lost revenue, or the revenue derived from any such customers materially decreases, our operating results may be materially adversely affected.
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Revenues, based on the location of our customers for the last three fiscal years, are as follows:
| | | | | | | |
| | Year Ended December 31, |
| ||||
|
| 2021 | | 2020 |
| 2019 |
|
Americas | | 46.5 | % | 46.7 | % | 48.7 | % |
Far East | | 15.7 | | 16.3 |
| 13.6 | |
Europe | | 35.6 | | 34.3 |
| 36.4 | |
Israel | | 2.2 | | 2.7 |
| 1.3 | |
Total | | 100.0 | % | 100.0 | % | 100.0 | % |
| Year Ended December 31, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Americas | 51.6 | % | 50.9 | % | 51.7 | % | ||||||
| Far East | 16.0 | 18.0 | 15.5 | |||||||||
| Europe | 27.8 | 26.9 | 31.4 | |||||||||
| Israel | 4.6 | 4.2 | 1.4 | |||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
WeBeyond repeated business from distributors and service providers, we believe that prospective customers are generally are required to make a significant commitment of resources to test and evaluate our products and to integrate them into their larger systems. Our sales process is often subject to delays associated with lengthy approval processes that typically accompany the design and testing of new communications equipment. For these reasons, the sales cycles of our products to new customers are often lengthy, averaging approximately six to twelve months. As a result, we may incur significant selling and product development expenses prior to generating revenues from sales.
The currency of the primary economic environment in which our operations are conducted is the U.S. dollar and, as such, we use the U.S. dollar as our functional currency. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. All transaction gains and losses from the remeasurementpremeasurement of monetary balance sheet items denominated in non-U.S. dollarnon-dollar currencies are reflected in the statement of operations as financial income or expenses, as appropriate.
The demand for Voice over IP, or VoIP technology has increased during recent years. In recent years, the shift from traditional circuit-switched networks to next generation packet-switched networks continued to gain momentum. As data traffic becomes the dominant factor in communications, service providers are building and maintaining converged networks for integrated voice and data services. In developed countries, traditional and alternative service providers have adopted bundled triple play (voice, video and data) and quadruple play (voice, video, data and mobile) offerings. This trend, enabled by voice and multimedia over IP, has fueled competition among cable, wireline, ISP and mobile operators, increasing the pressure for adopting and deploying VoIP networks. In addition, underdeveloped markets without basic wire line service in countries such as China and India and certain countries in Eastern Europe are adopting the use of VoIP technology to deliver voice and data services that were previously unavailable.
The general economic uncertainty, including disruptions in the world credit and equity markets, has had and continues to have a negative impact on business around the world. This economic environment has had an adverse impact on the technology industry and our major customers. Conditions may continue to be uncertain or may be subject to deterioration which could lead to a reduction in consumer and customer spending overall, which could have an adverse impact on sales of our products. A disruption in the ability of our significant customers to access liquidity could cause serious disruptions or an overall deterioration of their businesses which could lead to a significant reduction in their orders of our products and the inability or failure on their part to meet their payment obligations to us, any of which could have a material adverse effect on our results of operations and liquidity. In addition, any disruption in the ability of customers to access liquidity could lead customers to request longer payment terms from us or long-term financing of their purchases from us. Granting extended payment terms or a significant adverse change in a customer’s financial and/or credit position could also require us to assume greater credit risk relating to that customer’s receivables or could limit our ability to collect receivables related to purchases by that customer. As a result, our allowance for doubtful accounts and write-offs of accounts receivable could increase.
Impact of the COVID-19 Pandemic on Our Business and Operations
- 44 - The spread of COVID-19, including its highly contagious variants and sub-lineages, continues to present significant challenges and risks to businesses around the world. Governmental authorities of many countries, including Israel and the United States, have implemented, and may continue to implement, significant measures to control the spread of COVID-19, including temporary closure of businesses, severe restrictions on travel and the movement of people, and other material limitations on the conduct of businesses. In
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response to the COVID-19 pandemic, we previously implemented remote working and workplace protocols for our employees in Israel in accordance with Israeli Ministry of Health requirements and similar arrangements in other countries in which we operate.
The COVID-19 pandemic has disrupted supply chains and affected production and sales across a range of industries, including the industry in which we operate. Given that some of our materials and products are sourced from suppliers located in China, we manufacture most of our products in China and we have more than 50 employees in China. We previously experienced delays in the manufacturing of our hardware products during the middle of the first quarter of 2020. Although we were able to ship all of our products as planned during that quarter, the COVID-19 pandemic has caused, and may continue to cause, disruptions and/or delays in our supply chain, manufacturing and shipments. While we have previously managed, and will continue to actively manage, the business in an attempt to mitigate the impacts of the COVID-19 pandemic, we cannot at this time estimate the duration or full magnitude that the COVID-19 pandemic will have on our business, results of operations and financial condition.
Governmental reactions to the COVID-19 pandemic, lockdowns, including shelter-in-place orders, and social distancing policies adopted by governments worldwide to manage the COVID-19 pandemic led to an acceleration in the adoption of work from home (Work from Home or WFH) policies and technologies, a global trend that had already been gaining momentum in the past few years. To ensure business continuity, companies and contact centers were compelled to transition their employees quickly from a physical office to a Work from Home environment. This in turn led to increased demand for UCaaS and video conferencing solutions, such as Microsoft Teams and Zoom, as well as Work from Home agent solutions for contact centers. As a result of these recent trends, we have experienced an increased demand for our related products and solutions.
In response to such increased demand, we previously launched Work from Home promotions and solutions aimed at helping companies offer reliable and high-quality voice communications for Work from Home employees and contact center agents. Businesses that previously were unable to transition to WFH, or faced challenges in their implementation of WFH arrangements due to aging or inappropriate communications solutions, have begun, and will likely continue, to adopt policies and technologies to better prepare them for future foreseeable and unforeseeable events that prevent employees from working in a physical on-site office, a trend which has provided a direct benefit to our business. We also believe that more businesses may ultimately decide to transition to WFH, either fully or partially, as a continuing alternative to the manner in which they conducted their operations before the COVID-19 pandemic.
The ongoing developments and fluidity of the COVID-19 pandemic, and its material and adverse impact on the global economy at large, has restricted our ability to definitively predict how the COVID-19 pandemic will impact our business and operations in the near- and long-term. The latest governmental responses to the COVID-19 pandemic, as well as alterations and extensions of such approaches, could continue to result in volatile and uncertain economic conditions. The extent of the impact of the COVID-19 pandemic on our business and results of operations will depend on future developments, which are highly uncertain at this time. Such developments include, but are not limited to, the duration and severity, and the effects of subsequent waves and variants, of COVID-19 across the globe, the timing, pace and effectiveness of vaccination rollouts in the countries in which we operate, delays and impediments to our supply chain and ability to continue to manufacture products, and ongoing restrictions on our business and personnel that may be implemented by governmental rules and regulations in an attempt to prevent the spread of COVID-19 and its highly contagious and new variants.
Ongoing Conflict in Ukraine
In February 2022, Russia launched a large-scale invasion of Ukraine, and, as of the date of this Annual Report, Russia and Ukraine continue to engage in active and armed conflict. Such conflict has resulted, and will likely continue to result in, significant destruction of Ukraine’s infrastructure and substantial casualties amongst military personnel and civilians. As a result of Russia’s invasion of Ukraine, the governments of several nations have implemented commercial and economic sanctions against Russia (as well as certain banks, companies, government officials, and other individuals in Russia and Belarus). In March 2022, Israel’s Foreign Minister Mr. Yair Lapid indicated that Israel would not function as a route to bypass sanctions imposed on Russia by the United States and other western countries, and Israeli banks have elected to sever relationships with sanctioned Russian banks.
While it is not possible to predict or determine the ultimate consequences and impact of the conflict in Ukraine, such conflict could result in, among other things, significant regional instability and geopolitical shifts, and material and adverse effects on global macroeconomic conditions, financial markets, exchange rates and supply chains. To the extent negotiations between Russia and Ukraine are ultimately unsuccessful, the conflict in Ukraine could have a lasting impact in the near- and long-term on the financial condition, business and operations of our business (and the businesses of the counterparties with who we engage), and the global economy at large.
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Results of Operations
The following table sets forth the percentage relationshipsresults of certain items from our consolidated statements of operations in dollars and as a percentage of total revenues for the periods indicated:
| | | | | | | | | | | |
| | Year ended December 31, |
| ||||||||
|
| 2021 | | 2020 |
| ||||||
| | | | | % of | | | | | % of | |
| | Amount | | Revenues | | Amount | | Revenues | | ||
Revenues: | | | | | | | | | |
| |
Products | | $ | 155,089 | | 62.3 | % | $ | 145,332 | | 65.8 | % |
Services | | | 93,831 | | 37.7 | | | 75,442 | | 34.2 | |
Total revenues | | | 248,920 | | 100.0 | | | 220,774 | | 100.0 | |
| | | | | | | | | | | |
Cost of revenues: | | | | | | | | | |
| |
Products | | | 52,750 | | 21.2 | | | 54,384 | | 24.6 | |
Services | | | 25,279 | | 10.2 | | | 16,574 | | 7.5 | |
Total cost of revenues | | | 78,029 | | 31.3 | | | 70,958 | | 32.1 | |
Gross profit | | | 170,891 | | 68.7 | | | 149,816 | | 67.9 | |
Operating expenses: | | | | | | | | | | | |
Research and development, net | | | 53,396 | | 21.5 | | | 46,072 | | 20.9 | |
Selling and marketing | | | 62,057 | | 24.9 | | | 51,217 | | 23.2 | |
General and administrative | | | 15,914 | | 6.4 | | | 14,177 | | 6.4 | |
Total operating expenses | | | 131,367 | | 52.8 | | | 111,466 | | 50.5 | |
Operating income | | | 39,524 | | 15.9 | | | 38,350 | | 17.4 | |
| | | | | | | | | | | |
Financial income (expenses), net | | | 123 | | 0.1 | | | (1,703) | | (0.8) | |
Income before taxes on income | | | 39,647 | | 16.0 | | | 36,647 | | 16.6 | |
| | | | | | | | | | | |
Taxes on income | | | (5,896) | | (2.4) | | | (9,399) | | (4.3) | |
Net income | | $ | 33,751 | | 13.6 | % | $ | 27,248 | | 12.3 | % |
| Year Ended December 31, | ||||||||||||
| Statement of Operations Data: | 2015 | 2016 | 2017 | |||||||||
| Revenues: | ||||||||||||
| Products | 73.0 | % | 70.3 | % | 68.6 | % | ||||||
| Services | 27.0 | % | 29.7 | % | 31.4 | % | ||||||
| Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
| Cost of revenues: | ||||||||||||
| Products | 33.8 | 32.2 | 30.3 | |||||||||
| Services | 7.0 | 7.1 | 7.3 | |||||||||
| Total cost of revenues | 40.8 | 39.3 | 37.6 | |||||||||
| Gross profit | 59.2 | 60.7 | 62.4 | |||||||||
| Operating expenses: | ||||||||||||
| Research and development, net | 20.0 | 20.0 | 19.4 | |||||||||
| Selling and marketing | 31.0 | 31.0 | 31.2 | |||||||||
| General and administrative | 6.2 | 4.4 | 5.7 | |||||||||
| Total operating expenses | 57.2 | 55.4 | 56.3 | |||||||||
| Operating income | 2.0 | 5.3 | 6.1 | |||||||||
| Financial income (expenses), net | 0.3 | (0.1 | ) | 0.0 | ||||||||
| Income before taxes on income | 2.3 | 5.2 | 6.1 | |||||||||
| Income tax benefit (expense), net | (2.0 | ) | 6.0 | (3.6 | ) | |||||||
| Net income | 0.3 | % | 11.2 | % | 2.5 | % | ||||||
Year Ended December 31, 2017,2021, Compared to Year Ended December 31, 20162020
Revenues. Revenues increased 7.6%12.7% to $156.7$248.9 million in the year ended December 31, 2017,2021, from $145.6$220.8 million in the year ended December 31, 2016.
2020.
Our revenues from sales of products in the year ended December 31, 20172021 increased by 5.1%6.7% to $107.5$155.1 million, or approximately 69%62.3% of total revenues, from $102.3$145.3 million, or 70%65.8% of total revenues, in the year ended December 31, 2016.2020. The increase in revenues from sales of products was dueprimarily attributable to our enterprise activities related to the UCaaS and Contact Center markets, the increased adoption of SIP Trunk and unified communications and collaboration solutions by businesses/enterprises (specifically, Microsoft Teams), which account for a large portion of our revenues, and the increased migration by contact centerContact Center customers moving to IP and service providersacquiring Work from traditional TDMHome solutions. The increased adoption of UC and CC solutions and the migration to all-IP voice networks to pure IP networks. This migration positively affected the demand for our UC SIP products, whilespecifically supporting moderatehigh growth of our media gatewaySBC products.
Our revenues from sales of services in the year ended December 31, 20172021 increased by 13.6%24.4% to $49.2$93.8 million, or approximately 31.4%37.7% of total revenues, from $43.3$75.4 million, or 29.7%34.2% of total revenues, in the year ended December 31, 2016.2020. The increase in revenues from sales of services was primarily driven by the growth of our professional and managed services offerings. At the core of this growth is our continued progress in salespivoting to recurring revenues with strong execution in our operation of technicalthe AudioCodes Live offering. The growth in product support services which relate to sales of products in the year ended December 31, 2017 and in previous years and by the growth in professional services.We have expanded our direct support programs and have launched advanced support programs that enable us to sell more support services per product. Product support serviceswas attributable to sales of products in prior yearsperiods that resulted from an increase of our renewal rate of support agreements in some regions and from support services for a larger amountnumber of products being supported. The growth in sales of professional services iswas attributable to offering more managed services with larger contract value as part of our AudioCodes Live offering and a broader portfolio of professional services offered by us and an increase in demand for such services.services in the Enterprise UC market (mainly Microsoft Teams).
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Cost of Revenues and Gross Profit. Cost of revenues includes the cost of hardware, quality assurance, overhead related to professional and support customer services, overhead related to manufacturing activity, technology licensing and royalty fees payable to third parties and royalties payable to NATI.the IIA. Gross profit increased to $97.8$170.9 million in the year ended December 31, 2017,2021, from $88.3$149.8 million in the year ended December 31, 2016.2020. Gross profit as a percentage of total revenues was 62.4%68.7% in the year ended December 31, 2017,2021, compared to 60.7%67.9% in the year ended December 31, 2016.2020. The increase in the gross profit as a percentage of total revenues wasis primarily attributable to (i) the higher increase in our revenues from sales of software products and services, which have a significantly higher average gross margin, and a more favorable mix in the sale of our products. In addition, our gross profit percentage benefited from(ii) our fixed overhead costs being spread over increased revenues. In the year ended December 31, 2017,2021, expenses included in cost of revenues related to share-based compensation were $84,000$0.4 million, compared to $118,000$0.2 million in the year ended December 31, 2016.
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2020.
Cost of revenues related to sales of products increaseddecreased by 1.1%3.0% to $47.4$52.8 million in the year ended December 31, 2017,2021, from $46.9$54.4 million in the year ended December 31, 2016.
2020. Gross margin percentage from products was 66.0% in the year ended December 31, 2021 and 62.6% in the year ended December 31, 2020. This increase is primarily attributable to the more favorable product mix in the sale of our products, including software sales exceeding hardware sales, in the year ended December 31, 2021.
Cost of revenues related to sales of services in the year ended December 31, 20172021 increased by 10.7%52.5% to $11.4$25.3 million, from $10.3$16.6 million in the year ended December 31, 2016.2020. This increase is primarily attributable to higher support personnel expenses associated with providing services and implementation of our products with service providers as well as with enterprise customers. In the year ended December 31, 2017,2021, the gross margin percentage from sales of services increaseddecreased to 77%73.1%, from 76%78.0% in the year ended December 31, 2016. The increase in such gross margin percentage was primarily attributable spreading our fixed overhead costs over the increased revenues from the sale of services.
2020.
Research and Development Expenses, net. Research and development expenses, net, consist primarily of salaries and related costs of employees engaged in ongoing research and development activities, development-related raw materials and the cost of subcontractors, less grants from NATI.the IIA. Research and development expenses increased by 4.1%15.9% in the year ended December 31, 20172021 to $30.3$53.4 million, from $29.1$46.1 million in the year ended December 31, 2016.2020. As a percentage of total revenues, research and development expenses, decreasednet increased to 19.4%21.5% in the year ended December 31, 2017,2021, from 20%20.9% in the year ended December 31, 2016.2020. The increase on an absolute basis is primarily due to (i) the appreciation of the NIS against the dollar and (ii) an increase in the total number of our employees and related expenses. In addition, in the year ended December 31, 2021, expenses included in research and development expenses related to share-based compensation were $2.8 million, compared to $1.5 million in the year ended December 31, 2020. IIA grants recognized were $0.6 million in the year ended December 31, 2021, compared to $0.4 million in the year ended December 31, 2020.
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related costs (including sales commissions) of sales and marketing personnel, as well as exhibition, travel and related expenses. Selling and marketing expenses increased by 21.2% in the year ended December 31, 2021 to $62.1 million, from $51.2 million in the year ended December 31, 2020. As a percentage of total revenues, selling and marketing expenses increased to 24.9% in the year ended December 31, 2021, from 23.2% in the year ended December 31, 2020. The increase on an absolute basis is primarily due to the appreciation of the NIS against the U.S. dollar. In the year ended December 31, 2017, expenses included in researchdollar and development expenses related to share-based compensation were $383,000, compared to $459,000 in the year ended December 31, 2016. Grants recognized from NATI were $8.3 million in the year ended December 31, 2017 compared to $7.3 million in the year ended December 31, 2016.
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related costs of selling and marketing personnel, as well as exhibition, travel and related expenses. Selling and marketing expenses increased by 8.6% in the year ended December 31, 2017 to $49.0 million, from $45.1 million in the year ended December 31, 2016. As a percentage of total revenues, selling and marketing expenses slightly increased to 31.2% in the year ended December 31, 2017, from 31.0% in the year ended December 31, 2016. The increase on an absolute basis is primarily due to the appreciation of the NIS against the U.S. dollar and an increase in the total number of our employees and related expenses associated with the additionalsuch employees. We added employees in an effort to increase our market share in the areas in which we sell our products and services. This increase wasservices, mainly due to our continued progress in line with the increase in ourpivoting to recurring revenues. In addition, in the year ended December 31, 2017,2021, expenses included in selling and marketing expenses related to share-based compensation were $1.0$6.2 million, compared to $1.1$3.6 million in the year ended December 31, 2016.
2020.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related costs of finance, human resources and general management personnel, rent, network and allowance for doubtful accounts, as well as insurance and consultant services expenses. General and administrative expenses increased by 39.1%12.3% to $8.9$15.9 million in the year ended December 31, 2017,2021, from $6.4$14.2 million in the year ended December 31, 2016.2020. As a percentage of total revenues, general and administrative expenses increased to 5.7%were 6.4% in each of the yearyears ended December 31, 2017 from 4.4% in the year ended December 31, 2016.2021 and 2020. The increase in general and administrative expenses was primarily due to the income recorded as a resultappreciation of the revaluation of a liability related to potential earn-out paymentsNIS against the dollar. In addition, in the year ended December 31, 2016 and the appreciation of the NIS against the U.S. dollar. In the year ended December 31, 2017,2021, expenses included in general and administrative expenses related to share-based compensation were $816,000$4.8 million compared to $736,000 in the year ended December 31, 2016.
Financial Expenses, Net. Financial expenses, net consists primarily of interest earned on cash and cash equivalents, marketable securities and bank deposits, net of interest on our bank loans and bank charges. Financial expenses, net, in the year ended December 31, 2017 were $10,000, compared to $160,000 in the year ended December 31, 2016. The decrease in financial expenses, net in the year ended December 31, 2017 was primarily due to lower expenses related to exchange rate fluctuations.
Income Tax Benefit (Expense), Net.We had a net income tax expense of $5.6$3.4 million in the year ended December 31, 2017, compared to net income tax benefit of $8.6 million in the year ended December 31, 2016. During the year ended December 31, 2016, we fully utilized the remaining amount of the deferred tax asset recorded in the year ended December 31, 2013. Based on our earnings history and expected future operating results, we recorded a deferred tax asset in the amount of $11.6 million as of December 31, 2016. The net income tax benefit in the year ended December 31, 2016 reflected the effect of the tax benefit associated with the creation of this deferred tax asset. The Company estimates it will utilize the deferred tax asset over the next few years. The net income tax expense in the year ended December 31, 2017 mainly resulted from the decrease in deferred tax asset due to utilization and the new tax legislation enacted by the U.S. government in December 2017.
Year Ended December 31, 2016, Compared to Year Ended December 31, 2015
Revenues. Revenues increased 4.2% to $ 145.6 million in the year ended December 31, 2016 from $139.8 million in the year ended December 31, 2015.
- 46 - 2020.
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Our revenues from sales of services in the year ended December 31, 2016 increased by 14.6% to $43.3 million, or approximately 29.7% of total revenues, from $37.8 million, or 27% of total revenues, in the year ended December 31, 2015. The increase in revenues from sales of services was primarily driven by the growth in sales of technical support services, which relate to sales of products in the year ended December 31, 2016 and prior years and by growth in the sale of professional services.We have expanded our direct support programs and have launched advanced support programs that enable us to sell more support services per product. Product support services attributable to sales of products in prior years resulted from renewal of support agreements and from support services for a larger amount of products being supported. The growth in sales of professional services is attributable to a broader portfolio of professional services offered by us and an increase in demand for such services.
Cost of Revenues and Gross Profit. Cost of revenues includes the cost of hardware, quality assurance, overhead related to professional and support customer services, overhead related to manufacturing activity, technology licensing and royalty fees payable to third parties and royalties payables to NATI. Gross profit increased to $88.3 million in the year ended December 31, 2016, from $82.8 million in the year ended December 31, 2015. Gross profit as a percentage of total revenues was 60.7% in the year ended December 31, 2016, compared to 59.2% in the year ended December 31, 2015. The increase in the gross profit as a percentage of total revenues was attributable to increase in our revenues from sales of services, which have a significantly higher average gross margin and a more favorable mix in the sale of our products. In addition, our gross profit percentage benefited from our fixed overhead costs being spread over increased revenues. In the year ended December 31, 2016, expenses included in cost of revenues related to share-based compensation were $118,000, compared to $101,000 in the year ended December 31, 2015.
Cost of revenues related to sales of products slightly decreased by 0.6% to $46.9 million in the year ended December 31, 2016, from $47.2 million in the year ended December 31, 2015.
Cost of revenues related to sales of services in the year ended December 31, 2016 increased by 5.7% to $10.3 million, from $9.7 million in the year ended December 31, 2015. This increase is primarily attributable to higher support personnel expenses associated with providing services and implementation of our products with service providers, as well as with enterprise customers. In the year ended December 31, 2016, the gross margin from sales of services increased to 76%, from 74% in the year ended December 31, 2015. The increase in our gross margin percentage was primarily attributable spreading our fixed overhead costs over the increased revenues from the sale of services.
Research and Development Expenses, net. Research and development expenses, net, consist primarily of salaries and related costs of employees engaged in ongoing research and development activities, development-related raw materials and the cost of subcontractors, less grants from NATI. Research and development expenses increased by 4.1% in the year ended December 31, 2016 to $29.1 million, from $28.0 million in the year ended December 31, 2015. These expenses were 20.0% of revenues in each of the year ended December 31, 2016 and 2015. Research and development expenses increased on an absolute basis primarily as a result of adding personnel in connection with our continued development of new UC-SIP products as part of our new research and development center. In the year ended December 31, 2016, expenses included in research and development expenses related to share-based compensation were $459,000, compared to $429,000 in the year ended December 31, 2015. Grants recognized from NATI were $7.3 million in the year ended December 31, 2016, compared to $5.4 million in the year ended December 31, 2015.
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related costs of selling and marketing personnel, as well as exhibition, travel and related expenses. Selling and marketing expenses increased by 4.0% in the year ended December 31, 2016 to $45.1 million, from $43.4 million in the year ended December 31, 2015. These expenses were 31.0% of revenues in each of the years ended December 31, 2016 and 2015. The increase on an absolute basis is primarily due to an increase in the number of employees and related expenses associated with the additional employees. We added employees in an effort to increase our market share in the areas in which we sell our products and services. This increase was in line with the increase in our revenues. Expenses included in selling and marketing expenses related to share-based compensation were $1.1 million in the years ended December 31, 2016 and 2015.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related costs of finance, human resources and general management personnel, rent, network and allowance for doubtful accounts, as well as insurance and consultant services expenses. General and administrative expenses decreased by 27.1% to $6.4 million in the year ended December 31, 2016, from $8.7 million in the year ended December 31, 2015. As a percentage of total revenues, general and administrative expenses decreased to 4.4% in the year ended December 31, 2016, from 6.2% in the year ended December 31, 2015. The decrease in general and administrative expenses was primarily due to income recorded as a result of the revaluation of a liability related to potential earn-out payments. In the year ended December 31, 2016, expenses included in general and administrative expenses related to share-based compensation were $736,000, compared to $782,000 in the year ended December 31, 2015.
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Financial Income (Expenses), Net. Financial income (expenses), net consists primarily of interest earned on cash and cash equivalents, marketable securities and bank deposits, net of interest on our bank loans and bank charges.charges, exchange rate and linkage to the Israeli CPI differences. Financial expenses,income, net, in the year ended December 31, 2016 was $160,000,2021 were $0.1 million, compared to financial income,expenses, net of $442,000$1.7 in the year ended December 31, 2015.2020. The increasedecrease in financial expenses, net in the year ended December 31, 20162021 was primarily due to (i) lower expenses related to exchange rate fluctuations; and (ii) higher interest income recorded with respect to interestmarketable securities.
Taxes on our marketable securities and higher expenses relatedIncome. Taxes on income in the year ended December 31, 2021, were $5.9 million, compared to exchange rate fluctuations.
Income Tax Benefit (Expense), Net.We had a net income tax benefit of $8.6$9.4 million in the year ended December 31, 2016 compared to net2020. Taxes on income tax expense of $2.8 million in the year ended December 31, 2015. During2021 mainly resulted from the year ended December 31, 2016, we fully utilized the remaining amount of thedecrease in deferred tax asset recordeddue to change in tax rates in the year ended December 31, 2013. Based on our earnings history and expected future operating2020.
A discussion with respect to a comparison of the results we recorded deferred tax asset in the amount of $11.6 million as of December 31, 2016. This deferred tax asset represents the approximate amount of our net operating losses and temporary tax differences that the Company estimates it will utilize over the next few years. The net income tax benefit inoperations for the year ended December 31, 2016, reflect2020, compared to the effectyear ended December 31, 2019 is contained under the heading “Results of Operations” in Item 5 of our Annual Report on Form 20-F for the tax benefit associated withyear ended December 31, 2020, or the creation of this deferred tax asset.
2020 20-F.
Impact of Inflation, Devaluation and Fluctuation of Currencies on Results of Operations, Liabilities and Assets
Since the majority of our revenues are paiddenominated in or linked to the U.S. dollar, we believe that inflation and fluctuations in the NIS/U.S. dollar exchange rate have no material effectimpact on our revenues. However, a majority of the cost of our Israeli operations, mainly personnel and facility-related, is incurred in NIS. Inflation in Israel and U.S. dollar exchange rate fluctuations have some influence on our expenses and, as a result, on our net income. Our NIS costs, as expressed in U.S. dollar, are influenced by the extent to which any increase in the rate of inflation in Israel is not offset (or is offset on a lagging basis) by a devaluation of the NIS in relation to the U.S. dollar.
To protect against the changes in value of forecasted foreign currency cash flows resulting from payments in NIS, we may maintain a foreign currency cash flow hedging program. We hedge portions of our forecasted expenses denominated in foreign currencies with forward contracts. These measures may not adequately protect us from material adverse effects due to the impact of inflation in Israel.
Furthermore, rising inflation in the United States and other markets may impact the global economy and ultimately the demand for our products and services. During 2021, the global markets experienced, and continue to experience, higher rates of inflation as a result of several market factors. As a result of these inflationary pressures, governments in many countries have implemented, and are likely to continue in the near-term to implement, tight monetary policies, which could slow the growth rate of local economies and restrict the availability of credit. To the extent the current rates of inflation and shifts in fiscal and monetary policy result in slower growth or a recession, it could have a material and adverse effect on the demand for our products and services and, in the process, our business, results of operations and financial condition as a whole.
In the event that a global recession were to occur, it could adversely impact the critical counterparties that we engage, including in the form of a decrease in the products and services they seek to obtain from us.
The following table presents information about the rate of inflation in Israel, the rate of devaluation of the NIS against the U.S. dollar, and the rate of inflation in Israel adjusted for the devaluation:
| | | | | | |
�� | | | | | | Israeli |
| | Israeli | | NIS devaluation | | inflation |
| | inflation | | or appreciation | | adjusted for |
Year Ended | | rate | | rate | | devaluation |
December 31, |
| % |
| % |
| % |
2021 | | 2.8 | | (3.3) | | (6.1) |
2020 |
| (0.7) |
| (7.0) |
| (6.3) |
2019 |
| 0.6 |
| (7.8) |
| (8.4) |
| Israeli | NIS | Israeli inflation | ||||||||||
| inflation | devaluation or | adjusted for | ||||||||||
| Year Ended | rate | appreciation rate | devaluation | |||||||||
| December 31, | % | % | % | |||||||||
| 2015 | (1.0 | ) | 0.3 | 1.3 | ||||||||
| 2016 | (0.2 | ) | (1.5 | ) | (1.3 | ) | ||||||
| 2017 | 0.4 | (9.8 | ) | (10.2 | ) | |||||||
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| B. | LIQUIDITY AND CAPITAL RESOURCES |
We have financed our operations for the last threetwo years primarily from our cash and cash equivalents, bank deposits, bank borrowings and cash from operations.
In addition, in June 2020, we realized net proceeds of approximately $85.4 million as a result of a public offering (see below).
As of December 31, 2017,2021, we had $58.7$174.8 million in cash and cash equivalents, short-term and long-term marketable securities and bank deposits, a decrease of $10.8$11.5 million from $69.5$186.3 million of cash and cash equivalents and bank deposits at December 31, 2016.2020. As of December 31, 2017,2021, we were restricted with respect to using approximately $6.9$5.1 million of our cash as a result of provisions in our loan agreements, a lease agreementagreement.
Our material cash requirements from known contractual and foreign exchange derivatives transactions.other obligations include our lease commitments and purchasing commitments. For additional information on the foregoing commitments and purchasing commitments, see note 11 and note 12a to our Consolidated Financial Statements included elsewhere in this Annual Report. Issuance of Ordinary Shares
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On June 8, 2020, we sold in an underwritten public offering 2,600,000 of our ordinary shares, at a price of $35 per share. Our net proceeds from this offering were approximately $85.4 million, after deducting underwriters' discounts and commissions and other offering expenses payable by us.
Share Repurchase Program
and Cash Dividends
In August 2014, our Board of Directors approved a program to repurchase up to $3.0 million of our ordinary shares. In November 2014,February 2020, we received court approval in Israel to repurchase up to an additional $15.0$12.0 million of our ordinary shares. In May 2015, the court approved an additional $15.0 millionaddition, in share repurchases. In each of January, MayJuly and October 2016,December 2021, we received court approval to purchase up to an additional $30 million, $35 million and $35 million of our ordinary shares, respectively. Each of the approvals received in 2020 and 2021 allowed us to use the approved amounts for share repurchases or cash dividends. In addition, in August 2020, we received court approval in Israel to repurchase up to an additional $15 million of our ordinary shares fordistribution in an aggregate approval to repurchase up to an additional $45 millionamount of our ordinary shares. In May and November 2017, the court approved additional $15.0 million and $20.0 million respectively in share repurchases.$10 million. The Israeli court generally limits its approval to six months from the date of application. As a result, although the program does not have a set end date, it requires renewal each six months by submitting a new court application, based on the then prevailing facts. No shares were repurchased during the year ended December 31, 2017 other2021 (other than through the repurchase program.program). Share purchases have and will take place in open market transactions or in privately negotiated transactions and may be made from time to time depending on market conditions, share price, trading volume or other factors. The repurchase program does not require us to purchase a specific number of shares and may be suspended from time to time or discontinued. In July 2016, we completed a cash self-tender offer and accepted for purchase a total of 3,000,000 of our ordinary shares, the maximum amount of shares subject to the offer. These shares were purchased under our repurchase program.
During the year ended December 31, 2017,2021, we acquired an aggregate of 3,749,4621,325,078 of our ordinary shares for approximately $25.6$41.8 million and declared and paid cash dividends in the aggregate amount of $10.9 million. During the year ended December 31, 2016,2020, we acquired andeclared and paid a cash dividend in the aggregate amount of 6,198,363$8.5 million. In February 2022, we declared a cash dividend in the aggregate amount of our ordinary shares$5.8 million. As of April 24, 2022, we had approximately $8.3 million available for approximately $29.4 million. Duringshare repurchases or dividends under the year endedmost recent court approval granted in December 31, 2015, we acquired an aggregate of 4,762,529 of our ordinary shares for approximately $19.5 million.
2021.
Bank Loans
In December 2015, we entered into a loan agreement with an Israeli commercial bank that provided loans in the total principal amount of $3.0 million and 3.0 million Euro. The loans bearbore interest at an annual rate equal to LIBOR plus 1%-2.5% to 2.5% and arewere repayable in 20 equal quarterly installments. As of December 31, 2017, there was $4.0 million principal amount of these2021, the loans outstanding.
have been repaid in full.
In December 2016, we entered into a loan agreement with an Israeli commercial bank that provided loans in the total principal amount of $6.0 million. The loans bear interest at an annual rate equal to LIBOR plus 1.1%-2.5% to 2.5% and are repayable in 20 equal quarterly installments. As of December 31, 2017, there was $4.8 million principal amount of these2021, the loans outstanding.
As of December 31, 2017, we were required to maintain an aggregate of $4.2 million of compensating bank deposits with respect to our bank loans. The amount of the compensating balances we are required to keep decreases over time as we repay these loans.
The loan agreements require us, among other things, to meet certain financial covenants such as maintaining shareholders’ equity, cash balances, and liabilities to banks at specified levels, as well as achieving certain levels of operating income.
have been repaid in full.
Cash Flows from Operating Activities
Our operating activities provided cash in the approximate amount of $17.8$47.3 million in the year ended December 31, 2017,2021, primarily due to net income of $4.0$33.8 million, a decreasean increase of $4.9$5.5 million in deferred tax assets, a decreaserevenues, an increase of $3.4$4.5 million in trade receivablesinventories, an increase of $9.6 million in other payables and accrued expenses, non-cash charges of $2.4 million for depreciation and amortization and $2.3$14.2 million for share-based compensation expenses offset, in part, byand a decrease of $2.1$3.4 million in trade payablesdeferred tax assets, partially offset by a
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decrease of $11.7 million in the royalty buyout liability and an increase of $1.3$14.4 million in other receivablestrade receivables. Our deferred revenues increased mainly due to the increase in the revenues derived from services in the past years and prepaid expenses. The decrease inthe deferred tax assets is thedecreased as a result of utilization of the deferredthese assets and update of temporary tax assets recorded in the year ended December 31, 2016 and the effect of the new tax legislation enacted by the U.S. government in December 2017.
differences.
Our operating activities provided cash in the approximate amount of $18.3$38.5 million in the year ended December 31, 2016,2020, primarily due to a net income of $16.2$27.2 million, an increase of $3.2$5.9 million in deferred revenues, an increase of $3.8 million in other payables and accrued expenses, non-cash charges of $2.9$2.3 million for depreciation and amortization $1.0 million for amortization of marketable securities premiums and $2.4$8.8 million for share-based compensation expenses offset, in part, by an increaseand a decrease of $9.5$8.4 million in deferred tax assets. The increase in deferred tax assets, is the resultpartially offset by a decrease of the creation of another deferred tax assets (following the utilization$9.8 million in the year ended December 31, 2016royalty buyout liability and an increase of the remaining amount of the deferred tax asset recorded$7.0 million in the year ended December 31, 2013), related to the differences between the financial reporting and tax bases of assets and liabilities and to the available net carry forward tax losses based on expectations of generating taxable income in the foreseeable future.trade receivables. Our deferred revenues increased mainly due to the increase in the revenues from services in the year ended December 31, 2016, compared topast years and the year ended December 31, 2015.
