49% of Formula’s outstanding ordinary share. Therefore, based on the foregoing beneficial ownership by each of Formula and
Asseco, each of Formula and Asseco may be deemed to directly or indirectly (as appropriate) control us.
The following table sets forth as of December 31, 2020 certain information regarding the beneficial ownership by all shareholders known to us to own
beneficially 5.0% or more of our ordinary shares:
Name
Formula Systems (1985) Ltd. (3)
Harel Insurance (4)
Clal Insurance Enterprises Holdings Ltd (5)
Yelin Lapidot (6)
Number of
Ordinary
Shares
Beneficially
Owned(1)
22,324,434
4,835,262
3,765,068
2,626,903
Percentage
of
Ownership (2)
45.53%
9.86%
7.68%
5.36%
(1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to
securities. Ordinary Shares relating to options currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for
computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.
Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting
and investment power with respect to all shares shown as beneficially owned by them.
(2) The percentages shown are based on 49,035,055 Ordinary Shares issued and outstanding as of December 31, 2020.
(3) Asseco owns 25.60% of the outstanding shares of Formula. As such, Asseco may be deemed to be the beneficial owner of the aggregate 22,324,434
Ordinary Shares held directly by Formula Systems. Guy Bernstein owns 11.89% of the outstanding shares of Formula Systems. In addition, on
October 4, 2017 Asseco entered into a shareholders agreement, which was amended on September 7, 2020, with Mr. Bernstein, under which
agreement Asseco has been granted an irrecoverable proxy to vote an additional 1,817,973 Ordinary Shares of Formula, thereby effectively giving
Asseco beneficial ownership (voting power) over an aggregate of 37.49% of Formula’s outstanding ordinary shares. Therefore, based on the
foregoing beneficial ownership by each of Formula and Asseco, each of Formula and Asseco may be deemed to directly or indirectly (as appropriate)
control us. The address of Asseco is 35-322 Rzeszow, ul. Olchowa 14, Poland.
(4) Based on Schedule 13G amendment filed on January 27, 2021, Harel Insurance Investments & Financial Services Ltd. Such Ordinary shares are held
by members of the public through, among others, provident funds and/or mutual funds and/or pension funds and/or insurance policies and/or
exchange traded funds, which are managed by subsidiaries of the Reporting Person, each of which subsidiaries operates under independent
management and makes independent voting and investment decisions. Harel Insurance Investments & Financial Services Ltd. is an Israeli public
company, with a principal business address at Harel House; 3 Aba Hillel Street; Ramat Gan 52118, Israel.
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(5) Based on Schedule 13G amendment filed on February 16, 2020, by Clal Insurance Enterprises Holdings Ltd. Of the 3,765,068 Ordinary Shares held
as of December 31, 2020 and reported by such shareholder (i) 71,909 Ordinary Shares are beneficially held for its own account; and (ii) 3,693,159
are held for members of the public through, among others, provident funds and/or pension funds and/or insurance policies, which are managed by
subsidiaries of Clal, which subsidiaries operate under independent management and make independent voting and investment decisions. Clal
Insurance Enterprises Holdings Ltd is an Israeli public company, with a principal business address at 36 Raul Wallenberg St., Tel Aviv 66180, Israel.
(6) Based on Schedule 13G amendment filed on February 2, 2020. Of the 2,626,903 Ordinary Shares reported by such shareholder as of December 31,
2020, (i) 1,587,859 Ordinary Shares beneficially owned by mutual funds managed by Yelin Lapidot Mutual Funds Management Ltd. and (ii)
1,039,044 Ordinary Shares (representing 2.12% of the total Ordinary Shares outstanding) beneficially owned by provident funds managed by Yelin
Lapidot Provident Funds Management Ltd. The Ordinary Shares beneficially owned by Yelin are held by provident funds managed by Yelin Lapidot
Provident Funds Management Ltd., or Yelin Provident, and/or mutual funds managed by Yelin Lapidot Mutual Funds Management Ltd., or Yelin
Mutual. Each of Yelin Provident and Yelin Mutual is a wholly-owned subsidiary of Yelin Holdings. Messrs. Dov Yelin and Yair Lapidot each own
24.38% of the share capital and 25% of the voting rights of Yelin Holdings, and are responsible for the day-to-day management of Yelin Holdings.
The Ordinary Shares beneficially owned are held for the benefit of the members of the provident funds and the mutual funds. Each of Messrs. Yelin
and Lapidot, Yelin Holdings, Yelin Provident and Yelin Mutual disclaims beneficial ownership of the subject Ordinary Shares. The address of Yalin
is 50 Dizengoff Street, Dizengoff Center, Gate 3, Top Tower, 13th floor, Tel Aviv 64332, Israel.
Significant Changes in the Ownership of Major Shareholders
In July 2018, Formula participated in our private placement (together with other institutional investors) and reported on July 30, 2018 on Schedule 13D/A
that it holds 22,080,468 Ordinary Shares reflecting ownership of 45.2%. It currently holds 22,324,434 Ordinary Shares reflecting an ownership level of
45.53%.
In the past three years, Yelin Lapidot Holdings Management Ltd. jointly with Messrs. Dov Yelin and Yair Lapidot, filed several Schedules 13G with the
SEC reflecting their level of investment in our company. A Schedule 13G amendment filed with the SEC on January 27, 2020, reflected an ownership of
2,972,929, or 6.08% of our Ordinary Shares. A Schedule 13G amendment filed with the SEC on February 2, 2021, reflected ownership of 2,626,903, or
5.36% of our Ordinary Shares.
Based on a Schedule 13G filed on January 29, 2019, Harel Insurance Investments & Financial Services Ltd. held 2,728,908 or 5.58% of our Ordinary
Shares. Based on written notification received from Harel Insurance Investments & Financial Services Ltd on March 31, 2020, subsequent to Amendment
No.1 to Schedule 13G filed on January 23, 2020, Harel Insurance Investments & Financial Services Ltd. holds 4,564,903 or 9.32% of our Ordinary
Shares. A Schedule 13G amendment filed with the SEC on January 27, 2021, reflected ownership of 4,835,262, or 9.86% of our Ordinary Shares.
In January 2018, Clal first filed a Schedule 13G with the SEC reflecting ownership of 2,276,349 or 5.2% of our Ordinary Shares. A Schedule 13G filed
with the SEC on February 14, 2019, reflected an increase in ownership to 3,630,149, or 7.43% of our Ordinary Shares. A Schedule 13G filed with the
SEC on February 10, 2020, reflected an increase in ownership to 4,144,717, or 8.5% of our Ordinary Shares. A Schedule 13G filed with the SEC on
February 16, 2021, reflected a decrease in ownership to 3,765,068, or 7.68% of our Ordinary Shares.
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Major Shareholders Voting Rights
Our major shareholders do not have different voting rights.
Record Holders
Based on a review of the information provided to us by our U.S. transfer agent, as of January 1, 2021, there were 53 record holders, of which 42 record
holders holding approximately 96.5% of our Ordinary Shares had registered addresses in the United States. These numbers are not representative of the
number of beneficial holders of our shares nor are they representative of where such beneficial holders reside, since many of these Ordinary Shares were
held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 96.5% of our outstanding
Ordinary Shares as of such date).
B.
RELATED PARTY TRANSACTIONS
For information about related party transactions see “Item 6C. Directors, Senior Management and Employees – Board Practices - Approval of Related
Party Transactions Under Israeli Law.”
C.
INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See the consolidated financial statements, including the notes thereto, included in Item 18.
Legal Proceedings
Other than with respect to the below mentioned legal proceedings, we and our subsidiaries are, from time to time, subject to legal, administrative and
regulatory proceedings, claims, demands and investigations in the ordinary course of business, including claims with respect to intellectual property,
contracts, employment and other matters. Based upon the advice of counsel, we do not believe that the ultimate resolution of these matters will materially
affect our consolidated financial position, results of operations or cash flows.
In September 2016, an Israeli software company, that was previously involved in an arbitration proceeding with us in 2015 and won damages from us for
$2.4 million, filed a lawsuit seeking damages of NIS 34,106,000 against us and one of our subsidiaries. This lawsuit was filed as part of an arbitration
proceeding. In the lawsuit, the software company claimed that warning letters that we sent to its clients in Israel and abroad, warning those clients against
the possibility that the conversion procedure offered by the software company may amount to an infringement of our copyrights (the “Warning Letters”),
as well as other alleged actions, have caused the software company damages resulting from loss of potential business. The lawsuit is based on rulings
given in the 2015 arbitration proceeding in which it was allegedly ruled that the Warning Letters constituted a breach of a non-disclosure agreement
(NDA) signed between the parties.
We rejected the claims by the Israeli software company and moved to dismiss the lawsuit entirely. At this point, all the relevant motions have been filed
and all witnesses were deposed including submission of legal summaries. We are unable to make a reasonably reliable estimate of our chances of
successfully defending this lawsuit.
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Dividend Distribution Policy
In September 2012, our Board of Directors adopted a policy for distributing dividends, under which we will distribute a dividend of up to 50% of our
annual distributable profits each year, subject to any applicable law. On August 2019, our Board of Directors amended our dividend distribution policy,
whereas, each year we will distribute a dividend of up to 75% of our annual distributable profit. It is possible that our Board of Directors will decide,
subject to the conditions stated above, to declare additional dividend distributions. Our Board of Directors may at its discretion and at any time, change,
whether as a result of a one-time decision or a change in policy, the rate of dividend distributions or not to distribute a dividend.
According to the Israeli Companies Law, a registrant may distribute dividends out of its profits provided that there is no reasonable concern that such
dividend distribution will prevent the company from paying all its current and foreseeable obligations, as they become due. Notwithstanding the
foregoing, dividends may be paid with the approval of a court, provided that there is no reasonable concern that such dividend distribution will prevent
the company from satisfying its current and foreseeable obligations, as they become due. Profits, for purposes of the Israeli Companies Law, means the
greater of retained earnings or earnings accumulated during the preceding two years, after deducting previous distributions that were not deducted from
the surpluses.
B.
SIGNIFICANT CHANGES
Except as otherwise disclosed in this annual report, no significant change has occurred since December 31, 2020.
ITEM 9.
THE OFFER AND LISTING
A.
OFFER AND LISTING DETAILS
Our ordinary shares are traded on the NASDAQ Global Select Market under the ticker symbol “MGIC”.
B.
PLAN OF DISTRIBUTION
Not applicable.
C.
MARKETS
Our Ordinary Shares were listed on the NASDAQ Global Market (symbol: MGIC) from our initial public offering in the United States on August 16,
1991 until January 3, 2011, at which date the listing of our Ordinary Shares was transferred to the NASDAQ Global Select Market. Since November 16,
2000, our Ordinary Shares have also traded on the TASE, and on December 15, 2011 they have been included in the TASE’s TA-125 Index.
D.
SELLING SHAREHOLDERS
Not applicable.
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E.
DILUTION
Not applicable.
F.
EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A.
SHARE CAPITAL
Not applicable.
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
Set out below is a description of certain provisions of our Articles of Association and of the Israeli Companies Law related to such provisions. This
description is only a summary and does not purport to be complete and is qualified by reference to the full text of the Articles of Association, which are
incorporated by reference as an exhibit to this Annual Report.
Purposes and Objects of the Company
We are a public company registered with the Israeli Companies Registry as Magic Software Enterprises Ltd., registration number 52-003674-0. Section 2
of our memorandum of association provides that we were established for the purpose of engaging in all fields of the computer business and in any other
lawful activity permissible under Israeli law.
The Powers of the Directors
According to our articles of association, and under the limitations described therein, our board of directors may cause the company to borrow or secure
the payment of any sum or sums of money for the purposes of the company, and set aside any amount out of our profits as a reserve for any purpose.
Under our articles of association, retirement of directors from office is not subject to any age limitation and our directors are not required to own shares in
our company in order to qualify to serve as directors.
Rights Attached to Shares
Annual and Extraordinary Meetings
Under the Israeli Companies Law, a company must convene an annual meeting of shareholders at least once every calendar year and within fifteen
months of the last annual meeting. Depending on the matter to be voted upon, notice of at least 21 days or 35 days prior to the date of the meeting is
required. Our board of directors may, in its discretion, convene additional meetings as “extraordinary general meetings.” In addition, the board must
convene an extraordinary general meeting upon the demand of two of the directors or 25% of the nominated directors, one or more shareholders holding
at least 5% of the outstanding share capital and at least 1% of the voting power in the company, or one or more shareholders holding at least 5% of the
voting power in the company.
Please refer to Exhibit 2.2 for Items 10.B.3, B.4, B.6, B.7, B.8, B.9 and B.10.
C.
MATERIAL CONTRACTS
While we have numerous contracts with customers, resellers, distributors and property owners, we do not deem any such individual contract to be
material contracts that are not in the ordinary course of our business.
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D.
EXCHANGE CONTROLS
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our Ordinary Shares.
Non-residents of Israel who purchase our Ordinary Shares will be able to convert dividends, if any, thereon, and any amounts payable upon our
dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our Ordinary Shares to an Israeli resident, into freely repatriable
dollars, at the exchange rate prevailing at the time of conversion, provided that the Israeli income tax has been withheld (or paid) with respect to such
amounts or an exemption has been obtained.
E.
TAXATION
The following is a discussion of Israeli and United States tax consequences material to our shareholders. To the extent that the discussion is based on new
tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be
accepted by the appropriate tax authorities or the courts. The discussion is not intended, and should not be construed, as legal or professional tax advice
and is not exhaustive of all possible tax considerations.
Holders of our Ordinary Shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership
and disposition of Ordinary Shares, including, in particular, the effect of any foreign, state or local taxes.
ISRAELI TAX CONSIDERATIONS
Tax regulations have a material impact on our business, particularly in Israel where we have our headquarters. The following is a summary of some of the
current tax law applicable to companies in Israel, with special reference to its effect on us. The following also contains a discussion of specified Israeli tax
consequences to our shareholders and government programs benefiting us. To the extent that the discussion is based on tax legislation that has not been
subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax
authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all
possible tax considerations.
General Corporate Tax Structure
Generally, Israeli companies are subject to corporate tax on their taxable income. As of 2018 the corporate tax rate is 23%. However, the effective tax rate
payable by a company that derives income from an AE, BE, PFE or a PTE, in each case, as defined and further discussed below, may be considerably
lower. See “Law for the Encouragement of Capital Investments” in this Item 5.A below. In addition, Israeli companies are currently subject to regular
corporate tax rate on their capital gains.
Besides being subject to the general corporate tax rules in Israel, certain of our Israeli subsidiaries have also, from time to time, applied for and received
certain grants and tax benefits from, and participate in, programs sponsored by the Government of Israel, as described below.
Law for the Encouragement of Industry (Taxes), 1969
The Law for the Encouragement of Industry (Taxes), 5729-1969 (the “Industry Encouragement Law”) provides several tax benefits for an “Industrial
Company.” Pursuant to the Industry Encouragement Law, a company qualifies as an Industrial Company if it is an Israeli resident company which was
incorporated in Israel and at least 90% of its income in any tax year (other than income from certain government loans) is generated from an “Industrial
Enterprise” that it owns and is located in Israel or in the “Area,” in accordance with the definition under Section 3A of the Israeli Income Tax Ordinance
(New Version) 1961, or the Ordinance. An “Industrial Enterprise” is defined as an enterprise whose major activity, in a given tax year, is industrial
production.
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An Industrial Company is entitled to certain corporate tax benefits, including:
● Amortization of the cost of the purchases of patents, or the right to use a patent or know-how used for the development or promotion of the
Industrial Enterprise, over an eight-year period commencing on the year in which such rights were first exercised;
● The right to elect, under certain conditions, to file a consolidated tax return together with Israeli Industrial Companies controlled by it; and
● Expenses related to a public offering are deductible in equal amounts over three years beginning from the year of the offering.
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
We believe that certain of our Israeli subsidiaries currently qualify as Industrial Companies within the definition under the Industry Encouragement Law.
We cannot assure you that they will continue to qualify as Industrial Companies or that the benefits described above will be available in the future.
Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, provides certain incentives for capital investments in a
production facility (or other eligible assets). Generally, an investment program that is implemented in accordance with the provisions of the Investment
Law, referred to as an Approved Enterprise, or AE, a Benefitted Enterprise, or BE, or a Preferred Enterprise, or PFE, or a Preferred Technological
Enterprise, or PTE, or a Special Preferred Technological Enterprise, or SPFE is entitled to benefits as discussed below. These benefits may include cash
grants from the Israeli government and tax benefits, based upon, among other things, the geographic location in Israel of the facility in which the
investment is made. In order to qualify for these incentives, an AE, BE, PFE, PTE or SPFE is required to comply with the requirements of the Investment
Law.
The Investment Law has been amended several times over the recent years, with the three most significant changes effective as of April 1, 2005 (referred
to as the 2005 Amendment), as of January 1, 2011 (referred to as the 2011 Amendment) and as of January 1, 2017 (referred to as the 2017 Amendment).
Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005
Amendment remain in force but any benefits granted subsequently are subject to the provisions of the amended Investment Law. Similarly, the 2011
Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of the Investment Law prior to the 2011
Amendment. However, companies entitled to benefits under the Investment Law as in effect up to January 1, 2011 were entitled to choose to continue to
enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and elect the benefits of the 2011
Amendment. The 2017 Amendment introduces new benefits for Technological Enterprises, alongside the existing tax benefits.
Tax benefits under the 2011 Amendment became effective on January 1, 2011
The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and,
instead, introduced new benefits for income generated by a “Preferred Company” through its PFE (as such terms are defined in the Investment Law) as of
January 1, 2011. A Preferred Company is defined as either (i) a company incorporated in Israel which is not wholly owned by a governmental entity or
(ii) a limited partnership that (a) was registered under the Israeli Partnerships Ordinance and (b) all of its limited partners are companies incorporated in
Israel, but not all of them are governmental entities; which has, among other things, PFE status and is controlled and managed from Israel. Pursuant to the
2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its preferred income, or PFI, attributed to its
PFE in 2011 and 2012, unless the PFE is located in a certain development zone, in which case the rate will be 10%. Such corporate tax rate was reduced
to 12.5% and 7%, respectively, in 2013 and was increased to 16% and 9%, respectively, in 2014 until 2016. Pursuant to the 2017 Amendment, in 2017
and thereafter, the corporate tax rate for a PFE that is located in a specified development zone was decreased to 7.5%, while the reduced corporate tax rate
for other development zones remains 16%. Income derived by a Preferred Company from a Special PFE (as such term is defined in the Investment Law)
would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or 5% if the Special PFE is located in a certain development
zone. As of January 1, 2017, the definition for Special PFE includes less stringent conditions.
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The classification of income generated from the provision of usage rights in know-how or software that were developed in a PFE, as well as royalty
income received with respect to such usage, is subject, as PFE income, to the issuance of a pre-ruling from the Israel Tax Authority that stipulates that
such income is associated with the productive activity of the PFE in Israel.
