We believe that the proliferation of digital communication and information technology into the security market provides us with the opportunity to consolidate safety and site management with security applications. Cities and municipalities, air and sea ports,seaports, chemical factories, sporting event villagesgreen energy plants and stadiums,distribution facilities, oil and gas terminals and pipeline infrastructure, large logistics warehouses, and critical infrastructure sites are currently utilizing the benefits of this approach to security management. This integration allows users to share diverse sensors (such as cameras and emergency buttons)intrusion detection sensors), IT systems, traffic management tools Cyber solutions and other resources and feed them into a single command and control platform. Users from different departments within organizations can now share the same information, allowing for improved communication and coordination, whether it is a routine operation or crisis situation. We believe that we are well positioned and are in the forefront of this emerging market opportunity. We can also address the increasing cyber threats that the trend towards networking imposes on sites we traditionally protect with physical security.
| · | Perimeter Intrusion Detection Systems (PIDS); |
Perimeter Intrusion Detection Systems (PIDS), fence mounted, buried and free standing;
| · | PIDS fence sensor with perimeter LED based lighting; |
| · | VMS, including IVA applications; |
| · | CCTV systems, including a perimeter security robotic camera platform; |
| · | Security Video Observation & Surveillance systems; |
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PIDS fence sensor with intelligent perimeter LED based lighting;
| · | Pipeline security, third party interference (TPI); |
Common Operating Platform for VMS, including IVA applications, PIDS applications and EAC systems;
| · | Cyber security systems for security networks; |
EAC (Electronic Access Control) systems;
| · | Life safety/duress alarm systems; |
Security Thermal Imaging Observation & Surveillance systems (OEM);
| · | Command and control systems; and |
Pipeline security, third party interference (TPI); and
| · | Miscellaneous systems tailored for specific vertical market needs. |
Life safety/duress alarm systems.
The following table shows the breakdown of our consolidated revenues for the calendar years 2016, 2017 and 2018 by operating segments:
| | Year ended December 31, | |
| | 2016 | | | 2017 | | | 2018 | |
| | (In thousands) | |
Products | | $ | 32,372 | | | $ | 22,301 | | | $ | 27,626 | |
Turnkey projects | | | 31,823 | | | | 34,742 | | | | 57,072 | |
Video & Cyber security | | | 5,626 | | | | 8,350 | | | | 9,461 | |
Eliminations | | | (1,996 | ) | | | (1,101 | ) | | | (1,557 | ) |
Total | | $ | 67,825 | | | $ | 64,292 | | | $ | 92,602 | |
Perimeter Security Products
Perimeter security products enable customers to monitor, limit and control access by unauthorized personnel to specific regions or areas. High-end perimeter products are sophisticated in nature and are used for correctional facilities, borders, nuclear and conventional power plants, air and sea ports,seaports, military installations, logistics centers and other high securityhigh-security installations.
Our line of perimeter security products utilizes sophisticated sensor devices to detect and locate intruders and identify the nature of intrusions. Our perimeter security products have been installed along tens of thousands of kilometers of borders and facility boundaries throughout the world, including more than 600 correctional institutions and prisons in the United States and several other countries. We have installed several hundred kilometers of high security smart perimeter systems along Israel’s borders.
Our line of outdoor perimeter security products consists of the following:
| · | Fence mounted detection systems – mechanical sensors, “microphonic” wire sensors, fiber optic sensors and electronic ranging sensors; |
Fence mounted detection systems – “microphonic” wire sensors, fiber optic sensors and electronic ranging sensors;
| · | Smart barriers – a variety of robust detection grids, gates and innocent looking fences, designed to protect water passages, VIP residences and other outdoor applications; |
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Buried sensors – buried coaxial cable volumetric sensors and buried fiber sensors to secure pipelines, borders and critical assets against intrusion by targets on the surface and excavation;
| · | Buried sensors – volumetric buried cable sensors for PIDS and seismic and fiber sensors to secure pipelines and critical assets against digging, and a new fiber based pipeline leak detection system; |
Electrical field disturbance sensors (volumetric);
| · | Taut wire – hybrid perimeter intrusion detection system with physical barrier; |
Microwave sensors; and
| · | Electrical field disturbance sensors (volumetric); |
| · | Our new hybridHybrid perimeter intrusion detection and intelligent lighting system. |
Fence Mounted Detection Systems
We offer various types of detection systems. While less robust than taut wire installations, theThe adaptability of these systems to a wide range of pre-existing barrier structures makes these products viable and effective alternatives for cost-conscious customers. Our detection devices are most effective when installed on common metal fabric perimeter systems, such as chain link or welded mesh. In our BARRICADE system, electro-mechanical sensors are attached to fence panels approximately three meters apart on any of several common types of fence structures. Once attached to the fence, each sensor detects vibrations in the underlying structures. The sensor system’s built-in electro-mechanical filtering combines with system input from a weather analysis component to minimize the rate of false alarms from wind, hail or other sources of nuisance vibrations. Our most recent product is the FENSOR – an accelerometer based fence mounted detection system that is capable of locating the exact location of an intrusion within 3 meters and is optimized for rigid fences such as palisade.
FlexZone, our latest coaxial cable based fence mounted ranging sensor can pinpoint intrusions to within ±3 m (±10 ft); it provides long physical cable lengths (up to 600 m (1,968 ft) per processor) configurable through software to many smaller virtual zones.zones for site operations. Power and data between processors is supported through the sensor cable and thus it reducessignificantly reducing the requirement for supporting infrastructure. A novel wireless gate sensor module is available with FlexZone providing an accelerometer based gate sensor integrated via wireless communications into a FlexZone network eliminating the need to have sensor cables attached to sliding gates.
Intelli-FIBERFiberPatrol, our advanced FP1150 product is a zone basedperimeter intrusion detection system that can be fence-mounted, buried, or deployed in a wall-top configuration. Featuring long distance ranging to 80 Km (50 mi) via a fence mounted detection system based on a fiber optic sensor. During 2014, we acquiredcable detects and locates fence cut and climb events with an accuracy of approximately 4m (13 ft). Released in 2019 our latest FP400 product zone-based fiber optic cable PIDS solution replaces the IntelliFiber product line. Its advanced features include the processing of 4 detection zones from a U.S. based companysingle remote processor with advanced fiber technology and completed the merger of its business into the group. This acquisition added new state-of-the-art products, designedan alarm given for mid and long range perimeters under the product family name FiberPatrol.each zone independently with up to 300 m (984 ft) per zone.
Buried Sensors
Omnitrax is a fifth generation covert outdoor perimeter security intrusion detection sensor that generates an invisible radar detection field around buried sensor cables. An alarm is emitted and theThe exact location of an intruder is identified within approximately one meter ifwhen an intruder disturbs the detection field. Targets are detected by their conductivity, size and movement and the digital processor is able to filter out nuisance alarms that could be caused by environmental conditions and small animals.
FiberPatrol, our newadvanced FP1150 product featuring long distance ranging fiber product,optic cable based detection technology in a single rack mount unit is also offered as a buried solution detecting surface intrusion and to protect pipelines, as well as providing Data Conduit protection against sabotage or accidental third party interference (TPI). for example by manual or machine excavation. FiberPatrol has the capability to protect distances of up to 80 km of a pipelineKm (50 mi) or up to 100 Km (62 mi) for Pipeline TPI and Data Conduit protection with a single indoor processor.
Taut Wire Perimeter Intrusion Detection Systems
Our taut wire perimeter systems consist of wire strung at high tension between anchor posts. Sensor posts are located at the middle between anchor posts. These sensor posts contain one or more devices that detect changes in the tension being exerted on and by the taut wires. Any abnormal force applied against these wires or released from them (such as by cutting) automatically triggers an alarm. Taut wire technology provides three critical elements of protection against unauthorized intruders: deterrence, detection and delaying (until first responders may react and intercept the intruder).
Our sealed sensors are not affected by radio frequency interference, climatic or atmospheric conditions, or electrical transients from power lines or passing vehicles. The sensors self-adjust to, or remain unaffected by, extreme temperature variation, minor soil movements and other similar environmental changes that might trigger false alarms in less sophisticated systems. Our taut wire perimeter systems are designed to distinguish automatically between fence tension changes such as caused by small animals, violent weather or forces more typically exerted by a human intruder.
Our taut wire perimeter systems offer customers a wide range of installation options. Sensor posts can be as far as 200 feet apart, with relatively inexpensive ordinary fence support posts and anchor posts between them. These systems may stand alone, be mounted on a variety of fence posts or added to an existing wall or other structure, or mounted on short posts, with or without outriggers.
Taut wire perimeter systems have been approved by various Israeli and U.S. security and military authorities. We have installed several hundred kilometers of these perimeter systems along Israel’s borders to assist in preventing unauthorized entry and infiltration.
Electro-static Field Disturbance Sensors
Terrain following volumetric sensors can detect intrusions before thewithout requiring an intruder touchesto touch the sensor. They can be installed on buildings, free-standing posts, existing fences, walls or rooftops, and will sense changes in the electrostatic field when events, such as intruders penetrating through the wires taketakes place. The system’s tall, narrow, well contained detection zone allows the sensor to be installed in almost any application and minimizes nuisance alarms caused by nearby moving objects. Our flagship product is X-Field; it consists of a set of four to as many as eight parallel field generating and sensing wires that can form a volumetric detection fieldheight as much as 5m (16.4’)6m (20 ft) in height.height for free standing and wall applications and up to 7.3m (24 ft) for fence installations.
Microwave Products
We also offer aUltrawave is our K-band all digital bi-static microwave beam perimeter intrusion detection system designed for stable, reliable operation in extreme outdoor environments. Coverage distance range from 5 meters to 200 meters.meters (16 to 656 ft). Older generations of X band microwaves are retired but still supported.
Hybrid Perimeter Intrusion Detection and Intelligent Lighting System
The Senstar LM100 is the world’s first 2-in-1 perimeter intrusion detection and intelligent lighting system. Combining high performance LED lighting with accelerometer-based vibration sensors, the LM100 deters potential intruders by detecting and illuminating them at the fence line.
Video and Cyber SecurityProducts
VMS / IVA Solutions - Senstar Symphony Common Operating Platform
The Senstar Symphony Common Operating Platform with Sensor Fusion Engine or "Senstar Symphony", which is an evolution of our Senstar Symphony 7, is a modular solution for security management and data intelligence. In addition to being an open, highly scalable video management system with built-in video analytics, it includes full-featured access control and perimeter intrusion detection modules. We believe that what truly sets Senstar Symphony apart from other systems is its sensor fusion engine. By intelligently combining low-level sensor data with video analytics, the sensor fusion engine achieves the highest levels of performance, far beyond that of the individual devices. Senstar Symphony seamlessly incorporates sensor fusion, event algorithms, and rule-based actions to provide unmatched capabilities, flexibility, and performance.
Senstar Symphony’s Sensor Fusion Engine synthesizes data from separate systems to generate actionable information. More than just a simple Boolean logic integration, the sensor fusion engine accesses low level data to intelligently characterize potential risks. Data synthesis enables the system to achieve levels of performance that exceed those of the individual sensors. For security applications, this has direct, practical benefits, namely the ability to maximize the strengths of individual sensor technologies while avoiding their shortcomings. When signal response data from outdoor sensors is synthesized with video analytic data, nuisance alarms generated by wind, debris, or background activity are virtually eliminated while maintaining the system’s high probability of detection.
The Senstar Symphony 7, scheduled for release in first half 2019, has been designed to become a new benchmark for intelligent Video Management Software (VMS). The Symphony software packageCommon Operating Platform includes a proprietary seamless setfull-featured Windows®-based client, a HTML5-client web client, a thin client hardware appliance, and mobile apps (iOS and Android). With Senstar Symphony’s camera-based licensing scheme, our customers and end-users can install and use as many clients as they need. The Windows® client includes on-screen camera hotlinks, a full-featured alarm console that integrates alarms with video feeds and sensor data, timeline view, and intuitive graphical maps with precise alarm location data. Senstar Symphony installs on standard commercial off-the-shelf hardware and supports thousands of EAC Electronic Access Control (EAC) features.network devices as well as ONVIF profiles S and T (H.265 and metadata). Senstar Symphony Access Control will provide control overintegrates with a broad arraywide variety of security functions, integrating Symphony’s VMS feature set to one of the broadest arrays of trusted hardware brands forand access control intrusion, HVACproducts, while its RESTful API and elevator control.TCP/IP listener services enable it to interact with virtually any network-based device.
The Senstar Symphony 7Common Operating Platform is highly scalable, easy to set up and use, and can be used in both single server installations and multi-server deployments. Senstar Symphony 7can meet any business requirements, both today and in years to come. Functionality sets including video management, video analytics, security management, access control, and data intelligence can be used individually, added when needed, or combined together as a complete integrated solution. It is a highly cost-effective solution, licensed per security device (camera, door, or sensor), so that our customers only license what they need. All managed devices report to a shared rules and alarms management system, enabling operators to perform site security or operational functions from a ‘single pane of glass’.
The Senstar Symphony solution offers web-based administrator capabilities, centralized cloud management, native analytics applications which include motion tracking, auto-PTZ (pan–tilt–zoom) tracking, people counting, and high security and server and storage failover which reducesreducing the need for expensivecostly Microsoft clustering and extra servers. We intend to expand the Symphony product line over time to address a broad new market of applications.
Our intelligent video analytics (IVA) transforms IP video into more than a passive monitoring tool with video analytics that are seamlessly incorporated into Senstar Symphony 7. Each video analytic is specially designed for physical security and business intelligence applications, providing value across many vertical markets.
Our intelligent video analytics (IVA) capabilities include:
| · | Face Recognition - A robust video analytic, ideally suited for securing facilities that require a stronger layer of protection for access control. With real-time alarms and intuitive searching when paired with Senstar Symphony, the Face Recognition video analytic transforms what is possible with a video surveillance system. |
Face Recognition - Senstar Symphony-based video analytic identifies known and unknown individuals. Using a combination of patented 2D to 3D pose correction technology, this analytic is designed for fast, reliable identification under real-world challenges, including lighting, angles, facial hair, pose, glasses and other occlusions, motion, crowds, and expression.
| · | Automatic License Plate Recognition - Automatically recognize and record vehicle license plates from over 100 countries. Set alarms for specific plates to deny or approve entry. |
Automatic License Plate Recognition - Senstar Symphony-based video analytic reads license plates and other vehicle markings, and seamlessly integrates the data into the site’s security and operational processes. The analytic can be used for automating vehicle access systems such as gates and other barriers, flag vehicle in/out times in surveillance footage, notifying customer management systems of client arrivals, and track vehicles crossing toll and border checkpoints.
| · | Outdoor People and Vehicle Tracking - Detect and track all moving objects and classify them as a person, vehicle, or unknown. Movement tracks are recorded to know exactly where each object came from and where it left the camera’s point-of-view. |
Outdoor People and Vehicle Tracking - a Senstar Symphony-based video analytic optimized for detecting and monitoring the movement of vehicles and people in outdoor environments. Typical applications include perimeter intrusion detection, parking lot monitoring, public safety, and wrong-way detection. The analytic retains its extremely high tracking and object classification accuracy even in the presence of challenging weather and lighting conditions. Organizations can use tracked events to trigger alarms and direct operators to specific concerns, making it the perfect addition to any video surveillance system.
| · | Left and Removed Item Detection - Monitor changes in an environment to detect when objects are added or removed from a scene. Set alarms to notify security staff when an item has been removed from an area or left unattended for a designated amount of time. This solution designed for use in airports, train stations, and other public spaces. |
Left and Removed Item Detection - Monitor changes in an environment to detect when objects are added or removed from a scene. Set alarms to notify security staff when an item has been removed from an area or left unattended for a designated amount of time. This solution designed for use in airports, train stations, and other public spaces.
| · | Indoor People Tracking - Detect and track people moving within the frame of a camera. Alarms can be set when unauthorized entry into an area is detected and dwell times can be tracked and recorded for the detection of unwanted loitering. Heat maps can also be created in retail stores and public spaces to determine areas of highest traffic and interest. |
Indoor People Tracking - Detect and track people moving within the frame of a camera. Alarms can be set when unauthorized entry into an area is detected and dwell times can be tracked and recorded for the detection of unwanted loitering. Heat maps can also be created in retail stores and public spaces to determine areas of highest traffic and interest.
| · | Crowd Detection - Real-time occupancy estimation for indoor and outdoor deployments, ideal for monitoring public spaces, event venues, and capacity restricted environments. Crowd Detection also offers numerous business intelligence applications. |
Crowd Detection - Real-time occupancy estimation for indoor and outdoor deployments, ideal for monitoring public spaces, event venues, and capacity restricted environments. Crowd Detection also offers numerous business intelligence applications.
| · | PTZ Auto-Tracking (Auto PTZ) - Auto PTZ can automatically control a PTZ camera, enabling it to zoom in and follow moving people and vehicles within the field of the camera. This is designed for use in outdoor perimeter monitoring and provides a closer look at people and vehicles for future forensic purposes. |
PTZ Auto-Tracking (Auto PTZ) - Auto PTZ can automatically control a PTZ camera, enabling it to zoom in and follow moving people and vehicles within the field of the camera. This is designed for use in outdoor perimeter monitoring and provides a closer look at people and vehicles for future forensic purposes.
Hardware solutions offered supporting our VMS software products are an “R series” of preconfigured servers, “E series” of physical appliances for smaller applications and a novel POE powered Thin"Thin Client device for convenient network access for monitors or other applications.
The Senstar E5000 Physical Security Appliance (PSA) - is a complete security management system in a box. Available in two models, it combines compact, purpose-built hardware with Senstar Symphony Common Operating Platform and is ideal for sites where vibration and extreme temperatures are difficult to manage, including remote utility and energy infrastructure, as well as space-constrained environments.
The Senstar Thin Client - is a simple and cost-effective device designed to display 1080p video from 30+ network video camera manufacturers via ONVIF Profile S, as well as from the Senstar Symphony VMS or any RTSP-compatible video source. The device is ideal for space-constrained environments due to its compact design while its web-based interface makes it easy to configure and manage.
The R-Series Operator Station - complements the R-Series Network Video Recorders (NVR). Featuring Dell hardware, the Operator Station is ideal for customers looking for a preconfigured, validated video surveillance client. The R001 model is optimized for everyday video monitoring applications and supports up to three displays.
Cyber SecuritySenstar Life SafetyTM
Our solutions monitor, detectSenstar Safe Spaces™ is an all-in-one video analytics solution to help businesses operate safely amidst COVID-19. Consisting of the Senstar Edge Platform, a simple plug-and-play, stand-alone device with embedded software, Senstar Safe Spaces uses network cameras to verify if health and protect against abnormal network activity, both landlinesafety protocols are being followed. Face Mask Detection, Physical Distancing, Sanitization Station Monitoring, and wireless, within and close to protected sites. Our current solutions are:
| · | Tungsten – A hardened managed edge switch with built in security capabilities to monitor unauthorized traffic which is optimized for outdoors security and ICS networks (Industrial Control System); and |
| · | Rubidium – An easily operated SIEM (Security Information & Event Management) application, designed to manage an array of Tungsten products as well as third party network and cyber monitoring devices. |
Perimeter Security Robot
In 2014, we introduced our new concept for perimeter security called RoboGuard, a robotic platform that runs on an elevated rail along the perimeter of protected sites or border lines, carrying an assortment of sensors. The robot can respond promptly and rush to the exact zone or location where intrusions are suspected, or automatically patrol and inspect fence integrity, looking for holes or suspicious nearby objects by using a sophisticated laser scanner. The robot is powered by a battery which is recharged automatically.
A typical RoboGuard configuration includes:
| · | One or two fixed cameras with IR illuminators for fence surveillance; |
| · | One PTZ camera with IR illuminator; and |
| · | Two-way intercom in order to communicate with intercepted would-be intruders. |
Occupancy Counting.
Other Products
Life Safety / Duress Alarm Systems
Our products include high reliability, personal, portable duress alarm systems to protect personnel in prisons. These products identify individuals in distress and can pinpoint the location of the distress signal with an indoor-to-outdoor and floor-to-floor accuracy unmatched by any other product.
Flash and Flare personal emergency locating systems use radio frequency technology to provide a one touch emergency system that can be worn on a belt, or used with our newly released pendant style alarm initiation device The systems, sold to prisons, consist of transmitters that send distress signals to receivers mounted throughout the building. Receivers relay the signal to a central location, indicating that someone requires assistance and their exact location in the building. As a radio frequency based product, it can also perform its function in outdoor areas surrounding a building. The systems employ an automated testing mechanism that helps to reduce maintenance costs.
PAS is another personal alarm system that uses an ultrasonic based emergency notification system. The system, sold mainly to jails and prisons in the United States, allows individuals moving throughout a facility to quickly indicate the location of an indoor crisis situation.
CCTV Systems
We have a proven track record in delivering CCTV and IVA solutions that are designed for use in outdoor applications. Following the ESC BAZ and Aimetis acquisitions, our VMS outdoor and indoor solutions present advanced technologies. These capabilities are now fully embedded as part of our Fortis4G Physical Security Information Management (PSIM) system.
Following the ESC BAZ acquisition, our portfolio includes a wide range of modular and customizable medium and long range dual technology (thermal Imaging and CCD) surveillance systems for distances of 500m up to 25km. These surveillance systems include:
| · | AVIV - a short to mid-range surveillance system designed for perimeter defense and border protection. |
| · | Giraffe - a long-range surveillance system designed to provide powerful Intelligence, Surveillance and Reconnaissance capabilities (ISR) for commercial ports and merchant ships. |
| · | TOM Vehicle - a vehicle-mounted surveillance system that offers any type of patrol vehicle patrol vehicles a high quality, mobile video surveillance unit that gives vehicles operators real-time video enabling them to be fully aware of what is happening outside and around the vehicle. |
| · | Hawk-Eye - a surveillance system, designed for perimeter defense and border protection. It is ideal for strategic locations such as airports, borders, critical utilities, nuclear plants and oil refineries. |
| · | C-HAWK - a surveillance system designed for maritime environments, such as civilian ports and ships that are often difficult to protect. |
| · | MODOS - a discreet early-warning multi-sensor intruder detection and observation system that includes motion-detection radar, seamlessly integrated with an AVIV Video Surveillance system that can play a significant role in urban security architecture. |
Command and Control Systems
The development of communication and IT technology has significantly affected the security market. Multiple security systems and technologies, sometimes supplied by different vendors, can now be integrated into a unified command and control system. We offer three types of command and control systems:
| · | Fortis4G – a fourth generation high-end comprehensive command and control system;
|
| · | StarNet 2 – our security management system, or SMS, was launched in the latter part of 2015 and replaces the legacy StarNet 100; and |
| · | Network Manager – a middleware (software) package which is essential for integration with 3rd party control systems and offers an entry level alarm management system called AIM. |
Fortis 4G
FORTIS4G is our PSIM system. It is a comprehensive, wide areaSenstar Symphony Common Operating Platform - Video, Security and real time command and control solution, designed for entities requiring management of security, safety and site management as well as cyber events (Integrated PSIMData Intelligence Platform with SEIM). It is designed to manage daily routines and site activities, security, regular and irregular events as well as crisis situations.
FORTIS4G architecture integrates with legacy systemsStarNet 2 – feature-rich Security Management System (SMS) optimized for the management and sensorsoperation of perimeter protection and intrusion detection systems. Organized around a visual, map-based interface, StarNet 2 provides a streamlined user experience for operators handling everything from the physicaldaily routines to crisis situations, enabling organizations to reduce reaction times, improve efficiency and logical (cyber) levels through a configuration and business logic layer and up to the situational awareness and management levels. It is based on a strong GIS engine (Geospatial Information System), which creates a common layer for inputs, outputs and presentation. The GIS engine enables the display of synchronized information in time and space across all screens such as location of mobile forces, located alarms from stationary sensors, video of related cameras, pop-ups of associated radar screens and managed voice communication related to the managed area. Real-time information enablessafeguard personnel, our security personnel to respond immediately, while maintaining a full two-way communication and situational awareness between the command and control center(s) and the first responder(s). The target markets for Fortis4G are safe city applications airports, seaports border and homeland security applications. Fortis4G incorporates the Symphony advanced video management system, with its full suiteor SMS, was launched in the latter part of native IVA features:2015 and replaces the legacy StarNet 1000; and
| · | Our investments in IVA tools help eliminate dependency on constant human monitoring. Automatic tools and algorithms extract abnormalities and only irregular events are transferred and analyzed for verification. This approach saves bandwidth and storage and more importantly requires human intervention only when needed. |
| · | Our IVA / VMD have been developed to meet the challenge of the outdoor environment (such as weather effects, moving objects like trees, glare and flashing lights). |
| · | Our video solutions have a proven track record in high-end vertical markets that require outdoor security such as military bases, government organizations, airports, seaports, mass transportation, correctional facilities, utilities, banks, retail chains, hospitals and industrial sites. |
StarNet 2
StarNet 2, an SMS, is designed to manage basic sites, consisting of a PIDS with a few other devices.
Network Manager
Network Manager is- a middleware (software) package interfacing between our family of PIDS sensors and any command and control solution, be it our own system or an external third party application. It is provided to integrators with a full software development kit to enable fast integration of our PIDS into any other SMS and physical security information system. It offers an entry level operator display system called the Alarm Information Module (AIM), typically for management of a single PIDS sensor.
| · | Video and Cyber Security. Video management system software licenses, the associated maintenance and support services, as well as Cyber security products are sold primarily through locally based distributor partners. Some key accounts are managed directly with the end-users. |
VMS and IVA. Video management system software and Intelligent Video Applications licenses, the associated maintenance and support services, are sold primarily through locally based distributor partners. Some key accounts are managed directly with the end-users. Our sales team is trained on cross-selling PIDS, VMS, IVA and EAC.
| · | Projects. This part of the business deals with end-customers or high-end system integrators. We offer full comprehensive solutions, which include our in-house portfolio of products and products manufactured by third parties. Solutions are focused around our core competencies -outdoor and cyber security, safety and site management, VMS and IVA applications. In many cases we take responsibility for the full turnkey solution and we integrate and deliver a full solution, including civil works infrastructure, installation, training, warranty and after sale support. Cyber security solutions are now offered as an integrated part of our comprehensive solutions. |
In addition to our mainglobal corporate office in Israel and our principal facilities in Israel, Canada, the United States and Mexico,Germany, we have sales and technical support offices in India, the United Kingdom, Germany, Spain, China, the Philippines and other countries.
Customers
The following table shows the geographical breakdown of our consolidated revenues with respect to our continuing operations for the three years ended December 31, 2018:2021, 2020 and 2019:
| | Year Ended December 31,___ | | | Year ended in December 31, | |
| | 2016 | | | 2017 | | | 2018 | | | | | | | | | | |
| | (In thousands) | | | | |
Israel | | $ | 8,727 | | | $ | 9,599 | | | $ | 13,577 | | |
| | | | | | | | | | |
North America | | | 23,467 | | | | 15,547 | | | | 24,324 | | | $ | 15,902 | | | $ | 17,520 | | | $ | 17,251 | |
Europe | | | 8,330 | | | | 11,232 | | | | 14,021 | | | | 8,913 | | | | 9,052 | | | | 11,004 | |
APAC | | | | 8,387 | | | | 5,267 | | | | 6,476 | |
South and Latin America | | | 10,364 | | | | 13,152 | | | | 25,471 | | | | 1,296 | | | | 1,322 | | | | 391 | |
Africa | | | 7,585 | | | | 9,370 | | | | 7,126 | | |
Israel | | | | 317 | | | | - | | | | - | |
Others | | | 9,352 | | | | 5,392 | | | | 8,083 | | | | | | | | | | | | | |
Total | | $ | 67,825 | | | $ | 64,292 | | | $ | 92,602 | | | | | | | | | | | | | |
For the years ended December 31, 2016, 2017 and 2018, revenues generated from sales to the MOD and IDF accounted for 8.6%, 10.2% and 10.9% of our revenues, respectively. In addition, revenues from the national electricity company in Latin America, or CFE accounted for 11.9%, 14.6% and 25.3% of our revenues in 2016, 2017 and 2018, respectively. We cannot assure you that any of our major customers will maintain their level of business with us or that, if such business is reduced, other customers generating similar revenues will replace the lost business. The failure to replace these customers with one or more customers generating similar revenues will have a material adverse effect on our financial results.
Installation, Support and Maintenance
Our systems are generally installed by us or by an integrating partner or in some cases by the customer after appropriate training, depending on the size of the specific project and the location of the customer’s facilities, as well as prior experience with our systems. We generally provide our customers with training on the use and maintenance of our systems, thatwhich we conduct either on-site or at our facilities. In addition, some of our local perimeter security products customers have signed maintenance contracts with us. The life expectancy of a high-security perimeter system is approximately ten years. Consequently, many miles of perimeter systems need to be replaced each year.