Our operating activities provided cash in the amount of $17.6 million in the year ended December 31, 2015, primarily due to a decrease of $5.6 million in trade receivables, $2.0 million in deferred tax assets and $1.8 million in other receivables and prepaid expenses, an increase of $3.8 million in deferred revenues and $2.4 million in other payables and accrued expenses, as well as non-cash charges of $3.0 million for depreciation and amortization and $2.4 million for share-based compensation expenses, offset in part by an increase of $2.0 million in inventories, as well as a decrease of $3.0 million in trade payables. The deferred tax assets decreased as a result of utilization of these assets. Our deferred revenues increased due to the increase in the revenues from servicesassets and our trade receivables decreased primarily becauseupdate of our lower sales volume in the year ended December 31, 2015, compared to the year ended December 31, 2014.
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temporary tax differences.
Cash Flows from Investing Activities
In the year ended December 31, 2017,2021, our investing activities provided cash in the approximate amount of $8.4$42.6 million, from the proceeds $8.1 million from redemptionprimarily as a result of marketable securities and from a decrease of $1.9$84.6 million in short-term and long-term bank deposits, net,partially offset in part, by capital expendituresthe purchase of $1.6 million.
$43.8 million of marketable securities.
In the year ended December 31, 2016, our2020, we used approximately $139.3 million of cash in investing activities, provided cash in the amountprimarily as a result of $14.1purchase of $55.0 million due to proceeds from sale of marketable securities of $12.4 million, from redemption of marketable securities of $3.2 million and a decreasenet increase of $82.8 million in short-term bank deposits, net of $2.3 million, offset, in part, by an increase inand long-term bank deposits of $2.4 million and capital expenditures of $1.5 million.deposits.
Cash Flows from Financing Activities
In the year ended December 31, 2015, our investing activities provided cash in the amount of $4.3 million, due to proceeds from redemption of marketable securities of $2.7 million and of long-term bank deposits of $1.0 million, proceeds from sale of marketable securities of $2.6 million and a decrease in bank deposits, net of $2.0 million, offset by capital expenditures of $2.0 million and of $2.0 million in cash paid for the acquisition of ACS.
Cash from Financing Activities
In the year ended December 31, 2017,2021, we used $26.3approximately $51.5 million of cash in financing activities, primarily as a result of $25.6$41.8 million used to repurchase our shares,$10.9 million used to pay cash dividends to our shareholders and $3.5$1.2 million used for repayment of bank loans, partially offset in part, by $2.8$2.4 million of proceeds from the issuance of shares upon exercise of share options.
options
In the year ended December 31, 2016, we used $27.02020, our financing activities provided cash in the amount of approximately $77.1 million, primarily due to the $85.4 million of cash in financing activities, primarily as a result of $29.4 million used to repurchase our shares and $5.4 million used for repayment of bank loans, offset, in part, by $6.0 million innet proceeds from bank loansour public offering of ordinary shares in June 2020 and $2.0$2.6 million of proceeds from the issuance of shares upon exercise of share options.
In the year ended December 31, 2015, we used $17.8 million of cash in financing activities, primarily as a result of $19.5stock options, partially offset by $8.4 million used to repurchasepay cash dividends to our sharesshareholders and $4.7$2.5 million used for repayment of bank loans offset, in part, by $6.3 million in proceeds from bank loans.
Financing Needs
We anticipate that our operating expenses will be a material use of our cash resources for the foreseeable future. We believe that our current working capital is sufficient to meet our operating cash requirements for at least the next twelve months, including payments required under our existing bank loans. Part of our strategy is to pursue acquisition opportunities. If we do not have available sufficient cash to finance our operations and the completion of additional acquisitions, we may be required to obtain additional debt or equity financing. We cannot be certain that we will be able to obtain, if required, additional financing on acceptable terms or at all.
Information with respect to Liquidity and Capital Resources as of December 31, 2020 and for the year then ended is contained under the heading "Liquidity and Capital Resources" in Item 5 of our 2020 20-F.
C.RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. |
Research and Development
In order to accommodate the rapidly changing needs of our markets, we place considerable emphasis on research and development projects designed to improve our existing products and to develop new ones. We invest in cloud and virtualization technologies, making sure our products and technologies suit and are optimized to cloud and hosted services environments. We are also further developing our SaaS offers with solutions like SmartTAP, VoiceAI Connect and Voca. We are developing productivity solutions, and specialized appliances and applications for Microsoft Teams such as Direct Routing Survivable Branch Appliances (SBA). We are constantly enhancing our session border controllers and digital media gateways for carrier and enterprise deployments, multi-service
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business routers, IP phones and meeting room devices, and management applications with increased capacity, new functionalities and compliance with the latest relevant standards and protocols.
In addition we continue to maintain our analog and digital media gateways for carrier and enterprise applications, multi servicemulti-service business routers and develop further our session border controllers, IP phones, management routing and productivity applications, as well as specialized appliances for Microsoft SkypeSkype/Teams for Business such as SBA, CCE and CloudBond 365. Our platforms are expected to feature increased session capacity, new functionalities, enhanced signaling software and compliance with new protocols, as well as new management and productivity applications. We also invest in cloud and virtualization technologies, making sure our products and technologies suit andsuite are optimized tofor cloud and hosted services. As of December 31, 2017, 2802021, 316 of our employees were engaged primarily in research and development on a full-time basis.
Our net research and development expenses net were $30.3approximately $53.4 million in the year ended December 31, 2017,2021, compared to $29.1$46.1 million in the year ended December 31, 2016,2020, and $28.0$41.2 million in the year ended December 31, 2015.2019. From time to time we have received royalty-bearing grants from NATI.the IIA. As a recipient of grants from NATI,the IIA, we are obligated to perform all manufacturing activities for projects subject to the grants in Israel unless we receive an exemption. Know-how from research and development which is used to produce products may not be transferred to third parties without the approval of NATIthe IIA and may require significant payments. NATIThe IIA approval is not required for the export of any products resulting from such research or development.
As described above, in November 2019, we and our former Israeli subsidiary, AudioCodes Development Ltd. (which was merged into our company effective January 1, 2020), entered into the Royalty Buyout Agreement with the IIA relating to certain grants we had received from the IIA. The contingent net royalty liability to the IIA at the time of the Royalty Buyout Agreement with respect to these grants was approximately $49 million, including interest to the date of the Royalty Buyout Agreement. As part of the Royalty Buyout Agreement, we agreed to pay approximately $32.2 million to the IIA (to settle the debt in full) in three annual installments starting in 2019. The annual installments were linked to the NIS and bore interest. Pursuant to the Royalty Buyout Agreement, we eliminated all royalty obligations related to our future revenues with respect to these grants. In December 2021, December 2020 and November 2019, we paid the three installments of approximately $12.2 million, $11.6 million and $10.7 million, respectively, due under the Royalty Buyout Agreement.
Through December 31, 2017,2021, we had obtained grants from NATIthe IIA aggregating $52.5approximately $7.3 million for certain of our research and development projects.projects related to our other Israeli subsidiaries. We are obligated to pay royalties to NATI,the IIA (not covered by the Royalty Buyout Agreement), amounting to 1.3%-4.5%3% to 5% of the revenues from the sales of the products and other related revenues generated from such projects, up to 100% of the grants received, if no additional payments are required, linked to the U.S. dollar and bearing interest at the rate of LIBOR at the time of grant. 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.
As of December 31, 2017, we2021, our other Israeli subsidiaries have a contingent obligation to pay royalties in the amount of approximately $58.2$19.1 million.
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D. | TREND INFORMATION |
The accelerated demand for VoIP technology has impactedglobal migration to All-IP continues to impact our business during the last few years. Over the past fewas it has done for several years, with the shift from traditional circuit-switched networkscommunications systems to next generation packet-switched networksIP communications and unified communications. The COVID-19 pandemic expedited that trend, as many organizations accelerated their plans for migration and moved their employees to a Work from Home environment or Hybrid Workplace environment.
The continued growth of private and public cloud-based services in the telecommunications industry has continued to gain momentum. impact our business. Adopting cloud services, such as Microsoft Teams, is an attractive proposition for enterprises and service providers, with the potential to deliver significant operational and capital cost savings, as well as increased productivity and flexibility. We offer a range of software-based products and solutions designed with the cloud in mind. While we predict sales of these software-based solutions to increase, this may result in lower revenues from our hardware-based session border controller products.
As data traffic becomes the dominant factor in communications, service providers are building and maintaining converged networks for integrated voice and data services. In addition,This is driving integration of new data networking technologies, such as SD-WAN and the growth in broadband access and related technologies has driven the emergenceadoption of alternative service providers. This in turn stimulates competition with incumbent providers, encouraging them to adopt voice over packet technologies.integrated devices supporting these capabilities. Additionally, aging legacy TDM switches, high costhigh-cost maintenance
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contracts and regulatory guidelines are driving Service Providersservice providers worldwide to announce “PSTN shutdown” programs with dates by which TDM"PSTN shutdown" and migrate their telephony services shall not longer be available, driving service providers and enterprises to adopt VoIP based technologies and solutions.
While the growth in demand for VoIP services helped create demand for our products and services, there is an ongoing transition in network architectures that could adversely affect the demand for our products. The growth of services over Internet Protocol (IP) and data usage services over legacy voice using TDM is driving the transition in network architecture. The demand for our media gateway products is based on the need to interconnect VoIP networks with traditional non-packet based networks. The demand for our Enterprise Session Border Control (ESBC) products is based on the need to interconnect IP PBXs or UC systems between each other and to SIP Trunk services or to connect the enterprise to hosted PBX/UC service. The migration from traditional TDM networks to pure IP networks is gradually increasing. This could positively affect the demand for our ESBC products, but negatively affect the demand for our media gateway products. In addition, as businesses migrate towards pure IP networks, this could drive demand for our IP Phones and network management products.
communication.
We are experiencing decreasing demand for our technology products from customers who previously manufactured network equipment products based on our enabling technology. These customers are migrating from AudioCodes’our enabling technology products to diverse integrated comprehensive solutions and, as a result, the demand for our technology products is being adversely affected.
In addition, see the section "Impact of COVID-19 on Our Business and Operations" in Item 5.A above.
E. | CRITICAL ACCOUNTING ESTIMATES |
We continueOur consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP. These accounting principles require management to experience pressure to shorten our lead times in supplying products to customers. Some of our customers are implementing “demand pull” programs by which they only purchase our products very close tomake certain estimates, judgments and assumptions based upon information available at the time if not simultaneouslythat they are made, historical experience and various other factors that are believed to be reasonable under the circumstances. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented.
Our management has reviewed our critical accounting policies and related disclosures with our Audit Committee. See the time, they plansection entitled “Critical Accounting Estimates” above in this Item 5 as well as Note 2 to sell their products. We are increasing our sales effortsConsolidated Financial Statements included elsewhere in new markets, such as Latin America, Eastern Europethis Annual Report, which contains additional information regarding our accounting policies and Far East. We are still experiencing low visibility into customer demand for our products which restricts our ability to predict our level of sales.other disclosures required by U.S. GAAP.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
We do not have any “off-balance sheet arrangements” as this term is defined in Item 5E of Form 20-F.
As of December 31, 2017, our contractual obligations were as follows (U.S. dollars in thousands):
| PAYMENTS DUE BY PERIOD | ||||||||||||||||||||
| LESS THAN | 1-3 | 3-5 | MORE THAN | |||||||||||||||||
| 1 YEAR | YEARS | YEARS | 5 YEARS | TOTAL | ||||||||||||||||
| Bank loans | $ | 2,519 | $ | 5,037 | $ | 1,200 | $ | - | $ | 8,756 | ||||||||||
| Rent and lease commitments, net (1) | 6,717 | 11,964 | 11,618 | 6,473 | 36,772 | |||||||||||||||
| Accrued severance pay, net (2) | - | - | - | 1,090 | 1,090 | |||||||||||||||
| Uncertain tax positions (3) | 386 | - | - | - | 386 | |||||||||||||||
| Payment to ACS shareholders | 653 | 225 | - | - | 878 | |||||||||||||||
| National Authority for Technology and Innovation | - | - | - | 58,155 | 58,155 | |||||||||||||||
| Other commitments (4) | 18,516 | - | - | - | 18,516 | |||||||||||||||
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| DIRECTORS AND SENIOR MANAGEMENT |
The following table sets forth certain information with respect to our directors, senior executive officers and key employees at March 23, 2018:
April 24, 2022:
Name | Age | Position | ||
Stanley B. Stern | 64 | Chairman of the Board of Directors | ||
Shabtai Adlersberg | 69 | President, Chief Executive Officer and Director | ||
Niran Baruch | 51 | Vice President Finance and Chief Financial Officer | ||
Lior Aldema | 56 | Chief Business Officer and Director | ||
Ofer Nimtsovich | 53 | Chief Operating Officer | ||
Yair Hevdeli | 57 | Vice President, Research and Development | ||
Eyal Frishberg | 63 | Vice President, Operations | ||
Yehuda Herscovici | 55 | Vice President, Products | ||
Tal Dor | 52 | Vice President, Human Resources | ||
Shaul Weissman | 56 | Vice President, Business Development | ||
Joseph | 66 | Director | ||
Dr. Eyal | 62 | Director | ||
Doron | 66 | Director | ||
Zehava Simon (3) | 63 | Director | ||
Shira Fayans Birenbaum (1) | | 58 | | Director |
| (1) | Member of Audit Committee |
| (2) | Member of Nominating Committee |
| (3) |
(1) Member of Audit Committee
(2) Member of Nominating Committee
(3) Member of Compensation Committee
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Stanley Sternbecame a director and our Chairman of the Board in December 2012. From 2004 until 2013 Mr. Stern served in various positions at Oppenheimer& Co., including as a Managing Director and Head of Investment Banking, Technology, Israeli Banking and FIG. Since 2013, Mr. Stern has served as the president of Alnitak Capital, a private merchant bank and strategic advisory firm. From 2004 until 2013, Mr. Stern served in various positions at Oppenheimer & Co., including as a Managing Director and Head of Investment Banking, Technology, Israeli Banking and FIG. From 2002 until 2004, he was a Managing Director and the Head of Investment Banking at C.E. Unterberg, Towbin where he focused on technology and defense related sectors. From January 2000 until January 2002, Mr. Stern was the President of STI Ventures Advisory USA Inc., a venture capital firm focusing on technology investments. Prior to his term at STI Ventures, he spent over 20 years at CIBC Oppenheimer in the investment banking department and started the technology banking group in 1990. From 2002 until 2012, Mr. Stern served as the Chairman of the Board of Directors of Tucows, Inc., an internet service provider that iswas then a public traded company on AMEX,the American Stock Exchange (and is now traded on the Nasdaq Capital Market), and, from 2012 until 2013, he served as a Director of Tucows. From 2012 until February 2014, he served as a director of Given Imaging Ltd., a manufacturer of medical devices, until Given Imaging was acquired by another company. From 2004 until 2009, he served as a director of Odimo Inc. (DBA Diamond.com), an online jewelry vendor. From 2005 until its sale in 2011, he served as a director and Chairman of the Audit Committee of Fundtech Ltd. From February 2015 Mr. Stern served as a director at SodaStream International Ltd. and as from February 2015 Mr. Stern is serving as the Chairman of the Board at SodaStream International Ltd. Mr. Stern received his MBAM.B.A. from Harvard Business School and a BSB.S. from Queens College.
Shabtai Adlersberg co-founded AudioCodes in 1993, and has served as our President, Chief Executive Officer and a director since inception. Until December 2012, Mr. Adlersberg also served as the Chairman of our Board of Directors. Mr. Adlersberg co-founded DSP Group, a semiconductor company, in 1987. From 1987 to 1990, Mr. Adlersberg served as the Vice President of Engineering of DSP Group, and from 1990 to 1992, he served as Vice President of Advanced Technology. As Vice President of Engineering, Mr. Adlersberg established a research and development team for digital cellular communication which was spun-off in 1992 as DSP Communications. Mr. Adlersberg also serves as Chairman of the Board of Directors of Natural Speech Communication Ltd. and as a director of CTI Squared Ltd. Mr. Adlersberg holds a M.Sc. in Electronics and Computer Engineering from Tel Aviv University and a B.Sc. in Electrical Engineering from the Technion-Israel Institute of Technology, or the Technion.
Niran Baruchbecame has served as our Vice President Finance and Chief Financial Officer since July 2016 after serving as our Vice President Finance and Chief Accounting Officer since May 2015. He joined AudioCodes in 2005 as Director of Finance and became Vice President of Finance in 2011, responsible for the management of the finance department. Mr. Baruch has over 1720 years of experience with Nasdaq traded public companies, and is a Certified Public Accountant (CPA) with a BAB.A. in Business Management and Accounting.
Lior Aldema has served as Chief Business Officer (“CBO”)(CBO) since January 2018, as a director since July 2018, and as our Chief Operating Officer and Head of Global Sales from April 2012 to December 2017. Previously, he served as our Vice President, Product Management from 2002 until 2009, as well as our Vice President Marketing from February 2003 until 2009. He has been employed by us since 1998, when he was team leader and later headed our System Software Group in our research and development department. Prior to 1998, Mr. Aldema served as an officer in the Technical Unit of the Intelligence Corps of the Israeli Defense Forces (Major), heading both operational units and large development groups related to various technologies. Mr. Aldema holds an M.B.A. from Tel Aviv University and a B.Sc. from the Technion.
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Ofer Nimtsovichhas served as our Chief Operating Officer since January 2018 and as Vice President, Global Services from March 2013 to December 2017.2018. From 2000 until February 2013, Mr. Nimtsovich served in various executive positions at Retalix, including Chief Information Officer, Executive Vice President of Global Services and, most recently as the head of the Software as a Service division of Retalix. From 1994 tilluntil 2000, Mr. Nimtsovich worked for Scitex Corporation Ltd., where he held various technical and management positions, including as the Global Microsoft Infrastructure manager for Scitex. Mr. Nimtsovich graduated from the Business Administration College in Israel in 1997 with a B.A. in Business Administration and Marketing, and also holds an MBAM.B.A. degree from the University of Texas.
Yair Hevdeli joined AudioCodes in July 2013 as Vice President, Research and Development. From 2003 until 2013, Mr. Hevdeli served in various executive positions at Veraz/Dialogic, including Global Vice President, Research and Development and, most recently, as Senior Vice President, Research and Development and General Manager, Bandwidth Optimization BU. From 1998 until 2003, Mr. Hevdeli worked for ECI Ltd,Ltd., where he held various technical and management positions. Mr. Hevdeli has over 20 years of experience leading large multidisciplinary global research and development teams in the telecom industry. Mr. Hevdeli graduated in 1995 with an M.B.A. in Business Management from Bar Ilan University, Israel and in 1992 received his B.A. in Computer Science and Economics, from Bar Ilan University.
Eyal Frishberg has served as our Vice President, Operations since October 2000. From 1997 to 2000, Mr. Frishberg served as Associate Vice President, SDH Operations in ECI Telecom Ltd., a major telecommunication company. From 1987 to 1997, Mr. Frishberg worked in various operational positions in ECI Telecom including as manager of ECI production facility and production
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control. Mr. Frishberg worked from 1994 until 1997 for ELTA, company, part of Israeli AircraftIsrael Aerospace Industries, in the planning and control department. Mr. Frishberg holds a B.Sc. in Industrial Engineering from Tel Aviv University and an M.B.A. from Ben-Gurion University of the Negev.
Yehuda Herscovici has served as our Vice President, Products, overlookingoverseeing Product Management and Product Marketing since 2010. From 2003 till 2010, Mr. Herscovici served as our Vice President, Systems Group since 2003. From 2001 to 2003, Mr. Herscovici served as our Vice President, Advanced Products. From 2000 to 2001, Mr. Herscovici served as our Director of Advanced Technologies. From 1994 to 1998 and during 1999, Mr. Herscovici held a variety of research and development positions at Advanced Recognition Technologies, Ltd., a voice and handwriting recognition company, heading its research and development from 1999 to 2000 as Vice President, Research and Development. From 1998 to 1999, Mr. Herscovici was engaged in developing various wireless communication algorithms at Comsys, a telecommunications company. Mr. Herscovici holds an M.Sc. and a B.Sc., from the Technion, both in the area of Telecommunications.
Tal Dor has served as our Vice President of Human Resources since March 2000. Prior to March 2000, Ms. Dor acted for several years as a consultant in Israel to, among others, telephone and cable businesses, as well as health and social service organizations. Ms. Dor holds a B.A. in Psychology, from Ben-Gurion University of the Negev and an M.A. in Psychology from Tel Aviv University.
Nimrode Borovsky has served as our Vice President, Marketing since October 2013 and heads the strategic global marketing and business development efforts with AudioCodes partners and channels. From January 2013 until October 2013, Mr. Borovsky served as our Vice President of Unified Communications. Mr. Borovsky has been with AudioCodes since 2005 and has served in numerous product, marketing and business development positions with us. He has worked in telecom and VoIP markets for approximately 20 years. Prior to joining AudioCodes, Mr. Borovsky spent eight years at VocalTec Communications where he served in several positions in research and development, product management and marketing. Mr. Borovsky holds a B.Sc. degree in Electrical Engineering from the New Jersey Institute of Technology, and a M.Sc. degree in Biomedical Engineering from Tel Aviv University.
Shaul Weissman has served as our Vice President, Business Development since January 2014. Mr. Weissman has been with AudioCodes since 1994, serving in various positions. From 2007 until 2014, Mr. Weissman served as our Residential Business Line Manager. In addition, Mr. Weissman has served as our Vice President and Manager of our chip business line since 2006. From 2001 until 2005, Mr. Weissman served as our Support and Professional Services Manager for our chip business line; and from 1994 until 2000 he served as a digital signal processing engineer. Prior to joining AudioCodes, Mr. Weissman served as Captain in the Israeli Air Force. Mr. Weissman holds an M.Sc. and a B.Sc., from the Technion, both in the area of Telecommunications.
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Joseph Tenne has served as one of our directors since June 2003. Since May 2017, Mr. Tenne has served as a financial advisorconsultant to Itamar Medical Ltd., an Israeli company listed on the Tel Aviv Stock Exchange. (NASDAQ and TASE: ITMR, (until December 2021)). Mr. Tenne serves as a director of Orbothech Ltd., an Israeli company listed on Nasdaq, MIND CTI Ltd. (NASDAQ: MNDO), an Israeli company listed on Nasdaq, OPC Energy Ltd. (TASE: OPCE), an Israeli company listed on the Tel Aviv Stock Exchange, Ability Inc.Sapir Corp Ltd. (TASE: SPIR), A Cayman Island company listed on NasdaqHighcon Systems Ltd. (TASE: HICN) and on the Tel Aviv Stock Exchange, and Ratio Oil Explorations (Finance)Electreon Wireless Ltd., an Israeli company listed on the Tel Aviv Stock Exchange. (TASE: ELWS). From August 2014 to April 2017, Mr. Tenne served as the Vice President Finance and Chief Financial Officer of Itamar Medical Ltd. From March 2014 to July 2014, Mr. Tenne served as the Chief Financial Officer of Orgenesis Inc., a U.S. company traded on the Nasdaq. From March 2005 until April 2013, Mr. Tenne served as the Chief Financial Officer of Ormat Technologies, Inc., a company listed on the New York Stock Exchange. From January 2006 until April 2013, Mr. Tenne also served as the Chief Financial Officer of Ormat Industries Ltd., an Israeli holding company which was listed on the Tel-Aviv Stock Exchange (NYSE and was the parent company of Ormat Technologies, Inc.TASE: ORA). From 2003 to 2005, Mr. Tenne was the Chief Financial Officer of Treofan Germany GmbH & Co. KG, a German company, which is engaged in the development, production and marketing of oriented polypropylene films.company. From 1997 until 2003, Mr. Tenne was a partner in Kesselman & Kesselman, Certified Public Accountants in Israel (PwC Israel) and a member of PricewaterhouseCoopers International Limited. Mr. Tenne holds a B.A. in Accounting and Economics and an M.B.A. from Tel Aviv University. Mr. Tenne is also a Certified Public Accountant in Israel.
Dr. Eyal Kishon has served as one of our directors since 1997. Since 1996, Dr. Kishon has been Managing Partner of Genesis Partners, an Israel-based venture capital fund. From 1993 to 1996, Dr. Kishon served as Associate Director of Dovrat-Shrem/Yozma-Polaris Fund Limited Partnership. Prior to that, Dr. Kishon served as Chief Technology Officer at Yozma Venture Capital from 1992 to 1993. From 1991 to 1992, Dr. Kishon was a Research Fellow in the Multimedia Department of IBM Science & Technology. From 1989 to 1991, Dr. Kishon worked in the Robotics Research Department of AT&T Bell Laboratories. Dr. Kishon holds a B.A. in Computer Science from the Technion - Israel Institute of Technology and an M.Sc. and a Ph.D. in Computer Science from New York University.
Doron Nevo has served as one of our directors since 2000. Mr. Nevo is the CEO of MultiVu, a 3D imaging company, which he co-founded in 2019. From 2001 to 2018, Mr. Nevo was co-Founder, President and CEO of KiloLambda Technologies Ltd., an optical nano-technology company, which he co-founded in 2001.Technologies. From 1999 to 2001, Mr. Nevo was involved in fund raising activities for Israeli-based startup companies. From 1996 to 1999, Mr. Nevo served as President and CEO of NKO, Inc. Mr. Nevo established NKO in early 1995 as a startup subsidiary of Clalcom, Ltd. NKO designed and developed a full scale, carrier grade, IP telephony system platform and established its own IP network. From 1992 to 1996, Mr. Nevo was President and CEO of Clalcom Ltd. Mr. Nevo established Clalcom in 1992 as a telecom service provider in Israel. He also serves as a director of Ultracharge LTD.(ASX: UTR)Hadasit Bio-Holdings (TASE: HBL) and of a number of private companies. Mr. Nevo holds a B.Sc. in Electrical Engineering from the Technion – Israel Institute of Technology and an M.Sc. in Telecommunications Management from Brooklyn Polytechnic.Polytechnic.
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Zehava Simonwas appointed a director in February 2014. Ms. Simon served as a Vice President of BMC Software Inc. from 2000 until September 2013, most recently as Vice President, Corporate Development. From 2002 to 2011, Ms. Simon served as Vice President and General Manager of BMC Software in Israel. Prior to joining BMC Software, Ms. Simon held a number of executive positions at Intel Corporation. In her last position at Intel, she led Finance and Operations and Business Development for Intel in Israel. Ms. Simon has served as a board member of various companies, including Tower Semiconductor from 1999-2004, M-Systems from 2005-2006 and InSightec from 2005-2012. Ms. Simon is also a board member at Nova Measuring Instruments Ltd,Ltd. (NASDAQ: NVMI), Amiad Water System Ltd. (TASE: AMD) and Nice Statements LtdNICE Ltd. (NASDAQ: NICE). Ms. Simon holds a bachelor’s degree in Social Sciences from the Hebrew University, a law degree (LL.B.) from the Interdisciplinary Center in Herzlia and a master’s degree in Business and Management from Boston University.
Shira Fayans Birenbaum was appointed a director in March 2022. Ms. Shira Fayans Birenbaum holds the position of President Global of CYMPIRE Ltd., a cyber simulation platform, as well as serving as a board member at ION Acquisition Corp (NYSE: IACC), a SPAC's franchise company, at POMVOM Ltd. (TASE: PMVM), at Cyber Innovative Technologies as an advisory board member. Ms. Fayans Birenbaum has 25 years of experience as a Board Member in publicly traded companies such as investment houses, banks, insurance, real estate, manufacturers, semiconductor and educational institutions. In the years 2014-2019, Ms. Fayans Birenbaum held the position of COO and CMO of Microsoft Israel (NASDAQ: MSTF) leading Digital Transformation. Ms. Fayans Birenbaum has extensive experience in Executive C Level positions in her previous roles. Ms. Fayans Birenbaum holds an MBA and BA both from Tel Aviv University and Marketing management certification studies from The College of Management Academic studies.
| B. | COMPENSATION |
The table and summary below outline the compensation granted to our five most highly compensated office holders during or with respect to the year ended December 31, 2017.2020. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
For purposes of the table and the summary below, “compensation” includes base salary, discretionary and non-equity incentive bonuses, equity-basedshare-based compensation, payments accrued or paid in connection with retirement or termination of employment, and personal benefits and perquisites such as car, phone and social benefits paid to or earned by each Covered Executive during the year ended December 31, 2017.2021.
| | | | | | | | | | | | | | | |
| | | | | | | | Share-Based | | All Other | | | | ||
| | | | | | | | Compensation | | Compensation | | | | ||
Name and Principal Position | | Salary | | Bonus (1) | | (2) | | (3) | | Total | |||||
Shabtai Adlersberg – President and CEO |
| $ | 408,163 |
| $ | 1,000,000 |
| $ | 2,128,880 |
| $ | 216,225 |
| $ | 3,753,268 |
Lior Aldema – CBO | | $ | 296,846 | | $ | 296,846 | | $ | 1,129,719 | | $ | 125,592 | | $ | 1,849,003 |
Niran Baruch – VP Finance and CFO | | $ | 237,477 | | $ | 162,220 | | $ | 731,912 | | $ | 95,494 | | $ | 1,227,103 |
Yehuda Herscovici – VP Products | | $ | 230,056 | | $ | 82,257 | | $ | 566,385 | | $ | 88,552 | | $ | 967,250 |
Ofer Nimtsovich – COO | | $ | 222,057 | | $ | 103,026 | | $ | 522,899 | | $ | 90,933 | | $ | 938,915 |
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| Name and Principal Position | Salary ($) | Bonus ($) (1) | Equity-Based Compensation ($) (2) | All Other Compensation ($) (3) | Total ($) | |||||||||||||||
| Shabtai Adlersberg – CEO | $ | 345,779 | $ | 316,879 | $ | 442,093 | $ | 224,168 | $ | 1,328,919 | ||||||||||
| Lior Aldema – CBO | $ | 253,391 | $ | 145,920 | $ | 249,514 | $ | 102,449 | $ | 751,274 | ||||||||||
| Niran Baruch – CFO | $ | 202,087 | $ | 63,277 | $ | 138,496 | $ | 81,317 | $ | 485,177 | ||||||||||
| Yehuda Herscovici – VP Products | $ | 208,083 | $ | 45,477 | $ | 139,160 | $ | 77,939 | $ | 470,659 | ||||||||||
| Nimrode Borovsky – VP Marketing | $ | 169,487 | $ | 58,733 | $ | 133,367 | $ | 76,561 | $ | 438,148 | ||||||||||
| (1) | Amounts reported in this column represent annual incentive bonuses granted to the Covered Executives based on performance-metric formulas set forth in their respective employment agreements. |
| (2) | Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, |
| (3) | Amounts reported in this column include personal benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites may include, to the extent applicable to the respective Covered Executive, payments, contributions and/or allocations for savings funds (e.g., Managers Life Insurance Policy), education funds (referred to in Hebrew as |
The aggregate direct remuneration paid during the year ended December 31, 20172021 to the 15 persons who served in the capacity of director, senior executive officer or key employee during 20172021 was approximately $4.1$5.7 million, including approximately $509,000$0.6 million which was set aside for pension and retirement benefits. The compensation amounts do not include amounts expended by us for
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automobiles made available to our officers, expenses (including business, travel, professional and business association dues and expenses) reimbursed to officers and other fringe benefits commonly reimbursed or paid by companies in Israel.
We currently pay each of our non-employee directors an annual fee of $32,000$41,650 and a fee of $1,040$1,250 for each board meeting or committee meeting attended. In the event that a director attends a meeting by phone or a resolution is adopted by written consent, then the fee is reduced to 60% and 50% of the regular meeting fee, respectively. Such fees are in accordance with the rates prescribed by the Israeli Companies Law Regulation for fees of outside directors. Only directors who are not officers receive compensation for serving as directors. Our director, Mr. Adlersberg, who also serves as our President and Chief Executive Officer doesand our director, Mr. Aldema, who also serves as our Chief Business Officer, do not receive board meeting fees. Instead, heeach of them receives compensation in accordance with the terms of his respective employment agreement, a copy of which is filed as an exhibit to this Annual Report.
agreement.
Upon election or reelection to the board of directors for a term of three years, each non-employee director is granted options to purchase 22,5007,500 restricted share units, or RSUs, of which 7,500each year that vest on each of the first, second and third anniversary ofover a three year period from the grant date.
Options to purchase our ordinary shares granted under our 2008 Equity Incentive Plan to persons who served in the capacity of director or executive officer are generally exercisable at the fair market value at the date of grant and expire seven years from the date of grant. The options generally vest in four equal annual installments, commencing one year from the date of grant.
A summary of our stock option and restricted share units (“RSUs”)RSU activity and related information for the years ended December 31, 2015, 20162021, 2020 and 20172019 for the persons who served in the capacity of director, senior executive or key employee officer during those years is as follows:
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | |||||||||||||
| | 2021 | | 2020 | | 2019 | |||||||||
| | Number | | Weighted | | Number | | Weighted | | Number | | Weighted | |||
| | of | | Average | | of | | Average | | of | | Average | |||
| | Options and | | Exercise | | Options and | | Exercise | | Options and | | Exercise | |||
| | RSUs | | Price | | RSUs | | Price | | RSUs | | Price | |||
Outstanding at the beginning of the year |
| 1,209,768 |
| $ | 3.97 |
| 1,445,248 |
| $ | 4.30 |
| 1,677,699 |
| $ | 3.71 |
| | | | | | | | | | | | | | | |
Granted |
| 293,735 | | $ | 0.00 |
| 279,500 | | $ | 0.72 |
| 380,000 | | $ | 4.72 |
Cancelled | | (26,250) | | | | | — | | | | | — | | | |
Options exercised / RSUs vested |
| (492,415) | | $ | 3.19 |
| (514,980) | | $ | 3.12 |
| (612,451) | | $ | 2.93 |
| | | | | | | | | | | | | | | |
Outstanding at the end of the year |
| 984,838 | | $ | 3.17 |
| 1,209,768 | | $ | 3.97 |
| 1,445,248 | | $ | 4.30 |
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| 2015 | 2016 | 2017 | ||||||||||||||||||||||
| Number | Weighted | Number | Weighted | Number | Weighted | |||||||||||||||||||
| of | Average | of | Average | of | Average | |||||||||||||||||||
| Options and RSUs | Exercise Price | Options and RSUs | Exercise Price | Options and RSUs | Exercise Price | |||||||||||||||||||
| Outstanding at the beginning of the year | (*) 1,994,425 | $ | 3.95 | 2,225,048 | $ | 3.83 | 2,030,210 | $ | 3.95 | |||||||||||||||
| Granted | 349,867 | $ | 2.22 | 315,217 | $ | 2.87 | 456,293 | $ | 3.02 | |||||||||||||||
| Cancelled | - | (132,500 | ) | - | ||||||||||||||||||||
| Options exercised / RSUs vested | (119,244 | ) | $ | 1.13 | (377,555 | ) | $ | 2.42 | (402,341 | ) | $ | 3.54 | ||||||||||||
| Outstanding at the end of the year | 2,225,048 | $ | 3.83 | 2,030,210 | $ | 3.95 | 2,084,162 | $ | 3.82 | |||||||||||||||
(*) Including outstanding options granted to new executive officer in previous years, prior to joining management.
