Selling and marketing expenses
Selling and marketing expenses consist primarily of salaries and other employee benefits of our sales and marketing personnel, global marketing expenses and sales commissions. The majority of our selling and marketing expenses are generated by our VAYA Pharma segment, which maintains a dedicated sales and marketing staff in the United States consisting of medical representatives. As part of our growth strategy, we intend to increase our dedicated U.S. VAYA Pharma sales and marketing staff and therefore expect selling and marketing expenses to increase in absolute terms and as a percentage of our consolidated net revenues.
General and administrative expenses
General and administrative expenses consist primarily of salaries and other employee benefits for our managerial and administrative personnel, together with associated overhead costs. Other significant general and administrative costs include professional fees for accounting and legal services. If our sales grow, we expect our general and administrative expenses to increase in absolute terms, but to decrease as a percentage of our consolidated net revenues.
Financial income (expenses), net
Financial income (expenses) consist of interest income accrued on our bank deposits and marketable securities, changes in the fair value of foreign currency forward transactions which are not qualified as hedge transactions, foreign currency gains and losses and interest paid in respect of our long-term liabilities under our September 2009 bank financing agreement which was repaid in full in January 2014. For more information regarding these facilities, please see “Item 5.B. Operating and Financial Review and Prospects — Liquidity and Capital Resources”
Currency exchange rates
As our functional currency for all of our operations other than AL is the dollar, any movements in the currencies of other countries in which we operate can have an impact on our operating results. While the majority of our sales are in dollars and most of our expenses are in dollars, we do have exposure to the Euro and NIS. In addition, the functional currency of AL, is the Swedish Krona, and therefore the results of operations of our Nutrition segment, as reported in Note 5 to our consolidated financial statements included elsewhere in this annual report, are also influenced by fluctuations of the dollar against the Swedish Krona. For a discussion of our efforts to reduce our exposure to exchange rate fluctuations, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”
Taxes on income
The standard corporate tax rate in Israel is 26.5%; for the 2012 and 2013 tax years it was 25%.
As discussed in greater detail below under “Item 10.E. Additional Information — Taxation — Israeli tax considerations and government programs,” we have received various tax benefits under the Investment Law. Under the Investment Law, our effective tax rate to be paid with respect to our Israeli taxable income under these benefits programs is 0%. The majority of the benefits we receive under the Investment Law are pursuant to programs that are scheduled to expire in 2022.
Under the Investment Law and other Israeli legislation, we are entitled to certain additional tax benefits, including accelerated depreciation and amortization rates for tax purposes on certain assets, deduction of public offering expenses in three equal annual installments and amortization of other intangible property rights for tax purposes.
Our non-Israeli subsidiaries are taxed according to the tax laws in their respective jurisdictions of organization. We estimate our effective tax rate for the coming years based on the planned future financial results of our current business in existing and new markets and the key factors affecting our tax liability. Accordingly, we estimate that our effective tax rate will be lower than 10% of our income before taxes on income for the years 2015 through 2017.
Share in profits of equity investee
Under U.S. GAAP, we are required to account for the results of operations of AL, using the equity method, meaning that we recognize our share in the net results of AL as a share in profits of equity investee. See “— Joint venture accounting” below.
Joint venture accounting
Under our joint venture arrangement with AAK, each joint venture partner is responsible for particular functions related to the production, marketing and sale of the final InFat product. The direct costs of production of each partner are factored into the division of the joint venture’s revenues, as described below.
We manufacture enzymes that we supply to AAK, which then produces the final InFat product at its dedicated facility in Sweden using those enzymes together with other raw materials that AAK is responsible for sourcing. AAK is also responsible for all labor and other costs of production, including freight and logistics, as well as for capital expenditures for increased capacity, inventory storage and management, receivables collection and product liability insurance. We are responsible for research and development, as well as business development (including penetration of new markets) and marketing activities.
Once it has produced the final product, AAK sells it to AL, which sells the product to three types of customers: (i) companies that manufacture the end product themselves; (ii) companies that outsource manufacturing of the end product; and (iii) outsourced manufacturers of the end product. The difference between revenues from sales and the overall direct production costs of the joint venture partners represents the profit of AL, which is allocated between us and AAK on a 50:50 basis. This settlement does not include our operating expenses incurred in relation to the JV nor does it include depreciation or financing costs of AAK. Therefore, we are responsible for funding our operating expenses associated with our role in the joint venture and AAK is responsible for funding its other operating costs not directly related to the production of InFat, depreciation and financing costs.
Under U.S. GAAP, we are required to account for the results of operation of AL using the equity method, meaning that we recognize our share in the net results of AL as a share of profits of an equity investee. Accordingly, the revenues we recognize from the arrangement under U.S. GAAP are the amounts we charge to AAK, or our direct costs of production plus our share of the JV profits. Revenue from sales to AAK is recognized upon the sale of the product by AL to its customers. For purposes of segment reporting under U.S. GAAP, which requires presentation on the same basis provided to and utilized by management to analyze the relevant segment’s results of operations, we account for the results of operations of AL using the proportionate consolidation method.
Under the proportionate consolidation method, we recognize our proportionate share (50%) of the gross revenues of AL and record our proportionate share (50%) of the joint venture’s costs of production in our income statement.
Since under the equity method we do not include our proportionate share of the revenues, costs of revenues and operating expenses of the JV in our results of operation, our consolidated U.S. GAAP results of operations reflect lower revenues and a higher gross profit margin than our results of operation accounted for on a proportionate consolidation basis, as shown for purposes of segment reporting.