Dividends paid out of PFI attributed to a PFE or to a Special PFE are generally subject to withholding tax at source at the rate of 20% or such lower rate
as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced
tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently
distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will
apply). From 2017 to 2019, dividends paid out of PFI attributed to a PFE, directly to a foreign parent company, were subject to withholding tax at source
at the rate of 5% (temporary provisions).
The 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits under the Investment Law. These
transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended
in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted to an
AE, which chose to receive grants, before the 2011 Amendment became effective, will remain subject to the provisions of the Investment Law as in effect
on the date of such approval, and subject to certain conditions; and (ii) the terms and benefits included in any certificate of approval that was granted to
an AE, that had participated in an alternative benefits program, before the 2011 Amendment became effective, will remain subject to the provisions of the
Investment Law as in effect on the date of such approval, provided that certain conditions are met. We and one of our Israeli subsidiaries have elected to
apply the new incentives regime under the Amendment to our industrial activity under the 2011 Amendment.
New Tax benefits under the 2017 Amendment that became effective on January 1, 2017
The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and is effective as of January 1,
2017. The 2017 Amendment provides new tax benefits for two types of Technology Enterprises, as described below, and is in addition to the other
existing tax beneficial programs under the Investment Law.
The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a PTE, and will thereby enjoy a reduced corporate
tax rate of 12% on income that qualifies as Preferred Technology Income, or PTI, as defined in the Investment Law. The tax rate is further reduced to
7.5% for a PTE located in development zone A. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital
gain derived from the sale of certain Benefited Intangible Assets (as defined in the Investment Law) to a related foreign company if the Benefited
Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval
from the National Authority for Technological Innovation (previously known as the Israeli Office of the Chief Scientist) (referred to as IIA).
The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a Special PTE (an enterprise for which,
among others, total consolidated revenues of its parent company and all subsidiaries is at least NIS 10 billion) and will thereby enjoy a reduced corporate
tax rate of 6% on PTI regardless of the company’s geographic location within Israel. In addition, a Special PTE will enjoy a reduced corporate tax rate of
6% on capital gain derived from the sale of certain “Benefited Intangible Assets” to a related foreign company if the Benefited Intangible Assets were
either developed by the Special Preferred Technology Enterprise or acquired from a foreign company on or after January 1, 2017, and the sale received
prior approval from IIA. A Special PTE that acquires Benefited Intangible Assets from a foreign company for more than NIS 500 million will be eligible
for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
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Dividends distributed by a PTE or a Special PTE, paid out of PTI, are generally subject to withholding tax at source at the rate of 20% or such lower rate
as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced
tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently
distributed from such Israeli company to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in
an applicable tax treaty will apply). If such dividends are distributed to a foreign company that holds solely or together with other foreign companies 90%
or more in the Israeli company and other conditions are met, the withholding tax rate will be 4% (or a lower rate under a tax treaty, if applicable, subject
to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
We examined the impact of the 2017 Amendment and the degree to which we will qualify as a PTE or Special PTE, and the amount of PTI that we may
have, or other benefits that we may receive, from the 2017 Amendment. Beginning in 2017, part of the Company taxable income in Israel is entitled to a
preferred 12% tax rate under the 2017 Amendment.
Tax Benefits for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction for research and development expenditures, including capital expenditures, for the year in
which they are incurred. Such expenditures must relate to scientific research and development projects, and must be approved by the relevant Israeli
government ministry, determined by the field of research. Furthermore, the research and development must be for the promotion of the company’s
business and carried out by or on behalf of the company seeking such tax deduction. However, the amount of such deductible expenses is reduced by the
sum of any funds received through government grants for the finance of such scientific research and development projects. Expenditures not so approved
by the relevant Israeli government ministry, but otherwise qualifying for deduction, are deductible over a three-year period.
Israeli Capital Gains Tax
The following is a short summary of the material provisions of the tax environment to which shareholders may be subject. This summary is based on the
current provisions of tax law. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative
interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts.
The summary does not address all of the tax consequences that may be relevant to all purchasers of our Ordinary Shares in light of each purchaser’s
particular circumstances and specific tax treatment. For example, the summary below does not address the tax treatment of residents of Israel and traders
in securities who are subject to specific tax regimes. As individual circumstances may differ, holders of our Ordinary Shares should consult their own tax
adviser as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of Ordinary Shares. The following is not
intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Each individual should
consult his or her own tax or legal adviser.
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Tax Consequences Regarding Disposition of Our Ordinary Shares
Overview
Israeli law generally imposes a capital gain tax on the sale of capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of
assets located in Israel, including shares of Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or
unless a tax treaty between Israel and the seller’s country of residence provides otherwise. The Ordinance distinguishes between “Real Capital Gain” and
“Inflationary Surplus”. The Inflationary Surplus is a portion of the total capital gain, which is equivalent to the increase of the relevant asset’s purchase
price, which is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the
date of purchase and the date of sale. The Real Capital Gain is the excess of the total capital gain over the Inflationary Surplus.
Capital gain
Israeli Resident Shareholders
As of January 1, 2012, the tax rate applicable to Real Capital Gain derived by Israeli individuals from the sale of shares, whether or not listed on a stock
exchange, is 25%, unless such shareholder claims a deduction for interest and linkage differences expenses in connection with the purchase and holding
of such shares, in which case the gain will generally be taxed at a rate of 30%. However, if such shareholder is considered a Substantial Shareholder (i.e.,
a person who holds, directly or indirectly, alone or together with another person who collaborates with such person on a permanent basis, 10% or more of
any of the company’s “means of control” (including, among other things, the right to receive profits of the company, voting rights, the right to receive the
company’s liquidation proceeds and the right to appoint a director)) at the time of sale or at any time during the preceding 12-month period, such gain
will be taxed at the rate of 30%. Individual shareholders dealing in securities in Israel are taxed at their marginal tax rates applicable to business income
(up to 47% in 2018 and thereafter).
Under current Israeli tax legislation, the tax rate applicable to Real Capital Gain derived by Israeli resident corporations from the sale of shares of an
Israeli company is the general corporate tax rate. As described above, the corporate tax rate as of 2018 and thereafter is 23%.
Non-Israeli Resident Shareholders
Israeli capital gain tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or rights
to shares in an Israeli resident company; or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the
seller’s country of residence provides otherwise. As mentioned above, Real Capital Gain is generally subject to tax at the corporate tax rate (23% in 2018
and thereafter) if generated by a company, or at the rate of 25% or 30%, if generated by an individual. Individual and corporate shareholders dealing in
securities in Israel are taxed at the tax rates applicable to business income (a corporate tax rate for a corporation and a marginal tax rate of up to 47% for
an individual in 2018 and thereafter).
Notwithstanding the foregoing, shareholders who are non-Israeli residents (individuals and corporations) are generally exempt from Israeli capital gain
tax on any gains derived from the sale, exchange or disposition of shares publicly traded on the Tel Aviv Stock Exchange or on a recognized stock
exchange outside of Israel, provided, among other things, that (i) such gains are not generated through a permanent establishment that the non-Israeli
resident maintains in Israel, (ii) the shares were purchased after being listed on a recognized stock exchange, and (iii) with respect to shares listed on a
recognized stock exchange outside of Israel, such shareholders are not subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985.
However, non-Israeli corporations will not be entitled to the foregoing exemptions if Israeli residents (a) have a controlling interest of more than 25% in
such non-Israeli corporation, or (b) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation,
whether directly or indirectly. Such exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to
be business income.
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In addition, a sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, under the
U.S.-Israel Tax Treaty, or the U.S-Israel Treaty, the sale, exchange or disposition of shares of an Israeli company by a shareholder who is a U.S. resident
(for purposes of the U.S.-Israel Treaty) holding the shares as a capital asset is exempt from Israeli capital gain tax unless either (i) the shareholder holds,
directly or indirectly, shares representing 10% or more of the voting rights during any part of the 12-month period preceding such sale, exchange or
disposition; (ii) the shareholder, if an individual, has been present in Israel for a period or periods of 183 days or more in the aggregate during the
applicable taxable year; (iii) the capital gain arising from such sale are attributable to a permanent establishment of the shareholder which is maintained in
Israel; (iv) the capital gain arising from such sale, exchange or disposition is attributed to real estate located in Israel; (v) the capital gain arising from
such sale, exchange or disposition is attributed to royalties; or (vi) the shareholder is a U.S. resident (for purposes of the U.S.-Israel Treaty) and is not
holding the shares as a capital asset. In each case, the sale, exchange or disposition of such shares would be subject to Israeli tax, to the extent applicable;
however, under the U.S.-Israel Treaty, a U.S. resident would be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed
with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S-Israel Treaty does not
provide such credit against any U.S. state or local taxes.
In some instances where our shareholders may be liable for Israeli tax on the sale of their Ordinary Shares, the payment of the consideration may be
subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in
order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in
the form of a merger or otherwise, the Israel Tax Authority may require from shareholders who are not liable for Israeli tax to sign declarations in forms
specified by this authority or obtain a specific exemption from the Israel Tax Authority to confirm their status as non-Israeli resident, and, in the absence
of such declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.
Taxes applicable to Dividends
Israeli Resident Shareholders
Israeli residents who are individuals are generally subject to Israeli income tax for dividends paid on our Ordinary Shares (other than bonus shares or
share dividends) at 25%, or 30% if the recipient of such dividend is a Substantial Shareholder at the time of distribution or at any time during the
preceding 12-month period. However, dividends distributed from taxable income allocated and accrued during the benefits period of an AE are subject to
withholding tax at the rate of 15% (if the dividend is distributed during the tax benefits period under the Investment Law or within 12 years after such
period, except with respect to an FIC, in which case the 12 year limit does not apply) or 20% with respect to PFE. An average rate will be set in case the
dividend is distributed from mixed types of income (regular and Approved/Beneficiary/ Preferred income).
Israeli resident corporations are generally exempt from Israeli corporate tax for dividends paid on shares of Israeli resident corporations (like our
Ordinary Shares). However, dividends distributed from taxable income accrued during the benefits period of an AE are subject to withholding tax at the
rate of 15%, if the dividend is distributed during the tax benefits period under the Investment Law or within 12 years after such period.
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Non-Israeli Resident Shareholders
Non-Israeli residents (whether individuals or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on our Ordinary
Shares, at the rate of 25% or 30% (if the dividend recipient is a Substantial Shareholder at the time of distribution or at any time during the preceding 12-
month period) or 15% if the dividend is distributed from income attributed to our AE or BE, or 20% with respect to PFE. Such dividends are generally
subject to Israeli withholding tax at a rate of 25% so long as the shares are registered with a Nominee Company (whether the recipient is a Substantial
Shareholder or not), and 15% if the dividend is distributed from income attributed to an AE or BE or 20% if the dividend is distributed from income
attributed to a PFE, unless a reduced rate is provided under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel
Tax Authority allowing for a reduced tax rate). For example, under the U.S-Israel Treaty, the maximum rate of tax withheld in Israel on dividends paid to
a holder of our Ordinary Shares who is a U.S. resident (for purposes of the U.S.-Israel Treaty) is 25%. However, generally, the maximum rate of
withholding tax on dividends, not generated by our AE or BE, that are paid to a U.S. corporation holding at least 10% or more of our outstanding voting
capital from the start of the tax year preceding the distribution of the dividend through (and including) the distribution of the dividend, is 12.5%, provided
that no more than 25% of our gross income for such preceding year consists of certain types of dividends and interest. Notwithstanding the foregoing,
dividends distributed from income attributed to an AE or BE are subject to a withholding tax rate of 15% for such a U.S. corporation shareholder,
provided that the condition related to our gross income for the previous year (as set forth in the previous sentence) is met. The aforementioned rates will
not apply if the dividend income was generated through a permanent establishment of the U.S. resident which is maintained in Israel. If the dividend is
attributable partly to income derived from an AE a BE, or a PFE, and partly to other sources of income, the withholding rate will be a blended rate
reflecting the relative portions of the two types of income. U.S residents who are subject to Israeli withholding tax on a dividend may be entitled to a
credit or deduction for U.S. federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in United States tax
legislation. A non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel
with respect to such income, provided that (i) such income was not generated from business conducted in Israel by the taxpayer, and (ii) the taxpayer has
no other taxable sources of income in Israel with respect to which a tax return is required to be filed.
Excess Tax
Individuals who are subject to tax in Israel (whether any such individual is an Israeli resident or non-Israeli resident) are also subject to an additional tax
for income exceeding a certain level. For 2017 and onwards, the additional tax is at a rate of 3% on annual income exceeding NIS 651,600 for 2020
(approximately $0.2 million) which amount is linked to the annual change in the Israeli consumer price index, including, but not limited to, dividends,
interest and capital gain.
Estate and Gift Tax
Israeli law presently does not impose estate or gift taxes.
United States Federal Income Taxation
The following is a general discussion of the material U.S. federal income tax consequences of the acquisition, ownership and disposition of our
Ordinary Shares. This description addresses only the U.S. federal income tax considerations that may be relevant to U.S. Holders (as defined below) who
hold our Ordinary Shares as capital assets. This summary is based on the U.S. Internal Revenue Code of 1986, as amended, (the “Code”) Treasury
regulations promulgated thereunder, judicial and administrative interpretations thereof and the U.S.-Israel Tax Treaty (the “Treaty”), all as in effect on the
date hereof and all of which are subject to change either prospectively or retroactively or to differing interpretations. There can be no assurance that the
U.S. Internal Revenue Service (“IRS”) will not take a different position concerning the tax consequences of the acquisition, ownership or disposition of
our Ordinary Shares or that such a position would not be sustained. This discussion does not address all tax considerations that may be relevant to a U.S.
Holder of Ordinary Shares. In addition, this description does not account for the specific circumstances of any particular investor, such as:
● broker-dealers;
● financial institutions or financial services entities;
● certain insurance companies;
● investors liable for alternative minimum tax;
● regulated investment companies, real estate investment trusts, or grantor trusts;
● dealers or traders in securities, commodities or currencies;
● tax-exempt organizations;
● retirement plans;
● S corporations:
● pension funds;
● certain former citizens or long-term residents of the United States;
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● non-resident aliens of the United States or taxpayers whose functional currency is not the U.S. dollar;
● persons who hold Ordinary Shares through partnerships or other pass-through entities;
● persons who acquire their Ordinary Shares through the exercise or cancellation of employee stock options or otherwise as compensation for
services;
● direct, indirect or constructive owners of investors that actually or constructively own at least 10% of the total combined voting power of
our shares or at least 10% of our shares by value; or
● investors holding Ordinary Shares as part of a straddle, appreciated financial position, a hedging transaction or conversion transaction.
If a partnership or an entity treated as a partnership for U.S. federal income tax purposes owns our Ordinary Shares, the U.S. federal income tax
treatment of a partner in such a partnership will generally depend upon the status of the partner and the activities of the partnership. A partnership that
owns our Ordinary Shares and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of
holding and disposing of Ordinary Shares.
This summary does not address the effect of any U.S. federal taxation (such as estate and gift tax) other than U.S. federal income taxation. In
addition, this summary does not include any discussion of state, local or non-U.S. taxation.
For purposes of this summary the term “U.S. Holder” means a person that is eligible for the benefits of the Treaty and is a beneficial owner of
Ordinary Shares who is, for U.S. federal income tax purposes:
●
●
an individual who is a citizen or a resident of the United States;
a corporation or other entity taxable as a corporation for United States federal income tax purposes, created or organized in or under the
laws of the United States or any political subdivision thereof;
●
an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
● a trust if the trust has validly elected to be treated as a U.S. person for U.S. federal income tax purposes or if (1) a court within the United
States is able to exercise primary supervision over the trust’s administration and (2) one or more U.S. persons have the authority to control
all of the substantial decisions of the trust.
Unless otherwise indicated, it is assumed for the purposes of this discussion that the Company is not, and will not become, a “passive foreign
investment company” (“PFIC”) for U.S. federal income tax purposes. See “—Passive Foreign Investment Companies” below.
Taxation of Distributions
Subject to the discussion below under the heading “—Passive Foreign Investment Companies,” the gross amount of any distributions received
with respect to our Ordinary Shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S. federal income tax
purposes when such distribution is actually or constructively received, to the extent such distribution is paid out of our current and accumulated earnings
and profits, as determined for U.S. federal income tax purposes. Because we do not expect to maintain calculations of our earnings and profits under U.S.
federal income tax principles, you should expect that the entire amount of any distribution will be taxable to you as dividend income. Dividends are
included in gross income at ordinary income rates, unless such dividends constitute “qualified dividend income,” as set forth in more detail below.
Distributions in excess of our current and accumulated earnings and profits would be treated as a non-taxable return of capital to the extent of your
adjusted tax basis in our Ordinary Shares and any amount in excess of your tax basis would be treated as gain from the sale of Ordinary Shares. See
“—Sale, Exchange or Other Disposition of Ordinary Shares” below for a discussion of the taxation of capital gains. Our dividends would not qualify for
the dividends-received deduction generally available to corporations under section 243 of the Code.
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Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar
amount calculated by reference to the exchange rate in effect on the day such dividends are received, regardless of whether the payment is in fact
converted into U.S. dollars. A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in
effect on such day may have a foreign currency exchange gain or loss that would generally be treated as U.S.-source ordinary income or loss. U.S.
Holders should consult their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.
Subject to complex limitations, some of which vary depending upon the U.S. Holder’s circumstances, any Israeli withholding tax imposed on
dividends paid with respect to our Ordinary Shares, may be a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax
liability (or, alternatively, for deduction against income in determining such tax liability). Israeli taxes withheld in excess of the applicable rate allowed
by the Treaty (if any) will not be eligible for credit against a U.S. Holder’s federal income tax liability. The limitation on foreign income taxes eligible for
credit is calculated separately with respect to specific classes of income. Dividends paid with respect to our common stock generally will be treated as
foreign-source passive category income or, in the case of certain U.S. Holders, general category income for U.S. foreign tax credit purposes. Further,
there are special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to a reduced tax rate. A U.S. Holder
may be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on our Ordinary Shares if such U.S. Holder fails to
satisfy certain minimum holding period requirements or to the extent such U.S. Holder’s position in Ordinary Shares is hedged. An election to deduct
foreign taxes instead of claiming a foreign tax credit applies to all foreign taxes paid or accrued in the taxable year. The rules relating to the determination
of the foreign tax credit are complex. You should consult with your own tax advisors to determine whether and to what extent you would be entitled to
this credit.
Subject to certain limitations (including the PFIC rules discussed below), “qualified dividend income” received by a non-corporate U.S. Holder
may be subject to tax at the lower long-term capital gain rates (currently, a maximum rate of 20%). Distributions taxable as dividends paid on our
Ordinary Shares should qualify for a reduced rate if we are a “qualified foreign corporation,” as defined in Code section 1(h)(11)(C). We will be a
qualified foreign corporation if either: (i) we are entitled to benefits under the Treaty or (ii) our Ordinary Shares are readily tradable on an established
securities market in the United States and certain other requirements are met. We believe that we are entitled to benefits under the Treaty and that our
Ordinary Shares currently are readily tradable on an established securities market in the United States. However, no assurance can be given that our
Ordinary Shares will remain readily tradable. The rate reduction does not apply unless certain holding period requirements are satisfied, nor does it apply
to dividends received from a PFIC (see discussion below), in respect of certain risk-reduction transactions, or in certain other situations. U.S. Holders of
our Ordinary Shares should consult their own tax advisors regarding the effect of these rules in their particular circumstances.