As of December 31, 2017,2021, options to purchase 1,140,512302,870 ordinary shares were exercisable by the 1514 persons who served as an officer or director during 2017the year ended December 31, 2021 at an average exercise price of $4.57$6.85 per share. As of December 31, 2017,2021, the 1514 persons who served as an officer, director or key employee during 2017the year ended December 31, 2021 held an aggregate of 401,435603,206 RSUs.
| C. | BOARD PRACTICES |
Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Israeli Companies Law, 1999, or the Companies Law, relating to such matters as outside directors, the audit committee, compensation committee, the internal auditor and approvals of interested party transactions and of compensation of officers and directors. These matters are in addition to the ongoing listing conditions of the Nasdaq Global Select Market and other relevant provisions of U.S. securities laws. Under the Nasdaq rules, a foreign private issuer may generally follow its home country rules of corporate governance in lieu of the comparable Nasdaq requirements, except for certain matters such as composition and responsibilities of the audit committee and the independence of its members. For further information, see Item 16.G, – “Corporate Governance.”
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Independent Directors
Under the Companies Law, Israeli companies such as AudioCodes that have offered securities to the public in or outside of Israel are required to appoint at least two “outside” directors.directors, unless AudioCodes elects to exempt itself. The Board of Directors decided to remain subject to this requirement. Doron Nevo and Dr. Eyal Kishon currently serve as our outside directors. Under the requirements for listing on the Nasdaq Global Select Market, a majority of our directors are required to be independent as defined by Nasdaq rules. Doron Nevo, Dr. Eyal Kishon, Zehava Simon, Stanley Stern, and Joseph Tenne and Shira Fayans Birenbaum qualify as independent directors under the applicable SEC and Nasdaq rules, as well as under the Companies Law.
Under the Companies Law, a person may not serve as an outside director if at the date of the person’s election or within the prior two years the person is a relative of the company’s controlling shareholder, or the person or his or her relatives, partners, employers, supervisors or entities under the person’s control, have or had any affiliation with us or with a controlling shareholder or relatives of a controlling shareholder, and, in the case of a company without a controlling shareholder or a shareholder holding at least 25% of the voting rights, any affiliation, at the time of election, to the chairman of the board of directors, the chief executive officer, an interested party or the company’s most senior finance officer. Under the Companies Law, “affiliation” includes:
| an employment |
| a business or professional relationship maintained on a regular |
| service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed or elected as a director of the private company in order to serve as an outside director following the initial public offering. |
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In addition, a person may not serve as an outside director:
| if the person or his or her relatives, partners, employers, supervisors or entities under the person’s control, maintains a business or professional relationship with the company, even if such relationship is not on a regular basis, other than a negligible business or professional |
| if the person received compensation as an outside director in excess of the amounts permitted by the Companies Law and regulations |
In addition, no individual may serve as an outside director if the individual’s position or other activities create or may create a conflict of interest with his or her role as an outside director or are likely to interfere with his or her ability to serve as a director. Until the lapse of two years from the termination of office, the company, a controlling shareholder and entities under the company’s control may not grant the outside director or any of his or her relatives, directly or indirectly, any benefit, or engage the outside director or his or her relatives as an office holder of the company, of a controlling shareholders or of an entity under the company’s control, and may not employ or receive services from the outside director or any of his or her relatives, either directly or indirectly, including through a corporation controlled by that person. The restriction on a relative that is not the spouse or child of the outside director is limited to one year from the termination of office instead of two years. Pursuant to the Companies Law, at least one of the outside directors appointed by a publicly-traded company must have “financial and accounting expertise.” The other outside directors are required to possess “financial and accounting expertise” or “professional expertise,” as these terms are defined in regulations promulgated under the Companies Law. Joseph Tenne is designated as the “audit committee financial expert” as that term is defined in SEC rules.the rules promulgated by the SEC.
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Outside directors are elected by a majority vote at a shareholders’ meeting. In addition to the majority vote, the shareholder approval of the election of an outside director must satisfy either of two additional tests:
| the majority includes at least a majority of the shares voted by shareholders other than our controlling shareholders or shareholders who have a personal interest in the election of the outside directors (excluding a personal interest that is not related to a relationship with the controlling shareholders); or |
| the total number of shares held by non-controlling shareholders and disinterested shareholders that voted against the election of the outside director does not exceed 2% of the aggregate voting rights of our company. |
The initial term of an outside director is three years and may be extended for up to two additional three-year terms. Thereafter, he or she may be reelected by our shareholders for additional periods of up to three years each only if the audit committee and the board of directors confirm that, in light of the outside director’s expertise and special contribution to the work of the Board of Directors and its committees, the reelection for such additional period is beneficial to the company. Reelection of an outside director may be effected through one of the following mechanisms: (1) the board of directors proposed the reelection of the nominee and the election was approved by the shareholders by the majority required to appoint outside directors for their initial term; or (2) one or more shareholders holding one percent or more of a company’s voting rights or the outside director proposed the reelection of the nominee, and the reelection is approved by a majority of the votes cast by the shareholders of the company, excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relations with the controlling shareholders, provided that the aggregate votes cast in favor of the reelection by such non-excluded shareholders constitute more than two percent of the voting rights in the company.
Pursuant to the Companies Law, an Israeli company whose shares are publicly traded may elect to adopt a provision in its articles of association pursuant to which a majority of its board of directors (or a third of its board of directors in case the company has a controlling shareholder) will constitute individuals complying with certain independence criteria prescribed by the Companies Law. Pursuant to the related regulations, directors who comply with the independence requirements of the Nasdaq and SEC regulations are deemed to comply with the independence requirements of the Companies Law. We have not included such a provision in our articles of association since our board of directors complies with the independence requirements of the Nasdaq and SEC regulations described above. In any event, as described above, a majority of our board of directors and all members of our audit committee are directors who comply with the independence criteria prescribed by the Companies Law.
An outside director is entitled to compensation as provided in the regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, from the company. In accordance with such regulations, our shareholders approved that our outside directors are to receive compensation equal to that paid to the other members of the board of directors. For further information, please see Item 6.B, - “Directors, Senior Management and Employees—Compensation” in this Annual Report.
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Audit Committee
Under the Companies Law and the requirements for listing on the Nasdaq Global Select Market, our board of directors is required to appoint an audit committee. Our audit committee must be comprised of at least three directors, including all of the outside directors (one of whom must serve as the chair of the audit committee), and a majority of the committee members must comply with the director independence requirements prescribed by the Companies Law. The audit committee consists of: Doron Nevo, Dr. Eyal Kishon, Doron NevoJoseph Tenne and Joseph Tenne,Shira Fayans Birenbaum with Doron Nevo serving as the chairman of the audit committee. Our board of directors has determined that Joseph Tenne is an “audit committee financial expert” as defined in SEC rules and that all members of the audit committee are independent under the applicable SEC rules, Nasdaq rules and provisions of the Companies Law.
The audit 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 income is primarily dependent on a controlling shareholder, and may not include a controlling shareholder or any relatives of a controlling shareholder. Individuals who are not permitted to be audit committee members may not participate in the committee’s meetings other than to present a particular issue. However, an employee who is not a controlling shareholder or relative may participate in the committee’s discussions but not in any
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vote, and the company’s legal counsel and corporate secretary may participate in the committee’s discussions and votes if requested by the committee.
Under the Companies Law, a meeting of the audit committee is properly convened if a majority of the committee members attend the meeting, and in addition a majority of the attending committee members are independent directors within the meaning of the Companies Law and include at least one outside director.
We have adopted an audit committee charter as required by Nasdaq rules. The audit committee’s duties include providing assistance to the board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by approving the fees of, and services performed by, our independent accountants and reviewing their reports regarding our accounting practices and systems of internal accounting controls. The audit committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the accountants are independent of management. Under the Companies Law, the audit committee also is required to monitor deficiencies in the administration of our company, including by consulting with the internal auditor and independent accountants, to review, classify and approve related party transactions and extraordinary transactions, to review the internal auditor’s audit plan and to establish and monitor whistleblower procedures.
Nominating Committee
Nasdaq rules require that director nominees be selected or recommended for the board’s selection either by a committee composed solely of independent directors or by a majority of independent directors. Our nominating committee assists the board of directors in its selection of individuals as nominees for election to the board of directors and/or to fill any vacancies or newly created directorships on the board of directors. The nominating committee consists of Doron Nevo, Dr. Eyal Kishon Doron Nevo and Joseph Tenne, with Doron Nevo serving as the chairman of the nominating committee. All members of the nominating committee are independent under the applicable Nasdaq rules and provisions of the Companies Law.
Compensation Committee
Under the Companies Law, the board of directors of any public company must establish a compensation committee. The compensation committee must consist of at least three directors, include all of the outside directors (including one outside director serving as the chair of the compensation committee), and a majority of the committee members must comply with the director independence requirements prescribed by the Companies Law. 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;however, an employee who 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’s duties include recommending to the board of directors a compensation policy for executives and monitor its implementation, approve compensation terms of executive officers, directors and employees affiliated with controlling shareholders, make recommendations to the board of directors regarding the issuance of equity incentive awards under our equity incentive plan and exempt certain compensation arrangements from the requirement to obtain shareholder approval under the Companies Law. The compensation committee meets at least twice a year, with further meetings to occur, or actions to be taken by unanimous written consent, when deemed necessary or desirable by the committee or its chairperson. For information regarding the compensation policy for executives, see Item 10.C -10.B, “Additional Information -– Memorandum and Articles of Association – Compensation of Executive Officers and Directors; Executive Compensation Policy.”
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The compensation committee consists of Doron Nevo, Dr. Eyal Kishon, Doron Nevo, Joseph Tenne and Zehava Simon, with Doron Nevo serving as the chairman of the compensation committee. All members of the compensation committee are independent under the applicable SEC rules, Nasdaq rules and provisions of the Companies Law.
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Internal Auditor
Under the Companies Law, our board of directors is also required to appoint an internal auditor proposed by the audit committee. The internal auditor may be our employee, but may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of our independent accounting firm. The role of the internal auditor is to examine, among other things, whether our activities comply with the law and orderly business procedure. Corpocheck GlobalMr. Oren Grupi of KPMG Somekh Chaikin, Israel has been our internal auditor since May 2015.
July 2018.
Board Classes
Pursuant to our articles of association, our directors, other than our outside directors, are classified into three classes (classes I, II and III). The members of each class of directors and the expiration of his or her current term of office are as follows:
Zehava Simon | Class I | 2022 | ||
Lior Aldema | Class | 2022 | ||
Shira Fayans Birenbaum | | Class II | | 2022 |
Joseph Tenne | Class | 2023 | ||
Shabtai Adlersberg | Class III | 2024 | ||
Stanley B. Stern | Class III | 2024 |
Our outside directors under the Companies Law, Doron Nevo and Dr. Eyal Kishon, are not members of any class and serve in accordance with the provisions of the Companies Law. Mr. Nevo’s term ends in 20182024 and Dr. Kishon’s term ends in 2020.
2023.
Chairman of the Board
Under the Companies Law, the chief executive officer of a company (or a relative of the chief executive officer) 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 chief executive officer, unless approved by the shareholders by a special majority vote prescribed by the 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 chief executive officer 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 chief executive officer. Stanley B. Stern is our chairman of the board and Shabtai Adlersberg is our chief executive officer.
President and Chief Executive Officer.
| D. | EMPLOYEES |
We had the following number of employees as of December 31, 2015, 20162021, 2020 and 20172019 in the departments set forth in the table below:
| | | | | | |
| | As of December 31, | ||||
|
| 2021 | | 2020 |
| 2019 |
Research and development |
| 316 | | 277 |
| 273 |
Sales and marketing, technical service and support |
| 443 | | 374 |
| 340 |
Operations |
| 84 | | 83 |
| 76 |
Management and administration |
| 42 | | 39 |
| 39 |
|
| 885 | | 773 |
| 728 |
| As of December 31, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Research and development | 248 | 284 | 280 | |||||||||
| Sales and marketing, technical service and support | 276 | 297 | 303 | |||||||||
| Operations | 82 | 81 | 77 | |||||||||
| Management and administration | 35 | 38 | 38 | |||||||||
| 641 | 700 | 698 | ||||||||||
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Our employees were located in the following areas as of December 31, 2015, 20162021, 2020 and 2017.2019.
| | | | | | |
| | As of December 31, | ||||
|
| 2021 | | 2020 |
| 2019 |
Israel |
| 456 | | 412 |
| 398 |
United States |
| 182 | | 152 |
| 134 |
Europe |
| 96 | | 73 |
| 69 |
Far East |
| 127 | | 121 |
| 112 |
Latin America |
| 24 | | 15 |
| 15 |
|
| 885 | | 773 |
| 728 |
| As of December 31, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Israel | 397 | 426 | 403 | |||||||||
| United States | 113 | 124 | 130 | |||||||||
| Europe | 38 | 54 | 59 | |||||||||
| Far East | 80 | 83 | 92 | |||||||||
| Latin America | 13 | 13 | 14 | |||||||||
| 641 | 700 | 698 | ||||||||||
Israeli labor laws and regulations are applicable to our employees in Israel. These laws principally concern matters such as paid annual vacation, paid sick days, length of the workday, pay for overtime, insurance for work-related accidents, severance pay and other conditions of employment. Israeli law generally requires severance pay, which may be funded by Manager’s Insurance, described below, upon the retirement or death of an employee or termination of employment without cause (as defined under Israeli law). Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which include payments for national health insurance. The payments to the National Insurance Institute currently range from approximately 6.95%7.05% to 19.5%19.6% of wages up to specified wage levels, of which the employee contributes approximately 55% and the employer contributes approximately 45%.
Our employees in Israel are subject to certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists Associations) by order of the Israeli Minister of Economy and Industry (formerly known as Minister of Industry, Trade and Labor). These provisions principally concern cost of living increases, recreation pay and other conditions of employment. We generally provide our employees with benefits and working conditions above the required minimums. Our employees, as a group, are not currently represented by a labor union. To date, we have not experienced any work stoppages.
Pursuant to an order issued by the Israeli Minister of Industry, Trade and Labor, provisions relating to pension arrangements in the collective bargaining agreements between the Histadrut and the Coordination Bureau of Economic Organizations apply to all employees in Israel, including our employees in Israel. We regularly contribute to a “Manager’s Insurance Fund” or to a privately managed pension fund on behalf of our employees located in Israel. These funds provide employees with a lump sum payment upon retirement (or a pension, in case of a pension fund) and severance pay, if legally entitled thereto, upon termination of employment. We provide for payments to a Manager’s Insurance Fund and pension fund contributions in the amount of 14.83% of an employee’s salary on account of severance pay and provident payment or pension, with the employee contributing 6.0% of his salary. We also pay an additional amount of up to 2.5% of certain of our employees’ salaries in connection with disability payments. In addition, we administer an Education Fund for our Israeli employees and pay 7.5% of these employees’ salaries thereto, with the employees contributing 2.5% of their salary.
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| E. | SHARE OWNERSHIP |
The following table sets forth the share ownership of our directors and officers as of March 23, 2018April 24, 2022 and the outstanding number of options and RSUs held by them that vest within 60 days of March 23, 2018.April 24, 2022.
| | | | | | |
| | Total | | Percentage | | |
| | Shares | | of | | Number of |
|
| Beneficially |
| Ordinary |
| Options and |
Name | | Owned | | Shares | | RSUs |
| | | | | | |
Shabtai Adlersberg |
| 4,334,960 |
| 13.6 | % | 323,938 |
Stanley B. Stern |
| * |
| * |
| * |
Niran Baruch |
| * |
| * |
| * |
Lior Aldema |
| * |
| * |
| * |
Ofer Nimtsovich |
| * |
| * |
| * |
Yair Hevdeli |
| * |
| * |
| * |
Eyal Frishberg |
| * |
| * |
| * |
Yehuda Herscovici |
| * |
| * |
| * |
Tal Dor |
| * |
| * |
| * |
Shaul Weissman |
| * |
| * |
| * |
Joseph Tenne |
| * |
| * |
| * |
Dr. Eyal Kishon |
| * |
| * |
| * |
Doron Nevo |
| * |
| * |
| * |
Zehava Simon |
| * |
| * |
| * |
Shira Fayans Birenbaum |
| * |
| * |
| * |
| Total Shares | Percentage of | |||||||||||
| Beneficially | Ordinary | Number of | ||||||||||
| Name | Owned | Shares | Options | |||||||||
| Shabtai Adlersberg | 4,995,328 | 17.3 | % | 495,002 | ||||||||
| Stanley B. Stern | * | * | * | |||||||||
| Niran Baruch | * | * | * | |||||||||
| Lior Aldema | * | * | * | |||||||||
| Ofer Nimtsovich | * | * | * | |||||||||
| Yair Hevdeli | * | * | * | |||||||||
| Eyal Frishberg | * | * | * | |||||||||
| Yehuda Herscovici | * | * | * | |||||||||
| Nimrode Borovsky | * | * | * | |||||||||
| Tal Dor | * | * | * | |||||||||
| Shaul Weissman | * | * | * | |||||||||
| Joseph Tenne | * | * | * | |||||||||
| Dr. Eyal Kishon | * | * | * | |||||||||
| Doron Nevo | * | * | * | |||||||||
| Zehava Simon | * | * | * | |||||||||
* LessRepresented less than one percent.
Our officers and directors have the same voting rights as our other shareholders.
The following table sets forth information with respect to the options to purchase our ordinary shares held by Mr. Adlersberg as of March 23, 2018.April 24, 2022.
| | | | | | | | | | | | | |
Number of | | | | Exercise | | | | | | | | | |
Options |
| Grant Date |
| Price |
| Exercised |
| Cancelled |
| Vesting |
| Expiration Date | |
114,275 | | December 14, 2015 | | $ | 4.03 |
| — |
| — |
| 4 years | | December 14, 2022 |
95,293 | | March 20, 2017 | | $ | 6.90 |
| — |
| — |
| 4 years | | March 20, 2024 |
15,000 | | December 14, 2017 | | $ | 7.13 |
| — |
| — |
| 4 years | | December 14, 2024 |
15,000 | | March 14, 2018 | | $ | 7.56 |
| — |
| — |
| 4 years | | March 14, 2025 |
15,000 | | June 14, 2018 | | $ | 7.33 |
| — |
| — |
| 4 years | | June 14, 2025 |
15,000 | | September 14, 2018 | | $ | 10.59 |
| — |
| — |
| 4 years | | September 14, 2025 |
15,000 | | December 14, 2018 | | $ | 10.66 |
| — |
| — |
| 4 years | | December 14, 2025 |
15,000 | | March 14, 2019 | | $ | 13.27 |
| — |
| — |
| 4 years | | March 14, 2026 |
15,000 | | June 14, 2019 | | $ | 15.93 |
| — |
| — |
| 4 years | | June 14, 2026 |
| Number of | Exercise | |||||||||||||||||||
| Options | Grant Date | Price | Exercised | Cancelled | Vesting | Expiration Date | ||||||||||||||
| 122,201 | December 14, 2011 | $ | 3.66 | - | - | 4 years | December 14, 2018 | |||||||||||||
| 113,876 | December 14, 2012 | $ | 3.02 | 50,000 | - | 4 years | December 14, 2019 | |||||||||||||
| 116,031 | December 14, 2013 | $ | 6.69 | - | - | 4 years | December 14, 2020 | |||||||||||||
| 127,829 | December 14, 2014 | $ | 4.60 | - | - | 4 years | December 14, 2021 | |||||||||||||
| 114,275 | December 14, 2015 | $ | 4.03 | - | - | 4 years | December 14, 2022 | |||||||||||||
| 95,293 | March 20, 2017 | $ | 6.90 | - | - | 4 years | March 20, 2024 | |||||||||||||
| 15,000 | December 14, 2017 | $ | 7.13 | - | - | 4 years | December 14, 2024 | |||||||||||||
| 15,000 | March 14, 2018 | $ | 7.56 | - | - | 4 years | March 14, 2025 | |||||||||||||
The following table sets forth information with respect to the RSUs granted to Mr. Adlersberg as of March 23, 2018.April 24, 2022. These RSUs vest quarterly over a four-year period from the date of grant, subject to his continuing service to us.
| | | | |
Number of |
| |
|
|
RSUs | | Grant Date | | Issued |
60,000 | | December 14, 2018 |
| 48,750 |
80,000 | | September 14, 2019 |
| 50,000 |
80,000 | | September 14, 2020 |
| 30,000 |
80,000 | | September 14, 2021 |
| 10,000 |
| Number of | ||||||||
| RSUs | Grant Date | Issued | ||||||
| 42,610 | December 14, 2014 | 34,621 | ||||||
| 38,092 | December 14, 2015 | 21,425 | ||||||
| 32,717 | December 14, 2016 | 10,222 | ||||||
| 60,000 | December 14, 2017 | 3,750 | ||||||
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Employee Share Plans
We have Employee Share Purchase Plans for the sale of shares to our employees and an Equity Incentive Plan for the granting of options, RSUs and restricted shares to our employees, officers, directors and consultants. Our 2008 Equity Incentive Plan is pursuant to the Israeli Income Tax Ordinance, entitling the beneficiaries who are our employees to tax benefits under Israeli law. There are various conditions that must be met in order to qualify for these benefits, including registration of the options in the name of a trustee for each of the beneficiaries who is granted options. For tax benefits each option, and any ordinary shares acquired upon the exercise of the option, must be held by the trustee at least for a period commencing on the date of grant and ending no later than 24 months after the date of grant, in accordance with the period of time specified by Section 102 of Israel’s Income Tax Ordinance, and deposited in trust with the trustee.
Employee Share Option Plans
2008 Equity Incentive Plan.
We adopted an equity incentive plan under Section 102 of the Israeli Income Tax Ordinance, or Section 102, which provides certain tax benefits in connection with stock-basedshare-based compensation to employees, officers and directors. This plan, our 2008 Equity Incentive Plan, was approved by the IsraeliIsrael Tax Authority.
Under our equity incentive plan, we may grant our directors, officers and employees restricted shares, restricted share units and options to purchase our ordinary shares under Section 102. We may also grant other persons awards under our equity incentive plan. However, such other persons (controlling shareholders and consultants) will not enjoy the tax benefits provided by Section 102. The total number of ordinary shares that were originally available for grant under the 2008 Plan was 2,009,122, which was increased during the years to 8,009,122.4,009,122 in 2010, 6,009,122 in 2013, 8,009,122 in 2016 and 10,009,122 in 2019. This number is reduced by one share for each equity grant we make under the 2008 Plan. During 2017,2021, options to purchase 264,5433,000 ordinary shares and 333,962633,333 restricted share units were granted under the 2008 Plan. As of December 31, 2017, 1,221,9412021, 787,785 ordinary shares remained available for grant under the 2008 Plan. As of December 31, 20172021, there are 2,881,642551,809 options to purchase ordinary shares and 575,3971,203,431 restricted share units outstanding under the plan.
The IsraeliIsrael Tax Authority approved the 2008 Plan under the capital gains tax track of Section 102. Based on Israeli law currently in effect and the election of the capital gains tax track, and provided that options, restricted shares and restricted shares units granted or, upon their exercise or vesting, the underlying shares, issued under the plan are held by a trustee for the two years following the date in which such awards are granted, our employees, officers and directors will be (i) entitled to defer any taxable event with respect to the awards until the underlying ordinary shares are sold, and (ii) subject to capital gains tax of 25% on the sale of the shares. However, if we grant awards at a value below the underlying shares’ market value at the date of grant, the 25% capital gains tax rate will apply only with respect to capital gains in excess of the underlying shares’ market value at the date of grant and the remaining capital gains will be taxed at the grantee’s regular tax rate. We may not recognize a tax benefit pertaining to the employees’ restricted shares, restricted share units and options for tax purposes except in the events described above under which the gain is taxed at the grantee’s regular tax rate.
Restricted shares, restricted share units and options granted under the 2008 Plan will generally vest over four years from the grant date.date or in accordance with the alternative vesting schedule applicable to the specific grant. If the employment of an employee is terminated for any reason, the employee (or in the case of death, the designated beneficiary) may exercise his or her vested options within ninety days of the date of termination (or within twelve months of the date of termination in the case of death or disability) and shall be entitled to any rights upon vested restricted shares and vested restricted share units to be delivered to the employee to the extent that they were vested prior to the date his or her employment terminates. Directors are generally eligible to exercise his or her vested options within twelve months from the date the director ceases to serve on the board of directors.
The holders of options under all of the plans are responsible for all personal tax consequences relating to the options. The exercise prices of the options are based on the fair value of the ordinary shares at the time of grant as determined by our board of directors. The current practice of our board of directors is to grant options with exercise prices that equal 100% of the closing price of our ordinary shares on the applicable date of grant.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
| MAJOR SHAREHOLDERS |
To our knowledge, (A) we are not directly or indirectly owned or controlled (i) by another corporation or (ii) by any foreign government and (B) there are no arrangements, the operation of which may at a subsequent date result in a change in control of AudioCodes. The following table sets forth, as of March 23, 2018April 24, 2022 the number of our ordinary shares, which constitute our only outstanding voting securities, beneficially owned by (i) all shareholders known to us to own more than 5% of our outstanding ordinary shares, and (ii) all of our directors and senior executive officers as a group.
| | | | | |
Identity of Person or |
| Amount |
| Percent of |
|
Group | | Owned | | Class(6) |
|
Shabtai Adlersberg(1) |
| 4,658,898 |
| 14.6 | % |
Leon Bialik(2) |
| 2,468,041 |
| 7.7 | % |
The Phoenix Holdings Ltd. (3) | | 1,683,386 | | 5.3 | % |
Copeland Capital Management, LLC(4) | | 1,653,376 | | 5.2 | % |
All directors and senior executive officers as a group (15 persons) (5) |
| 4,854,153 |
| 15.2 | % |
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| Identity of Person or | Amount | Percent of | ||||||
| Group | Owned | Class | ||||||
| Shabtai Adlersberg(1) | 5,490,329 | 19.0 | % | |||||
| Leon Bialik(2) | 3,874,022 | 13.4 | % | |||||
| Senvest Management, LLC(3) | 2,066,374 | 7.2 | % | |||||
| Morgan Stanley(4) | 1,689,115 | 5.8 | % | |||||
| All directors and senior executive officers as a group (15 persons)(5) | 6,168,961 | 21.4 | % | |||||
| (1) | Includes options to purchase |
| (2) | The information is derived from a statement on Schedule 13G/A of Leon Bialik filed with the SEC on January 26, 2022. |
| (3) | The information is derived from a statement on Schedule 13G/A of The Phoenix Holdings Ltd. filed with the SEC on February 6, 2022. |
| (4) | The information is derived from a statement on Schedule 13G/A of Copeland Capital Management, LLC filed with the SEC on January 26, 2022. |
| (5) | Includes 321,939 ordinary shares which may be purchased pursuant to options exercisable within 60 days following April 24, 2022 and 32,499 ordinary shares issuable pursuant to restricted share units that vest within 60 days of April 24, 2022. |
| (6) | This percentage calculation is rounded to the nearest tenth and based on 31,903,433 outstanding shares as of April 24, 2022 (which does not include treasury shares outstanding as of April 24, 2022). |
Mr. Adlersberg held 18.6%approximately 14.1% of our ordinary shares as of December 31, 20172021 as compared to 16.4%15.2% of our ordinary shares as of December 31, 20162020 and 14.2%17.5% of our ordinary shares as of December 31, 2015.
2019.
Mr. Bialik held 13.2%approximately 7.6% of our ordinary shares as of December 31, 20172021, as compared to 12.1%8.4% of our ordinary shares as of December 31, 20162020 and 10.6%10.2% of our ordinary shares as of December 31, 2015.
Senvest Management, LLC (formerly Rima Senvest Management LLC) held 7.0% of our ordinary shares as of December 31, 2017 as compared to 8.5% of our ordinary shares as of December 31, 2016 and 8.2% of our ordinary shares as of December 31, 2015.
2019.
Morgan Stanley and Morgan Stanley Capital Services LLC collectively held 5.7%approximately 4.6% of our ordinary shares as of December 31, 20172021, as compared to to our knowledge, less than 5.0%6.3% of our ordinary shares as of December 31, 20162020 and 6.7% of our ordinary shares as of December 31, 2015.2019.
The Phoenix Holdings Ltd. held approximately 5.1% of our ordinary shares as of December 31, 2021.
Copeland Capital Management, LLC held approximately 5.1% of our ordinary shares as of December 31, 2021.
As of March 23, 2018,April 24, 2022, there were approximately 9six holders of record of our ordinary shares in the United States, although we believe that the number of beneficial owners of the ordinary shares is significantly greater. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held of record by brokers or other nominees.
The major shareholders have the same voting rights as the other shareholders.
| B. | RELATED PARTY TRANSACTIONS |
Not applicable.
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| C. | INTERESTS OF EXPERTS AND COUNSEL |
Not applicable.
ITEM 8. FINANCIAL INFORMATION
| CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION |
See Item 18.
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Legal Proceedings
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are currently not involved in any pending or contemplated legal proceedings that could reasonably be expected to have a significant effect on our financial position, or profitability. We may become involved in material legal proceedings in the future. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
None.
Dividend Policy
For a discussion of our dividend policy, please see Item 10B-“Additional10.B, “Additional Information-Memorandum and Articles of Association-Dividends.”
| B. |
No significant change has occurred since December 31, 2017,2020, except as otherwise disclosed in this Annual Report.
ITEM 9. THE OFFER AND LISTING
| OFFER AND LISTING DETAILS |
Our ordinary shares are listed on the Nasdaq Global Select Market and the TASE under the symbol “AUDC.”
The following table sets forth, for the periods indicated, the high and low sales prices of our ordinary shares as reported by the Nasdaq Global Select Market.
| Price Per Share | ||||||||
| Calendar Year | High | Low | ||||||
| 2017 | $ | 8.43 | $ | 5.83 | ||||
| 2016 | $ | 6.50 | $ | 3.66 | ||||
| 2015 | $ | 5.58 | $ | 2.69 | ||||
| 2014 | $ | 9.12 | $ | 4.11 | ||||
| 2013 | $ | 7.62 | $ | 3.02 | ||||
| Price Per Share | ||||||||
| Calendar Period | High | Low | ||||||
| 2018 | ||||||||
| First quarter (through March 23, 2018) | $ | 7.90 | $ | 6.88 | ||||
| 2017 | ||||||||
| Fourth Quarter | $ | 8.43 | $ | 6.15 | ||||
| Third Quarter | $ | 7.21 | $ | 5.87 | ||||
| Second Quarter | $ | 7.04 | $ | 5.83 | ||||
| First quarter | $ | 7.26 | $ | 5.95 | ||||
| 2016 | ||||||||
| Fourth quarter | $ | 6.50 | $ | 5.07 | ||||
| Third quarter | $ | 5.75 | $ | 4.05 | ||||
| Second quarter | $ | 4.72 | $ | 3.68 | ||||
| First quarter | $ | 4.77 | $ | 3.66 | ||||
| Price Per Share | ||||||||
| Calendar Month | High | Low | ||||||
| 2018 | ||||||||
| February | $ | 7.81 | $ | 6.88 | ||||
| January | $ | 7.90 | $ | 7.25 | ||||
| 2017 | ||||||||
| December | $ | 7.39 | $ | 6.77 | ||||
| November | $ | 7.20 | $ | 6.15 | ||||
| October | $ | 8.43 | $ | 6.58 | ||||
| September | $ | 7.21 | $ | 6.62 | ||||
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The following table sets forth, for the periods indicated, the high and low sales prices of our ordinary shares as reported by The Tel Aviv Stock Exchange. All share prices shown in the following table are in NIS. As of December 31, 2017, the exchange rate was equal to approximately NIS 3.467 per U.S. $1.00.
| Price Per Share | ||||||||
| Calendar Year | High | Low | ||||||
| 2017 | NIS | 29.38 | NIS | 20.85 | ||||
| 2016 | NIS | 24.90 | NIS | 14.08 | ||||
| 2015 | NIS | 22.50 | NIS | 10.01 | ||||
| 2014 | NIS | 32.24 | NIS | 15.88 | ||||
| 2013 | NIS | 26.48 | NIS | 11.37 | ||||
| Price Per Share | ||||||||
| Calendar Period | High | Low | ||||||
| 2017 | ||||||||
| First quarter (through March 23, 2018) | NIS | 27.67 | NIS | 23.00 | ||||
| 2017 | ||||||||
| Fourth quarter | NIS | 29.38 | NIS | 21.51 | ||||
| Third quarter | NIS | 25.30 | NIS | 20.85 | ||||
| Second quarter | NIS | 25.80 | NIS | 21.32 | ||||
| First quarter | NIS | 27.07 | NIS | 22.40 | ||||
| 2016 | ||||||||
| Fourth quarter | NIS | 24.90 | NIS | 18.92 | ||||
| Third quarter | NIS | 21.98 | NIS | 15.42 | ||||
| Second quarter | NIS | 17.97 | NIS | 14.08 | ||||
| First quarter | NIS | 18.74 | NIS | 14.76 | ||||
| Price Per Share | ||||||||
| Calendar Month | High | Low | ||||||
| 2018 | ||||||||
| February | NIS | 27.67 | NIS | 23.00 | ||||
| January | NIS | 26.99 | NIS | 24.67 | ||||
| 2017 | ||||||||
| December | NIS | 26.15 | NIS | 23.99 | ||||
| November | NIS | 25.32 | NIS | 21.51 | ||||
| October | NIS | 29.38 | NIS | 23.69 | ||||
| September | NIS | 25.30 | NIS | 23.55 | ||||
| B. | PLAN OF DISTRIBUTION |
Not applicable.
| C. | MARKETS |
Our ordinary shares are listed for trading on the Nasdaq Global Select Market under the symbol “AUDC.” Our ordinary shares are also listed for trading on The Tel-Aviv Stock Exchange under the symbol “AUDC.” In addition, we are aware of our ordinary shares being traded on the following markets: Frankfurt Stock Exchange, Berlin Stock Exchange, Munich Stock Exchange, Stuttgart Stock Exchange, the German Composite and XETRA.
| D. | SELLING SHAREHOLDERS |
Not applicable.
| E. | DILUTION |
Not applicable.
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| F. | EXPENSES OF THE ISSUE |
Not applicable.
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ITEM 10. ADDITIONAL INFORMATION
| SHARE CAPITAL |
Not applicable.
| B. | MEMORANDUM AND ARTICLES OF ASSOCIATION |
Objectives
Objects and Purposes
We were incorporated in 1992 under the laws of the State of Israel. Our registration number with the Israeli Registrar of Companies is 520044132. Our objects and purposes,objectives, set forth in Section 2 of our memorandumarticles of association, are:
are to engage in any legal occupation or business.
Share Capital
Our authorized share capital consists of NIS 1,025,000 divided into 100,000,000 ordinary shares, nominal value NIS 0.01 per share, and 2,500,000 preferred shares, nominal value NIS 0.01 per share. As of March 23, 2018,April 24, 2022, we had 28,892,27731,903,433 ordinary shares outstanding (which does not include 28,036,64231,516,816 treasury shares) and no preferred shares outstanding.
Borrowing Powers
The board of directors has the power to cause us to borrow money and to secure the payment of borrowed money. The board of directors specifically has the power to issue bonds or debentures, and to impose mortgages or other security interests on all or any part of our property.
Amendment of Articles of Association
ShareholdersIn general, shareholders may amend our articles of association by a resolution adopted at a shareholders meeting by the holders of 50% of the voting power represented at the meeting in person or by proxy and voting thereon. The amendment of certain provisions of our articles of association requires an increased voting threshold. For example, the approval of amendments to the provisions concerning business combinations with certain shareholders requires the approval of holders of 85% of our outstanding voting shares. Additionally, the amendment of the provisions concerning (i) the procedure according to which shareholders may propose items to include in the agenda of a general meeting of the shareholders and (ii) the role and composition of the board of directors, including the method of appointment of its members, require the approval sixty-six and two-thirds percent (66 2/3)% of the voting power represented at the meeting in person or by proxy and voting thereon.
Qualification of Directors
No person shall be disqualified to serve as a Directordirector by reason of his not holding AudioCodes shares in the Company or by reason of his having served as a Directordirector in the past.