Comparison of year-to-year results of operations
The following table sets forth certain consolidated statement of income data as a percentage of total net revenues for the years indicated. All items are included in, or derived from, our consolidated statements of operations. The year-to-year comparison of financial results is not necessarily indicative of future results.
| | | Year ended December 31, | |
| | | 2012 | | | 2013 | | | 2014 | |
| Net revenues | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Cost of revenues | | | 52.3 | | | | 49.4 | | | | 38.9 | |
| Gross profit | | | 47.7 | | | | 50.6 | | | | 61.1 | |
| Operating expenses | | | | | | | | | | | | |
| Research and development, net | | | 12.2 | | | | 9.2 | | | | 12.7 | |
| Selling and marketing | | | 13.7 | | | | 10.4 | | | | 17.1 | |
| General and administrative | | | 7.8 | | | | 13.0 | | | | 15.9 | |
| Total operating expenses | | | 33.7 | | | | 32.5 | | | | 45.7 | |
| Operating income | | | 14.0 | | | | 18.1 | | | | 15.4 | |
| Financial income (expense), net | | | (1.4 | ) | | | (0.8 | ) | | | 1.1 | |
| Income before taxes on income | | | 12.6 | | | | 17.3 | | | | 16.5 | |
| Taxes on income | | | (0.5 | ) | | | (0.5 | ) | | | (0.1 | ) |
| Share in profits of equity investee | | | 0.5 | | | | 0.8 | | | | 0.1 | |
| Net income | | | 12.6 | % | | | 17.5 | % | | | 16.6 | % |
Year ended December 31, 2014 compared with year ended December 31, 2013
Net revenues
Total net revenues decreased by $17.9 million, or 27.5%, to $47.1 million in the year ended December 31, 2014 from $65.0 million in the year ended December 31, 2013. The decrease was due to a decrease of $19.1 million in sales of our Nutrition segment partially offset by an increase of $1.2 million in sales of our VAYA Pharma segment.
Nutrition segment
Based on the equity method of accounting for our joint venture, net revenues of our Nutrition segment in the year ended December 31, 2014 were $41.5 million, representing a decrease of 31.5% from net revenues of $60.5 million in the year ended December 31, 2013. Based on the proportionate consolidation method, net revenues of our Nutrition segment in the year ended December 31, 2014 were $55.8 million, representing a decrease of 26.7% from net revenues of $76.2 million in the year ended December 31, 2013. The change was due to: (i) a decrease of $15.8 million in the volume of sales of krill products, representing a decrease of 45.2% in the sales of these products from the year ended December 31, 2013, driven primarily by decreased sales in the United States and in Australia. Approximately $8.4 million of the decrease in sales of krill products was from one customer in the United States that had not placed orders with us since the second quarter of-2014. In addition, approximately $5.7 million of the decrease in sales of krill products was from our distributor in Australia, as a result of the decreased demand for krill and Omega-3 products in the Australian market, (ii) a decrease of $4.6 million in InFat sales (based on the proportionate consolidation method) by AL, resulting primarily from the Chinese infant formula market undergoing a shift in how infant formula is sold. Historically, local brands, where a majority of AL customers are positioned, were sold primarily through supermarkets and health stores. Increasingly, sales are migrating to an e-commerce platform, thereby inviting increased competition and affecting the market share of AL customers. In addition, new Chinese regulation which became effective in 2014 required both domestic and foreign infant formula companies, including some of AL’s customers, to make certain changes to their supply and production chain. This had a short term effect on the sales of AL’s customers and correspondingly on InFat which is an ingredient in some of AL’s customer’s infant formulas.
VAYA Pharma segment
Net revenues for our VAYA Pharma segment in the year ended December 31, 2014 were $5.6 million, representing an increase of 26.9% over net revenues of $4.4 million in the year ended December 31, 2013. The increase in net revenues reflected increased volume of sales as we continued penetrating the U.S. market.
Cost of revenues and gross profit
The following table presents net revenues, cost of revenues and gross profit in dollars and as a percentage of net revenues for the years indicated, and the percentage change in such amounts year-over-year:
| | | Year ended December 31, | | | Change in | | | As a percentage of net revenues for the year ended December 31, | |
| | | 2013 | | | 2014 | | | dollars | | | percentage | | | 2013 | | | 2014 | |
| | | (in thousands) | |
| Net revenues | | $ | 64,975 | | | | 47,103 | | | $ | (17,872 | ) | | | (27.5 | )% | | | | | | | | |
| Cost of revenues | | | 32,110 | | | | 18,316 | | | | (13,794 | ) | | | (43.0 | )% | | | 49.4 | % | | | 38.9 | % |
| Gross profit | | $ | 32,865 | | | | 28,787 | | | $ | (4,078 | ) | | | (12.4 | )%) | | | 50.6 | % | | | 61.1 | % |
Gross profit decreased by $4.1 million, or 12.4%, to $28.8 million in the year ended December 31, 2014, from $32.9 million in the year ended December 31, 2013. The decrease in absolute gross profit relates primarily to our decreased volume of sales in the year ended December 31, 2014, compared to the year ended December 31, 2013.
Gross profit margin increased to 61.1% for the year ended December 31, 2014 from 50.6% for the year ended December 31, 2013. Approximately 680 basis points of the increase in gross profit margin were due to the operation of our new extraction facility and other improvements in production efficiency. Approximately 370 basis points of the increase in gross profit margin resulted from changes in the mix of products sold, as net revenues in the year ended December 31, 2014 reflected an increase in the volume of sales of InFat (as a percentage of consolidated sales) which when accounted for by the equity method carry a higher gross margin, and an increase in sales of VAYA Pharma products, which carry a higher gross margin than some of our other products.