Sale, Exchange or Other Disposition of Ordinary Shares
Subject to the discussion of the PFIC rules below, if you sell or otherwise dispose of our Ordinary Shares (other than with respect to certain non-
recognition transactions), you will generally recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the
amount realized on the sale or other disposition and your adjusted tax basis in our Ordinary Shares, in each case determined in U.S. dollars. Such gain or
loss will generally be capital gain or loss and will be long-term capital gain or loss if you have held the Ordinary Shares for more than one year at the
time of the sale or other disposition. Long-term capital gain realized by a non-corporate U.S. Holder is generally eligible for a preferential tax rate
(currently at a maximum of 20%). In general, any gain that you recognize on the sale or other disposition of Ordinary Shares will be U.S.-source for
purposes of the foreign tax credit limitation; losses will generally be allocated against U.S. source income. Deduction of capital losses is subject to certain
limitations under the Code.
In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of our Ordinary Shares, the amount realized
will be based on the U.S. dollar value of the NIS received with respect to the Ordinary Shares as determined on the settlement date of such exchange. A
cash basis U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at a conversion rate other than the rate in effect on the settlement
date may have a foreign currency exchange gain or loss, based on any appreciation or depreciation in the value of NIS against the U.S. dollar, which
would be treated as ordinary income or loss.
An accrual basis U.S. Holder may elect the same treatment of currency exchange gain or loss required of cash basis taxpayers with respect to a
sale or disposition of our Ordinary Shares that are traded on an established securities market, provided that the election is applied consistently from year
to year. Such election may not be changed without the consent of the IRS. In the event that an accrual basis U.S. Holder does not elect to be treated as a
cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder is required to calculate the value
of the proceeds as of the “trade date” and may have a foreign currency gain or loss for U.S. federal income tax purposes in the event of any difference
between the U.S. dollar value of NIS prevailing on the trade date and on the settlement date. Any such currency gain or loss generally would be treated as
U.S.- source ordinary income or loss and would be subject to tax in addition to the gain or loss, if any, recognized by such U.S. Holder on the sale or
disposition of such Ordinary Shares.
Passive Foreign Investment Company Considerations
Based on the composition of our income, assets (including the value of our goodwill, going-concern value or any other unbooked intangibles,
which may be determined based on the price of the ordinary shares), and operations, we believe we will not be classified as a “passive foreign investment
company”, or PFIC, for the 2020 taxable year. However, because PFIC status is based on our income, assets and activities for the entire taxable year, it is
not possible to determine whether we will be characterized as a PFIC for our current taxable year or future taxable years until after the close of the
applicable taxable year. Moreover, we must determine our PFIC status annually based on tests that are factual in nature, and our status in the current year
and future years will depend on our income, assets and activities in each of those years and, as a result, cannot be predicted with certainty as of the date
hereof.
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If we were a PFIC for any taxable year during which a U.S. Holder owned Ordinary Shares, certain adverse consequences could apply to the
U.S. Holder. Specifically, unless a U.S. Holder makes one of the elections mentioned below, gain recognized by the U.S. Holder on a sale or other
disposition of Ordinary Shares would be allocated ratably over the U.S. Holder’s holding period for the Ordinary Shares. The amounts allocated to the
taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each
other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest
charge would be imposed on the resulting tax liability. Further, any distribution in excess of 125% of the average of the annual distributions received by
the U.S. Holder on our Ordinary Shares during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, would be subject to
taxation as described immediately above. In addition, if we were a PFIC for a taxable year in which we pay a dividend or the immediately preceding
taxable year, the preferential dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply. If we
were a PFIC for any taxable year in which a U.S. Holder owned our shares, the U.S. Holder would generally be required to file annual returns with the
IRS on IRS Form 8621.
If we are treated as a PFIC with respect to you for any taxable year, you will be deemed to own shares in any entities in which we own equity
that are also PFICs (“lower tier PFICs”), and you may be subject to the tax consequences described above with respect to the shares of such lower tier
PFIC you would be deemed to own.
i. Mark-to-market elections
If we are a PFIC for any taxable year during which you hold ordinary shares, then instead of being subject to the tax and interest charge rules
discussed above, you may make an election to include gain on the ordinary shares as ordinary income under a mark-to-market method, provided that such
ordinary shares are “marketable.” The ordinary shares will be marketable if they are “regularly traded” on a qualified exchange or other market, as
defined in applicable U.S. Treasury regulations, such as the New York Stock Exchange (or on a foreign stock exchange that meets certain conditions).
For these purposes, the ordinary shares will be considered regularly traded during any calendar year during which they are traded, other than in de
minimis quantities, on at least 15 days during each calendar quarter. Any trades that have as their principal purpose meeting this requirement will be
disregarded. However, because a mark-to-market election cannot be made for any lower tier PFICs that we may own, you will generally continue to be
subject to the PFIC rules discussed above with respect to your indirect interest in any investments we own that are treated as an equity interest in a PFIC
for U.S. federal income tax purposes. As a result, it is possible that any mark-to-market election with respect to the ordinary shares will be of limited
benefit.
If you make an effective mark-to-market election, in each year that we are a PFIC, you will include in ordinary income the excess of the fair
market value of your ordinary shares at the end of the year over your adjusted tax basis in the ordinary shares. You will be entitled to deduct as an
ordinary loss in each such year the excess of your adjusted tax basis in the ordinary shares over their fair market value at the end of the year, but only to
the extent of the net amount previously included in income as a result of the mark-to-market election. If you make an effective mark-to-market election,
in each year that we are a PFIC, any gain that you recognize upon the sale or other disposition of your ordinary shares will be treated as ordinary income
and any loss will be treated as ordinary loss, but only to the extent of the net amount of previously included income as a result of the mark-to-market
election.
Your adjusted tax basis in the ordinary shares will be increased by the amount of any income inclusion and decreased by the amount of any
deductions under the mark-to-market rules discussed above. If you make an effective mark-to-market election, it will be effective for the taxable year for
which the election is made and all subsequent taxable years unless the ordinary shares are no longer regularly traded on a qualified exchange or the IRS
consents to the revocation of the election. You should consult your tax advisor about the availability of the mark-to-market election, and whether making
the election would be advisable in your particular circumstances.
ii. Qualified electing fund elections
In certain circumstances, a U.S. equity holder in a PFIC may avoid the adverse tax and interest charge regime described above by making a
“qualified electing fund” election to include in income its share of the corporation’s income on a current basis. However, you may make a qualified
electing fund election with respect to the ordinary shares only if we agree to furnish you annually with a PFIC annual information statement as specified
in the applicable U.S. Treasury regulations. We do not intend to provide the information necessary for you to make a qualified electing fund election if
we are classified as a PFIC. Therefore, you should assume that you will not receive such information from us and would therefore be unable to make a
qualified electing fund election with respect to any of our ordinary shares were we to be or become a PFIC.
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Additional Tax on Investment Income
In addition to the income taxes described above, U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds
may be subject to a 3.8% Medicare contribution tax on net investment income, which includes dividends and capital gains from the sale or exchange of
our Ordinary Shares.
Backup Withholding and Information Reporting
Payments in respect of our Ordinary Shares may be subject to information reporting to the IRS and to U.S. backup withholding tax at the rate
(currently) of 24%. Backup withholding will not apply, however, if you (i) fall within certain exempt categories and demonstrate the fact when required
or (ii) furnish a correct taxpayer identification number and make any other required certification.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s U.S.
tax liability. A U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for
refund with the IRS.
U.S. citizens and individuals taxable as resident aliens of the United States that (i) own “specified foreign financial assets” (as defined in Section
6038D of the Code and the regulations thereunder) with an aggregate value in a taxable year in excess of certain thresholds (as determined under rules in
Treasury regulations) and (ii) are required to file U.S. federal income tax returns generally will be required to file an information report with respect to
those assets with their tax returns. IRS Form 8938 has been issued for that purpose. “Specified foreign financial assets” include any financial accounts
maintained by foreign financial institutions, foreign stocks held directly, and interests in foreign estates, foreign pension plans or foreign deferred
compensation plans. Under those rules, our Ordinary Shares, whether owned directly or through a financial institution, estate or pension or deferred
compensation plan, would be “specified foreign financial assets.” Under Treasury regulations, the reporting obligation applies to certain U.S. entities that
hold, directly or indirectly, specified foreign financial assets. Penalties can apply if there is a failure to satisfy this reporting obligation. In addition, in the
event a U.S. Holder that is required to file IRS Form 8938 does not file such form, the statute of limitations on the assessment and collection of U.S.
federal income taxes of such U.S. Holder for the related tax year may not close until three years after the date that the required information is filed. A
U.S. Holder is urged to consult the U.S. Holder’s tax advisor regarding the reporting obligation.
Any U.S. Holder who acquires more than $100,000 of our Ordinary Shares or holds 10% or more of our Ordinary Shares by vote or value may
be subject to certain additional U.S. information reporting requirements.
The above description is not intended to constitute a complete analysis of all tax consequences relating to acquisition, ownership and
disposition of our Ordinary Shares. You should consult your tax advisor concerning the tax consequences of your particular situation.
F.
DIVIDENDS AND PAYING AGENTS
Not applicable.
G.
STATEMENT BY EXPERTS
Not applicable.
H.
DOCUMENTS ON DISPLAY
We are subject to certain of the reporting requirements of the Exchange Act, as applicable to “foreign private issuers” as defined in Rule 3b-4 under the
Exchange Act. As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy solicitations are not
subject to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, and transactions in our equity securities by our officers
and directors are exempt from reporting and the “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we
are not required under the Exchange Act to file periodic reports and financial statements as frequently or as promptly as U.S. companies whose securities
are registered under the Exchange Act. However, we file with the SEC an annual report on Form 20-F containing financial statements audited by an
independent accounting firm. We also submit to the SEC reports on Form 6-K containing (among other things) press releases and unaudited financial
information. We post our annual report on Form 20-F on our website (www.magicsoftware.com) promptly following the filing of our annual report with
the SEC. The information on our website is not incorporated by reference into this annual report.
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The Exchange Act file number for our SEC filings is 000-19415.
The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that
make electronic filings with the SEC using its EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.
The documents concerning our company that are referred to in this annual report may also be inspected at our offices located at Yahadut Canada 1 Street,
Or Yehuda 6037501, Israel.
I.
SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to a variety of market risks, primarily changes in interest rates affecting our investments in marketable securities and foreign currency
fluctuations.
Cash Investments, Marketable Securities and Interest Rate Risk
Our cash investment policy seeks to preserve principal and maintain adequate liquidity while maximizing the income we receive from our investments
without significantly increasing the risk of loss. To minimize investment risk, we maintain a diversified portfolio across various maturities, types of
investments and issuers, which may include, from time to time, money market funds, U.S. government bonds, state debt, bank deposits and certificates of
deposit, and investment grade corporate debt. Our cash management policy does not allow us to purchase or hold commodity instruments, structures or
“sub-prime” related holdings (such as auction rate securities and collateralized debt obligation) or other financial instruments for trading purposes.
As of December 31, 2020, we had approximately $88.4 million in cash and cash equivalents and short term bank deposits and $1.2 million in marketable
securities. Our marketable securities include investments in commercial bonds. The performance of the capital markets affects the values of the funds we
hold in marketable securities. These assets are subject to market fluctuations. In such case, the fair value of our investments may decline. We periodically
monitor our investments for adverse material holdings related to the underlying financial solvency of the issuers of the marketable securities in our
portfolio.
Our exposure to market risk for changes in interest rates relates primarily to our investment in marketable securities. Investments in both fixed rate and
floating rate interest bearing securities carry a degree of interest rate risk. The fair market value of fixed rate securities may be adversely impacted due to
a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall. Due in part to these factors, our future
financial results may be negatively affected in the event that interest rates fluctuate.
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Foreign Currency Exchange Risk
Our financial results may be negatively impacted by foreign currency fluctuations. Our foreign operations are transacted through a global network of
subsidiaries. These sales and related expenses are generally denominated in currencies other than the U.S. dollar. Because our financial results are
reported in U.S. dollars, our results of operations may be adversely impacted by fluctuations in the rates of exchange between the U.S. dollar and such
other currencies as the financial results of our foreign subsidiaries are converted into U.S. dollars in consolidation. Our earnings are predominantly
affected by fluctuations in the value of the U.S. dollar as compared to the NIS, as well as the value of the U.S. dollar as compared to the euro, Japanese
Yen and British Pound.
We measure and record non-monetary accounts in our balance sheet (principally fixed assets and prepaid expenses) in U.S. dollars. For this measurement,
we use the U.S. dollar value in effect at the date that the asset or liability was initially recorded in our balance sheet (the date of the transaction).
Our operating expenses may be affected by fluctuations in the value of the U.S. dollar as it relates to foreign currencies, with NIS, euro and Japanese Yen
having the greatest potential impact. In managing our foreign exchange risk, we periodically enter into foreign exchange hedging contracts. Our goal is to
mitigate the potential exposure with these contracts. By way of example, an increase of 10% in the value of the NIS relative to the U.S. dollar in 2020
would have resulted in an increase in the U.S. dollar reporting value of our operating income of $2.1 million for that year, while a decrease of 10% in the
value of the NIS relative to the U.S. dollar in 2020 would have resulted in a decrease in the U.S. dollar reporting value of our operating income of $1.8
million for the year. An increase of 10% in the value of the euro, the Japanese yen and the British Pound relative to the U.S. dollar in 2020 would have
resulted in an increase in the U.S. dollar reporting value of our operating income of $0.9 million, $0.4 million and $0.2 million, respectively, for that year,
while a decrease of 10% in the value of the euro, Japanese Yen and British Pound relative to the U.S. dollar in 2020 would have resulted in a decrease in
the U.S. dollar reporting value of our operating income of $0.8 million, $0.3 million and $0.1 million, respectively, for that year.
Equity Price Risk
As of December 31, 2020, we had no trading securities that are classified as available for sale.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
100
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
PART II
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer, and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2020. Based on such evaluation, the Chief
Executive Officer, and the Chief Financial Officer, have concluded that, as of December 31, 2020, our disclosure controls and procedures are effective.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-
15(f) and 15d-15(f) of the Exchange Act. Our management, including our Chief Executive Officer and our Chief Financial Officer, conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of the end of the
period covered by this report.
Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2020.
Notwithstanding the foregoing, there can be no assurance that our internal control over financial reporting will detect or uncover all failures of persons
within the company to comply with our internal procedures, as all internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective may not prevent or detect misstatements.
Our management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of
the business of Aptonet Inc., Mobisoft Ltd. and Stockell Information Systems Inc., that were acquired during 2020 and included in our 2020 consolidated
financial statements and constituted 3% and 1% of total and net assets, respectively as of December 31, 2020 and 5% and 10% of revenues and net
income, respectively, for the year then ended
Attestation Report of the Registered Public Accounting Firm
The attestation report of Kost Forer Gabbay& Kasierer, a member of EY Global, an independent registered public accounting firm in Israel, on
our management’s assessment of our internal control over financial reporting as of December 31, 2020 is provided on page F-4, as included
under Item 18 of this annual report.
Changes in Internal Control over Financial Reporting
Based on the evaluation conducted by our Chief Executive Officer and our Chief Financial Officer pursuant to Rules 13a-15(d) and 15d-15(d) under the
Exchange Act, our management has concluded that there was no change in our internal control over financial reporting that occurred during the year
ended December 31, 2020 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
101
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Ettlinger, an external director within the meaning of the Israeli Companies Law, meets the definition of an
audit committee financial expert, as defined by rules of the SEC. For a brief listing of Mr. Ettlinger’s relevant experience, see Item 6A. “Directors, Senior
Management and Employees -- Directors and Senior Management.”
ITEM 16B. CODE OF ETHICS
We have adopted a code of ethics that applies to any chief executive officer and all senior financial officers of our company, including the chief financial
officer, chief accounting officer or controller, or persons performing similar functions. Written copies are available upon request. If we make any
substantive amendment to the code of ethics or grant any waivers, including any implicit waiver, from a provision of the codes of ethics, we will disclose
the nature of such amendment or waiver on our website.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Registered Public Accounting Firm Fees
The following table sets forth, for each of the years indicated, the fees billed by our principal independent registered public accounting firm. All of such
fees were pre-approved by our Audit Committee.
Services Rendered
Audit (1)
Tax and other (2)
Total
Year Ended December 31,
2020
2019
$
$
$
365,000
92,000
457,000
$
$
$
355,000
115,000
470,000
(1) Audit fees relate to audit services provided for each of the years shown in the table, including fees associated with the annual audit, the filing of a
shelf registration statement, various accounting issues and audit services provided in connection with other statutory or regulatory filings.
(2) Tax fees relate to services performed by the tax division for tax compliance, planning and advice.
Pre-Approval Policies and Procedures
Our Audit Committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent registered
public accountants, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global. Pre-approval of an audit or non-audit service may be given as a
general pre-approval, as part of the audit committee’s approval of the scope of the engagement of our independent auditor, or on an individual basis. Any
proposed services that exceed general pre-approved levels also require specific pre-approval by our audit committee. The policy prohibits retention of the
independent public accountants to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of
the SEC, and also requires the Audit Committee to consider whether proposed services are compatible with the independence of the public accountants.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
102
ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G. CORPORATE GOVERNANCE
NASDAQ Stock Market Rules and Home Country Practice
Under NASDAQ Stock Market Rule 5615(a)(3), foreign private issuers, such as our company, are permitted to follow certain home country corporate
governance practices instead of certain provisions of the NASDAQ Stock Market Rules. A foreign private issuer that elects to follow a home country
practice instead of any of such NASDAQ requirements must submit to NASDAQ, in advance, a written statement from an independent counsel in such
issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. We provided NASDAQ with such a letter of
non-compliance with respect to:
● The Rule requiring maintaining a majority of independent directors (Rule 5605(b)(1)). Instead, under Israeli law and practice, we are required to
appoint at least two external directors, within the meaning of the Israeli Companies Law, to our board of directors.
● The Rule requiring that our independent directors have regularly scheduled meetings at which only independent directors are present (Rule 5605
(b)(2)). Instead, we follow Israeli law according to which independent directors are not required to hold executive sessions.
● The Rule regarding independent director oversight of director nominations process for directors (Rule 5605(e)). Instead, we follow Israeli law
and practice according to which our board of directors recommends directors for election by our shareholders.
● The requirement to obtain shareholder approval for the establishment or amendment of certain equity based compensation plans (Rule 5635(c)),
an issuance that will result in a change of control of the company (Rule 5635(b)), certain transactions other than a public offering involving
issuances of a 20% or more interest in the company (Rule 5635(d)) and certain acquisitions of the stock or assets of another company (Rule 5635
(a)). Instead, we follow Israeli law and practice in approving such procedures, according to which Board approval may suffice in certain
circumstances.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
103
PART III
ITEM 17.