Dividends
Under the Israeli Companies Law, we may pay dividends only out of our profits as determined for statutory purposes, unless court approval is granted for the payment of dividends despite the lack of statutory profits. (There is a unified statutory test for the payment of dividends and a company’s repurchase of its outstanding shares.) In 2021, we received court approval to pay dividends (and repurchase our shares) up to certain ceilings, despite the lack of statutory profits. The current approval is valid until June 19, 2022. We may seek further approvals to repurchase our shares and to continue to pay dividends. The amount of any dividend to be distributed among shareholders is based on the nominal value of their shares. Our board
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Voting Rights and Powers
Unless any shares have special rights as to voting, every shareholder has one vote for each share held of record. A shareholder is not entitled to vote at any shareholders meeting unless all calls then payable by him in respect of his shares have been paid (this does not apply to separate meetings of the holders of a particular class of shares with respect to the modification or abrogation of their rights).
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Under our articles of association, we may issue preferred shares from time to time, in one or more series. However, in connection with our listing on The Tel-Aviv Stock Exchange in 2001, we agreed that for such time as our ordinary shares are traded on The Tel-Aviv Stock Exchange, we will not issue any of the 2,500,000 preferred shares, nominal value NIS 0.01, authorized in our articles of association. Notwithstanding the foregoing, we may issue preferred shares if the preference of those shares is limited to a preference in the distribution of dividends and such preferred shares have no voting rights.
Business Combinations
Our articles of association impose restrictions on our ability to engage in any merger, asset or share sale or other similar transaction with a shareholder holding 15% or more of our voting shares.
Winding Up
Upon our liquidation, our assets available for distribution to shareholders will be distributed to them in proportion to the nominal value of their shares.
Redeemable Shares
Subject to our undertaking to the Tel-Aviv Stock Exchange as described above, we may issue and redeem redeemable shares.
Modification of Rights
Subject to the provisions of our memorandumarticles of association, and without prejudice to any special rights previously conferred upon the holders of our existing shares, we may, from time to time, by a resolution approved by the holders of 75%a simple majority of the voting power represented at the meeting in person or by proxy and voting thereon, provide for shares with such preferred orpreference rights, deferred rights or conversion rights, of redemption, or any other special rights and/or such restrictions, whether in regard to dividends, voting repayment of share capital or otherwise,limitations as may be stipulated in such resolution.
If at any time our share capital is divided into different classes of shares, we may modify or abrogate the rights attached to any class, unless otherwise provided by the articles of association, by a resolution approved by the holders of 75%a simple majority of the voting power represented at the meeting in person or by proxy and voting thereon, subject to the consent in writing of the holders of 75%a simple majority of the issued shares of that class.
class (unless otherwise provided by law or by the terms of issue of the shares of that class).
The provisions of our articles of association relating to general meetings also apply, mutatis mutandis, to any separate general meeting of the holders of the shares of a particular class, except that twoclass.
he creation or more members holding not less than 75%issuance of the issued shares of thatany class, must be present in person or by proxy at that separate general meeting forincluding a quorum to exist.
Unless otherwise provided by our articles of association, the increase of an authorizednew class, of shares, or the issuance of additional shares thereof out of the authorized and unissued share capital, shall not be deemed to modify or abrogatealter the rights and privileges attached to previously issued shares of that class or of any other class.class (unless otherwise provided by our articles of association, including the terms of issue of the shares of any class).
Shareholder Meetings
An annual meeting of shareholders is to be held once a year, within 15 months after the previous annual meeting. The annual meeting may be held in Israel or outside of Israel, as determined by the board of directors.
The board of directors may, whenever it thinks fit, convene a special shareholders meeting. The board of directors must convene a special shareholders meeting at the request of:
| at least two directors; |
| at least one-quarter of the directors in office; or |
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| one or more shareholders who hold at least 5% of the outstanding share capital and at least 1% of the voting rights, or one or more shareholders who hold at least 5% of the outstanding voting rights. |
A special shareholders meeting may be held in Israel or outside of Israel, as determined by the board of directors.
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Notice of General Meetings; Omission to Give Notice
The provisions of the Companies Law and the related regulations override the provisions of our articles of association, and provide for notice of a meeting of shareholders to be sent to each registered shareholder at least 21 days or 35 days in advance of the meeting, depending on the items included in the meeting agenda. Notice of a meeting of shareholders must also be published in two Israeli newspapers at least five days prior to the record date for the meeting.
or on our website.
Notice of a meeting of shareholders must specify the type of meeting, the place and time of the meeting, the agenda, a summary of the proposed resolutions, the majority required to adopt the proposed resolutions, and the record date for the meeting. The notice must also include the address and telephone number of our registered office, and a list of times at which the full text of the proposed resolutions may be examined at the registered office.
The accidental omission to give notice of a meeting to any shareholder, or the non-receipt of notice sent to such shareholder, does not invalidate the proceedings at the meeting.
Limitations on Foreign Shareholders to Hold or Exercise Voting Rights
There are no limitations on foreign shareholders in our articles of association. Israeli law restricts the ability of citizens of countries that are in a state of war with Israel to hold shares of Israeli companies.
Fiduciary Duties; Approval of Transactions under Israeli Law
Fiduciary duties.duties. The Companies Law codifies the fiduciary duties that office holders, which under the Companies Law includes our directors and executive officers, owe to a company. An office holder’s fiduciary duties consist of a duty of loyalty and a duty of care.
The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, including to avoid any conflict of interest between the office holder’s position in the company and personal affairs, and prohibits any competition with the company or the exploitation of any business opportunity of the company in order to receive a personal advantage for himself or herself or for others. This duty also requires an office holder to reveal to the company any information or documents relating to the company’s affairs that the office holder has received due to his or her position as an office holder. A company may approve any of the acts mentioned above provided that all the following conditions apply: the office holder acted in good faith and neither the act nor the approval of the act prejudices the good of the company and, the office holder disclosed the essence of his personal interest in the act, including any substantial fact or document, a reasonable time before the date for discussion of the approval. A director is required to exercise independent discretion in fulfilling his or her duties and may not be party to a voting agreement with respect to his or her vote as a director. A violation of these requirements is deemed a breach of the director’s duty of loyalty.
The duty of care requires an office holder to act with a level of care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to use reasonable means to obtain information regarding the advisability of a given action submitted for his or her approval or performed by virtue of his or her position and all other relevant information material to these actions.
Disclosure of personal interest.interest. The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may have and all related material information or documents known to him or her, in connection with any existing or proposed transaction by the company. “Personal interest,” as defined by the Companies Law, includes a personal interest of any person in an act or transaction of the company, including a personal interest of his relative or of a corporation in which that person or a relative of that person is a 5% or greater shareholder, a holder of 5% or more of the voting rights, a director or general manager, or in which he or she has the right to appoint at least one director or the general manager, and includes shares for which the person has the
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right to vote pursuant to a power-of-attorney. “Personal interest” does not apply to a personal interest stemming merely from holding shares in the company.
The office holder must make the disclosure of his personal interest no later than the first meeting of the company’s board of directors that discusses the particular transaction. This duty does not apply to the personal interest of a relative of the office holder in a transaction unless it is an “extraordinary transaction.” The Companies Law defines an “extraordinary transaction” as a transaction that is not in the ordinary course of business, not on market terms or that is likely to have a material impact on the company’s profitability, assets or liabilities.
Approvals.Approvals. The Companies Law provides that a transaction with an office holder or a transaction in which an office holder has a personal interest requires board approval, unless the transaction is an extraordinary transaction or the articles of association provide otherwise. Our articles of association do not provide otherwise. The transaction may be approved only if it is in our best interest. If the transaction is an extraordinary transaction, then the approvals of the company’s audit committee and the board of directors are required. If the transaction concerns exculpation, indemnification, insurance or compensation of an office holder, then the approvals of the company’s compensation committee and the board of directors are required, except if the compensation arrangement is an immaterial amendment to an existing compensation arrangement of an officer who is not a director, in which case the approval of the compensation committee is sufficient. Exculpation, indemnification, insurance or compensation of a director or the Chief Executive Officer also requires shareholder approval.
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A person who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee generally may not attend that meeting or vote on that matter, unless a majority of the board of directors or the audit committee has a personal interest in the matter or if such person is invited by the chairchairman of the board of directors or audit committee, as applicable, to present the matter being considered. If a majority of the board of directors or the audit committee has a personal interest in the transaction, shareholder approval also would be required.
Shareholders
The Companies Law imposes on a controlling shareholder of a public company the same disclosure requirements described above as it imposes on an office holder. For this purpose, a “controlling shareholder” is any shareholder who has the ability to direct the company’s actions, including any shareholder holding 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Two or more shareholders with a personal interest in the approval of the same transaction are deemed to be one shareholder.
Approval of the audit committee, the board of directors and our shareholders, in that order, is required for extraordinary transactions, including a private placement, with a controlling shareholder or in which a controlling shareholder has a personal interest.
Approval of the compensation committee, the board of directors and our shareholders, in that order, is required for the terms of compensation or employment of a controlling shareholder or his or her relative, as an officer holder or employee of our company or as a service provider to the company, including through a company controlled by a controlling shareholder.
Shareholder approval must include the majority of shares voted at the meeting. In addition to the majority vote, the shareholder approval must satisfy either of two additional tests:
| the majority includes at least a majority of the shares voted by shareholders who have no personal interest in the transaction; or |
| the total number of shares held by disinterested shareholders that voted against the approval of the transaction does not exceed 2% of the aggregate voting rights of our company. |
Generally, the approval of such a transaction may not extend for more than three years, except that in the case of an extraordinary transaction, including a private placement, with a controlling shareholder or in which a controlling shareholder has a personal interest that does not concern compensation for employment or service, the transaction may be approved for a longer period if the audit committee determines that the approval of the transaction for a period longer than three years is reasonable under the circumstances.
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Compensation of Executive Officers and Directors; Executive Compensation Policy
In accordance with the Companies Law, we have adopted a compensation policy for our executive officers and directors. The purpose of the policy is to describe our overall compensation strategy for our executive officers and directors and to provide guidelines for setting their compensation, as prescribed by the Companies Law. In accordance with the Companies Law, the policy must be reviewed and readopted at least once every three years.
Approval of the compensation committee, the board of directors and our shareholders, in that order, is required for the adoption of the compensation policy. The shareholders’ approval must include the majority of shares voted at the meeting. In addition to the majority vote, the shareholder approval must satisfy either of two additional tests:
| the majority includes at least a majority of the shares voted by shareholders other than our controlling shareholders or shareholders who have a personal interest in the adoption of the compensation policy; or |
| the total number of shares held by non-controlling shareholders and disinterested shareholders that voted against the adoption of the compensation policy does not exceed 2% of the aggregate voting rights of our company. |
Under the Companies Law, the compensation arrangements for officers (other than the Chief Executive Officer) who are not directors require the approval of the compensation committee and the board of directors; provided, however, that if the compensation arrangement is not in compliance with our executive compensation policy, the arrangement may only be approved by the compensation committee and the board of directors for special reasons to be noted, and the compensation arrangement shall also require a special shareholder approval. If the compensation arrangement is an immaterial amendment to an existing compensation arrangement of an officer who is not a director and is in compliance with our executive compensation policy, the approval of the compensation committee is sufficient.
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Arrangements regarding the compensation of the Chief Executive Officer and of directors require the approval of the compensation committee, the board and the shareholders, in that order. In certain limited cases, the compensation of a new Chief Executive Officer who is not a director may be approved without approval of the shareholders.
Duties of Shareholders.
Under the Israeli Companies Law, a shareholder also has a duty to act in good faith towards the company and other shareholders and refrain from abusing his or her power in the company, including, among other things, voting in the general meeting of shareholders on the following matters:
| any amendment to the articles of association; |
| an increase of the company’s authorized share capital; |
| a merger; or |
| approval of related party transactions that require shareholder approval. |
In addition, any controlling shareholder, any shareholder who can determine the outcome of a shareholder vote and any shareholder who, under the company’s articles of association, can appoint or prevent the appointment of an office holder, is under a duty to act with fairness towards the company. The Israeli Companies Law also provides that a breach of the duty of fairness will be governed by the laws governing breach of contract; however, the Israeli Companies Law does not describe the substance of this duty.
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Anti-Takeover Provisions Underunder Israeli Law
The 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 25% or more of the voting rights in the company, unless there is already another shareholder of the company with 25% or more of the voting rights. Similarly, the 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 more than 45% of the voting rights in the company, unless there is a shareholder with more than 45% of the voting rights in the company.
The Companies Law requires the parties to a proposed merger to file a merger proposal with the Israeli Registrar of Companies, specifying certain terms of the transaction. Each merging company’s board of directors and shareholders must approve the merger. Shares in one of the merging companies held by the other merging company or certain of its affiliates are disenfranchised for purposes of voting on the merger. A merging company must inform its creditors of the proposed merger. Any creditor of a party to the merger may seek a court order blocking the merger, if there is a reasonable concern that the surviving company will not be able to satisfy all of the obligations of the parties to the merger. Moreover, a merger may not be completed until at least 50 days have passed from the time that the merger proposal was filed with the Israeli Registrar of Companies and at least 30 days have passed from the approval of the shareholders of each of the merging companies.
Finally, in general, Israeli tax law treats stock-for-stock acquisitions less favorably than does U.S. tax law. Israeli tax law provides for tax deferral in specified acquisitions, including transactions where the consideration for the sale of shares is the receipt of shares of the acquiring company. Nevertheless, Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares 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.
Insurance, Indemnification and Exculpation of Directors and Officers; Limitations on Liability
Insurance of Office Holders
The Companies Law permits a company, if permitted by its articles of association, to insure an office holder in respect of liabilities incurred by the office holder as a result of:
| breach of the duty of care owed to the company or a third party; |
| breach of the fiduciary duty owed to the company, provided that the office holder acted in good faith and had reasonable grounds to believe that his action would not harm the company’s interests; |
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| monetary liability imposed on the office holder in favor of a third party; and |
| reasonable litigation expenses, including attorney fees, incurred by the office holder as a result of an administrative enforcement proceeding instituted against him (without limiting from the generality of the foregoing, such expenses will include a payment imposed on the office holder in favor of an injured party as set forth in Section 52(54)(a)(1)(a) of the Israel Securities Law, |
Indemnification of Office Holders
Under the Companies Law, a company can, if permitted by its articles of association, indemnify an office holder for any of the following obligations or expenses incurred in connection with his or her acts or omissions as an office holder:
| monetary liability imposed on an office holder in favor of a third party in a judgment, including a settlement or an arbitral award confirmed by a court; |
| reasonable legal costs, including attorney’s fees, expended by an office holder as a result of: |
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- | an investigation or proceeding instituted against the office holder by a competent authority, provided that such investigation or proceeding concludes without the filing of an indictment against the office holder, and either: |
o | no financial liability was imposed on the office holder in lieu of criminal proceedings, or |
o | financial liability was imposed on the office holder in lieu of criminal proceedings but the alleged criminal offense does not require proof of criminal intent; and (y) in connection with an administrative enforcement proceeding or a financial sanction (without derogating from the generality of the foregoing, such expenses will include a payment imposed on the Office Holder in favor of an injured party as set forth in Section 52(54)(a)(1)(a) of the Israeli Securities Law, and expenses that the Office Holder incurred in connection with a proceeding under Chapters H’3, H’4 or I’1 of the Israeli Securities Law, including reasonable legal expenses, which term includes attorney fees); and |
| reasonable legal costs, including attorneys’ fees, expended by the office holder or for which the office holder is charged by a court: |
- | in an action brought against the office holder by or on behalf of the company or a third party, or |
- | in a criminal action in which the office holder is found innocent, or |
- | in a criminal action in which the office holder is convicted and in which a proof of criminal intent is not required. |
o | A company may indemnify an office holder in respect of these liabilities either in advance of an event or following an event. If a company undertakes to indemnify an office holder in advance of an event, the indemnification, other than legal costs, must be limited to foreseeable events in light of the company’s actual activities when the company undertook such indemnification, and reasonable amounts or standards, as determined by the board of directors. |
Exculpation of Office Holders
Under the Companies Law, a company may, if permitted by its articles of association, also exculpate an office holder in advance, in whole or in part, from liability for damages sustained by a breach of duty of care to the company, other than in connection with distributions.
Limitations on Exculpation, Insurance and Indemnification
Under the Companies Law, a company may indemnify or insure an office holder against a breach of duty of loyalty only to the extent that the office holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company. In addition, a company may not indemnify, insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly (excluding mere negligence), or committed with the intent to derive an unlawful personal gain, or for a fine or forfeit levied against the office holder in connection with a criminal offense.
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Our articles of association allow us to insure, indemnify and exculpate office holders to the fullest extent permitted by law, provided such insurance or indemnification is approved in accordance with law. Pursuant to the 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 our board of directors and, if the office holder is a director, also by our shareholders.
We have entered into agreements with each of our directors and senior officers to insure, indemnify and exculpate them to the full extent permitted by law against some types of claims, subject to dollar limits and other limitations. These agreements have been ratified by our audit committee, board of directors and shareholders. We have acquired directors’ and officers’ liability insurance covering our officers and directors and the officers and directors of our subsidiaries against certain claims.
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| C. | MATERIAL CONTRACTS |
Not applicable.
None.
| D. | EXCHANGE CONTROLS |
Non-residents of Israel who own our ordinary shares may freely convert all amounts received in Israeli currency in respect of such ordinary shares, whether as a dividend, liquidation distribution or as proceeds from the sale of the ordinary shares, into freely-repatriable non-Israeli currencies at the rate of exchange prevailing at the time of conversion (provided in each case that the applicable Israeli income tax, if any, is paid or withheld).
Since January 1, 2003, all exchange control restrictions on transactions in foreign currency in Israel have been eliminated, although there are still reporting requirements for foreign currency transactions. Legislation remains in effect, however, pursuant to which currency controls may be imposed by administrative action at any time.
The State of Israel does not restrict in any way the ownership or voting of our ordinary shares by non-residents of Israel, except with respect to subjects of countries that are in a state of war with Israel.
| E. | TAXATION |
The following is a summary of the material Israeli and United States federal tax consequences, Israeli foreign exchange regulations and certain Israeli government programs affecting us. To the extent that the discussion is based on new tax or other legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax or other authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice, is not exhaustive of all possible tax considerations and should not be relied upon for tax planning purposes. Potential investors are urged to consult their own tax advisors as to the Israeli tax, United States federal income tax and 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 and Government Programs
The following is a brief summary of the material Israeli income tax laws applicable to us, and certain Israeli Government programs that benefit us. This section also contains a discussion of material Israeli income tax consequences concerning the ownership and disposition of our ordinary shares. This summary does not discuss all the aspects 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 such investors include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. Several parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax on their taxable income. AsTaxable income of 2016, the company is subject to a corporate tax rate is 25% (in 2014 and 2015, the corporate tax rate was 26.5%). In December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which reduces the corporate income tax rate to 24% (instead of 25%) effective from January 1, 2017 and to 23% effective from January 1, 2018. The deferred tax balances as of December 31, 2016 and 2017 have been calculated based on the revised tax rates.
However, the effective tax rate payable by a company that qualifies as an Industrial Company that derives income from an Approved Enterprise, a BeneficiaryPreferred Enterprise or a Preferred Technological Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli company are subject to the prevailing corporate tax rate.
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Law for the Encouragement of Capital Investments, 5719-1959
1959, or the Investment Law
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law provides certain incentives for capital investments in production facilities (or other eligible assets) by “Industrial Enterprises” (as defined under the Investment Law).
The Investment Law was significantly amended effective April 1, 2005, (the “2005 Amendment”), and further amended as of January 1, 2011, (the “2011 Amendment”)or the 2011 Amendment, and January 1, 2017, (the “2017 Amendment”). Pursuant toor the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the 20052017 Amendment. Similarly, theThe 2011 Amendment introduced new benefits to replace those granted in accordance with the provisions of the Investment Law in effect prior to the 2011 Amendment. However, companies entitled to benefits
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under the Investment Law as in effect prior to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead irrevocably to forego such benefits and have the benefits of the 2011 Amendment apply. The 2017 Amendment was designed to accommodate the implementation of the “Nexus Principles” (based on OECD guidelines published as part of the Base Erosion and Profit Shifting, (BEPS)or BEPS, project).
Tax Benefits Prior to the 2005 Amendment
An investment program that is implemented in accordance with the provisions of the Investment Law prior to the 2005 Amendment, referred to as an “Approved Enterprise,” is entitled to certain benefits. A company that wished to receive benefits as an Approved Enterprise must have received approval from the Investment Center of the Israeli Ministry of Economy and Industry, (formerly the Ministry of Industry, Trade and Labor), or the Investment Center. Each certificate of approval for an Approved Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset.
In general, an Approved Enterprise is entitled to receive a grant from the Government of Israel and certain tax benefits under the “Grant Track” or an alternative package of tax benefits under the “Alternative Track”. The tax benefits from any certificate of approval relate only to taxable profits attributable to the specific Approved Enterprise. Income derived from activity that is not approved by the Investment Center or not integral to the activity of the Approved Enterprise does not enjoy tax benefits.
The tax benefits include a tax exemption for at least the first two years of the benefit period from the first year of taxable income (depending on the geographic location of the Approved Enterprise facility within Israel) and the taxation of income generated from an Approved Enterprise at a reduced corporate tax rate of between 10% to 25% for the remainder of the benefit period depending on the level of foreign investment in the company in each year as detailed below. The benefit period is ordinarily seven years commencing with the year in which the Approved Enterprise first generates taxable income. The benefit period is limited to 12 years from the operational year as determined by the Investment Center or 14 years from the start of the tax year in which approval of the Approved Enterprise is obtained, whichever is earlier.
A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors Company, or a FIC, which is a company with a level of foreign investment, as defined in the Investment Law, of more than 25%. The level of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share and loan capital, that are owned, directly or indirectly, by persons who are not residents of Israel. The determination as to whether a company qualifies as a FIC is made on an annual basis. A company that qualifies as a FIC and has an Approved Enterprise program is eligible for an extended ten-year benefit period. As specified above, depending on the geographic location of the Approved Enterprise within Israel, income derived from the Approved Enterprise program may be exempt from tax on its undistributed income for a period of between two to ten years, and will be subject to a reduced tax rate for the remainder of the benefit period. The tax rate for the remainder of the benefits period will be 25%, unless the level of foreign investment exceeds 49%, in which case the tax rate will be 20% if the foreign investment is more than 49% and less than 74%; 15% if more than 74% and less than 90%; and 10% if 90% or more.
If a company elects the Alternative Track and distributes a dividend out of income derived from the Approved Enterprise during the tax exemption period, such dividend will be subject to tax on the gross amount distributed. The tax rate will be the rate which would have been applicable had the company not been tax-exempt under the alternative package of benefits. This rate is generally 10%-25% to 25%, depending on the percentage of the company’s shares held by foreign shareholders. The dividend recipient is subject to withholdings of tax at the source by the company at the reduced rate applicable to dividends from Approved Enterprises, which is 15% (or such lower rate as may be provided in an applicable tax treaty) if the dividend is distributed during the tax exemption period or within 12 years after the period. This limitation does not apply to ana Foreign Investors Company, or FIC.
The benefits available to an Approved Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations and the criteria in the specific certificate of approval. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, and interest or other monetary penalty.
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Our production facilities in Israel have been granted the status of an Approved Enterprise in accordance with the Investment Law under four separate investment programs. In accordance with the provisions of the Investment Law, we have elected the Alternative Track.
Therefore, our income derived from the Approved Enterprise will be entitled to a tax exemption for a period of two years and to an additional period of five to eight years of reduced tax rates of 10% -25% (based on the percentage of foreign ownership).
Tax Benefits Subsequent to the 2005 Amendment
The 2005 Amendment changed certain provisions of the Investment Law. As a result of the 2005 Amendment, a company referred to as a “Beneficiary Enterprise”, was no longer obligedobligated to obtain Approved Enterprise status in order to receive the tax benefits previously available under the Alternative Track, and therefore generally there was no need to apply to the Investment Center for this purpose (Approved Enterprise status remains mandatory for companies seeking cash grants). Rather,
In May 2019, we notified the Company may claim the tax benefits offered by the Investment Law directly in its tax returns by notifying the IsraeliIsrael Tax Authority within 12 months of the end of that year, provided that its facilities meet the criteria for tax benefits set out by the 2005 Amendment. Companies are also granted the right to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the 2005 Amendment.
The 2005 Amendment applies to new investment programs and investment programs with an election year commencing after 2004, but does not apply to investment programs approved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted before the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval.
Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of their business income from export to specific markets with a population of at least 12 million (following an amendment which became effective as of July 2013, the export criteria was increased to markets with population of at least 14 million; such export criteria will further increase in the future by 1.4% per annum) and meet additional criteria stipulate in the amendment (referred to as a “Beneficiary Enterprise”). In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which meets all of the conditions, including exceeding a minimum investment amount specified in the Investment 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 its Beneficiary Enterprise (the “Year of Election”).
The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Beneficiary Enterprise depend on, among other things, the geographic location in Israel of the Beneficiary Enterprise. The geographic location of the company at the year of election will also determine the period for which tax benefits are available. Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to ten years, depending on the geographic location of the Beneficiary Enterprise in Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year if it is a qualified FIC. A company qualifying for tax benefits under the 2005 Amendment which pays a dividend out of income derived by its Beneficiary Enterprise during the tax exemption period will be subject to corporate tax in respect of the gross amount of the dividend at the otherwise applicable rate of 10%-25%. Dividends paid out of income attributed to a Beneficiary Enterprise are generally subject to withholding tax at source at the rate of 15% or such lower rate as may be provided in an applicable tax treaty.
The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the Commencement Year, or 12 years from the first day of the Year of Election.
The benefits available to a Beneficiary Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it may be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, and interest, or other monetary penalties.
We have elected 2008 and 2011 as “Years of Election” under the Investment Law forwe waived our Beneficiary Enterprise status.status starting from the 2019 tax year and thereafter.
Tax Benefits under the 2011 and 2017 Amendments
The 2011 Amendment canceled the availability of the benefits granted to companies under the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (as such terms are defined in the Investment Law) as of January 1, 2011. Similarly to “Beneficiary Company”, aA Preferred Company is an industrial company owning a Preferred Enterprise which meets certain conditions (including a minimum threshold of 25% export). However, under this new legislation the requirement for a minimum investment in productive assets was cancelled.
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Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 16% in 2014, unless the Preferred Company is located in a certain development zone, in which case the rate will be 9%. Pursuant to the 2017 Amendment, in 2017 and thereafter, a Preferred Company is entitled to a reduced corporate tax rate of 16% and 7.5%, respectively.
Dividends paid out of income attributed to a Preferred Enterprise during 2014 and thereafter are generally subject to withholding tax at the rate of 20% or such lower rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax is required to be withheld (however, if afterward distributed to individuals or non-Israeli company a withholding of 20% or such lower rate as may be provided in an applicable tax treaty, will apply).
The 2011 Amendment also provided transitional provisions to address companies already enjoying existing tax benefits under the Investment Law. These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise which chose to receive grants and certain tax benefits under the Grant Track before the 2011 Amendment became effective will remain subject to the provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions; and (ii) terms and benefits included in any certificate of approval that was granted to an Approved Enterprise under the Alternative Track before the 2011 Amendment became effective will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met; and (iii) a Beneficiary Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain conditions are met.
We have reviewedIn May 2019, we notified the Israel Tax Authority that we waived our Beneficiary Enterprise status starting from the 2019 tax year and evaluated the implications and effect of the benefits under the 2011 Amendment, and, while potentially eligible for such benefits, we have not yet chosen to be subject to the tax benefits introduced by the 2011 Amendment.
thereafter.
The 2017 Amendment provides that 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%)16)%.
The 2017 Amendment provides new tax tracks as follows: Preferred Technology Enterprise -for a “Preferred Technological Enterprise”– an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than NIS 10 billion for a tax year. A technological preferred enterprise, as defined inUnder the Law,law, a Preferred Technological Enterprise, which is located in the center of Israel will be subject to tax at a rate of 12% on profits deriving from intellectual property (inand Preferred Technological Enterprise which is located in development area A - awill be subject to tax rate of 7.5%).
TheWe are eligible for tax benefits as a Preferred Technological Enterprise mentioned above and the changes in the tax rates relating to technological enterprisesPreferred Technological Enterprises were not taken into account in the computation of deferred taxes as of December 31, 2016 and 2017.2021.
Tax Benefits and Funding for Research and Development
Israeli tax law allows, under specific conditions, a tax deduction in the year incurred for expenditures, including capital expenditures, relating to scientific research and development projects, for the year in which they are incurred if:
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. Expenditures not so approved are deductible over a three-year period if the R&Dresearch and development is for the promotion or development of the company.
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Law for the Encouragement of Industry (Taxes), 5729-1969
1969
The Law for the Encouragement of Industry (Taxes), 5729-1969 ,1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for “Industrial Companies.” We currently qualify as an Industrial Company within the meaning of the Industry Encouragement Law.
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The Industry Encouragement Law defines an “Industrial Company” as a company resident in Israel, of which 90% or more of its income in any tax year, other than income from defense loans, is derived from an “Industrial Enterprise” owned by it and located in Israel. An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial production.
The following corporate tax benefits, among others, are available to Industrial Companies:
| amortization over an eight-year period of the cost of purchased know-how and patents and rights to use a patent and know-how which are used for the development or advancement of the company; |
| under limited conditions, an election to file consolidated tax returns with related Israeli Industrial Companies; and |
| expenses related to a public offering are deductible in equal amounts over a three-year period. |
Eligibility for benefits under the Industry Encouragement Law is not contingent upon the approval of any governmental authority. The Israeli tax authorities may determine that we do not qualify as an Industrial Company, which could entail our loss of the benefits that relate to this status. There can be no assurance that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
Trapped Earnings
On November 15, 2021, a new amendment to the Investment Law was approved, introducing a new dividend distribution ordering rule to cause the distribution of earnings that were tax exempt under the historical Approved or Beneficial Enterprise regimes, or Trapped Earnings, to be on a pro-rata basis from any dividend distribution, which is applicable to distributions starting from August 15, 2021 onwards. Therefore, the corporate income tax, or CIT, claw-back will apply upon any dividend distribution, as long as the Company has Trapped Earnings.
In parallel, the Budget Law also introduced a Temporary Order to enhance the release of Trapped Earnings by reducing the claw-back CIT rate that is applicable upon such a release or distribution by up to 60%, but not less than a 6% CIT rate, during a one-year period commencing as of November 15, 2021.
Taxation of our Shareholders
Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders. A non-Israeli resident who derives capital gains from the sale of shares in an Israeli resident company that were purchased after the company was listed for trading on a stock exchange outside of Israel will be exempt from Israeli tax so long as the shares were not held through a permanent establishment that the non-resident maintains in Israel. However, non-Israeli corporations will not be entitled to the foregoing exemption if Israeli residents: (i) have a controlling interest of more than 25% or more in such non-Israeli corporation or (ii) are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. Additionally, such exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
Additionally, a sale of securities by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the United States-Israel Tax Treaty, the disposition of shares by a shareholder who is a United States resident (for purposes of the treaty) holding the shares as a capital asset is generally exempt from Israeli capital gains tax unless, among other things, (i) the capital gain arising from the disposition is attributed to business income derived by a permanent establishment of the shareholder in Israel; (ii) the shareholder holds, directly or indirectly, shares representing 10% or more of the voting capital during any part of the 12-month period preceding the disposition; or (iii) such U.S. resident is an individual and was present in Israel for 183 days or more in the aggregate during the relevant taxable year.
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In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at source.
Taxation of Non-Israeli Shareholders on Receipt of Dividends. Non-Israeli residents (whether individuals or corporations) generally will be subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25%, which tax will be withheld at source, unless relief is provided in a treaty between Israel and the shareholder’s country of residence (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). With respect to a person who is a “substantial shareholder” at the time of receiving the dividend or on any time during the preceding twelve months, the applicable tax rate is 30%. A “substantial shareholder” is generally a person who alone or together with such person’s relative or another person who collaborates with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, regardless of the source of such right.
However, a distribution of dividends to non-Israeli residents is subject to withholding tax at source at a rate of 15% if the dividend is distributed from income attributed to an Approved Enterprise, or a Beneficiary Enterprise, unless a reduced tax rate is provided under an applicable tax treaty. If the dividend is being paid out of certain income attributable to a Preferred Technological Enterprise, the dividend will be subject to tax at the rate of 20%. A different rate may be provided in a treaty between Israel and the shareholder’s country of residence, as mentioned below.
In this regard, under the United States-Israel Tax Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our ordinary shares who is a United States resident (for purposes of the United States-Israel Tax Treaty) is 25%. Consequently, distributions to U.S. residents of income attributed to an Approved Enterprise or a Beneficiary Enterprise will be subject to withholding tax at a rate of 15% (20% with respect to Preferred Enterprise). However, generally, the maximum rate of withholding tax on dividends, not generated by an Approved Enterprise or a Preferred Enterprise or a BeneficiaryTechnological Enterprise, that are paid to a United States corporation holding 10% or more of the outstanding voting capital throughout the tax year in which the dividend is distributed as well as during the previous tax year, is 12.5%, provided that not more than 25% of the gross income for such preceding year consists of certain types of dividends and interest. If the above conditions are met and the dividends are generated by an Approved Enterprise or a Preferred Technological Enterprise, the maximum rate of withholding tax on such dividends is 15%. We cannot assure you that we will designate the profits that we may distribute in a way that will reduce shareholders’ tax liability.
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Excess Tax
Surtax
Individuals who are subject to tax in Israel (whether any such individual is anor not Israeli resident or non-Israeli resident)residents) are also subject to an additional taxa surtax at the rate of 2% on annual taxable income exceeding NIS 803,520 in 2016 (and as of 2017, the additional tax was increased to a rate of 3% onof annual taxable income exceedingin excess of NIS 640,000)663,240 (for the 2022 tax year, which amount is linked to the annual change in the Israeli consumer price index,index), including, but not limited to, dividends, interest and capital gain.
U.S. Federal Income Tax Considerations
The following summary describes the material U.S. federal income tax consequences to “U.S. Holders” (as defined below) arising from the acquisition, ownership and disposition of our ordinary shares. This summary is based on the Internal Revenue Code of 1986, as amended, or the “Code,” the final, temporary and proposed U.S. Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, all as of the date hereof and all of which are subject to change (possibly with retroactive effect) or different interpretations. For purposes of this summary, a “U.S. Holder” will be deemed to refer only to any of the following beneficial owners of our ordinary shares:
| an individual who is either a U.S. citizen or a resident of the United States for U.S. federal income tax purposes; |
| a corporation or other entity taxable as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the United States or any political subdivision thereof; |
| an estate the income of which is subject to U.S. federal income tax regardless of the source of its income; and |
| a trust, if (a) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person. |
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This summary does not consider all aspects of U.S. federal income taxation that may be relevant to particular U.S. Holders by reason of their particular circumstances, includingand does not consider the potential application of the U.S. federal estate, gift or alternative minimum tax, or any aspect of state, local or non-U.S. federal tax laws or U.S. federal tax laws other than U.S. federal income tax laws. In addition, this summary is directed only to U.S. Holders that hold our ordinary shares as “capital assets” within the meaning of Section 1221 of the Code and does not address the considerations that may be applicable to particular classes of U.S. Holders, including U.S. expatriates, banks, financial institutions, regulated investment companies, real estate investment trusts, pension funds, insurance companies, broker-dealers or traders in securities, commodities or currencies, tax-exempt organizations, grantor trusts, partnerships (including entities classified as partnerships for U.S. federal income tax purposes) or other pass-through entities, holderspersons that will hold our ordinary shares in partnerships or other pass-through entities, holders whose functional currency is not the U.S. dollar, holders who have elected mark-to-market accounting, holders who acquired our ordinary shares through the exercise of options or otherwise as compensation for the performance of services, holders who hold our ordinary shares as part of a “straddle,” “hedge” or “conversion transaction,” holders selling our ordinary shares short, holders deemed to have sold our ordinary shares in a “constructive sale,” holders required to accelerate the recognition of any item of gross income with respect to our ordinary shares as a result of such income being recognized on an applicable financial statement, holders that are resident or ordinarily resident in or have a permanent establishment in a jurisdiction outside the United States; and holders, directly, indirectly or through attribution, of 10% or more (by vote or value) of our outstanding ordinary shares. If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds our ordinary shares, the U.S. federal income tax consequences relating to an investment in our ordinary shares will depend in part upon the status of the partner and the activities of the partnership. Such a partner or partnership should consult its tax advisor regarding the U.S. federal income tax consequences of acquiring, owning and disposing of our ordinary shares in its particular circumstances.