Nutrition segment
Based on the equity method of accounting for our joint venture, gross profit of our Nutrition segment in the year ended December 31, 2014 decreased by $5.1 million, to $24.6 million, from $29.7 million in the year ended December 31, 2013, and gross profit margin increased to 59.4% in the year ended December 31, 2014 from 49.1% in the year ended December 31, 2013. Based on the proportionate consolidation method, gross profit of our Nutrition segment in the year ended December 31, 2014 decreased by $5.2 million to $25.2 million from $30.4 million in the year ended December 31, 2013, and gross profit margin increased to 45.2% in the year ended December 31, 2014 from 39.9% in the year ended December 31, 2013. The decrease in absolute gross profit was due to lower volume of sales of our Nutrition products. The increase in gross profit margin was due primarily to improvements in production efficiency as well as to a higher volume of sales of InFat in the year ended December 31, 2014 in relation to other Nutrition products. InFat, which when accounted for by the equity method, carries a higher margin than other Nutrition products.
VAYA Pharma segment
Gross profit for our VAYA Pharma segment in the year ended December 31, 2014 increased by $1.0 million to $4.2 million from $3.2 million in the year ended December 31, 2013, due to increased volume of sales. Gross profit margin increased to 74.6% in the year ended December 31, 2014 from 71.8% in the year ended December 31, 2013, primarily due to increased volume of sales in the United States, where our gross margins on sales of VAYA Pharma products are higher than in other markets.
Operating expenses
The following table presents the types of operating expenses in dollars and as a percentage of net revenues for the years indicated, and the percentage change in such amounts year-over-year:
| | | Year ended December 31, 2013 | | | Year-over-year change | | | Year ended December 31, 2014 | |
| | | ($ in thousands) | | | Percentage of total net revenues | | | ($ in thousands) | | | (Percentage) | | | ($ in thousands) | | | Percentage of total net revenues | |
| Research and development, net | | $ | 5,947 | | | | 9.2 | % | | $ | 39 | | | | 0.7 | % | | $ | 5,986 | | | | 12.7 | % |
| Selling and marketing | | | 6,725 | | | | 10.4 | | | | 1,309 | | | | 19.5 | | | | 8,034 | | | | 17.1 | |
| General and administrative | | | 8,434 | | | | 13.0 | | | | (959 | ) | | | (11.4 | ) | | | 7,475 | | | | 15.9 | |
| Total operating expenses | | $ | 21,106 | | | | 32.5 | % | | $ | 389 | | | | 1.8 | % | | $ | 21,495 | | | | 45.7 | % |
Research and development expenses slightly increased by $39,000, to $6.0 million in the year ended December 31, 2014, from $5.9 million in the year ended December 31, 2013. As a percentage of net revenues, our research and development expenses increased to 12.7% in the year ended December 31, 2014 from 9.2% in the year ended December 31, 2013. The increase in absolute amounts reflected an increase of $0.3 million in expenses related to clinical trials partially offset by a decrease of $0.2 million in laboratory expenses. The increase in research and development expenses as a percentage of net revenues reflected the overall decrease in net revenues. Grants from the OCS decreased by $52,000, or 26.4%, to $0.1 million in the year ended December 31, 2014, from $0.2 million in the year ended December 31, 2013.
Selling and marketing expenses increased by $1.3 million, or 19.5%, to $8.0 million in the year ended December 31, 2014, from $6.7 million in the year ended December 31, 2013. As a percentage of net revenues our selling and marketing expenses increased to 17.1% in the year ended December 31, 2014 from 10.4% in the year ended December 31, 2013. The increase in selling and marketing expenses both as an absolute amount and as a percentage of net revenues reflected primarily an increase of $0.6 million in salaries, due primarily to the addition of sales personnel for the VAYA Pharma segment in the United States and an increase of $0.2 million in marketing activities (primarily marketing activities related to the marketing of VAYA Pharma products) and also due to an increase in license amortization expenses of $0.4 million related to the settlement and license agreement signed with Neptune Technologies & Bioresources Inc. and Acasti Pharma Inc. Sales and marketing expenses as a percentage of net revenues was also impacted by the overall decrease in net revenues.
General and administrative expenses decreased by $1.0 million, or 11.4%, to $7.5 million in the year ended December 31, 2014, from $8.4 million in the year ended December 31, 2013. As a percentage of net revenues, our general and administrative expenses increased to 15.9% in the year ended December 31, 2014 from 13.0% in the year ended December 31, 2013. The decrease in general and administrative expenses as an absolute amount was due to a decrease in litigation expenses of $1.0 million (mainly related to a decrease in Neptune patent litigation offset by an increase in litigation costs related to the arbitration with AAK and the class action. The decrease was also due to a decrease of $1.0 million in salaries (mainly related to the bonuses granted to certain of our employees in connection with our initial public offering, or IPO, in October 2013 that were recorded in the fourth quarter of 2013), as well as a decrease in share-based compensation expenses of $0.4 million (primarily as a result of the acceleration of vesting of options in the fourth quarter of 2013 related to the IPO). This was partially offset by expenses of $0.4 million related to the secondary offering we conducted in February 2014, other expenses of $0.7 million relating to being a public company and an increase of $0.2 million in allowance for doubtful accounts. The increase in general and administrative expenses as a percentage of net revenues reflected the overall decrease in net revenues, partially offset by the decrease in the absolute amount of general and administrative expenses. We anticipate that general and administrative expenses may increase in 2015 as a result of legal costs relating to the arbitration with AAK.