For systems installed outside of Israel, maintenance is provided by our local subsidiaries, by an independent third party, by partners or by the end-user. We also provide services, maintenance and support on an “as needed” basis.basis, as well as on a subscription basis, through the Senstar Care Program - our multi-year maintenance and support program. During the years ended December 31, 2016, 20172021, 2021 and 2018,2019, we derived approximately 20.4%15.4%, 26.7%14.0% and 19.3%15.4% of our total Products revenues, respectively, from maintenance and services.
Research and Development; Royalties
We place considerable emphasis on research and development to improve our existing products and technology and to develop new products and technology. We believe that our future success will depend upon our ability to enhance our existing products and technology and to introduce on a timely basis new commercially viable products and technology addressing the needs of our customers. We intend to continue to devote a significant portion of our personnel and financial resources to research and development. As part of our product development process, we seek to maintain close relationships with our customers to identify market needs and to define appropriate product specifications. Our development activities are a direct result of the input and guidance we receive from our marketing personnel during our annual meetings with such personnel. In addition, the heads of research and development for each of our development centers discussed below meet annually to identify market needs for new products.
We have centralized all our development centers in Israel, Canada, in Carp near Ottawa and the United States,Waterloo near Toronto, each of which develops products and technologies based on its area of expertise. Our development center in Israel was part of the assumed assets under the assets and shares purchase agreement of our Integrated Solutions (Projects) division sold to Aeronautics.
Our research and development expenses relating to our continuing Products' segment operations during 2016, 20172021, 2020 and 20182019 were $6.8$3.9 million, $6.6$4 million and $6.9$5.1 million, respectively. In addition to our own research and development activities, we also acquire know-how from external sources. We cannot assure you that any of our research and development projects will yield profitable results in the future.
Manufacturing and Supply
Our manufacturing operations consist of engineering, fabricating, assembly, quality control, final testing and shipping of finished products. Substantially all of our manufacturing operations are currently performed at our facilities in Canada and Israel.Canada. In 2018 we launched a “Made in USA” version of our FlexZone product to better serve our US-US - based partners and customers. See Item 4D. “Information on the Company – Property, Plants and Equipment.”
Although we had to occasionally adjust our manufacturing routine due to restrictions resulting from the Covid-19 pandemic, such as mandatory quarantines, social distancing, and an occasional absence of our manufacturing workforce, we managed to continue manufacturing and make deliveries of our products to our customers throughout 2021. Nevertheless, a potential increase of the Covid-19 pandemic-related quarantines and social distancing requirements, and the inability of our workforce to continue or quickly resume manufacturing after periods of absence, may disrupt our manufacturing operations, resulting in an adverse effect on our financial results.
We acquire most of the components utilized in our products, including our turnkey products, and certain services from a limited number of suppliers and subcontractors. Supply chain disruptions were exacerbated in 2021 as major shipping ports and manufacturing facilities in Asia have been affected by outbreaks of the Covid-19 variants, either closing or reducing capacity. The disruption to global supply chains has led to longer supplier delivery times and an increase in material prices. Despite the supply chain said disruptions we were able to source the needed material and sub-components to continue manufacturing and deliveries to our customers, We cannot assure you that we will continue to be able to obtain such items from theseour suppliers on satisfactory terms. Alternative sources of supply are available, andmay be difficult to obtain. therefore, temporary disruptions of our manufacturing operations would result if we are not dependent upon these suppliers and subcontractors.were required to obtain materials from alternative sources, which may have an adverse effect on our financial results. We also maintain an inventory of systems and spare parts in order to enable us to overcome potential temporary supply shortages until an alternate source of supply is available. Nevertheless, temporary disruptions of our manufacturing operations would result if we were required to obtain materials from alternative sources, which may have an adverse effect on our financial results.
Competition
PIDS Sensors. The principal factors affecting competition in the market for security systems are a system’s high probability for detection and low probability of false and nuisance alarms. We believe that a manufacturer’s reputation for reliable equipment is a major competitive advantage, and that such a reputation will usually be based on the performance of the manufacturer’s installed systems. Additional competitive factors include quality of customer support, maintenance and price.
The PIDS market is very fragmented. Our most frequently encountered competition includes EL-FAR Electronics Systems 2000 LTD. and Afcon Security and Parking Ltd. in Israel and outside of Israel our competitors include Southwest Microwave Inc., AVA (formerly named Future FiberFibre Technologies Fiber SensysPty. Ltd.), Fibersensys Inc. (an Optex Company), Geoquip Ltd., GPS Standard SpA, CIAS Elettronica Srl, SorheaVitaprotech, and Gallagher (New Zealand).
We believe that our principal competitors for our pipeline security products (FiberPatrol) are; Future Fibre Technologies Pty. Ltd.,are: AVA, Optasense, a QinetiQ Company,Luna Innovations company, Omnisens SA, and Fotech Solutions Ltd; and that our principal competitors for personal emergency location systems are Actall Corp., Bosch LLC and Visonic Networks.Ltd.
The video management software market is well developed internationally with several large manufacturers. Our most frequently encountered competitors are Genetec Inc., Avigilon Corp., Milestone Systems A/S, and SeeTec GmbH. There are a large number of entrants into the cyber security market which is expected to mature over the next few years.
IndirectWe also face indirect competition from competing technologies such as Ground Based Radarground based radar and thermal cameras as PIDS sensors with principleprincipal competitors being, Spotter RF,SpotterRF, Navtech, FLIR, SightLogix and FLIR.
Turn Key Projects and Solutions. Thousands of solution providers offer security products and services. Most of the integrators focus on indoor applications, but some also offer outdoor solutions. Most of the market players are local to their countries; however, some are global, such as ADT, Honeywell, Johnson Controls and Siemens. In some cases, we may cooperate with global integrators or may supply equipment to them. We believe that our principal competitors in Israel for security solutions are C. Mer Industries Ltd., Afcon Industries Ltd., Shamrad Electronics (1977) Ltd., EL-FAR Electronics Systems 2000 LTD and Orad Ltd.
Some of our competitors and potential competitors have greater research, development, financial and personnel resources, including governmental support, or more extensive business experience than we do. We cannot assure you that we will be able to maintain the quality of our products relative to those of our competitors or continue to develop and market new products effectively.
Intellectual Property Rights
WeFollowing the sale of our Integrated Solutions (Projects) division, we have 245 patents issued and have 8 2 patent reinstatement applications pending in the U.S. and in several other countries and have obtained licenses to use proprietary technologies developed by third parties. We cannot assure you:
| · | that patents will be issued from any pending applications, or that the claims allowed under any patents will be sufficiently broad to protect our technology; |
that patents will be issued from any pending applications, or that the claims allowed under any patents will be sufficiently broad to protect our technology;
| · | that any patents issued or licensed to us will not be challenged, invalidated or circumvented; or |
that any patents issued or licensed to us will not be challenged, invalidated or circumvented; or
| · | as to the degree or adequacy of protection any patents or patent applications may or will afford. |
as to the degree or adequacy of protection any patents or patent applications may or will afford.
In addition, we claim proprietary rights in various technologies, know-how, trade secrets and trademarks relating to our principal products and operations. We cannot assure you as to the degree of protection these claims may or will afford. It is our policy to protect our proprietary rights in our products and operations through contractual obligations, including confidentiality and non-disclosure agreements with certain employees and distributors. We cannot assure you as to the degree of protection these contractual measures may or will afford. Although we are not aware that we are infringing upon the intellectual property rights of others, we cannot assure you that an infringement claim will not be asserted against us in the future. We believe that our success is less dependent on the legal protection that our patents and other proprietary rights may or will afford than on the knowledge, ability, experience and technological expertise of our employees. We cannot provide any assurance that we will be able to protect our proprietary technology. The unauthorized use of our proprietary technology by third parties may impair our ability to compete effectively. We could become subject to litigation regarding intellectual property rights, which could seriously harm our business.
We have registered trademarks for AIMETIS, AIMETIS SYMPHONY, FIBERPATROL, FLARE, FLEXPI, FLEXPS, FLEXZONE, GUIDAR, INTELLI-FIELD, OMNITRAX, PANTHER, PINPOINTER, REPELS, SENNET, SENSTAR, SENSTAR & DESIGN, SENTIENT, ULTRAWAVE design,and XFIELD MAGAL, DTR, FORTIS, MAESTRO DB, FENSOR and ROBOGUARD.are registered trademarks.
ARMOURFLEX, CYBERSEAL, ENTERPRISE MANAGER, GALLIUM PDS, INTELLI-FLEX, INTELLIFIBER, LM100, the MAGAL logo, NETWORK MANAGER, RUBIDIUM, STARLED, STARNET, SENSTAR CARE, SENSTAR logo, SENSTAR SYMPHONY TUNGSTEN, VANADIUM GALLIUM-PDS, VANADIUMand SENSTAR SAFE SPACES and all other marks used to identify particular products and services associated with our businesses are unregistered trademarks.trademarks (unregistered). Any other trademarks and trade names appearing in this annual report are owned by their respective holders.
Government Regulations
Current Israeli governmental policy encourages the export of security related products to approved customers, as long as the export is consistent with Israeli government policy. We are also subject to regulations related to the export of “dual use” items (items that are typically sold in the commercial market, but which may also be used for military use). Israel enhanced enforcement of export control legislation under the Defense Export Control Law, 2007, under which a license is required to initiate marketing activities and a specific export license is required for any hardware, software and knowhow exported from Israel. The law provides for certain exemptions from the licensing requirement and broadens certain areas of licensing, particularly with respect to transfer of technology.
At present, only a limited numbernone of our products require a permit or license for export. We cannot assure that we will receive all the required permits and licenses for which we may apply in the future. In addition, our participation in governmental procurement processes in Israel and other countries is subject to specific regulations governing the conduct of the process of procuring defense contracts. Furthermore, solicitations for procurements by governmental purchasing agencies in Israel and other countries are usually governed by laws, regulations and procedures relating to procurement integrity, including avoiding conflicts of interest and corruption in the procurement process.
In addition, antitrust laws and regulations in Israel and other countries oftenin which we operate may require governmental approvals for transactions that are considered to limit competition. Such transactions may include cooperative agreements for specific programs or areas, as well as mergers and acquisitions.
C. | Organizational Structure. |
We have wholly owned and majority-owned active subsidiaries that operate world-wide. Set forth below are our significant subsidiaries.
| | Country of Incorporation/Organization | | |
Senstar Corporation | | Canada | | 100% |
Senstar Inc. | | United States (Delaware) | | 100% |
Senstar Latin America, S.A. DE C.V.GmbH. | | MexicoGermany | | 100% |
MAGAL-S3 CANADA INC.D. | | Canada | | 100% |
ESC BAZ LTD. | | Israel | | 55%Property, Plants and Equipment. |
D. Property, Plants and Equipment.
We own a two-story 2,533 square meter facility located on a 4,352 square meter parcel in the Yehud Industrial Zone, Israel, which is used as our principal facility. Approximately 600 square meters are devoted to administrative, marketing and management functions and approximately 800 square meters are used for engineering, system integration and customer service. We use the remaining area of approximately 1,100 square meters for production management and production operations, including manufacturing, assembly, testing, warehousing, shipping and receiving. We also lease a one-story 810 square meter facility located on a 1,820 square meter parcel in the Yehud Industrial Zone for $120,000 per year for use in production and operations. The lease terminates in 2029. The products that we manufacture at our facilities in the Yehud Industrial Zone include our taut-wire intrusion detection systems, our detection systems Fortis4G, MTC-1500, MSS-1500, RoboGuard, Fensor and other perimeter systems.
We own a 33,000 square foot facility in Carp, Ontario, Canada. Approximately 9,000 square feet are devoted to administrative, marketing and management functions, and approximately 8,000 square feet are used for engineering, system integration and customer service. We use the remaining area of approximately 16,000 square feet for production operations, including cable manufacturing, assembly, testing, warehousing, shipping and receiving. We own an additional 182,516 square feet of vacant land adjacent to this property, which is being held for future expansion. We also lease 358,560 square feet of land near this facility for use as an outdoor sensor test and demonstration site for our products including the Omnitrax buried cable intrusion detection system, the X-Field volumetric system, the FlexZone microphonic fence detection system, Flash and Flare, and various perimeter monitoring and control systems. The lease expense for this site is approximately $3,500 per year plus taxes under a lease that expires in November 2024.
We own a 999 square meter facility in Cuernavaca, Mexico, which we built in August 2013.
We lease office space in Waterloo, Canada, providing the facility which houses our video management software operations. We also lease office space in two sites in the U.S. andother sites world-wide. The aggregate annual rent for such offices was approximately $660,000$255,000 in 2018.2021.
Following the sale of our offices in Yehud, Israel in connection to the sale of our Integrated Solutions (Projects) division, we lease office space in Ramt-Gan, Israel which houses our corporate operations. The annual rent for this space is approximately $50,000 per year under a lease that expires in November 2023
We believe that our facilities are suitable and adequate for our current operations and the foreseeable future.
ITEM 4A.Unresolved Staff Comments
Not applicable.
| ITEM 5. | Operating and Financial Review and Prospects |
The following discussion of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this annual report. This discussion contains forward‑looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward‑looking statements as a result of certain factors, including, but not limited to, those set forth in Item 3.D. “Key Information–Risk Factors.”
Overview
We develop, manufacture, marketHistorically, we had two operating segments, which also represented our reportable segments and sell complex computerized security systems. Our systemsreporting units. Magal Integrated Solutions (“Projects” segment) and Senstar Product division (“Products” segment). On June 30, 2021, the Projects segment was sold. Therefore, the results of the Projects segment were classified as discontinued operations in our consolidated statements of operations and thus excluded from both continuing operations and segment results for all periods presented. Accordingly, we are usednow have one reportable segment with the change reflected in more than 100 countries to protect aircraft, national borders and sensitive facilities, including military bases, power plant installations, airports, sea ports, postal facilities, prisons, banks, retail operations, hospitals, municipal security, sporting events including athlete villages and stadiums, and industrial locations from terrorism, theft and other security threats.all periods presented.
Following organizational changes adopted inOur consolidated revenues for the course of 2016, we operate in three business segments:years ended December 31, 2021, 2020 and 2019 for our continuing operations were approximately $34.9 million, $33.4 million and 35.1 million, respectively.
| · | Perimeter Products segment – sales of perimeter products, including services and maintenance that are performed either on a fixed-price basis or pursuant to time-and-materials based contracts.
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Products (PIDS, VMS, IVA and EAC)
| · | Turnkey Projects segment – installation of comprehensive turnkey solutions for which revenues are generated from long-term fixed price contracts.
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| · | Video and Cyber Security segment (includes Video Management Software , Intelligent Video Analytics and Cyber Security) – sales of integrated intelligent video management solutions for security surveillance and business intelligence applications complemented by cyber-security products for monitoring, securing, and the active management of wired, wireless, and fiber optic communication networks. |
Perimeter Products Segment
The Perimeter Products segment sells itsWe sell our products worldwide and this segment primarily includes the operations of Senstar Canada, Senstar US, and Senstar Germany. as one reporting unit. The Israeli operation of the Perimeter Products segment is considered as separate reporting unit within this segment.
Turnkey Projects Segment
The Turnkey Projects segment has operations worldwide and the segment includes a number of reporting units operating in Israel, Mexico, Romania, India, Spain and Canada.
Video and Cyber Security Segment
This segment includesworldwide. Our products include Video Management Software (VMS), Intelligent Video Analytics (IVA) and Cyber-SecurityPIDS products. The PIDS, VMS and IVA activity which is operated and managed by Senstar, following the amalgamationactivities offer an unmatched portfolio of Senstar and Aimetis (acquired in 2016) offersPIDS technologies, as well as, integrated intelligent video management solutions for security surveillance and business intelligence applications worldwide. Cyber security sales are mainly in the U.S., Mexico and Israel. In early 2017, product management as well as sales management of this business activity was transferred to our facility in Waterloo, Canada.
Business Challenges/Areas of Focus
Our primary business challenges and areas of focus include:
| · | continuing the growth of revenues and profitability of our perimeter security system and video management system lines of products; |
continuing the growth of revenues and profitability of our perimeter security systems and video management systems lines of products;
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enhancing the introduction and recognition of our new products;
| · | enhancing the introduction and recognition of our new products into the markets; |
penetrating new markets and strengthening our presence in existing markets;
| · | penetrating new markets and strengthening our presence in existing markets; and |
strengthening our presence in our strategic verticals;
| · | succeeding in selling our comprehensive turnkey solutions. |
succeeding in selling our comprehensive PIDS, VMS and EAC products as a combined solution.
| · | succeeding in selling our comprehensive physical and cyber products as a combined solution. |
Our business is subject to the effects of general global economic conditions. If general economic conditions or economic conditions in key markets will be uncertain or weaken further, demand for our products could be adversely affected.
Key Performance Indicators and Sources of Revenues
Our management believes that our revenues and operating income are the two key performance indicators for our business.
Our revenues from our perimeter products, turnkey projects and Video and Cyber-Security segments for the three years ended December 31, 2018 were as follows:
| | Year Ended December 31, | |
| | 2016 | | | 2017 | | | 2018 | |
| | (In thousands) | |
Products | | $ | 32,372 | | | $ | 22,301 | | | $ | 27,626 | |
Turnkey projects | | | 31,823 | | | | 34,742 | | | | 57,072 | |
Video and Cyber-Security | | | 5,626 | | | | 8,350 | | | | 9,461 | |
Eliminations | | | (1,996 | ) | | | (1,101 | ) | | | (1,557 | ) |
Total | | $ | 67,825 | | | $ | 64,292 | | | $ | 92,602 | |
The increase in revenues from products was primarily dueProducts in 2021 compared to 2020, presented a partial recovery from the changeCovid-19 crisis, which continued to impact our operations in our leadership2021. The continuing impact represents a shift in governmental expenditures from HLS related projects towards addressing the USA and EMEA, including better management of our sales force. In addition,crisis caused by the increase in revenuesspread of the Videopandemic, and Cyber security segment was attributable tovarious travel and social distancing restrictions that reduced the Aimetis operation, which we acquired in April 2016. The increase in revenues from turnkeyvolume of related security-related projects was primarily due to the positive performance of our Israeli and Mexican based projects activity.
Our operating income (loss) from our perimeter products, turnkey projects and Video and Cyber Security segments for the three years ended December 31, 2018 were as follows:
| | Year Ended December 31, | |
| | 2016 | | | 2017 | | | 2018 | |
| | (In thousands) | |
Products | | $ | 5,799 | | | $ | 242 | | | $ | 2,863 | |
Turnkey projects | | | (163 | ) | | | 1,762 | | | | 2,782 | |
Video and Cyber Security | | | (3,383 | ) | | | (2,830 | ) | | | (1,298 | ) |
Eliminations | | | (758 | ) | | | (418 | ) | | | (592 | ) |
Total | | $ | 1,495 | | | $ | (1,244 | ) | | $ | 3,755 | |
Our operating profit in 2018 increased mainly due to the increase in sales in all of our segments of operations and major business units, as well as the results of our cost saving initiatives.globally.
Key Factors Affecting ourOur 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,reliance on large orders from a small number of customers, reliance on government contractspublic sector projects, and competition. For further discussion of the factors affecting our results of operations, see “Risk Factors.”
Reliance on large orders from a small number of customers
We receive relatively large orders for products from a relatively small number of customers. Consequently, a single order from one customer may represent a substantial portion of our sales in any one period and significant orders by any customer during one period may not be followed by further orders from the same customer in subsequent periods. Our sales and operating results are subject to very substantial periodic variations. Since quarterly performance is likely to vary significantly, our results of operations for any quarter or calendar year are not necessarily indicative of the results that we might achieve for any subsequent period. Accordingly, quarter-to-quarter and year-to-year comparisons of our operating results may not be meaningful. In addition, we have a limited order backlog that is generally composed of orders that are fulfilled within a period of three to twelve months after receipt, which makes revenues in any quarter substantially dependent upon orders received in prior quarters.
Growth Strategy
InDuring 2021 and following the first quarterdivestiture of 2016our Integrated Solutions (Projects) division, we initiated acontinued our recent strategic growth plan to implementfocusing on the sale of our growth strategy for the following 3-4 years. The strategic plan was adopted by our board of directors in the third quarter of 2016.Senstar products and solutions. Pursuant to the plan, we reorganized our group structure and clearly separated our two core areas of operation - Products and Projects. We also streamlined our product sales activity to concentrate onin our three main regions, the Americas (including LATAM), EMEA, and APAC. In 2021, we addressed the Chinese market with the establishment of Senstar China. We are continuing to focus on our strategic verticals: critical infrastructure, Energy (oil and gas), logistics and correctional facilities (mainly in the US). We intend to continue to expand our sales team into these verticals through allocation of resources and funds, including the U.S., which is the main strategic market foracquisition of complementary technologies that will increase our product activity. In 2018, we consolidated, our EMEA operations under a new in-region leadership.offerings to these targeted verticals.
We may not be able to implement our growth strategy plan and may not be able to successfully expand our business activity and increase our sales. If we are successful in the implementation of our strategic plan, we may be required to hire additional employees in order to meet customer demands. If we are unable to attract or retain qualified employees, our business could be adversely affected.
We may not be able to implement our growth strategyplan and may not be able to successfully expand our business activity and increase our sales. Our failure to successfully integrate the operations of an acquired business or to retain key employees of acquired businesses and integrate and manage our growth may have a material adverse effect on our business, financial condition, results of operation or prospects. We may not be able to realize the anticipated benefits of any acquisition. Moreover, future acquisitions by us could result in potentially dilutive issuances of our equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to identifiable intangible assets, any of which could materially adversely affect our operating results and financial position. Acquisitions also involve other risks, including risks inherent in entering markets in which we have no or limited prior experience.
Reliance on government contracts
Our products are primarily sold to end-users such as governmental agencies, governmental authorities, and government-owned companies, many of which have complex and time consumingtime-consuming procurement procedures. A substantial period of time often elapses from the time we begin marketing a product until we actually sell that product to a particular customer. In addition, our sales to governmental agencies, authoritiesagencies', authorities' and companiescompanies' projects are directly affected by these customers’end-users budgetary constraints and the priority given in their budgets to the procurement of our products. A decrease in governmental funding for our customers’end-users’ budgets would adversely affect our results of operations. This risk is heightened during periods of global economic slowdown. Accordingly, governmental purchases of our systems, products and services may decline in the future if governmental purchasing agencies terminate, reduce or modify contracts.
Competition
The global market for safety, security, video management, site management solutions and products is highly fragmented and intensely competitive. It is characterized by changing technology, new product introductions and changing customer requirements. We compete principally in the market for perimeter intrusion detection systems, or PIDS and video management systems, and turnkey projects and solutions.systems. Some of our competitors and potential competitors have greater research, development, financial and personnel resources, including governmental support. We cannot assure you that we will be able to maintain the quality of our products relative to those of our competitors or continue to develop and market new products effectively. Continued competitive pressures could cause us to lose significant market share.
Explanation of Key Income Statement Items
Cost of revenues. Our cost of revenues for perimeter products consists of component and material costs, direct labor costs, subcontractor costs, shipping expenses, overhead related to manufacturing and depreciation. Our cost of revenues for turnkey projects consists primarily of component and material costs, subcontractor costs, direct labor costs and overhead related to the turnkey projects. Our cost of revenues for Video and Cyber Security sales consists primarily of direct labor costs, some component, material and subcontractor costs and overhead related to those sales.
Our gross margin is affected by the proportion of our revenues generated from perimeter products, turnkey projects and the Video and Cyber Security segments. Our revenues from Video and Cyber Security products generally have higher gross margins than our other segments.
Research and development expenses, net. Research and development expenses, net consists primarily of expenses for on-going research and development activities and other related costs.
Selling and marketing expenses. Selling and marketing expenses consist primarily of commission payments, compensation and related expenses of our sales teams, attendance at trade shows and advertising expenses and related costs for facilities and equipment.
General and administrative expenses. Our general and administrative expenses consist primarily of salary and related costs associated with our executive and administrative functions, public company related expenses, legal and accounting expenses, allowances for doubtful accounts and bad debts and other miscellaneous expenses. Staff costs include direct salary costs and related costs, such as severance pay, social security and retirement fund contributions, vacation and other pay.
Depreciation, Amortization and Impairment of goodwill. The amount of depreciation, amortization and Impairment of goodwill attributable to our perimeter products, turnkey projects and Video and Cyber-security segments for the three years ended December 31, 2018 were as follows:
| | Year Ended December 31, | |
| | 2016 | | | 2017 | | | 2018 | |
| | (in thousands) | |
Products | | $ | 632 | | | $ | 614 | | | $ | 586 | |
Turnkey projects | | | 512 | | | | 498 | | | | 879 | |
Video and Cyber-security | | | 596 | | | | 764 | | | | 1,759 | |
Total | | $ | 1,740 | | | $ | 1,876 | | | $ | 3,224 | |
Financial Expenses, Net. Financial expenses, net include exchange rate differences arising from changes in the value of monetary assets and monetary liabilities stated in currencies other than the functional currency of each entity, currency transactions as well as interest income on our cash and cash equivalents and short term investments.
Discussion of Critical Accounting Policies
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the use of different assumptions would likely result in materially different results of operations. Critical accounting policies are those that are both most important to the portrayal of our financial position and results of operations and require management’s most difficult, subjective or complex judgments. Although not all of our significant accounting policies require management to make difficult, subjective or complex judgments or estimates, the following policies and estimates are those that we deem most critical.
Revenue Recognition
We generates our revenues mainly from (1) installation of comprehensive security systems for which revenues are generated from long-term fixed price contracts; (2) sales of security products; (3) services and maintenance, which are performed either on a fixed-price basis or as time-and-materials based contracts; and (4) software license fees and related services.
Revenues from our contracts are recognized using the five-step model in ASC 606 - "Revenue from Contracts with Customers" ("ASC 606"). At first, we determine if an agreement with a customer is considered to be a contract to the extent it has a commercial substance, it is approved in writing by both parties, all rights and obligations including payment terms are identifiable, the agreement between the parties creates enforceable rights and obligations, and collectability in exchange for goods and services that will be transferred to the customer is considered as probable. We then assesse the transaction price for a contract in order to determine the consideration we expects to receive for satisfying the performance obligations called for in the contract. To the extent, the transaction price includes variable consideration (e.g., contract penalties, unpriced change orders or like measures), we usually estimate the most likely amount that should be included in the transaction price subject to constraints based on the specific facts and circumstances.
At the inception of a contract, we also evaluate and determines if a contract should be separated into more than one performance obligation. Our installation of comprehensive security systems contracts usually includes one-performance obligations due to a significant customization for each customer's specific needs and integrated system or solution.
For most of our installation of comprehensive security systems contracts, where our performance does not create an asset with an alternative use, we recognizes revenue over performance time because of continuous transfer of control to the customer. For these performance obligations that are satisfied over time, we generally recognize revenue using an input method with revenue amounts being recognized proportionately as costs are incurred relative to the total expected costs to satisfy the performance obligation. We believe that costs incurred as a portion of total estimated costs is an appropriate measure of progress towards satisfaction of the performance obligation since this measure reasonably depicts the progress of the work effort and we have the ability to make reasonably dependable estimates of the extent of progress towards completion, contract revenues and contract costs. In addition, contracts executed include provisions that clearly specify the enforceable rights regarding services to be provided and received by the parties to the contracts, the consideration to be exchanged, the manner, and the terms of settlement, including in cases of termination for convenience. Project costs include materials purchased to produce the system, related labor, overhead expenses and subcontractor's costs. The performance costs are measured by monitoring costs and efforts devoted using records of actual costs incurred to date in the project compared to the total estimated project requirements, which corresponds to the costs related to earned revenues. We estimate the profit on a contract as the difference between the total estimated transaction price and the total expected performance costs of the contract and recognizes revenue and costs over the life of the contract. Estimated gross profit or loss from long-term contracts may change due to changes in estimates resulting from differences between actual performance and original forecasts. Such changes in estimated gross profit are recorded in results of operations when they are reasonably determinable by management, on a cumulative catch-up basis.
For contracts that are deemed to be loss contracts, we establishe forward loss reserves for total estimated costs that are in excess of total estimated consideration under a contract in the period in which they become probable.
Fees are payable upon completion of agreed upon milestones and subject to customer acceptance. Amounts of revenues recognized in advance of contractual billing are recorded as unbilled accounts receivable. In most instances, the period between the advanced recognition of revenues and the customers' billing generally ranges between one to six months.
Revenues for performance obligations that are not recognized over time are recognized at the point in time when control is transferred to the customer (which is generally upon delivery) and include mainly revenues from the sales of security products and software license fees without significant installation work. We generally do not provide a right of return to our customers. For performance obligations that are satisfied at a point in time, we evaluates the point in time when the customer can direct the use of, and obtain the benefits from, the products. Shipping and handling costs are not considered performance obligations and are included in cost of sales as incurred.