Each U.S. Holder should consult with its own tax advisor as to the particular tax consequences to it of the acquisition, ownership and disposition of our ordinary shares, including the effects of applicable tax treaties, state, local, foreign or other tax laws and possible changes in the tax laws.
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laws.
Distributions With Respect to Our Ordinary Shares
We do not expect to pay cash dividends for the foreseeable future. In the event we do make a distribution with respect to our ordinary shares, subject to the discussion below under “Passive Foreign Investment Company Status,” for U.S. federal income tax purposes, the amount of the distribution will equal the U.S. dollar value of the gross amount of cash and/or the fair market value of any property distributed, including the amount of any Israeli taxes withheld on such distribution as described above under “Israeli Tax Considerations – Taxation of Non-Israeli Shareholders on Receipt of Dividends.” Other than distributions in liquidation or in redemption of our ordinary shares that are treated as exchanges, a distribution with respect to our ordinary shares to a U.S. Holder generally will be treated as a dividend to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of any distribution that exceeds these earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. Holder’s tax basis in its ordinary shares (but not below zero), and then generally as capital gain from a deemed sale or exchange of such ordinary shares. However, because we do not account for our earnings and profits in accordance with U.S. federal income tax principles, U.S. Holders should expect all distributions to be reported to them as dividends. Corporate U.S. Holders generally will not be allowed a deduction under Section 243 of the Code for dividends received on our ordinary shares and thus will be subject to tax at the rate applicable to their taxable income.
Currently, a noncorporatenon-corporate U.S. Holder’s “qualified dividend income” generally is subject to tax at lower long-term capital gains rates. For this purpose, “qualified dividend income” generally includes dividends paid by a foreign corporation if, among other things, the noncorporatenon-corporate U.S. Holder meets certain minimum holding period requirements, is not under an obligation to make related payments with respect to positions in substantially similar or related property, and either (a) the stock of such corporation is readily tradable on an established securities market in the U.S., including the Nasdaq Global Select Market, or (b) such corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. The U.S. Secretary of the Treasury has indicated that the income tax treaty between the United States and Israel is satisfactory for this purpose. Dividends paid by us will not be treated as qualified dividend income, however, if we are treated, for the tax year in which the dividends are paid or the preceding tax year, as a “passive foreign investment company” for U.S. federal income tax purposes. See the discussion below under the heading “Passive Foreign Investment Company Status.”
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A noncorporatenon-corporate U.S. Holder may be subject to an additional tax based on its “net investment income,” (which generally is computed as gross income from interest, dividends, annuities, royalties and rents and gain from the sale of property (other than property held in the active conduct of a trade or business that does not regularly trade financial instruments or commodities), less the amount of deductions properly allocable to such income or gain. Such tax is equal to 3.8% of the lesser of an individual U.S. Holder’s (i) net investment income or (ii) the excess of such U.S. Holder’s “modified adjusted gross income” (adjusted gross income plus the amount of any foreign earned income excluded from income under Section 911(a)(1) of the Code, net of deductions and exclusions disallowed with respect to such foreign earned income) over a specified threshold amount ($250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return and $200,000 in any other case). In the case of a U.S. Holder which is an estate or trust, the tax is equal to 3.8% of the lesser of (i) undistributed net investment income or (ii) the excess of adjusted gross income (as defined in Section 67(e) of the Code) over the dollar amount at which the highest tax bracket applicable to an estate or trust begins.
U.S. Holders are urged to consult their own tax advisors regarding the U.S. federal income tax consequences of their receipt of any distributions with respect to our ordinary shares.
shares.
A dividend paid by us in NIS will be included in the income of U.S. Holders at the U.S. dollar amount of the dividend, based on the “spot rate” of exchange in effect on the date of receipt or deemed receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars. U.S. Holders will have a tax basis in the NIS for U.S. federal income tax purposes equal to that U.S. dollar value. Any gain or loss upon the subsequent conversion of the NIS into U.S. dollars or other disposition of the NIS will constitute foreign currency gain or loss taxable as ordinary income or loss and will be treated as U.S.-source income or loss for U.S. foreign tax credit purposes.
Dividends received with respect to our ordinary shares will constitute “portfolio income” for purposes of the limitation on the deductibility of passive activity losses and, therefore, generally may not be offset by passive activity losses. Dividends received with respect to our ordinary shares also generally will be treated as “investment income” for purposes of the investment interest deduction limitation contained in Section 163(d) of the Code, and generally as foreign-source passive income for U.S. foreign tax credit purposes. Subject to certain limitations, U.S. Holders may elect to claim as a foreign tax credit against their U.S. federal income tax liability for any Israeli income tax withheld from distributions with respect to our ordinary shares which constitute dividends under U.S. income tax law. A U.S. Holder that does not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax withheld, but only if the U.S. Holder elects to do so with respect to all foreign income taxes in such year. If a refund of the tax withheld is available under the applicable laws of Israel or under the Israel-U.S. income tax treaty, the amount of tax withheld that is refundable will not be eligible for such credit against your U.S. federal income tax liability (and will not be eligible for the deduction against your U.S. federal taxable income). In addition, special rules may apply to the computation of foreign tax credits relating to “qualified dividend income,” as defined above. The calculation of foreign tax credits and, in the case of a U.S. Holder that elects to deduct foreign income taxes, the availability of deductions involve the application of complex rules that depend on a U.S. Holder’s particular circumstances. U.S. Holders are urged to consult their own tax advisors regarding the availability to them of foreign tax credits or deductions in respect of any Israeli tax withheld or paid with respect to any dividends which may be paid with respect to our ordinary shares, including limitations pursuant to the U.S.-Israel income tax treaty.
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However, if we are a “United States-owned foreign corporation,” solely for foreign tax credit purposes, a portion of the dividends allocable to our U.S. source earnings and profits may be recharacterized as U.S. source. A “United States-owned foreign corporation” is any foreign corporation in which United States persons own, directly or indirectly, 50% or more (by vote or by value) of the stock. In general, United States-owned foreign corporations with less than 10% of earnings and profits attributable to sources within the United States are excepted from these rules. In such case, if 10% or more of our earnings and profits are attributable to sources within the United States, a portion of the dividends paid on our ordinary shares allocable to our U.S. source earnings and profits will be treated as U.S. source, and, as such, a U.S. Holder may not offset any foreign tax withheld as a credit against U.S. federal income tax imposed on that portion of dividends. The rules governing the treatment of foreign taxes imposed on a U.S. Holder and foreign tax credits are complex, and U.S. Holders should consult their tax advisors about the impact of these rules in their particular situations.
Disposition of Our Ordinary Shares
Subject to the discussion below under “Passive Foreign Investment Company Status,” a U.S. Holder’s sale, exchange or other taxable disposition of our ordinary shares generally will result in the recognition by such U.S. Holder of capital gain or loss in an amount equal to the difference between the U.S. dollar value of the amount realized and the U.S. Holder’s tax basis in the ordinary shares disposed of (measured in U.S. dollars). This gain or loss will be long-term capital gain or loss if such ordinary shares have been held or are deemed to
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have been held for more than one year at the time of the disposition. Non-corporate U.S. Holders currently are subject to a maximum tax rate of 20% on long-term capital gains, also may be subject to the additional tax on “net investment income” described above in “Distributions With Respect to Our Ordinary Shares.” If the U.S. Holder’s holding period on the date of the taxable disposition is one year or less, such gain or loss will be a short-term capital gain or loss. Short-term capital gains generally are taxed at the same rates applicable to ordinary income. See “Israeli Tax Considerations -– Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders” for a discussion of taxation by Israel of capital gains realized on sales of our ordinary shares. Any capital loss realized upon the taxable disposition of our ordinary shares generally will be deductible only against capital gains and not against ordinary income, except that noncorporatenon-corporate U.S. Holders generally may deduct annually from ordinary income up to $3,000 of net capital losses. In general, any capital gain or loss recognized by a U.S. Holder upon the taxable disposition of our ordinary shares will be treated as U.S.-source income or loss for U.S. foreign tax credit purposes, although the tax treaty between the United States and Israel may permit gain derived from the taxable disposition of ordinary shares by a U.S. Holder to be treated as foreign-source income for U.S. foreign tax credit purposes under certain circumstances.
A U.S. Holder’s tax basis in its ordinary shares generally will be equal to the U.S. dollar purchase price paid by such U.S. Holder to acquire such ordinary shares. The U.S. dollar cost of ordinary shares purchased with foreign currency generally will be equal to the U.S. dollar value of the purchase price on the date of purchase or, in the case of ordinary shares that are purchased by a cash basis U.S. Holder (or an accrual basis U.S. Holder that so elects), on the settlement date for the purchase. Such an election by an accrual basis U.S. Holder must be applied consistently from year to year and cannot be revoked without the consent of the U.S. Internal Revenue Service. The holding period of each ordinary share owned by a U.S. Holder will commence on the day following the date of the U.S. Holder’s purchase of such ordinary share and will include the day on which the ordinary share is sold by such U.S. Holder.
In the case of a U.S. Holder who uses the cash basis method of accounting and who receives NIS in connection with a taxable disposition of ordinary shares, the amount realized will be based on the “spot rate” of exchange on the settlement date of such taxable disposition. If such U.S. Holder subsequently converts NIS into U.S. dollars at a conversion rate other than the spot rate in effect on the settlement date, such U.S. Holder may have a foreign currency exchange gain or loss treated as ordinary income or loss for U.S. federal income tax purposes. A U.S. Holder who uses the accrual method of accounting may elect the same treatment required of cash method taxpayers with respect to a taxable disposition of ordinary shares, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the U.S. Internal Revenue Service. If an accrual method U.S. Holder does not (or is not eligible to) elect to be treated as a cash method taxpayer (pursuant to U.S. Treasury Regulations applicable to foreign currency transactions), such U.S. Holder may be deemed to have realized an immediate foreign currency gain or loss for U.S. federal income tax purposes in the event of any difference between the U.S. dollar value of the NIS on the date of the taxable disposition and the settlement date. Any such currency gain or loss generally would be treated as U.S.-source ordinary income or loss and would be subject to tax in addition to any gain or loss recognized by such U.S. Holder on the taxable disposition of ordinary shares.
Passive Foreign Investment Company Status
Generally, a foreign corporation is treated as a passive foreign investment company, (“PFIC”)or PFIC, for U.S. federal income tax purposes for any tax year if, in such tax year, either (i) 75% or more of its gross income (including its pro rata share of the gross income of any company in which it is considered to own 25% or more of the shares by value) is passive in nature, (the “Income Test”),or the Income Test, or (ii) the average percentage of its assets during such tax year (including its pro rata share of the assets of any company in which it is considered to own 25% or more of the shares by value) which produce, or are held for the production of, passive income (determined by averaging the percentage of the fair market value of its total assets which are passive assets as of the end of each quarter of such year) is 50% or more, (the “Asset Test”).or the Asset Test. Passive income for this purpose generally includes dividends, interest, rents, royalties and gains from securities and commodities transactions. Cash is treated as generating passive income.
There is no definitive method prescribed in the Code, U.S. Treasury Regulations or relevant administrative or judicial interpretations for determining the value of a publicly-traded foreign corporation’s assets for purposes of the Asset Test. The legislative history of the U.S. Taxpayer Relief Act of 1997, (the “1997 Act”)or the 1997, Act indicates that for purposes of the Asset Test, “the total value of a publicly-traded foreign corporation’s assets generally will be treated as equal to the sum of the aggregate value of its outstanding stock plus its liabilities.” It is unclear whether other valuation methods could be employed to determine the value of a publicly-traded foreign corporation’s assets for purposes of the Asset Test.
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We must make a separate determination each taxable year as to whether we are a PFIC. As a result, our PFIC status may change from year to year. Based on the composition of our gross income and the composition and value of our gross assets for each taxable year from 2004 through 2017,2020, we do not believe that we were a PFIC during any of such tax years. It is likely, however, that under the asset valuation method described in the legislative history of the 1997 Act, we would have been classified as a PFIC for each of 2001, 2002 and 2003 primarily because (a) a significant portion of our assets consisted of the remaining proceeds of our two public offerings of ordinary shares in 1999, and (b) the public market valuation of our ordinary shares during such years was relatively low. There can be no assurance that we will not be deemed a PFIC for the current tax year or any future tax year in which, for example, the value of our assets, as measured by the public market valuation of our ordinary shares, declines in relation to the value of our passive assets (generally, cash, cash equivalents and marketable securities). If we are treated as a PFIC with respect to a U.S. Holder for any tax year, the U.S. Holder will be deemed to own ordinary shares in any of our subsidiaries that are also PFICs.
If we are treated as a PFIC for U.S. federal income tax purposes for any year during a U.S. Holder’s holding period of our ordinary shares and the U.S. Holder does not make a QEF Election or a “mark-to-market” election (both as described below), the U.S. Holder would be subject to the following rules:
| (i) | the U.S. Holder would be required to (a) report as ordinary income any “excess distributions” (as defined below) allocated to the current tax year and any period prior to the first day of the first tax year in which we were a PFIC, (b) pay tax on amounts allocated to each prior tax year in which we were a PFIC at the highest rate for individuals or corporations as appropriate in effect for such prior year, and (c) pay an interest charge on the tax due for prior tax years in which we were a PFIC at the rate applicable to deficiencies of U.S. federal income tax. “Excess distributions” with respect to any U.S. Holder are amounts received by such U.S. Holder with respect to our ordinary shares in any tax year that exceed 125% of the average distributions received by such U.S. Holder from us during the shorter of (i) the three previous years, or (ii) such U.S. Holder’s holding period of our ordinary shares before the then-current tax year. Excess distributions must be allocated ratably to each day that a U.S. Holder has held our ordinary shares. |
| (ii) | the entire amount of any gain realized by the U.S. Holder upon the sale or other disposition of our ordinary shares also would be treated as an “excess distribution” subject to tax as described above. |
If we are a PFIC for any tax year in which a U.S. Holder holds our ordinary shares, we generally will continue to be treated as a PFIC as to such U.S. Holder for all subsequent years during the U.S. Holder’s holding period unless we cease to be a PFIC and the U.S. Holder elects to recognize gain based on the unrealized appreciation in such U.S. Holder’s ordinary shares through the close of the tax year in which we cease to be a PFIC. Thereafter, so long as we do not again become a PFIC, such U.S. Holder’s ordinary shares for which an election was made will not be treated as shares in a PFIC.
A U.S. Holder who beneficially owns shares of a PFIC must file U.S. Internal Revenue Service Form 8621 (Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) with the U.S. Internal Revenue Service for each tax year in which such U.S. Holder recognizes gain upon a disposition of our ordinary shares, receives certain distributions from us or makes the QEF Election or mark-to-market election described below.
annually.
For any tax year in which we are treated as a PFIC, a U.S. Holder may elect to treat its ordinary shares as an interest in a qualified electing fund (a “QEF Election”), or a QEF Election, in which case the U.S. Holder would be required to include in income currently its proportionate share of our earnings and profits in years in which we are a PFIC regardless of whether distributions of our earnings and profits are actually made to the U.S. Holder. Any gain subsequently recognized by the U.S. Holder upon the sale or other disposition of its ordinary shares, however, generally would be taxed as capital gain.
A U.S. Holder may make a QEF Election with respect to a PFIC for any tax year. The election is effective for the tax year for which it is made and all subsequent tax years of the U.S. Holder. Procedures exist for both retroactive elections and the filing of protective statements. A QEF Election is made by completing U.S. Internal Revenue Service Form 8621 and attaching it to a timely-filed (including extensions) U.S. federal income tax return for the first tax year to which the election will apply. A U.S. Holder must satisfy additional filing requirements each year the election remains in effect. Upon a U.S. Holder’s request, we will provide to such U.S. Holder the information required to make a QEF Election and to make subsequent annual filings.
As an alternative to a QEF Election, a U.S. Holder generally may elect to mark its ordinary shares to market annually, recognizing ordinary income or loss (subject to certain limitations) equal to the difference, as of the close of each tax year, between the fair market value of its ordinary shares and the adjusted tax basis of such shares. A U.S. Holder will be allowed a deduction for the excess, if any, of the adjusted basis of its ordinary shares over their fair market value as of the close of the taxable year. However,
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deductions will be allowable only to the extent of any net mark-to-market gains on our ordinary shares included in the U.S. Holder’s income for prior taxable years. Amounts included in a U.S. Holder’s income under a mark-to-market election, as well as gain on the actual sale or other disposition of ordinary shares, will be treated as ordinary income. Ordinary loss treatment will also apply to the deductible portion of any mark-to-market loss on ordinary shares, as well as to any loss realized on the actual sale or disposition of ordinary shares, to the extent the amount of such loss does not exceed the net mark-to-market gains for such ordinary shares previously included in income. A U.S. Holder ‘sHolder’s basis in our ordinary shares will be adjusted to reflect any such income or loss amounts. If a U.S. Holder makes a mark-to-market election, any distributions we make would generally be subject to the rules discussed above under “—Distributions With Respect to Our Ordinary Shares,” except the lower rates applicable to qualified dividend income would not apply. Once made, a mark-to-market election generally continues unless revoked with the consent of the U.S. Internal Revenue Service.
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The mark-to-market election is available only for “marketable stock,” which is stock that is regularly traded on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. Our ordinary shares are traded on Nasdaq and TASE. Because a mark-to-market election cannot be made for equity interests in any lower-tier PFICs we own, a U.S. Holder generally will continue to be subject to the PFIC rules with respect to its indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. Nasdaq is a qualified exchange, and we believe TASE should be treated as a qualified exchange but there can be no assurance that the trading in our ordinary shares will be sufficiently regular to qualify our ordinary shares as marketable stock. U.S. Holders should consult their own tax advisor as to the availability and desirability of a mark-to-market election, as well as the impact of such election on interests in any lower-tier PFICs.
Each U.S. person that is an investor of a PFIC is generally required to file an annual information return on IRS Form 8621 containing such information as the U.S. Treasury Department may require. The failure to file IRS Form 8621 could result in the imposition of penalties and the extension of the statute of limitations with respect to U.S. federal income tax.
Due to the complexity of the PFIC rules and the uncertainty of their application in many circumstances, U.S. Holders should consult their own tax advisors with respect to the U.S. federal income tax risks related to owning and disposing of our ordinary shares, the consequence of our status as a PFIC and, if we are treated as a PFIC, compliance with the applicable reporting requirements and the eligibility, manner and advisability of making a QEF Election or a mark-to-market election.
election.
Information Reporting and Backup Withholding
Payments in respect of our ordinary shares that are made in the United States or by certain U.S.-related financial intermediaries may be subject to information reporting requirements and U.S. backup withholding tax, currently at a rate of 28%24%. The information reporting requirements will not apply, however, to payments to certain exempt U.S. Holders, including corporations and tax-exempt organizations. In addition, backup withholding will not apply to a U.S. Holder that furnishes a correct taxpayer identification number on U.S. Internal Revenue Service Form W-9 (or substitute form). or establishes an exemption. The backup withholding tax is not an additional tax. Amounts withheld under the backup withholding tax rules may be credited against a U.S. Holder’s U.S. federal income tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding tax rules by timely filing the appropriate claim for refund with the U.S. Internal Revenue Service. U.S. Holders should consult their own tax advisors regarding their qualification for an exemption from the backup withholding tax and the procedures for obtaining such an exemption, if applicable.
Foreign Asset Reporting
A U.S. Holder with interests in “specified foreign financial assets” (including, among other assets, our ordinary shares, unless such ordinary shares are held on such U.S. Holder’s behalf through a financial institution) may be required to file an information report with the U.S. Internal Revenue Service if the aggregate value of all such assets exceeds $50,000 on the last day of the taxable year or $75,000 at any time during the taxable year (or such higher dollar amount as may be prescribed by applicable U.S. Internal Revenue Service guidance). Regulations extend this reporting requirement to certain entities that are treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets based on certain objective criteria. A U.S. Holder that fails to report the required information could be subject to substantial penalties. Each U.S. Holders should consult with its own tax advisor regarding its obligation to file such information reports in light of its own particular circumstances.
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The foregoing discussion of certain U.S. federal income tax considerations is a general summary only and should not be considered as income tax advice or relied upon for tax planning purposes. Accordingly, each U.S. Holder should consult with its own tax advisor regarding U.S. federal, state, local and non-U.S. income and other tax consequences of the acquisition, ownership and disposition of our ordinary shares.
shares.
| F. | DIVIDENDS AND PAYING AGENTS |
Not applicable.
| G. | STATEMENT BY EXPERTS |
Not applicable.
| H. | DOCUMENTS ON DISPLAY |
Our website is http://www.audiocodes.com. We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill the obligations with respect to such requirements by filing reports with the SEC. You may readWe make available, free of charge, on our website (under the heading “Investor Relations”) our Annual Reports on Form 20-F, Reports on Form 6-K and copy any documentamendments to those reports as soon as reasonably practicable after we electronically file including any exhibits, with the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public Reference Branch of the SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Certain of our SEC filings are also availablewith, or furnish it to, the public at the SEC’sSEC. No information contained on our website at http://www.sec.gov.
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As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and contentis intended to be included as part of, proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. However, we file with the SEC anincorporated by reference into, this Annual Report on Form 20-F containing consolidated financial20-F. The SEC maintains an Internet site that contains reports, proxy statements audited by an independent accounting firm. We also furnish reports on Form 6-K containing unaudited financialand other information afterregarding issuers that file electronically with the end of eachSEC. The address of the first three quarters. We intend to post our Annual Report on Form 20-F on ourSEC’s website (www.audiocodes.com) promptly following the filing of our Annual Report with the SEC.
is http://www.sec.gov.
| I. | SUBSIDIARY INFORMATION |
Not applicable.
| ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to financial market risk associated with changes in foreign currency exchange rates. To mitigate these risks, we use derivative financial instruments. The majority of our revenues and expenses are generated in U.S. dollars. A portion of our expenses, however, is denominated in NIS. In order to protect ourselves against the volatility of future cash flows caused by changes in foreign exchange rates, we use currency forward contracts and currency options. We usually hedge the part of our forecasted expenses denominated in NIS. If our currency forward contracts and currency options meet the definition of a hedge, and are so designated, changes in the fair value of the contracts will be offset against changes in the fair value of the hedged assets or liabilities through earnings. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. Our hedging program reduces, but does not eliminate, the impact of foreign currency rate movements and due to the general economic slowdown along with the devaluation of the dollar, our results of operations may be adversely affected. Without taking into account the mitigating effect of our hedging activity, a 10% decrease in the U.S. dollar exchange rates in effect for the year ending December 31, 20182021 would cause a decrease in net income of approximately $5$8.3 million.
We are subject to market risk from exposure to changes in interest rates relating to borrowings under our loan agreements. The interest rate on these borrowings is based on LIBOR. Based on the scheduled amount of these borrowings to be outstanding in 2018,2021, we estimate that each 100 basis point increase in our borrowing rates would result in additional interest expense to us of approximately $75,000.$12,000.
| ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
Not applicable.
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PART II
| ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
Not applicable.
| ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Not applicable.Our original Articles of Association and Memorandum of Association were adopted prior to the enactment of the Companies Law and were only amended on limited occasions since adoption. In light of changes in the business and legal environment that occurred since such time, in August 2020, our Board of Directors approved, and in September 2020 our shareholders approved, our Amended and Restated Articles of Association and Amended and Restated Memorandum of Association, which amended and restated our prior Articles of Association and Memorandum of Association in their entirety. The description of the amendments, set forth in our proxy statement filed as Exhibit 99.1 to our Form 6-K filed with the SEC on August 10, 2021, is incorporated herein by reference, and the Amended and Restated Articles of Association and Amended and Restated Memorandum of Association are incorporated by reference as Exhibits 1.1 and 1.2 to this Form 20-F.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our President and Chief Executive Officer and our Vice President Finance and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in 13a-15(e) under the Securities Exchange Act) as of December 31, 2017.2021. Based on this evaluation, our President and Chief Executive Officer and Vice President Finance and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were (i) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our management, including our President and Chief Executive Officer and Vice President Finance and Chief Financial Officer, by others within those entities, as appropriate to allow timely decisions regarding required disclosure, particularly during the period in which this report was being prepared and (ii) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
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Management’s Annual Report on Internal Control Over Financial Reporting
Our management, under the supervision of our President and Chief Executive Officer and our Vice President Finance and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that:
| pertain to the maintenance of our records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions; |
| provide reasonable assurance that our transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles; |
| provide reasonable assurance that our receipts and expenditures are made only in accordance with authorizations of our management and board of directors (as appropriate); and |
| provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
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Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20172021 based on the framework for Internal Control -– Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO). Based on our assessment under that framework and the criteria established therein, our management concluded that the Company’scompany’s internal control over financial reporting were effective as of December 31, 2017.2021.
Attestation Report of the Registered Public Accounting Firm
This Annual Report includes an attestation report of our registered public accounting firm regarding internal control over financial reporting on page 3F-3 of our audited consolidated financial statements set forth in Item 18, – “Financial Statements,” and is incorporated herein by reference.
Changes in Internal Control Overover Financial Reporting
There were no changes in our internal controls over financial reporting identified with the evaluation thereof that occurred during the period covered by this Annual Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reportingreporting.
ITEM 16.[RESERVED]
| ITEM 16.A. AUDIT COMMITTEE FINANCIAL EXPERT |
Our Board of Directors has determined that Joseph Tenne is an “audit committee financial expert” as(as defined in Item 16A16.A of Form 20-F20-F) and is “independent” as(as defined in the applicable regulations.regulations).
| ITEM 16.B. CODE OF ETHICS |
We have adopted a Code of Conduct and Business Ethics, which was updated in 2019, that applies to our chief executive officer,President and Chief Executive Officer, Vice President Finance and Chief Financial Officer and other senior financial officers. This Code has been posted on our website, www.audiocodes.com.
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| ITEM 16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, has served as our independent public accountants for each of the years in the three-year period ended December 31, 2017.2021. The following table presents the aggregate fees for professional audit services and other services rendered by Kost Forer Gabbay & Kasierer in 20162021 and 2017.2020.
| | | | | | |
| | Year Ended December 31, | ||||
| | (Amounts in thousands) | ||||
|
| 2021 | | 2020 | ||
Audit Fees | | $ | 440 | | $ | 405 |
Audit Related Fees* | | | — | |
| 167 |
Tax Fees | | | 107 | |
| 117 |
Total | | $ | 547 | | $ | 689 |
| * | Primarily consists of fees related to our public offering of ordinary shares in June 2020. |
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| Year Ended December 31, (Amounts in thousands) | ||||||||
| 2016 | 2017 | |||||||
| Audit Fees | $ | 376 | $ | 350 | ||||
| Audit Related Fees | 28 | 52 | ||||||
| Tax Fees | 58 | 73 | ||||||
| Total | $ | 462 | $ | 475 | ||||
Audit Fees consist of fees billed for the annual audit of the company’s consolidated financial statements and the statutory financial statements of the company. They also include fees billed for other audit services, which are those services that only the external auditor reasonably can provide, and include services rendered for the integrated audit over internal controls as required under Section 404 of the Sarbanes-Oxley Act applicable in 20162020 and 2017,2021, the provision of consents and the review of documents filed with the SEC.
Audit Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the company’s financial statements and include operational effectiveness of systems.
Tax Fees include fees billed for tax compliance services, including the preparation of tax returns and claims for refund; tax consultations, such as assistance and representation in connection with tax audits and appeals, transfer pricing, and requests for rulings or technical advice from taxing authorities; tax planning services; and expatriate tax compliance, consultation and planning services.
Audit Committee Pre-approval Policies and Procedures
The audit committee of AudioCodes’ Board of Directors is responsible, among other matters, for the oversight of the external auditor subject to the requirements of Israeli law. The audit committee has adopted a policy regarding pre-approval of audit and permissible non-audit services provided by our independent auditors, (the “Policy”).
or the Policy.
Under the Policy, proposed services either (i) may be pre-approved by the audit committee without consideration of specific case-by-case services as general pre-approval or (ii) require the specific pre-approval of the audit committee as specific pre-approval. The audit committee may delegate either type of pre-approval authority to one or more of its members. The appendices to the Policy set out the audit, audit-related, tax and other services that have received the general pre-approval of the audit committee, including those described in the footnotes to the table, above; these services are subject to annual review by the audit committee. All other audit, audit-related, tax and other services must receive a specific pre-approval from the audit committee.
The audit committee pre-approves fee levels annually for the audit services. Non-audit services are pre-approved as required. The financial expert of the audit committee may approve non-audit services of up to $25,000 and then request the audit committee to ratify his decision.
During 2017,2020, no services provided to AudioCodes by Kost Forer Gabbay & Kasierer were approved by the audit committee pursuant to the de minimis exception to the pre-approval requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. We approve all such compensation by the audit committee.
| ITEM 16.D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
Not applicable.
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| ITEM 16.E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
In 2017,2021, we repurchased an aggregate of 3,749,4621,325,078 of our ordinary shares for an aggregate consideration of approximately $25.6$41.85 million, as set forth below:
| Period | (a) Total Number of Ordinary Shares Purchased (1) | (b) Average Price Paid per Ordinary Share ($) (2) | (c) Total Number of Ordinary Shares Purchased as Part of Publicly Announced Program | (d) Approximate Dollar Value of Shares That May Yet be repurchased under the Program ($) | ||||||||||||
| 23,816,664 | ||||||||||||||||
| January 1 – January 31, 2017 | 545,212 | 6.37 | 545,212 | 20,329,548 | ||||||||||||
| February 1 – February 28, 2017 | 197,571 | 7.00 | 197,571 | 18,941,020 | ||||||||||||
| March 1 – March 31, 2017 | 362,825 | 6.74 | 362,825 | 16,483,671 | ||||||||||||
| April 1 – April 30, 2017 | - | - | - | 16,483,671 | ||||||||||||
| May 1 – May 31, 2017 | 153,018 | 6.63 | 153,018 | 30,464,975 | ||||||||||||
| June 1 – June 30, 2017 | 285,406 | 6.39 | 285,406 | 28,632,775 | ||||||||||||
| July 1 – July 31, 2017 | 280,393 | 6.51 | 280,393 | 26,799,489 | ||||||||||||
| August 1 – August 31, 2017 | 383,676 | 6.74 | 383,676 | 24,202,119 | ||||||||||||
| September 1 – September 30, 2017 | 276,037 | 6.98 | 276,037 | 22,268,083 | ||||||||||||
| October 1 – October 31, 2017 | 445,853 | 7.30 | 445,853 | 19,000,232 | ||||||||||||
| November 1 – November 30, 2017 | 475,600 | 6.87 | 475,600 | 35,720,135 | ||||||||||||
| December 1 – December 31, 2017 | 343,871 | 7.15 | 343,871 | 33,252,370 | ||||||||||||
| Total in 2017 | 3,749,462 | 6.79 | 3,749,462 | 33,252,370 | ||||||||||||
| | | | | | | | |
|
| |
| |
| |
| (d) |
| | | | | | | | Approximate |
| | | | | | | | dollar |
| | | | | | (c) Total | | Value of |
| | | | (b) | | Number of | | Shares |
| | | | Average | | Ordinary | | That |
| | (a) Total | | Price | | Shares | | May Yet be |
| | Number of | | Paid | | Purchased as | | Purchased |
| | Ordinary Shares | | per | | Part | | under |
| | Purchased | | Ordinary Share ($) | | of Publicly | | the Program |
Period |
| (1) |
| (2) |
| Announced Program |
| ($) |
January 1 – January 31, 2021 |
| — |
| — |
| — |
| 30,000,000 |
February 1 – February 28, 2021 |
| 175,761 |
| 29.79 |
| 175,761 |
| 24,759,281 |
March 1 – March 31, 2021(3) |
| 174,239 |
| 28.74 |
| 174,239 |
| 14,442,686 |
April 1 – April 30, 2021 |
| 100,000 |
| 28.79 |
| 100,000 |
| 11,560,994 |
May 1 – May 31, 2021 |
| 112,877 |
| 30.47 |
| 112,877 |
| 8,117,812 |
June 1 – June 30, 2021 |
| 23,667 |
| 32.60 |
| 23,667 |
| 7,345,651 |
July 1 – July 31, 2021 |
| 124,307 |
| 32.49 |
| 124,307 |
| 31,199,885 |
August 1 – August 31, 2021(4) |
| 150,000 |
| 32.58 |
| 150,000 |
| 20,745,687 |
September 1 – September 30, 2021 |
| 150,000 |
| 32.74 |
| 150,000 |
| 15,829,954 |
October 1 – October 31, 2021 |
| 210,300 |
| 33.70 |
| 210,300 |
| 8,735,772 |
November 1 – November 30, 2021 |
| 38,709 |
| 34.79 |
| 38,709 |
| 7,387,915 |
December 1 – December 31, 2021 |
| 65,218 |
| 33.86 |
| 65,218 |
| 33,984,843 |
Total in 2021 |
| 1,325,078 |
| 31.55 |
| 1,325,078 |
| 33,984,843 |
(1)On August 7, 2014, we announced that our Board had authorized a program to repurchase up to $3 million of our ordinary shares. In November 2014,January 2021, we received court approval in Israel to repurchase up to an additional $15 million of our ordinary shares. In May 2015, we received court approval in Israel to repurchase up to an additional $15 million of our ordinary shares. In each of January, May and October 2016, we received court approval in Israel to repurchase up to an additional $15$30 million of our ordinary shares for an aggregate approvaland in each of up to an additional $45 million of our ordinary shares. In MayJuly and November 2017,December 2021, the court approved an additional $35.0 million. Each of $15 million and $20 millionthe approvals received in 2021 allowed us to use the approved amounts for share repurchases respectively.or cash dividends. The Israeli court generally limits its approval to six months from the date of application. Consequently, although the program does not have a set end date, it requires renewal each 6six months by submitting new court application based on the then prevailing facts. No shares were repurchased during 20172021 other than through the repurchase program.
(2) Excluding commissions.
(3) In March 2021, we paid a cash dividend in the aggregate amount of $5.3 million.
(4) In August 2021, we paid a cash dividend in the aggregate amount of $5.6 million. ITEM 16.F. CHANGE IN REGISTRANT’S CERTIFIED ACCOUNTANT |
Not applicable.
| ITEM 16.G. CORPORATE GOVERNANCE |
As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the Nasdaq Marketplace Rules.
We do not comply with the Nasdaq requirement that we obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain share-based compensation plans (including amendments to increase the number of shares available for grant under our existing equity based compensation plans.incentive plan). Instead, we follow Israeli law and practice which permits the establishment or amendment of certain equity basedshare-based compensation plans approved by our board of directors without the need for a shareholder vote, unless such arrangements are for the compensation of directors and the chief executive officer, in which case they also require compensation committee and shareholder approval.
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We may elect in the future to follow Israeli practice with regard to, among other things, director nomination, composition of the board of directors and quorum at shareholders’ meetings. In addition, we may follow Israeli law, instead of the Nasdaq Marketplace Rules, which require that we obtain shareholder approval for an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company.
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A foreign private issuer that elects to follow a home country practice instead of Nasdaq requirements must submit to Nasdaq in advance a written statement from an independent counsel in its home country certifying that its practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC or on its website each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq’s corporate governance rules.
For a discussion of the requirements of Israeli law with respect to these matters, see Item 6.C, - “Directors, Senior Management and Employees -Employees- Board Practices,” and Item 10.B, - “Additional Information - MemorandumInformation-Memorandum and Articles of Association.”
| ITEM 16.H. MINE SAFETY DISCLOSURE |
Not applicable.