Financial income (expenses), net
The following table presents our financial income (expenses), net, in dollars and as a percentage of net revenues for the years indicated, and the percentage change in such amounts year-over-year:
| | | Year ended December 31, 2013 | | | Year-over-year change | | | Year ended December 31, 2014 | |
| | | (in thousands) | |
| Financial income (expenses), net | | $ | (531 | ) | | $ | 1,030 | | | $ | 499 | |
| Percentage of total net revenues | | | (0.8 | )% | | | | | | | 1.1 | % |
For the year ended December 31, 2014, financial income was $0.5 million, compared to financial expenses of $0.5 million for the year ended December 31, 2013, primarily due to decrease in financial expenses of $0.5 million related to the long-term loans that were repaid in January 2014, interest received and accrued on our bank deposits and marketable securities of $0.3 million and foreign currency exchange differences of $0.3 million, partially offset by a decrease in gain in respect of derivatives of $0.1 million.
Year ended December 31, 2013 compared with year ended December 31, 2012
Net revenues
Total net revenues increased by $27.1 million, or 71.6%, to $65.0 million in the year ended December 31, 2013 from $37.9 million in the year ended December 31, 2012. The increase was due primarily to a significant increase in the volume of sales in our Nutrition segment.
Nutrition segment
Based on the equity method of accounting for our joint venture, net revenues of our Nutrition segment in the year ended December 31, 2013 were $60.5 million, representing an increase of 68.0% over net revenues of $36.0 million in the year ended December 31, 2012. Based on the proportionate consolidation method, net revenues of our Nutrition segment in the year ended December 31, 2013 were $76.2 million, representing an increase of 71.6% over net revenues of $44.4 million in the year ended December 31, 2012. The change was due to (i) an increase of $16.0 million in the volume of sales of krill products, representing an increase of 84% in the sales of this product over the year ended December 31, 2012, driven primarily by increased volume of sales in the United States reflecting increased demand for premium omega-3 products in that market; and (ii) an increase of $15.8 million in the volume of sales of InFat by AL, which we believe reflects increased market penetration due to growing awareness of the benefits of InFat, especially in the Chinese market. Approximately $9.2 million of the increase in sales of krill products was from one customer in the United States that placed initial orders with us in 2012 and significantly increased those orders in 2013.
VAYA Pharma segment
Net revenues for our VAYA Pharma segment in the year ended December 31, 2013 were $4.4 million, representing an increase of 142.6% over net revenues of $1.8 million in the year ended December 31, 2012. The increase in net revenues reflected increased volume of sales as we continued penetrating the U.S. market.
Cost of revenues and gross profit
The following table presents net revenues, cost of revenues and gross profit in dollars and as a percentage of net revenues for the years indicated, and the percentage change in such amounts year-over-year:
| | | Year ended December 31, | | | Increase in | | | As a percentage of net revenues for the year ended December 31, | |
| | | 2012 | | | 2013 | | | dollars | | | percentage | | | 2012 | | | 2013 | |
| | | (in thousands) | |
| Net revenues | | $ | 37,867 | | | $ | 64,975 | | | $ | 27,108 | | | | 71.6 | % | | | | | | | | |
| Cost of revenues | | | 19,815 | | | | 32,110 | | | | 12,295 | | | | 62.0 | | | | 52.3 | % | | | 49.4 | % |
| Gross profit | | $ | 18,052 | | | $ | 32,865 | | | $ | 14,813 | | | | 82.1 | % | | | 47.7 | % | | | 50.6 | % |
Gross profit increased by $14.8 million, or 82.1%, to $32.9 million in the year ended December 31, 2013, from $18.1 million in the year ended December 31, 2012. The change in absolute gross profit reflects primarily our increased volume of sales. The increase in gross profit margin from 47.7% to 50.6% is due primarily to increased volume of sales of InFat, which carries a higher gross margin than our other products.
Nutrition segment
Based on the equity method of accounting for our joint venture, gross profit of our Nutrition segment in the year ended December 31, 2013 increased by $12.9 million, to $29.7 million, from $16.8 million in the year ended December 31, 2012, and gross profit margin increased to 49.1% in the year ended December 31, 2013 from 46.7% in the year ended December 31, 2012. Based on the proportionate consolidation method, gross profit of our Nutrition segment in the year ended December 31, 2013 increased by $13.3 million to $30.4 million from $17.1 million in the year ended December 31, 2012, and gross profit margin increased to 39.9% in the year ended December 31, 2013 from 38.5% in the year ended December 31, 2012. The increase in absolute gross profit was due to increased volume of sales of our Nutrition products. The increase in gross profit margin was due primarily to a higher volume of sales of InFat in the year ended December 31, 2013 in relation to other Nutrition products, as InFat carries a higher margin than other Nutrition products, as well as improvements in production efficiency and the leveraging of fixed production costs.
VAYA Pharma segment
Gross profit for our VAYA Pharma segment in the year ended December 31, 2013 increased by $1.9 million to $3.2 million from $1.2 million in the year ended December 31, 2012, due to increased volume of sales. Gross profit margin increased to 71.8% in the year ended December 31, 2013 from 67.9% in the year ended December 31, 2012, primarily due to increased volume of sales in the United States, where our gross margins on sales of VAYA Pharma products are higher than in other markets.
