NOTE 1:-

GENERAL

General:

Magal Security Systems Ltd. ("the Parent Company" or "Magal") and its subsidiaries (together - "the Company") is a leading international provider of solutions and products for physical and video security solutions, as well as site management. Since 1969, the Company has delivered its products as well as tailor-made security solutions and turnkey projects to customers in over 100 countries under some of the most challenging conditions. The Company offers comprehensive integrated solutions for critical sites, which leverage its broad portfolio of homegrown PIDS (Perimeter Intrusion Detection Systems), advanced VMS (Video Management Software) with native IVA (Intelligent Video Analytics) security solutions, as well as a proprietary command and control platform.

On September 30, 2016, the Parent Company completed a rights offering according to which it distributed to all holders of its ordinary shares at no charge, subscription rights to purchase up to an aggregate of 6,170,386 Ordinary shares. The rights offering was fully subscribed for and the Parent Company received net proceeds of approximately $ 23,617 after deducting issuance expenses related to the rights offering of approximately $ 201.

On October 1, 2014, FIMI Opportunity Fund ("FIMI"), completed the purchase of approximately 40% of Magal's outstanding shares from Ki Corporation Limited, a Company beneficially owned by Mr. Nathan Kirsh. Following the closing of the transaction, FIMI is the largest shareholder of Magal. Following the 2016 rights offering, FIMI increased its holdings in Magal to approximately 43%.

2018 Acquisition:

On April 2, 2018 (the "Closing Date"), the Company completed the acquisition of a 55% controlling interest in ESC BAZ Ltd. ("ESC BAZ" or "BAZ") by means of a capital investment in ESC BAZ against the issuance of shares. As a part of the transaction, the Company invested $ 2,846 in ESC BAZ and granted a put option to the non-controlling interest for the remaining 45% of the shares of ESC BAZ, exercisable starting 2021. Starting 2019, the Company has an exercisable call option, which enables it to acquire the non-controlling interest in ESC BAZ. The exercise price of the put and call options is based on a formula calculation, driven by an adjusted multiple on the average operating income of ESC BAZ.

ESC BAZ is an Israeli-based company, focused on the development and manufacture of military-grade smart security video observation and surveillance systems. The acquisition broadens the Company’s offerings, adding a wide range of modular and customizable medium and long range surveillance systems for distances from 500m up to 25km. ESC BAZ systems, which have been used successfully for over twenty years, are operational and field proven with customers including the Israeli Defense Forces, police and security services, as well as numerous other government and civilian customers worldwide.

The acquisition was accounted for by the acquisition method and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed. The entire goodwill was assigned to the BAZ reporting unit within the Company’s Project segment. The results of ESC BAZ's operations have been included in the consolidated financial statements since April 2, 2018.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:

Net assets (including cash of $ 2,461)	$	3,683
Intangible assets		501
Adjustment to deferred revenue		20
Deferred tax liabilities		(80	)
Goodwill		255
Redeemable non-controlling interests		(1,533	)

Total purchase price	$	2,846

In performing the purchase price allocation, management considered, among other factors, analyses of historical financial performance, highest and best use of the acquired assets and estimates of future performance of the acquired company's business.

The fair value of intangible assets was based on the market participant approach using an income approach. Intangible assets that are subject to amortization are amortized over their estimated useful lives. For technology, Magal is using the straight-line method and for customer relationships and backlog, Magal is using the acceleration method.

The following table sets forth the components of intangible assets associated with the acquisition:

	Fair value

Technology	$	190
Customer relationships		164
Backlog		147

Total intangible assets	$	501

Redeemable non-controlling interests in the amount of $ 1,533 was recorded at acquisition date and classified as temporary equity (mezzanine account), separate from permanent equity, on the consolidated balance sheets. The redeemable non-controlling interests is measured at each reporting period at the higher of their redemption amount or the non-controlling interest book value, in accordance with the requirements of ASC 810 “Consolidation” and ASC 480-10-S99-3A, “Distinguishing Liabilities from Equity” (See note 2c).