Services and maintenance are performed under either fixed-price or time-and-materials based contracts. Under fixed-price contracts, we agree to perform certain work for a fixed price. Under time-and-materials contracts, we are reimbursed for labor hours at negotiated hourly billing rates and for materials. Our service contracts include contracts in which the customer simultaneously receives and consumes the benefits provided as the performance obligations are satisfied, accordingly, related revenues are recognized, as those services are performed or over the term of the related agreements.
Maintenance and support agreements provide customers with rights to unspecified software product updates, if and when available. These services grant the customers on line and telephone access to technical support personnel during the term of the service. We recognize maintenance and support services revenues ratably over the term of the agreement, usually one year.
We generate revenues from the sales of our software products user licenses as well as from maintenance, support, consulting and training services.
As required by ASC 606, following the determination of the performance obligations in the contract, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised license fees or services underlying each performance obligation. Standalone selling price is the price at which we would sell a promised license or service separately to a customer.
We capitalizes sales commission as costs of obtaining a contract when they are incremental and if they are expected to be recovered. Amortization of sales commission expense is included in selling and marketing expenses in the accompanying consolidated statements of income. For costs that we would have capitalized and amortized over one year or less, we have elected to apply the practical expedient and expense these contract costs as incurred.
Inventories
Inventories are stated at the lower of cost or market value. We periodically evaluate the quantities on hand relative to historical and projected sales volumes, current and historical selling prices and contractual obligations to maintain certain levels of parts. Based on these evaluations, inventory write-offs are provided to cover risks arising from slow-moving items, discontinued products, excess inventories, market prices lower than cost and adjusted revenue forecasts. Cost is determined as follows:
| · | Raw materials, parts and supplies – using the “first-in, first-out” method.
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| · | Work-in-progress and finished products –on the basis of direct manufacturing costs with the addition of allocable indirect manufacturing costs.
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During the years ended December 31, 2016, 2017 and 2018 we recorded inventory write-offs from continuing operations in the amounts of $0.2 million, $0.1 million and $0.1 million, respectively. Such write-offs were included in cost of revenues.
Income taxes
We account for income taxes in accordance with ASC 740 “Income Taxes.” This statement prescribes the use of the 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.
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and we must establish a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Increases in the valuation allowance result in additional expense to be reflected within the tax provision in the consolidated statement of income.
As of December 31, 2018, we had a net deferred tax asset of $3.3 million attributable to our subsidiaries. We had total estimated available tax loss carryforwards of $8.9 million with respect to our operations in Israel and our non-Israeli subsidiaries, had estimated total available tax loss carryforwards of $8.7 million, of which $6.1 million was attributable to our U.S. subsidiaries, which may be used as an offset against future taxable income for periods ranging between 1 and 20 years. As of December 31, 2018, we recorded a partial valuation allowance on these carryforward tax losses due to the uncertainty of their future realization. Utilization of U.S. net operating losses may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.
Goodwill
We have recorded goodwill as a result of acquisitions, which represents the excess of the cost over the net fair value of the assets of the businesses acquired. We follow ASC 350, “Intangibles – Goodwill and Other,” which requires goodwill to be tested for impairment, at the reporting unit level, at least annually or between annual tests in certain circumstances, and written down when impaired, rather than being amortized.
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 it does result in a more likely than not indication of impairment, the quantitative 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. We perform annual impairment test of goodwill as of December 31 of each year, or more frequently if impairment indicators are present
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): - Simplifying the Test for Goodwill Impairment”, which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the goodwill impairment test) for the purpose of measuring a goodwill impairment charge. Instead, an impairment charge shall be recognized based on the excess of a reporting unit’s carrying amount over its fair value. The standard shall be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019, for public entities. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We early adopted the new guidance on January 1, 2018.
We evaluate the risk of goodwill impairment at a reporting unit level. Our goodwill as of December 31, 2018, relates to our Video reporting unit, PIDS reporting unit and BAZ reporting unit. As of December 31, 2018, the fair values of these reporting units significantly exceeded their carrying values. Accordingly, we determined that (i) the estimated fair value of each reporting unit was substantially in excess of its carrying value, (ii) each reporting unit's goodwill balance was not at risk of impairment, and (iii) therefore, no additional disclosure was required.
During the three years ended December 31, 2018, we did not record any impairment charges relating to the goodwill allocated to our Product segment, BAZ reporting unit within the Project segment and Video reporting unit within the Video and Cyber security segment.
In 2018, we recorded an impairment loss of goodwill in the amount of $1 million with respect to our Cyber security reporting unit within the Video and Cyber security segment. During the years ended December 31, 2017 and 2016, we did not record any impairment charges relates to the goodwill allocated to the Cyber security reporting unit within the Video and Cyber security segment.
Goodwill annual impairment tests
As required by ASC 820, "Fair Value Measurements and Disclosures," we apply assumptions that marketplace participants would consider in determining the fair value of the reporting unit.
The material assumptions used for the goodwill annual impairment test for the PIDS reporting unit within the Products segment, according to the income approach for 2018, were five years of projected net cash flows, a weighted average cost of capital rate of 13% and a long-term growth rate of 3%. 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 the goodwill associated with the PIDS reporting unit within the Products segment.
The material assumptions used for the goodwill annual impairment test for the Cyber security reporting unit within the Video and Cyber security segment, according to the income approach for 2018, were five years of projected net cash flows, a weighted average cost of capital rate of 14% and a long-term growth rate of 2%. We consider current market conditions when determining the discount and growth rates to use in our analyses. As a result of our impairment testing we have determined that an impairment charge of $1 million was recorded, which was the remaining good will for that reporting unit.
The material assumptions used for the goodwill annual impairment test for the Video reporting unit within the Video and Cyber security segment, according to the income approach for 2018, were five years of projected net cash flows, a weighted average cost of capital rate of 16.4% and a long-term growth rate of 3%. We considered historical rates and current market conditions when determining the discount and growth rates to use in our analyses. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for goodwill.
The material assumptions used for the goodwill annual impairment test for the BAZ reporting unit within the Project segment, according to the income approach for 2018, were five years of projected net cash flows, a weighted average cost of capital rate of 15% and a long-term growth rate of 1.5%. We considered historical rates and current market conditions when determining the discount and growth rates to use in our analyses. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for goodwill.
Intangible assets
Our intangible assets are comprised of patents, acquired technology, customer relations and backlog. Intangible assets are amortized over their useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, in accordance with ASC 350, “Intangibles – Goodwill and Other.”
During the three years ended December 31, 2018, we did not record any impairment charges relating to intangible assets.
Impairment of long lived assets
We periodically evaluate our intangible assets and long-lived assets (mainly property and equipment) in all of our reporting units for potential impairment indicators in accordance with ASC 360, “Property, Plant and Equipment”, or “ASC 360”. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions, operational performance and prospects of our acquired businesses and investments. Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. In measuring the recoverability of assets, we are required to make estimates and judgments in assessing our future cash flows which derive from the estimated useful life of our current primary assets, and compare that with the carrying amount of the assets. Additional significant estimates used by management in the methodologies employed to assess the recoverability of our long-lived assets include estimates of future short-term and long-term growth rates, useful lives of assets, market acceptance of products and services, our success in winning bids and other judgmental assumptions, which are also affected by factors detailed in our risk factors section in this annual report.
During the three years ended December 31, 2018, we did not record any impairment charges relating to long lived assets.
Functional Currency and Financial Statements in U.S. Dollars
While our functional currency in Israel is the NIS, our reporting currency is the U.S. dollar. Translation adjustments resulting from translating our financial statements from NIS and other local operation currencies to the U.S. dollar are reported as a separate component in shareholders’ equity.
The first step in the translation process is to identify the functional currency for each entity included in the financial statements. The accounts of each entity are then “re-measured” in its functional currency. All transaction gains and losses from the re-measurement of monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate. Non-monetary assets and liabilities denominated in foreign currency and measured at cost are translated at the exchange rate at the date of the transaction.
After the re-measurement process is complete the financial statements are translated into our reporting currency, which is the U.S. dollar, using the current rate method. Equity accounts are translated using historical exchange rates. All other balance sheet accounts are translated using the exchange rates in effect at the balance sheet date. Statement of operations amounts have been translated using the average exchange rate for the year. The resulting translation adjustments are reported as a component of shareholders’ equity. For the years ended December 31, 2016, 20172021, 2020 and 2018,2019, our foreign currency translation adjustments totaled $0.4$9.7 million, $9.1 million and $5.9 million respectively. We recorded foreign exchange losses, net of $1 million, $1 million and $2.8$1.3 million in the years ended December 31, 2021, 2020 and 2019, respectively. The losses in 2016 and 2017 were exacerbated as a result of our increasedhigher cash balances. In late 2016 we completed a rights offering that provided us with proceedsbalances during the years. The majority of $ 23.6 million, which we deposited into our bank accountsthose balances were denominated in Israel. These balancesUSD and were translated into NIS, which depreciated by 1.5%3.3%, 7.0% and 9.8%7.8% against the U.S. dollar in 20162021, 2020 and 2017, respectively and in 2018 we recorded a gain of approximately $ million as the NIS appreciated by 8.1% against the U.S. dollar.2019, respectively.
Concentrations of credit risk
Financial instruments that are potentially subject to concentrations of credit risk consist principally of cash and cash equivalents, short and long-term bank deposits, unbilled accounts receivable, trade receivables, long-term trade receivables and long-term loans.
OfAs of December 31, 2021, $13,616 of our cash and cash equivalents and short-termrestricted cash and restricted bank deposits at December 31, 2018, $25.6 million was deposited withwere invested in major Israeli banks. An additional $29.4 million was depositedand U.S. banks, and approximately $12,787 were invested in other banks, mainly with the Royal Bank of Canada, BBVA Bankcomer, ComericaDeutsche Bank, Natwest Bank and Deutsche Bank.BBVA Bancomer. Cash and cash equivalents deposited with U.S. banks or other banks may be in excess of insured limits and are not insured in other jurisdictions. Generally, these deposits maybe redeemed upon demand and therefore bear low risk.
The trade receivables and the unbilled accounts receivable of our company and our subsidiaries are derived from sales to large and solid organizations located mainly in Israel, the United States, Canada, Africa, Mexico and Europe. We perform ongoing credit evaluations of our customers and to date have generally not experienced any material losses. An allowance for doubtful accountscredit losses is determinedrecognized with respect to those amounts that we have determined to be doubtful of collection and in accordance with an aging policy.collection. In certain circumstances, we may require letters of credit, other collateral or additional guarantees. During the years ended December 31, 2016, 20172021, 2020 and 20182019 we recorded $0.4$0.1 million, $0.3$0.1 million and $1.5$0.1 million of expenses related to doubtful accounts,credit losses, respectively. As of December 31, 2018,2021, our allowance for doubtful accountscredit losses amounted to $2.8$0.1 million.
We have no significant off-balance sheet concentration of credit risks, such as foreign exchange contracts or foreign hedging arrangements, except derivative instruments, which are detailed below.
Recent Developments
36
The ongoing COVID-19 pandemic has had an adverse effect on our industry and the markets in which we operate. The COVID-19 outbreak has impacted the verticals in which our customers operate and has resulted in a slowdown in our business with some of our customers. We have experienced postponed orders and suspended decision making in the markets that are likely to be negatively affected by COVID-19. Further, the guidance of social distancing and the requirements to work from home in key territories such as Canada, Germany, the USA and other countries, in addition to greatly reduced travel globally, has resulted in a substantial curtailment of business activities, which has affected and is likely to continue to affect our ability to conduct fieldwork as well as deliver products and services, thus, delaying some of the revenues expected in 2021 to a later date. We are unable at this time to estimate the extent of the effect of COVID-19 on our business. In order to mitigate the impact of COVID-19 on our business, we have adopted a plan to reduce expenses and have enacted cost-savings measures. In addition, we have benefitted from approximately $1 million in subsidies from the Canada Emergency Wage Subsidy program.
Most of our administrative functions can be performed remotely. Our ability to collect money, pay bills, handle customer communications, schedule production, and order raw materials necessary for our production has not been materially impacted. To date we have not experienced a significant change in the timeliness of payments of our invoices and our cash position remains stable.
We had to occasionally adjust our manufacturing routine due to restrictions resulting from the Covid-19 pandemic, such as mandatory quarantines, social distancing, and an occasional absence of our manufacturing workforce. We had managed to continue manufacturing and deliveries of our products to our customers throughout 2021. Nevertheless, a potential increase of the Covid-19 pandemic-related quarantines and social distancing requirements, and the inability of our workforce to continue or quickly resume manufacturing after periods of absence, may disrupt our manufacturing operations, resulting in an adverse effect on our financial results
ResultsSupply chain disruptions have been exacerbated in 2021 as major shipping ports and manufacturing facilities in Asia have been affected by outbreaks of Operations
Duethe Covid-19 variants, either closing or reducing capacity. The disruption to the nature of our customersglobal supply chains has led to longer supplier delivery times and products, our revenues are often generated from a relatively small number of large orders. Consequently, individual orders from individual customers can represent a substantial portion of our revenuesan increase in any one period and significant revenues from a customer during one period may not be followed by additional significant revenues from the same customer in subsequent periods. Accordingly, our revenues and operating results may vary substantially from period to period. Consequently, we do not believe that our revenues and operating results should necessarily be judged on a quarter-to-quarter comparative basis.material prices.
The following table presents certain financial data expressed as a percentage of revenues for the periods indicated:indicated for the continuing operations:
| | Year Ended December 31 | | | | |
| | 2016 | | | 2017 | | | 2018 | | | | | | | | | | |
Revenues | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
Cost of revenues | | | 51.0 | | | | 51.3 | | | | 56.5 | | | | | | | | | | | | | |
Gross profit | | | 49.0 | | | | 48.7 | | | | 43.5 | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development, net | | | 10.0 | | | | 10.2 | | | | 7.4 | | | | 11 | % | | | 12 | % | | | 14 | % |
Selling and marketing, net | | | 25.9 | | | | 28.2 | | | | 20.0 | | | | 29 | % | | | 26 | % | | | 29 | % |
General and administrative | | | 11.0 | | | | 12.2 | | | | 11.0 | | | | 20 | % | | | 19 | % | | | 16 | % |
Impairment of goodwill | | | - | | | | - | | | | 1.1 | | |
Operating income (loss) | | | 2.2 | | | | (1.9 | ) | | | 4.1 | | |
Financial income (expenses), net | | | (0.9 | ) | | | (6.2 | ) | | | 1.5 | | |
Income before income taxes | | | 1.3 | | | | (8.1 | ) | | | 5.5 | | |
Operating income | | | | 3 | % | | | 9 | % | | | 2 | % |
Financial (expenses), net | | | | (3 | )% | | | (3 | )% | | | (3 | )% |
Income (loss) before income taxes | | | | - | | | | 6 | % | | | (2 | )% |
Taxes on income (tax benefit) | | | 0.2 | | | | (2.6 | ) | | | (2.2 | ) | | | | | | | | | | | | |
Net income | | | 1.5 | | | | (10.8 | ) | | | 3.3 | | |
Income (loss) from continuing operations | | | | | | | | | | | | | |
Year Ended December 31, 20182021 Compared with Year Ended December 31, 20172020 (for continuing operations)
Revenues.Revenues from continuing operations increased by 44%4.7% to $92.6$34.9 million for the year ended December 31, 20182021 from $64.3$33.4 million for the year ended December 31, 2017. Revenues from sales of perimeter products increased by 23.9%2020. The increase relates to $27.6 million in 2018 from $22.3 million in 2017, primarily due to the improved management and improved market conditions in North America and EMEA markets. Revenues from turnkey projects increased by 64.3% to $57.1 million in 2018 from $34.7 million in 2017, primarily due to the increased bookings and executionssome recovery in our worldwide projects mainly inbusiness which was impacted by the Americas and Israel, as well as consolidation of revenues from the ESC BAZ reporting unit. Revenues of the Video and Cyber security segment increased by 13.3% to $9.5 million in 2018 from $8.4 million in 2017, primarily due to the increase in VMS software and hardware sales.COVID-19 pandemic.
Cost of revenues. Cost of revenues increased by 58.6%15.0% to $52.3$12.9 million for the year ended December 31, 20182021 from $33$11.2 million for the year ended December 31, 2017. This increase was primarily due to the increase in revenues.2020. Cost of revenues as a percentage of revenues increased slightly to 56.5%37.0% in 20182021 from 51.3%33.7% in 2017,2020, primarily due to the increased percentage of lower margin projects and video hardware sales within our revenue mix.mix and some increases in the material costs.
Research and development expenses, net.Research and development expenses, net increased slightly decreased by 4.5% 0.9% to $6.9$3.9 million for the year ended December 31, 20182021 from $6.6$4.0 million for the year ended December 31, 2017. The increase in mainly due to the acquisition of ESC BAZ during 2018.2020.
Selling and marketing expenses. Selling and marketing expenses increased by 2.2%16.1% to $18.6$10.0 million for the year ended December 31, 20182021 from $18.2$8.6 million for the year ended December 31, 2017.2020, primarily due to the increase in revenues, travel and marketing activities in 2021. Selling and marketing expenses as a percentage of revenues increased to 28.6% in 2021 from 25.8% in 2020. The increase is driven mainly by the increase in travel, sales related expenses and marketing activities.
General and administrative expenses. General and administrative expenses increased by 7.6% to $7 million for the year ended December 31, 2021 from $6.5 million for the year ended December 31, 2020. The increase is mainly due to the increase in operation and some one-time costs. General and administrative expenses amounted to 20% and 19.4% of revenues in 2021 and 2020, respectively.
Operating income. We had operating income of $1.1 million for the year ended December 31, 2021 compared to operating income of $3.1 million for the year ended December 31, 2020. The decrease in operating income was primarily attributable to the reduction in gross margins due to revenues mix and increase in materials costs, as well as operating expenses increase, mainly from sales related expenses, travel and marketing costs.
Financial (expenses), net. Our financial expenses, net, for the year ended December 31, 2021 was $1 million compared to financial expenses, net of $1 million for the year ended December 31, 2020. The financial expenses in 2021 as well as in 2020 were primarily attributable to foreign exchange loss, net.
Income taxes.We recorded tax expenses of $2.3 million in the year ended December 31, 2021 compared to tax expenses of $1.8 million in the year ended December 31, 2020, primarily due to a different geographical mix of pre-tax profitability as well as due to provisions for uncertain tax positions.
Year Ended December 31, 2020 Compared with Year Ended December 31, 2019 (for continuing operations)
Revenues. Revenues from continuing operations decreased by 5.1% to $33.4 million for the year ended December 31, 2020 from $35.1 million for the year ended December 31, 2019. The decrease relates mainly to the impact of the COVID-19 pandemic.
Cost of revenues. Cost of revenues decreased by 16.3% to $11.2 million for the year ended December 31, 2020 from $13.4 million for the year ended December 31, 2019. Cost of revenues as a percentage of revenues decreased to 33.7% in 2020 from 38.2% in 2020, primarily due to our revenue mix and due to subsidies granted to our Canadian subsidiary under the Canada Emergency Wage Subsidy program.
Research and development expenses, net. Research and development expenses, net decreased by 22% to $4 million for the year ended December 31, 2020 from $5.1 million for the year ended December 31, 2019.
Selling and marketing expenses. Selling and marketing expenses decreased by 16.3% to $8.6 million for the year ended December 31, 2020 from $10.3 million for the year ended December 31, 2019, primarily due to the decrease in revenues, travel and marketing activities in 2020. Selling and marketing expenses as a percentage of revenues, decreased to 20%25.8% in 20182020 from 28.2%29.3% in 2017, primarily2019. The decrease is driven mainly by the reduction in travel, as well as due to the increase in revenues in 2018.subsidies granted to our Canadian subsidiary.
General and administrative expenses. General and administrative expenses increased by 29.4%12.9% to $10.2$6.5 million for the year ended December 31, 20182020 from $7.9$5.7 million for the year ended December 31, 2017.2019. The increase is mainly duedriven by increased legal costs, partially offset by subsidies granted to the acquisition of ESC BAZ, an increase in the provision for a doubtful account and to severance costs.our Canadian subsidiary. General and administrative expenses amounted to 11%19.4% and 12.2%16.3% of revenues in 20182020 and 2017,2019, respectively.
ImpairmentOperating income. We had operating income of goodwill. Impairment of goodwill amounted to $1$3.1 million for the year ended December 31, 2018, which impairment relates2020 compared to our Cyber security reporting unit within the Video and Cyber security segment. There were no impairment charges in 2017.
Operating income (loss). We had operating income of $3.8$0.6 million for the year ended December 31, 2018 compared to an operating loss of $1.2 million for the year ended December 31, 2017.2019. The increase in operating income was primarily attributable to increase in sales and gross profit, as well as the beneficial impact of operating cost reduction initiatives. The operating income (loss) of our business segments in the years ended December 31, 2017 and 2018 were as follows:
| | Year Ended December 31 | |
| | 2017 | | | 2018 | |
| | (In thousands) | |
Perimeter products | | $ | 242 | | | $ | 2,863 | |
Turnkey projects | | | 1,762 | | | | 2,782 | |
Video and Cyber Security | | | (2,830 | ) | | | (1,298 | ) |
Eliminations | | | (418 | ) | | | (592 | ) |
Total | | $ | (1,244 | ) | | $ | 3,755 | |
Our perimeter products segment recorded operating income of $2.9 million for the year ended December 31, 2018 compared to operating income of $0.2 million for the year ended December 31, 2017, primarily as a result of an increase in revenues and gross profit, partially offset by the increase in the provision for a doubtful account. Our turnkey project segment recorded operating income of $2.8 million in the year ended December 31, 2018 compared to an operating income of $1.8 million for the year ended December 31, 2017, primarily as a result of an increase in revenues. Our Video and Cyber security segment recorded an operating loss of $1.3 million in the year ended December 31, 2018 compared to an operating loss of $2.8 million for the year ended December 31, 2017. The improved result is primarily due to an increase in revenues and operating costs reductions, partially offset byincluding the goodwill impairment.non-recurring subsidy, granted to our Canadian subsidiary under the Canada Emergency Wage Subsidy program.
Financial income,(expenses), net. Our financial income, net, for the year ended December 31, 2018 was $1.4 million compared to financial expense, net of $4 million for the year ended December 31, 2017. The financial income in 2018 were primarily attributable to foreign exchange gain, net of $1.1 million compared to foreign exchange loss, net of $4 million in 2017.
Income taxes. We recorded tax expenses of $2.1 million in the year ended December 31, 2018 compared to tax expenses of $1.7 million in the year ended December 31, 2017, primarily due to the increase in pre-tax income and changes in our net deferred tax assets.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Revenues. Revenues decreased by 5.2% to $64.3 million for the year ended December 31, 2017 from $67.8 million for the year ended December 31, 2016. Revenues from sales of perimeter products decreased by 31.1% to $22.3 million in 2017 from $32.4 million in 2016, primarily due to the decrease in sales in North America. Revenues from turnkey projects increased by 9.2% to $34.7 million in 2017 from $31.8 million in 2016, primarily due to the executions in our worldwide projects. Revenues of the Video and Cyber security segment increased by 48.4% to $8.4 million in 2017 from $5.6 million in 2016, primarily due to additional quarter of revenues in 2017, as Aimetis was acquired on April 1, 2016 and to an increase in sales.
Cost of revenues. Cost of revenues decreased by 4.6% to $33 million for the year ended December 31, 2017 from $34.6 million for the year ended December 31, 2016. This decrease was primarily due to the decrease in revenues. Cost of revenues as a percentage of revenues increased slightly to 51.3% in 2017 from 51% in 2016, primarily due to the revenue mix.
Research and development expenses, net. Research and development expenses, net decreased by 3.3% to $6.6 million for the year ended December 31, 2017 from $6.8 million for the year ended December 31, 2016.
Selling and marketing expenses. Selling and marketing expenses increased by 3.5% to $18.2 million for the year ended December 31, 2017 from $17.5 million for the year ended December 31, 2016. Selling and marketing expenses amounted to 28.2% and 25.9% of revenues in 2017 and 2016, respectively.
General and administrative expenses. General and administrative expenses increased by 5.5% to $7.9 million for the year ended December 31, 2017 from $7.4 million for the year ended December 31, 2016. General and administrative expenses amounted to 12.2% and 11% of revenues in 2017 and 2016, respectively.
Operating income (loss). We had operating loss of $1.2 million for the year ended December 31, 2017 compared to operating income of $1.5 million for the year ended December 31, 2016. The decrease in operating income was primarily attributable to loss incurred by the Video and Cyber Security segment. The operating income (loss) of our business segments in the years ended December 31, 2016 and 2017 were as follows:
| | Year Ended December 31 | |
| | 2016 | | | 2017 | |
| | (In thousands) | |
Perimeter products | | $ | 5,799 | | | $ | 242 | |
Turnkey projects | | | (163 | ) | | | 1,762 | |
Video and Cyber Security | | | (3,383 | ) | | | (2,830 | ) |
Eliminations | | | (758 | ) | | | (418 | ) |
Total | | $ | 1,495 | | | $ | (1,244 | ) |
Our perimeter products segment recorded operating income of $0.2 million for the year ended December 31, 2017 compared to operating income of $5.8 million for the year ended December 31, 2016, primarily as a result of reduction in revenues. Our turnkey project segment recorded operating income of $1.8 million in the year ended December 31, 2017 compared to an operating loss of $0.2 million for the year ended December 31, 2016, primarily as a result of the increase in revenues. Our Video and Cyber security segment recorded an operating loss of $2.8 million in the year ended December 31, 2017 compared to an operating loss of $3.4 million for the year ended December 31, 2016.
Financial income, net. Our financial expenses, net, for the year ended December 31, 20172020 was $4$1 million compared to financial expense,expenses, net of $0.6$1.1 million for the year ended December 31, 2016.2019. The financial expenses in 20172020 as well as in 2019 were primarily attributable to foreign exchange loss, net of 4 million compared to foreign exchange loss, net of $0.6 million in 2016.net.
Income taxes.We recorded tax expenses of $1.7$1.8 million in the year ended December 31, 20172020 compared to a tax benefitexpenses of $0.2$0.3 million in the year ended December 31, 2016,2019, primarily due to changes in our net deferreda different geographical mix of pre-tax profitability as well as due to provisions for uncertain tax assets.positions.
Seasonality
Our operating results are characterized by a seasonal pattern, with a higher volume of revenues towards the end of the year and lower revenues in the first part of the year. This pattern, which is expected to continue, is mainly due to two factors:
| · | our customers are mainly budget-oriented organizations with lengthy decision processes, which tend to mature late in the year; and |
our customers are mainly budget-oriented organizations with lengthy decision processes, which tend to mature late in the year; and
| · | due to harsh weather conditions in certain areas in which we operate during the first quarter of the calendar year, certain projects and services are put on hold and consequently revenues are delayed. |
due to harsh weather conditions in certain areas in which we operate during the first quarter of the calendar year, certain projects and services are put on hold and consequently revenues are delayed.
Our revenues are partly dependent on government procurement procedures and practices and because we receive large product orders from a relatively small number of customers,therefore our revenues and operating results are subject to substantial periodic variations.
Impact of Inflation and Currency Fluctuations on Results of Operations, Liabilities and Assets
We sell most of our products in North America, Africa, Latin America Europe and Israel.APAC. Our financial results, which are reported in U.S. dollars, are affected by changes in foreign currency. Our revenues are primarily denominated in U.S. dollars Euros, Mexican Peso and NIS,Euros, while a portion of our expenses, primarily labor expenses, is incurred in NIS CAD and Mexican Peso.CAD. Additionally, certain assets, especially cash, trade receivables and other accounts receivables, as well as part of our liabilities are denominated in NIS and CAD. As a result, fluctuations in rates of exchange between the U.S. dollar and non-U.S. dollar currencies may affect our operating results and financial condition. The dollar cost of our operations in Israel and Canada may be adversely affected by the appreciation of the NIS andagainst the U.S. dollar. The dollar cost of our operations in Canada may be adversely affected by the appreciation of the CAD against the U.S. dollar. In addition, the value of our non-U.S. dollar revenues could be adversely affected by the depreciation of the U.S. dollar against such currencies.
The appreciation of the NIS, the Mexican PesosCAD and the CADEuro 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. Conversely, the depreciation of the NIS, the Mexican PesoCAD and the CADEuro 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 NIS, Mexican Pesos or inNew Israeli Shekel, Canadian dollars and Euro (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 NIS, Mexican PesosNISs, CADs and CADsEuros or receivables payable in NIS, Mexican Pesos or CAD and Euro (unless such receivables are linked to the U.S. dollar). In addition, the U.S. dollar value of revenues and expenses denominated in NIS, Mexican PesosCAD or CADEuro would increase. Because foreign currency exchange rates fluctuate continuously, exchange rate fluctuations may have an impact on our profitability and period-to-period comparisons of our results. The effects of foreign currency re-measurements are reported in our consolidated financial statements in current operations.