Operating expenses
The following table presents the types of operating expenses in dollars and as a percentage of net revenues for the years indicated, and the percentage change in such amounts year-over-year:
| | | Year ended December 31, 2012 | | | Year-over-year change | | | Year ended December 31, 2013 | |
| | | ($ in thousands) | | | Percentage of total net revenues | | | ($ in thousands) | | | (Percentage) | | | ($ in thousands) | | | Percentage of total net revenues | |
| Research and development, net | | $ | 4,611 | | | | 12.2 | % | | $ | 1,336 | | | | 29.0 | % | | $ | 5,947 | | | | 9.2 | % |
| Selling and marketing | | | 5,191 | | | | 13.7 | | | | 1,534 | | | | 29.6 | | | | 6,725 | | | | 10.4 | |
| General and administrative | | | 2,935 | | | | 7.8 | | | | 5,499 | | | | 187.4 | | | | 8,434 | | | | 13.0 | |
| Total operating expenses | | $ | 12,737 | | | | 33.7 | % | | $ | 8,369 | | | | 65.7 | % | | $ | 21,106 | | | | 32.5 | % |
Research and development expenses increased by $1.3 million, or 29.0%, to $5.9 million in the year ended December 31, 2013, from $4.6 million in the year ended December 31, 2012. As a percentage of net revenues, however, our research and development expenses decreased to 9.2% in the year ended December 31, 2013 from 12.2% in the year ended December 31, 2012. The increase in absolute amounts reflected an increase of $0.4 million in regulatory expenses, an increase of $0.4 million in salaries, an increase of $0.2 million in patent and trademarks expenses, an increase of $0.2 million in laboratory expenses and a decrease of $0.1 million in government participation in the form of grants from the OCS. Grants from the OCS decreased by $0.1 million, or 25.6%, to $0.2 million in the year ended December 31, 2013, from $0.3 million in the year ended December 31, 2012. The decrease in research and development expenses as a percentage of net revenues reflected the increase in net revenues in both segments.
Selling and marketing expenses increased by $1.5 million, or 29.6%, to $6.7 million in the year ended December 31, 2013, from $5.2 million in the year ended December 31, 2012. As a percentage of net revenues, however, our selling and marketing expenses decreased to 10.4% in the year ended December 31, 2013 from 13.7% in the year ended December 31, 2012. The increase in absolute amounts reflected an increase of $1.0 million in salaries, due primarily to the addition of sales personnel for the VAYA Pharma segment in the United States and an increase of $0.6 million in marketing activities in the United States (primarily marketing activities related to the marketing of VAYA Pharma products). The decrease in selling and marketing expenses as a percentage of net revenues reflected the increase in net revenues in both segments.
General and administrative expenses increased by $5.5 million, or 187.4%, to $8.4 million in the year ended December 31, 2013, from $2.9 million in the year ended December 31, 2012. As a percentage of net revenues, our general and administrative expenses increased to 13.0% in the year ended December 31, 2013 from 7.8% in the year ended December 31, 2012.
The increase in absolute amounts reflected an increase of $2.6 million incurred in connection with the Neptune patent litigation, an increase of $1.6 million in salaries ($1.0 million of which relates to the bonuses granted to certain of our employees in connection with our initial public offering), an increase of $0.8 million in share-based compensation expense, primarily related to the issuance of restricted shares to two of our directors and the acceleration of options upon our initial public offering and an increase of $0.4 million in audit and legal expenses. The increase in general and administrative expenses as a percentage of net revenues reflected the increase in absolute amount, partially offset by the increase in net revenues in both segments.
Financial expenses, net
The following table presents our financial expenses, net, in dollars and as a percentage of net revenues for the years indicated, and the percentage change in such amounts year-over-year:
| | | Year ended December 31, 2012 | | | Year-over-year change | | | Year ended December 31, 2013 | |
| | | (in thousands) | |
| Financial expenses, net | | $ | 539 | | | | (1.4 | )% | | $ | 531 | |
| Percentage of total net revenues | | | (1.4 | )% | | | | | | | (0.8 | )% |
Our financial expenses, net were $0.5 million in the year ended December 31, 2013 and the year ended December 31, 2012. As a percentage of net revenues, however, our financial expenses decreased to 0.8% in the year ended December 31, 2013 from 1.4% in the year ended December 31, 2012 due to the increase in net revenues.
Seasonality
Our revenues generally are not affected by seasonality.
Critical accounting estimates and assumptions
We have prepared our consolidated financial statements and related disclosures in conformity with U.S. GAAP. This has required us to make estimates based on our judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. See “Item 3.D. Key Information—Risk factors” for a discussion of the possible risks which may affect these estimates. Note 1 to our consolidated financial statements contained elsewhere in this annual report describes the significant accounting policies and principles that are used to prepare our consolidated financial statements.
We have identified several critical accounting estimates that required us to use assumptions about matters that were uncertain at the time of our estimates. Had we used different assumptions, the amounts we recorded could have been significantly different. Additionally, if we had used different assumptions or had different conditions existed, our financial condition or results of operations could have been materially different. The critical accounting policies that were impacted by the estimates, assumptions, and judgments used in the preparation of our consolidated financial statements are discussed below.
Revenue recognition
We recognize revenues from sales of products to customers, including distributors, when persuasive evidence of a sale arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. We recognize revenues related to AL from sales to AAK only upon sales by AL to its customers. Revenues are recorded net of reserves for returns and net of cash discounts and distribution fees.
We provide a right of return to U.S. distributors upon expiration of the medical food products sold in the VAYA Pharma segment, in compliance with applicable regulations. The majority of our product returns are the result of product dating. Accordingly, we record a reserve for estimated sales returns based on historical experience with actual returns, as well as specific factors, such as levels of inventory in the distribution channel, product dating and expiration. Returns to date have been inconsequential. Revenues from product sales are also recorded net of cash discounts and distribution fees, which can be reasonably estimated.