FINANCIAL STATEMENTS
Not applicable.
ITEM 18.
FINANCIAL STATEMENTS
Index to Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Appendix to Consolidated Financial Statements – Details of Subsidiaries and Affiliate
104
F-1
F-2 – F-5
F-6 – F-7
F-8
F-9
F-10
F-11 – F-13
F-14 – F-54
F-55 – F-56
ITEM 19. EXHIBITS
Index to Exhibits
Exhibit
1.1
1.2
2.1
2.2
4.1
4.2
8.1
12.1
12.2
13.1
13.2
15.1
15.2
101.INS
101.SCH
101.PRE
101.CAL
101.LAB
101.DEF
104
Description
Memorandum of Association of the Registrant1
Articles of Association of the Registrant2
Specimen of Ordinary Share Certificate3
Description of the rights of each class of securities registered under Section 12 of the Securities Exchange Act of 19344
2000 Employee Stock Option Plan5
2007 Incentive Compensation Plan6
List of Subsidiaries of the Registrant
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Consent of Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global
Consent of KDA Audit Corporation (relating to Magic Software Japan K.K.)
Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are
embedded within the Inline XBRL document)
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Presentation Linkbase Document
Inline XBRL Taxonomy Calculation Linkbase Document
Inline XBRL Taxonomy Label Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
(1) Filed as Exhibit 3.2 to the registrant’s registration statement on Form F-1, registration number 33-41486, and incorporated herein by reference.
(2) Filed as an Item to the registrant’s Form 6-K for the month of December 2011, filed on December 7, 2011, and incorporated herein by reference.
(3) Filed as Exhibit 4.1 to the registrant’s registration statement on Form F-1, registration number 33-41486, and incorporated herein by reference.
(4) Filed as Exhibit 2.2 to the registrant’s registration statement on Form 20-F for the year ended December 31, 2019, and incorporated herein by
reference.
(5) Filed as Exhibit 10.2 to the registrant’s annual report on Form 20-F for the year ended December 31, 2000, and incorporated herein by reference.
(6) Filed as Exhibit 4.3 to the registrant’s annual report on Form 20-F for the year ended December 31, 2007, and incorporated herein by reference.
105
MAGIC SOFTWARE ENTERPRISES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2020
U.S. DOLLARS IN THOUSANDS
INDEX
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Appendix to Consolidated Financial Statements - Details of Subsidiaries and Affiliate
- - - - - - - - - - - -
F-1
Page
F-2 – F-5
F-6 – F-7
F-8
F-9
F-10
F-11 – F-13
F-14 – F-54
F-55 – F-56
Kost Forer Gabbay &
Kasierer
144 Menachem Begin St.
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
MAGIC SOFTWARE ENTERPRISES LTD.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Magic Software Enterprises LTD. (“the Company”) as of December 31, 2020
and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion,
based on our audits and the report of other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2020, in conformity with U.S. generally accepted accounting principles.
We did not audit the financial statements of Magic Software Japan K.K., a wholly-owned subsidiary, which reflect total assets of constituting 1%
and 1% at December 31, 2020 and 2019, respectively, and total revenues of 3%, 4% and 3% for the years ended December 31, 2020, 2019 and 2018,
respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Magic Software Japan K.K., is based solely on the report of the other auditors.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated May 13, 2021 expressed an
unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
F-2
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated
or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our
opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Description of the Matter
Valuation of Goodwill
At December 31,2020, the Company had 135,682 of goodwill. As discussed in Note 2 to the consolidated financial
statement, goodwill is tested annually for impairment, or more frequently if impairment indicators arise. The
Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit
to its carrying value. If the Company’s carrying amount of a reporting unit exceeds its fair value, an impairment
loss would be recognized in an amount equal to the excess of the carrying amount over the calculated fair value.
The Company determines the fair value of its reporting units using the income approach, which considers a
discounted future cash flow analysis using judgments and assumptions related to revenue, operating income, future
short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures, cash flows,
and market conditions are inherent in developing the discounted cash flow model. The Company considers
historical rates and current market conditions when determining the discount and growth rates to use in its analyses.
The company performed an annual impairment test.
Auditing the Company’s goodwill test was complex and highly judgmental due to the significant estimation and
assumptions required by management to estimate the fair value of the reporting units. In particular, significant
assumptions, such as projected the future operating cash flows based on forecasted operating income margins,
future revenues, the selection of terminal value growth rate, and discount rate. These significant assumptions are
forward-looking and could be affected by future economic and market conditions.
How We Addressed the Matter
in Our Audit
We obtained an understanding, evaluated the design and tested the effectiveness of controls over goodwill
impairment testing process, including those over management’s assessment of the significant assumption and the
projected future operating cash flows based on forecasted operating income margins, including future revenues,
and the selection of the terminal value growth rate and discount rate.
Our audit procedures to evaluate the significant judgments made by management to test the estimated fair value of
the Company’s reporting units included, among others, evaluating the reasonableness of management’s projected
future operating cash flows based on forecasted EBIT margins, including future revenues by comparing to (1)
historical results, (2) internal communications to management and the Board of Directors, and (3) forecasted
information included in Company press releases, analyst and industry reports of the Company and companies in its
peer group.
We also evaluated the appropriateness of the related disclosures included in Note 2 to the consolidated financial
statements in relation to Goodwill impairment.
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company’s auditor since 1984.
Tel-Aviv, Israel
May 13. 2021
F-3
Kost Forer Gabbay &
Kasierer
144 Menachem Begin St.
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
MAGIC SOFTWARE ENTERPRISES LTD.
Opinion on Internal Control over Financial Reporting
We have audited Magic Software Enterprises Ltd.’s (“the Company”) internal control over financial reporting as of December 31, 2020, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (“the COSO criteria”). In our opinion, the Company, based on our audit and the report of other auditors, maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We did not examine the effectiveness of internal control over financial reporting of Magic Software Japan K.K, a wholly owned subsidiary, whose
financial statements reflect total assets and revenues constituting 1% and 3%, respectively, of the related consolidated financial statement amounts as of
and for the year ended December 31, 2020. The effectiveness of Magic Software Japan K.K.’s internal control over financial reporting was audited by
other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the effectiveness of Magic Software Japan K.K.’s internal
control over financial reporting, is based solely on the report of the other auditors.
As indicated in the accompanying Management's Report on Internal Control Over Financial Reporting, management’s assessment of and
conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the business of Aptonet Inc., Mobisoft
Ltd. and Stockell Information Systems, Inc., that were acquired during 2020 and included in the 2020 consolidated financial statements of the Company
and constituted 3% and 1% of total and net assets, respectively as of December 31, 2020 and 5% and 10% of revenues and net income, respectively, for
the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over
financial reporting of the business of Aptonet Inc., Mobisoft Ltd. and Stockell Information Systems, Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income,
changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020 and the related notes and our report
dated May 13, 2021 expressed an unqualified opinion thereon based on our audit and the report of the other auditors.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
F-4
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit and the report of other auditors provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
May 13, 2021
F-5
MAGIC SOFTWARE ENTERPRISES LTD.
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Short-term bank deposits
Marketable securities
Trade receivables (net of allowance of $ 3,967 and $ 3,810 at December 31, 2020 and 2019, respectively)
Other accounts receivable and prepaid expenses
Total current assets
LONG-TERM ASSETS:
Severance pay fund
Deferred tax asset
Operating lease right-of-use assets
Other long-term receivables
PROPERTY AND EQUIPMENT, NET
INTANGIBLE ASSETS, NET
GOODWILL
Total long-term assets
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
F-6
December 31,
2020
2019
$
$
88,127
289
1,238
111,059
10,513
81,915
6,996
6,600
96,694
12,845
211,226
205,050
4,673
6,397
24,509
5,507
5,988
53,404
4,013
2,188
14,956
5,879
3,649
51,128
135,682
117,743
236,160
199,556
$
447,386
$
404,606
MAGIC SOFTWARE ENTERPRISES LTD.
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share data)
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Short term debt
Trade payables
Accrued expenses and other accounts payable
Current maturities of operating lease liabilities
Liabilities due to acquisition activities
Deferred revenues and customer advances
Total current liabilities
LONG TERM LIABILITIES:
Long-term debt
Long-term operating lease liabilities
Long-term liabilities due to acquisition activities
Deferred tax liability
Accrued severance pay
Total long term liabilities
COMMITMENTS AND CONTINGENCIES, see Note 16
REDEEMABLE NON-CONTROLLING INTEREST
EQUITY:
Magic Software Enterprises equity:
Share capital:
Ordinary shares of NIS 0.1 par value - Authorized: 50,000,000 shares at December 31, 2020 and 2019; Issued
and Outstanding: 49,035,055 and 48,939,538 shares at December 31, 2020 and 2019, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total equity attributable to Magic Software Enterprises shareholders
Non-controlling interests
Total equity
Total liabilities, redeemable non-controlling interest and equity
The accompanying notes are an integral part of the consolidated financial statements.
F-7
$
December 31,
2020
2019
$
11,529
14,250
41,846
3,413
4,998
8,793
84,829
13,352
21,109
10,926
17,639
5,545
68,571
7,079
10,990
32,619
3,833
3,638
8,724
66,883
15,540
11,119
8,613
11,069
4,770
51,111
24,980
21,915
1,164
211,713
7,835
39,720
260,432
8,574
1,161
218,647
(324)
28,354
247,838
16,859
269,006
264,697
$
447,386
$
404,606
CONSOLIDATED STATEMENTS OF INCOME
U.S. dollars in thousands (except per share data)
Revenues:
Software
Maintenance and technical support
Consulting services
Total revenues
Cost of revenues:
Software
Maintenance and technical support
Consulting services
Total cost of revenues
Gross profit
Operating costs and expenses:
Research and development, net
Selling and marketing
General and administrative
Change in valuation of contingent consideration related to acquisitions
Total operating costs and expenses
Operating income
Financial income (expenses), net
Increase in valuation of consideration related to acquisitions
Income before taxes on income
Taxes on income
Net income
Net income attributable to redeemable non-controlling interests
Net income attributable to non-controlling interests
Net income attributable to Magic Software Enterprises shareholders
Net earnings per share attributable to Magic Software Enterprises’ shareholders:
Basic and Diluted earnings per share
The accompanying notes are an integral part of the consolidated financial statements.
F-8
MAGIC SOFTWARE ENTERPRISES LTD.
Year ended December 31,
2019
2020
2018
$
$
24,272
33,181
313,741
$
28,084
30,996
266,550
25,454
30,951
227,970
371,194
325,630
284,375
10,487
3,598
247,517
10,220
4,167
209,114
9,960
4,120
181,477
261,602
223,501
195,557
109,592
102,129
88,818
8,789
31,160
27,967
1,088
69,004
40,588
(917)
(2,268)
37,403
7,286
30,117
2,526
2,405
8,239
30,454
29,529
255
68,477
33,652
(1,169)
(11)
32,472
6,874
25,598
3,111
2,221
5,696
27,197
24,265
(38)
57,120
31,698
153
(4)
31,847
7,071
24,776
3,383
1,510
$
$
25,186
$
20,266
$
19,883
0.49
$
0.26
$
0.39
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars in thousands
MAGIC SOFTWARE ENTERPRISES LTD.
Year ended December 31,
2019
2020
2018
Net income
$
30,117
$
25,598
$
24,776
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net
Unrealized gains (losses) from available-for-sale securities
Total other comprehensive income (loss), net of tax
Total comprehensive income
Comprehensive income attributable to redeemable non-controlling interests
Comprehensive income attributable to non-controlling interests
10,275
(1)
10,274
40,391
4,374
2,672
8,125
95
8,220
(8,217)
(36)
(8,253)
33,818
16,523
5,106
2,645
1,649
1,200
Comprehensive income attributable to Magic Software Enterprises’ shareholders
$
33,345
$
26,067
$
13,674
The accompanying notes are an integral part of the consolidated financial statements.
F-9
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
U.S. dollars in thousands (except share data)
MAGIC SOFTWARE ENTERPRISES LTD.
Attributable to the Company’s shareholders
Number of
Shares
Share
capital
Additional
paid-in
capital
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Non-
controlling
interests
Total
equity
Balance as of January 1, 2018
Issue of share capital, net of issuance costs of $ 400
Exercise of stock options
Stock-based compensation
Increase in value of put options of redeemable non-controlling
44,488,578
4,268,293
104,167
-
1,040
117
2
-
183,445
34,452
309
194
interests
Dividend
Other comprehensive loss
Net income
-
-
-
-
-
-
-
-
-
-
-
-
Balance as of December 31, 2018
Exercise of stock options
Stock-based compensation
Acquisition of redeemable non-controlling interests
Increase in value of put options of redeemable non-controlling
48,861,038
78,500
-
-
1,159
2
-
-
218,400
173
74
-
interests
Acquisition of non-controlling interests
Redeemable non-controlling interests reclassification to non-
controlling interests
Dividend
Other comprehensive income
Net income
Balance as of December 31, 2019
Exercise of stock options
Acquisition of redeemable non-controlling interests
Increase in value of put options of redeemable non-controlling
interests
Acquisition of non-controlling interests
Non-controlling interests reclassification to Redeemable non-
controlling interests
Dividend
Other comprehensive income
Net income
-
-
-
-
-
-
-
-
-
-
-
-
48,939,538
95,517
1,161
3
-
-
-
-
-
-
218,647
253
(5,972)
(1,215)
83
-
-
-
-
-
(6,208)
-
(6,125)
-
-
-
25,713
-
-
-
(1,726)
(13,348)
-
19,883
30,522
-
-
(911)
3,282
-
-
-
213,563
34,569
311
194
-
(69)
(310)
1,510
(1,726)
(13,417)
(6,518)
21,393
4,413
-
-
-
248,369
175
74
(911)
-
-
(6,560)
-
-
359
(6,560)
359
-
-
5,801
-
-
(14,963)
-
20,266
9,899
(457)
424
2,221
9,899
(15,420)
6,225
22,487
(324)
28,354
16,859
(1,317)
(3,409)
264,697
256
(5,972)
(1,317)
(4,624)
8,159
(12,503)
25,186
(6,617)
(931)
267
2,405
(6,617)
(13,434)
8,426
27,591
Balance as of December 31, 2020
49,035,055
1,164
211,713
7,835
39,720
8,574
269,006
The accompanying notes are an integral part of the consolidated financial statements.
F-10
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation
Change in deferred taxes, net
Amortization of marketable securities premium and accretion of discount
Net change in operating assets and liabilities:
Trade receivables, net
Other long-term and short-term accounts receivable and prepaid expenses
Trade payables
Exchange rate of loans
Accrued expenses and other accounts payable
Deferred revenues
MAGIC SOFTWARE ENTERPRISES LTD.
Year ended December 31,
2019
2020
2018
$
30,117
$
25,598
$
24,776
13,939
-
(1,650)
(70)
(3,939)
3,399
1,899
1,362
8,175
(936)
14,025
74
(1,893)
117
6,550
9,594
(5,273)
1,895
(7,673)
2,934
12,564
194
526
189
(11,367)
(4,364)
2,203
(2,099)
1,802
(374)
Net cash provided by operating activities
52,296
45,948
24,050
The accompanying notes are an integral part of the consolidated financial statements.
F-11
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from investing activities:
Capitalized software development costs
Purchase of property and equipment
Cash paid in conjunction with acquisitions, net of acquired cash
Proceeds from maturity and sale of marketable securities
Investment in long-term bank deposits
Proceeds from (Investment in) short-term bank deposits
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from exercise of options by employees
Issuance of ordinary shares, net
Dividend paid
Dividend paid to non-controlling interests
Dividend paid to redeemable non-controlling interests
Short-term credit, net
Purchase of redeemable non-controlling interest
Payments of deferred and contingent consideration related to acquisitions
Short-term and long-term loans received
Repayment of short-term and long-term loans
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
MAGIC SOFTWARE ENTERPRISES LTD.
Year ended December 31,
2019
2020
2018
(3,302)
(2,772)
(16,534)
5,429
-
7,575
(4,143)
(1,379)
(22,603)
3,356
(714)
10,043
(3,666)
(863)
(1,218)
4,000
(932)
(16,875)
(9,604)
(15,440)
(19,554)
256
-
(12,503)
(931)
(4,174)
-
(18,016)
(4,596)
9,686
(9,369)
69
104
(14,963)
(457)
(3,395)
-
(5,592)
-
878
(13,624)
(39,647)
(36,980)
3,167
6,212
81,915
1,261
(5,211)
87,126
311
34,569
(13,543)
(69)
(2,671)
(437)
-
(3,126)
26
(6,634)
8,426
(1,872)
11,050
76,076
Cash and cash equivalents at end of the year
$
88,127
$
81,915
$
87,126
The accompanying notes are an integral part of the consolidated financial statements.
F-12
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Supplementary information on investing and financing activities not involving cash flows:
Non-cash activities:
Deferred acquisition payment
Contingent acquisition consideration
Operating lease, right of use assets
Supplemental disclosure of cash flow activities:
Cash paid (received), net during the year for:
Income taxes
Interest
The accompanying notes are an integral part of the consolidated financial statements.
F-13
MAGIC SOFTWARE ENTERPRISES LTD.
Year ended December 31,
2019
2020
2018
$
$
$
$
$
2,892
2,222
1,652
7,835
371
$
$
$
$
$
$
$
11,209
5,851
5,949
-
-
6,736
$
5,419
(152) $
312
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1:- GENERAL
MAGIC SOFTWARE ENTERPRISES LTD.
MAGIC SOFTWARE ENTERPRISES LTD., an Israeli company (“the Group” or “the Company”), is a global provider of: (i) proprietary
application development and business process integration platforms that accelerate the planning, development, deployment and integration
of on-premise, mobile and cloud business applications (“the Magic Technology”); (ii) selected packaged vertical software solutions; and
(iii) a vendor of software services and IT outsourcing software services.
Magic Technology enables enterprises to accelerate the process of delivering business solutions that meet current and future needs and
allow customers to dramatically improve their business performance and return on investment. To complement its software products and to
increase its traction with customers, the Group also offers a complete portfolio of software services in the areas of infrastructure design and
delivery, application development, technology planning and implementation services, communications services and solutions, and
supplemental IT professional outsourcing services. The Company reports its results on the basis of two reportable business segments:
software services (which include proprietary and non-proprietary software solutions, maintenance and support and related services) and IT
professional services (see Note 18 for further details).
The Company’s principal markets are the United States, Israel, Europe and Japan (see Note 18).
For information about the Company’s holdings in subsidiaries and affiliates, see Appendix to the consolidated financial statements.
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles
(“U.S. GAAP”), applied on a consistent basis, as follows, unless otherwise stated:
Use of estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments
and assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon
information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those estimates.
Financial statements in United States dollars
A substantial portion of the revenues and expenses of the Company and of certain subsidiaries is generated in U.S. dollars (“dollar”). The
Company’s management believes that the dollar is the currency of the primary economic environment in which the Company and certain
subsidiaries operate. Thus, the functional and reporting currency of the Company and certain subsidiaries is the dollar.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with the Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 830, “Foreign Currency Matters”. All transaction gains
and losses of the remeasurement of monetary balance sheet items are reflected in the statements of income as financial income or expenses,
as appropriate. Monetary accounts and transactions maintained in dollars are presented at their original amounts.