The following table presents information about the rate of inflation in Israel, the rate of devaluation or appreciation of the NIS against the dollar, anddollar. These metrics provide insight on the rateimpact of inflation in Israel adjusted for the devaluation:currency fluctuations on our financial results.
Year ended December 31, | | Israeli inflation rate % | | | NIS devaluation (appreciation) rate % | | | Israeli inflation adjusted for devaluation (appreciation) % | | | NIS devaluation (appreciation) rate % |
2014 | | | (0.2 | ) | | | 12.0 | | | | (12.2 | ) | |
2015 | | | (1.0 | ) | | | (0.3 | ) | | | (0.7 | ) | |
2016 | | | (0.2 | ) | | | (1.5 | ) | | | 1.3 | | |
| | | |
2017 | | | 0.4 | | | | (9.8 | ) | | | 10.2 | | | (9.8) |
2018 | | | 1.3 | | | | 8.1 | | | | (6.8 | ) | | 8.1 |
2019 | | | (7.8) |
2020 | | | (7.0) |
2021 | | | (3.3) |
The U.S. dollar cost of our operations in Canada is influenced by the exchange rate between the U.S. dollar and the CAD. In 20162021, 2020 and 20172019 the CAD appreciated against the U.S. dollar by 2.7%0.1%, 2.1% and 7%, respectively. In 2018 the CAD depreciated against the U.S. dollar by 8.6%. In addition, the U.S. dollar cost of our operations in Mexico is influenced by the exchange rate between the U.S. dollar and the Mexican Peso. In 2016 Peso depreciated against the U.S. dollar by 19.2%. In 2017 and 2018 the Mexican Peso appreciated against the U.S. dollar by 4.5% and 0.4%4.4%, respectively.
In 2018,2021, 2020 and 2019, foreign currency fluctuations had a positivenegative impact on our results of operations as we recorded foreign exchange gain,loss, net of $1.1$1 million, compared to $4$1 million of foreign exchange loss, net in 2017.and $1.3 million, respectively. We expect that our results of operations will continue to be affected by currency fluctuations in the future.
Conditions in Israel
We are incorporated under the laws of and our principal executive offices and manufacturing and research and development facilities are located in, the State of Israel. See Item 3D “Key Information – Risk Factors – Risks Relating to Our Location in Israel” for a description of governmental, economic, fiscal, monetary and political policies or factors that have materially affected or could materially affect our operations.
Effective Corporate Tax Rate
The Israeli corporate tax rate was 25% in 2016, 24% in 2017 andhas been 23% insince 2018.
Our effective corporate tax rate may substantially exceed the Israeli tax rate since our U.S.-based subsidiaries will generally be subject to applicable federal, state, local and foreign taxation, and we may also be subject to taxation in the other foreign jurisdictions in which we own assets, have employees or conduct activities. Because of the complexity of these local tax provisions, it is not possible to anticipate the actual combined effective corporate tax rate, which will apply to us.
As of December 31, 2018,2021, we had a net deferred tax assetsliability of $3.3$0.4 million, attributable to our subsidiaries.of which $0.7 million in domestic deferred tax liability offset by $0.3 million in foreign deferred tax asset. We had total estimated available carryforwardoperating tax lossesloss carryforwards of $8.9$9.7 million with respect to our operations in Israel to offset against future taxable income. We have recorded a full valuation allowance for such carryforward tax losses due to the uncertainty of their future realization. As of December 31, 2018,2021, our subsidiaries outside of Israel had estimated total available carryforward operating tax losses of $8.7$4.6 million, of which $3.6 million was attributable to our U.S. subsidiaries (federal only), which may be used as an offset against future taxable income for periods ranging between 1 and 20 years. Utilization of U.S. net operating losses may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state tax law provisions. The annual limitation may result in the expiration of net operating losses before utilization.
Trade Relations
Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel is a member of the World Trade Organization and is a signatory to the General Agreement on Tariffs and Trade. Israel is also a member of the Organization for Economic Co-operation and Development, or the OECD, an international organization whose members are governments of mostly developed economies. The OECD’s main goal is to promote policies that will improve the economic and social well-being of people around the world. In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada and Japan. These preferences allow Israel to export products covered under such programs either duty-free or at reduced tariffs.
B. | Liquidity and Capital Resources |
Israel and the European Union Community, known as the “European Union,” concluded a Free Trade Agreement in July 1975 that confers some advantages with respect to Israeli exports to most European countries and obligates Israel to lower its tariffs with respect to imports from these countries over a number of years. In 1985, Israel and the United States entered into an agreement to establish a Free Trade Area. The Free Trade Area has eliminated all tariff and some non-tariff barriers on most trade between the two countries. On January 1, 1993, an agreement between Israel and the European Free Trade Association, known as the “EFTA,” established a free-trade zone between Israel and the EFTA nations. In November 1995, Israel entered into a new agreement with the European Union, which includes a redefinition of rules of origin and other improvements, such as allowing Israel to become a member of the Research and Technology programs of the European Union. In recent years, Israel has established commercial and trade relations with a number of other nations, including Russia, China, India, Turkey and other nations in Eastern Europe and the Asia-Pacific region. In addition, Israel has entered into a free trade agreement with the MercoSur countries (Brazil, Paraguay, Argentina and Uruguay) which became fully effective in September 2011. Generally, the purpose of this agreement is to reduce the custom rates between Israel and these countries and to abolish them completely in certain cases. Israel is the first country outside of Latin America to enter into such an agreement with the MercoSur countries.
B. Liquidity and Capital Resources
Our working capital at December 31, 2018 and 2017 was $60.8 million and $59.4 million, respectively. Cash and cash equivalents amounted to $38.7$26.4 million at December 31, 20182021 compared to $22.5$24.5 million at December 31, 2017.2020. The increase in cash and cash equivalents is primarily due to the decreasenet cash provided by operating activities as well as investing activities which was offset by net cash used in Short-term and long-term deposits, restricted bank deposits and escrow deposits, which amounted to $16.4 million at December 31, 2018 compared to $30 million at December 31, 2017.financing activities. Our cash and cash equivalents, short and long-term bank deposits are held in various banks, mainly in U.S. dollars, Euros, NIS and CAD.
From our inception until our initial public offering in March 1993, we financed our activities mainly through cash flow from operations and bank loans.operations. In March 1993, we received proceeds of $9.8 million from our initial public offering of 1,380,000 ordinary shares. Subsequently, we made follow-on public offerings, in February 1997 (of 2,085,000 ordinary shares) and in April 2005 (of 1,700,000 ordinary shares), in which we raised $9.4 million and $14.9 million, respectively. To allow us to begin to implement a new strategic plan, on September 8, 2010, a company affiliated with Mr. Nathan Kirsh, our former principal shareholder, provided us with a bridge loan of $10.0 million. To repay the loan and to raise permanent capital for general working capital purposes including facilitating the implementation of our new business strategy, in July and August 2011 we raised $16.2 million from a rights offering of 5,273,274 ordinary shares and a private placement of 150,000 of our ordinary shares.
In October 2016, we completed a rights offering in which we received gross proceeds of approximately $23.8$23.8 million from the sale of 6,170,386 ordinary shares.shares. Our controlling shareholders, FIMI V Funds purchased 3,392,869 ordinary shares including through an exercise of over-subscription rights.
In 2016, we paid approximately $12.1 million, (including $0.8 million placed in escrow to secure potential indemnity obligations and net of cash acquired) in consideration of our acquisition of Aimetis in 2016, and approximately $0.4 million (net of $2.4 million of acquired cash) in consideration of our acquisition of a majority interest in ESC BAZ Ltd. in 2018.
In connection with our acquisition of CyberSeal, we issued warrants to purchase 898,203 of our ordinary shares at an exercise price of $ 4.16$4.16 per share to CyberSeal's former owners. Of such warrants, 60,000 warrants were exercised in 2017. In October 2018, we agreed to purchase the remaining 838,203 warrants from the warrant holders for an aggregate consideration of $375,000. Under Israeli law, the consummation of such transaction was subject to court approval, which was granted on January 16, 2019. The closing of the purchase of the warrants occurred onin March 2019.
On December 7, 2020, following receipt of the required court approval under Israeli law, we announced a cash distribution in the amount of US$1.079 per share (approximately US$ 25 million in the aggregate) which was paid on December 28, 2020. On December 31, 2020 we paid approximately $1.9 million in consideration for the remaining 45% interest in ESC BAZ.
On August 16, 2021, following the completion of the sale of our Integration Solution Division and the receipt of the required court approval under Israeli law, we announced a cash distribution in the amount of US$1.725 per share (approximately US$40 million in the aggregate) which was paid on September 22, 2021.
We expect that our total research and development expenses in 20192022 will be approximately $7.7$5 million. Our research and development plan for 20192022 covers development of new and innovative products, as well as the improvement of existing technologies.
We believe that our cash and cash equivalents, bank facilities, bank deposits and our expected cash flows from operations will be sufficient to meet our ongoing cash requirements through 2019.2022. However, our liquidity could be negatively affected by a decrease in demand for our products, including the impact of potential reductions in customer purchases that may result from the current general economic climate.
Cash Flows
The following table summarizes our cash flows for the periods presented:
| | Year ended December 31, | | | | |
| | 2016 | | | 2017 | | | 2018 | | | | | | | | | | |
| | (in thousands) | | | (in thousands) | |
Net cash provided by (used in) operating activities | | | 8,933 | | | | (1,952 | ) | | | 7,326 | | | | 6,029 | | | | 2,317 | | | | (4,523 | ) |
Net cash provided by (used in) investing activities | | | (40,703 | ) | | | 3,176 | | | | 10,121 | | | | 31,725 | | | | 16,220 | | | | (4,779 | ) |
Net cash provided by (used in) financing activities | | | 25,006 | | | | 504 | | | | 77 | | | | (39,683 | ) | | | (28,785 | ) | | | 178 | |
Effect of exchange rate changes on cash and cash equivalents | | | 160 | | | | 2,076 | | | | (1,029 | ) | | | 981 | | | | 2,828 | | | | 2,089 | |
Increase (decrease) in cash, cash equivalents and restricted cash | | | (6,604 | ) | | | 3,804 | | | | 16,495 | | | | (948 | ) | | | (7,420 | ) | | | (7,035 | ) |
Cash, cash equivalents and restricted cash at the beginning of the year | | | 28,105 | | | | 21,501 | | | | 25,305 | | |
Cash, cash equivalents and restricted cash at the end of the year | | $ | 21,501 | | | $ | 25,305 | | | $ | 41,800 | | |
Cash, cash equivalents and restricted cash at the beginning of the year, including cash attributable to discontinued operations | | | | | | | | | | | | | |
Cash, cash equivalents and restricted cash at the end of the year, including cash attributable to discontinued operations | | | | | | | | | | | | | |
Less: Cash, cash equivalents, and restricted cash attributable to discontinued operations | | | | | | | | | | | | | |
Cash, cash equivalents, and restricted cash from continuing operations | | | | | | | | | | | | | |
Net cash provided by operating activities was approximately $8.9 million and $7.3 million in the years ended December 31, 20162021 and 2018,2020 was approximately $6.0 million and $2.3 million, respectively, compared to net cash used in operating activities of approximately $2$4.5 million in the year ended December 31, 2017.2019.
Net cash provided by operating activities in the year ended December 31, 20182021 was primarily attributable to 2018our profit in 2021, as well as $3.2$1.9 million of depreciation and amortization expenses, a decrease of $11.1 million in trade receivables, a decrease of $2.6 million in unbilled receivables and a decrease of $1.4 million in deferred income taxes. This was offset in part by the gain on divestiture of the Integrated Solutions Division of $14.9 million, a decrease of $0.8 million in trade payables, an increase of $0.7 million in inventories, a decrease of $0.5 million in customer advances, changes in accrued severance pay, net of $0.3 million and a decrease of $0.2 million in other accounts payable and accrued expenses and deferred revenues.
Net cash provided by operating activities in the year ended December 31, 2020 was primarily attributable to our profit in 2020, as well as $2.0 million of depreciation and amortization expenses, an increase of $3.2$1.9 million in customer advances,trade payables, an increase of $3.1$1.8 million in other accounts payable and accrued expenses and deferred revenues, an increasea decrease of $1.1$0.9 million in trade payablesdeferred income taxes and a decrease of $0.6$0.8 million in trade receivables.inventories. This was offset in part by an increase of $2.1 million in unbilled receivables, an increase of $1.6 million in trade receivables, a decrease of $1.5 million in customer advances and an increase of $0.5 million in other accounts receivables and prepaid expenses.
Net cash used in operating activities in the year ended December 31, 2019 was primarily attributable to a decrease of $5.1 million in customer advances, an increase of $4 million in trade receivables, an increase of $2.3 million in unbilled receivables, a decrease of $1.3 million in trade payables and an increase of $0.6 million in deferred income taxes. This was offset in part by 2019 profit, as well as $2.1 million of depreciation and amortization expenses, a decrease of $2.1 million in inventories, an increase of $1 million in deferred income taxes, an increase of $1.3 million in other accounts receivablespayable and prepaidaccrued expenses and deferred revenues and an increase of $0.5$0.7 million in accrued interest and exchange differences on short-term and other long-term liabilities.
Net cash used in operating activities in the year ended December 31, 2017 was primarily attributable to our 2017 loss, as well as an increase of $2.1 million in inventories, an increase of $1.6 million in unbilled receivables and an increase of $0.5 million in deferred income taxes. This was offset in part by an increase of $3 million in accrued interest and exchange differences on short-term and other long-term liabilities, $1.9 million of depreciation and amortization expenses, an increase of $1.5 million in other accounts payable and accrued expenses and deferred revenues, an increase of $1.2 in customer advances, an increase of $0.8 million in trade payables and a decrease of $0.5 million in short-term and long-term trade receivables.
Net cash provided by operating activities in the year ended December 31, 2016 was primarily attributable to 2016 income, as well as an increase of $3.4 million in customer advances, a decrease of $1.5 million in trade receivables, net, a decrease of $1.4 million in unbilled receivables, a decrease of $1.2 million in inventory and $1.7 million of depreciation and amortization expenses. This was offset in part by an increase of $1.7 million in deferred income taxes.
Net cash provided by investing activities was approximately $10.1 million in the year ended December 31, 2018 compared to net cash provided by investing activities of approximately $3.2$31.7 million and $16.2 million in the yearyears ended December 31, 20172021 and 2020, respectively, compared to net cash used in investing activities was approximately $40.7$4.8 million in the year ended December 31, 2016.
In the year ended December 31, 2018,2021, our net cash provided by investing activities was primarily attributable saleto the divestiture of short-term bank deposits of $12.9. This was offset in part by purchase of property and equipmentthe Integrated Solutions Division for $2.1 million, payments for business acquisitions of ESC BAZ of $0.4 million (net of acquired cash) and investment in technology of $0.3$32.6 million.
In the year ended December 31, 2017, our net cash provided by investing activities was primarily attributable sale of short-term bank deposits of $4.1 million. This was offset in part by purchase of property and equipment for $0.9$0.8 million.
In the year ended December 31, 2016,2020, our net cash provided by investing activities was primarily attributable to sale of short-term bank deposits of $17.0 million. This was offset in part by purchase of property and equipment for $0.8 million.
In the year ended December 31, 2019, our net cash used in investing activities was primarily attributable to investmentsinvestment in short-term deposits of short-term bank deposits and restricted deposit$3.1 million, investment in technology of $28.9 million, payments for business acquisitions of Aimetis of $12.1$0.9 million and athe purchase of property and equipment for $0.8 million.
Net cash provided byused in financing activities was $0.1of approximately $39.7 million and $28.8 million in the yearyears ended December 31, 20182021 and 2020, respectively, compared to net cash provided by financing activities of approximately $0.5was $0.2 million in the year ended December 31, 2017 and net cash used in financing activities of approximately $25 million in the year ended December 31, 2016.2019.
In the year ended December 31, 2018,2021, our net cash used in financing activities was attributable to cash distribution to Company’s shareholders of $40.1 million. This was offset in part by the proceeds from the issuance of shares upon exercise of options of $0.4 million.
In the year ended December 31, 2020, our net cash used in financing activities was attributable to the cash distribution to our company’s shareholders of $25 million, a dividend to redeemable non-controlling interests of $1.9 million and the purchase of redeemable non-controlling interests of $1.9 million.
In the year ended December 31, 2019, our net cash provided by financing activities was attributable to issuance of shares upon exercise of options of $0.1$0.5 million. This was offset in part by our purchase of outstanding warrants for $0.4 million.
In the year ended December 31, 2017,For our net cash provided by financing activities was primarily attributable to issuance of shares upon exercise of options and warrants of $0.6 million.
In the year ended December 31, 2016, net cash provided by financing activities was $25 million. In 2016continuing operations, we received net proceeds of $23.6 million from a rights offering and $1.4 million from the exercise of options and issuance of shares under our employee stock purchase plan.
We had capital expenditures for property and equipment of approximately $0.8$0.6 million, $0.9$0.4 million and $2.1$0.2 million, in the years ended December 31, 2016, 20172021 and 2018,2020 and $2019, respectively. We estimate that our capital expenditures for 20192022 will total approximately $0.7$0.6 million. We expect to finance these expenditures primarily from our cash and cash equivalents and our operating cash flows. However, the actual amount of our capital expenditures will depend on a variety of factors, including general economic conditions and changes in the demand for our products.
Credit Lines and Other Debt
As of December 31, 2018,2021, we had credit lines with Bank Leumi Le-Israel B.M., or Bank Leumi, and Union Bank of Israel Ltd., or Union Bank, totaling $15$12.5 million in the aggregate (of which $11.9$10.7 million is reserved exclusively for guarantees, out of which $2.8$5.5 million was available as of December 31, 2018)2021). Our credit lines at Bank Leumi and Union Bank have no restrictions as to our use of the credit. We are not under any obligation to maintain financial ratios or other terms in respect of our credit lines. In addition, as of December 31, 2018,2021, our foreign subsidiary had credit lines with the Royal Bank of Canada of $1.4$0.6 million in the aggregate, of which $1.2$0.5 million was available at December 31, 2018.
Our Canadian subsidiary has undertaken to maintain a general covenant and the following financial ratio and term in respect of its outstanding credit lines: a ratio of total liabilities to tangible net worth of not greater than 0.75:1. As of December 31, 2018, the Canadian subsidiary was in a default of its covenant. After the balance sheet date, the bank acknowledged the default and agreed to the Company's plan to remedy such default until May 31, 2019. Such default has no impact on the Company's financial statements as of December 31, 2018.2021.
As of December 31, 2018,2021, our outstanding balances under our credit lines in Israel consisted of several bank performance, advance payment and bid guarantees totaling approximately $9.1$5.2 million, at an annual cost of 0.65%-1.15%-1%. As of December 31, 2018,2021, the outstanding balances under the credit lines of our subsidiary consisted of several bank performance, advance payment and bid guarantees totaling approximately $0.2$0.1 million, at an annual cost of 1% -2%approximately 1.7%.
We have no significant off-balance sheet concentration of credit risks, such as foreign exchange contracts or foreign hedging arrangements, except derivative instruments, which are detailed below.
C. C. | Research and Development, Patents and Licenses. |
Government Grants
We participate in programs sponsored by the Israeli Government for the support of research and development activities. In the past we have received royalty-bearing grants from the Innovation Authority (formerly the Office of the Chief Scientist) for certain of our research and development projects for perimeter security products. We are obligated to pay royalties to the Innovation Authority amounting to 3.5% of revenues derived from sales of the products funded with these grants and ancillary services, up to 100% of the grants received, linked to the U.S. dollar. All grants received after January 1, 1999 also bear interest equal to the 12 month LIBOR rate. The obligation to pay these royalties is contingent on actual sales of the products, and in the absence of such sales no payment is required.
In 2015, CyberSeal received $134,000 from the Innovation Authority. Following the cancelation of the 2015 project, CyberSeal returned the $134,000 grant received in 2015.
In 2018, Magal received approval for a grant of $301,000 from the Innovation Authority, subject to development milestones achievement. The grant is for further development of Roboguard.
For the years ended December 31, 2016, 2017 and 2018, we paid the Innovation Authority royalties in the amount of $17,000, $33,000 and $6,000, respectively. These royalties related to sales of perimeter security products and management security systems. As of December 31, 2018, we had a contingent obligation to pay royalties to the Innovation Authority in the amount of approximately $1.7 million upon the successful sale of perimeter security products developed under research and development programs sponsored by the Innovation Authority.
We participate in programs sponsored by the Industrial Research Assistance Program (IRAP) in Canada. During 20182021, 2020 and 2019 our Canadian subsidiary receiveddid not receive any grants in the amount of $ 6,000.with respect to such programs.
Investment Tax Credit
Our Canadian subsidiary is eligible for investment tax credits for its research and development activities and for certain current and capital expenditures. For the years ended December 31, 2018, 20172021, 2020 and 2016,2019, our Canadian subsidiary recognized $179,000, $117,000$152,000, $151,000 and $149,000,$180,000, respectively, of investment tax credits.
In addition, as of December 31, 2018,2021, our U.S. subsidiary had available investment tax credits of approximately $245,000 million$189,000 to reduce future federal and state income taxes payable. These credits will expire in 20192022 through 2025 in the U.S. As of December 31, 2018,2021, our subsidiaries made a full valuation allowance in respect of such investment tax credits.
Our 20182021 results were impacted by delaysa decrease in infrastructure security spendingrevenues from project customers and by the decrease in North America. Onrevenues from products customers due to the other hand,impact of the continuous spending on critical infrastructure security in developing regions, coupled withCovid-19 pandemic whereas the growth in VMS and IVA global demandguidance of social distancing and the signsrequirements to work from home in key territories such as USA, Canada, Germany, and other countries, in addition to greatly reduced travel globally, has resulted in a substantial curtailment of gradual recoverybusiness activities. The COVID-19 outbreak has impacted verticals in North America will affect the industrywhich our customers operate (such as: oil and gas) and has resulted in the near future.
E. Off-Balance Sheet Arrangements.a slowdown, postponement and sometime cancelation of projects.
We had to occasionally adjust our manufacturing routine due to restrictions resulting from the Covid-19 pandemic by Ontario the public health department, such as mandatory quarantines, social distancing, and an occasional absence of our manufacturing workforce, we had managed to continue manufacturing and deliveries of our products to our customers throughout 2021. Nevertheless, a potential increase of the Covid-19 pandemic-related quarantines and social distancing requirements, and the inability of our workforce to continue or quickly resume manufacturing after periods of absence, may disrupt our manufacturing operations, resulting in an adverse effect on our financial results.
Our operations were negatively affected by the worldwide shortage of various materials and sub-components required to produce certain of our PIDS products. This negative effect increased in the second half of 2021. We are notmonitoring the supply chain shortage, vs our ongoing and forecasted manufacturing requirements, while implementing various procurement methodologies to meet current and forecasted demand for our products. However, our ability to continue meeting the demand for our products is dependent among others, on our ability to maintain an effective procurement plan support from our suppliers, and when needed establish a partycontractual relationship with alternative suppliers.
E. | Critical Accounting Estimates. |
The preparation of financial statements in conformity with U.S. GAAP requires us to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entitiesmake estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the use of different assumptions would likely result in materially different results of operations. Critical accounting policies are those that are likelyboth most important to create material contingent obligations.the portrayal of our financial position and results of operations and require management’s most difficult, subjective or complex judgments. Although not all of our significant accounting policies require management to make difficult, subjective or complex judgments or estimates, the following policies and estimates are those that we deem most critical
Explanation of Key Income Statement Items
45
Cost of revenues. Our cost of revenues for perimeter products consists of component and material costs, direct labor costs, subcontractor costs, shipping expenses, overhead related to manufacturing and depreciation. Our cost of revenues for Video Security sales consists primarily of direct labor costs, some component, material and subcontractor costs and overhead related to those sales.
In the past, our gross margin was affected by the proportion of our revenues generated from our Products and Projects segments. Historically, our revenues from Products (our remaining operating segment following the sale of the Integrated Solutions (Projects) division to Aeronautics Ltd.) generally had higher gross margins than our Projects revenues.
Research and development expenses, net. Research and development expenses, net consists primarily of expenses for on-going research and development activities and other related costs.
F. Tabular DisclosureSelling and marketing expenses. Selling and marketing expenses consist primarily of Contractual Obligations.commission payments, compensation and related expenses of our sales teams, attendance at trade shows and advertising expenses and related costs for facilities and equipment.
General and administrative expenses. Our general and administrative expenses consist primarily of salary and related costs associated with our executive and administrative functions, public company related expenses, legal and accounting expenses, allowances for credit losses and bad debts and other miscellaneous expenses. Staff costs include direct salary costs and related costs, such as severance pay, social security and retirement fund contributions, vacation and other pay.
Depreciation and Amortization and impairment of goodwill. The amount of depreciation and amortization attributable to our Products segment for the years ended December 31, 2021, 2020 and 2019 were approximately $1.5 million, $1.2 million and 1.3 million, respectively.
Financial Expenses, Net.Financial expenses, net include exchange rate differences arising from changes in the value of monetary assets and monetary liabilities stated in currencies other than the functional currency of each entity, currency transactions as well as interest income on our cash and cash equivalents and short term investments.
Revenue Recognition
We recognize revenues from continuing operations in accordance with ASC No. 606, "Revenue from Contracts with Customers" ("ASC No. 606"). As such, we identify a contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to each performance obligation in the contract and recognize revenues when (or as) we satisfy a performance obligation.
Following the sale of the Integrated Solution Division, we generate our revenues mainly from: (1) sales of security products; (2) services and maintenance, which are performed either on a fixed-price basis or as time-and-materials based contracts; and (3) software license fees and related services.
We enter into contracts that can include combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The perpetual license is distinct as the customer can derive the economic benefit of the software without any professional services, updates or technical support.
The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer. We do not grant a right of return to our customers.
In instances of contracts where revenue recognition differs from the timing of invoicing, we generally determined that those contracts do not include a significant financing component. We use the practical expedient and do not assess the existence of a significant financing component when the difference between payment and revenue recognition is a year or less.
Maintenance and support agreements provide customers with rights to unspecified software product updates, if and when available. These services grant the customers online and telephone access to technical support personnel during the term of the service. We recognize maintenance and support services revenues ratably over the term of the agreement, usually one year.
We generate revenues from the sales of its software products user licenses as well as from maintenance, support, consulting and training services.
As required by ASC 606, following table summarizes our minimumthe determination of the performance obligations in the contract, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised license fees or services underlying each performance obligation. Standalone selling price is the price at which we would sell a promised license or service separately to a customer.
Inventories
Inventories are stated at the lower of cost or market value. We periodically evaluate the quantities on hand relative to historical and projected sales volumes, current and historical selling prices and contractual obligations to maintain certain levels of parts. Based on these evaluations, inventory write-offs are provided to cover risks arising from slow-moving items, discontinued products, excess inventories, market prices lower than cost and commercial commitmentsadjusted revenue forecasts. Cost is determined as follows:
Raw materials, parts and supplies – using the “first-in, first-out” method.
Work-in-progress and finished products – on the basis of direct manufacturing costs with the addition of allocable indirect manufacturing costs.
During the years ended December 31, 2021, 2020 and 2019 we recorded inventory write-offs from continuing operations in the amounts of $0.1 million, $0.0 million and $0.2 million respectively. Such write-offs were included in cost of revenues.
Income taxes
We account for income taxes in accordance with ASC 740 “Income Taxes.” This statement prescribes the use of the 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.
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and we must establish a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Increases in the valuation allowance result in additional expense to be reflected within the tax provision in the consolidated statement of income.
As of December 31, 20182021, we had a net deferred tax liability of $0.4 million, of which $0.7 million in domestic deferred tax liability offset by $0.3 million in foreign deferred tax asset. We had total estimated available operating tax loss carryforwards of $9.7 million with respect to our operations in Israel. Our non-Israeli subsidiaries had estimated total available operating tax loss carryforwards of $4.6 million, of which $3.6 million was attributable to our U.S. subsidiaries (federal only), which may be used as an offset against future taxable income for periods ranging between 1 and 20 years. As of December 31, 2021, we recorded a partial valuation allowance on these carryforward tax losses due to the effectuncertainty of their future realization. Utilization of U.S. net operating losses may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.
Goodwill
Goodwill and certain other purchased intangible assets have been recorded as a result of acquisitions. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill is not amortized, but rather is subject to an impairment test.