Share-based compensation
Under U.S. GAAP, we account for employee share-based compensation awards classified as equity awards in accordance with the provisions of ASC No. 718, “Compensation — Stock Based Compensation”, which requires us to measure the cost of options based on the fair value of the award on the grant date. We also apply ASC No. 718, “Compensation — Stock Based Compensation” and ASC No. 505-50, “Equity Based Payments to Non-Employees” with respect to options issued to consultants and other non-employees.
We selected the binomial option pricing model as the most appropriate method for determining the estimated fair value of our share-based compensation awards. The fair value of share-based compensation awards is recognized as an expense over the requisite service period, which is usually the vesting period, net of estimated forfeitures. We estimate forfeitures based on historical experience and anticipated future conditions. We recognize compensation cost for an award with service conditions that has a graded vesting schedule using the straight-line method based on the multiple-option award approach.
When options are granted as consideration for services provided by consultants and other non-employees, the grant is accounted for based on the fair value of the consideration received or the fair value of the options issued, whichever is more reliably measurable. The fair value of the options granted is measured on a final basis at the end of the service period and is recognized over the service period using the straight-line method.
Option valuations. The determination of the grant date fair value of options using an option pricing model is affected by estimates and assumptions regarding a number of complex and subjective variables. The key variables are as follows:
| | Fair Value of our Ordinary Shares. Prior to our initial public offering, due to the absence of a public market for our ordinary shares, the fair value of our ordinary shares for purposes of determining the exercise price for award grants was determined in good faith by our management and approved by our board of directors. In connection with preparing our financial statements, our management considered the fair value of our ordinary shares based on a number of objective and subjective factors consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, referred to as the AICPA Practice Aid. The fair value of our ordinary shares is now determined based on the trading price on the NASDAQ Global Select Market. |
| | Volatility. The expected share price volatility was based on the historical equity volatility of the ordinary shares of publicly traded comparable companies with a trading history as long as the contractual term. |
| | Risk-Free Interest Rate. The annual risk-free interest rate was based on the interest curve for U.S. government bonds for periods corresponding to the life term of the option on the grant date. |
| | Contractual Term. The contractual term is 10 years. This was then adjusted based on data regarding our historical post-vesting exit rates. Pre-vesting exit rates were reflected in an adjustment to the number of options recognized in expenses. |
| | Early Exercise Multiple. The early exercise multiple was based on the early exercise multiple data of publicly traded comparable companies with a trading history as long as the contractual term. |
| | Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero. |
If any of the assumptions used changes significantly, share-based compensation awards for future awards may differ materially compared with the awards granted previously.
Research and development expenses
Research and development expenses are charged to income as incurred. Participation from government departments and from research foundations for development of approved projects is recognized as a reduction of expense as the related costs are incurred. The main components of the research and development expenses are salaries and related expenses, laboratory, clinical research and regulatory related expenses.
Taxes on income
Deferred income taxes are determined by the asset and liability method based on the estimated future tax effects of differences between the financial accounting and the tax bases of assets and liabilities under the applicable tax law. Deferred tax balances are computed using the tax rates expected to be in effect at the time when these differences reverse. Valuation allowances in respect of the deferred tax assets are provided when it is more likely than not that all or a portion of the deferred income tax assets will not be realized. See Note 11g to our consolidated financial statements contained elsewhere in this annual report for additional information regarding the composition of the deferred taxes.
We assess our valuation allowance considering different indicators, including profitability of the different entities around the world and the ability to utilize the deferred tax assets in subsequent years.
Tax benefits recognized in our consolidated financial statements are those that our management deems at least more likely than not to be sustained, based on technical merits. The amount of benefits recorded for these tax benefits is measured as the largest benefit our management deems more likely than not to be sustained.
Contingencies
Certain conditions may exist as of the date of our financial statements, which may result in a loss to us but which will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities and estimated legal fees, if any, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us, or unasserted claims that may result in such proceedings, we evaluate the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
We apply the guidance in ASC Topic 450-20-25, issued by the Financial Accounting Standards Board, or FASB, when assessing losses resulting from contingencies. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability is recorded as accrued expenses in our financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material are disclosed. Loss contingencies considered to be remote are generally not disclosed unless they involve guarantees, in which case the guarantees are disclosed.
Impairment of long-lived assets
We test long-lived assets (including intangible assets) for impairment whenever events or circumstances present an indication of impairment. If the sum of expected future cash flows (undiscounted and without interest charges) of the assets is less than the carrying amount of such assets, an impairment loss would be recognized. The assets would be written down to their estimated fair values, calculated based on the present value of expected future cash flows (discounted cash flows), or some other fair value measure. As of December 31, 2014, 2013 and 2012, we did not recognize an impairment loss for its long-lived assets.
New and Revised Financial Accounting Standards
The JOBS Act permits emerging growth companies such as us to delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this and, therefore, we are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Recently Issued Accounting Pronouncements
See note 1 to our consolidated financial statements.