For those foreign subsidiaries whose functional currency is not the dollar, all balance sheet amounts have been translated using the exchange
rates in effect at each balance sheet date. Statement of income amounts have been translated using the average exchange rate prevailing
during each year. Such translation adjustments are reported as a component of accumulated other comprehensive income (loss) in equity.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Intercompany balances and
transactions, including profit from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation.
Changes in the Company’s ownership interest in a subsidiary with no change of control are treated as equity transactions, with any
difference between the amount of consideration paid and the change in the carrying amount of the non-controlling interest, recognized in
equity.
Non-controlling interests of subsidiaries represent the non-controlling shareholders’ share of the total comprehensive income (loss) of the
subsidiaries and fair value of the net assets upon the acquisition of the subsidiaries. The non-controlling interests are presented in equity
separately from the equity attributable to the equity holders of the Company. Redeemable non-controlling interests are classified as
mezzanine equity, separate from permanent equity, on the consolidated balance sheets and measured at each reporting period at the higher
of their redemption amount or the non-controlling interest book value, in accordance with the requirements of ASC 810 “Consolidation” and
ASC 480-10-S99-3A, “Distinguishing Liabilities from Equity”.
The following table provides a reconciliation of the redeemable non-controlling interests for the year ended December 31, 2020:
January 1, 2020
Net income attributable to redeemable non-controlling interest
Increase in value of put options of redeemable non-controlling interests
Dividend declared to redeemable non-controlling interest
Acquisition of redeemable non-controlling interests
Increase in redeemable non-controlling interest as part of acquisitions
Foreign currency translation adjustments
Non-controlling interest reclassification to redeemable non-controlling interest
December 31, 2020
F-15
$
21,915
2,526
1,317
(4,391)
(9,089)
4,237
1,848
6,617
$
24,980
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Cash and cash equivalents
MAGIC SOFTWARE ENTERPRISES LTD.
Cash and cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three
months or less, at acquisition.
Cash and cash equivalents include amounts held primarily in NIS, dollar, Euro, Japanese Yen and British Pound.
Short-term deposits and restricted deposits
Short-term deposits include deposits with original maturities of more than three months and less than one year. Such deposits are presented
at cost (including accrued interest) which approximates their fair value. Restricted deposits are used to secure certain of the Group’s
ongoing projects and are classified under other long-term receivables.
Marketable securities
The Company accounts for all its investments in marketable securities in accordance with ASC No. 320, “Investments – Debt and Equity
Securities”. The Company classifies all of its marketable securities as available for sale and held for trading. Available for sale securities are
carried at fair value, with the unrealized gains and losses, net of tax, reported in “accumulated other comprehensive income (loss)” in equity.
Realized gains and losses on sale of investments are included in “financial income (expense), net” and are derived using the specific
identification method for determining the cost of securities.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization
together with interest on securities is included in “financial expense (income), net”.
The Company assessed AFS debt securities with an amortized cost basis in excess of estimated fair value to determine what amount of that
difference, if any, is caused by expected credit losses in accordance with ASC 326. Allowance for credit losses on AFS debt securities are
recognized as a charge of credit loss expenses (income), net, on the consolidated statements of income, and any remaining unrealized losses,
net of taxes, are included in accumulated other comprehensive income (loss) in stockholders' equity.
The Company did not record credit loss allowance on its marketable securities during the years ended December 31, 2020.
The Company classifies its marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual
maturity date and the Company’s expectations of sales and redemptions in the following year.
Held for trading securities are measured at fair value through profit or loss.
Trade receivables
Trade receivables are stated net of credit losses allowance. The Company is exposed to credit losses primarily through sales. The allowance
against gross trade receivables reflects the current expected credit loss inherent in the receivables portfolio determined based on the
Company’s methodology. The Company’s methodology is based on historical collection experience, customer creditworthiness, current and
future economic condition and market condition. Additionally, specific allowance amounts are established to record the appropriate
provision for customers that have a higher probability of default. The Company also considered the current and expected future economic
and market conditions surrounding the COVID-19 pandemic and determined that the estimate of credit losses was not significantly
impacted. Trade receivables are written off after all reasonable means to collect the full amount have been exhausted.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Property and equipment, net
MAGIC SOFTWARE ENTERPRISES LTD.
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the
estimated useful lives of the assets, at the following annual rates:
Computers and peripheral equipment
Office furniture and equipment
Motor vehicles
Software
Years
3 - 5
7 - 15 (mainly 7)
7
3 – 5 (mainly 5)
Leasehold improvements are amortized using the straight-line method over the term of the lease (including option terms that are deemed to
be reasonably assured) or the estimated useful life of the improvements, whichever is shorter.
Business combinations
The Company accounts for business combinations under ASC 805, “Business Combinations”. ASC 805 requires recognition of assets
acquired, liabilities assumed, contingent consideration, non-controlling interest and redeemable non-controlling interest in the acquiree at
the acquisition date, to be measured at their fair values as of that date. As required by ASC 820, “Fair Value Measurements and
Disclosures” the Company applies assumptions, judgments and estimates that marketplace participants would consider in determining the
fair value of assets acquired, liabilities assumed, non-controlling interest and redeemable non-controlling interest in the acquiree at the
acquisition date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated
contingencies are to be recorded in earnings. Acquisition related costs are expensed to the statements of income in the period incurred. The
cumulative impact of measurement period adjustments, including the impact to prior periods, is recognized in the reporting period in which
the adjustment is identified.
During the years ended December 31, 2018, 2019 and 2020 the Company recorded income of $ 34, and expenses of $ 266 and $ 3,356, with
respect to changes in the fair value of contingent consideration liability, respectively.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Research and development costs
MAGIC SOFTWARE ENTERPRISES LTD.
Research and development costs incurred in the process of software development before establishment of technological feasibility are
charged to expenses as incurred. Costs incurred subsequent to the establishment of technological feasibility are capitalized according to the
principles set forth in ASC 985-20, “Costs of Software to be Sold, Leased or Marketed”.
The Company and its subsidiaries establish technological feasibility upon completion of a detailed program design or working model.
ASC 985-20-35 requires that a product be amortized when the product is available for general release to customers. The Company considers
a product to be available for general release to customers when the Company completes its internal validation of the product that is
necessary to establish that the product meets its design specifications including functions, features, and technical performance requirements.
Internal validation includes the completion of coding, documentation and testing that ensure bugs are reduced to a minimum. The internal
validation of the product takes place a few weeks before the product is made available to the market. In certain instances, the Company
enters into a short pre-release stage, during which the product is made available to a selected number of customers as a beta program for
their own review and familiarization. Subsequently, the release is made generally available to customers from the Company’s download
area. Once a product is considered available for general release to customers, the capitalization of costs ceases and amortization of such
costs to “Cost of revenues” begins.
Capitalized software costs are amortized on a product by product basis by the straight-line method over the estimated useful life of the
software product (approximately 5 years, due to their high rates of acceptance, the continued reliance on these products by existing
customers, and the demand for such products from prospective customers, all of which validate the Company’s expectations) which
provides greater amortization expense compared to the revenue-curve method.
The Company assesses the recoverability of these intangible assets on a regular basis by assessing the net realizable value of these
intangible assets based on the estimated future gross revenues from each product reduced by the estimated future costs of completing and
disposing of it, including the estimated costs of performing maintenance and customer support over its remaining economical useful life
using internally generated projections of future revenues generated by the products, cost of completion of products and cost of delivery to
customers over its remaining economical useful life. During the years ended December 31, 2018, 2019 and 2020, no such unrecoverable
amounts were identified.
Research and development costs incurred in the process of developing product enhancements are generally charged to expenses as incurred.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Leases
MAGIC SOFTWARE ENTERPRISES LTD.
The Company determines if an arrangement is a lease at inception. The Company’s assessment is based on: (1) whether the contract
involves the use of an identified asset, (2) whether the Company obtains the right to substantially all of the economic benefits from the use
of the asset throughout the period of use, and (3) whether the Company has the right to direct the use of the asset.
Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria
are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is
reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset, the present value of the lease
payments equals or exceeds substantially all of the fair value of the asset, or the underlying asset is of such a specialized nature that it is
expected to have no alternative use to the lessor at the end of lease term. A lease is classified as an operating lease if it does not meet any
one of these criteria. Since all of the Company’s lease contracts do not meet any one of the criteria above, the Company concluded that all
of its lease contracts should be classified as operating leases.
ROU assets and liabilities are recognized on the commencement date based on the present value of remaining lease payments over the lease
term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. As most of the
Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate (“IBR”) based on the information
available on the commencement date in determining the present value of lease payments. The Company’s IBR is estimated to approximate
the interest rate for collateralized borrowing with similar terms and payments and in economic environments where the leased asset is
located. Certain leases include options to extend or terminate the lease. The ROU asset also includes any lease payments made prior to
commencement and is recorded net of any lease incentives received. Moreover, the ROU asset may also include initial direct costs, which
are incremental costs of a lease that would not have been incurred if the lease had not been obtained. The Company uses the long-lived
assets impairment guidance in Accounting Standards Codification (“ASC”) Subtopic 360-10, “Property, Plant, and Equipment - Overall,” to
determine whether a right-of-use asset is impaired, and if so, the amount of the impairment loss to recognize. An option to extend the lease
is considered in connection with determining the ROU asset and lease liability when it is reasonably certain that the Company will exercise
that option. An option to terminate is considered unless it is reasonably certain that the Company will not exercise the option.
Offices
The Company leases space for offices in various locations worldwide under operating leases. These contracts are considered as operating
leases presented in ROU assets.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Motor vehicles
MAGIC SOFTWARE ENTERPRISES LTD.
The Company leases motor vehicles. Each leasing contract is generally valid for a term of three years. These contracts are considered as
operating leases presented in ROU assets.
For the vast majority of the Company’s motor vehicle lease agreements, the lease payments include inconsequential non-lease payments,
such as license and registration fees, insurance and maintenance. As a result, the Company elected to not separate non-lease components
from lease components, and instead, to account for each separate lease component and the non-lease component associated with that lease
component as a single lease component.
Impairment of long-lived assets, right of use assets and intangible assets subject to amortization
The Company’s long-lived assets (assets group) to be held or used, including right of use assets and intangible assets that are subject to
amortization, are reviewed for impairment in accordance with ASC 360, “Property, Plant and Equipment” whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such
assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
As required by ASC 820, “Fair Value Measurements and Disclosures” the Company applies assumptions, judgments and estimates that
marketplace participants would consider in determining the fair value of long-lived assets (or asset groups).
During the years ended December 31, 2018, 2019 and 2020, no impairment losses have been identified.
Goodwill
Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets
acquired. Under ASC 350, “Intangibles - Goodwill and Other”, goodwill is subject to an annual impairment test or more frequently if
impairment indicators are present. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair
value. As of December 31, 2020, the Company operates in four reporting units within its operating segments.
Goodwill reflects the excess of the consideration paid or transferred plus the fair value of contingent consideration and any non-controlling
interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired.
ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill
impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment
testing is required. If the Company elects not to use this option, or if the Company determines that it is more likely than not that the fair
value of a reporting unit is less than its carrying value, then the Company prepares a quantitative analysis to determine whether the carrying
value of a reporting unit exceeds its estimated fair value
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
If the carrying value of a reporting unit exceeds its estimated fair value, the Company recognizes an impairment of goodwill for the amount
of this excess, in accordance with the guidance in FASB Accounting Standards Update ("ASU") No. 2017-04, Intangibles - Goodwill and
Other (Topic 350), Simplifying the Test for Goodwill Impairment, which the adopted as of January 1, 2020. Prior to the adoption of ASU
2017-04, if the Company elected not to use the qualitative analysis the two-step impairment test was performed.
The Company determines the fair value of each reporting unit by using the income approach, which utilizes a discounted cash flow model,
as it believes that this approach best approximates the reporting unit’s fair value. Judgments and assumptions related to revenue, operating
income, future short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures, cash flows, and
market conditions are inherent in developing the discounted cash flow model. The Company considers historical rates and current market
conditions when determining the discount and growth rates to use in its analyses. If these estimates or their related assumptions change in
the future, the Company may be required to record impairment charges for its goodwill.
The Company performed an annual impairment test as of December 31, of each of 2018, 2019 and 2020 and did not identify any
impairment losses (see Note 9).
Intangible assets
Intangible assets that are not considered to have an indefinite useful life are amortized over their economic useful life using a method of
amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up. Acquired
technology and non-compete agreements were amortized on a straight line basis and customer relationships and backlog were amortized on
an accelerated method basis over a period between 1 - 15 years based on the intangible assets identified.
Revenue recognition
The Company implements the provisions of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with
Customers (“ASC 606”). See Note 19 for further disclosures required under ASC 606.
Revenues are recognized when control of the promised goods or services are transferred to the customers, in an amount that reflects the
consideration that the company expects to receive in exchange for those goods or services.
The Company determines revenue recognition through the following steps:
● identification of the contract with a customer;
● identification of the performance obligations in the contract;
● determination of the transaction price;
● allocation of the transaction price to the performance obligations in the contract; and
● recognition of revenue when, or as, the Company satisfies a performance obligation.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The Company enters into contracts that can include various combinations of products, software and professional services, as detailed below,
which are generally capable as being distinct from each other and accounted for as separate performance obligations.
The Company derives its revenues from licensing the rights to use its software (proprietary and non-proprietary), provision of related
professional services, maintenance and technical support as well as from other software and IT professional services (either fixed price or
based on time and materials). The Company sells its products primarily through direct sales force and indirectly through distributors and
value added resellers.
Under ASC 606, an entity recognizes revenue when or as it satisfies a performance obligation by transferring software license or software
related services to the customer, either at a point in time or over time. The company recognizes its revenues from software sales at a point in
time upon delivery of its software license. The software license is considered a distinct performance obligation, as the customer can benefit
from the software on its own. Revenues from contracts that involve significant customization to customer-specific specifications are
performance obligations the Company generally accounts for as performance obligations satisfied over time. The underlying deliverable is
owned and controlled by the customer, and does not create an asset with an alternative use to the Company. The Company recognizes
revenue of such contracts over time using cost inputs, which recognize revenue and gross profit as work is performed based on a ratio
between actual costs incurred compared to the total estimated costs for the contract, to measure progress toward completion of its
performance obligations, which is similar to the method prior to the adoption of ASC 606. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are first determined, in the amount of the estimated loss for the entire contract. During
the years ended December 31, 2018, 2019 and 2020, no material estimated losses were identified. In addition, the Company provides
professional services that do not involve significant customization to customer-specific specifications. For contracts that do not involve
significant customization to customer-specific specifications (typically staffing or consulting services) revenue is recognized as the services
are performed, either on a straight-line basis or based on the hours of services that were provided to the customer, in accordance with the
terms of the contracts.
The Company’s revenues from post contract support are derived from annual maintenance contracts providing for unspecified upgrades for
new versions and enhancements on a when-and-if-available basis for an annual fee. The right for an unspecified upgrade for new versions
and enhancements on a when-and-if-available basis do not specify the features, functionality and release date of future product
enhancements for the customer to know what will be made available and the general timeframe in which it will be delivered. The Company
considers the post contract support performance obligation as a distinct performance obligation that is satisfied over time, and recognized on
a straight-line basis over the contractual period.
Revenue from professional services, both related to software and IT professional services businesses consists of either fixed price or time
and materials, and are considered performance obligations that are satisfied over time, and revenues are recognized as the services are
provided.
The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling
prices of software licenses are estimated using the residual approach, due to the lack of selling software licenses on a standalone basis.
Standalone selling prices of services are determined by considering several external and internal factors including, but not limited to,
transactions where the specific performance obligation is sold separately.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The Company generally does not grant a right of return to its customers. When a right of return exists, the Company defers revenue until the
right of return expires, at which time revenue is recognized provided that all other revenue recognition criteria are met.
Revenue from third-party sales is recorded at a gross or net amount according to certain indicators. The application of these indicators for
gross and net reporting of revenue depends on the relative facts and circumstances of each sale.
The Company pays commissions to sales and marketing and certain management personnel based on their attainment of certain
predetermined sales or profit goals. When sales commissions are considered incremental costs of obtaining a contract with a customer they
are deferred and amortized on a systematic basis that is consistent with the transfer to the customer of the performance obligations to which
the asset relates. The Company expenses sales commissions as they are incurred when the amortization period would have been less than
one year. In addition, generally, sales commissions which are paid upon contract renewal are commensurate with the initial commissions as
the renewal amounts are substantially identical to the initial commission costs. During the year ended December 31, 2020, no costs have
been capitalized.
The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that
the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
Accrued severance pay and retirement plans
The Company’s and its Israeli subsidiaries’ obligation for severance pay with respect to their Israeli employees (for the period for which the
employees were not included under Section 14 of the Severance Pay Law, 1963) is calculated pursuant to the Israeli Severance Pay Law
based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date, and are
presented on an undiscounted basis (referred to as the “Shut Down Method”). Employees are entitled to one month’s salary for each year of
employment or a portion thereof. The Company’s obligation for all of its Israeli employees is fully provided for by monthly deposits with
insurance policies and severance pay funds and by an accrual.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The carrying value of deposited funds includes profits (losses) accumulated up to the balance sheet date. The deposited funds may be
withdrawn only upon the fulfillment of the obligations pursuant to the Israeli Severance Pay Law or labor agreements and are recorded as an
asset in the Company’s consolidated balance sheet.
The Company and its Israeli subsidiaries’ agreements with most of their Israeli employees are in accordance with Section 14 of the
Severance Pay Law, 1963, mandating that upon termination of such employees’ employment, all the amounts accrued in their insurance
policies shall be released to them instead of severance compensation. Upon release of deposited amounts to the employee, no additional
liability exists between the parties regarding the matter of severance pay and no additional payments are payable by the Company or its
subsidiaries to the employee. Further, the related obligation and amounts deposited on behalf of such obligation are not stated on the balance
sheet, as the Company and its subsidiaries are legally released from their obligations to employees once the deposit amounts have been paid.
The Group has a number of savings plans in the United States that qualify under Section 401(k) of the Internal Revenue Code. U.S.
employees may contribute up to 100% of their pretax or post-tax salary, but not more than statutory limits. Matching contributions are
discretionary and if made, are up to 3% of the participants annual contributions. When contributions are granted, they are invested in
proportion to each participant’s voluntary contributions in the investment options provided under the plan.
Severance expenses for the years ended December 31, 2018, 2019 and 2020 amounted to approximately $ 4,052, $ 4,712 and $ 5,344,
respectively.
Advertising expenses
Advertising expenses are charged to selling and marketing expenses, as incurred. Advertising expenses for the years ended December 31,
2018, 2019 and 2020 amounted to $ 304, $ 519 and $ 472, respectively.
Income taxes
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 prescribes the use of the “asset and
liability” method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable
value. Deferred tax assets and liabilities are classified as non-current.