ASC No. 350, "Intangible-Goodwill and other" requires goodwill to be tested for impairment at least annually and, in certain circumstances, between annual tests. The accounting guidance gives the option to perform a qualitative assessment to determine whether further impairment testing is necessary. The qualitative assessment considers events and circumstances that might indicate that a reporting unit's fair value is less than its carrying amount. If it is determined, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative test is performed. Alternatively, ASC No. 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to performing the quantitative goodwill impairment test
If the carrying value of a reporting unit exceeds its fair value, we expect them to have on our liquidity and cash flow in future periods.should recognize an impairment of goodwill for the amount of this excess. We perform an annual impairment test during the fourth quarter of each fiscal year, or more frequently if impairment indicators are present.
| | Payments due by period | |
Contractual Obligations | | Total | | | Less than 1 year | | | 1-2 years | | | 3-5 years | | | More than 5 years | |
| | (in thousands) | |
Operating lease obligations | | | 4,893 | | | | 1,119 | | | | 720 | | | | 1,581 | | | | 1,473 | |
Other long-term liabilities reflected on our balance sheet under U.S. GAAP | | | 2,181 | | | | - | | | | - | | | | - | | | | 2,181 | |
Total | | | 7,074 | | | | 1,119 | | | | 720 | | | | 1,581 | | | | 3,654 | |
As of June 30, 2021, as a result of the sale of the Projects segment, we began operating as one operating segment with a single reporting unit.
In addition,2020 and 2019, we have guaranteed advance payments,operated as two operating segments, each comprised of one reporting unit. For the performancepurposes of our workimpairment testing of goodwill, we identified two reporting units to which goodwill relates: (1) Products reporting unit which comprises the Products segment and; (2) ESC BAZ reporting unit within the Projects segment.
For the years ended December 31, 2021, 2020 and provided warranties for2019, no impairment losses were identified.
Intangible assets
Our intangible assets are comprised of patents, acquired technology, customer relations and backlog. Intangible assets are amortized over their useful lives using a method of amortization that reflects the performance of our work to certain of our customers (usually governmental entities). Such guarantees are required by contract for our performance duringpattern in which the installation and operational period of projects throughout Israel and the resteconomic benefits of the world. The performance guarantees typically expire soon after certain milestonesintangible assets are metconsumed or otherwise used up, in accordance with ASC 350, “Intangibles – Goodwill and warranty guarantees typically expire at the end of the warranty period. The maximum potential amount of future payments we could be required to make under our guarantees at December 31, 2018 was $9.3 million. We have not recorded any liability for such amounts as we believe our performance will not result in any claims.Other.”
For the years ended December 31, 2021, 2020 and 2019, no impairment losses were identified.
Impairment of long-lived assets
Our 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 a group of assets may not be recoverable. Recoverability of a group of assets to be held and used is measured by a comparison of the carrying amount of the group to the future undiscounted cash flows expected to be generated by the group. If such group of assets is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. For the years ended December 2021, 2020 and 2019, we did not record any impairment charges attributable to long-lived assets.
| ITEM 6. | Directors, Senior Management and Employees |
A. 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:
| | | | |
Gillon Beck | | 5760 | | Chairman of the Board of Directors |
Ron Ben-Haim | | 49 52 | | Director |
Jacob Berman | | 7073 | | Director |
Avraham Bigger (1)(2) | | 7376 | | Director |
Liza SingerLimor Steklov (1)(2)
| | 4851 | | External Director |
Moshe Tsabari (1)(2) | | 6568 | | External Director |
Dror Sharon | | 5356 | | Chief Executive Officer |
Yaacov VinokurTomer Hay | | 4145 | | Chief Financial Officer |
Brian Rich | | 62 | | Deputy CEO, CTO and President of Senstar Corporation |
Doron Kerbel | | 4750 | | Vice President – General Counsel and Company Secretary |
Yaniv Shachar Fabien Haubert | | 45 | | Senior Vice President & General Manager Magal Israel |
Jeremy Weese | | 42 | | Senior Vice President & COO of Senstar Corporation |
Kristen Cory | | 3647 | | Vice President North America Sales |
Carlos Garcia Almeida | | 48 | | General Manager Latin America |
Fabien Haubert | | 44 | | Vice President EMEA Sales |
Gord Loney | | 66 | | Vice President APAC Sales& Managing Director of Senstar - Head of the Product Division |
____________
(1) Member of our Audit Committees.
(2) Member of our Compensation Committee
Gillon Beck has served as a director and Executive Chairman of our board of directors since September 2014. Since 2003, Mr. Beck has been a Senior Partner at FIMI Opportunity Funds, the controlling shareholder of Magal,Senstar, as well as a Director of the FIMI Opportunity Funds’ General Partners and SPV companies. In addition, Mr. Beck currently serves as Chairman of the Board of ImageSat NV, Emet Computing Ltd. (TASE), Gal-Shvav Ltd, Bet Shemesh Engines LTD (TASE), Ham-Let (Israel-Canada) Ltd. (TASE), Rivulis Irrigation Ltd.(TASE: BSEN), Inrom Industries Ltd., Oxygen and Argon Works Ltd and Overseas Commerce Ltd., Bird Aerosystems Ltd, and is a director of Inrom Construction IndustriesRafa Laboratories Ltd. (TASE), Simplivia Ltd., Orbit Technologies Ltd (TASE)(TASE: ORBI), Carmel Forge Ltd., Monfort MedicalAITECH Ltd, AITECH Ltd,Stern Engineering Ltd., Utron Ltd. ( TASE) and Unitronics (1989) (R”G)(RG) Ltd (TASE)(TASE: UNIT). During the past five years, Mr. Beck had served as a member of the Board of Directors of the following public companies: Overseas Commerce Ltd (TASE)(TASE: OVRS), Ormat Technologies Inc. (NYSE) and Ormat IndustriesHam-Let Ltd., Inrom Construction Ltd. From 1999 to 2003, Mr. Beck served as Chief Executive Officer and President of Arad Ltd., a publicly-traded water measurement and automatic meter reading company, and from 1995 to 1999, he served as Chief Operating Officer of Arad Ltd. (TASE Mr. Beck received a Bachelor of Science degree (Cum Laude) in Industrial Engineering in 1990 from the Technion – Israel Institute of Technology, and a Master of Business Administration in Finance in 1992 from Bar-Ilan University.University.
Ron Ben-Haimhas served as a director since September 2014. Mr. Ben-Haim has been a partner in FIMI Opportunity Funds since 2006. Mr. Ben-Haim currently serves on the boards of directors of Poliram Plastic Industries Ltd., Oxygen and Argon Works Ltd., Tadir-Gan (Precision Products) 1993, Ltd. (TASE), Aitech Rugged Group, Inc., Rivulis Irrigation Ltd., Inrom Industries Ltd., Inrom Construction Industries Ltd. (TASE), Nirlat PaintsSimplivia Healthcare, Ltd., AlonyGal-Shvav, Ltd., Orbit Technologies, Ltd. (TASE)(TASE:ORBI), G1 Security Solutions Ltd (TASE)(TASE:GOSS) and TAT Technologies, Ltd. (TASE, NASDAQ)NASDAQ:TATT). Mr. Ben Haim formerly served as a member of the boards of directors of the following public companies: Hadera Paper Ltd., Overseas Commerce, Ltd., Inrom Construction Industries Ltd., Medtechnica, Ltd., Tadir-Gan (Precision Products) 1993, Ltd., Ginegar Plastic Products, Ltd., Raval Acs, Ltd., Merhav Ceramic and Building Materials Center, Ltd. and Ophir Optronics, Ltd. Mr. Ben Haim was previously with Compass Advisers, LLP, an investment banking firm based in New York and in Tel Aviv and with the Merrill Lynch Mergers and Acquisitions group in New York. Prior to Merrill Lynch, Mr. Ben-Haim worked at Teva Pharmaceuticals in production management. Mr. Ben-Haim holds a B.Sc. degree in industrial engineering from the Tel Aviv University and an M.B.A. degree from New York University.University. On 26 April 2022, Mr. Ben-Haim informed the Company of his resignation from the Company Board, effective 27 April 2022.
Jacob Berman has served as a director since November 2013. Since November 2014 until March 2019, Mr. Berman serveshad served as the chairman of the board of directors of Israel Discount Bank of New York and acted as a member of our audit committee and compensation committee between September 2014 and December 2014. Mr. Berman has beenis the President and founder of JB Advisors, Inc., a New York based financial advisory firm with extensive experience in international private banking, real estate investment counseling, and commercial/retail banking since 2002. Mr. Berman served as a director of Micronet Enertec Technologies, Inc. Previously, Mr. Berman was the founder, President and CEO of the Commercial Bank of New York.
Avraham Bigger has served as a director since September 2014. Mr. Bigger has been, since 2010, the owner and a member of the Board of Directors of Bigger Investments Ltd. Mr. Bigger currently serves as athe chairman of the board member of Migdal insurance, chairmanPCB Technologies Ltd. and of the board at Recha, board member at MCA (car import and distributor), international board member of the Weitzman Science Institute and presidenta board member of the Israel Nature and Heritage Foundation. He formerly served as the Chief Executive Officer and Chairman of the Board of Directors of Adama Ltd. (formerly) Makhteshim Agam Industries Ltd.), Chairman of the Boards of Directors of Supersol Ltd. (TASE)(TASE:SAE), Caniel Beverages & Caniel Packaging Industries Ltd., the Edmond Benjamin de Rothschild Caesarea Foundation and as managing director of Paz Oil Company Ltd. (TASE)(TASE:PZOL) and Israel General Bank (U Bank). Mr. Bigger also served as a member of the Boards of Directors of Bank Leumi Le-Israel Ltd. (TASE)(TASE:LUMI), First International Bank of Israel Ltd. (TASE)(TASE:FIBI), Strauss Group Ltd. (formerly known as Strauss-Elite Ltd.) (TASE)(TASE:STRS), Partner Communications Company Ltd. (TASE)(TASE, NASDAQ:PTNR), Cellcom Israel Ltd. (TASE, NYSE)NYSE:CEL), El-Al Israel Airlines Ltd., Migdal Insurance and various private companies. Mr. Bigger received a Bachelor of Economics degree and an M.B.A. degree, both from the Hebrew University of Jerusalem.
Limor Steklov has served as an external director since June 2010. Since 2003,August 2019. Ms. Singer has servedSteklov serves as the owner’s representativeCFO of the Lewis Trust Group, an investment assessmentTNT Express Worldwide (Israel) Ltd. Ms. Steklov has extensive experience in business partnering, combining business and development entity that focuses on touristfinancial visions, leading economic and business analytics, leading worldwide/local projects, creating effective and the development of marineefficient processes, and hotels resorts.leading, coaching, motivating and mentoring large finance teams. Ms. SingerSteklov currently serves as a directorboard member of the Haifa Port and Diners Club Israel Ltd. During 2007,parent company of FEDEX Israel. Ms. Singer served as the chief operating officer and country manager of Brack Capital Real Estate. Previously, Ms. Singer served as the Vice President of Business Development of the Baran Group, a provider of engineering and construction services, as investment director of Syntek Capital, a private-equity investment company and as an associate at APAX Partners & Co., a venture capital fund. Previously Ms. Singer worked at Kesselman & Kesselman, the Israeli member firm of PriceWaterhouseCoopers and at Gornitzky & Co. a leading Israeli law firm. Ms. Singer has an LL.B degree,Steklov holds a B.A. degree in accountingeconomics and an M.B.A. degree, allaccountancy from Tel Aviv University. Ms. Singer is a certified public accountant (Israel)College of Management – Academic Studies (COMAS) in Rishon LeZion and a registered lawyer with the Israeli Bar Association.M.A. degree in law from Bar-Ilan University.
Moshe Tsabari has served as an external director since December 2014. Since 2018 Mr. Tsabari has served as EVP for innovation at ICTS Europe S.A. which is part of Groupe Sofinord S.A. Until 2018 Mr. Tsabari was the owner and serveshad served as the joint CEO of GME Trust, a company that advises on crisis management and improvement of work processes, in Israel and worldwide. Since 2005, Mr. Tsabari has served as the owner and director of Osher – Training & Consulting Ltd. From 2006 to 2011 Mr. Tsabari served as a senior partner in the International Company for Defense and Rescue Ltd. and in QG Company, two companies that are engaged in the provision of consultancy and training projects in the security field in Israel. In addition, Mr. Tsabari is the founder of the International Institute for Researching the Arab World, is a former director in Links Aviation and is the former CEO of SYS-TRY, an electronic equipment development company. Prior to that, Mr. Tsabari served for 15 years, until 2004, in the Israeli Security Agency (ISA) in a number of positions, including Director of Personal in the Human Resources Division, Director of Security Assistance Division (rank in both positions equivalent to Major General) and Head of the Operations Division (rank equivalent to Brigadier). Mr. Tsabari holds a B.Sc. degree in Geodetic Engineering, a M.A. degree in Industrial and Management Engineering and a PhD degree in Science, all from the Technion – The Israeli Institute of Technology. In addition, Mr. Tsabari is an A.M.P. graduate from the Wharton School of the University of Pennsylvania.
Dror Sharon has served as our Chief Executive Officer since June 24, 2018, following a six years career as President and CEO atof Controp Precision Technology Ltd., a company specializing in developing, manufacturing and selling Electro Opticalelectro optical and Precision Motion Control Systemsprecision motion control systems for the global defense and homeland security (HLS) markets. Prior to that, Mr. Sharon served in various positions at Opgal Optronics Ltd., the last four years as its President and CEO. Mr. Sharon holds an MBA degree from Derby University, United Kingdom and a B.Sc. degree in Mechanical Engineering (Dean’s award of excellence) from the Technion -Israel Institute of Technology, Haifa, Israel.
Yaacov (Kobi) Vinokur joined our companyTomer Hay has served as Chief Financial Officer since July 2021. Mr. Hay joined the Company in September 2016.2012 as Corporate Controller and progressed to the position of VP Finance before his appointment as CFO. As VP Finance, Mr. Hay was responsible for the Company’s financial reporting, analysis, controls and tax matters. In addition, he was actively involved in strategic processes, including M&A and restructuring. Prior to joining our company,the Company, Mr. Vinokur served for threeHay had a successful career within the high-tech sector at Ernst and Young Israel, ending as Senior Audit Manager. Mr. Hay brings over 18 years as Chief Financial Officer of Miya (Arison Group), a global providerprofessional experience and knowledge of comprehensive water efficiency solutions and a water utilities operator. Prior to that,financial management of NASDAQ-listed companies engaged in the tech sector. Mr. Vinokur served in several key leadership positions at Brink’s Company (NYSE: BCO), a global leader in cash logistics, including Chief Financial Officer - Developing Markets division, Director of Procurement - EMEA division and Director of Finance - Global Services division. Prior to his career with Brink’s, Mr. Vinokur served as an Executive Director at Shapira Films, one of the leading film distribution and production companies in Israel, as well as a Head of Treasury at the Ministry of Defense of Israel. In 2017, the Israeli CFO Forum honored Mr. Vinokur with its annual CFO Excellence award. Mr. Vinokur,Hay is a certified public accountant in the United StatesIsrael and Israel, holds a B.A. degree in Accounting and Economics (magna cum laude) from Haifa University and a M.B.A. degree (cum laude) from Tel AvivTel-Aviv University. Mr. Vinokur is also a graduate of Harvard Business School’s Leadership Development Program.
Brian Rich serves as Deputy CEO, CTO and President of Senstar Corporation, our Canadian subsidiary since May 2015. Prior to such date, he served as President of Senstar Corporation since September 2000. Prior to joining Magal, Mr. Rich served as Vice President, Engineering and Operations at Intelligent Detection Systems (IDS), a designer and manufacturer of trace explosives and narcotics detection equipment. Prior to IDS he was a founding member of Senstar Corporation Canada from October 1981 to February 1998, during which time he held positions of increasing responsibility ending as Vice President, Engineering and Systems, and prior to that was a research engineer at Computing Devices Company of Canada (a Control Data company). Mr. Rich holds a B.A.Sc. degree in Electrical Engineering from the University of Toronto.
Doron Kerbel has served as our General Counsel since July 2015. Prior to joining Magal,Senstar, Mr. Kerbel had served for more than eight years as legal counsel at Elbit Systems Ltd. (NASDAQ: ESLT) Aerospace Division. Mr. Kerbel has extensive experience in advising on variety of commercial legal issues, mergers and acquisitions as well as (private finance initiatives) PFI and BOT (Build Operate Transfer) projects, both locally and internationally. Prior to his work at Elbit Systems, Mr. Kerbel was an associate lawyer at M. Firon & Co. and Senior Legal Counsel for International Law at the Israeli Embassy to the Netherlands. Mr. Kerbel holds a LL.B. degree from the Interdisciplinary Center (IDC) Herzliya and a LL.M. degree (with distinction) from the International Law School, University of Amsterdam.
Yaniv Shachar serves as Vice President Projects and Operations. Mr. Shachar joined Magal in June 2015. Prior to joining Magal, he worked for five and half years at Logic Industries Ltd. (a subsidiary of AGT International) as Project, Program, and Division Manager, leading large-scale homeland security projects and operations in the Middle East. Prior to joining Logic, Mr. Shachar served for 17 years in the Israeli Navy. Mr. Shachar is a graduate of the Executive M.B.A. program of the Hebrew University in Jerusalem, where he majored in integrative management. He also holds a B.A. degree in Economics and Communications from Haifa University.41
Jeremy Weese joined Magal in 1999 in a design engineering role. During his tenure with the company Mr. Weese has moved through progressive levels of responsibility within the research and development department. Prior to taking the position of Chief Operations Officer, Mr. Weese was responsible for the Company’s product portfolio and research and development activities as VP of Engineering. Mr. Weese has served in his current role as Senior VP & COO since April 2016. Mr. Weese is a Professional Engineer and member of the IEEE. He holds a B.A.Sc. degree in Computer Engineering from the University of Ottawa.
Kristen Cory joined our company in January 2019 as Vice President - North American Sales of Senstar Corporation, our Canadian subsidiary. Prior to Senstar, Ms. Cory held the position of Director of Business Development with Hikvision USA – world’s largest provider of video surveillance solutions – where she focused on the demand creation side of generating rapid business growth. Prior to Hikvision, Ms. Cory controlled the operations (sales, technical, support, etc.) for Raytec Systems, Inc.; a high end security LED lighting solution for the enterprise and oil & gas industries.
Carlos Garcia Almeida joined our company in February 2013 with more than 23 years of experience in the security market. Prior to joining our company, Mr. Garcia served as General Manager of Prosegur Mexico. Prior to Prosegur, Mr. Garcia served in several leadership and general management roles in leading security organizations, among them UTC Fire & Security and Tyco Fire & Security. Mr. Garcia holds a degree in Telecom Engineering and has successfully participated in various executive programs, including the Management Development Program (D-1) from the IPADE Business School.
Fabien Haubert joined our company in February 2018 as Vice President Sales – EMEA Region, based in Paris, France. Mr. Haubert’s most recent experience (February 2014 – February 2018) was with UK based CCTV solution provider Indigo Vision located in Edinburgh where he was Regional Director – EMEA South. Previous to his 4four years at Indigo he worked with several companies in the VMS, IP CCTV, intrusion, access control and integration areas since 2002. He has extensive experience in sales management with past responsibility for the EMEA region. Mr. Haubert has a technical background with a Master of Science degree in Electronics Engineering (Ecole Supérieure d’Ingénieurs en Electrontechnique et Electronique) as well as a Master of Strategy and Engineering of International business (Ecole Supérieure des Sciences Economiques et Commerciales). He speaks French, English, Spanish, and Italian and has a working knowledge of Dutch.
Gord Loney joined our company in 1995 when he was responsible for product sales in Canada, the Middle East and Africa, before assuming responsibility for strategic OEM accounts and the Far East. During 2016 Mr. Loney was appointed as Vice President for Sales - Asia Pacific. In this role Mr. Loney is responsible for establishment of an office in the Clark Freeport Zone in the Philippines, from which he is leading a support and sales team to better serve the high growth Asian market. Mr. Loney is an engineering graduate of the Royal Military College of Canada who served twenty-five years in the Royal Canadian Air Force.
The terms of office of Messrs. Beck, Berman, Ben-Haim and Bigger will expire at our 20192022 annual general meeting of shareholders. The terms of our external directors, Mr. Tsabari and Ms. Singer,Steklov, expire in 2020at our 2023 and 2019,2022 annual general meetings, respectively.
Mr. Dror Sharon replaced Saar Koursh as our CEO in June 2018. Mr. Yaniv Shachar, E.V.P. and General Manager of Magal Israel, acted as CEO in the interim period after Mr. Koursh left our company on April 30, 2018.
Compensation of Directors and Executive Officers
The aggregate compensation costs on behalf of our directors and executive officers as a group during 2018 (including the former Chief Executive Officer who was replaced during the course of 2018)2021 consisted of approximately $3.1$3.2 million in salary, fees, bonus, equity based compensation, commissions and directors’ fees, but excluding dues for professional and business associations, business travel and other expenses commonly reimbursed or paid by companies. As of December 31, 2018,2021, the aggregate amount set aside or accrued for pension, retirement and vacation or similar benefits for our directors and executive officers was approximately $0.1$0.2 million. In addition, we e provide automobiles to our executive officers at our expense.
We pay our directors an annual fee of NIS 90,000 (approximately $24,000)$28,000) and a fee of NIS 4,000 (approximately $1,050)$1,200) for each board or committee meeting that they attend. Such amounts are linked to the Israeli consumer price index, or CPI, and are updated on a semi-annual basis and accordingly, are adjusted to reflect changes in the CPI in February and August, each year. In addition, we pay to our Executive Chairman a monthly payment of NIS 15,000 (approximately $4,000)$4,600). Our executive Chairman is also entitled to a director fees paid to all of our directors as described above. In addition, Mr. Beck is entitled to annual cash bonus of $30,000 payable in the event our net profit pursuant to our annual audited and consolidated financial statement exceeds $5,000,000.
As of December 31, 2018,2021, our directors and executive officers as a group, then consisting of 1610 persons, held options to purchase an aggregate of 669,500526,000 ordinary shares, having exercise prices ranging from $4.15$1.9 to $5.61.$3.28 and expiration dates ranging from 2021 to 2028. Generally, the options vest over a two to four year period. Of such options, no options to purchase ordinary shares expire in 2019; and options to purchase 669,500 ordinary shares expire in each of 2020 -2026. See this Item 6E. “Directors, Senior Management and Employees – Share Ownership – Stock Option Plans.”
Compensation of Senior Office Holders – Israel Companies Law Disclosure
The table below sets forth the compensation paid to our five most highly compensated senior office holders (as defined in the Israeli Companies Law) during the year ended December 31, 20182021 (which include one former executivesenior officer), in the disclosure format of Regulation 21 of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
Information Regarding the Covered Executive(1) (in thousands) |
Name and Principal Position(2) | Base Salary | Benefits and Perquisites(3) | Variable Compensation(4) | Equity-Based Compensation(5) | Total |
Dror Sharon – Chief Executive Officer | 148 | 73 | 134 | 116 | 471 |
Saar Koursh – Former Chief Executive Officer | 102 | 219 | 146 | (63) | 404 |
Yaniv Shachar - Senior Vice President & General Manager Magal Israel | 167 | 74 | 58 | 31 | 330 |
Fabien Haubert - Vice President EMEA Sales | 161 | 76 | 51 | 15 | 303 |
Yaacov Vinokur - Chief Financial Officer | 141 | 60 | 63 | 11 | 275 |
(1) | All amounts reported in the table are in terms of cost to our company, as recorded in our financial statements. |
(2) | All current Covered Executives listed in the table are full-time employees. Cash compensation amounts denominated in currencies other than the U.S. dollar were converted into U.S. dollars at the average conversion rate for the year ended December 31, 2018. |
(3) | Amounts reported in this column include benefits and perquisites or on account of such benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites may include, to the extent applicable to each executive, payments, contributions and/or allocations for savings funds, pension, severance, vacation, car or car allowance, medical insurances and benefits, risk insurances (e.g., life, disability, accident), convalescence pay, payments for social security, tax gross-up payments and other benefits and perquisites consistent with our guidelines. |
(4) | Amounts reported in this column refer to Variable Compensation such as commission, incentive and bonus payments as recorded in our financial statements for the year ended December 31, 2018. |
(5) | Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2018. |
Information Regarding the Covered Executive(1) (dollars in thousands) |
Name and Principal Position(2) | Base Salary | Benefits and Perquisites(3) | Variable Compensation(4) | Equity-Based Compensation(5) | Total |
Dror Sharon – Chief Executive Officer | 338 | 160 | 510 | 98 | 1,106 |
Brian Rich – Former President and CTO of Senstar Corporation (6) | 144 | 272 | 50 | - | 466 |
Yaacov (Kobi) Vinokur – Former Chief Financial Officer (7) | 180 | 78 | 214 | (22) | 450 |
Doron Kerbel - Vice President General Counsel and Company Secretary | 152 | 68 | 189 | 16 | 425 |
Fabien Haubert –Vice President & Managing Director of Senstar - Head of the Product Division | 191 | 44 | 76 | 26 | 337 |
(1) | All amounts reported in the table are in terms of cost to our company, as recorded in our financial statements. |
(2) | All current Covered Executives listed in the table are full-time employees. Cash compensation amounts denominated in currencies other than the U.S. dollar were converted into U.S. dollars at the average conversion rate for the year ended December 31, 2021. |
(3) | Amounts reported in this column include benefits and perquisites or on account of such benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites may include, to the extent applicable to each executive, payments, contributions and/or allocations for savings funds, pension, severance, vacation, car or car allowance, medical insurances and benefits, risk insurances (e.g., life, disability, accident), convalescence pay, payments for social security, tax gross-up payments and other benefits and perquisites consistent with our guidelines. |
(4) | Amounts reported in this column refer to Variable Compensation such as commission, incentive and bonus payments as recorded in our financial statements for the year ended December 31, 2021. |
(5) | Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2021. |
(6) | Mr. Rich resigned effective December 31, 2021. |
(7) | Mr. Vinokur resigned effective November 30, 2021. |
Pursuant to the Israeli Companies Law, we have adopted a compensation policy and are required to follow certain approval requirements with respect to the compensation of our directors and executive officers. See below “Board of Directors – Compensation Committee” and Item 10. Additional Information –– Office Holders.
We follow Israeli law and practice instead of the requirements of the NASDAQ Stock Market Rules regarding the compensation of our chief executive office and other executive officers. See Item 16G. “Corporate Governance.”
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 chief executive officer and 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 of not less than three and not more than 11 members, as may be determined from time to time at our annual general meeting. Our board of directors is currently composed of sevensix (6) directors.
Our directors (except the external directors, as detailed below), are elected by our shareholders at our annual general meeting and hold office until the next annual general meeting. All the members of our board of directors (except the external directors), may be reelected upon completion of their term of office. Our annual general meetings of shareholders are held at least once every calendar year, but not more than 15 months after the last preceding annual general meeting. In the intervals between our annual general meetings of shareholders, the board of directors may from time to time appoint a new director to fill a casual vacancy or to add to their number, and any director so appointed will remain in office until our next annual general meeting of shareholders and may be re-elected.
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. Our board of directors has determined that at least one director must have “accounting and financial expertise.” Our board of directors has further determined that Ms. Liza SingerLimor Steklov has the requisite “accounting and financial expertise.”
We do not follow the requirements of the NASDAQ Stock Market Rules regarding the nomination process of directors, and instead, we follow Israeli law and practice, in accordance with which our directors are recommended by our board of directors for election by our shareholders. See Item 16G. “Corporate Governance.”
External and Independent Directors
External directors. The Israeli Companies Law requires Israeli companies with shares that have been offered to the public in or outside of Israel to appoint at least two external directors. The Israeli Companies Law provides that a person may not be appointed as an external director if the person, or the person’s relative, partner, employer or an entity under that person’s control, has or had during the two years preceding the date of appointment any affiliation with the company, or any entity controlling, controlled by or under common control with the company. The term “relative” means a spouse, sibling, parent, grandparent, child or child of spouse or spouse of any of the above as well as a sibling, brother, sister or parent of the foregoing relatives. In general, the term “affiliation” includes an employment relationship, a business or professional relationship maintained on a regular basis, control and service as an office holder. Furthermore, if the company does not have a controlling shareholder or a shareholder holding at least 25% of the voting rights, “affiliation” also includes a relationship, at the time of the appointment, with the chairman of the board, the chief executive officer, a substantial shareholder or the most senior financial officer of such company. Regulations promulgated under the Israeli Companies Law include certain additional relationships that would not be deemed an “affiliation” with a company for the purpose of service as an external director. 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 director or may otherwise interfere with the person’s ability to serve as director or if such person is an employee of the Israel Securities Authority or of an Israeli stock exchange. If, at the time an external director is appointed, all current members of the board of directors are of the same gender, then that external director must be of the other gender. A director of one company may not be appointed as an external director of another company if a director of the other company is acting as an external director of the first company at such time.