ITEM 16.I.DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
| ITEM 17. FINANCIAL STATEMENTS |
Not applicable.
| ITEM 18. FINANCIAL STATEMENTS |
Reference is made to pages 1F-1 to 50F-42 of the financial statements attached hereto.
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The following exhibits are filed as part of this Annual Report:
Exhibit |
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*Filed herewith.
-92- SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form 20-F on its behalf.
Date:
-93- AUDIOCODES LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2021 IN U.S. DOLLARS INDEX
F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of AUDIOCODES LTD. AND ITS SUBSIDIARIES Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of AudioCodes Ltd. and its subsidiaries (the We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. F-2
We have served as the Company’s auditor since 1997.
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of AUDIOCODES LTD. AND ITS SUBSIDIARIES Opinion on Internal Control over Financial Reporting We have audited AudioCodes Ltd. and its subsidiaries’ internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, AudioCodes Ltd. and its subsidiaries (collectively, the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated April 28, 2022 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures, as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
F-4
Contents AUDIOCODES LTD. CONSOLIDATED BALANCE SHEETS U.S. dollars in thousands
The accompanying notes are an integral part of the consolidated financial statements. F-5 AUDIOCODES LTD. CONSOLIDATED BALANCE SHEETS (Cont.)
The accompanying notes are an integral part of the consolidated financial statements. F-6 CONSOLIDATED STATEMENTS OF OPERATIONS U.S. dollars in thousands, except share and per share data
The accompanying notes are an integral part of the consolidated financial statements. F-7 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME U.S. dollars in thousands
The accompanying notes are an integral part of the consolidated financial statements. F-8 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY U.S. dollars in thousands, except share and per share data
The accompanying notes are an integral part of the consolidated financial statements. F-9 CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. dollars in thousands
The accompanying notes are an integral part of the consolidated financial statements. F-10 AUDIOCODES LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.) U.S. dollars in thousands
The accompanying notes are an integral part of the consolidated financial statements. F-11 AUDIOCODES LTD.
U.S. dollars in thousands, except share and per share data
AudioCodes Ltd. (the customers to choose a service packages (or complement their own offering) from a modular portfolio of professional services. The Company operates through its wholly-owned subsidiaries in the United States, Europe, Asia, Latin America, Australia and Israel.
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The spread of COVID-19, including its highly contagious variants and sub-lineages, continues to present significant challenges and risks to businesses around the world. Governmental authorities of many countries, including Israel and the United States, have implemented, and may continue to implement, significant measures to control the spread of COVID-19, including temporary closure of businesses, severe restrictions on travel and the movement of people, and other material limitations on the conduct of businesses. In response to the COVID-19 pandemic, the Group previously implemented remote working and workplace protocols for its employees in Israel in accordance with Israeli Ministry of Health requirements and similar arrangements in other countries in which the Group operates. F-12 AUDIOCODES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data NOTE 1:- GENERAL (Cont.) The ongoing developments and fluidity of the COVID-19 pandemic, and its material and adverse impact on the global economy at large, has restricted the Group’s ability to definitively predict how the COVID-19 pandemic will impact the Group’s business and operations in the near- and long-term. The latest governmental responses to the COVID-19 pandemic, as well as alterations and extensions of such approaches, could continue to result in volatile and uncertain economic conditions. The extent of the impact of the COVID-19 pandemic on the Group’s business and results of operations will depend on future developments, which are highly uncertain at this time. Such developments include, but are not limited to, the duration and severity, and the effects of subsequent waves and variants, of COVID-19 across the globe, the timing, pace and effectiveness of vaccination rollouts in the countries in which the Group operates, delays and impediments to the Group’s supply chain and ability to continue to manufacture products, and ongoing restrictions on the Group’s business and personnel that may be implemented by governmental rules and regulations in an attempt to prevent the spread of COVID-19 and its highly contagious and new variants. While the Group’s management has previously managed, and will continue to actively manage, the business in an attempt to mitigate the impacts of the COVID-19 pandemic (including implementing recommendations and orders issued by government and public health authorities in the regions where the Group operates), the Group cannot at this time estimate the duration or full magnitude that the COVID-19 pandemic will have on the Group’s business, results of operations and financial condition.
On November 10, 2021, the Company entered into a share purchase agreement, pursuant to which the Company acquired 100% of the outstanding shares of Callverso, a leading Israeli developer and provider of conversational AI solutions for contact centers. Following the transaction, Callverso became a wholly-owned subsidiary of the Company. On December 22, 2021, a merger agreement was signed between the Company and Callverso in connection with an internal restructuring. The merger was made effective as of January 1, 2022. (See also Note 3).
In February 2022, Russia launched a large-scale invasion of Ukraine, and, as of the date of issuance of these financial statements, Russia and Ukraine continue to engage in active and armed conflict. Such conflict has resulted, and will likely continue to result in, significant destruction of Ukraine’s infrastructure and substantial casualties amongst military personnel and civilians. As a result of Russia’s invasion of Ukraine, the governments of several nations have implemented commercial and economic sanctions against Russia (as well as certain banks, companies, government officials, and other individuals in Russia and Belarus). In March 2022, Israel’s Foreign Minister, Mr. Yair Lapid indicated that Israel would not function as a route to bypass sanctions imposed on Russia by the United States and other western countries, and Israeli banks have elected to sever relationships with sanctioned Russian banks. While it is not possible to predict or determine the ultimate consequences and impact of the conflict in Ukraine, such conflict could result in, among other things, significant regional instability and geopolitical shifts, and material and adverse effects on global macroeconomic conditions, financial markets, exchange rates and supply chains. To the extent negotiations between Russia and Ukraine are ultimately unsuccessful, the conflict in Ukraine could have a lasting impact in the near- and long-term on the financial condition, business and operations of the Group’s business (and the businesses of the counterparties with who the Group engages), and the global economy at large. F-13 AUDIOCODES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("(“U.S. GAAP"GAAP”).
, applied on a consistent basis as follows:
a. | Use of estimates: |
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions. Managementassumptions that affect the amounts reported in the consolidated financial statements. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they arewere made. TheseAs applicable to these consolidated financial statements, the most significant estimates judgments and assumptions can affect the reported amounts ofrelate to revenue recognition and allowance for sales returns, allowance for doubtful accounts, inventories write-off, intangible assets, goodwill, income taxes and liabilitiesvaluation allowance, share-based compensation and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period.liabilities. Actual results could differ from those estimates.
In light of the currently unknown extent and duration of the COVID-19 pandemic, the Company faces a greater degree of uncertainty than normal in making the judgments and estimates needed to apply certain of the Company’s significant accounting policies. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of December 31, 2021 and through the date of issuance of these financial statements. These estimates may change, as new events occur, and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
b. | Financial statements in U.S. dollars |
A majority of the Group'sGroup’s revenues is generated in dollars. In addition, most of the Group'sGroup’s costs are denominated and determined in dollars and in new Israeli shekels.shekels (“NIS”). Management believes that the dollar is the currency in the primary economic environment in which the Group operates. Thus, the functional and reporting currency of the Group is the dollar.
Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with Accounting Standards Codification (ASC)(“ASC”) 830, "Foreign“Foreign Currency Matters"Matters”. All transaction gains and losses of the remeasured
AUDIOCODES LTD.
monetary balance sheet items are reflected in the consolidated statements of operations as financial income or expenses, as appropriate.
c. | Principles of consolidation: |
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances, including profits from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation.
d. | Cash equivalents: |
Cash equivalents represent short-term highly liquid investments that are readily convertible into cash with original maturities of three months or less at the date acquired.
F-14
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
e. | Short-term and restricted bank deposits: |
Short-term and restricted bank deposits are deposits with maturities of more than three months, but less than one year. The deposits are mainly in dollars and bear interest at an average annual rate of 0.72%0.28% and 0.95%,0.97% for the years ended December 31, 20162021 and 2017,2020, respectively. Short-term and restricted deposits are presented at cost. Any accrued interest on these deposits is included in other receivables and prepaid expenses.
In connection with long-term bank loans and their related covenants, the Company iswas required to maintain compensating balances with the banks and to maintain deposits in the same banks that provided the loans to the Company (see Note 10). In.In addition, the Company maintains restricted deposits in connection with foreign exchange derivatives and an office lease agreement (see also Note 11a). Out of the short-term and restricted bank deposits, a total of $3,401$5,100 and $2,739,$5,910 are restricted short-term deposits as of December 31, 20162021 and 2017, respectively.2020, respectively.
| | | |
| | December 31, | |
|
| 2021 | |
Cash and cash equivalents | | $ | 79,423 |
| | | |
Restricted cash | |
| 5,100 |
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | | $ | 84,523 |
f. | Marketable securities: |
The Group accounts for investments in debt securities in accordance with ASC 320, "Investments-Debt“Investments - Debt and Equity Securities"Securities”.
Management determines the appropriate classification of its investments in marketable debt securities at the time of purchase and reevaluates such determinations at each balance sheet date.
As of December 31, 2016 and 2017,2021, the Group classified all of its marketable securities as available-for-sale. Available-for-saleavailable-for-sale (“AFS”). AFS securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in “accumulated other comprehensive loss” in shareholders’ equity. Realized gains and losses on sale of investments are included in “financial income (expenses), net” and are derived using the specific identification method for determining the cost of securities.
AUDIOCODES LTD.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, together with interest on securities, is included in "financial“financial income (expenses), net"net”.
The Group recognizesassessed AFS debt securities with an impairmentamortized cost basis in excess of estimated fair value to determine what amount of that difference, if any, is caused by expected credit losses in accordance with ASC 326, “Financial Instruments - Credit Losses”. Allowance for credit losses on AFS debt securities are recognized as a charge when a declinein other income (expenses), net, in the fair value of its investments in debt securities below the cost basis of such securities is considered to be other-than-temporary. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value, the potential recovery period and the Group's intent to sell, including whether it is more-likely-than-not that the Group will be required to sell the investment before recovery of cost basis. For securities that are deemed other-than-temporarily impaired, the amount of impairment is recognized in theconsolidated statements of operationsoperation, and is limited to the amount related toany remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in stockholders’ equity.
The Group’s credit losses while impairment related to other factors is recognized in other comprehensive loss.
Forallowance for the years ended December 31, 2015, 201631,2021 and 2017, no other-than-temporary impairment losses have been identified.
2020 was immaterial.
g. | Inventories: |
Inventories are stated at the lower of cost or net realizablemarket value. Cost is determined as follows:
Raw materials - using the "weighted“weighted average cost"cost” method; finishedand
F-15
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Finished products - using the "weighted“weighted average cost"cost” method with the addition of direct manufacturing costs.
The Group periodically evaluates the quantities on hand relative to current and historical selling prices, historical and projected sales volume and technological obsolescence. Based on these evaluations, inventory write-offs are taken based on slow moving items, technological obsolescence, excess inventories, discontinuation of productsproduct lines, and for market prices lower than cost.
g. | Long-term and restricted bank deposits: |
Bank deposits and the related accrued interest with maturities of more than one year are included in long-term investments and presented at their cost. Accrued interest that is payable within a one-year period is included in other receivables and prepaid expenses. Thedeposits are denominated in dollars and bear interest at an average rate of 1.50% and 2.05%, for the years ended December 31, 2016 and 2017, respectively. Out of the total long-term bank deposits, a total of $5,407 and $4,207, are restricted long-term deposits as of December 31, 2016 and 2017, respectively.
AUDIOCODES LTD.
h. | Property and equipment: |
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets at the following annual rates:
| ||
Computers and peripheral equipment | 33% | |
Office furniture and equipment | | 6% |
Leasehold improvements | | Over the shorter of the term of the lease, or |
The Group'sGroup’s long-lived assets (asset group) to be held and used, including right of use assets and intangible that are subject to amortization are reviewed for impairment in accordance with ASC 360-10-35, "Property,“Property, Plant and Equipment - Subsequent Measurement",Measurement” whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. RecoverabilityIf such assets are considered to be impaired, recoverability of assets (asset group) to be held and used is measured by a comparison of the carrying amount of an asset (asset group) to the future undiscounted cash flows expected to be generated by the asset if such assets are considered to be impaired.asset. The impairment to be recognized is measured by the amount by which the carrying amount of the assets (asset groups) exceeds the fair value of the assets (asset groups). During the years ended December 31, 2015, 20162021, 2020 and 2017,2019, no impairment losses hadhave been identified for property and equipment.
identified.
i. | Intangible assets: |
Intangible assets are comprised of acquired technology, customer relations and licenses. Intangible assets that are not considered to have an indefinite useful life are amortized using the straight-line basis over their estimated useful lives, which range from 4.54 to 10 years. Recoverability of these assets is measured by a comparison of the carrying amount of the asset to the undiscounted future cash flows expected to be generated by the assets. If the assets are considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets.
During the years ended December 31, 2015, 20162021, 2020 and 2017,2019, no impairment losses have been identified with respect to intangible assets.
F-16
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
j. | Leases: |
Under ASC 842, “Leases”, a contract is or contains a lease when the Group has the right to control the use of an identified asset for a period of time. The Group determines if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contract are agreed to, and the agreement creates enforceable rights and obligations. The commencement date of the lease is the date that the lessor makes an underlying asset available for the Group’s use. Leases are evaluated for classification on the commencement date, and assets and liabilities are recognized based on the present value of lease payments over the lease term.
The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised. The right-of-use (“ROU”) asset is initially measured as the amount of lease liability, adjusted for any initial lease costs, prepaid lease payments and any lease incentives. Costs incurred for common area maintenance, real estate taxes, and insurance are not included in the lease liability and are recognized as they are incurred.
The Company uses incremental borrowing rates based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The ROU asset also includes any lease prepayments made and reduced by lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expenses are recognized on a straight-line basis over the lease term or the useful life of the leased asset.
As the Group’s lease arrangements do not provide an implicit rate, the Group uses its incremental estimated borrowing rate at lease commencement to measure ROU assets and lease liabilities. Operating lease expense is generally recognized on a straight-line basis over the lease term. For leases with a term of one year or less, the Group elected not to record the ROU asset or liability.
The Group elected to not recognize a lease liability or ROU asset for leases with a term of twelve months or less. The Group also elected the practical expedient to not separate lease and non-lease components for its leases.
In addition, the carrying amount of the ROU asset and lease liabilities are remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.
k. | 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.
The Group performs an annual impairment test during the fourth quarter of each fiscal year, or more frequently if impairment indicators are present. The Group operates in one operating segment, and this segment comprises its only reporting unit.
AUDIOCODES LTD.
Goodwill is not amortized, but rather is subject to an impairment test. In accordance with ASC 350, "Intangibles“Intangibles – Goodwill and Other"Other”, prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment, whileat least annually (in the second phase (if necessary) measures impairment. Goodwill impairment is deemed to existfourth quarter), or more frequently if the net book value of a reporting unit exceeds its estimated fair value. In such case, the second phase is then performed, and the Group measures impairment by comparingevents or changes in circumstances indicate that the carrying amount of the reporting unit's goodwill to the implied fair value of that goodwill. An impairment loss is recognized in an amount equal to the excess.may be impaired. The GroupCompany has an option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amountvalue prior to performing the two-stepquantitative goodwill impairment test. IfThe Company operates in one operating segment, and this issegment comprises its only reporting unit.
F-17
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Following the case,adoption of Accounting Standards Update (“ASU”) 2017-04, “Simplifying the two-stepTest for Goodwill Impairment”, as part of the quantitative goodwill impairment test, any excess of the carrying value of the reporting unit over its fair value is required. If itrecognized as an impairment loss, and the carrying value of goodwill is more-likely-than-not thatwritten down to the fair value of athe reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required.
unit.
For each of the three years in the period ended December 31, 2017, the Group performed an annual impairment analysis, using market capitalization, and2021, no impairment losses have been identified.
l. | Revenue recognition: |
The Group generates its revenues primarily from the sale of products through a direct sales force and sales representatives. The Group'sGroup’s products are delivered to its customers, which include original equipment manufacturers, network equipment providers, systems integrators and distributors in the telecommunications and networking industries, all of whom are considered end-users.
Revenues from products and services are recognized in accordance with ASC 605, "Revenue Recognition" ("ASC 605"),606, “Revenue from Contracts with Customers”. The Group recognizes revenue under the core principle that transfer of control to a customer of the Group generates revenue in an amount reflecting the consideration the Group expects to receive from the customer. As such, the Group identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenues when (or as) the Group satisfies a performance obligation.
Product revenues are recognized when all performance obligations are satisfied, at the point of time when control is transferred, generally when the following criteriaproducts are met: persuasive evidence of an arrangement exists, deliveryshipped.
Revenues from support are recognized ratably over the term of the productunderlying contract term. Renewals of support contracts create new performance obligations that are satisfied over the term with the revenues recognized ratably over the period.
For professional services, the performance obligations are satisfied, and revenues are recognized, when the services are provided or once the service term has occurred, the fee is fixed or determinable, and collectability is reasonably assured. expired.
The Group has no remaining obligation to customers after the date on whichenters into contracts that can include combinations of products and services that are capable of being distinct and accounted for as separate performance obligations. The products are delivered other than pursuant to warranty obligations and rightdistinct upon delivery as the customer can derive the economic benefit of return.
In a multiple element arrangement, Accounting Standards Update ("ASU") 2009-13, Topic 605, "Multiple-Deliverable Revenue Arrangements" requiresit without any professional services, updates or technical support. The Group allocates the allocation of arrangement considerationtransaction price to each deliverable to be based on the relative selling price.
The selling price for a deliverable isperformance obligation, based on its vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or estimatedrelative standalone selling price ("ESP") if neither VSOE nor TPE is available. Theout of the total consideration of the contract. For support, the Group then recognizes revenue on each deliverable in accordance with its policies for product and service revenue recognition. VSOE ofdetermines the standalone selling price isprices, based on the price charged when the element is sold separately. In determining VSOE,at which the Group requires thatseparately sells a substantial majorityrenewal contract on a standalone basis. For professional services, the Group determines the standalone selling prices based on the price at which the Group separately sells those services on a standalone basis.
Aspects of the selling prices fall within a narrow range based on stand-alone rates. TPE of selling price is established by evaluating largely interchangeable competitorGroup’s products or services in stand-alone sales to similarly situated customers.
AUDIOCODES LTD.
However, as the Group's products contain a significant element ofencompass proprietary technology and itsthe Group’s solutions offer substantially different features and functionality,functionality. As a result, the comparable pricing of products with similar functionality typically cannot be obtained. Additionally, as the Group is unable to reliably determine what competitor's products'the selling prices of comparable products sold by competitors and generally does not sell the products separately on a standalone basis, the standalone selling prices are on a stand-alone basis,not directly observable. Therefore, the Group is not typically able to determine TPE.makes estimates, based on reasonably available information. The ESPestimated selling price is established considering multiple factors including, but not limited to,such as pricing practices in different geographical areas and through different sales channels, gross margin objectives, internal costs, competitors'the pricing strategies of competitors and industry technology lifecycles. The selling price
F-18
Table of the products was based on ESP. MaintenanceContents
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and professional services selling prices were based on either VSOE or ESP.per share data
The Group limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services or subject to customer- specific return or refund privileges. The Group evaluates each deliverable in an arrangement to determine whether they represent separate units of accounting.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Group grants to certain customers a right of return or the ability over a limited period of time to exchange for other products a specific percentage of the total price paid for products they have purchased over a limited period for other products.purchased. The Group maintains a provision for product returns and exchanges and other incentives, based on its experience with historical sales returns, analysis of credit memo data and other known factors, all in accordance with ASC 605. The606. This provision wasis deducted from revenues and amounted to $1,948$3,509 and $2,174,$2,962 as of December 31, 20162021 and 2017,2020, respectively. This provision was recorded as part of other payables and accrued expenses.
Revenues fromThe Group uses the salepractical expedient and does not assess the existence of products which were not yet determined to be final sales due to acceptance provisions are deferreda significant financing component when the difference between payment and included in deferred revenues. In cases where collectabilityrevenue recognition is not probable, revenues are deferred and recognized upon collection.
a year or less.
Deferred revenues include amounts invoiced to customers for which revenue has not yet been recognized. Deferred revenues are recognized as (or when) the Group performs the performance obligations under the contract.
The Group pays sales commissions to sales and marketing personnel, based on their attainment of certain predetermined sales goals. Some sales commissions for support earned by its employees are capitalized and amortized on a straight-line basis over the related contractual support period. Amortization expenses related to these costs are included in selling and marketing expenses in the consolidated statements of operations.
The Group has included as part of other receivables and prepaid expenses in its consolidated balance sheet, costs to obtain a contract in the amount of $635 and $665, as of December 31, 2021 and 2020, respectively.
Remaining performance obligations represents contracted revenues that have not yet been recognized, which includes deferred revenues and non-cancelable contracts that will be recognized as revenue in future periods. The following table represents the remaining performance obligations as of December 31, 2021, which are expected to be satisfied and recognized in future periods:
| | | | | | | | | |
| | Year Ending December 31, | |||||||
| | | | | | | | 2024 and | |
|
| 2022 |
| 2023 |
| thereafter | |||
Product | | $ | 882 | | $ | 17 | | $ | 2 |
Services |
| | 40,709 |
| | 7,935 |
| | 5,071 |
| | | | | | | | | |
| | $ | 41,591 | | $ | 7,952 |
| $ | 5,073 |
Significant changes in the balances of deferred revenues during the years are as follows:
| | | | | | |
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Balance, at the beginning of the year | | $ | 49,136 | | $ | 43,230 |
| | | | | | |
Revenue recognized | |
| (31,456) | |
| (31,172) |
Increase in deferred revenues and customer advances | |
| 36,936 | |
| 37,078 |
| | | | | | |
Balance, at the end of the year | |
| 54,616 | |
| 49,136 |
Less current portion | |
| (41,591) | |
| (37,182) |
| | | | | | |
Long term portion | | $ | 13,025 | | $ | 11,954 |
F-19
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
m. | Warranty costs: |
The Group usually provides an assurance-type warranty for a warranty period of 12 months at no extra charge. The Group estimates the costs that may be incurred under its basic limited warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Group'sGroup’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. The Group periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. As of December 31, 20162021 and 2017,2020, the provision for warranty amounted to $349$187 and $339,$253, respectively.
AUDIOCODES LTD.
n. | Research and development costs: |
ASC 985-20, "Costs“Costs of Software to Be Sold, Leased, or Marketed"Marketed”, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility.
Based on the Company'sCompany’s product development process, technological feasibility is established upon the completion of a working model. The Company does not incur material costs between the completion of a working model and the point at which the products are ready for general release. Therefore, research and development costs are charged to the consolidated statement of operations, as incurred.
Participation grants from the Israel NationalInnovation Authority for Technology and Innovation (formerly known as the Office of the Chief Scientist) of the Israeli Ministry of Economy and Industry ("NATI"(the “IIA”) for research and development activity are recognized at the time the Company is entitled to such grants on the basis of the costs incurred and included as a deduction of research and development costs. Research and development grants recognized during the years ended December 31, 2015, 20162021, 2020 and 20172019 were $5,448, $7,335$570, $388 and $8,290,$1,323, respectively.
o. | Income taxes: |
The Group accounts for income taxes in accordance with ASC 740, "Income Taxes" ("ASC 740")“Income Taxes”. ASC 740 prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and for carry forward tax losses. Deferred taxes are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Group records a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more-likely-than-not that some portion of or the entire amount of the deferred tax asset will not be realized.
In addition, ASC 740 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The first step is to evaluate the tax position taken or expected to be taken in a tax return. This is done by determining if the weight of available evidence indicates that it is more-likely-than-not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.
The Group accounts for deferred income taxes in accordance with ASU 2015-17 which require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet.
Interest and penalties assessed by taxing authorities on an underpayment of income taxes are included as a component of income tax expense in the consolidated statements of operations.
F-20
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
p. | Accumulated other comprehensive income (loss) |
The Company accounts for comprehensive income (loss) in accordance with ASC topic 220, "Comprehensive Income". This statement“Comprehensive Income”, which establishes standards for the reporting and displaypresentation of comprehensive income (loss) and its components in a full set of general purpose financial statements. Comprehensive income (loss) generally represents all changes in shareholders'shareholders’ equity during the period except those resulting from investments by, or distributions to, shareholders.
The components of AOCI were as follows:
| Unrealized gains (losses) on available- for-sale marketable securities | Unrealized gains (losses) on cash flow hedges | Total | ||||||||||
| Balance as of January 1, 2017 | $ | (61 | ) | $ | (142 | ) | $ | (203 | ) | |||
| Other comprehensive income before reclassifications | 17 | 1,739 | 1,756 | |||||||||
| Amounts reclassified from AOCI | - | (1,597 | ) | (1,597 | ) | |||||||
| Other comprehensive income (loss) | 17 | 142 | 159 | |||||||||
| Balance as of December 31, 2017 | $ | (44 | ) | $ | - | $ | (44 | ) | ||||
| | | | | | | | | |
|
| Unrealized |
| | |
| | | |
| | gains (losses) | | | | | | | |
| | on available- | | Unrealized | | | | ||
| | for-sale | | gains (losses) | | | | ||
| | marketable | | on cash flow | | | | ||
| | securities | | hedges | | Total | |||
Balance as of January 1, 2021 | | $ | 453 | | $ | 1,319 | | $ | 1,772 |
| | | | | | | | | |
Other comprehensive income (loss) before reclassifications, net of tax | |
| (1,395) | |
| 1,538 | |
| 143 |
Amounts reclassified from AOCI | |
| 0 | |
| (2,138) | |
| (2,138) |
Other comprehensive income (loss), net of tax | |
| (1,395) | |
| (600) | |
| (1,995) |
| | | | | | | | | |
Balance as of December 31, 2021 | | $ | (942) | | $ | 719 | | $ | (223) |
The effects on net income of amounts reclassified from AOCI forin the year ended December 31, 20172021 derive from realized gainslosses on cash flow hedges recorded in operating expenses and from realized gainslosses on available-for-sale marketable securities recorded in financial expenses (income).
income (expenses), net.
q. | Concentrations of credit risk: |
Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents, bank deposits, trade receivables, marketable securities and foreign currency derivative contracts.
The majority of the Group'sGroup’s cash and cash equivalents, bank deposits and foreign currency derivative contracts are invested in dollar denominated instruments with major banks in Israel and the United States. Such investments in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Group'sGroup’s investments are corporations with high credit standing.
Accordingly, management believes that low credit risk exists with respect to these financial investments.
AUDIOCODES LTD.
Marketable securities include investments in dollar-linkeddollar-denominated corporate bonds. Marketable securities consist of highly liquid debt instruments with high credit standing. The Company’s investment policy, approved by the Board of Directors, limits the amount the Group may invest in any one type of investment or issuer, thereby reducing credit risk concentrations. Management believes that the Group’s portfolio is well diversified and, accordingly, minimal credit risk exists with respect to these marketable debt securities.
The trade receivables of the Group are derived from sales to customers located primarily in the Americas, the Far East, Israel and Europe. Under certain circumstances, the Group may require letters of credit, other collateral, additional guarantees or advance payments.
F-21
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Regarding certain credit balances, the Group is covered by foreign trade risk insurance. The Group performs ongoing credit evaluations of its customers and establishes an allowance for doubtful accounts based upon a specific review.
credit losses.
r. | Earnings per share: |
Basic earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year. Diluted earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year, plus potential dilutive ordinary shares considered outstanding during the year, in accordance with ASC 260, "Earnings“Earnings per Share"Share”.
Certain outstanding share options, restricted share units ("RSUs"(“RSUs”) and warrants have been excluded from the calculation of the diluted earnings per share since such securities are anti-dilutive for all years presented. The total weighted average number of shares related to the outstanding options, RSUs and warrants that have been excluded from the calculation of diluted earnings (loss) per share was 2,250,433, 1,927,28126,686, 64,312 and 317,18648,491 for the years ended December 31, 2015, 20162021, 2020 and 2017,2019, respectively.
s. | Accounting for share-based compensation: |
The Company accounts for share-based compensation in accordance with ASC 718, "Compensation-Stock Compensation" ("ASC 718")“Compensation-Stock Compensation”. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company'sCompany’s consolidated statement of operations.
The Company recognizes compensation expenses for the value of its awards based on the accelerated method over the requisite service period of each of the awards. Prior to January 1, 2016, share-based compensation expense was recorded net of estimated forfeitures in the Company’s consolidated statements of operations and, accordingly, was recorded for only those share-based awards that the Company expected to vest.
AUDIOCODES LTD.
The Company applies ASC 718 and ASC 505-50, "Equity-Based Payments to Non-Employees" ("ASC 505-50") with respect to options and warrants issued to non-employees. Accordingly, the Company uses option valuation models to measure the fair value of the options and warrants at the measurement date as defined in ASC 505-50.
The Company recognizes compensation expenses for the value of awards granted based on the accelerated method for performance-based awards.
The weighted-average estimated fair value of employee stock options granted during the years ended December 31, 2015, 20162021, 2020 and 2017,2019, was $2.04, $2.01$10.64, $8.55, and $3.05$6.63 per share, respectively, using the Black-Scholes option pricing formula.model. Fair values were estimated using the following weighted-average assumptions (annualized percentages):
| Year Ended December 31, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| | | | | | | ||||||
|
| Year Ended December 31, | ||||||||||
|
| 2021 |
| 2020 |
| 2019 | ||||||
| Dividend yield | 0% | 0% | 0% | | 0.88% | | 1.01%-1.17% | | 1.13%-1.64% | |||
| Expected volatility | 53.32%-55.86% | 47.64%-52.95% | 41.78%-47.25% | | 49.45% | | 37.89%-43.09% | | 38.08%-39.34% | |||
| Risk-free interest | 1.14%-1.74% | 1.11%-1.86% | 1.81%-2.14% | | 0.5% | | 0.29%-1.43% | | 1.66%-2.59% | |||
| Expected life | 4.75-5.43 years | 4.76-5.30 years | 4.77-5.28 years | | 3.61 years |
| 3.57-4.23 years |
| 4.75-5.21 years | |||
The Company used its historical volatility in accordance with ASC 718. The computation of volatility uses historical volatility derived from the Company'sCompany’s exchange traded shares. The expected term of options granted is estimated based on historical experience and represents the period of time that options granted are expected to be outstanding. The risk free interest rate assumption is the implied yield currently available on United States treasury zero-coupon issues with a remaining term equal to the expected life of the Company'sCompany’s options. The dividend yield assumption is based on the Company'sCompany’s historical experience and expectation of no future dividend payouts and may be subject to substantial change in the future. The Company paid its first cash dividend during the third quarter of 2018 and has historically not paidbeen paying cash dividends and has no foreseeable planson a bi-annual basis since then. The Company currently expects to continue pay cash dividends in the future.
The Company estimated the forfeiture rate based on historical forfeituresfuture, subject to receipt of equity awards and adjusted the rate to reflect changes in facts and circumstances, if any. The Company revised its estimated forfeiture rate if actual forfeitures differed from its initial estimates. Effective asrequired Israeli court approvals, although there can be no assurance that it will do so. See also Note 13.
F-22
Contents
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The total share-based compensation expenses relating to all of the Company'sCompany’s share-based awards recognized for the years ended December 31, 2015, 20162021, 2020 and 20172019 were included in items of the consolidated statements of operations, as follows:
| Year Ended December 31, | |||||||||||||||||||||
| 2015 | 2016 | 2017 | |||||||||||||||||||
| | | | | | | | | | ||||||||||||
|
| Year Ended December 31, | |||||||||||||||||||
|
| | 2021 | |
| 2020 |
| 2019 | |||||||||||||
| Cost of revenues | $ | 101 | $ | 118 | $ | 84 | | $ | 411 | | $ | 181 | | $ | 183 | ||||||
| Research and development expenses, net | 429 | 459 | 383 | |
| 2,772 | |
| 1,535 | |
| 937 | |||||||||
| Selling and marketing expenses | 1,061 | 1,101 | 1,024 | |
| 6,170 | |
| 3,635 | |
| 2,171 | |||||||||
| General and administrative expenses | 782 | 736 | 816 | |
| 4,811 | |
| 3,420 | |
| 2,001 | |||||||||
| | | | | | | | | | ||||||||||||
| Total share-based compensation expenses | $ | 2,373 | $ | 2,414 | $ | 2,307 | | $ | 14,164 | | $ | 8,771 | | $ | 5,292 | ||||||
t. | Treasury stock: |
The Company has repurchased its ordinary shares from time to time in the open market, or, in 2016, pursuant to a self-tender offer in Israel and in the U.S., and holds such repurchased shares as treasury stock. The Company presents the cost to repurchase treasury stock as a reduction of shareholders'shareholders’ equity. See also Note 12a.
13a.
u. | Severance pay: |
The liability for severance pay for Israeli employees is calculated pursuant to Israel'sthe Israeli Severance Pay Law, 1963 (the "Severance“Severance Pay Law"Law”), based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date for all employees in Israel. Employees who have been employed for more than a one-year period are entitled to one month'smonth’s salary for each year of employment or a portion thereof. The Group'sGroup’s liability for all of its Israeli employees is fully provided for by monthly deposits with severance pay funds, pension funds, insurance policies and by an accrual. The value of these deposits is recorded as an asset in the Company'sCompany’s consolidated balance sheet.
The deposited funds include profits accumulated up to the consolidated balance sheets date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to the Severance Pay Law or labor agreements.
Since March 2011, the Group'sGroup’s agreements with new Israeli employees are under Section 14 of the Severance Pay Law. The Group'sGroup’s contributions for severance pay have replaced its severance pay obligation. Upon contribution of the full amount of the employee'semployee’s monthly salary for each year of service, no additional calculations are conducted between the parties regarding the matter of severance pay and no additional payments are made by the Group to the employee upon termination. The Group is legally released from the obligations to employees once the deposit amounts have been paid, and therefore the severance pay liability is not reflected in the balance sheet.
Severance pay expenses for the years ended December 31, 2015, 20162021, 2020 and 2017,2019, amounted to $2,153, $3,217$2,373, $3,078 and $2,631,$2,324, respectively.
F-23
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
v. | Employee benefit plan: |
The Group has 401(k) defined contribution plans covering employees in the U.S.United States. All eligible employees may elect to contribute a portion of their annual compensation to the plan through salary deferrals, subject to the IRS limit of $18$19.5 during the years ended December 31, 20162021 and 2017,2020, plus a catch-up contribution of $6$6.5 for participants ageaged 50 or over. The Group matches 50% of employees’ contributions, up to a maximum of 6% of the employees'employees’ annual pay. In the years ended December 31, 2015, 20162021, 2020 and 2017,2019, the Group matched contributions in the amount of $287, $286$431, $386 and $287, respectively.$318, respectively.
w. | Advertising expenses: |
Advertising expenses are charged to the consolidated statements of operations as incurred. Advertising expenses for the years ended December 31, 2015, 20162021, 2020 and 20172019 amounted to $604, $687$582, $371 and $442,$669, respectively.
x. | Fair value of financial instruments: |
The estimated fair value of financial instruments has been determined by the Group using available market information and valuation methodologies. Considerable judgment is required in estimating fair values. Accordingly, the estimates may not be indicative of the amounts the Group could realize in a current market exchange.
The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments:
The carrying amounts of cash and cash equivalents, short-term and restricted bank deposits, trade receivables, trade payables, other receivables and prepaid expenses and other payables and accrued expenses approximate their fair value due to the short-term maturity of such instruments. Theinstruments.The fair value of long-term and restricted bank deposits and long-term bank loans also approximatesapproximate their carrying value, since they bear interest at rates close to the prevailing market rates.
The fair value of foreign currency contracts is estimated by obtaining current quotes from banks and market observable data of similar instruments.
The fair value of marketable securities is estimated by obtaining the fair value of the marketable securities from the bank, which is based on current quotes and market value provided by external service providers.
AUDIOCODES LTD.
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820, "Fair“Fair Value Measurements and Disclosures" ("ASC 820")Disclosures” establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1-Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 -Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
F-24
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Level 3 -Unobservable inputs which are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See also Note 8.
y. | Derivative instruments and hedging: |
The Group accounts for derivativesderivative instruments and hedging based on ASC 815, "Derivatives“Derivatives and Hedging"Hedging”.