The Company utilizes a two-step approach for recognizing and measuring uncertain tax positions accounted for in accordance with an
amendment of ASC 740 “Income Taxes.” Under the first step the Company evaluates a tax position taken or expected to be taken in a tax
return by determining if the weight of available evidence indicates that it is more likely than not that, based on its technical merits, the tax
position will be sustained on audit, including resolution of any related appeals or litigation processes.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement with
the tax authorities. The Company accrued interest and penalties related to unrecognized tax benefits in its provisions for income taxes.
Basic and diluted net earnings per share
Basic net earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year. Diluted
net earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year, plus dilutive
potential ordinary shares considered outstanding during the year, in accordance with ASC 260, “Earnings Per Share.”
No portion of the outstanding stock options have been excluded from the calculation of the diluted earnings per share because such
securities are anti-dilutive.
Stock-based compensation
The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation - Stock Compensation” which requires
the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made. ASC
718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the
Company’s consolidated statement of income.
The Company recognizes compensation expenses for the value of its awards, which have graded vesting based on the accelerated method
over the requisite service period of each of the awards, net of estimated forfeitures.
The Company uses the Binomial option-pricing model (“the Binomial model”) to estimate the fair value for any options granted. The
Binomial model takes into account variables such as volatility, dividend yield rate, and risk-free interest rate and also allows for the use of
dynamic assumptions and considers the contractual term of the option, the probability that the option will be exercised prior to the end of its
contractual life, and the probability of termination or retirement of the option holder in computing the value of the option.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The fair value of each option granted using the Binomial model, was estimated on the date of grant with the following assumptions:
expected volatility was based upon actual historical stock price movements and was calculated as of the grant dates for different periods,
since the Binomial model can be used for different expected volatilities for different periods. The risk-free interest rate was based on the
yield from U.S. Treasury zero-coupon bonds with an equivalent term to the contractual term of the options. The expected term of options
granted was derived from the output of the option valuation model and represented the period of time that options granted were expected to
be outstanding. Estimated forfeitures were based on actual historical pre-vesting forfeitures. Since dividend payments are applied to reduce
the exercise price of the option, the effect of the dividend protection was reflected by using an expected dividend assumption of zero.
For awards with performance conditions, compensation cost is recognized over the requisite service period if it is ‘probable’ that the
performance conditions will be satisfied.
No grants were made to employees or directors in 2020.
During the years ended December 31, 2018, 2019, the Company recognized stock-based compensation expense related to employee stock
options in the amount of $ 194 and $ 74, respectively, as follows:
Cost of revenues
Research and development, net
Selling and marketing
General and administrative
Total stock-based compensation expense
Concentrations of credit risk
Year ended December 31,
2019
2018
$
$
$
-
-
74
-
74
$
2
4
4
184
194
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents,
short-term deposits, restricted cash, marketable securities, trade receivables and foreign currency derivative contracts.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The Company’s cash and cash equivalents, short-term deposits and restricted cash are invested primarily in bank deposits with major banks
worldwide, mainly in the United States and Israel, however, such cash and cash equivalents and short-term deposits in the United States
may be in excess of insured limits and are not insured in other jurisdictions. The Company believes that since these deposits may be
redeemed upon demand and since such institutions are of high rating they bear low risk.
The Company’s marketable securities include investments in commercial and government bonds and foreign banks. The Company’s
marketable securities are considered to be highly liquid and have a high credit standing (also refer to Note 4). In addition, management
considered its portfolios in foreign banks to be well-diversified.
The Company’s trade receivables are derived from sales to customers located primarily in the United States, Israel, Europe and Japan. An
allowance for credit losses is determined based on historical collection experience, customer creditworthiness, current and future economic
condition and market condition. The expense related to credit losses for the years ended December 31, 2018, 2019 and 2020 was $ 1,070, $
958 and $ 1,242, respectively.
From time to time the Company enters into foreign exchange forward contracts and option contracts intended to protect against the changes
in value of forecasted non-dollar currency cash flows related to salary and related expenses. These derivative instruments are designed to
offset the Company’s non-dollar currency exposure.
Fair value measurements
The Company accounts for certain assets and liabilities at fair value under ASC 820, “Fair Value Measurements and Disclosures”. Fair
value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier
value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 -
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 -
Includes other inputs that are directly or indirectly observable in the marketplace, other than quoted prices included in Level 1,
such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities
in markets with insufficient volume or infrequent transactions, or other inputs that are observable (model-derived valuations in
which significant inputs are observable), or can be derived principally from or corroborated by observable market data;
Level 3 -
Unobservable inputs which are supported by little or no market activity;
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The Company categorized each of its fair value measurements in one of these three levels of hierarchy. Assets and
liabilities measured at fair value on a recurring basis are comprised of marketable securities, foreign currency forward contracts and
contingent consideration of acquisitions (see Note 5).
The carrying amounts reported in the balance sheet for cash and cash equivalents, short term bank deposits, trade receivables, other accounts
receivable, short-term bank credit, trade payables and other accounts payable approximate their fair values due to the short-term maturities
of such instruments.
Comprehensive income (loss)
The Company accounts for comprehensive income (loss) in accordance with ASC 220, “Comprehensive Income.” This Statement
establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial
statements. Comprehensive income (loss) generally represents all changes in equity during the period except those resulting from
investments by, or distributions to, shareholders. The Company determined that its items of other comprehensive income (loss) relate to gain
and loss on foreign currency translation adjustments, unrealized gain and loss on derivative instruments designated as hedges and unrealized
gain and loss on available-for-sale marketable securities.
Recently adopted accounting pronouncement
On January 1, 2020, the Company adopted Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, using the modified retrospective transition method. Upon adoption, the Company
changed its impairment model to utilize a forward-looking current expected credit losses (CECL) model in place of the incurred loss
methodology for financial instruments measured at amortized cost, including trade receivables. For available-for-sale (“AFS”) debt
securities with unrealized losses, the standard eliminates the concept of other-than-temporary impairments and requires allowances to be
recorded instead of reducing the amortized cost of the investment. This standard limits the amount of credit losses to be recognized for AFS
debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if
fair value increases. The adoption by the Company of the new guidance did not have a material impact on its consolidated financial
statements.
In January 2017, the FASB issued ASU 2017-04 (ASU 2017-04): Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. ASU 2017-04 eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be
measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each
reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 is effective for annual or interim
goodwill impairment tests performed in fiscal years beginning after December 15, 2019, and early adoption is permitted. Adoption of this
new guidance did not have a material impact on the Company’s consolidated financial statements.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 3:- BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS
MAGIC SOFTWARE ENTERPRISES LTD.
a. On May 7, 2020, the Company acquired Aptonet Inc (“Aptonet”), a U.S.-based services company, specializes in IT staffing and
recruiting, for a total consideration of $ 4,663, of which $ 3,663 was paid upon closing and the remaining $ 1,000 will be paid in two
installments, 6 and 12 months following the closing date. Acquisition related costs were immaterial. Unaudited pro forma condensed
results of operations for the years ended December 31, 2019 and 2020 were not presented, since the acquisition was not material. The
acquisition was accounted for by the purchase method.
The results of operations were included in the consolidated financial statements of the Company commencing May 1, 2020.
The following table summarizes the estimated fair values of the assets acquired and liabilities at the date of acquisition:
Net assets, excluding cash acquired
Intangible assets, net
Goodwill
Total assets acquired net of acquired cash
$
$
529
1,556
1,785
3,870
The estimated fair values of the tangible and intangible assets are provisional and are based on information that was available as of the
acquisition date to estimate the fair value of these amounts. The Company’s management believes the information provides a
reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair
values. Therefore, provisional measurements of fair value reflected are subject to change. The Company expects to finalize the tangible
and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than the measurement period.
b. On September 2, 2020, the Company acquired Stockell Information Systems, Inc (“Stockell”), a U.S.-based services company,
specializes in IT staffing and recruiting, for a total consideration of $ 7,714, of which $ 6,265 was paid upon closing and the remaining
$ 1,449 will be paid 12 months following the closing date. Acquisition related costs were immaterial. Unaudited pro forma condensed
results of operations for the years ended December 31, 2019 and 2020 were not presented, since the acquisition was not material. The
acquisition was accounted for by the purchase method.
The results of operations were included in the consolidated financial statements of the Company commencing September 1, 2020.
The following table summarizes the estimated fair values of the assets acquired and liabilities at the date of acquisition:
Net assets, excluding cash acquired
Intangible assets, net
Goodwill
Total assets acquired net of acquired cash
$
$
1,051
2,616
4,047
7,714
The estimated fair values of the tangible and intangible assets are provisional and are based on information that was available as of the
acquisition date to estimate the fair value of these amounts. The Company’s management believes the information provides a
reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair
values. Therefore, provisional measurements of fair value reflected are subject to change. The Company expects to finalize the tangible
and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than the measurement period.
c. During 2020 the Company acquired two companies which individually and in the aggregate, were not material. These entities were
consolidated into the Company’s result of operations since their respective acquisition dates. The total consideration paid for these
companies was $ 11,340.
Net assets, excluding cash acquired
Intangible assets, net
Goodwill
Total assets acquired net of acquired cash
$
$
1,069
4,553
5,718
11,340
d. On June 30, 2019, the Company acquired NetEffects Inc (“NetEffects”), a U.S.-based services company, specializes in IT staffing and
recruiting, for a total consideration of $ 12,500, of which $ 9,400 was paid upon closing and the remaining $ 3,100 will be paid in three
installments, on the first, second and third closing date anniversary. During 2020, an amount of $ 1,550 was paid.
Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations for the years ended December 31, 2018
and 2019 were not presented, since the acquisition was not material. The acquisition was accounted for by the purchase method.
The results of operations were included in the consolidated financial statements of the Company commencing July 1, 2019.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 3:- BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS (Cont.)
The following table summarizes the fair values of the assets acquired and liabilities at the date of acquisition:
MAGIC SOFTWARE ENTERPRISES LTD.
Net assets, excluding cash acquired
Intangible assets
Goodwill
Total assets acquired net of acquired cash
$
$
91
8,716
3,526
12,333
e. On April 1st, 2019 the Company acquired PowWow Inc (“PowWow”), creator of SmartUX™, A leading Low-Code Development
Platform for Mobilizing and Modernizing Enterprise Apps, for a total consideration of $8.4 million, out of which $2 million was
contingent on future performance. During 2020, the Company reversed the entire contingent amount since PowWow will not be able to
meet its revenue goals.
Acquisition related costs were immaterial. Unaudited pro forma condensed results of operations for the years ended December 31, 2018
and 2019 were not presented, since the acquisition was not material. The acquisition was accounted for by the purchase method.
The results of operations were included in the consolidated financial statements of the Company commencing March 1, 2019.
The following table summarizes the estimated fair values of the assets acquired and liabilities at the date of acquisition
Net assets, excluding cash acquired
Intangible assets
Goodwill
Total assets acquired net of acquired cash
$
$
(1,557)
2,855
7,145
8,443
f. On February 28, 2019, the Company acquired OnTarget Group Inc. (“OnTarget”), a U.S.-based services company, specializes in
outsourcing of software development services, for a total consideration of $ 12,456 of which $ 6,000 was paid upon closing and the
remaining amount constitutes a deferred payment depending on the future operating results achieved by OnTarget. Acquisition related
costs were immaterial. Unaudited pro forma condensed results of operations for the years ended December 31, 2018 and 2019 were not
presented, since the acquisition was not material. The acquisition was accounted for by the purchase method.
The results of operations were included in the consolidated financial statements of the Company commencing March 1, 2019.
The following table summarizes the fair values of the assets acquired and liabilities at the date of acquisition:
Net assets, excluding cash acquired
Intangible assets
Goodwill
Total assets acquired net of acquired cash
$
$
(832)
4,908
8,380
12,456
g. On October 1, 2019 the Company acquired a 30% interest in its subsidiary Infinigy Solutions LLC (“Infinigy”), a U.S.-based services
company focused on expanding the development and implementation of technical solutions which deliver design-driven turnkey
solutions, combining Architecture and Engineering, or A&E design project management and general contracting competencies, across
the wireless communications industry, for a total cash consideration of approximately $ 4,393, which was paid upon closing.
Subsequent to the share purchase the Company holds 100% of Infinigy.
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 4:- MARKETABLE SECURITIES
MAGIC SOFTWARE ENTERPRISES LTD.
The Company invests in marketable debt securities, which were classified at fair value through profit or loss and as available-for-sale
securities. The following is a summary of marketable securities:
a. Composition:
Fair value through profit or loss (1)
Available-for-sale- Corporate bonds
(1) The Company recognized trading gains in the amount of $ 126 during the year ended December 31, 2020.
The following is the change in the other comprehensive income of available-for-sale securities
Other comprehensive income from available-for-sale securities as of January 1, 2019
Unrealized losses from available-for-sale securities
Other comprehensive loss from available-for-sale securities as of December 31, 2019
Unrealized gain from available-for-sale securities
Other comprehensive income from available-for-sale securities as of December 31, 2020
NOTE 5:- FAIR VALUE MEASUREMENTS
December 31,
2020
2019
$
$
$
1,238
-
1,112
5,488
1,238
$
6,600
Other
comprehensive
income (loss)
$
$
$
(94)
95
1
(1)
-
In accordance with ASC 820, the Company measures its investment in marketable securities at fair value. Generally equity funds are
classified within Level 1, this is because these assets are valued using quoted prices in active markets. Foreign currency derivative contracts,
certain corporate bonds and convertible bonds are classified within Level 2 as the valuation inputs are based on quoted prices and market
observable data of similar instruments.
Contingent consideration is classified within Level 3. The Company values the Level 3 contingent consideration using discounted cash flow
of the expected future payments, whose inputs include interest rate.
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 5:- FAIR VALUE MEASUREMENTS (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The Company’s financial assets and liabilities measured at fair value on a recurring basis, consisted of the following types of instruments:
Assets:
Corporate bonds
Convertible bonds
Total financial assets
Liabilities:
Contingent consideration
Total financials liabilities
Assets:
Corporate bonds
Convertible bonds
Total financial assets
Liabilities:
Contingent consideration
Total financials liabilities
December 31, 2020
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
-
-
-
-
-
$
$
$
$
$
-
1,238
1,238
$
-
-
-
-
-
$
$
11,206
11,206
$
$
$
$
-
1,238
1,238
11,206
11,206
December 31, 2019
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
-
-
-
-
-
$
$
$
$
$
5,488
1,112
6,600
$
-
-
-
-
-
$
$
5,964
5,964
$
$
$
$
5,488
1,112
6,600
5,964
5,964
$
$
$
$
$
$
$
$
Fair value measurements using significant unobservable inputs (Level 3):
Opening balance
Increase in contingent consideration due to acquisitions
Payment of contingent consideration
Increase in fair value of contingent consideration
Decrease in fair value of contingent consideration
Amortization of interest and exchange rate
Closing balance
F-32
December 31,
2020
2019
$
$
5,964
2,222
(728)
3,812
(2,040)
2,014
414
5,851
(585)
255
-
29
$
10,561
$
5,964
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 6:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
MAGIC SOFTWARE ENTERPRISES LTD.
Prepaid expenses
Government authorities
Related parties
Other
NOTE 7:- PROPERTY AND EQUIPMENT, NET
Cost:
Leasehold improvements
Computers and peripheral equipment
Office furniture and equipment
Motor vehicles
Software
Accumulated depreciation:
Leasehold improvements
Computers and peripheral equipment
Office furniture and equipment
Motor vehicles
Software
$
$
$
December 31,
2020
2019
$
3,581
3,005
615
3,312
4,467
5,052
183
3,143
10,513
$
12,845
December 31,
2020
2019
$
3,611
7,021
3,627
1,411
1,621
17,291
753
5,886
2,340
866
1,458
11,303
1,461
16,640
4,287
1,170
3,394
26,952
622
15,702
3,288
598
3,093
23,303
Depreciated cost
$
5,988
$
3,649
Depreciation expenses amounted to $ 1,175, $ 1,261 and $ 1,335 for the years ended December 31, 2018, 2019 and 2020, respectively.
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 8:-
INTANGIBLE ASSETS, NET
a.
Intangible assets:
MAGIC SOFTWARE ENTERPRISES LTD.
Original amounts:
Capitalized software costs
Customer relationships
Backlog and non-compete agreement
Acquired technology
Other
Accumulated amortization:
Capitalized software costs
Customer relationships
Backlog and non-compete agreement
Acquired technology
Other
Intangible assets, net
December 31,
2020
2019
$
$
86,240
78,750
2,712
18,052
616
82,878
70,032
2,712
15,867
-
186,370
171,489
74,841
46,621
2,712
8,720
72
70,326
40,550
2,712
6,773
-
132,966
120,361
$
53,404
$
51,128
b. Amortization expenses amounted to $ 11,389, $ 12,764 and $ 12,604 for the years ended December 31, 2018, 2019 and 2020,
respectively.
c. The estimated future amortization expense of intangible assets as of December 31, 2020 is as follows:
2021
2022
2023
2024
2025
2026 and thereafter
$
12,224
9,866
8,287
6,852
5,156
11,019
$
53,404
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 9:- GOODWILL
MAGIC SOFTWARE ENTERPRISES LTD.
Changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2020 according to the Company’s reportable
segments are as follows (see also Note 18):
As of January 1, 2019
Business combination
Measurement period adjustments
Foreign currency translation adjustments
As of December 31, 2019
Business combination
Measurement period adjustments
Foreign currency translation adjustments
As of December 31, 2020
IT
professional
services
Software
services
Total
$
46,691
$
48,315
$
95,006
12,691
(785)
1,749
3,382
3,762
1,938
16,073
2,977
3,687
$
60,346
$
57,397
$
117,743
5,832
1,443
1,725
5,718
618
2,603
11,550
2,061
4,328
$
69,346
$
66,336
$
135,682
The Company performed annual impairment tests as of December 31, 2018, 2019 and 2020 and did not identify any impairment losses (see
Note 2).
NOTE 10:- SHORT TERM DEBT
Short-term credit from banks
Short-term credit from banks
Current maturities of long-term loans from financial institutions
Linkage
basis
USD
NIS
Interest
rate
%
U.S Prime -0.2
2.5%
and banks
NIS
Israeli Prime + 0.2 - 3.1%
December 31,
2020
2019
$
$
-
1,259
10,270
11,529
$
$
688
868
5,523
7,079
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 11:- ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE
MAGIC SOFTWARE ENTERPRISES LTD.
Employees and payroll accruals
Accrued expenses
Government authorities
Other
NOTE 12:- LONG TERM DEBT
Loans from banks and other (1)
Other long term debt
Current maturities
December 31,
2020
2019
$
28,562
7,086
5,559
639
21,092
6,790
4,110
627
41,846
$
32,619
December 31,
2020
2019
23,534
88
23,622
(10,270)
$
$
20,951
112
21,063
(5,523)
13,352
$
15,540
$
$
$
$
$
Interest
rate
%
Israeli Prime + 0.2 – 5%
Linkage
basis
NIS
NIS
(1) On November 2016, the Company obtained a loan in the amount of $ 31,356 linked to the New Israel Shekel from an Israeli financial institution. The
principal amount of the loan is payable in seven equal annual installments with the final payment due on November 2, 2023 and bears a fixed interest
rate of 2.60% per annum, payable in two semi-annual payments.