At least one of the elected external directors must have “accounting and financial expertise” and any other external director must have “accounting and financial expertise” or “professional qualification,” as such terms are defined by regulations promulgated under the Israeli Companies Law.
The external directors are elected by shareholders at a general meeting. The shareholders voting in favor of their election must include at least a majority of the shares voted by shareholders other than controlling shareholders or shareholders who have a personal interest in the election of the external director (unless such personal interest is not related to such persons relationship with the controlling shareholder) present and voting at such meeting (excluding abstentions). This majority requirement will not be required if the total number of shares of such non-controlling shareholders and disinterested shareholders who vote against the election of the external director represent 2% or less of the voting rights in the company.
In general, under the Israeli Companies Law, external directors serve for a three-year term and may be reelected to two (2) additional three-year terms. However, Israeli companies listed on certain stock exchanges outside Israel, including The NASDAQ Global Market, such as our company, may appoint an external director for additional terms of not more than three years subject to certain conditions. Such conditions include the determination by the audit committee and board of directors, that in view of the director’s professional expertise and special contribution to the company’s board of directors and its committees, the appointment of the external director for an additional term is in the best interest of the company. External directors can be removed from office only by the same special percentage of shareholders that can elect them, or by a court order, and then only if the external directors cease to meet the statutory qualifications with respect to their appointment or if they violate their fiduciary duty to the company.
Pursuant to the Israeli Companies Law, external directors up for re-election are nominated either by the board of directors or by any shareholder(s) holding at least 1% of the voting rights in the company. If the board of directors proposed the nominee, the reelection must be approved by the shareholders in the same manner required to appoint external directors for an initial term, as described above. If such reelection is proposed by shareholders, such reelection requires the approval of the majority of the shareholders voting on the matter, and satisfaction of all of the following requirements: (i) In calculating the majority votes, the votes of the controlling shareholders and other shareholders that have personal interest in such reelection (unless such personal interest is not related to such persons relationship with the controlling shareholder) as well as abstentions are not included; (ii) the votes of the non-controlling shareholders in favor of the reelection and of the shareholders who do not have personal interest in the reelection (unless such personal interest is not related to such person’s relationship with the controlling shareholder) is greater than 2% of the voting rights in the company; and (iii) the external director is not, at the time of such reelection, a related shareholder or competitor or a relative thereof and does not have any affiliation to any related shareholder, competitor or any relative thereof during the two years prior to such re-election. A related shareholder or a competitor are defined as the shareholder proposing the reelection, any substantial shareholder (within the meaning of the Israeli Companies Law) if at the time of reelection either such shareholder, its controlling shareholder or any company controlled by either of them has business relations with the company or that either such shareholder, its controlling shareholder or a company controlled by either of them is a competitor of the company.
Each committee of the board of directors that is authorized to exercise powers vested in the board of directors must include at least one external director and the audit committee must 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.
Ms. SingerSteklov and Mr. Tsabari serve as our external directors under the Israeli Companies Law. Ms. Singer’sSteklov’s first term will expire in 20192022 and Mr. Tsabari’s third term will expire in 2020.2023.
Independent Directors. 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) or a director who is appointed or classified as such, and who meets the qualifications of an external director (other than the professional qualifications/accounting and financial expertise requirement), who the audit committee has confirmed meets the external director qualifications, and who has not served as a director for more than nine consecutive years (with any period of up to two years during which such person does not serve as a director not being viewed as interrupting a nine-year period).
In general, NASDAQ Stock Market Rules require that the board of directors of a NASDAQ-listed company has a majority of independent directors and that its audit committee has at least three members and be comprised only of independent directors, each of whom satisfies the “independence” requirements of NASDAQ and the SEC. However, foreign private issuers, such as our company, may follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Stock Market Rules. On June 30, 2006, we provided NASDAQ with a notice that instead of maintaining a majority of independent directors, we follow Israeli law, under which we are required to appoint at least two external directors, within the meaning of the Israeli Companies Law, to our board of directors. In addition, in accordance with the rules of the SEC and NASDAQ, our audit committee is composed of three independent directors, as defined in the rules of the SEC and NASDAQ. At present the majority of our directors satisfy the independence requirements of NASDAQ and the SEC.
Our board of directors has determined that our external directors, Ms. SingerSteklov and Mr. Tsabari, qualify as independent directors under the requirements of the SEC and NASDAQ. Our board of directors has further determined that Messrs. Bigger and Berman also qualify as independent directors under the requirements of the SEC and NASDAQ.
Audit Committee under Israeli Law
Under the Israeli Companies Law, the board of directors of any public company must establish an audit committee, or the Israeli Audit Committee. The Israeli Audit Committee must consist of at least three directors and must include all of the external directors, the majority of which must be independent directors. The Israeli Audit Committee may not include the chairman of the board of directors; any director employed by the company or providing services to the company on an ongoing basis (other than as a director); a controlling shareholder or any of the controlling shareholder’s relatives; and any director who is employed by, or rendered services to, the controlling shareholder or an entity controlled by the controlling shareholder, or a director whose main livelihood is from the controlling shareholder. Any person who is not permitted to be a member of the Israeli Audit Committee may not be present in the meetings of the Israeli Audit Committee unless the chairman of the Israeli Audit Committee determines that such person’s presence is necessary in order to present a specific matter. However, an employee who is not a controlling shareholder or relative of a controlling shareholder may participate in the audit committee’s discussions but not in any vote, and at the request of the Israeli Audit Committee, the secretary of the company and its legal counsel may be present during the meeting. The chairman of the Israeli Audit Committee must be an external director.
The role of the Israeli Audit Committee, pursuant to the Israeli Companies Law, includes:
| · | monitoring deficiencies in the management of the company, including in consultation with the independent auditors or the internal auditor, and to advise the board of directors on how to correct such deficiencies. If the audit committee finds a material deficiency, it will hold at least one meeting regarding such material deficiency, with the presence of the internal auditor or the independent auditors but without the presence of the senior management of the company. However, a member of the company’s senior management can participate in the meeting in order to present an issue which is under his or her responsibility; |
monitoring deficiencies in the management of the company, including in consultation with the independent auditors or the internal auditor, and to advise the board of directors on how to correct such deficiencies. If the audit committee finds a material deficiency, it will hold at least one meeting regarding such material deficiency, with the presence of the internal auditor or the independent auditors but without the presence of the senior management of the company. However, a member of the company’s senior management can participate in the meeting in order to present an issue which is under his or her responsibility;
determining, on the basis of detailed arguments, whether to classify certain engagements or transactions as material or extraordinary, as applicable, and therefore as requiring special approval under the Israeli Companies Law. The audit committee may make such determination according to principles and guidelines predetermined on an annual basis;
determining if transactions (excluding extraordinary transactions) with a controlling shareholder, or in which a controlling shareholder has a personal interest, are required to be rendered pursuant to a competitive procedure;
deciding whether to approve engagements or transactions that require the Israeli Audit Committee approval under the Israeli Companies Law;
determining the approval procedure of non-extraordinary transactions, following classification as such by the Israeli Audit Committee, including whether such specific non-extraordinary transactions require the approval of the Israeli Audit Committee;
examining and approving the annual and periodical working plan of the internal auditor;
overseeing the company’s internal auditing and the performance of the internal auditor; confirm that the internal auditor has sufficient tools and resources at his disposal, considering, among other matters, the special requirements of the company and its size;
examining the scope of work of the independent auditor and its pay, and bringing such recommendations on these issue before the Board;
determining the procedure of addressing complaints of employees regarding shortcomings in the management of the company and ensure the protection of employees who have filed such complaints;
| · | determining, on the basis of detailed arguments, whether to classify certain engagements or transactions as material or extraordinary, as applicable, and therefore as requiring special approval under the Israeli Companies Law. The audit committee may make such determination according to principles and guidelines predetermined on an annual basis; |
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| · | determining if transactions (excluding extraordinary transactions) with a controlling shareholder, or in which a controlling shareholder has a personal interest, are required to be rendered pursuant to a competitive procedure; |
| · | deciding whether to approve engagements or transactions that require the Israeli Audit Committee approval under the Israeli Companies Law; |
| · | determining the approval procedure of non-extraordinary transactions, following classification as such by the Israeli Audit Committee, including whether such specific non-extraordinary transactions require the approval of the Israeli Audit Committee; |
| · | examining and approving the annual and periodical working plan of the internal auditor; |
| · | overseeing the company’s internal auditing and the performance of the internal auditor; confirm that the internal auditor has sufficient tools and resources at his disposal, taking into account, among other, the special requirements of the company and its size; |
| · | examining the scope of work of the independent auditor and its pay, and bringing such recommendations on these issue before the Board; |
| · | determining the procedure of addressing complaints of employees regarding shortcomings in the management of the company and ensure the protection of employees who have filed such complaints; |
| · | determining with respect to transactions with the controlling shareholder or in which such controlling shareholder has personal interest, whether such transactions are extraordinary or not, an obligation to conduct competitive process under supervisions of the audit committee or determination that prior to entering into such transactions the company shall conduct other process as the audit committee may deem fit, all taking into account the type of the company; and |
| ·• | determining the manner of approval of transactions with the controlling shareholder or in which it has personal interest which (i) are not negligible transactions (pursuant to the committee’s determination) and (ii) are not qualified by the Israeli Audit Committee as extraordinary transactions. |
Our Israeli Audit Committee is currently composed of Ms. SingerSteklov and Messrs. Bigger and Tsabari. Both Ms. SingerSteklov and Mr. Tsabari satisfy the “independence” requirements of the Israeli Companies Law. Our board of directors has determined that Ms. SingerSteklov has the requisite accounting and financial expertise to serve as our audit committee financial expert. Ms. SingerSteklov also serves as the chairperson of our Israeli Audit Committee. The Israeli Audit Committee meets at least once each quarter.
Audit Committee under U.S. Laws and Regulations
The NASDAQ Stock Market Rules require us to establish an audit committee consisting of at least three members, each of whom must be financially literate and satisfy the respective ‘‘independence’’ requirements of the SEC and NASDAQ and one of whom has accounting or related financial management expertise. Such audit committee is established for the primary purpose of assisting the Board in overseeing the:
| · | integrity of the Company’s financial statements; |
integrity of the Company’s financial statements;
independent auditor’s qualifications, independence and performance;
| · | independent auditor’s qualifications, independence and performance; |
Company’s financial reporting processes and accounting policies; performance of the Company’s internal audit function; and
Company’s compliance with legal and regulatory requirements.
| · | Company’s financial reporting processes and accounting policies; performance of the Company’s internal audit function; and |
| · | Company’s compliance with legal and regulatory requirements. |
Ms. SingerSteklov and Messrs. Bigger and Tsabari satisfy the respective “independence” requirements of the SEC and NASDAQ. Our board of directors has determined that Ms. SingerSteklov has the requisite accounting and financial expertise to serve as our Audit Committee financial expert and that both Mr. Bigger and Mr. Tsabari are financially literate, having a basic understanding of financial controls and reporting. The U.S. Audit Committee meets at least once each quarter. Mr. Bigger serves as chairperson of our U.S. Audit Committee for purposes of compliance with U.S. law and regulations.
Compensation Committee
Pursuant to the Israeli Companies Law, each publicly traded company is required to establish a compensation committee which must be comprised of at least three directors, including all of the external directors. The additional members of the compensation committee must be directors that receive compensation in accordance with the provisions and limitations set forth in the regulations promulgated under the Israeli Companies Law with respect to external directors. An external director shall serve as the chairman of the compensation committee. Under the Israeli Companies Law, the external directors shall constitute a majority of the compensation committee. Similar to the rules that apply to the audit committee, the compensation committee may not include the chairman of the board, or any director employed by us, by a controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity controlled by a controlling shareholder on a regular basis, or any director whose primary income is dependent on a controlling shareholder, and may not include a controlling shareholder or any of its relatives. Individuals who are not permitted to be compensation committee members may not participate in the committee’s meetings other than to present a particular issue; provided, however, that an employee that is not a controlling shareholder or relative may participate in the committee’s discussions but not in any vote, and the company’s legal counsel and corporate secretary may participate in the committee’s discussions and votes if requested by the committee.
The compensation committee is responsible for (i) recommending the compensation policy to the board of directors for its approval (and subsequent approval by shareholders) and (ii) duties related to the compensation policy and to the approval of the terms of engagement of office holders, including: recommending whether a compensation policy should continue in effect, if the then-current policy has a term of greater than three (3) years (approval of either a new compensation policy or the continuation of an existing compensation policy must in any case occur every three years), recommending to the board of directors periodic updates to the compensation policy, assessing implementation of the compensation policy; determining whether the compensation terms of a proposed new Chief Executive Officer of the company need not be brought to approval of the shareholders; and determining whether to approve transactions concerning the terms of engagement and employment of the company’s officers and directors that require compensation committee approval under the Israeli Companies Law or the company’s compensation plans and policies.
We have established aOur compensation committee that is currently composed of Ms. SingerSteklov and Messrs. Bigger and Tsabari. Mr. Tsabari serves as the chairperson of our Compensation Committee. The composition and function of the Compensation Committee comply with the requirements of the Israeli Companies Law and NASDAQ Stock Market Rules.
Israeli Regulations
In March 2016, the Israeli Companies Law Regulations were amended to reduce certain duplicative regulatory burden to which Israeli companies publicly-tradedpublicly traded on NASDAQ are subject to.
Generally, pursuant to the new regulations, an Israeli company traded on NASDAQ that does not have a “controlling shareholder” (as defined in the Israeli Companies Law) will be able to elect not to appoint External Directors to its Board of Directors and not to comply with the Audit Committee and Compensation Committee composition and chairman requirements of the Israeli Companies Law (as described above under); provided, the company complies with the applicable NASDAQ independent director requirements and the NASDAQ Audit Committee and Compensation Committee composition requirements.
Since our largest shareholder, the limited partnerships managed by FIMI FIVE 2012 Ltd., are deemed to be a “controlling shareholder” under the Israeli Companies Law, we are not currently eligible to benefit from the relief provided by these new amended Israeli regulations.
Internal Auditor
Under the Israeli Companies Law, the board of directors of a publicly traded company must appoint an internal auditor nominated by the audit committee. The role of the internal auditor is to examine whether the company’s actions comply with the law, integrity and orderly business practice. Under the Israeli Companies Law, the internal auditor may not be an interested party, an office holder, or an affiliate, or a relative of an interested party, office holder or affiliate, nor may the internal auditor be the company’s independent accountant or its representative. KPMG 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.
Chairman of the Board
Under the Israeli Companies Law, the general manager of a company (or a relative of the general manager) may not serve as the chairman of the board of directors, and the chairman of the board of directors (or a relative of the chairman of the board of directors) may not serve as the general manager, unless approved by the shareholders by a special majority vote prescribed by the Israeli Companies Law. The shareholder vote cannot authorize the appointment for a period of longer than three years, which period may be extended from time to time by the shareholders with a similar special majority vote. The chairman of the board of directors shall not hold any other position with the company (except as general manager if approved in accordance with the above procedure) or in any entity controlled by the company, other than as chairman of the board of directors of a controlled entity, and the company shall not delegate to the chairman duties that, directly or indirectly, make him or her subordinate to the general manager.
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 director, general manager, chief business manager, deputy general manager, vice general manager, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions without regard to such person’s title. An office holder’s fiduciary duties consist of a duty of care and a fiduciary duty. 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 fiduciary duty 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; Approval of Transactions with Office Holders
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.
Some transactions, actions and arrangements involving an office holder (or a third party in which an office holder has an interest) must be approved by the board of directors or as otherwise provided for in a company’s articles of association, however, a transaction that is adverse to the company’s interest may not be approved. In some cases, such a transaction must be approved by the audit committee and by the board of directors itself, and under certain circumstances shareholder approval may also be required. A director who has a personal interest in a transaction that is considered at a meeting of the board of directors or the audit committee may not be present during the board of directors or audit committee discussions and may not vote on the transaction, unless the transaction is not an extraordinary transaction or the majority of the members of the board or the audit committee have a personal interest, as the case may be. In the event the majority of the members of the board of directors or the audit committee have a personal interest, then the approval of the general meeting of shareholders is also required.
Approval of a Compensation Policy for Office Holders
The Israeli Companies Law and the regulations adopted thereunder require the compensation committee to adopt a policy for director and office holders. In adopting the compensation policy, the compensation committee must take into accountconsider factors such as the office holder’s education, experience, past compensation arrangements with the company, and the proportional difference between the person’s cost of compensation and the average cost of compensation of the company’s employees.
The compensation policy must be approved at least once every three years at the company’s general meeting of shareholders, and is subject to the approval of a majority vote of the votes of the shareholders present and voting at a shareholders’ meeting, provided that either: (i) such majority includes at least a majority of the votes of all shareholders who are not controlling shareholders and do not have a personal interest in the approval of the compensation policy, present and voting at such meeting (excluding abstentions); or (ii) the total number of ordinary shares of non-controlling shareholders and shareholders who do not have a personal interest in the approval of the compensation policy, voting against the resolution does not exceed 2% of the aggregate voting rights in the company. Our compensation policy was last approved by the shareholders in November 2020.
The Board may approve the compensation policy even if such policy was not approved by the shareholders, provided that the compensation committee and the board of directors resolve, based on detailed consideration of the compensation policy that approval of the policy, is in the best interest of the company, despite the fact that it was not approved at the shareholders’ meeting.
The compensation policy serves as the basis for decisions concerning the financial terms of employment or engagement of officer holders, including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The compensation policy must relate to certain factors, including advancement of the company’s objectives, the company’s business and its long-term strategy, and creation of appropriate incentives for executives. It must also consider, among other things, the company’s risk management, size and the nature of its operations. The compensation committee must also consider among others, the ratio between the cost of terms offered to the relevant director or office holder and the average and median cost of compensation of the other employees of the company, including those employed through manpower companies, the effect of disparities in salary upon work relationships in the company, the possibility of reducing variable compensation at the discretion of the board of directors; the possibility of setting a limit on the exercise value of non-cash variable compensation; and as to severance compensation (in excess of those promulgated by applicable labor law), the period of service of the director or office holder, the terms of his or her compensation during such service period, the company’s performance during that period of service, the person’s contribution towards the company’s achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving the company.
The compensation policy must also include the link between variable compensation and long-term performance and measurable criteria, the relationship between variable and fixed compensation, and the upper limit for the value of variable compensation, the conditions under which a director or an office holder would be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate and was required to be restated in the company’s financial statements, the minimum holding or vesting period for variable, equity-based compensation whilst referring to appropriate a long-term perspective based incentives; and maximum limits for severance compensation.
Once a compensation policy is properly adopted, the Israeli Companies Law requires the compensation policy to be approved by the company’s compensation committee, with subsequent approval of the board of directors. In addition, compensation of the directors and the chief executive officer is also subject to the approval of the shareholders at a general meeting. The approval of the compensation of the chief executive officer that complies with the compensation policy is subject to the same majority requirements as the approval of a transaction between a company and its controlling shareholder. Where the director is also a controlling shareholder, the requirements for approval of transactions with controlling shareholders apply. The terms of employment of the company’s directors and executive officers must satisfy the requirements of the compensation policy in respect of matters relating to compensation. Any deviations from the compensation policy in respect of the compensation of the office holders require the approval of the compensation committee, the board of directors and the shareholders. If the deviation is with respect to the compensation of the chief executive office then such approval must be made by the majority of the shareholders provided that such majority includes the majority of the votes of the non-controlling shareholder and other shareholders who have personal interest in the proposal (unless such personal interest is not related to the controlling shareholder) present and voting (excluding abstention). Such special majority is not required if the number of votes of the non-controlling shareholders and shareholder who do not have personal interest in the proposal as previously mentioned is lower than 2% of the aggregate voting rights in the company.
Under the Israeli Companies Law, all arrangements as to compensation of office holders who are not directors require the approval of the compensation committee prior, and in addition, to the approval of the board of directors. However, if the Company duly adopts a compensation plan for its office holders, the approval of the board of directors is not required if the new arrangement only modifies an existing arrangement and the compensation committee determines that such modification is not material. Generally, the compensation of the CEO must be approved by the compensation committee, the board of directors and by the majority of the shareholders provided that either: (i) such majority includes a majority of the total votes of shareholders who are not controlling shareholders and do not have a Personal Interest in the approval of the compensation policy and who participate in the voting, in person, by proxy or by written ballot, at the meeting (abstentions not taken into account); or (ii) the total number of votes of shareholders mentioned in (i) above that are voted against the approval of the compensation policy do not represent more than 2% of the total voting rights in the company.company. The compensation of office holders who are directors must be approved by the compensation committee, board of directors and simple majority vote of the shareholders.
External directors of the company are prohibited from receiving, directly or indirectly, any compensation from the company, other than for their services as external directors pursuant to the provisions and limitations set forth in regulations promulgated under the Israeli Companies Law, which compensation is determined prior to their appointment and may not be changed throughout the term of their service as external directors (except for certain exceptions set forth in such regulations).
Disclosure of Personal Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders
Pursuant to the Israeli Companies Law, the disclosure requirements regarding personal interests that apply to directors and executive officers also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, but excludes a shareholder whose power derives solely from its position on the board of directors or any other position at the company. A person is presumed to be a “controlling shareholder” if it holds or controls, by itself or together with others, one half or more of any one of the “Means of Control” of the company. “Means of Control” is defined as any one of the following: (i) the right to vote at a General Meeting of the company, or (ii) the right to appoint directors of the company or its chief executive officer. For the purpose of related party translations, under the Israeli Companies Law, a controlling shareholder is also a shareholder who holds 25% or more of the voting rights if no other shareholder who holds more than 50% of the voting rights. For this purpose, the holdings of all shareholders who have a personal interest in the same transaction will be aggregated.
Certain shareholders also have a duty of fairness toward the company. These shareholders include any controlling shareholder, together with any shareholder who knows that it has the power to determine the outcome of a shareholder vote and any shareholder who has the power to appoint or to prevent the appointment of an office holder of the company or exercise any other rights available to it under the company’s articles of association with respect to the company. The Israeli Companies Law does not define the substance of this duty of fairness, except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty of fairness.
An extraordinary transaction between a public company and a controlling shareholder, or in which a controlling shareholder has a personal interest, including a private placement in which the controlling shareholder has a personal interest, and the terms of engagement of the company, directly or indirectly, with a controlling shareholder or a controlling shareholder’s relative (including through a corporation controlled by a controlling shareholder), regarding the company’s receipt of services from the controlling shareholder, and if such controlling shareholder is also an office holder of the company, regarding his or her terms of employment, require the approval of a company’s audit committee (or compensation committee with respect to compensation arrangements), board of directors and shareholders, in that order. Such transaction must be elected by a majority vote of the Ordinary Shares present and voting at a shareholders’ meeting, provided that either: (i) such majority includes at least a majority of votes held by all shareholders who do not have a personal interest in such transaction, present and voting at such meeting (excluding abstentions); or (ii) the total number of votes of shareholders who do not have a personal interest in such transaction voting against the approval of the transaction, does not exceed 2% of the aggregate voting rights in the company.
Pursuant to the Israeli Companies Law, the audit committee of the company should determine in connection with such transaction if it requires rendering pursuant to a competitive procedure or pursuant to other proceedings. See “Audit Committee” above.
To the extent that any such transaction with a controlling shareholder or his relative is for a period extending beyond three years, shareholder approval is required once every three years, unless, in respect to certain transactions, the audit committee determines that the longer duration of the transaction is reasonable under the circumstances.
Pursuant to regulations promulgated pursuant to the Israeli Companies Law, a transaction with a controlling shareholder that would otherwise require approval of the shareholders is exempt from shareholders’ approval if each of the audit committee and the board of directors determine that the transaction meets certain criteria that are set out in specific regulations promulgated under the Israeli Companies Law. Under these regulations, a shareholder holding at least 1% of the issued share capital of the company may require, within 14 days of the publication of such determination, that despite such determination by the audit committee and the board of directors, such transaction will require shareholder approval under the same majority requirements that otherwise apply to such transactions.
The Israeli Companies Law provides that 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 become a 25% or greater shareholder of the company. This rule does not apply if there is already another 25% or greater shareholder of the company. Similarly, the Israeli Companies Law provides that 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 greater than a 45% interest in the company, unless there is another shareholder holding more than a 45% interest in the company. These requirements do not apply if, in general, (i) the acquisition was made in a private placement that received shareholder approval, (ii) was from a 25% or greater shareholder of the company which resulted in the acquirer becoming a 25% or greater shareholder of the company, if there is not already a 25% or greater shareholder of the company, or (iii) was from a shareholder holding a 45% interest in the company which resulted in the acquirer becoming a holder of a 45% interest in the company if there is not already a 45% or greater shareholder of the company.
If, as a result of an acquisition of shares, the acquirer will hold more than 90% of a public company’s outstanding shares or a class of shares, the acquisition must be made by means of a tender offer for all of the outstanding shares or a class of shares. If less than 5% of the outstanding shares are not tendered in the tender offer, all the shares that the acquirer offered to purchase will be transferred to the acquirer. If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding shares. The Israeli Companies Law provides for appraisal rights if any shareholder files a request in court within six months following the consummation of a full tender offer. However, in the event of a full tender offer, the offeror may determine that any shareholder who accepts the offer will not be entitled to appraisal rights. Such determination will be effective only if the offeror or the company has timely published all the information that is required to be published in connection with such full tender offer pursuant to all applicable laws.
Exculpation, Indemnification and Insurance of Directors and Officers
Exculpation of Office Holders. The Israeli Companies Law provides that an Israeli company cannot exculpate an office holder from liability with respect to a breach of his or her fiduciary duty. If permitted by its articles of association, a company may exculpate in advance an office holder from his or her liability to the company, in whole or in part, with respect to a breach of his or her duty of care. However, a company may not exculpate in advance a director from his or her liability to the company with respect to a breach of his duty of care in the event of distributions.
Office Holders’ Insurance. Israeli law provides that a company may, if permitted by its articles of association, enter into a contract to insure its office holders for liabilities incurred by the office holder with a respect to an act performed in his or her capacity as an office holder, as a result of: (i) a breach of the office holder’s duty of care to the company or another person; (ii) a breach of the office holder’s fiduciary duty to the company, provided that the office holder acted in good faith and had reasonable cause to assume that the act would not prejudice the company’s interests; and (iii) a financial liability imposed upon the office holder in favor of another person.
Indemnification of Office Holders. Under Israeli law a company may, if permitted by its articles of association, indemnify an office holder for acts performed by the office holder in such capacity for (i) a monetary liability imposed upon the office holder in favor of another person by any court judgment, including a settlement or an arbitration award approved by a court; (ii) reasonable litigation expenses, including attorney’s fees, actually incurred by the office holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against the office holder or the imposition of any monetary liability in lieu of criminal proceedings, or concluded without the filing of an indictment against the office holder and a monetary liability was imposed on him or her in lieu of criminal proceedings with respect to a criminal offense that does not require proof of criminal intent; and (iii) reasonable litigation expenses, including attorneys’ fees, actually incurred by the office holder or imposed upon the office holder by a court: in an action, suit or proceeding brought against the office holder by or on behalf of the company or another person, or in connection with a criminal action in which the office holder was acquitted, or in connection with a criminal action in which the office holder was convicted of a criminal offence that does not require proof of criminal intent.
Israeli law provides that a company’s articles of association may permit the company to (a) indemnify an office holder retroactively, following a determination to this effect made by the company after the occurrence of the event in respect of which the office holder will be indemnified; and (b) undertake in advance to indemnify an office holder, except that with respect to a monetary 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.
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 exculpating an office holder from duty to the company shall be valid, where such insurance, indemnification or exculpation relates to any of the following: (i) a breach by the office holder of his fiduciary duty unless, with respect to insurance coverage or indemnification, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; (ii) 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; (iii) any act or omission done with the intent to unlawfully yield a personal benefit; or (iv) any fine or forfeiture imposed on the office holder.
Pursuant to the Israeli Companies Law, exculpation of, procurement of insurance coverage for, and an undertaking to indemnify or indemnification of, our office holders must be approved by our audit committee and board of directors and, if the office holder is a director, also by our shareholders.
Our articles of association allow us to insure, indemnify and exempt our office holders to the fullest extent permitted by Israeli law. We maintain a directors’ and officers’ liability insurance policy with a per claim and aggregate coverage limit of $10$20 million, including legal costs incurred in Israel. In addition, our audit committee, board of directors and shareholders resolved to indemnify our office holders, pursuant to a standard indemnification agreement that provides for indemnification of an office holder in an amountholders up to $5 million.an aggregate amount of 25% the company's equity, according to our latest consolidated financial statements prior to the date that the indemnity was given. To date, we have provided letters of indemnification to all of our officers and directors.