The Group accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivative instruments that are not designated and qualified as hedging instruments must be adjusted to fair value through earnings. The changes in fair value of such instruments are included as gain or loss in "financial“financial income (expenses), net"net” at each reporting period.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive loss in equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is classified as payroll and rent expenses. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings and included in "financial“financial income (expenses), net"net”. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions.
AUDIOCODES LTD.
z. | Recently adopted accounting |
In May 2014,January 2017, the FASB issuedFinancial Accounting Standards Update No. 2014-09, “RevenueBoard (the “FASB”) issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. ASU 2017-04 eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (the “Step 2 test”) from Contracts with Customers (Topic 606)” (“the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit. ASU 2014-09”), which amends the existing accounting standards for revenue recognition. The core principle of the ASU is that an entity should recognize revenue2017-04 became effective for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The Company plans to adopt ASU 2014-09 onbeginning January 1, 2018, using2020.
The implementation did not have a material impact on the modified retrospective method of adoption. The Company is substantially complete with its evaluation of the impact of adopting ASU 2014-09 on itsCompany’s consolidated financial statements and does not expect significant changes in the timing or method of its revenue recognition. The Company has identified and implemented changes to its accounting processes and controls to support the new revenue recognition and disclosure requirements. In connection with adopting ASU 2014-09, the Company expects to record a cumulative-effect adjustment to retained earnings of $180 on January 1, 2018. This adjustment primarily relates to the deferral of costs to obtain a contract that were previously expensed at the beginning of the contract period.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), whereby, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under ASU 2016-02, lessor accounting is largely unchanged. A modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements must be applied. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Companies may not apply a full retrospective transition approach. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the potential impact of ASU 2016-02 on its consolidated financial statements and related disclosures.
statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit“Financial Instruments - Credit Losses (Topic 326)" ("ASU 2016-13")”. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 will becomebecame effective for annual and interim periodsthe Company beginning afterJanuary 1, 2020. The implementation did not have a material impact on the Company’s consolidated financial statements.
In December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted asthe Financial Accounting Standards Board (the “FASB”) issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which simplifies the accounting for income taxes. This guidance became effective for the first quarter of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.2021 on a prospective basis. The Company is currently evaluating the impactimplementation of ASU 2016-132019-12 in the year ended December 31, 2021, did not have a material impact on itsthe Company’s consolidated financial statements and related disclosures.statements.
F-25
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
aa. | Impact of recently issued accounting standard not yet adopted: |
In August 2016,October 2021, the FASB issued ASU 2016-15, "Statement of Cash Flows2021-08, “Business Combinations (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15")805)”. ASU 2016-152021-08 creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. Under this exception, an acquirer applies ASC 606 to recognize and measure contract assets and contract liabilities on the acquisition date. ASC 805 generally requires the acquirer in a business combination to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. The ASU 221-08 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 isbecome effective for fiscal years beginning after December 15, 2017. ASU 2016-15 will require adoption on a retrospective basis unless it2022. Early application is impracticable to apply, in which case it would be required to applypermitted, and the amendments prospectively asCompany is currently assessing the impact of the earliest date practicable. The Company does not expect the adoption of ASU 2016-15 to have a material impact2021-08 on its consolidated financial statements and related disclosures.
statements.
In November 2016,2021, the FASB issued ASU 2016-18, "Statement2021-10, “Disclosures by Business Entities about Government Assistance (Topic 832)”. ASU 2021-10 requires the following annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy: (i) information about the nature of Cash Flows: Amendmentthe transactions and the related accounting policy used to Restricted Cash" ("ASU 2016-18"),account for the transactions; (ii) the line items on the classificationbalance sheet and presentationincome statement that are affected by the transactions, and the amounts applicable to each financial statement line item; and (iii) significant terms and conditions of changes in restricted cash on the statement of cash flows. Amounts generally described as restricted cashtransactions, including commitments and restricted cash equivalentscontingencies. ASU 2021-10 will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 isbecome effective for fiscal years beginning after December 15, 2017.2021. The Company is currently evaluatingassessing the effect of ASU 2016-18 on its financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (the "Step 2 test") from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit. ASU 2017-04 will become effective for the Company beginning January 1, 2020 and must be applied to any annual or interim goodwill impairment assessments after that date. Early adoption is permitted. The Company is currently evaluating the effect of ASU 2017-04 on its consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, "Stock Compensation – Scope of Modification Accounting" ("ASU 2017-09"), guidance that clarifies that all changes to share-based payment awards are not necessarily accounted for as a modification. Under ASU 2017-09, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. ASU 2017-09 is effective prospectively beginning January 1, 2018. ASU 2017-09 will apply to any future modifications. The Company does not expect ASU 2017-09 to have a material impact on its consolidated financial statements and related disclosures.
AUDIOCODES LTD.
In August 2017, the FASB issued ASU No. 2017-12,"Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"). The objectives of ASU 2017-12 are to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and to make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company is currently evaluating the effect of the adoption of ASU 2017-122021-10 on its consolidated financial statements and related disclosures.statements.
NOTE 3:-ACQUISITION OF CALLVERSO
On December 31, 2015November 10, 2021 (the "Closing Date"“Closing Date”), the Company entered into a share purchase agreement according(the “Share Purchase Agreement”), pursuant to which the Company acquired 100% of the outstanding shares of ACS. FollowingCallverso. Immediately following the transaction, ACSCallverso became a wholly-owned subsidiary of the Company.
The acquisition of Callverso was accounted for using the purchase method. The $3,000 purchase price for the acquisition was composed of the following amounts: (i) a $2,900 payment in cash payable on the Closing Date, of which $300 was deposited in escrow for a period of 12 months following the Closing Date; and (ii) $100 retained as security for any liabilities of Callverso as of the Closing. The foregoing amount was paid in January 2022.
As part of the share purchase agreement,Share Purchase Agreement, the Company also agreed to pay an earn-out amount, based on the sales of the Company’s products related to ACSCallverso technology (the “ACS Products”).and subject to the employment of the former shareholders of Callverso. The maximum earn-out amount is calculated based on: (a) 20% of the net revenues from ACS Products (the "ACS Revenues") after the first $2,000 of ACS Revenues$6,000 and is to be paid over three years as follows: (i) up to an earn-out payment of $2,000 plus (b) an additional amount of 10% of ACS Revenues after the first $20,000 of ACS Revenues (the "ACS Earn-Out").
The acquisition was accounted for using the purchase method. The $4,109 purchase price for the acquisition was composed of the following amounts: (i) a $2,000 payment in cashis payable on January 31, 2023 ,based on sales in 2022; (ii) up to $2,000 is payable on January 31, 2024, based on sales in 2023; and (iii) up to $2,000 is payable on January 31, 2025, based on sales in 2024 (collectively, the Closing Date, and (ii) $2,109, which represented the fair value of the ACS Earn-Out.
“Earn-Out payments”).
In addition, the Company agreedis required to pay $500an aggregate of $1,000 after 12 months and an additional $500aggregate of $1,000 after 24 months following the Closing Date upon meetingto former shareholders of Callverso who remain employed by the Company and satisfy certain cumulative conditions (including service conditions) for each of these two periods (the "Deferred Payments"(collectively, the “Deferred Payments”).
The Earn-Out payments and the Deferred Payments werewill be recorded as payroll expenses duringsince the periods for which the deferred payments remain contingent. The Company recorded $750 and $198 expenses relatedare subject to the Deferred Payments during the years ended December 31, 2016 and 2017 respectively. In February 2017 and in March 2018, the Company paid $448 and $500, respectively in relation to the deferred payments. In addition, in March 2018, the Company paid $151 in relation to the ACS Earn-Out.continuing employment.
F-26
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:-ACQUISITION OF CALLVERSO (Cont.)
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
| | | | ||||
| Current assets | $ | 305 | �� |
| $ | 152 | |
| Property and equipment | 20 | ||||||
| Technology | 1,917 | |
| 1,958 | |||
| Customer relationships | 312 | |
| 201 | |||
| | | | ||||
| Total identifiable assets acquired | 2,554 | |
| 2,311 | |||
| | | | ||||
| Current liabilities | (361 | ) | |
| (152) | ||
| Deferred tax liability | (557 | ) | |
| (497) | ||
| | | | ||||
| Total identifiable liabilities assumed | (918 | ) | |
| (649) | ||
| | | | ||||
| Net identifiable assets acquired | 1,636 | |
| 1,662 | |||
| Goodwill | 2,473 | |
| 1,338 | |||
| | | | ||||
| Net assets acquired | $ | 4,109 | | $ | 3,000 | ||
The Company allocated the acquired assets and liabilities assumed based on a preliminary purchase price allocation.
The fair values of the acquired technology and customer relationships were valued using the income approach. This method utilized a forecast of expected cash inflows, cash outflows and contributory charges for economic returns on tangible and intangible assets employed.
The excess of the purchase price over the preliminary assessment of the net tangible and intangible assets acquired resulted in goodwill of $2,473.$1,338. The goodwill is primarily attributable to expected synergies resulting from the acquisition. The acquired technology and customer relationships are being amortized on a straight-line basis over a period of 74 and 5-74.5 years, respectively.
The fair value of the Earn-OutOn December 22, 2021, a merger agreement was estimatedentered into by utilizing the income approach, taking into account the potential cash payments discounted to arrive at a present value amount, based on the Company's expectation as to future revenues of ACS products in the three subsequent annual periods following the Closing Date. The discount rate was based on the market interest rate and estimated operational capitalization rate.
Since the actual revenues from ACS products in the years ended December 31, 2016 and 2017 and the expected revenues of ACS products in 2017 and 2018 were lower than the Company’s expectation, the Company recorded incomeand Callverso in connection with an internal restructuring. The merger was made effective as of $1,674 and $118 in the years ended December 31, 2016 and 2017, respectively, as a reversalJanuary 1, 2022.
F-27
As of December 31, 2016 and 2017, the estimated fair value of the Earn-Out amounted to $487 and $378, respectively.
Contents
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
|
The following is a summary of available-for-sale marketable securities:
| December 31, 2016 | ||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| cost | gains | losses | Value | |||||||||||||
| Corporate bonds: | ||||||||||||||||
| Maturing within one year | $ | 6,479 | $ | 4 | $ | (5 | ) | $ | 6,478 | |||||||
| Maturing between one to three years | 29,602 | 32 | (94 | ) | 29,540 | |||||||||||
| Accrued interest | 300 | - | - | 300 | ||||||||||||
| $ | 36,381 | $ | 36 | $ | (99 | ) | $ | 36,318 | ||||||||
| | | | | | | | | | | | |
|
| December 31, 2021 | ||||||||||
| | Amortized | | Unrealized | | Unrealized | | Fair | ||||
|
| cost |
| Gains |
| losses |
| Value | ||||
Maturing between one to five years: | | | | | | | | | | | | |
Corporate bonds | | $ | 87,690 | | $ | 54 | | | (1,248) | | $ | 86,496 |
Governmental bonds | | | 2,848 | | | 0 | | | (37) | | | 2,811 |
Accrued interest | |
| 669 | | | 0 | |
| 0 | |
| 669 |
| | | | | | | | | | | | |
Balance as of December 31, 2021 | | $ | 91,207 | | $ | 54 | | $ | (1,285) | | $ | 89,976 |
| December 31, 2017 | ||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| cost | gains | losses | Value | |||||||||||||
| Corporate bonds: | ||||||||||||||||
| Maturing within one year | $ | 6,883 | $ | - | $ | (9 | ) | $ | 6,874 | |||||||
| Maturing between one to two years | 20,510 | 10 | (45 | ) | 20,475 | |||||||||||
| Accrued interest | 213 | - | - | 213 | ||||||||||||
| $ | 27,606 | $ | 10 | $ | (54 | ) | $ | 27,562 | ||||||||
| | | | | | | | | | | | |
|
| December 31, 2020 | ||||||||||
| | Amortized | | Unrealized | | Unrealized | | Fair | ||||
|
| cost |
| Gains |
| losses |
| Value | ||||
Maturing between one to five years: | | | | | | | | | | | | |
Corporate bonds | | $ | 53,351 | | $ | 508 | | | (6) | | $ | 53,853 |
Governmental bonds | | | 1,055 | | | — | | | (13) | | | 1,042 |
Accrued interest | |
| 449 | | | — | |
| — | |
| 449 |
| | | | | | | | | | | | |
Balance as of December 31, 2020 | | $ | 54,855 | | $ | 508 | | $ | (19) | | $ | 55,344 |
These investments were issued by highly rated corporations.corporations, ranged from BBB to A+. Accordingly, it is expected that the securities wouldwere not be settled at a price less than the amortized cost of the Group'sGroup’s investment. As of December 31, 2016 and 2017,On each reporting period, the Group did not have any investmentCompany evaluates whether declines in marketable securities that were in an unrealized loss position for a period of twelve months or greater. Since the Group hadfair value below amortized cost are due to expected credit losses, as well as the ability and intent to hold these investmentsthe investment until an anticipateda forecasted recovery occurs, in accordance with ASC 326.
Allowance for credit losses on of fair value, which may be until maturity,available-for-sale debt securities are recognized as a charge in financial expenses (income), net, in the Group didconsolidated statements of operations, and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive income (loss) in shareholders’ equity. The Company has not consider these investments to be other-than-temporarily impaired as ofrecorded any credit losses for the year ended December 31, 2016 and 2017. Unrealized gains (losses) are valued using alternative pricing sources and models utilizing observable market inputs.2021.
NOTE 5:- INVENTORIES
| | | | | | |
|
| December 31, | ||||
|
| 2021 |
| 2020 | ||
Raw materials | | $ | 15,263 | | $ | 13,376 |
Finished products | |
| 8,725 | |
| 15,817 |
| | | | | | |
| | $ | 23,988 | | $ | 29,193 |
AUDIOCODES LTD.
| December 31, | ||||||||
| 2016 | 2017 | |||||||
| Raw materials | $ | 5,779 | $ | 5,146 | ||||
| Finished products | 10,554 | 11,417 | ||||||
| $ | 16,333 | $ | 16,563 | |||||
In the years ended December 31, 2015, 20162021, 2020 and 2017,2019, the Group wrote-off inventories in athe total amountamounts of $724, $2,173$1,700, $4,175 and $1,946,$4,493, respectively.
F-28
| December 31, | ||||||||
| 2016 | 2017 | |||||||
| Cost: | ||||||||
| Computers and peripheral equipment | $ | 28,799 | $ | 29,806 | ||||
| Office furniture and equipment | 11,707 | 12,099 | ||||||
| Leasehold improvements | 3,395 | 3,553 | ||||||
| 43,901 | 45,458 | |||||||
| Accumulated depreciation: | ||||||||
| Computers and peripheral equipment | 27,104 | 28,295 | ||||||
| Office furniture and equipment | 10,501 | 10,723 | ||||||
| Leasehold improvements | 2,429 | 2,605 | ||||||
| 40,034 | 41,623 | |||||||
| Depreciated cost | $ | 3,867 | $ | 3,835 | ||||
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 6:- PROPERTY AND EQUIPMENT, NET
| | | | | | |
|
| December 31, | ||||
|
| 2021 |
| 2020 | ||
Cost: | | | | | | |
Computers and peripheral equipment | | $ | 24,561 | | $ | 23,616 |
Office furniture and equipment | |
| 12,578 | |
| 12,004 |
Leasehold improvements | |
| 3,184 | |
| 3,213 |
| | | | | | |
| |
| 40,323 | |
| 38,833 |
Accumulated depreciation: | | | | | | |
Computers and peripheral equipment | |
| 22,644 | |
| 21,697 |
Office furniture and equipment | |
| 10,689 | |
| 10,136 |
Leasehold improvements | |
| 2,596 | |
| 2,407 |
| | | | | | |
| |
| 35,929 | |
| 34,240 |
| | | | | | |
Depreciated cost | | $ | 4,394 | | $ | 4,593 |
Depreciation expenses amounted to $1,761, $1,700$2,074, $1,936 and $1,606$1,692 for the years ended December 31, 2015, 20162021, 2020 and 2017,2019, respectively.
NOTE 7:- INTANGIBLE ASSETS, NET
| | | | | | | | | | |
| | |
| Useful life |
| December 31, | ||||
| | | (years) |
| 2021 |
| 2020 | |||
| a. | Impaired cost: | | | | | | | | |
| | Acquired technology and license |
| 4 - 10 | | $ | 21,815 | | $ | 19,857 |
| | Customer relationship |
| 4.5 - 9 | |
| 4,951 | |
| 4,750 |
| | | | | | | | | | |
| | | | | |
| 26,766 | |
| 24,607 |
| | Accumulated amortization: |
| | | | | | | |
| | Acquired technology and license |
|
| |
| 19,639 | |
| 19,299 |
| | Customer relationship |
| | |
| 4,757 | |
| 4,739 |
| | | | | | | | | | |
| | | | | |
| 24,396 | |
| 24,038 |
| | | | | | | | | | |
| | Amortized cost |
| | | $ | 2,370 | | $ | 569 |
AUDIOCODES LTD.
| Useful life | December 31, | |||||||||||
| (years) | 2016 | 2017 | ||||||||||
| a. | Impaired cost: | |||||||||||
| Acquired technology and license | 5 - 10 | $ | 19,857 | $ | 19,857 | |||||||
| Customer relationship | 4.5 - 9 | 4,750 | 4,750 | |||||||||
| 24,607 | 24,607 | |||||||||||
| Accumulated amortization: | ||||||||||||
| Acquired technology and license | 17,292 | 18,008 | ||||||||||
| Customer relationship | 4,483 | 4,599 | ||||||||||
| 21,775 | 22,607 | |||||||||||
| Amortized cost | $ | 2,832 | $ | 2,000 | ||||||||
b. | Amortization expenses related to intangible assets amounted to |
c. | Expected amortization expenses are as follows: |
| Year ending December 31, | ||||
| 2018 | $ | 749 | ||
| 2019 | 354 | |||
| 2020 | 334 | |||
| 2021 | 282 | |||
| Thereafter | 281 | |||
| $ | 2,000 |
| | | |
Year ending December 31, |
|
| |
2022 | | $ | 804 |
2023 | |
| 545 |
2024 and thereafter | |
| 1,021 |
| | | |
| | $ | 2,370 |
F-29 AUDIOCODES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands, except share and per share data |
In accordance with ASC 820, the Group measures its foreign currency derivative instruments and marketable securities and Earn-Out liability related to the acquisition of ACS, at fair value.securities. Investments in foreign currency derivative instruments and marketable securities are classified within Level 2 of the fair value hierarchy. This is because these assets (liabilities) are valued using alternative pricing sources and models utilizing market observable inputs. The Earn-Out liability related to the acquisition of ACS is classified within Level 3 of the fair value hierarchy because this liability is based on present value calculations and an external valuation model whose inputs include market interest rates, estimated operational capitalization rates and volatilities. Unobservable inputs used in this model are significant.
AUDIOCODES LTD.
The Group'sGroup’s financial assets and liabilities measured at fair value on a recurring basis, consisted of the following types of instruments as of the following dates:
| December 31, 2016 | ||||||||||||
| Fair value measurements using input type | ||||||||||||
| Level 2 | Level 3 | Total | ||||||||||
| Financial liabilities related to foreign currency derivative hedging contracts | $ | (142 | ) | $ | - | $ | (142 | ) | ||||
| Marketable securities | 36,318 | - | 36,318 | |||||||||
| Earn-Out liability related to the acquisition of ACS | - | (487 | ) | (487 | ) | |||||||
| Total financial net assets (liabilities) | $ | 36,176 | $ | (487 | ) | $ | 35,689 | |||||
| | | | | | |
|
| December 31, 2021 | ||||
| | Fair value measurements | ||||
| | using input type | ||||
|
| Level 2 |
| Total | ||
Marketable securities | | $ | 89,976 | | $ | 89,976 |
Financial assets related to foreign currency derivative hedging contracts | |
| 812 | |
| 812 |
| | | | | | |
Total financial net assets as of December 31, 2021 | | $ | 90,788 | | $ | 90,788 |
| December 31, 2017 | ||||||||||||
| Fair value measurements using input type | ||||||||||||
| Level 2 | Level 3 | Total | ||||||||||
| Marketable securities | 27,562 | - | 27,562 | |||||||||
| Earn-Out liability related to the acquisition of ACS | - | (378 | ) | (378 | ) | |||||||
| Total financial net assets (liabilities) | $ | 27,562 | $ | (378 | ) | $ | 27,184 | |||||
| | | | | | |
|
| December 31, 2020 | ||||
| | Fair value measurements | ||||
| | using input type | ||||
|
| Level 2 |
| Total | ||
Marketable securities | | $ | 55,344 | | $ | 55,344 |
Financial assets related to foreign currency derivative hedging contracts | | | 1,489 | | | 1,489 |
| | | | | | |
Total financial net assets as of December 31, 2020 | | $ | 56,833 | | $ | 56,833 |
Fair value measurements using significant unobservable inputs (Level 3):
| Balance at January 1, 2017 | $ | (487 | ) | |
| Adjustment due to change in the forecast of earn-out consideration | 118 | |||
| Adjustment due to time change value | (9 | ) | ||
| Balance at December 31, 2017 | $ | (378 | ) |
F-30
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| December 31, | ||||||||
| 2016 | 2017 | |||||||
| Payroll and other employee related accruals | $ | 4,214 | $ | 4,346 | ||||
| Vacation accrual | 3,096 | 3,680 | ||||||
| Royalties provision | 1,170 | 1,620 | ||||||
| Government authorities | 979 | 1,105 | ||||||
| Accrued expenses | 8,517 | 9,373 | ||||||
| Others | 642 | 662 | ||||||
| $ | 18,618 | $ | 20,786 | |||||
NOTE 9:- OTHER PAYABLES AND ACCRUED EXPENSES
NOTE 10:- LONG-TERM BANK LOANS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In September and December 2011, the Company entered into loan agreements with Israeli commercial banks that provided loans in the total principal amount of $23,750 (the "2011 Loans"). Certain amounts of the 2011 Loans were required to be maintained as compensating bank deposits that decrease as the loans are repaid. The 2011 Loans bear interest at LIBOR plus 2.1%-4.35% with respect to $19,850 of the original principal amount. The remaining $3,900 of original principal amount bear interest at 0.5% above the interest rate paid on the bank deposit. Of these 2011 Loans, $19,850 of the principal amount was repayable in 20 equal quarterly installments and the remaining $3,900 of principal amount was repayable in 10 equal semiannual payments through September 2017.
In December 2015, the Company entered into loan agreements with an Israeli commercial bank that provided loans in the total principal amountamounts of $3,000 and Euro 3,000 (the "2015 Loans"“2015 Loans”). Certain amounts of the 2015 Loans arewere required to be maintained as a compensating bank deposit that decreasesdecreased as the loans are repaid. The loans bearbore interest at LIBOR plus 1%-2.5% to 2.5% and are repayablewere payable in 20 equal quarterly installments through December 2020.
In December 2016, the Company entered into loan agreements with an Israeli commercial bank that provided loans in the total principal amount of $6,000 (the "2016 Loans"“2016 Loans”). Certain amounts of the 2016 Loans arewere required to be maintained as a compensating bank deposit that decreasesdecreased over the repayment period of the loans. The loans bearbore interest at LIBOR plus 1.1%-2.5% to 2.5% and are repayablewere payable in 20 equal quarterly installments through December 2021.
As of December 31, 2016 and 2017,2020, the banks havehad a lien on the Company'sCompany’s assets that securessecure the 2011 Loans, the 20152016 Loans and the 2016 Loans. As of December 31, 2016 and 2017, the Company iswas required to maintain a total of $5,910 and $4,200, respectively,$600, in compensating balances with the banks, to secure the 2011 Loans, the 2015 Loans and the 2016 Loans.
AUDIOCODES LTD.
banks.
As of December 31, 2016 and 2017,2020, the compensating balances arewere included in $1,710 and $1,200 of short-term and restricted bank deposits and $4,200 and $3,000 of long-term and restricted bank deposits, respectively.in the amount $600. The amount of the compensating balances that iswere required decreasesdecreased as the loans arewere repaid. The agreements with respect to the 2011 Loans, the 2015 Loans and the 2016 Loans requirerequired the Company, among other things, to meet certain financial covenants such as maintaining shareholders'shareholders’ equity, cash balances, and liabilities to banks at specified levels, as well as achieving certain levels of operating income (the "Covenants").
income.
As of December 31, 2016 and 2017, the Company was in compliance with2021, all of the Covenants.loans were fully repaid.
NOTE 11:- LEASES
The Group'sGroup’s facilities are leased under several lease agreements in Israel, Europe, Asia and the Americas for periods ending in 2024.
up to 2027, with options to extend the leases ending up to 2029. In addition, the CompanyGroup has various operating lease agreements with respect to motor vehicles.
Lease expenses of office rent and vehicles for the years ended December 31, 2021, 2020 and 2019 were approximately $8,297, $8,000 and $8,149, respectively. Lease expenses for the years ended December 31, 2021, 2020 and 2019 include an offset for sublease rental of $1,547, $1,405 and $1,359, respectively.
The Group’s capitalized operating lease agreements have remaining lease terms ranging from 1 year to 7.5 years, including agreements with options to extend the leases for up to 5 years.
F-31
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- LEASES (Cont.)
The following table represents the weighted-average remaining lease term and discount rate:
| | |
| Year ended | |
| | December 31, |
| | 2021 |
Weighted average remaining lease term | 2.77 years | |
Weighted average discount rate | 2.07% |
The following table presents supplemental cash flows information related to the lease costs for operating and finance leases:
| | | |
|
| December 31, | |
| | 2021 | |
Cash paid for amounts included in measurement of lease liabilities: |
| |
|
Operating cash flows for operating leases *) | | $ | 8,793 |
*) Total operating cash flows for operating leases have been reduced by lease receipt in the amount of $743 in connection with lease modification agreement of the Company’s U.S. subsidiary, due to lease agreements are for 36 months, which expiretermination prior to its scheduled expiration.
The discount rate was determined based on various dates, the latestestimated collateralized borrowing rate of which is in 2020.the Group, adjusted to the specific lease term and location of each lease.
Future minimum rental commitments under non-cancelableMaturities of operating leases arelease liabilities were as follows:
| Year ending December 31, | ||||
| 2018 | $ | 6,717 | ||
| 2019 | 6,075 | |||
| 2020 | 5,889 | |||
| 2021 | 5,643 | |||
| 2022 and thereafter | 12,448 | |||
| Total minimum lease payments *) | $ | 36,772 |
| | | |
Year ending December 31, |
| | |
2022 | | $ | 8,330 |
2023 | |
| 8,309 |
2024 | |
| 1,428 |
2025 | |
| 722 |
2026 and thereafter | |
| 1,366 |
| | | |
Total lease payments *) | | $ | 20,155 |
| | | |
Less- imputed interest | | $ | (625) |
Present value of lease liabilities | | $ | 19,530 |
In connection with the Company's facilitiesCompany’s offices lease agreement in Israel, the lessor has a lien of approximately $1,644 on certain bank deposits as of December 31, 2017. These deposits are$5,100 which is included in short-term and restricted bank deposits.
Lease expenses for the years ended December 31, 2015, 2016 and 2017, were approximately $5,930, $5,784 and $6,027, respectively. Lease expenses for the years ended December 31, 2015, 2016 and 2017, include an offset for sublease rentalF-32
Table of $960, $801 and $1,183, respectively.
Contents
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES |
a. | Purchases commitments: |
1.The Group is obligated under certain agreements with its suppliers to purchase specified items of excess inventory which are expected to be utilized in 2018.2022. As of December 31, 2017,2021, non-cancelable purchase obligations were approximately $18,516.$28,669.
2.In addition, the Group is obligated under certain agreements with its suppliers to purchase software as a service (SaaS) subscription services.
b. | Royalty commitment to the |
Under the research and development agreements of the Company and its Israeli subsidiaries with the NATIIIA and pursuant to applicable laws, the Company and its Israeli subsidiaries arewere required to pay royalties at the rate of 1.3%-4.5%-5% on sales to end customers of products developed with funds provided by the NATI,IIA, up to an amount equal to 100% of the NATIIIA research and development grants received, linked to the dollar plus interest on the unpaid amount received based on the 12-month LIBOR rate (from the year the grant was approved) applicable to dollar deposits. The Company and its Israeli subsidiaries arewere obligated to repay the NATIIIA for the grants received only to the extent that there are sales of the funded products.
The place of manufacturing ofIn November 2019, the Company and its former Israeli subsidiary, AudioCodes Development Ltd. (which was merged into the Company effective January 1, 2020), entered into a product that was developedroyalty buyout agreement (the “Royalty Buyout Agreement”) with the supportIIA relating to certain grants they had received from the IIA. The contingent net royalty liability to the IIA at the time of the NATI, or based on know-how developedRoyalty Buyout Agreement with respect to these grants was $49,008 (the “Debt”), including interest to the supportdate of the NATI, shall be in accordance withRoyalty Buyout Agreement. As part of the Company's declaration in the application for support (including manufacturing abroad). In caseRoyalty Buyout Agreement, the Company or any of its Israeli subsidiaries wishagreed to transfer their manufacturing activities abroad, in addition to their statement in the application for support, they will be required to receive approval from the NATI research committee. The committee is entitled to increase both the royalty liability and the rate of the royalty payments. The increased repayment is calculated accordingpay $32,178 to the percentage ofIIA (to settle the manufacturing activities that are intendedDebt in full) in 3 annual installments starting in November 2019. The annual installments were denominated in NIS and bore interest. Pursuant to be carried out outside Israel, and can reach up to 300% of the original amount. When the manufacturing of the product is being done outside of Israel,Royalty Buyout Agreement, the Company or anyeliminated all royalty obligations related to its future revenues with respect to these grants.
In December 2021, December 2020 and November 2019, the Company paid the 3 installments of its Israeli subsidiaries are required to pay an increased royalty rate of an additional 1%.
approximately $12,225, $11,580 and $10,700 million, respectively, due under the Royalty Buyout Agreement.
As of December 31, 20162021, and 2017,2020, the Company and itsCompany’s other Israeli subsidiaries have a contingent obligation to pay royalties to the IIA in the amount of approximately $52,717$19,137 and $58,155,$18,136, respectively.
As of December 31, 2016 and 2017, the Company and its Israeli subsidiaries have paid or accrued royalties to the NATI in the amount of $6,186 and $8,350, respectively, which were recorded in cost of revenues.
On March 27, 2016, the Company received a notification from the NATI that, according to an audit conducted on their behalf, the Company is alleged to owe the NATI an amount of $999 for underpaid royalties. The Company has reviewed the findings and presented an appeal of the audit claims. In December 2017, the Company received a confirmation from NATI that the amount should be reduced by $720. The remaining amount is still under examination. The Company believes that it has paid the correct amount of royalties and has valid defenses to this claim.
AUDIOCODES LTD.
c. | Royalty commitments to third parties: |
The Group has entered into technology licensing fee agreements with third parties. Under the agreements, the Group agreed to pay the third parties royalties, based on sales of relevant products.
d. | Legal proceedings: |
In October 2021, the Company was sued in the Labor Tribunal for declaratory relief by the Industrialists Association. The proceedings were settled by agreement and sealed by the court on January 7, 2022. As part of the arrangement, the Company paid an insignificant amount.
F-33
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- SHAREHOLDERS’ EQUITY
a. | Treasury stock: |
During the year ended December 31, 2014, the Company'sCompany’s Board of Directors approved a share repurchase program to repurchase up to $3,000 of its ordinary shares (the "share repurchase program"“Share Repurchase Program”), which is the amount that the Company could repurchase according tounder Israeli law without further approval from an Israeli court. During the seven years ended December 31, 2016, 2015 and 2014,2020, the Company received Israeli court approvals to purchase up to an additional $75,000$176,000 of its ordinary shares. In addition, in each of MayJanuary 2021, July 2021 and November 2017,December 2021, the Company received court approval to purchase up to an additional $15,000$30,000, $35,000 and $20,000,$35,000, respectively of its ordinary shares.shares (the “Permitted Amount”). The November 2017most recent court approval for share repurchases will expire on May 27, 2018.
AUDIOCODES LTD.
Asapprovals also permit the Company to declare a dividend of any part of the share repurchase program, onPermitted Amount during the approved validity period. The current approval is valid through June 16, 2016, the Company commenced an offer in the U.S. and Israel to purchase up to 3,000,000 of its ordinary shares for $4.35 per share (the "Offer"). The Offer expired on July 20, 2016 and the Company purchased 3,000,000 of its ordinary shares, the maximum amount of shares subject to the Offer, at a price of $4.35 per share. The Company had $150 of legal and other expenses related to the Offer.
19, 2022.
As of December 31, 2017,2021, pursuant to the share repurchase program,Company’s Share Repurchase Program, the Company had repurchased a total of 27,115,95230,796,692 of its ordinary shares at a total cost of $115,545$179,641 (of which 3,749,4621,325,078 of its ordinary shares were repurchased during the year ended December 31, 201731,2021 for aggregate consideration of $25,564)$41,852).
As to ordinary shares repurchased subsequent to December 31, 2021, see Note 19.
b. | Cash Dividends: |
On February 4, 2021, the Company declared a cash dividend of $0.16 per share. The dividend, in the aggregate amount of approximately $5.3 million, was paid on March 4, 2021 to all of the Company’s shareholders of record on February 18, 2021.
On July 27, 2021, the Company declared a cash dividend of $0.17 per share. The dividend, in the aggregate amount of approximately $5.6 million, was paid on August 26, 2021 to all of the Company’s shareholders of record on August 11, 2021. See also Note 19.
As to cash dividend declared and paid subsequent to December 31, 2021, see Note 19.
c. | Issuance of ordinary shares in a public offering: |
On June 8, 2020, the Company sold in a public offering 2,600,000 of its ordinary shares, at a price of $35 per share. The Company’s net proceeds from this offering were $85,426, after deducting underwriters’ discounts and commissions and other offering expenses.
d. | Employee and |
In 2008, the Company'sCompany’s Board of Directors approved the 2008 Equity Incentive Plan (the "Plan"“Plan”) that became effective in January 2009. Under the Plan, options and RSUs may be granted to employees, officers, non-employee consultants and directors of the Company. As of December 31, 2017,2021, the total number of shares authorized for future grant under the Plan is 1,221,941.787,785.
Share optionsOptions granted under the Plan are generally exercisable at the fair market value of the ordinary shares atexpire seven years from the date of grant and usually expire seven or ten years from the date of grant. The options generally vest over four years from the date of grant. Anyany options that are forfeited or cancelled before expiration become available for future grants.
F-34
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- SHAREHOLDERS’ EQUITY (Cont.)
The following is a summary of the Company'sCompany’s stock option activity and related information for the year ended December 31, 2017:2021:
| Amount of options | Weighted average exercise price | Weighted average remaining contractual term (in years) | Aggregate intrinsic value | |||||||||||||||||||||||
| | | | | | | | | | | ||||||||||||||||
| | | | | | | Weighted | | | | ||||||||||||||||
|
| |
| | |
| average |
| | | ||||||||||||||||
| | | | Weighted | | remaining | | | | |||||||||||||||||
| | | | average | | contractual | | Aggregate | ||||||||||||||||||
| | Amount | | exercise | | term (in | | intrinsic | ||||||||||||||||||
| | of options | | price | | years) | | value | ||||||||||||||||||
| Options outstanding at beginning of year | 3,353,457 | $ | 4.50 | 4.1 | $ | 6,346 |
| 914,915 | | $ | 8.19 |
| 3.5 | | $ | 17,709 | ||||||||||
| Changes during the year: | | | | | | | | | | | ||||||||||||||||
| Granted | 264,543 | $ | 6.36 |
| 3,000 | | $ | 30.76 | | | | | | |||||||||||||
| Exercised | (636,067 | ) | $ | 4.38 |
| (348,106) | | $ | 7.01 |
|
| |
|
| ||||||||||||
| Forfeited | (105,291 | ) | $ | 4.86 |
| (18,000) | | $ | 13.77 |
|
| |
|
| ||||||||||||
| | | | | | | | | | | ||||||||||||||||
| Options outstanding at end of year | 2,876,642 | $ | 4.68 | 3.7 | $ | 7,703 |
| 551,809 | | $ | 8.88 |
| 2.91 | | $ | 14,268 | ||||||||||
| | | | | | | | | | | ||||||||||||||||
| Options exercisable at end of year | 1,850,677 | $ | 4.58 | 2.9 | $ | 5,151 |
| 396,422 | | $ | 7.17 |
| 2.36 | | $ | 10,928 | ||||||||||
The weighted-averageweighted average grant-date fair value of options granted during the years ended December 31, 2015, 20162021, 2020 and 20172019 was $2.04, $2.01$10.64, $8.55 and $3.05,$6.63, per option, respectively. The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company'sCompany’s closing share price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of the fiscal year. This amount changes based on the fair market value of the Company'sCompany’s ordinary shares.