Under the terms of the loan with the Israeli financial institution, the Company has undertaken to maintain the following financial
covenants, as they will be expressed in its consolidated financial statements, as described:
a. Total equity attributable to Magic Software Enterprises shareholders shall not be lower than $ 100,000 at all times;
b. The Company’s consolidated cash and cash equivalent and marketable securities available for sales shall not be less than $ 10,000;
c. The ratio of the Company’s consolidated total financial debts to consolidated total assets will not exceed 50%;
d. The ratio of the Company’s total financial debts less cash, short-term deposits and short-term marketable securities to the annual
EBITDA will not exceed 3.25 to 1; and
e. The Company shall not create any pledge on all of its property and assets in favor of any third party without the financial institution’s
consent.
As of December 31, 2020, the Company was in compliance with the financial covenants.
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13:- TAXES ON INCOME
a.
Israeli taxation:
1. Corporate tax rate in Israel:
MAGIC SOFTWARE ENTERPRISES LTD.
The Israeli corporate income tax rate as of 2018 to 2020 and thereafter is 23%.
2. Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (“the Law”):
Effective January 1, 2011, the Knesset enacted the Law for Economic Policy for 2011 and 2012 (Amended Legislation), and among
other things, amended the Law, (“the Amendment”). According to the Amendment, a flat corporate tax rate of 16% was established for
exporting industrial enterprises (over 25%). The reduced tax rate will not be program dependent and will apply to the “Preferred
Enterprise’s” (as such term is defined in the Investment Law) entire “preferred income”.
The Amendment also prescribes that any dividends distributed to individuals or foreign residents from the preferred enterprise’s
earnings as above will be subject to tax at a rate of 20%.
One of its Israeli subsidiaries have elected to apply the new incentives regime under the Amendment to their industrial activity in Israel,
subject to meeting its requirements, starting in 2011.
New Amendment- Preferred Technology Enterprise
In December 2016, the Israeli Knesset passed Amendment 73 to the Investment Law which included a number of changes to the
Investments Law regimes. Certain changes were scheduled to come into effect beginning January 1, 2017, provided that regulations are
promulgated by the Finance Ministry to implement the “Nexus Principles” based on OECD guidelines which were published as part of
the Base Erosion and Profit Shifting (BEPS) project. The regulations were approved on May 1, 2017 and accordingly, these changes
have come into effect. Applicable benefits under the new regime include:
Introduction of a benefit regime for “Preferred Technology Enterprises” granting a 12% tax rate in central Israel – on income deriving
from Intellectual Property, subject to a number of conditions being fulfilled, including a minimal amount or ratio of annual R&D
expenditure and R&D employees, as well as having at least 25% of annual income derived from exports. A Preferred Technology
Enterprise (“PTE”) is defined as an enterprise which meets the aforementioned conditions and for which total consolidated revenues of
its parent company and all subsidiaries are less than NIS 10 billion.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13:- TAXES ON INCOME (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
A 12% capital gains tax rate on the sale of a preferred intangible asset to a foreign affiliated enterprise, provided that the asset was
initially purchased from a foreign resident at an amount of NIS 200 million or more.
A withholding tax rate of 20% for dividends paid from PTE income (with an exemption from such withholding tax applying to
dividends paid to an Israeli company). Such rate may be reduced to 4% on dividends paid to a foreign resident company, subject to
certain conditions regarding percentage of foreign ownership of the distributing entity.
In the years 2018, 2019 and 2020, part of the Company’s taxable income in Israel was entitled to a preferred 12% tax rate in the
preferred technological enterprise track under Amendment 73 to the Investment Law.
In 2015, the Company transitioned to the preferred enterprise track entitling it to a preferred 16% tax rate under Amendment 73 to the
Investment Law.
The Company has received final tax assessments through the year 2016. The Company subsidiaries have received final tax assessments
(or assessments that are deemed final) through the tax year 2014.
Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969:
The Company qualifies as an Industrial Company within the meaning of the Law for the Encouragement of Industry (Taxes), 1969 (the
“Industrial Encouragement Law”). The Industrial Encouragement Law defines an “Industrial Company” as a company that is resident
in Israel and that derives at least 90% of its income in any tax year, other than income from defense loans, capital gains, interest and
dividends, from an enterprise whose major activity in a given tax year is industrial production. Under the Industrial Encouragement
Law, the Company is entitled to amortization of the cost of purchased know-how and patents over an eight-year period for tax purposes
as well as accelerated depreciation rates on equipment and buildings.
Eligibility for the benefits under the Industrial Encouragement Law is not subject to receipt of prior approval from any governmental
authority.
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13:- TAXES ON INCOME (Cont.)
5. Foreign Exchange Regulations:
MAGIC SOFTWARE ENTERPRISES LTD.
Under the Foreign Exchange Regulations, the Company and one of its Israeli subsidiaries calculate their tax liability in U.S. dollars
according to certain orders. The tax liability, as calculated in U.S. dollars is translated into NIS according to the exchange rate as of
December 31 of each year.
b. Non-Israeli subsidiaries:
Non-Israeli subsidiaries are taxed according to the tax laws in their respective domiciles of residence. If earnings are distributed to
Israel in the form of dividends or otherwise, the Company may be subject to additional Israeli income taxes (subject to an adjustment
for foreign tax credits) and foreign withholding tax rates.
Neither Israeli income taxes, foreign withholding taxes nor deferred income taxes were provided in relation to undistributed earnings of
the non-Israeli subsidiaries. This is because the Company intends to permanently reinvest undistributed earnings in the foreign
subsidiaries in which those earnings arose. If these earnings were distributed in the form of dividends or otherwise, the Company would
be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits) and non-Israeli withholding taxes.
The amount of the Company’s cash and cash equivalents that are currently held outside of Israel that would be subject to income taxes
if distributed as dividends is $ 14,165. However, a determination of the amount of the unrecognized deferred tax liability for temporary
difference related to those undistributed earnings of foreign subsidiaries is not practicable due to the complexity of the structure of our
group of subsidiaries for tax purposes and the difficulty of projecting the amount of future tax liability.
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13:- TAXES ON INCOME (Cont.)
c. Net operating loss carryforwards:
MAGIC SOFTWARE ENTERPRISES LTD.
As of December 31, 2020, three Israeli subsidiaries of the Company had operating loss carryforwards of $ 12,280 (mainly F.T.S
Formula Telecom Solutions, Ltd. which accounts for $ 10,523), which can be carried forward to offset against taxable income in the
future for an indefinite period.
One of the Company’s subsidiaries in England had estimated total available tax loss carryforwards of $ 4,072 as of December 31, 2020,
which can be carried forward to offset against future taxable income.
One of the Company’s subsidiaries in U.S. had estimated total available tax loss carryforwards of $ 7,122 as of December 31, 2020,
which can be carried forward to offset against future taxable income.
d.
Income before taxes on income:
Domestic
Foreign
e. Taxes on income:
Taxes on income (tax benefit) consist of the following:
Current:
Domestic
Foreign
Deferred taxes:
Domestic
Foreign
Taxes on income
F-40
$
$
$
Year ended December 31,
2019
2020
2018
25,423
11,980
$
17,806
14,666
$
25,839
6,008
37,403
$
32,472
$
31,847
Year ended December 31,
2019
2020
2018
$
7,867
1,069
$
7,266
1,636
8,936
(1,687)
37
(1,650)
8,902
(1,001)
(1,027)
(2,028)
5,186
1,359
6,545
81
445
526
$
7,286
$
6,874
$
7,071
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13:- TAXES ON INCOME (Cont.)
f. Deferred tax assets and liabilities:
MAGIC SOFTWARE ENTERPRISES LTD.
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company and its subsidiaries deferred
tax assets are as follows:
Net operating loss carryforwards
Allowances, reserves and intangible assets
Deferred tax assets before valuation allowance
Less - valuation allowance
Deferred tax assets, net
Long-term deferred tax assets
Long-term deferred tax liabilities
Net deferred tax liabilities
December 31,
2020
2019
$
5,557
6,228
11,785
(5,388)
4,529
1,584
6,113
(3,925)
6,397
$
2,188
December 31,
2020
2019
6,397
(17,639)
$
2,188
(11,069)
(11,242) $
(8,881)
$
$
$
$
Deferred tax liabilities are mainly in respect of certain property and equipment, acquired intangible assets and capitalized software
costs.
The Company has provided valuation allowances in respect of certain deferred tax assets resulting from operating losses carry forwards
and other reserves and allowances due to uncertainty concerning realization of these deferred tax assets.
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13:- TAXES ON INCOME (Cont.)
g. Reconciliation of the theoretical tax expense to the actual tax expense:
MAGIC SOFTWARE ENTERPRISES LTD.
A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income for an
Israeli company (corporate tax rate as of 2018 and thereafter is 23%), and the actual tax expense as reported in the statements of income
is as follows:
Income before taxes, as reported in the consolidated statements of income
Statutory tax rate
Theoretical tax expenses on the above amount at the Israeli statutory tax rate
Tax adjustment in respect of different tax rates
Deferred taxes on losses for which full valuation allowance was provided in the past
Tax-deductible costs, not included in the accounting costs
Tax expenses in respect of prior years, net
Non-deductible expenses
Uncertain tax position and other differences
Income tax
F-42
Year ended December 31,
2019
2018
2020
$
$
37,403
$
32,472
$
31,847
23%
23%
23%
$
8,603
(1,169)
(326)
(679)
(71)
1,398
(470)
$
7,468
465
(227)
-
(37)
-
(795)
7,325
(826)
(11)
-
(22)
45
560
$
7,286
$
6,874
$
7,071
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 13:- TAXES ON INCOME (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
h. The Company applies ASC 740, “Income Taxes” with regards to tax uncertainties. During the years ended December 31, 2018, and
2020 the Company recorded expenses of $ 1,050 and recorded income of $ 1,103 as a result of this application.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
Gross unrecognized tax benefits at January 1, 2018
$
Increase in tax positions taken in prior years
Decrease in tax positions taken in prior years
Gross unrecognized tax benefits at December 31, 2018
Increase in tax positions taken in prior years
Decrease in tax positions taken in prior years
Gross unrecognized tax benefits at December 31, 2019
Increase in tax positions taken in prior years
Decrease in tax positions taken in prior years
Gross unrecognized tax benefits at December 31, 2020
1,125
1,050
-
2,175
-
-
2,175
-
(1,103)
$
1,072
Although the Company believes that it has adequately provided for any reasonably foreseeable outcomes related to tax audits and
settlement, there is no assurance that the final tax outcome of its tax audits will not be different from that which is reflected in the
Company’s income tax provisions. Such differences could have a material effect on the Company’s income tax provision, cash flow
from operating activities and net income in the period in which such determination is made.
F-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 14:- EQUITY
MAGIC SOFTWARE ENTERPRISES LTD.
a. The Ordinary shares of the Company are listed on the NASDAQ Global Select Market in the United States and are traded on the Tel-
Aviv Stock Exchange in Israel.
b. Stock Option Plans:
Under the Company’s 2007 Stock Option Plan, as amended (“the 2007 Plan”), options may be granted to employees, officers, directors
and consultants of the Company and its subsidiaries. Pursuant to the original 2007 Stock Option Plan, the Company reserved 1,500,000
Ordinary shares for issuance. In 2012, the Company increased the number of Ordinary shares reserved for issuance under the 2007 Plan
by additional 1,000,000 Ordinary shares.
On December 31, 2015 the Company’s Board of Directors increased the amount of Ordinary shares reserved for issuance under the
2007 Plan by additional 250,000 Ordinary shares and extended the 2007 Plan by 10 years whereas it will expire on August 1, 2027. As
of December 31, 2020, an aggregate of 932,500 Ordinary shares of the Company are available for future grants under the 2007 Plan.
Each option granted under the 2007 Plan is exercisable for a period of ten years from the date of the grant of the option.
The exercise price for each option is determined by the Board of Directors and set forth in the Company’s award agreement. Unless
determined otherwise by the Board of Directors, the option exercise price shall be equal to or higher than the share market price at the
grant date. The options generally vest over 3-4 years. Any option that is forfeited or canceled before expiration becomes available for
future grants under the 2007 Plan.
A summary of employee option activity under the 2007 Plan as of December 31, 2020 and changes during the year ended December 31,
2020 are as follows:
Outstanding at January 1, 2020
Granted
Exercised
Forfeited
Outstanding at December 31, 2020
Exercisable at December 31, 2020
Number
of options
Weighted
average
exercise
price
119,767
-
(95,517)
-
24,250
24,250
$
$
$
2.58
2.28
3.45
3.45
Weighted
average
remaining
contractual
term
(in years)
Aggregate
intrinsic
value
1.37
$
1,171
1.24
1.24
$
$
380
380
F-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 14:- EQUITY (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The aggregate intrinsic value in the table above represents the total intrinsic value that would have been received by the option holders
had all option holders exercised their options on December 31, 2020. This amount is changed based on the market value of the
Company’s Ordinary shares. Total intrinsic value of options exercised during the years ended December 31, 2018, 2019 and 2020 was
$617, $537 and $765, respectively. As of December 31, 2020, there was no unrecognized compensation costs related to non-vested
share-based compensation arrangements granted under the Plans.
The options outstanding as of December 31, 2020, have been separated into ranges of exercise price categories, as follows:
Exercise price
In $
2.01-3
4.01-5
Weighted
average
remaining
contractual
life
(years)
Weighted
average
exercise
price
Options
exercisable
Weighted
average
exercise
price of
exercisable
options
0.77
2.60
1.24
$
$
$
2.94
4.94
3.45
18,000
6,250
24,250
$
$
$
2.94
4.94
3.45
Options
outstanding
18,000
6,250
24,250
c. Accumulated other comprehensive income (loss):
Accumulated realized and unrealized gain (loss) on available-for-sale securities, net
Accumulated foreign currency translation adjustments
Accumulated unrealized gain on derivative instruments, net
Total other comprehensive income (loss)
F-45
2020
December 31,
2019
2018
$
$
$
-
7,809
26
$
1
(351)
26
(94)
(6,057)
26
7,835
$
(324) $
(6,125)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 14:- EQUITY (Cont.)
d. Dividend distribution policy
MAGIC SOFTWARE ENTERPRISES LTD.
On August 9, 2017, the Company’s Board of Directors decided to amend the dividend distribution policy announced in 2012.
According to the Company’s amended policy, each year the Company will distribute a dividend of up to 75% of its annual distributable
profits. The Company’s Board of Directors may at its discretion and at any time, change, whether as a result of a one-time decision or a
change in policy, the rate of dividend distributions and/or decide not to distribute a dividend, all at its discretion.
On February 22, 2017, the Company declared a dividend distribution of $ 0.085 per share ($ 3,775 in the aggregate) which was paid on
April 5, 2017. On August 13, 2017, the Company declared a dividend distribution of $ 0.13 per share ($ 5,779 in the aggregate) which
was paid on September 13, 2017. On February 28, 2018, the Company declared a dividend distribution of $ 0.13 per share ($ 5,785 in
the aggregate) which was paid on March 26, 2018. On August 8, 2018, the Company declared a dividend distribution of $ 0.155 per
share ($ 7,563 in the aggregate) which was paid on September 5, 2018. On March 4, 2019, the Company declared a dividend
distribution of $ 0.15 per share ($ 7,335 in the aggregate) which was paid on March 25, 2019. On August 13, 2019, the Company
declared a dividend distribution of $ 0.156 per share ($ 7,628 in the aggregate) which was paid on September 12, 2019. On May 26,
2020, the Company declared a dividend distribution of $ 0.08 per share ($ 3,918 in the aggregate) which was paid on June 25, 2020. On
August 13, 2020, the Company declared a dividend distribution of $ 0.175 per share ($ 8,585 in the aggregate) which was paid on
September 10, 2020.
NOTE 15:- RELATED PARTIES TRANSACTIONS
Agreements with controlling shareholder and its affiliates:
The Company has in effect agreements with affiliated companies pursuant to which the Company has rendered services amounting to
approximately $ 2,535, $ 4,300 and $ 3,000, in aggregate for the years ended December 31, 2018, 2019 and 2020, respectively and acquired
services amounting to approximately $ 309, $ 224 and $ 788 for the years ended December 31, 2018, 2019 and 2020, respectively.
As of December 31, 2019 and 2020, the Company had trade and other receivables balances due to its related parties in amount of
approximately $ 648 and $ 763, respectively. In addition, as of December 31, 2019 and 2020, the Company had trade payables balances due
from its related parties in amount of approximately $ 31 and $ 130, respectively.
F-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 16:- COMMITMENTS AND CONTINGENCIES
a. Guarantees and Collaterals:
MAGIC SOFTWARE ENTERPRISES LTD.
As of December 31, 2020, the Company has provided performance bank guarantees in the amount of $1,650 as security for the
performance of various contracts with customers. As of December 31, 2020, the Company has restricted bank deposits of $ 477 in favor
of the issuing banks.
b. From time to time, the Company and/or its subsidiaries are subject to legal, administrative and regulatory proceedings, claims, demands
and investigations in the ordinary course of business, including claims with respect to intellectual property, contracts, employment and
other matters. The Company accrues a liability when it is both probable that a liability has been incurred and the amount of the loss can
be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a
loss is reasonably estimable. These accruals are reviewed and adjusted to reflect the impact of negotiations, settlements, rulings, advice
of legal counsel and other information and events pertaining to a particular matter.
Lawsuits have been brought against the Company in the ordinary course of business. The Company intends to defend itself vigorously
against those lawsuits.
In September 2016, an Israeli software company, that was previously involved in an arbitration proceeding with us in 2015 and won
damages from us of $2.4 million, filed a lawsuit seeking damages of NIS 34,106 against the Company and one its subsidiaries. This
lawsuit was filed as part of an arbitration proceeding. In the lawsuit, the software company claimed that warning letters that the
Company sent to its clients in Israel and abroad, warning those clients against the possibility that the conversion procedure offered by
the software company may amount to an infringement of the Company’s copyrights (the “Warning Letters”), as well as other alleged
actions, have caused the software company damages resulting from loss of potential business. The lawsuit is based on rulings given in
the 2015 arbitration proceeding in which it was allegedly ruled that the Warning Letters constituted a breach of a non-disclosure
agreement (NDA) signed between the parties.
The Company rejected the claims by the Israeli software company and moved to dismiss the lawsuit entirely. At this point, all the
relevant motions have been filed and all witnesses deposed including legal summaries. The Company is unable to make a reasonably
reliable estimate of its chances of successfully defending this lawsuit.
F-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 17:- NET EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net earnings per share:
MAGIC SOFTWARE ENTERPRISES LTD.