D. Board Diversity
While we do not have a formal policy on diversity, our Board considers diversity to include the skill set, background, reputation, type and length of business experience of our board members, as well as a particular nominee’s contribution to that mix. Although there are many other factors, the Board seeks individuals with experience in the defense industry, sales and marketing, legal and accounting skills and board experience. Nasdaq’s Board Diversity Rule requires companies listed on Nasdaq to publicly disclose board-level diversity statistics using a standardized template by the later of August 8, 2022 or our 2022 proxy statement.
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 workspaces) 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.
As of December 31, 2018,2021 following the divestiture of our Integrated Solutions (Projects) division, we employed 411160 full-time employees, of whom 5524 were employed in general management and administration, 7955 were employed in selling and marketing, 46 were employed in production, customers' support and maintenance and 35 were employed in engineering and research and development. Of such full-time employees, 107 were located in Canada, 22 were in the United States and 31 were in various other countries.
As of December 31, 2020, prior to the divestiture of our Integrated Solutions (Projects) division, we employed 394 full-time employees, of whom 57 were employed in general management and administration, 77 were employed in selling and marketing, 17 were employed in projects management, 181 were employed in production, installation and maintenance, and 62 were employed in engineering and research and development. Of such full-time employees, 157 were located in Israel, 116 were in Canada, 24 were in the United States and 97 were in various other countries.
As of December 31, 2019, prior to the divestiture of our Integrated Solutions (Projects) division, we employed 421 full-time employees, of whom 59 were employed in general management and administration, 80 were employed in selling and marketing, 18 were employed in projects management, 194195 were employed in production, installation and maintenance, and 6569 were employed in engineering and research and development. Of such full-time employees, 158161 were located in Israel, 29123 were in Canada, 25 were in the United States 119 were in Canada and 105112 were in various other countries.
As of December 31, 2017, we employed 360 full-time employees, of whom 45 were employed in general management and administration, 83 were employed in selling and marketing, 16 were employed in projects management, 158 were employed in production, installation and maintenance, and 58 were employed in engineering and research and development. Of such full-time employees, 112 were located in Israel, 31 were in the United States, 110 were in Canada and 107 were in various other countries.
As of December 31, 2016, we employed 406 full-time employees, of whom 50 were employed in general management and administration, 81 were employed in selling and marketing, 21 were employed in projects management, 182 were employed in production, installation and maintenance, and 72 were employed in engineering and research and development. Of such full-time employees, 128 were located in Israel, 29 were in the United States, 133 were in Canada and 116 were in various other countries.
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. We are subject to various Israeli labor laws, collective bargaining agreements entered into from time to time between the Manufacturers Association and the New General Federation of Workers (the Histadrut), as well as collective bargaining arrangements. Such laws, agreements and arrangements cover a wide range of areas, including minimum employment standards, such as working hours, minimum wages, vacation, procedures for dismissing employees, severance pay and pension plans and special issues, such as equal pay for equal work, equal opportunity in employment and employment of youth and army veterans. We are currently engaged in negotiations with the Histadrut in relation to a collective agreement which will apply to our employees in Israel. Israeli law requires severance pay upon certain circumstances, including upon the retirement or death of an employee or termination of employment without due cause. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the U.S. Social Security Administration, which amounts also include payments for national health insurance. In addition, certain of our employees are parties to individual employment agreements. We generally provide our employees with benefits and working conditions beyond the required minimums. Each of our subsidiaries provides a benefits package and working conditions which we believe are competitive with other companies in their field of operations.
The following table sets forth certain information regarding the ownership of our ordinary shares by our directors and executive officers as of April 12, 2019.24, 2022.
Name | | Number of Ordinary Shares Owned (1) | | | Percentage of Outstanding Ordinary Shares (2) | |
Gillon Beck (3) | | | - | | | | - | |
Ron Ben-Haim (3) | | | - | | | | - | |
Jacob Berman | | | 13,750 | | | | * | |
Avraham Bigger | | | - | | | | - | |
Liza Singer | | | - | | | | - | |
Moshe Tsabari | | | - | | | | - | |
Dror Sharon | | | - | | | | * | |
Yaacov Vinokur (4) | | | 8,000 | | | | - | |
Brian Rich (5) | | | 8,333 | | | | * | |
Doron Kerbel (6) | | | 13,166 | | | | * | |
Yaniv Shachar (7) | | | 24,000 | | | | * | |
Jeremy Weese (8) | | | 16,548 | | | | * | |
Kristen Cory | | | - | | | | - | |
Carlos Garcia Almeida | | | - | | | | - | |
Fabien Haubert | | | - | | | | - | |
Gord Loney | | | 100 | | | | * | |
All directors and executive officers as a group (16 persons) | | | 83,897 | | | | * | |
| | Number of Ordinary Shares Owned (1) | | | Percentage of Outstanding Ordinary Shares (2) | |
Gillon Beck (3) | | | - | | | | - | |
Ron Ben-Haim (3) | | | - | | | | - | |
Jacob Berman | | | 13,750 | | | | * | |
Avraham Bigger | | | - | | | | - | |
Limor Steklov | | | - | | | | - | |
Moshe Tsabari | | | - | | | | - | |
Dror Sharon (4) | | | 240,000 | | | | 1 | % |
Tomer Hay | | | - | | | | * | |
Doron Kerbel (5) | | | 16,000 | | | | * | |
Fabien Haubert (6) | | | 24,000 | | | | * | |
All directors and executive officers as a group (10 persons) (7) | | | 293,750 | | | | 1.3 | |
_______________
* Less than 1%
(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 or convertible debenture notes 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, 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 23,143,98523,309,987 ordinary shares issued and outstanding as of April 12, 2019.24, 2022. |
(3) | Does not include any ordinary shares held by the FIMI Funds. |
(4) | Includes 8,000240,000 ordinary shares issuable upon the exercise of currently exercisable options. |
(5) | Includes 8,33316,000 ordinary shares issuable upon the exercise of currently exercisable options. |
(6) | Includes 13,166 ordinary shares issuable upon the exercise of currently exercisable options. |
(7) | Includes 24,000 ordinary shares issuable upon the exercise of currently exercisable options. |
(8)(7) | Includes 16,548280,000 ordinary shares issuable upon the exercise of currently exercisable options. |
Share Option Plans
2010 Israeli Share Option Plan
In June 2010, we adopted our 2010 Israeli Share Option Plan, or the 2010 Plan. Under the 2010 Plan, stock options to purchase 510,575 ordinary shares may be granted to our employees, officers, directors and consultants of our company and subsidiaries. In addition, an aggregate 498,384 ordinary shares that remained available for future option grants under the 2003 Plan and any ordinary shares that become available in the future under the 2003 Plan as a result of expiration, cancellation or relinquishment of any option were rolled over to the 2010 Plan. In June 2013, our shareholders approved an increase to the number of ordinary shares available for issuance under the 2010 Plan by additional 500,000 shares. The 2010 Plan has ahad an original term of ten years.years, which was extended in August 2020 for an additional 5 years, on which date our board of directors had also increased and set the number of ordinary shares available for issuance under the 2010 Plan to 1,200,000.
The 2010 Plan is designed to allow the grantees to benefit from the tax benefits under Section 102 of the Israeli Income Tax Ordinance [New Version], 1961. Our Board of Directors has resolved that all options that will be granted to Israeli residents under the 2010 Plan will be taxable under the “capital gains route.” Pursuant to this route, the profit realized by an employee is taxed as a capital gain (25%) if the options or underlying shares are held by a trustee for at least 24 months from their date of the grant or issuance. Any difference between the exercise price of the options and the average price of the company’s shares during the 30 trading days before the date of grant of the options will be treated as ordinary income and will be taxed according to the employee’s marginal tax rates plus social contribution. If the underlying shares are sold before the elapse of such period, the profit is re-characterized as ordinary income. As of December 31, 2018,2021, options to purchase 889,118620,000 ordinary shares were outstanding under the 2010 Plan, exercisable at an average exercise price of $4.865$2.777 per share. During 2018, 555,0002021, 105,000 options were awarded under the 2010 Plan. Options to purchase 17,191137,668 ordinary shares were exercised during 2018.2021.
| ITEM 7. | Major Shareholders and Related Party Transactions |
The following table sets forth certain information as of April 12, 201924, 2022 regarding the beneficial ownership of our ordinary shares, by each person or entity known to us to own beneficially 5% or more of our ordinary shares.
Name | | Number of Ordinary Shares Beneficially Owned (1) | | | Percentage of Outstanding Ordinary Shares (2) | | | Number of Ordinary Shares
Beneficially Owned (1) | | | Percentage of Outstanding Ordinary Shares (2) | |
FIMI Opportunity Five (Delaware), Limited Partnership (3) | | | 4,646,924 | | | | 20.1 | % | | | 4,646,924 | | | | 19.9 | % |
FIMI Israel Opportunity Five, Limited Partnership (3) | | | 5,207,235 | | | | 22.5 | % | | | 5,207,235 | | | | 22.4 | % |
Grace & White, Inc. (4) | | | 1,409,399 | | | | 6.1 | % | |
| | | | | | | | | |
____________________
| (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 or convertible notes 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, 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 23,143,98523,309,987 ordinary shares issued and outstanding as of April 12, 2019.24, 2022. |
| (3) | Based on Schedule 13D/A filed with the SEC on October 11, 2016 and other information available to us. The address of FIMI Opportunity Five (Delaware), Limited Partnership and FIMI Israel Opportunity Five, Limited Partnership is c/o FIMI FIVE 2012 Ltd., Electra Tower, 98 Yigal Alon St., Tel-Aviv 6789141, Israel. |
| (4) | Based upon a Schedule 13G/A filed with the SEC on January 29, 2019 by Grace & White, Inc. The Schedule 13G/A indicates that Grace & White, Inc. is a registered investment adviser. The address of Grace & White, Inc. is 515 Madison Avenue, Suite 1700, New York, NY 10022. |
Significant Changes in the Ownership of Major Shareholders
On October 11, 2016, FIMI Five 2012 Ltd., FIMI Opportunity Five (Delaware), Limited Partnership and FIMI Israel Opportunity Five, Limited Partnership, or the FIMI Partnerships, filed a Schedule 13D/A reflecting beneficial ownership of 9,854,159 ordinary shares, or 42.6%, of our issued and outstanding ordinary shares, as of such date.
On February 7, 2017, Grace & White, Inc. filed an amendment to its Schedule 13G reflecting beneficial ownership of 1,569,833, or 6.8%, of our issued and outstanding ordinary shares. On February 1, 2018, Grace & White, Inc. filed an amendment to its Schedule 13G reflecting beneficial ownership of 1,415,703, or 6.15%, of our issued and outstanding ordinary shares. On January 29, 2019, Grace & White, Inc. filed an amendment to its Schedule 13G reflecting beneficial ownership of 1,409,399, or 6.12%, of our issued and outstanding ordinary shares. On February 3, 2020, Grace & White, Inc. filed an amendment to its Schedule 13G reflecting beneficial ownership of 1,426,582, or 6.2%, of our issued and outstanding ordinary shares. On January 29, 2021, Grace & White, Inc. filed an amendment to its Schedule 13G reflecting beneficial ownership of 1,187,763, or 5.13%, of our issued and outstanding ordinary shares. On March 4, 2021, Grace & White, Inc. filed an amendment to its Schedule 13G reflecting beneficial ownership of 1,141,243, or 4.93%, of our issued and outstanding ordinary shares.
Major Shareholders Voting Rights
The voting rights of our major shareholders do not differ from the voting rights of other holders of our ordinary shares.
Record Holders
Based on a review of the information provided to us by our transfer agent, as of March 26, 2019,April 24, 2022, there were 2926 holders of record of our ordinary shares, of which 2624 record holders holding approximately 91.2%91.3% 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 is it representative of where such beneficial holders reside since many of these ordinary shares were held of record by brokers or other nominees, including CEDE & Co., the nominee for the Depositary Trust Company (the central depositary for the U.S. brokerage community), which held approximately 91.1%91.2% of our outstanding ordinary shares as of such date.
B. B. | Related Party Transactions. |
In October 2017, we completed a rights offering in which we received gross proceeds of approximately $23.8 million from the sale of 6,170,386 ordinary shares. In the rights offering, we distributed to each of our shareholders one subscription right for each eight ordinary shares held by such holder. Our controlling shareholders, FIMI V Funds, purchased 3,392,870 ordinary shares including through an exercise of over-subscription rights for a total subscription price of $ 13,096,478.20. None
C. C. | Interests of Experts and Counsel. |
Not applicable.
| ITEM 8. | Financial Information |
A. A. | Consolidated Statements and Other Financial Information. |
Consolidated Financial Statements
See the consolidated financial statements included under Item 18, “Financial Statements.”
Export Sales
In the years ended December 31, 2016, 2017 and 2018, our operations based outside of Israel generated income to customers outside of Israel of approximately $48.2 million, $45.2 million and $67.4 million, respectively, or 71.1%, 70.2% and 72.8% of our total revenues, respectively. In the years ended December 31, 2016, 2017 and 2018, the total amount of our export revenues generated by our Israeli facilities to countries outside of Israel was approximately $10.9 million, $9.6 million and $11.7 million, respectively, or 16.%, 14.9% and 12.6%, of our total revenues, respectively.
Legal Proceedings
We are subject to legal proceedings arising in the normal course of business. Based on the advice of our legal counsel, management believes that these proceedings will not have a material adverse effect on our financial position or results of operations.
In February 2019, Magal Mexico (our former subsidiary whose shares were sold as part of the Integrated Solutions Division sale) initiated a dispute procedure with the Mexican tax authorities requesting the recognition of deduction of certain expenses as claimed by the former Mexican subsidiary in its annual tax filings. In July 2019, the tax authorities denied the former Mexican subsidiary position. On September 11, 2019, Magal Mexico filed a nullity claim (administrative trial) against the resolution of the Mexican Internal Revenue Service (Servicio de Administración Tributaria) that had requested the former subsidiary to correct its tax situation. The claim was admitted and resolved in favor of the former subsidiary, on August 5, 2020. This resolution was then challenged by the tax authority, through a motion of review before the Collegiate Courts of Circuit, which resolved the appeal by the tax authority unfavorably to the former Mexican subsidiary, on June 4, 2021.
On September 21, 2021, the former Mexican subsidiary appealed the resolution by the lower court before the Collegiate Courts of Circuit, in October 2021, the Collegiate Court admitted the appeal, however, on March 14, 2022, the Court notified the resolution whereby it ruled in favor of the Tax Authority, deciding to confirm the challenged resolution. On March 25, 2022, the former Mexican subsidiary appealed the Collegiate Court's decision before the Mexican Supreme Court of Justice.
Under the Purchase Agreement of the Integrated Solutions division of February 7, 2021, we are financially liable for the outcome of this dispute and thus required to indemnify Aeronautics Ltd. per the final tax resolution in this matter.
Dividend Distribution Policy
We currently intendWhile we have historically retained our earnings to retain future earnings for use infinance operations and expand our business, and do not anticipate payingon December 7, 2020, we announced a cash dividends on our ordinary sharesdistribution in the foreseeable future.amount of US$1.079 per share (approximately US$ 25 million in the aggregate) which was paid on December 28, 2020, and, following the completion of the sale of Integration Solutions Division and court approval, we announced on August 16, 2021 a cash distribution in the amount of $1.725 per share (approximately $40 million in the aggregate), which was paid on September 22, 2021. Future dividend distributions are subject to the discretion of our board of directors and approval of our shareholders and will depend on a number of factors, including our operating results, future capital resources available for distribution, capital requirements, financial condition, the tax implications of dividend distributions on our income, future prospects and any other factors our board of directors may deem relevant.
The distribution of dividends also may be limited by Israeli law, which permits the distribution of dividends only out of profits (as defined by the Israeli Companies Law) or otherwise upon the permission of the court, and only if the Board of Directors determines that such distribution will not jeopardize the ability of the company to repay its debts on the due date thereof. “Profits’’ are defined in the Israeli Companies Law as the balance of surpluses, or the surpluses accumulated over the past two years, whichever is the greater, in accordance with the latest adjusted financial statements, audited or reviewed, prepared by the company, provided that the date in respect of which the statements were prepared is no earlier than six months prior to the date of distribution. ‘‘Surplus’’ means sums included in a company’s shareholders’ equity originating from the net profit of the company, as determined according to generally accepted accounting principles, and sums other than share capital or premiums that are included in shareholders’ equity under generally accepted accounting principles and that the Minister of Justice has prescribed to be considered surplus.
SinceOn June 30, 2021, we completed the datesale of our Integration Solution Division to Aeronautics Ltd., a subsidiary of RAFAEL Advanced Defense Systems Ltd., in a share and asset purchase agreement for total consideration of $35 million in cash, on a cash-free, debt-free basis. As part of the annual consolidated financial statements includedacquisition, Aeronautics acquired our facility in this annual report, no significant changes have occurred.Yehud, Israel.
Following the sale of the Integrated Solutions (Project) Division, we changed our name to Senstar Technologies Ltd. and focused our business on providing comprehensive physical, video and access control security products and solutions, with development and manufacturing facilities located in Canada and sales and support offices in the US, EMEA, China and APAC regions as well as in Canada.
Our ordinary shares are traded on the NASDAQ Global Market under the symbol “SNT”. Our website is www.senstartechnologies.com.
| ITEM 9. | The Offer and Listing |
A. A. | Offer and Listing Details. |
Our ordinary shares are traded on the NASDAQ Global Market. Our ticker symbol is “MAGS.“SNT.”
Not applicable.
Our ordinary shares have traded on the NASDAQ Global Market under the symbol “MAGS” since our initial public offering in 1993. Since September 30, 2021 our ordinary shares trade under the symbol “SNT” (previously under the symbol “MAGS”).
Not applicable.
Not applicable.
Not applicable.
| ITEM 10. | Additional Information |
Not applicable.
B. Memorandum and Articles of Association. B. | Memorandum and Articles of Association. |
Purposes and Objects of the Company
We are a public company registered with the Israeli Companies Registrar and have been assigned company number 52‑003892‑8. Under our memorandum of association, we were established for the purposes of acquiring a plant from Israel Aircraft Industries known as the Magal Plant, which was engaged in the development, manufacture, sale and support of alarm devices and dealing in the development, manufacturing and support of security alarm devices and other similar products. In addition, the purpose of our Company is to be eligible to perform and act in connection with any right or obligation of whatever kind or nature permissible under Israeli law.
Board of Directors
The strategic management of our business (as distinguished from the daily management of our business affairs) is vested in our board of directors, which may exercise all such powers and do all such acts as our company is authorized to exercise and do, and which are not required to be exercised by a resolution of the general meeting of our shareholders. The board of directors may, subject to the provisions of the Israeli Companies Law, delegate some of its powers to committees, each consisting of one or more directors, provided that at least one member of such committee is an external director.
According to the Israeli Companies Law, we may stipulate in our articles of association that the general meeting of shareholders is authorized to assume the responsibilities of the board of directors. In the event the board of directors is unable to act or exercise its powers, the general meeting of shareholders is authorized to exercise the powers of the board of directors, even if the articles of association do not stipulate so. Our board of directors has the power to assume the responsibilities of our chief executive officer if he is unable to act or exercise his powers or if he fails to fulfill the instructions of the board of directors with respect to a specific matter.
Our articles of association do not impose any mandatory retirement or age limit requirements on our directors and our directors are not required to own shares in our company in order to qualify to serve as directors.
The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except in the same manner as any other transaction by us.
For a discussion of Israeli law concerning a director’s fiduciary duties and the approval of transactions with office holders, see Item 6.C. “Directors, Senior Management and Employees – Board Practices – Approval of Related Party Transactions under Israeli Law.”
Rights Attached to Shares
Our authorized share capital consists of NIS 39,748,000 ordinary shares, par value NIS 1.00 each. All our ordinary shares have the same rights, preferences and restrictions, some of which are detailed below. At the general meeting of shareholders, our shareholders may, subject to certain provisions detailed below, create different classes of shares, each class bearing different rights, preferences and restrictions.
The rights attached to the ordinary shares are as follows:
Dividend Rights. Holders of ordinary shares are entitled to participate in the payment of dividends in accordance with the amounts paid‑up or credited as paid up on the nominal value of such ordinary shares at the time of payment (without taking into account any premium paid thereon). However, under Article 13 of our articles of association no shareholder will be entitled to receive any dividends until the shareholder has paid all calls then currently due and payable on each ordinary share held by such shareholder.
The board of directors may declare interim dividends and propose the final dividend with respect to any fiscal year only out of the retained earnings, in accordance with the provisions of the Israeli Companies Law. Declaration of a final dividend requires the approval by ordinary resolution of our shareholders at a general meeting of shareholders. Such resolution may reduce but not increase the dividend amount recommended by the board of directors. Dividends may be paid, in whole or in part, by way of distribution of dividends in kind. See “Item 8A. Financial Information – Consolidated Statements and Other Financial Information – Dividend Distributions Policy.”
Voting Rights. Holders of ordinary shares are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Such voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Generally, resolutions are adopted at the general meeting of shareholders by an ordinary resolution, unless the Israeli Companies Law or our articles of association require an extraordinary resolution. An ordinary resolution, such as a resolution approving the declaration of dividends or the appointment of auditors, requires approval by the holders of a simple majority of the shares represented at the meeting, in person or by proxy, and voting on the matter. An extraordinary resolution requires approval by the holders of at least 75% of the shares represented at the meeting, in person or by proxy, and voting on the matter. The primary resolutions required to be adopted by an extraordinary resolution of the general meeting of shareholders are resolutions to:
| · | amend the memorandum of association or articles of association; |
| · | change the share capital, for example by increasing or canceling the authorized share capital or modifying the rights attached to shares; and |
| · | approve mergers, consolidations or winding up of our company. |
Our articles of association do not contain any provisions regarding a classified board of directors or cumulative voting for the election of directors. Pursuant to our articles of association, our directors (except the external directors) are elected at our annual general meeting of shareholders 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 general meeting of shareholders and until their successors have been elected. All the members of our board of directors (except the external directors) may be reelected upon completion of their term of office. For information regarding the election of external directors, see “Item 6C. Directors, Senior Management and Employees – Directors and Senior Management – Board Practices – External and Independent Directors – External Directors.”
Rights to Share in the Company’s Profits. Our shareholders have the right to share in our profits distributed as a dividend or any other permitted distributions. See this Item 10B. “Additional Information – Memorandum and Articles of Association – Rights Attached to Shares – Dividend Rights.”
Liquidation Rights. Article 111 of our articles of association provides that upon any liquidation, dissolution or winding-up of our company, our remaining assets shall be distributed pro-rata to our ordinary shareholders.
Redemption. Under Article 38 of our articles of association, we may issue redeemable stock and redeem the same.
Capital Calls. Under our memorandum of association and the Israeli Companies Law, the liability of our shareholders is limited to the par value of the shares held by them.
Substantial limitations on shareholders. See Item 6.C. “Directors, Senior Management and Employees‑Board Practices–Approval of Related Party Transactions.”
Modifications of Share Rights
The rights attached to a class of shares may be altered by an extraordinary resolution of the general meeting of shareholders, provided the holders of 75% of the issued shares of that class approve such change by the adoption of an extraordinary resolution at a separate meeting of such class, subject to the terms of such class. The provisions of the articles of association pertaining to general meetings of shareholders also apply to a separate meeting of a class of shareholders. Shares which confer preferential or subordinate rights relating to, among other things, dividends, voting, and payment of capital may be created only by an extraordinary resolution of the general meeting of shareholders.
General Meetings of Shareholders
Under the Israeli Companies Law, a company must convene an annual meeting of shareholders at least once every calendar year and within 15 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 “special general meetings.” In addition, the board must convene a special general meeting upon the demand of two of the directors, 25% of the nominated directors, one or more shareholders having at least 5% of the outstanding share capital and at least 1% of the voting power in the company, or one or more shareholders having at least 5% of the voting power in the company. See this Item 10B. “Additional Information – Memorandum and Articles of Association – Rights Attached to Shares – Voting Rights.”
A shareholder present, in person or by proxy, at the commencement of a general meeting of shareholders may not seek the cancellation of any proceedings or resolutions adopted at such general meeting of shareholders on account of any defect in the notice of such meeting relating to the time or the place thereof. Shareholders who are registered in our register of shareholders at the record date may vote at the general meeting of shareholders. The record date is set in the resolution to convene the general meeting of shareholders, provided, however, that such record date must be between 14 to 21 days or, in the event of a vote by ballots, between 28 to 40 days prior the date the general meeting of shareholders is held.
The quorum required for a general meeting of shareholders consists of at least two record shareholders, present in person or by proxy, who hold, in the aggregate, at least one third of the voting power of our outstanding shares. A general meeting of shareholders will be adjourned for lack of a quorum after half an hour from the time appointed for such meeting to the same day in the following week at the same time and place or any other time and place as the board of directors designates in a notice to the shareholders. At such reconvened meeting, if a quorum is not present within half an hour from the time appointed for such meeting, two or more shareholders, present in person or by proxy, will constitute a quorum. The only business that may be considered at an adjourned general meeting of shareholders is the business that might have been lawfully considered at the general meeting of shareholders originally convened and the only resolutions that may be adopted are the resolutions that could have been adopted at the general meeting of shareholders originally convened.
Limitations on the RightPlease refer to Own Our SecuritiesExhibit 2.5 for Items 10.B.3, B.4, B.6, B.7, B.8, B.9 and B.10.
Neither our memorandum or articles of association nor the laws of the State of Israel restrict in any way the ownership or voting of our ordinary shares by non-residents, except that the laws of the State of Israel may restrict the ownership of ordinary shares by residents of countries that are in a state of war with Israel.
Provisions Restricting a Change in Control of Our Company
The Israeli Companies Law requires that mergers between Israeli companies be approved by the board of directors and general meeting of shareholders of both parties to the transaction. The approval of the board of directors of both companies is subject to such boards’ confirmation that there is no reasonable doubt that after the merger the surviving company will be able to fulfill its obligations towards its creditors. Each company must notify its creditors about the contemplated merger. Under our articles of association, such merger must be approved by a resolution of the shareholders, as explained above. The approval of the merger by the general meetings of shareholders of the companies is also subject to additional approval requirements as specified in the Israeli Companies Law and regulations promulgated thereunder. For purposes of the shareholders’ approval, the merger shall not be deemed as granted unless the court determines otherwise, if it is not supported by the 75% of the shares represented and voting at the general meeting, provided that such majority includes a simple majority of the non-interested shareholders. See also Item 6C. “Directors, Senior Management and Employees – Board Practices – Approval of Related Party Transactions under Israeli Law.”
The Israeli Companies Law also provides that an acquisition of shares of a public company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company and there is no existing 25% or greater shareholder in the company. An acquisition of shares of a public company must also be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company and there is no existing 45% or greater shareholder in the company. These requirements do not apply if the acquisition (i) was made through a private placement that received shareholder approval, (ii) was from a 25% shareholder of the company and resulted in the acquirer becoming a 25% shareholder of the company or (iii) was from a 45% shareholder of the company and resulted in the acquirer becoming a 45% shareholder of the company. The special tender offer must be extended to all shareholders but the offer may include explicit limitations allowing the offeror not to purchase shares representing more than 5% of the voting power attached to the company’s outstanding shares, regardless of how many shares are tendered by shareholders. The special tender offer may be effected only if (i) at least 5% of the voting power attached to the company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.
If, as a result of an acquisition of shares, the acquirer will hold more than 90% of the outstanding shares, the acquisition must be made by means of a tender offer for the entire outstanding shares. In such event, if less than 5% of the outstanding shares are not tendered in the tender offer, all the shares of the company will be deemed as tendered and sold. However, if more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire any shares at all. The law provides for appraisal allowing any shareholder to file a motion to the court within six months following the consummation of a full tender offer. However, in the event of a full tender offer, the offer or may determine that any shareholder who accepts the offer will not be entitled to appraisal rights. Such determination shall be effective only if the offeror or the company has timely published all the information that is required to be published in connection with such full tender offer pursuant to all applicable laws.
In addition, the purchase of 25% or more of the outstanding share capital of a company or the purchase of substantial assets of a company requires, under certain conditions, the approval of the Restrictive Practices Authority. Furthermore, if the target company has received tax incentives of grants from the Office of the Chief Scientist, changes in ownership may require also the approval of the tax authorities or the Office of the Chief Scientist, as applicable.