| B. Liquidity and Capital Resources |
Liquidity
A summary of our statement of cash flows for the years ended December 31, 2012, 2013 and 2014 is as follows:
| | | Year ended December 31, | |
| | | 2012 | | | 2013 | | | 2014 | |
| | | (in thousands) | |
| Net income | | $ | 4,782 | | | $ | 11,395 | | | $ | 7,838 | |
| Depreciation and amortization | | | 1,422 | | | | 1,551 | | | | 2,308 | |
| Change in inventories | | | (3,100 | ) | | | (2,584 | ) | | | (9,629 | ) |
| Change in accounts receivable | | | (3,806 | ) | | | (6,965 | ) | | | 5,304 | |
| Change in accounts payable and accruals | | | 3,590 | | | | 3,052 | | | | 3,868 | |
| Net cash provided by operating activities | | | 3,023 | | | | 7,390 | | | | 1,965 | |
| Net cash used in investing activities | | | (1,278 | ) | | | (5,025 | ) | | | (63,558 | ) |
| Net cash provided by (used in) financing activities | | | (3,803 | ) | | | 69,336 | | | | (2,522 | ) |
| Net increase (decrease) in cash and cash equivalents | | | (2,058 | ) | | | 71,701 | | | | (64,115 | ) |
| Balance of cash and cash equivalents at end of year | | | 2,729 | | | | 74,430 | | | | 10,315 | |
Cash flows provided by operating activities
Cash flows from operating activities consist primarily of net income adjusted for certain non-cash items. Adjustments to net income for non-cash items include depreciation and amortization and share-based compensation expense. In addition, operating cash flows are impacted by changes in operating assets and liabilities, which include inventories, accounts receivable and other assets and accounts payable.
We generated $2.0 million in cash from operating activities in the year ended December 31, 2014, while in the year ended December 31, 2013 we generated $7.4 million from operating activities. Cash from operating activities in the year ended December 31, 2014 was due primarily to our achieving net income of $7.8 million and to a decrease of $5.3 million in accounts receivable due to the decreased sales, as well as $2.3 million in depreciation and amortization and $0.9 million in share-based compensation expense. This was partially offset by an increase of $9.6 million in inventories reflecting our strategy of building inventories from certain single source suppliers to partially manage supply risk as well as a result of the decreased sales, share of profits of equity investee of $0.5 million and a decrease of $3.9 million in accounts payable due to the decreased activity in the fourth quarter of 2014 compared to the activity in the fourth quarter of 2013. Cash from operating activities in the year ended December 31, 2013 was due primarily to our achieving net income of $11.4 million and to an increase of $3.1 million in accounts payable reflecting primarily increased purchases of raw materials due to increased activity, as well as $1.6 million in depreciation and amortization and $1.1 million in share-based compensation expense. This was partially offset by an increase of $2.6 million in inventories reflecting our increased activity as well as our strategy of building inventories from certain single source suppliers to partially manage supply risk and an increase of $7.0 million in accounts receivable due to increased sales.
The $3.0 million in cash provided by operating activities in the year ended December 31, 2012 was due primarily to our achieving net income of $4.8 million and to an increase of $3.6 million in accounts payable reflecting primarily increased purchases of raw materials due to increased activity, as well as $1.4 million in depreciation and amortization. This was partially offset by an increase of $3.1 million in inventories reflecting our increased activity as well as our strategy of building inventories from certain single source suppliers to partially manage supply risk and an increase of $3.8 million in accounts receivable due to increased sales.
Working capital
Our working capital, which we define as accounts receivable plus inventory less accounts payable, increased from $20.7 million at December 31, 2013 to $29.3 million at December 31, 2014 due to an increase in inventory of $9.6 million and a decrease in accounts payable of $4.0 million, partially offset by a decrease in accounts receivables of $5.0 million. Working capital as a percentage of net revenues increased from 31.8% at December 31, 2013 to 62.2% at December 31, 2014, mainly reflecting increases in our inventories conversion period as a result of our strategy of building inventories from certain single source suppliers to partially manage supply risk as well as a result of the decreased sales. Working capital increased from $14.1 million at December 31, 2012 to $20.7 million at December 31, 2013. However, working capital as a percentage of net revenues decreased from 37.2% at December 31, 2012 to 31.8% at December 31, 2013, reflecting a decrease in days of sales outstanding and in our inventories conversion period.
Cash flows used in investing activities
In the year ended December 31, 2014, we invested the substantial portion of the cash proceeds of the offerings of our securities into bank deposits and marketable securities. Otherwise, the majority of our investment activities have historically been related to the construction and expansion of our manufacturing facilities and the purchase of manufacturing equipment and components for our production lines. Cash flows used in investing activities in the year ended December 31, 2014 amounted to $63.6 which reflects primarily our investment of $62.5 million, mostly comprised of proceeds from our IPO, in bank deposits and marketable securities, purchase of property, plant and equipment and intangible assets of $6.4 million (mainly related to the construction and expansion of our manufacturing facility and the one-time settlement payment to Neptune), partially offset by $5.3 million in proceeds from the sale of marketable securities. Cash flows used in investing activities in the year ended December 31, 2013 amounted to $5.0 million that was mainly related to our manufacturing facility expansion project, which has enabled us to extract krill oil from krill meal ourselves using technologically advanced equipment and proprietary processes. Cash flows used in investing activities in the year ended December 31, 2012 amounted to $1.2 million and related primarily to normal capital expenditures.
We expect cash used in investing activities to increase significantly when and if we will commence the construction on our new manufacturing facility. While we anticipate that construction of this new facility will require significant capital expenditures, we have not yet started construction of the facility or even entered into contracts relating to the construction and therefore it would not be completed, if we do undertake it, before 2016. The timing and amount of the capital expenditures associated with this project, if we do undertake it, is uncertain. In addition, cash used in investing activities would increase to the extent that we acquire complementary businesses or assets.
Cash flows provided by (used in) financing activities
Cash used in financing activities in the year ended December 31, 2014 amounted to $2.5 million, which reflects primarily a repayment in full of $4.2 million of our long-term loan, partially offset by proceeds from exercises of options by employees of $1.8 million.
We generated $69.3 million in cash from financing activities in the year ended December 31, 2013, which reflects primarily $62.8 million of net proceeds from our IPO and $8.2 million received in an investment in our preferred shares and warrants, partially offset by a repayment of $1.0 million in short-term loans under our working capital credit facility and repayment of $0.7 million under our long-term loan.