Year ended December 31,
2019
2020
2018
Net income attributable to Magic shareholders
Accretion of redeemable non-controlling interests
Net income attributable to Magic shareholders after accretion of redeemable non-controlling
interests
$
$
$
25,186
$
(1,317) $
20,266
$
(7,471) $
19,883
(1,726)
23,869
$
12,795
$
18,157
Weighted average Ordinary shares outstanding:
Denominator for basic net earnings per share
Effect of dilutive securities
Denominator for diluted net earnings per share
49,028,975
18,682
48,896,163
97,920
46,665,042
131,648
49,047,657
48,994,083
46,796,690
Basic and Diluted earnings per share
$
0.49
$
0.26
$
0.39
F-48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 18:- SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
MAGIC SOFTWARE ENTERPRISES LTD.
a. The Company reports its results on the basis of two reportable business segments: software services (which include proprietary and
none proprietary software technology) and IT professional services.
The Company evaluates segment performance based on revenues and operating income of each segment. The accounting policies of the
operating segments are the same as those described in the summary of significant accounting policies. This data is presented in
accordance with ASC 280, “Segment Reporting.”
Headquarters’ general and administrative costs have not been allocated between the different segments.
Software services
The Company develops markets, sells and supports a proprietary and none proprietary application platform, software applications,
business and process integration solutions and related services.
IT professional services
The Company offers advanced and flexible IT services in the areas of infrastructure design and delivery, application development,
technology planning and implementation services, communications services and solutions, as well as supplemental outsourcing
services.
There are no significant transactions between the two segments.
b. The following is information about reported segment results of operation:
2018
Total revenues
Expenses
Segment operating income (loss)
Depreciation and amortization
Software
services
IT
professional
services
Unallocated
expense
Total
$
$
$
81,332
63,902
17,430
8,727
$
$
$
203,043
183,985
19,058
3,611
$
$
$
$
-
4,790
284,375
252,677
(4,790) $
31,698
226
$
12,564
F-49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 18:- SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
2019
Total revenues
Expenses
Segment operating income (loss)
Depreciation and amortization
2020
Total revenues
Expenses
Segment operating income (loss)
Depreciation and amortization
Software
services
IT
professional
services
Unallocated
expense
Total
$
$
$
$
$
$
86,140
71,825
14,315
8,799
86,025
64,498
21,527
10,329
$
$
$
$
$
$
239,490
216,842
22,648
5,059
285,169
258,907
26,262
3,347
$
$
$
$
$
$
$
-
3,311
325,630
291,978
(3,311) $
33,652
167
$
14,025
$
-
7,201
371,194
330,606
(7,201) $
40,588
263
$
13,939
c. The Company’s business is divided into the following geographic areas: United States, Israel, Europe, Japan and other regions. Total
revenues are attributed to geographic areas based on the location of the customers.
The following table presents total revenues classified according to geographical destination for the years ended December 31, 2018,
2019 and 2020:
United States
Israel
Europe
Japan
Other
Year ended December 31,
2019
2020
2018
$
$
177,882
149,094
26,947
12,643
4,628
$
158,095
124,523
25,788
12,499
4,725
137,066
103,850
28,257
9,797
5,405
$
371,194
$
325,630
$
284,375
F-50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 18:- SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont.)
d. The Company’s long-lived assets are located as follows:
MAGIC SOFTWARE ENTERPRISES LTD.
Israel
United States
Japan
Other
Europe
December 31,
2020
2019
$
$
130,326
74,637
6,404
3,013
5,191
108,608
68,989
6,406
3,248
3,103
$
219,571
$
190,354
e. The Company does not allocate its assets to its reportable segments; accordingly, asset information by reportable segments is not
presented.
f.
In 2018, 2019 and 2020, the Company had one major customer, included in the IT professional services segment, which accounted for
13%, 9% and 10% of the group revenues, respectively.
F-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 19:- REVENUE RECOGNITION
MAGIC SOFTWARE ENTERPRISES LTD.
The following table includes estimated revenue expected to be recognized in future periods related to performance obligations that are
unsatisfied or partially unsatisfied at the end of the reporting period and are part of a contract that has an original expected duration of more
than one year:
Software license and related revenues and consulting services
$
7,459
$
2,189
$
3,045
Contract balances:
The following table provides information about trade receivables, contract assets (unbilled receivables) and contract liabilities (deferred
revenues) from contracts with customers (in thousands):
2021
2022
2023
and
thereafter
Trade receivables (net of allowance)
Deferred revenues
December 31,
2020
2019
$
$
111,059
8,793
$
$
96,694
8,724
Trade receivable are recorded when the right to consideration becomes unconditional, and an invoice is issued to the customer.
Billing terms and conditions generally vary by contract type. Amounts are billed as work progresses in accordance with agreed-upon
contractual terms, either at periodic intervals (e.g., monthly or quarterly) or upon achievement of contractual milestones.
Deferred revenues represent contract liabilities, and include unearned amounts received under contracts with customers and not yet
recognized as revenues.
During the year ended December 31, 2020, the Company recognized $8,724 that was included in deferred revenues (short-term contract
liability) balance at January 1, 2020.
F-52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 20:- SELECTED STATEMENTS OF INCOME DATA
a. Research and development costs, net:
Total costs
Less - capitalized software costs
Research and development, net
b. Financial income (expenses), net:
Bank charges and interest from loans offset by interest from short term deposits
Interest income from marketable securities, net of amortization of premium on marketable
securities
Gain (loss) arising from foreign currency translation and other
Financial income (expenses), net
NOTE 21:- LEASES
MAGIC SOFTWARE ENTERPRISES LTD.
Year ended December 31,
2019
2020
2018
12,091
(3,302)
$
12,382
(4,143)
$
9,362
(3,666)
8,789
$
8,239
$
5,696
(614) $
(374) $
(986)
100
(403)
212
(1,007)
(917) $
(1,169) $
284
855
153
$
$
$
$
The Company leases substantially all of its office space and vehicles under operating leases. The Company’s leases have original lease
periods expiring between 2020 and 2028. Some leases include an option to renew. The Company does not assume renewals in its
determination of the lease term unless the renewals are deemed to be reasonably certain at lease commencement. Lease payments included
in the measurement of the lease liability comprise the following: the fixed non-cancellable lease payments, payments for optional renewal
periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is
reasonably certain the lease will not be terminated early.
In July 2020, the Company entered into a lease agreement for new corporate offices for the company in Or Yehuda, Israel. The lease expires
in June 2033, with an option by the Company to extend for an additional 10-years term. The Company deemed this option as reasonably
certain to be renewed.
The Company has several leased offices in the United States, with expiry dates varying between 2021 and 2024, with renewal options
varying between 2021 and 2030.
Under Topic 842, all leases with durations greater than 12 months, including non-cancellable operating leases, are now recognized on the
balance sheet. The aggregated present value of lease agreements is recorded as a long-term asset titled ROU asset.
F-53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 21:- LEASES (Cont.)
MAGIC SOFTWARE ENTERPRISES LTD.
The corresponding lease liabilities are classified between operating lease liabilities which are current and long-term.
The components of operating lease costs were as follows: Basic rent expenses, management fees, parking expenses and maintenance costs.
The following is a summary of weighted average remaining lease terms and discount rates for all of the Company’s operating leases:
Weighted average remaining lease term (years)
Weighted average discount rate
December 31,
2020
5.06
2.45%
Cash paid for amounts included in the measurement of operating lease liabilities was $5,132 (included in cash flows from operating
activities).
Maturities of lease liabilities are as follows:
2021
2022
2023
2024
2025
2026 and thereafter
Total undiscounted cash flows
Less imputed interest
Present value of lease liabilities
NOTE 22:- SUBSEQUENT EVENTS
$
$
$
4,642
3,449
2,520
2,076
1,744
13,764
28,195
(3,686)
24,509
On March 8, 2021, the Company declared a dividend distribution of $ 0.21 per share ($ 10.2 million in the aggregate) which was paid on
April 7, 2021. The dividend distribution relates to the Company’s earnings in the second half of 2020.
F-54
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
MAGIC SOFTWARE ENTERPRISES LTD.
Details of the percentage of control of the share capital and voting rights of subsidiaries and an affiliate as of December 31, 2020:
DETAILS OF SUBSIDIARIES AND AFFILIATE
Name of Company
Magic Software Japan K.K.
Magic Software Enterprises Inc.
Magic Software Enterprises (UK) Ltd.
Hermes Logistics Technologies Limited.
Magic Software Enterprises Spain Ltd.
Coretech Consulting Group Inc.
Coretech Consulting Group LLC.
Fusion Solutions LLC.
Fusion Technical Solutions LLC.
Xsell Resources Inc.
Magic Software Enterprises (Israel) Ltd.
Magic Software Enterprises Netherlands B.V.
Magic Software Enterprises France
Magic Beheer B.V.
Magic Benelux B.V.
Magic Software Enterprises GMBH
Magic Software Enterprises India Pvt. Ltd.
Onyx Magyarorszag Szsoftverhaz .
Magix Integration (Proprietary) Ltd.
Appbuilder Solutions Ltd.
Complete Business Solutions Ltd.
DataMind Technologies Ltd.
Comm-IT Technology Solutions Ltd.
Comm-IT Software Ltd. (a subsidiary of Comm-IT Technology Solutions Ltd.)
Comm-IT Embedded Ltd. (a subsidiary of Comm-IT Technology Solutions Ltd.)
Valinor Ltd. (a subsidiary of Comm-IT Technology Solutions Ltd.)
Dario IT Solutions Ltd. (a subsidiary of Comm-IT Technology Solutions Ltd.)
Quickode Ltd. (a subsidiary of Comm-IT Technology Solutions Ltd.)
Twingo Ltd. (a subsidiary of Comm-IT Technology Solutions Ltd.)
Pilat (North America), Inc
Pilat Europe Ltd.
Roshtov Software Industries Ltd.
BridgeQuest Labs, Inc
BridgeQuest, Inc.
Allstates Consulting Services LLC
F.T.S Formula Telecom Solutions, Ltd.
F.T.S Bulgaria Ltd.
F-55
Percentage
of ownership
and control
%
Place of
incorporation
India
100
Japan
100 U.S.A.
100 U.K.
100 U.K.
100
Spain
100 U.S.A
100 U.S.A
100 U.S.A
49 U.S.A
100 U.S.A
100
Israel
100 Netherlands
100
France
100 Netherlands
100 Netherlands
100 Germany
100
100 Hungary
100
100 U.K.
Israel
100
Israel
100
Israel
77.8
Israel
100
Israel
75
Israel
100
Israel
100
Israel
100
Israel
60
100 U.S.A
100 U.K.
Israel
100 U.S.A
100 U.S.A
100 U.S.A
Israel
100
100 Bulgaria
80
South Africa
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS
MAGIC SOFTWARE ENTERPRISES LTD.
DETAILS OF SUBSIDIARIES AND AFFILIATE (Cont.)
Name of Company
Comblack IT Ltd.
Yes-IT Ltd. (a subsidiary of Comblack IT Ltd.)
Shavit Software (2009) Ltd. (a subsidiary of Comblack IT Ltd.)
Infinigy (UK) holdings limited
Infinigy (US) holding Inc.
Infinigy Solutions LLC.
Infinigy Engineering LLP (a subsidiary of Infinigy Solutions LLC.)
Skysoft Solutions Ltd.
Futurewave Systems, Inc.
OnTarget Group, Inc.
NetEffects, Inc.
PowWow Inc.
BA Microwaves Ltd.
Stockell Information Systems Inc.
Mobisoft Ltd.
Magic Hands B.V.
Knowledge & Solutions Software B.V.
Aptonet, Inc.
Comm-IT USA, Inc.
Comblack Municipal Services Ltd.
Shavit Human resource Ltd.
F-56
Percentage
of ownership
and control
%
Place of
incorporation
75
Israel
80
Israel
100
100
Israel
100 U.K.
100 U.S.A
100 U.S.A
99.9 U.S.A
Israel
100 U.S.A
100 U.S.A
100 U.S.A
100 U.S.A
Israel
100 U.S.A
Israel
100 Netherlands
100 Netherlands
100 U.S.A
100 U.S.A
Israel
Israel
70
100
70
56.67
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Magic Software Japan K. K.
Opinion on the Financial Statements
We have audited the accompanying statements of financial position of Magic Software Japan K.K. (the “Company”) as of December 31, 2019
and 2020, and the related statements of comprehensive income and cash flows for each of the three years in the period ended December 31, 2020. In our
opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019
and 2020, and the related statements of comprehensive income and cash flows for each of the three years in the period ended December 31, 2020 in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2020, based on Section 404 of the Sarbanes-Oxley Act (“SOA”) and our report
dated February 6, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our
opinion.
Tokyo, Japan
February 6, 2020
/s/ KDA Audit Corporation
KDA Audit Corporation
F-57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Magic Software Japan K. K.
Opinion on Internal Control over Financial Reporting
We have audited Magic Software Japan K.K.’s (the “Company”) internal control over financial reporting as of December 31, 2019, based on
Section 404 of the Sarbanes-Oxley Act (“SOA”). In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2020, based on Section 404 of the Sarbanes-Oxley Act (“SOA”).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the statements of
financial position of the Company as of December 31, 2019 and 2020, and the related statements of comprehensive income and cash flows for each of the
three years in the period ended December 31, 2020 and our report dated February 6, 2021 expressed unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management's Assessment of Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the entity’s internal control over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United
States of America. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Tokyo, Japan
February 6, 2021
/s/ KDA Audit Corporation
KDA Audit Corporation
F-58
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
S I G N A T U R E S
MAGIC SOFTWARE ENTERPRISES LTD.
By:
/s/ Guy Bernstein
Name: Guy Bernstein
Title:
Chief Executive Officer
Dated: May 13, 2021
106
List of Subsidiaries and Affiliates of the Registrant
Exhibit 8.1
The following table sets forth the legal name, location and country of incorporation and percentage ownership of each of the registrant’s
subsidiaries and affiliated companies as of December 31, 2020:
Subsidiary Name
Magic Software Japan K.K
Magic Software Enterprises Inc.
Magic Software Enterprises (UK) Ltd.
Hermes Logistics Technologies Limited
Magic Software Enterprises Spain Ltd
Coretech Consulting Group, Inc.
Coretech Consulting Group LLC
Fusion Solutions LLC.
Fusion Technical Solutions LLC.
Xsell Resources Inc.
Magic Software Enterprises (Israel) Ltd
Magic Software Enterprises Netherlands B.V.
Magic Software Enterprises France.
Magic Beheer B.V.
Magic Benelux B.V.
Magic Software Enterprises GMBH
Magic Software Enterprises India Pvt. Ltd
Onyx Magyarorszag Szsoftverhaz
Magix Integration (Proprietary) Ltd
AppBuilder Solutions Ltd
Complete Business Solutions Ltd
Datamind Technologies Ltd
CommIT Technology Solutions Ltd
CommIT Software Ltd (shares held by Comm-IT Technology Solutions Ltd.)
CommIT Embedded Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Valinor Ltd. (shares held by Comm-IT Technology Solutions Ltd.)
Dario Solutions IT Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Quickode Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Twingo Ltd (shares held by Comm-IT Technology Solutions Ltd.)
Pilat Europe Ltd.
Pilat (North America), Inc.
Roshtov Software Industries Ltd
BridgeQuest Labs, Inc.
BridgeQuest, Inc.
Allstates Consulting Services LLC
F.T.S. - Formula Telecom Solutions Ltd
FTS Bulgaria Ltd. (FTS Global Ltd.)
Comblack IT Ltd
Yes-IT Ltd. (shares held by Comblack IT Ltd)
Shavit Software (2009) Ltd. (shares held by Comblack Ltd)
Infinigy (UK) Holdings Limited
Infinigy (US) Holding Inc.
Infinigy Solutions LLC.
Infinigy Engineering LLP (shares held by Infinigy Solutions LLC.)
Skysoft Solutions Ltd.
Futurewave Systems, Inc.
OnTarget Group, Inc.
NetEffects, Inc.
PowWow Inc.
BA Microwaves Ltd.
Stockell Information Systems Inc.
Mobisoft Ltd.
Magic Hands B.V.
Knowledge & Solutions Software B.V.
Aptonet, Inc.
Comm-IT USA, Inc.
Country of Incorporation
Ownership Percentage
Japan
Delaware
United Kingdom
United Kingdom
Spain
Pennsylvania
Delaware
Delaware
Delaware
Pennsylvania
Israel
Netherlands
France
Netherlands
Netherlands
Germany
India
Hungary
South Africa
United Kingdom
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
Israel
United Kingdom
New Jersey
Israel
North Carolina
North Carolina
Delaware
Israel
Bulgaria
Israel
Israel
Israel
United Kingdom
Georgia
Georgia
Georgia
Israel
Georgia
North Carolina
Missouri
California
Israel
Missouri
Israel
Netherlands
Netherlands
Georgia
Delaware
100%
100%
100%
100%
100%
100%
100%
100%
49%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
80%
77.8%
100%
75%
100%
100%
100%
60%
100%
100%
60%
100%
100%
100%
100%
100%
80%
100%
100%
100%
100%
100%
99.9%
75%
100%
100%
100%
100%
56.67%
100%
70%
100%
100%
100%
100%
Exhibit 12.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
I, Guy Bernstein, certify that:
1. I have reviewed this annual report on Form 20-F of Magic Software Enterprises Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13(a)-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal
control over financial reporting.
Date: May 13, 2021
*
The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon
request.
/s/ Guy Bernstein
Guy Bernstein*
Chief Executive Officer
(Principal Executive Officer)
Exhibit 12.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
I, Asaf Berenstin, certify that:
1. I have reviewed this annual report on Form 20-F of Magic Software Enterprises Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13(a)-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its consolidated Subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal
control over financial reporting
Date: May 13, 2021
*
The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon
request.
/s/ Asaf Berenstin
Asaf Berenstin*
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.1
In connection with the Annual Report of Magic Software Enterprises Ltd. (the “Company”) on Form 20-F for the period ending December 31,
2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Guy Bernstein, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
May 13, 2021
*
The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon
request.
/s/ Guy Bernstein
Guy Bernstein*
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.2
In connection with the Annual Report of Magic Software Enterprises Ltd. (the “Company”) on Form 20-F for the period ending December 31,
2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Asaf Berenstin, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
May 13, 2021
*
The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon
request.
/s/ Asaf Berenstin
Asaf Berenstin*
Chief Financial Officer
(Principal Financial Officer)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File No. 333-113552, 333-132221 and 333-149553),
of Magic Software Enterprises Ltd. (“the Company”), of our reports dated May 13, 2021 with respect to the consolidated financial statements and the
effectiveness of the internal control over financial reporting of the Company and its subsidiaries included in this Annual Report on Form 20-F for the year
ended December 31, 2020, filed with the Securities and Exchange Commission.
Exhibit 15.1
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel Aviv, Israel
May 13, 2021
CONSENT OF INDEPENDENT AUDITORS
OF
Magic Software Japan K.K
Exhibit 15.2
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-113552, 333-132221 and 333-149553)
of Magic Software Enterprises Ltd., of our report dated February 6, 2021, with respect to the financial statements of Magic Software Japan K.K. as of
December 31, 2020, which report appears in the Annual Report on Form 20-F of Magic Software Enterprises Ltd. for the year ended December 31, 2020.
/s/ KDA Audit Corporation
KDA Audit Corporation
Registered Auditors
Tokyo, Japan
May 10, 2021