Acquisition related costs for the year ended December 31, 2018 amounted to approximately $ 67 were included in general and administrative expenses in the statement of operations.

The amounts of revenue and net earnings of ESC BAZ since the acquisition date included in the consolidated income statement for the reporting period are:

	Year ended December 31,
	2018

Revenues	$	3,969

Net income	$	210

Unaudited pro forma condensed results of operations:

The following represents the unaudited pro forma condensed results of operations for the years ended December 31, 2018 and 2017, assuming that the acquisition of ESC BAZ occurred on January 1, 2017. The pro forma information is not necessarily indicative of the results of operations that would have actually occurred had the acquisitions been consummated on those dates, nor does it purport to represent the results of operations for future periods.

	Year ended December 31,
	2018		2017
	Unaudited

Revenues	$	94,216	$	69,851

Net income (loss) attributable to Magal shareholders'	$	3,198	$	(6,802	)

Basic and diluted net income (loss) per share	$	0.14	$	(0.30	)

2016 Acquisition:

On April 1, 2016 (the "Closing Date"), a wholly-owned subsidiary of the Parent Company, completed the acquisition of all of the outstanding ordinary shares of Aimetis Corp. ("Aimetis"), a corporation incorporated under the laws of Canada for total consideration of $ 14,469, consisting of $ 14,387 in cash and performance-based contingent payments ("Earn-out") of up to $ 844. The Earn-out payments were measured, by using the Monte Carlo Simulation of the triangular model, at fair value at the Closing Date in the amount of $ 82. Since the performance conditions have not been met, the liability of $ 82 was eliminated and such amount was included as a reduction of general and administrative expenses in the statement of operations in 2016.

In addition, a retention payment in the amount of $ 844 was paid as a result of the continued employment of two executive employees of Aimetis during the period of 13 months following the closing date. The expense was recognized on a straight-line basis.

Aimetis specializes in advanced video analytics software and intelligent IP video management software (VMS). The acquisition added a product portfolio complementary to the Company's large portfolio of perimeter intrusion detection systems (PIDS), adding a video surveillance offering with solutions for outdoor and critical sites, and also strengthening the Company's position in the market. The value of goodwill was attributed to synergies between the Company's portfolio and the acquired company's products and services.

The acquisition was accounted for by the acquisition method and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired and liabilities assumed of the acquired company. The entire goodwill was assigned to the Video reporting unit within the Video and Cyber security segment. The results of the operations of Aimetis have been included in the consolidated financial statements since April 1, 2016.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:

Net assets (including cash of $ 2,274)	$	1,981
Intangible assets		4,520
Adjustment to deferred revenue		671
Deferred tax liabilities, net		(562	)
Goodwill		7,859

Total purchase price	$	14,469

The fair value of intangible assets was based on market participant approach using an income approach. Intangible assets that are subject to amortization are amortized over their estimated useful lives. For technology, the Company is using the straight-line method and for customer relationships it is using the acceleration method.

The following table sets forth the components of intangible assets associated with the acquisition:

	Fair value

Technology	$	3,759
Customer relationships		761

Total intangible assets	$	4,520

Acquisition related costs for the year ended December 31, 2016 amounted to approximately $270 and were included in general and administrative expenses in the statement of operations.

The amounts of revenue and net earnings of the Aimetis since the acquisition date included in the consolidated income statement for the reporting period are:

	Year ended December 31,
	2016

Revenues	$	5,047

Net loss	$	(2,667	)

Unaudited pro forma condensed results of operations:

The following represents the unaudited pro forma condensed results of operations for the years ended December 31, 2016 and 2015, assuming that the acquisitions of Aimetis occurred on January 1, 2015. The pro forma information is not necessarily indicative of the results of operations that would have actually occurred had the acquisitions been consummated on those dates, nor does it purport to represent the results of operations for future periods.

	Year ended December 31,
	2016			2015
	Unaudited

Revenues	$	69,956		$	71,709

Net income (loss) attributable to Magal shareholders'	$	(73	)	$	2,134

Basic and diluted income (loss) per share	$	0.00		$	0.13