Finally, in general, Israeli tax law treats stock-for-stock acquisitions less favorably than does U.S. tax law. Israeli tax law has been amended to provide for tax deferral in specified acquisitions, including transactions where the consideration forOn June 30, 2021, we completed the sale of shares is the receiptour Integration Solution Division to Aeronautics Ltd., a subsidiary of sharesRAFAEL Advanced Defense Systems Ltd., in a share and asset purchase agreement for total consideration of $35 million in cash, on a cash-free, debt-free basis. As part of the acquiring company. Nevertheless, Israeli tax law may subject a shareholder who exchanges his ordinary shares for sharesacquisition, Aeronautics acquired our facility in a foreign corporation to immediate taxation or to taxation before his investment in the foreign corporation becomes liquid, although in the case of shares of a foreign corporation that are traded on a stock exchange, the tax may be postponed subject to certain conditions.Yehud, Israel.
C. Material Contracts.
On April 2, 2018, we acquired 55% controlling interests in ESC BAZ Ltd. ("BAZ"). BAZ is an Israeli-based company focused on the development and manufacturing of military-grade smart Security Video Observation and Surveillance systems. The BAZ product portfolio includes a wide range of modular and customizable medium and long range surveillance systems for distances from 500m up to 25km.
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 us and to our shareholders. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, the views expressed in the discussion might not 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 does not exhaust 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
The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section also contains a discussion of material Israeli tax consequences concerning the ownership of and disposition of our ordinary shares. This summary does not discuss all the acts of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. Since some parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion.
The discussion below should not be construed as legal or professional tax advice and does not cover all possible tax considerations. Potential investors are urged to consult their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares, including in particular, the effect of any foreign, state or local taxes.
General Corporate Tax Structure
Generally, Israeli companies are subject to corporate tax on their taxable income. Since January 2018, the corporate tax rate is 23%. However, the effective tax rate payable by a company that generates income from an Approved Enterprise or a Preferred Enterprise, as further discussed below, may be considerably lower. In addition, Israeli companies are currently subject to regular corporate tax rate on their capital gains.
Israeli Transfer Pricing Regulations
On November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Israeli Tax Ordinance, came into effect, or the TP Regs. Section 85A of the Tax Ordinance and the TP Regs generally require that all cross-border transactions carried out between related parties be conducted on an arm’s length principle basis and will be taxed accordingly. The TP Regs are not expected to have a material effect on us.
Tax Benefits for Research and Development
Israeli tax law allows, under specified conditions, a tax deduction for expenditures, including capital expenditures, inUntil the year incurred relating to scientific research and development projects, if the expenditures are approved by the relevant Israeli Government ministry, determined by the field of research, and the research and development is for the promotionsale of the company and is carried out by orIntegrated Solution Division on behalf of the company seeking such deduction. However, the amount of such deductible expenses shall be reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. ExpendituresJune 30, 2021, we believed that were not approved (as described above) are deductible over a three-year period.
Encouragement of Capital Investments Law, 1959
2005 Amendment to the Investments Law
An amendment to the Investments Law, which was published on April 1, 2005, or the Amendment, has changed certain provisions of the Investments Law. As a result of the Amendment, a company is no longer obliged to acquire approved enterprise status in order to receive the tax benefits previously available under the alternative benefits provisions, and therefore generally there is no need to apply to the Investment Center for this purpose (approved enterprise status remains mandatory for companies seeking grants). Rather, a company may claim the tax benefits offered by the Investments Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set out by the Amendment. A company is also granted a right to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the Amendment.
Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of their business income from export, referred towe qualified as a “Benefited Enterprise.” In order to receive the tax benefits, the Amendment states that the company must make an investment in the BenefitedPreferred Enterprise, exceeding a certain percentage or a minimum amount specified in the Investments Law. Such investment may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Benefited Enterprise, referred to as the Year of Election. Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Benefited Enterprise and the company’s effective tax rate will be the result of a weighted combination of the applicable rates. In this case, the minimum investment required in order to qualify as a Benefited Enterprise is required to exceed a certain percentage or a minimum amount of the company’s production assets before the expansion.
The duration of tax benefits is subject to a limitation of the earlier of seven to ten years from the commencement year, or 12 years from the first day of the Year of Election. The tax benefits granted to a Benefited Enterprise are determined, as applicable to its geographic location within Israel, according to one of the following new tax routes, which may be applicable to us:
| · | Similar to the currently available alternative route, exemption from corporate tax on undistributed income for a period of two to ten years, depending on the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in each year. Benefits may be granted for a term of seven to ten years, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived from the Benefited Enterprise during the tax exemption period, such income will be subject to corporate tax at the applicable rate (10%-25%) with respect to the gross amount of dividend distributed. The company is required to withhold tax at the source at a rate of 15% from any dividends distributed from income derived from the Benefited Enterprise; and
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| · | A special tax route, which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited Enterprise. The benefits period is ten years. Upon payment of dividends, the company is required to withhold tax at source at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents. |
Generally, a company that is “Abundant in Foreign Investment,” as defined in the Investments Law, is entitled to an extension of the benefits period by an additional five years, depending on the rate of its income that is derived in foreign currency.
The Amendment changes the definition of “foreign investment” in the Investments Law so that the definition now requires a minimal investment of NIS 5 million by foreign investors. Furthermore, such definition now also includes the purchase of shares of a company from another shareholder, provided that the company’s outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the aforementioned definition are retroactive from 2003.
The Amendment applies to approved enterprise programs in which the year of election under the Investments Law is 2004 or later, unless such programs received “Approved Enterprise” approval from the Investment Center on or prior to December 31, 2004, in which case the Amendment provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the Investments Law as they were on the date of such approval.
Should we elect to utilize tax benefits under the Amendment to the Investments Law, any such tax exempt profits might be subject to future taxation on the corporate level upon distribution to shareholders by a way of dividend or liquidation. Accordingly, we may be required to recognize deferred tax liability with respect to such tax exempt profits.
In March 2007, we received a pre-ruling from the Israeli Tax Authority for our request for a Beneficiary Enterprise for the elected tax year 2005 ("the 2005 program"), regarding eligibility for benefits under the Amendment. We have not obtained any tax benefits from this program. The benefit period of this program terminated on December 31, 2016.
Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendment 68):
An additional amendment to ("the Investment Law became effective in January 2011, or the 2011 Amendment. Under the 2011 Amendment,Law") and accordingly were eligible for a reduced corporate tax rate of 16% on our preferred income, derived by ‘Preferred Companies’ from ‘Preferred Enterprises’ (both as defined in the 2011 Amendment) would be subject to a uniform rate of corporate tax as opposed to the incentives prior to the 2011 Amendment that were limited to income from Approved or Benefiting Enterprises during their benefits period. According to the 2011 Amendment, the uniform tax rate on such income, referred to as ‘Preferred Income’, would be 10% in areas in Israel that are designated as Development Zone A and 15% elsewhere in Israel during 2011-2012, 7% and 12.5%, respectively, in 2013-2014, and 6% and 12%, respectively, thereafter. Income derived by a Preferred Company from a ‘Special Preferred Enterprise’ (as defined in the Investment Law) would enjoy further reduced tax rates for a period of ten years of 5% in Zone A and 8% elsewhere. As with dividends distributed from taxable income derived from an Approved Enterprise or Benefiting Enterprise during the applicable benefits period, dividends distributed from Preferred Income would be subject to a 15% tax (or lower, if so provided under an applicable tax treaty), which would generally be withheld by the distributing company, provided however that dividends distributed from ‘Preferred Income’ from one Israeli corporation to another, would not be subject to tax. While a company may incur additional tax liability in the event of distribution of dividends from tax exempt income generated from its Approved and Benefiting Enterprises, no additional tax liability will be incurred by in the event of distribution of dividends from income taxed in accordance with the 2011 Amendment. Under the transitional provisions of the 2011 Amendment, we could have elected whether to irrevocably implement the 2011 Amendment with respect to our existing Approved and Benefiting Enterprises while waiving benefits provided under the legislation prior to the 2011 Amendment or keep implementing the legislation prior to the 2011 Amendment during the next years. The 2011 Amendment had no material effect on the tax payable in respect of our operations and therefore, we did not elect to implement the 2011 Amendment.
In November 2012, the Knesset passed Amendment No. 69 to the Investment Law, or the Trapped Earnings Law, which provides a temporary, partial, relief from taxation on a distribution from exempt income for companies which elect the relief through November 2013. The Trapped Earnings Law allows companies to qualify a portion of its exempt income, or Elected Earnings, for a reduced tax rate ranging between 17.5% and 6%. While the reduced tax is payable within 30 days of election, an electing company is not required to actually distribute the Elected Earnings within a certain period of time. The applicable rate is based on a linear formula involving the portion of Elected Earnings to exempt income and the applicable tax rate prescribed in the Investment Law. A company electing to qualify its exempt income must undertake to make designated investments in productive fixed assets, research and development, or wages of new employees. The amount of such designated investments is defined by a formula which considers the portion of Elected Earnings to the exempt income and the applicable tax rate prescribed by the Investment Law.
In addition, to the reduced tax rate a distribution of Elected Earnings would be subject to a 15% withholding tax. The Trapped Earnings Law provides an exemption from the 15% withholding tax for a distribution to an Israeli resident company from companies which have elected the Privileged Enterprise status and waived their Approved Enterprise and privileged Enterprise Status through June 2015.
We are currently evaluating the implications that the Trapped Earnings Law will have on the tax payable in respect of our operations.
Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendment 71):
On August 5, 2013, the “Knesset” issued the Law for Changing National Priorities (Legislative Amendments for Achieving Budget Targets for 2013 and 2014), 2013 which consists of Amendment 71 to the Law for the Encouragement of Capital Investments (“the Amendment”). According to the Amendment, the tax rate on preferred income from a preferred enterprise in 2014 and thereafter is 16% (in development area A - 9%). As for changes in tax rates resulting from the enactment of Amendment 73 to the Law, see below.
The Amendment also prescribes that any dividends distributed to individuals or foreign residents from the preferred enterprise’senterprise's earnings as above will bewere subject to tax at a rate of 20%.
Amendment to
Following the Law for the Encouragement of Capital Investments, 1959 (Amendment 73):
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which includes Amendment 73 to the Law for the Encouragement of Capital Investments ("the Amendment") was published. According to the Amendment, a preferred enterprise located in development area A will be subject to a tax rate of 7.5% instead of 9% effective from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%).
The Amendment also prescribes special tax tracks for technological enterprises, which are subject to rules that are to be issued by the Minister of Finance by March 31, 2017.
The new tax tracks under the Amendment are as follows:
Technological preferred enterprise - an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than NIS 10 billion. A technological preferred enterprise, as defined in the Law, which is located in the center of Israel will be subject to tax at a rate of 12% on profits deriving from intellectual property (in development area A - a tax rate of 7.5%).
Any dividends distributed to "foreign companies", as defined in the Law, deriving from income from the technological enterprises will be subject to tax at a rate of 4%.
Since definitive criteria to determine the tax benefits had not yet been established as of December 31, 2018, it cannot be concluded that the legislation in respect of technological enterprises had been enacted or substantively enacted as of that date. Accordingly, the above changes in the tax rates relating to technological enterprises were not taken into account in the computation of deferred taxes as of December 31, 2018.
Encouragement of Industry (Taxes) Law, 5729-1969
Under the Encouragement of Industry (Taxes) Law, 5729-1969, or the Industry Encouragement Law, “Industrial Companies” are entitled to certain corporate tax benefits, including, among others:
| · | Amortization, under certain conditions, of purchases of know‑how and patents and of rights to use a patent and know‑how which are used for the development or advancement of the company, over an eight‑year period for tax purposes; |
| · | Right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli industrial companies; and |
| · | Accelerated depreciation rates on equipment and buildings; and |
| · | Deductions over a three-year period of expenses in connection with the issuance and listing of shares on a recognized stock market. |
Eligibility for benefits under the Industry Encouragement Law is not subject to the prior approval of any governmental authority. Under the Industry Encouragement Law, an “Industrial Company” is a company resident in Israel, at least 90%sale of the Integrated Solution Division, our income of which, in any tax year, determined in Israeli currency, exclusive of income from government loans, capital gains, interest and dividends, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is an enterprise owned by an Industrial Company, whose major activity in a given tax year is industrial production activity.
We believe that we currently qualify as an industrial company as defined by the Industry Encouragement Law. We cannot assure you that we will continue to qualify as an industrial company or that the benefits described above will be available to us in the future.
Encouragement of Industrial Research and Development Law, 5744-1984
Under the Encouragement of Industrial Research and Development Law, 5744-1984, or the Research Law, research and development programs that meet specified criteria and are approved by a governmental committee of the Innovation Authority (formerly the Office of the Chief Scientist), are eligible for grants between 20%-50% of certain of the project’s expenditures, as determined by the research committee of the Innovation Authority. In exchange, the recipient of such grants is required to pay the Innovation Authority royalties from the revenues derived from products incorporating technology developed within the framework of the approved research and development program or derived from such program (including ancillary services in connection with such program), usually up to 100% of the U.S. dollar-linked value of the total grants received in respect of such program, plus LIBOR interest.
The terms of the Israeli government participation also require a declaration regarding the location of manufacturing of supported products by the recipients of the grants. Under regulations promulgated under the Research Law, upon the approval of the Innovation Authority, some of the manufacturing volume may be transferred outside of Israel, beyond the aforementioned declared rate of production abroad, provided that the grant recipient pays royalties at an increased rate and in addition may incur an increased payment cap of up to 300% of the received grant, depending on the percentage of manufacturing being transferred abroad. The Research Law also provides that know-how developed under an approved research and development program and any derivatives of this know-how may not be transferred to third parties in Israel without the prior approval of the research committee of the Innovation Authority. The Research Law further provides that the know-how developed under an approved research and development program may not be transferred to any third parties outside Israel. No approval is required for the sale or export of any products resulting from such research and development.
In June 2005, an amendment to the Research Law became effective, which amendment was intended to make the Research Law more compatible with the global business environment by, among other things, relaxing restrictions on the transfer of manufacturing rights outside Israel and on the transfer of Innovation Authority funded know-how outside of Israel. The amendment permits the Innovation Authority, among other things, to approve the transfer of manufacturing rights outside Israel in exchange for an import of different manufacturing into Israel as a substitute, in lieu of demanding the recipient to pay increased royalties as described above. The amendment further permits, under certain circumstances and subject to the Innovation Authority’s prior approval, the transfer outside Israel of know-how that has been funded by Innovation Authority, generally in the following cases: (a) the grant recipient pays to the Innovation Authority a portion of the consideration paid for such funded know-how (according to certain formulas), (b) the grant recipient receives know-how from a third party in exchange for its funded know-how, or (c) such transfer of funded know-how arises in connection with certain types of cooperation in research and development activities under agreements of cooperation programs between Israel and an additional country.
The Research Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The law requires the grant recipient and its controlling shareholders and interested parties to notify the Innovation Authority on any change in control of the recipient or a change in the holdings of the means of control of the recipient and obtaining the approval of the Innovation Authority in case such a change results in a foreign resident becoming an interested party directly in the recipient and requires the new interested party to undertake to the Innovation Authority to comply with the Research Law. In addition, the rules of the Innovation Authority may require prior approval of the Innovation Authority or additional information or representations in respect of certain of such events. For this purpose, “control” is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company. A person is presumed to have control if such person holds 50% or more of the means of control of a company. “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer. An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, any foreign resident who acquires 5% or more of our ordinary shares will be required to notify the Innovation Authority that it has become an interested party and to sign an undertaking to comply with the Research Law.
The Israeli authorities have indicated that the government may reduce or abolish grants from the Innovation Authority in the future. Even if these grants are maintained, we cannot assure you that we will receive Innovation Authority grants in the future. In addition, each application to the Innovation Authority is reviewed separately, and grants are based on the program approved by the research committee. Generally, expenditures supported under other incentive programs of the State of Israel are not eligible for grants fromPreferred Enterprise benefits and is taxed at the Innovation Authorityregular corporate tax rate for Israeli companies at 23%.
Taxation under Inflationary Conditions
In February 2008, the “Knesset” (Israeli parliament) passed an amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law starting 2008 and thereafter. Since 2008, the results for tax purposes are measured in nominal values, excluding certain adjustments for changes in the Israeli CPI carried out in the period up to December 31, 2007. Adjustments relating to capital gains such as for sale of property (betterment) and securities continue to apply until disposal. Since 2008, the amendment to the law includes, among others, the cancellation of the inflationary additions and deductions and the additional deduction for depreciation (in respect of depreciable assets purchased after the 2007 tax year).
Capital Gains Tax on Sales of Our Ordinary Shares by Foreign Holders
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is 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 CPI or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus.
Generally, as of January 1, 2012, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 25% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 30%. Additionally, if such shareholder is considered a “significant shareholder” at the time of sale or at any time during the 12-month period preceding such sale, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the company, the tax rate shall be 30% (in case of Israeli individual shareholders who acquired shares before January 1, 2012 the rates applicable to the holding period between January 1, 2003 and December 31, 2012 should be 20% and 25% instead of the abovementioned 25% and 30% respectively. In case of individual shareholders who acquired shares before January 1, 2003, the rates applicable to the holding period until such date shall be based on tax brackets and rates applicable to regular income. Real capital gain in such cases shall be calculated based on linearity throughout the entire holding period). However, the foregoing tax rates do not apply to: (i) dealers in securities; and (ii) shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement). Israeli companies are subject to the Corporate Tax rate on capital gains derived from the sale of listed shares. A surtax of 3% applies on top of the above rates in case of individuals whose taxable income (including inter-alia income from real capital gain) in the relevant year exceeds a threshold of NIS 647,640 (for 2021 – indexed annually).
The tax basis of our ordinary shares acquired prior to January 1, 2003 will generally be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.
Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock exchange or regulated market outside of Israel, provided however that certain conditions are met including, but not limited to that such capital gains are not derived from a permanent establishment in Israel and such shareholders did not acquire their shares prior to an initial public offering. However, non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest (through any means of control) of more than 25% or more in such non-Israeli corporation, or (ii) are the beneficiaries or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In some instances, where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source.source (generally, withholding tax under Israeli law is not self-assessed by the payer and reduced or no withholding tax (where relevant) requires pre-approval from the ITA).
Pursuant to the Convention Between the government of the United States of America and the government of Israel with Respect to Taxes on Income, as amended, or the U.S.-Israel Tax Treaty, the sale, exchange or disposition of ordinary shares by a person who (i) holds the ordinary shares as a capital asset, (ii) qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty, or a Treaty U.S. Resident, and (iii) is entitled to claim the benefits afforded to such person by the U.S.-Israel Tax Treaty, generally, will not be subject to the Israeli capital gains tax. Such exemption will not apply if (i) such Treaty U.S. Resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange or disposition, subject to certain conditions, or (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent establishment in Israel. In such case, the sale, exchange or disposition of ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.
Taxation of Dividends paid to Non-Resident Holders of Shares
Non-residents of Israel are subject to Israeli income tax on income accrued or derived from sources in Israel. Such sources of income include passive income such as dividends. On distributions of dividends other than bonus shares or stock dividends, income tax is applicable at the rate of 25%, or 30% for a shareholder that is considered a “significant shareholder” at the time of receipt of the dividend or at any time during the 12-month period preceding such, distribution, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. However, under the Investments Law, dividends generated by an Approved Enterprise (or Benefited Enterprise) are taxed at the rate of 15%. A surtax of 3% applies on top of the above rates in case of individuals whose taxable income (including inter-alia income from dividend) in the relevant year exceeds a threshold of NIS 647,640 (for 2021 – indexed annually).
Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a Treaty U.S. Resident is 25%. However, if the income out of which the dividend is paid is not generated by an Approved Enterprise (or Benefited Enterprise), and not more than 25% of our gross income consists of interest or dividends, dividends paid to a U.S. corporation holding at least 10% of our issued voting power during the part of the tax year which precedes the date of payment of the dividend and during the whole of its prior tax year, are generally taxed at a rate of 12.5%. Dividends generated by an Approved Enterprise (or Benefited Enterprise) are taxed at the rate of 15% under the U.S.-Israel Tax Treaty. With respect to the December 2020 and 2021 cash distributions the Company requested the ITA for a ruling determining whether the said distribution should be treated as a capital reduction or dividend. Note that treaty rates are not automatically applied under Israeli law and require preapproval from the ITA (by way of a withholding tax reduction certificate) which should be actively sought by the payee.
United States Federal Income Tax Considerations
The following is a description 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 are 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, or the Code, Treasury regulations promulgated thereunder, judicial and administrative interpretations thereof, and the U.S.-Israel Tax Treaty, or the Treaty, all as in effect on the date hereof and all of which are subject to change either prospectively or retroactively.
There can be no assurance that the U.S. Internal Revenue Service, or the IRS, will not take a different position concerning the tax consequences of the acquisition, ownership and disposition of our ordinary shares or that such a position would not be sustained. This description does not address all tax considerations that may be relevant with respect to an investment in our ordinary shares. In addition, this description does not account for the specific circumstances of any particular investor, such as:
| · | broker-dealers;broker-dealers; |
| · | financial institutions;financial institutions; |
| · | certain insurance companies;certain insurance companies; |
| · | investors liable for alternative minimum tax;investors liable for alternative minimum tax; |
| · | regulated investment companies, real estate investment trusts, or grantor trusts; |
| · | dealers or traders in securities, commodities or currencies; |
dealers or traders in securities, commodities or currencies;
| · | tax-exempt organizations;tax-exempt organizations; |
| · | non-resident aliens of the United States or taxpayers whose functional currency is not the U.S. dollar;non-resident aliens of the United States or taxpayers whose functional currency is not the U.S. dollar; |
| · | persons who hold the ordinary shares through partnerships or other pass-through entities;persons who hold the 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;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 investorspersons (or their direct, indirect or constructive owners) that actually or constructively own 10% or more of our shares by vote or value; or |
| · | investors holding ordinary shares as part of a straddle, appreciated financial position, a hedging transaction or conversion transaction. |
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. You are urged to consult your tax advisors regarding the non-U.S. and U.S. federal, state and local tax consequences of an investment in ordinary shares.
For purposes of this summary, as used herein, the term “U.S. Holder” means a person that is eligible for the benefits of the Treaty and is a beneficial owner of an ordinary share who is, for U.S. federal income tax purposes:
| · | an individual who is a citizen or, for U.S. federal income tax purposes, a resident of the United States; |
an individual who is a citizen or, for U.S. federal income tax purposes, a resident of the United States;
| · | a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any political subdivision thereof; |
a corporation or other entity taxable as a corporation 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 |
an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
| · | a trust if such 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 its administration and (2) one or more U.S. persons have the authority to control all of the substantial decisions of such trust. |
a trust if such 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 its administration and (2) one or more U.S. persons have the authority to control all of the substantial decisions of such trust.
Unless otherwise indicated, this discussion assumes that the Company is not, and will not become, a “passive foreign investment company,” or a PFIC, for U.S. federal income tax purposes. See “—Passive Foreign Investment Companies” below.
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 to the extent 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, it is expected that the entire amount of any distribution will generally be reported as dividend income to you. Dividends are included in gross income as ordinary income. 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 tax basis in our ordinary shares and any amount in excess of your tax basis will be treated as gain from the sale of ordinary shares. See “—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.
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 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, at a rate not exceeding the applicable rate provided by the Treaty, will 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 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 (see discussion below). 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 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, and 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 will be subject to tax at the lower long-term capital gain rates (currently ata maximum of 20%). Distributions taxable as dividends paid on our ordinary shares should qualify for a reduced rate provided that 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 (see discussion below). 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. The legislation enacting the reduced tax rate on qualified dividend income contains special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to the reduced tax rate. U.S. Holders of our ordinary shares should consult their own tax advisors regarding the effect of these rules in their particular circumstances.
Sale or Disposition of Ordinary Shares
Subject to the discussion of PFIC rules below, if you sell or otherwise dispose of our ordinary shares, 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 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, which would be treated as ordinary income or loss.
An accrual basis U.S. Holder may elect the same treatment 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 may have a foreign currency gain or loss for U.S. federal income tax purposes because of differences between the U.S. dollar valuevalues of the currency received prevailing on the trade date and the settlement date. Any such currency gain or loss would be treated as U.S.- source ordinary income or loss and would be 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 Companies
We believe that we were not a PFIC for U.S. federal income tax purposes for the taxable year of 2018. However, since PFIC status depends uponBased on the composition of our income, and assets and(including the market value of our assets from time to time, there cangoodwill, going-concern value or any other unbooked intangibles, which may be no assurance thatdetermined based on the price of the ordinary shares), and operations, we believe we will not be consideredclassified as a “passive foreign investment company”, or PFIC, for the 2021 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 anyour 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. If we were a PFIC for any taxable year during which a U.S. Holder owned an ordinary share,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 athe U.S. Holder on a sale or other disposition of such ordinary shareOrdinary Shares would be allocated ratably over the U.S. Holder’s holding period for the ordinary share.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 sharesOrdinary 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. Certain elections (such as a mark-to-market election) may be available to U.S. Holders and may result in alternative tax treatment. In addition, if we were a PFIC for a taxable year in which we pay a dividend or the priorimmediately preceding taxable year, the favorablepreferential 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.
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 will 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 ordinaryOrdinary 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) are a corporation, or fall within certain exempt categories, and demonstrate the fact when so 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 own “specified foreign financial assets” with an aggregate value in a taxable year in excess of certain thresholds (as determined under rules in Treasury regulations) and that are required to file a U.S. federal income tax return generally will be required to file an information report with respect to those assets with their tax returns. IRS Form 8938 has been issued for that purpose. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, foreign stocks held directly, and interests in foreign estates, foreign pension plans or foreign deferred compensation plans. Under those rules, our ordinary shares, whether owned directly or through a financial institution, estate or pension or deferred compensation plan, would be “specified foreign financial assets.” Under Treasury regulations, the reporting obligation applies to certain U.S. entities that hold, directly or indirectly, specified foreign financial assets. Penalties can apply if there is a failure to satisfy this reporting obligation. A U.S. Holder is urged to consult 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 in vote or value of our ordinary shares 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. F. | Dividends and Paying Agents. |
Not applicable.
Not applicable.
We are subject to certain of the reporting requirements of the Securities and Exchange Act of 1934, as amended, or 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 to file quarterly reports including financial statements. 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.magalsecurity.comwww.senstartechnologies.com) promptly following the filing of our annual report with the SEC. The information on our website is not incorporated by reference into this annual report.
The SEC maintains an Internet website that contains reports and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov. We make our reports available on our internet website, free of charge, as soon as reasonably practicable after such material is electronically filed with the SEC. The documents concerning our company that are referred to in this annual report may also be inspected at our executive offices in Israel.
I. I. | Subsidiary Information. |
Not applicable.
| ITEM 11. | Quantitative and Qualitative Disclosures about Market Risk |
We are exposed to a variety of risks, including changes in interest rates and foreign currency fluctuations.
Foreign Currency Exchange Risk
We sell most of our products in North America, Europe, Africa, Latin America and Israel. Our revenues are primarily denominated in U.S. dollars, Canadian dollars, Mexican pesos, Euros and NIS, while a portion of our expenses, primarily labor expenses, is incurred in NIS and Canadian Dollars. Additionally, certain assets, especially trade receivables, as well as part of our liabilities are denominated in NIS and CAD. As a result, fluctuations in rates of exchange between the U.S. dollar and non-U.S. dollar currencies may affect our operating results and financial condition. The dollar cost of our operations in Israel may be adversely affected by the appreciation of the NIS against the U.S. dollar. The U.S. dollar cost of our operations in Canada may be adversely affected by the appreciation of the Canadian dollars against the U.S. dollar. The U.S. dollar cost of our operations in Mexico may be adversely affected by the appreciation of the Mexican peso against the U.S. dollar. In addition, the value of our non-U.S. dollar revenues could be adversely affected by the depreciation of the U.S. dollar against such currencies.
The U.S. dollar cost of our operations in Canada is influenced by the exchange rate between the U.S. dollar and the CAD. In 20162021, 2020 and 20172019 the CAD appreciated against the U.S. dollar by 2.7%0.1%, 2.1% and 7%4.4%, respectively. In 2018 the CAD depreciated against the U.S. dollar by 8.6%. In addition, the U.S. dollar cost of our operations in Mexico is influenced by the exchange rate between the U.S. dollar and the Mexican Peso. In 2016, the Peso depreciated against the U.S. dollar by 19.2%. In 2017 and 2018 the Mexican Peso appreciated against the U.S. dollar by 4.5% and 0.4% respectively.
During the years ended December 31, 2016In 2021, 2020 and 2017,2019, foreign currency fluctuations had a negative impact on our results of operations andas we recorded a foreign exchange loss, net of $0.6$1 million, $1 million and $4$1.3 million, respectively. During the year ended December 31, 2018, foreign currency fluctuations had a positive impact on our results of operations and we recorded a foreign exchange gain, net of $1.1 million. We cannot assure you that in the future our results of operations may not be materially affected by currency fluctuations.
| ITEM 12. | Description of Securities Other Than Equity Securities |
Not applicable.
Not applicable.
Not applicable.