Total intrinsic value of options exercised for the years ended December 31, 2015, 20162021, 2020 and 20172019 was $219, $1,583$9,281, $10,633 and $1,562,$9,352, respectively.
The options for employees outstanding as of December 31, 2021 have been separated into ranges of exercise prices, as follows:
| | | | | | | | | | | | | |
| | | Number of | | Weighted | | | | | Number of | | | |
| |
| options |
| average |
| | |
| options |
| Weighted | |
| | | outstanding | | remaining | | Weighted | | exercisable | | average | ||
Range of | | as of | | contractual | | average | | as of | | exercise price | |||
exercise | | December 31, | | life (in | | exercise | | December 31, | | of exercisable | |||
price | | 2021 | | years) | | price | | 2021 | | options | |||
$ | 3.54-4.35 |
| 146,650 |
| 0.99 | | $ | 4.02 |
| 146,650 | | $ | 4.02 |
$ | 5.00-6.90 |
| 104,668 |
| 2.24 | | $ | 6.85 |
| 102,793 | | $ | 6.86 |
$ | 7.08-10.66 |
| 147,741 |
| 3.55 | | $ | 8.61 |
| 103,172 | | $ | 8.78 |
$ | 11.52-30.76 |
| 152,750 |
| 4.61 | | $ | 15.21 |
| 43,807 | | $ | 14.69 |
| | | | | | | | | | | | | |
| |
| 551,809 |
| 2.91 | | $ | 8.88 |
| 396,422 | | $ | 7.17 |
F-35
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- SHAREHOLDERS’ EQUITY (Cont.)
The following is a summary of the Company'sCompany’s RSU activity and related information for the year ended December 31, 2017:2021:
| Number of shares | Weighted average grant date fair value | ||||||||||||
| | | | | | ||||||||
|
| |
| Weighted | |||||||||
| | Number of | | average grant | |||||||||
| | shares | | date fair value | |||||||||
| RSUs outstanding at beginning of year | 393,534 | $ | 4.38 |
| 1,072,471 | | $ | 20.88 | |||||
| Changes during the year: |
| | |
| | ||||||||
| Granted | 333,962 | $ | 7.12 |
| 633,333 | | $ | 31.96 | |||||
| Vested | (145,099 | ) | $ | 4.61 |
| (457,373) | | $ | 17.85 | ||||
| Forfeited | (7,000 | ) | $ | 5.75 |
| (45,000) | | $ | 27.70 | ||||
| | | | | | ||||||||
| RSUs outstanding at end of year | 575,397 | $ | 5.90 |
| 1,203,431 | | $ | 27.60 | |||||
The following is a summary of warrants issued to non-employees for the year ended December 31, 2017:
| Number of shares | Weighted average exercise price | |||||||
| Warrants outstanding at beginning and end of year | 5,000 | $ | 5.00 | |||||
| Warrants exercisable at end of year | 3,750 | $ | 5.00 | |||||
The Group recorded immaterial compensation expenses with respect to the grants of these warrants in accordance with ASC 505-50.
As of December 31, 2017,2021, there was $3,293a total of total$19,788 unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1.093.11 years.
NOTE 14:- |
AUDIOCODES LTD.
The options and warrants outstanding as of December 31, 2017, have been separated into ranges of exercise prices, as follows:
| Range of exercise price | Number of options outstanding as of December 31, 2017 | Weighted average remaining contractual life | Weighted average exercise price | Number of options exercisable as of December 31, 2017 | Weighted average exercise price of exercisable options | |||||||||||||||||
| (Years) | ||||||||||||||||||||||
| $ | 0.00-1.10 | 5,875 | 0.54 | $ | 0.00 | 5,500 | $ | 0.00 | ||||||||||||||
| $ | 1.50-2.51 | 43,250 | 1.69 | $ | 2.04 | 43,250 | $ | 2.04 | ||||||||||||||
| $ | 2.57-4.00 | 980,805 | 3.00 | $ | 3.51 | 714,430 | $ | 3.43 | ||||||||||||||
| $ | 4.03-6.49 | 1,400,388 | 4.10 | $ | 4.90 | 821,671 | $ | 4.99 | ||||||||||||||
| $ | 6.51-8.23 | 451,324 | 3.95 | $ | 6.87 | 269,576 | $ | 6.88 | ||||||||||||||
| 2,881,642 | 3.66 | $ | 4.69 | 1,854,427 | $ | 4.58 | ||||||||||||||||
| TAXES ON INCOME |
a. | Israeli taxation: |
1. | Measurement of taxable income in |
The Company has elected to measure its taxable income and file its tax return under the Israeli Income Tax Regulations (Principles Regarding the Management of Books of Account of Foreign Invested Companies and Certain Partnerships and the Determination of Their Taxable Income), 1986. Accordingly, results for tax purposes are measured in terms of earnings in dollars.
2. | Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (the |
The Company'sCompany’s production facilities in Israel have been granted the status of an "Approved Enterprise"“Approved Enterprise” in accordance with the Investment Law under four separate investment programs. According to the provisions of the Investment Law, the Company has been granted the "Alternative Benefit Plan", under which the main benefits are tax exemptions and reduced tax rates.
Therefore, the Company's income derived from the "Approved Enterprise" will be entitled to a tax exemption for a period of two years and to an additional period of five to eight years of reduced tax rates of 10% - 25% (based on the percentage of foreign ownership). The duration of tax benefits of reduced tax rates is subject to a limitation of the earlier of 12 years from commencement of production, or 14 years from the approval date. The Company utilized tax benefits from the first program in 1998 and has not been eligible for benefits since 2007.
AUDIOCODES LTD.
As of December 31, 2017, retained earnings included approximately $540 in tax-exempt income earned by the Company's "Approved Enterprise". The Company's Board of Directors has decided not to declare dividends out of such tax-exempt income. Accordingly, no deferred income taxes have been provided on income attributable to the Company's "Approved Enterprise". Tax-exempt income attributable to the "Approved Enterprise" cannot be distributed to shareholders without subjecting the Company to taxes except upon complete liquidation of the Company. If such retained tax-exempt income is distributed in a manner other than upon the complete liquidation of the Company, it would be taxed at the corporate tax rate between 10% and 25%, applicable to such profits as if the Company had not elected the alternative tax benefits and an income tax liability would be incurred by the Company up to a maximum amount of $180.
The entitlement to the above benefits is conditional upon the Company fulfilling the conditions stipulated by the Investment Law, regulations published thereunder and the certificate of approval for the specific investments in "Approved Enterprises". In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. As of December 31, 2017, management believes that the Company is in compliance with all of the aforementioned conditions.
However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the Investment Law as they were on the date of such approval. Therefore, the Company's existing "Approved Enterprises" are generally not subject to the provisions of the 2005 Amendment (see below). As a result of the 2005 Amendment, tax-exempt income generated under the provisions of the Investment Law, as amended, will subject the Company to taxes upon distribution or liquidation and the Company may be required to record a deferred tax liability with respect to such tax-exempt income.
Income from sources other than the "Approved Enterprise" during the benefit period will be subject to tax at the regular tax rate prevailing at that time.
On April 1, 2005, an amendment to the Investment Law came into effect (the "2005 Amendment"“2005 Amendment”) that significantly changed the provisions of the Investment Law. The 2005 Amendment limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as a "Beneficiary Enterprise" including a provision generally requiring that at least 25% of the Beneficiary Enterprise's income will be derived from export. Additionally, the 2005 Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits. However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the Investment Law as they were on the date of such approval.
AUDIOCODES LTD.
As of December 31, 2017, there was no taxable income attributable to the Beneficiary Enterprise.
“Beneficiary Enterprise”.
In January 2011, another amendment to the Investment Law came into effect ("the 2011 Amendment"(the “2011 Amendment”). According to the 2011 Amendment, the benefit tracks in the Investment Law were modified, and a flat tax rate applies to the Company's entireCompany’s income subject to this amendment (the "Preferred Income"“Preferred Income”). Once an election is made, the Company'sCompany’s income will be subject to the amended tax rate of 16% from 2015 and thereafter (or 9% for a preferred enterprise located in development area A).
F-36
The Company does not currently intend to adopt the 2011 AmendmentAUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and intends to continue to comply with the Investment Law as in effect prior to enactment of the 2011 Amendment.per share data
NOTE 14:- TAXES ON INCOME (Cont.)
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2016 and 2017 Budget Years), 2016, which includes Amendment 73 to the Investment Law ("(“Amendment 73"73”) was published. According to Amendment 73, 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, 2016 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%).
The Amendment 73 also prescribes special tax tracks for technological enterprises, which are subject to regulations that were issued by the Minister of Finance in May 2017. The new tax tracks under the Amendment 73 are as follows: Preferred Technological Preferred Enterprise ("TPE"(“PTE”) - an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than NIS 10 billion. A TPE,PTE, as defined in the Investment 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%).
TheOn May 2019, the Company has evaluatednotified the effect onIsrael Tax Authority that it had waived its financial statementsBeneficiary Enterprise status starting from the 2019 tax year and thereafter. Beginning in January 2020 and with respect to the Company’s taxable results from 2020 onwards, the Company elected to apply the terms of the transition to the preferred enterprise tax track, andInvestments Law as of the date of the approval of the financial statements, the Company believes that it will not transition to the preferred enterprise tax track. Accordingly, the Company did not adjustper its deferred tax balances as of December 31, 2017. The Company's position may change in the future.
AUDIOCODES LTD.
PTE status.
3. | Tax benefits under the law for the Encouragement of Industry |
The Encouragement Law provides several tax benefits for industrial companies. An industrial company is defined as a company resident in Israel, that at least 90% of the income of which in a given tax year exclusive of income from specified government loans, capital gains, interest and dividends, is derived from an industrial enterprise owned by it. An industrial enterprise is defined as an enterprise whose major activity in a given tax year is industrial production activity.
Management believes that the Company is currently qualified as an "industrial company"“industrial company” under the Encouragement Law and, as such, is entitled to tax benefits, including: (1)(i) deduction of purchase of know-how and patents and/or right to use a patent over an eight-year period; (2)(ii) the right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli industrial companies and an industrial holding company; (3)(iii) accelerated depreciation rates on equipment and buildings; and (4)(iv) expenses related to a public offering on the Tel-AvivTel Aviv Stock Exchange Ltd. and on recognized stock markets outside of Israel, such as Nasdaq, are deductible in equal amounts over three years.
Eligibility for benefits under the Encouragement Law is not subject to receipt of prior approval from any governmental authority. No assurance can be given that the IsraeliIsrael Tax AuthoritiesAuthority will agree that the Company qualifies that the Companyand will continue to qualify as an industrial company, or that the benefits described above will be available to the Company in the future.
F-37
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- TAXES ON INCOME (Cont.)
4. | Tax |
Israeli tax law (Section 20a to the Israeli Tax Ordinance) allows, under certain conditions, a tax deduction for research and development expenses, including capital expenses, for the year in which they are paid. Such expenses must relate to scientific research in industry, agriculture, transportation, or energy, and must be approved by the relevant Israeli government ministry, determined by the field of research. Furthermore, the research and development must be for the promotion of the company’s business and carried out by or on behalf of the company seeking such tax deduction. However, the amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. Expenses incurred in scientific research that is not approved by the relevant Israeli government ministry will be deductible over a three-year period starting from the tax year in which they are paid. The Company believes that it is eligible for the abovementioned benefit for the majority of its research and development expenses.
5. | Tax rates: |
Taxable income of the CompanyIsraeli Companies is subject to a corporate tax rate of 23% in the years ended December 31, 2021, 2020 and 2019.
The Company is eligible for tax benefits as follow:a PTE as mentioned in 2015 - 26.5%, in 2016 - 25% and in 2017 - 24%.
In December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which reduces the corporate income tax rate to 24% (instead of 25%) effective from January 1, 2017 and to 23% effective from January 1, 2018.
2 above.
The deferred tax balances as of December 31, 20172021 have been calculated based on the revised tax rates.
ThePTE effective tax rate payable by a company which is taxed under the Investment Law may be considerably lower (see also Note 13.a2)2 above).
AUDIOCODES LTD.
b. | U.S. taxation: |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”(“TCJA”). (H.R. 1) was signed into law. This Act includes, among other things, a permanent reduction to the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, and requires immediate taxation of accumulated, unremitted non-U.S. earnings.
The TCJA makes broad and complex changes to the Code. The changes include,also established new tax provisions affecting 2018, including, but are not limited to:
The TCJA makes certain changes to the depreciation rules and implements new limits on the deductibility of certain executive compensation paid by the Company’s U.S. subsidiary.compensation.
ACSASC 740 requires companies to account for the tax effects of changes in income tax rates and laws in the period in which legislation is enacted (December 22, 2017). ASC 740 does not specifically address accounting and disclosure guidance in connection with the income tax effects of the TCJA. Consequently, on December 22, 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), to address the application of ASC 740 in the reporting period that includes the date the TCJA was enacted. SAB 118 allows companies a reasonable period of time to complete the accounting for the income tax effects of the TCJA.
The deferred tax balances as of December 31, 20172021 and 2020 have been calculated based on the revised tax rates.
F-38
At December 31, 2017, the Company had notAUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- TAXES ON INCOME (Cont.)
The Group has completed the accounting for all the income tax effectsimpacts of the TCJA. However, pursuantAs part of finalizing the analysis, the Company’s U.S. subsidiary recorded adjustments that relate to SAB 118, the Company has made provisional estimatesTransition Tax during the year ended December 31, 2018 and GILTI during the year ended December 31, 2021 in the total amounts of approximately $660 and $234, respectively.
On March 27, 2020, the effectsCoronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in the United States in response to the COVID-19 pandemic. The CARES Act contains temporary taxpayer favorable provisions related to the use of existing deferred tax assets and liabilitiesnet operating losses and the one-time transition tax. The Company believes the accounting for the tax effects will be completed upon the filingdeductibility of the 2017 federalinterest expense, charitable contributions, and state tax returns in 2018.qualified improvement property. The Company does not expect thatto be materially impacted by the TCJA willCARES Act.
On December 27, 2020, the Consolidated Appropriations Act (“CAA”) was enacted in further response to the COVID-19 pandemic, in combination with omnibus spending for the 2021 federal fiscal year. The CAA extended many of the provisions enacted by the CARES Act, which did not have a material impact on itsthe Company’s consolidated financial statements and related disclosures.
for the year ended December 31, 2021. On March 11, 2021, the American Rescue Plan Act of 2021 (the “ARPA”) was enacted in still further response to the COVID-19 pandemic. The Company hasdoes not yet adopted an accounting policy relatedexpect the provisions of the ARPA to GILTI and will continue to perform further analysis during the SAB 118 measurement period to evaluate the GILTI provisions and the effects tohave a material impact on the Company’s consolidated financial statements.
AUDIOCODES LTD.
statements for the year ended December 31, 2021.
c. | Net operating loss |
As of December 31, 2020, the Company has realized all of its carryforward tax losses in Israel, which can be offset against taxable income (except those stated in the merger agreement (see note 1d). As of December 31, 2021, the Company recorded a net deferred tax asset of $4,377 in respect of other temporary differences.
As of December 31, 2017,2021, the Company had cumulativeCompany’s Israeli subsidiaries have total available carryforward tax losses for tax purposes in the amount of approximately $11,500 which can$84,040. The net operating losses may be carried forward and offset against taxable income in the future for an indefinite period. AsThe Group does not expect utilization of December 31, 2017,such carryforward tax losses and therefore recorded full valuation allowance against the Company recorded a net deferred tax asset of $5,013assets in respect of such carry-forwardcarryforward tax losses and other temporary differences.losses.
As of December 31, 2017, the Company's Israeli subsidiaries have estimatedThe Company’s U.S. subsidiary has total available carry-forwardcarryforward tax losses of approximately $75,500. The net operating losses may be claimed and offset against taxable income in the future for an indefinite period.
The Company's U.S. subsidiary has estimated total available carry-forward tax losses of approximately $67,800$39,600 to offset against future U.SU.S. federal taxable income and $1,600 to offset against state taxable income in the U.S.gains. These carry-forwardcarryforward tax losses expire between 2022 and 2032. As of December 31, 2017,2021, the Company's U.SCompany’s U.S. subsidiary recorded a deferred tax asset of $1,673 relating to the available net carry forward$4,413 in respect of such carryforward tax losses.
Utilization of U.S. net operating losses may be subject to substantial annual limitations due to the "change“change in ownership"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.
d. | Income (loss) before taxes on income is comprised as follows: |
| | | | | | | | | |
|
| Year Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Domestic | | $ | 31,084 | | $ | 30,008 | | $ | (18,264) |
Foreign | |
| 8,563 | |
| 6,639 | |
| 6,949 |
| | | | | | | | | |
| | $ | 39,647 | | $ | 36,647 | | $ | (11,315) |
| Year Ended December 31, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Domestic | $ | 1,007 | $ | 4,151 | $ | 5,948 | ||||||
| Foreign | 2,141 | 3,443 | 3,692 | |||||||||
| $ | 3,148 | $ | 7,594 | $ | 9,640 | |||||||
F-39
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- TAXES ON INCOME (Cont.)
e. | Taxes on income (tax benefits) are comprised as follows: |
| | | | | | | | | |
|
| Year Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Current taxes: | | | | | | | | | |
Domestic | | $ | 819 | | $ | 300 | | $ | 100 |
Foreign | |
| 1,615 | |
| 701 | |
| 707 |
| | | | | | | | | |
| | $ | 2,434 | | $ | 1,001 | | $ | 807 |
Deferred tax expense (benefit): | | | | | | | | | |
Domestic | | $ | 2,464 | | $ | 7,220 | | $ | (10,521) |
Foreign | |
| 998 | |
| 1,178 | |
| (5,578) |
| | | | | | | | | |
| | $ | 3,462 | | $ | 8,398 | | $ | (16,099) |
| | | | | | | | | |
| | $ | 5,896 | | $ | 9,399 | | $ | (15,292) |
| Year Ended December 31, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Current taxes | $ | 806 | $ | 831 | $ | 688 | ||||||
| Deferred tax expense (income) | 1,976 | (9,475 | ) | 4,922 | ||||||||
| $ | 2,782 | $ | (8,644 | ) | $ | 5,610 | ||||||
| Domestic | $ | 1,458 | $ | (6,576 | ) | $ | 2,979 | |||||
| Foreign | 1,324 | (2,068 | ) | 2,631 | ||||||||
| $ | 2,782 | $ | (8,644 | ) | $ | 5,610 | ||||||
f. | Deferred income taxes: |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Group'sGroup’s deferred tax liabilities and assets are as follows:
| December 31, | ||||||||
| 2016 | 2017 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry-forward | $ | 41,781 | $ | 34,708 | ||||
| Reserves and allowances | 8,916 | 4,195 | ||||||
| Net deferred tax assets before valuation allowance | 50,697 | 38,903 | ||||||
| Less - Valuation allowance | (39,090 | ) | (32,217 | ) | ||||
| Deferred tax asset | $ | 11,607 | $ | 6,686 | ||||
| Deferred tax liability | $ | (473 | ) | $ | (389 | ) | ||
| Deferred tax asset | ||||||||
| Domestic: | 7,849 | 5,013 | ||||||
| Foreign: | 3,758 | 1,673 | ||||||
| $ | 11,607 | $ | 6,686 | |||||
| Deferred tax liability | ||||||||
| Foreign: | $ | (473 | ) | $ | (389 | ) | ||
| | | | | | |
|
| December 31, | ||||
|
| 2021 |
| 2020 | ||
Deferred tax assets: | | | | | | |
Net operating loss carryforward | | $ | 27,859 | | $ | 26,506 |
Marketable Securities | | | 207 | | | — |
Reserves and allowances | |
| 6,861 | |
| 10,861 |
| | | | | | |
Net deferred tax assets before valuation allowance | |
| 34,927 | |
| 37,367 |
Less - valuation allowance | |
| (26,022) | |
| (25,286) |
| | | | | | |
Deferred tax asset | | $ | 8,905 | | $ | 12,081 |
| | | | | | |
Deferred tax liability | | $ | (612) | | $ | (206) |
| | | | | | |
Deferred tax asset: | |
| | |
| |
Domestic | |
| 4,470 | |
| 6,643 |
Foreign | |
| 4,435 | |
| 5,438 |
| | | | | | |
| | $ | 8,905 | | $ | 12,081 |
| | | | | | |
Deferred tax liability: | |
|
| |
|
|
Domestic | | $ | (612) | | $ | (206) |
F-40
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- TAXES ON INCOME (Cont.)
g. | Reconciliation of the theoretical tax expenses: |
A reconciliation between the theoretical tax expense (benefit), assuming all income is taxed at the Israeli statutory corporate tax rate applicable to the income of the Company, and the actual tax expense (benefit) as reported in the statement of operations is as follows:
| | | | | | | | | | |
|
| Year Ended December 31, |
| |||||||
|
| 2021 |
| 2020 |
| 2019 |
| |||
Income (loss) before taxes, as reported in the consolidated statements of operations | | $ | 39,647 | | $ | 36,647 | | $ | (11,315) | |
| | | | | | | | | | |
Israeli statutory corporate tax rate | |
| 23.0 | % |
| 23.0 | % |
| 23.0 | % |
| | | | | | | | | | |
Theoretical tax expense (benefit) on the above amount at the Israeli statutory corporate tax rate | | $ | 9,118 | | $ | 8,429 | | $ | (2,602) | |
PTE | | | (3,555) | | | (3,424) | | | 0 | |
Changes in tax reserve for uncertain tax positions | | | 175 | | | 0 | | | 0 | |
Adjustments for previous years’ taxes | | | 88 | | | 0 | | | 0 | |
Income tax at rate other than the Israeli statutory corporate tax rate | |
| 603 | |
| 411 | |
| 78 | |
Non-deductible expenses, including share-based compensation expenses | |
| (137) | |
| 405 | |
| 693 | |
Losses for which valuation allowance was utilized | |
| 731 | |
| (2,500) | |
| (12,076) | |
Changes in exchange rates of subsidiaries | |
| (629) | |
| (1,324) | |
| (1,455) | |
Impact of tax rate change | |
| 0 | |
| 6,931 | |
| 0 | |
Other | |
| (498) | |
| 471 | |
| 70 | |
| | | | | | | | | | |
Actual tax expense (benefit) | | $ | 5,896 | | $ | 9,399 | | $ | (15,292) | |
| Year Ended December 31, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Income before taxes, as reported in the consolidated statements of operations | $ | 3,148 | $ | 7,594 | $ | 9,640 | ||||||
| Israeli statutory corporate tax rate | 26.5% | 25.0% | 24.0% | |||||||||
| Theoretical tax expense on the above amount at the Israeli statutory corporate tax rate | $ | 834 | $ | 1,898 | $ | 2,314 | ||||||
| Income tax at rate other than the Israeli statutory corporate tax rate | 361 | (749 | ) | 429 | ||||||||
| Non-deductible expenses, including share-based compensation expenses | 1,338 | 744 | 629 | |||||||||
| Losses for which valuation allowance was provided (utilized) | 209 | (11,373 | ) | 975 | ||||||||
| Impact of rate change | - | 679 | 943 | |||||||||
| Other | 40 | 157 | 320 | |||||||||
| Actual tax expense (benefit) | $ | 2,782 | $ | (8,644 | ) | $ | 5,610 | |||||
h. | Tax assessments: |
The Company's unrecognized tax benefits asstatute of December 31, 2016 and 2017 are $158.
The Company recognized interest and penaltieslimitations related to unrecognized tax benefits inreturns of the Company for all tax expenses in the amountyears up to and including 2016 has lapsed.
F-41
The Company has received a final tax assessment through the tax year 2015.
The Company’s U.S. subsidiary is currently undergoing an income tax examination by the Internal Revenue Service for the 2015 tax year.
Contents
AUDIOCODES LTD.
| Year Ended December 31, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Numerator: | ||||||||||||
| Net income | $ | 366 | $ | 16,238 | $ | 4,030 | ||||||
| Denominator: | ||||||||||||
| Denominator for basic earnings per share - weighted average number of ordinary shares, net of treasury stock | 40,178,292 | 35,173,562 | 31,103,703 | |||||||||
| Effect of dilutive securities: | ||||||||||||
| Employee stock options, warrants and RSUs | 386,653 | 605,292 | 1,064,659 | |||||||||
| Denominator for diluted earnings per share - adjusted weighted average number of shares | 40,564,945 | 35,778,854 | 32,168,362 | |||||||||
| Year Ended December 31, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Financial expenses: | ||||||||||||
| Loss related to non-hedging derivative instruments | $ | (230 | ) | $ | (90 | ) | $ | (9 | ) | |||
| Interest | (278 | ) | (262 | ) | (294 | ) | ||||||
| Amortization of marketable securities premiums and accretion of discounts, net | (1,094 | ) | (853 | ) | (570 | ) | ||||||
| Exchange rate differences | - | (519 | ) | (73 | ) | |||||||
| Other | (286 | ) | (283 | ) | (273 | ) | ||||||
| (1,888 | ) | (2,007 | ) | (1,219 | ) | |||||||
| Financial income: | ||||||||||||
| Interest and other | 2,302 | 1,847 | 1,209 | |||||||||
| Exchange rate differences | 28 | - | - | |||||||||
| 2,330 | 1,847 | 1,209 | ||||||||||
| $ | 442 | $ | (160 | ) | $ | (10 | ) | |||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- FINANCIAL INCOME (EXPENSES), NET
| | | | | | | | | |
|
| Year Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Financial expenses: | | | | | | | | | |
Interest | | $ | (621) | | $ | (657) | | $ | (198) |
Loss related to non-hedging derivative instruments | | | (12) | | | 0 | | | 0 |
Amortization of marketable securities premiums and accretion of discounts, net | |
| (1,387) | |
| (172) | |
| (80) |
Exchange rate differences | |
| (293) | |
| (1,975) | |
| (2,171) |
Other | |
| (252) | |
| (171) | |
| (322) |
| | | | | | | | | |
| |
| (2,565) | |
| (2,975) | |
| (2,771) |
Financial income: | |
| | |
| | |
| |
Gain related to non-hedging derivative instruments | |
| 0 | |
| 17 | |
| 0 |
Interest and other | |
| 2,688 | |
| 1,255 | |
| 1,010 |
| | | | | | | | | |
| |
| 2,688 | |
| 1,272 | |
| 1,010 |
| | | | | | | | | |
Financial income (expenses), net | | $ | 123 | | $ | (1,703) | | $ | (1,761) |
AUDIOCODES LTD.
NOTE 16:- EARNINGS PER SHARE
| | | | | | | | | |
|
| Year Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Numerator: | | | | | | | | | |
Net income | | $ | 33,751 | | $ | 27,248 | | $ | 3,977 |
| | | | | | | | | |
Denominator: | | | | | | | | | |
Denominator for basic earnings per share - weighted average number of ordinary shares, net of treasury stock | |
| 32,703,478 | |
| 31,440,093 | |
| 29,251,888 |
Effect of dilutive securities: | |
| | |
| | |
| |
Employee stock options, warrants and RSUs | |
| 1,142,081 | |
| 1,475,590 | |
| 1,548,016 |
| | | | | | | | | |
Denominator for diluted earnings per share - adjusted weighted average number of shares | |
| 33,845,559 | |
| 32,915,683 | |
| 30,799,904 |
NOTE 17:- GEOGRAPHIC INFORMATION Summary information about geographic areas: |
The Group manages its business on a basis of one1 reportable segment (see Note 1 for a brief description of the Group'sGroup’s business). The data is presented in accordance with ASC 280, "Segment Reporting"“Segment Reporting”. Revenues in the table below are attributed to geographical areasareas. based on the location of the end customers.
F-42
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 17:- GEOGRAPHIC INFORMATION (Cont.)
The following presents total revenues for the years ended December 31, 2015, 20162021, 2020 and 20172019 and long-lived assets as of December 31, 2015, 20162021,2020 and 2017.2019.
| 2015 | 2016 | 2017 | ||||||||||||||||||||||||||||||||||||||||
| Total | Long- lived | Total | Long- lived | Total | Long- lived | |||||||||||||||||||||||||||||||||||||
| revenues | assets | revenues | assets | revenues | assets | |||||||||||||||||||||||||||||||||||||
| Israel | $ | 6,414 | $ | 3,836 | $ | 6,061 | $ | 3,625 | $ | 2,221 | $ | 3,569 | ||||||||||||||||||||||||||||||
| Americas, principally the U.S. | 72,079 | 96 | 74,161 | 95 | 81,051 | 96 | ||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
|
| Year Ended and as of December 31, | ||||||||||||||||||||||||||||||||||||||||
| | 2021 |
| 2020 |
| 2019 | ||||||||||||||||||||||||||||||||||||
| | | | | Long- | | | | | Long- | | | | | Long- | |||||||||||||||||||||||||||
| | Total | | lived | | Total | | lived | | Total | | lived | ||||||||||||||||||||||||||||||
|
| revenues |
| assets |
| revenues |
| assets |
| revenues |
| assets | ||||||||||||||||||||||||||||||
Americas, principally the United States | | $ | 115,806 | | $ | 977 | | $ | 103,190 | | $ | 4,310 | | $ | 97,453 | | $ | 4,740 | ||||||||||||||||||||||||
| Europe | 38,873 | 79 | 39,134 | 68 | 49,229 | 106 | |
| 88,746 | |
| 662 | |
| 75,490 | |
| 403 | |
| 72,956 | |
| 424 | ||||||||||||||||||
| Far East | 22,393 | 79 | 26,215 | 79 | 24,238 | 64 | |
| 38,988 | |
| 706 | |
| 36,083 | |
| 768 | |
| 27,233 | |
| 480 | ||||||||||||||||||
| $ | 139,759 | $ | 4,090 | $ | 145,571 | $ | 3,867 | $ | 156,739 | $ | 3,835 | |||||||||||||||||||||||||||||||
Israel | |
| 5,380 | |
| 20,876 | |
| 6,011 | |
| 25,111 | |
| 2,645 | |
| 29,337 | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | $ | 248,920 | | $ | 23,221 | | $ | 220,774 | | $ | 30,592 | | $ | 200,287 | | $ | 34,981 | ||||||||||||||||||||||||
TotalThe Group has derived approximately 42% of its revenues for the year ended December 31, 2021 from external customers divided onsales in the basis of the Company's product lines are as follows:United States.
| Year Ended December 31, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Technology | $ | 15,965 | $ | 13,649 | $ | 13,603 | ||||||
| Networking | 123,794 | 131,922 | 143,136 | |||||||||
| $ | 139,759 | $ | 145,571 | $ | 156,739 | |||||||
NOTE 18:- DERIVATIVE INSTRUMENTS
The Group enters into hedgehedging transactions with a major financial institution, using derivative instruments, primarily forward contracts and options to purchase and sell foreign currencies, in order to reduce the net currency exposure associated with anticipated expenses (primarily salaries and rent expenses) in currencies other than the dollar. The Group currently hedges such future exposures for a maximum period of one year. However, the Group may choose not to hedge certain foreign currency exchange exposures for a variety of reasons, including but not limited to immateriality, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange rates.
AUDIOCODES LTD.
TheAs of December 31, 2021 and 2020 the Group records all derivatives in the consolidated balance sheet at fair value. The effective portions ofhad a net deferred gain associated with cash flow hedges areof $719 and $1,319, respectively, recorded in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portions of cash flow hedges are adjusted to fair value through earnings in "financial income (expense), net". As of December 31, 2016, the Group had accumulated unrealized loss of $142 associated with cash flow hedges that was recorded in other comprehensive income (loss). As of December 31, 2017, the Group did not have accumulated unrealized loss associated with cash flow hedges.
The Group entered into forward and options contracts that did not meet the requirement for hedge accounting. The Group measured the fair value of the contracts in accordance with ASC 820, at Level 2. The net losses recognized in "financial expenses (income), net" during the years ended December 31, 2015, 2016 and 2017 were $230, $90 and $9, respectively.
As of December 31, 20162021 and 2020, the Group had outstanding forward and options collar (cylinder) contracts in the amount of $27,000 which were designated as payroll$44,000 and rent hedging contracts. As of December 31, 2017, the Group did not have outstanding forward and options collar (cylinder) contracts$10,500, respectively, which were designated as payroll and rent hedging contracts. In addition, as of December 31, 20172021 and 2020, the Group had $2,500 of$3,500 and $3,500, respectively, outstanding forward contracts which were not designated as hedging contracts. As of December 31, 2016, the Group had no outstanding forward contracts which wereare not designated as hedging contracts.
F-43
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 18:- DERIVATIVE INSTRUMENTS (Cont.)
The fair value of the Group'sGroup’s outstanding derivative instruments and the effect of derivative instruments in cash flow hedging relationship on other comprehensive income for the years ended December 31, 20162021 and 2017December 31, 2020 are summarized below:
| | | | | | | | | ||||||||||
| Foreign exchange forward | December 31, |
|
|
| December 31, | |||||||||||||
| and options contracts | Balance sheet | 2016 | 2017 | | Balance sheet |
| 2021 |
| 2020 | |||||||||
| | | | | | | | | ||||||||||
| Fair value of foreign exchange forward and options collar (cylinder) contracts | "Other payables and accrued expenses" | $ | (142 | ) | $ | - | | “Other receivables and prepaid expenses” | | $ | 812 | | $ | 1,489 | ||||
| Gains (losses) recognized in other comprehensive income (loss) (effective portion) | "Other comprehensive income (loss)" | $ | (415 | ) | $ | 142 | ||||||||||||
| | | | | | | | | ||||||||||
Gains recognized in other comprehensive income (effective portion) | | “Other comprehensive income (loss)” | | $ | 719 | | $ | 1,319 | ||||||||||
The effect of derivative instruments in cash flow hedging relationship on income for the years ended December 31, 20162021 and 20172020 is summarized below:
| | | | | | | | | ||||||||||
|
| |
| Year Ended | ||||||||||||||
| Foreign exchange forward | Comprehensive | Year Ended December 31, | | Comprehensive | | December 31, | ||||||||||||
| and options contracts | Income (loss) | 2016 | 2017 |
| Income (loss) |
| 2021 |
| 2020 | |||||||||
| Comprehensive income from derivatives before reclassifications | "Other comprehensive income (loss)" | $ | 608 | $ | 1,739 | |||||||||||||
| Income reclassified from accumulated other comprehensive income (effective portion) | "Operating expenses" | $ | 1,023 | $ | 1,597 | |||||||||||||
Comprehensive income (loss) from derivatives before reclassifications |
| “Other comprehensive income (loss)” | | $ | 1,538 | | $ | 3,445 | ||||||||||
| | | | | | | | | ||||||||||
Loss reclassified from accumulated other comprehensive income (loss) (effective portion) |
| “Operating expenses (income)” | | $ | (2,138) | | $ | (2,126) | ||||||||||
NOTE 19:- - - - - - - - - - -SUBSEQUENT EVENT
1.On January 31, 2022, the Company declared a cash dividend of $0.18 per share. The dividend, in the aggregate amount of approximately $5.8 million, was paid on March 1, 2022 to all of the Company’s shareholders of record on February 15, 2022.
2.Subsequent to December 31, 2021, the Company repurchased additional 720,124 of its ordinary shares for an aggregate consideration of $20,869.
F-44