Cash used in financing activities in the year ended December 31, 2012 amounted to $3.8 million, which reflects primarily a repayment of $4.6 million in short-term loans under our working capital credit facility and a repayment of $0.7 million on our long-term loan, partially offset by an investment of $1.5 million in our preferred shares and warrants.
Capital resources
We have traditionally funded our operations with a combination of cash generated from operating activities, third-party debt consisting mainly of long-term and short-term bank credit facilities, as well as cash generated through the sale of equity securities.
In September 2009, we entered into a credit facility for long-term loans with an Israeli bank which expired as of December 31, 2013 and was fully repaid.
As of December 31, 2013, we had $4.2 million in outstanding principal amount under a long-term credit facility. On January 31, 2014, we repaid this amount in full and, as a result, we accrued $150,000 in early repayment fees.
We believe that, based on our current business plan, our cash, cash equivalents and short-term bank deposits on hand and cash from operations, we will be able to meet our capital expenditure and working capital requirements, and liquidity needs for at least the next twelve months. We may require additional capital in the future, and therefore may engage in debt or equity financings to meet our longer term liquidity and future growth objectives.
| C. Research and Development, Patents and Licenses |
Research and development
We believe that our leading position as a developer and manufacturer of innovative bioactive ingredients is due in part to our expertise in lipids and enzymes accompanied by our policy of shared research and development resources across our organization and leveraging the significant cross benefits.
We maintain an ongoing program of research and development, or R&D, to substantiate our clinical evidence and to enlarge our technological platform and process capabilities in relation to, among other things, lipid chemistry, enzymatic technology and lipid analysis. The primary aim of our R&D program is to develop improved and more affordable products. We therefore focus on the enhancement of our existing product lines in order to reinforce our competitive strengths and expand the scope of our existing products into new indications. We have a pipeline of more than ten products, including new uses and applications for existing products, in various stages of development. Some of these products address new medical indications or provide new dietary or medical benefits, while others provide different levels/concentrations of active ingredients and offer improved secondary characteristics. In addition to further substantiating the value and efficacy of our existing products, our R&D program also focuses on the development of additional lipid-based products.
As all of our products are derived from our expertise in lipids biochemistry and our capabilities in analyzing lipid structure, composition and performance, much of our R&D is not divided based on segment or product line. Rather, more general R&D is conducted and only after particular R&D is seen to relate to the development of a new product or the enhancement of an existing product does that R&D become associated with a specific product line or segment. We believe that this helps us leverage shared R&D resources across our organization.
We have several new nutritional ingredient products for infant formula under development planned to launch within the next few years.
We invest a significant amount of our resources in R&D as we believe that superior technology is key to maintaining a leading market position. Our R&D expenses were $4.6 million, $5.9 million and $6.0 million in 2012, 2013 and 2014, respectively, representing 12.2%, 9.2% and 12.7% of net revenues, respectively.
We may use our R&D platform to seek to penetrate the prescription pharmaceuticals market. For more information regarding our prescription pharmaceuticals, see “Item 4.B. Information on Enzymotec — Business Overview — Government regulation — VAYA Pharma — Prescription drugs.”
In 2015, we intend to introduce Incog, Incog is a marine-based lipid composition for use in infant nutrition products that is intended to mimic certain characteristics of human breast milk. InCog is produced by enriching lipids with a bio-functional DHA-rich phospholipid that is present in human breast milk and is highly concentrated in the developing human brain. This compound was found to support cognitive functioning and is being developed as a key cognitive ingredient for early nutrition. InCog is currently in the clinical development phase. This ingredient is approved as GRAS by the FDA for marketing in the United States for the general population. We are currently in the process of applying for GRAS certification for infants. We are also in the process of preparing a submission for registration in China and Europe, and we hope to obtain regulatory approval for InCog in Europe during the second half of 2015.
We hope that InCog will generate incremental revenues, but we do not expect it to be material to our results of operations in the near term.
We currently have several products in our VAYA Pharma segment in various stages of development. These include compositions based on phosphatidylserine (PS) and phosphatidylcholine (PC), two phospholipids known to support cognitive, behavioral and metabolic human functions. We are developing and evaluating these products, which will each contain PS-Omega3 or PC-Omega3, for the treatment of various cognitive, behavioral, mood or metabolic disorders. None of these products is expected to be individually material to our business in the near term.
Clinical Trials
Even though our nutritional ingredients and medical foods products are generally not required to undergo clinical trials prior to approval by the FDA or other regulatory authorities, we nonetheless conduct clinical and pre-clinical studies to support the efficacy and safety of our products and their ingredients and to extend and validate their benefits for human health. Pre-clinical studies allow us to substantiate the safety of our products and obtain preliminarily indications of their pharmacological profile and mechanism of the action. Through January 31, 2015, we had conducted 11 pre-clinical studies, according to the principles of Good Laboratory Practices (GLP) and completed 14 clinical studies, according to the principles of Good Clinical Practices (GCP). As a result, we have developed significant experience in planning, designing, executing, analyzing and publishing clinical studies.
In 2014, we initiated a number of clinical trials, including a clinical trial for a product on managing Autism Spectrum Disorder symptoms, a clinical trial on Vayarin for adults with Attention Deficit Hyperactivity Disorder and a clinical trial on long term efficacy of Vayacog in mild cognitive impairment. We also finalized the clinical phase of a clinical study of Vayarol for reducing triglyceride levels in patients with hypertriglyceridemia.
Our R&D team manages our clinical studies and is deeply involved with project planning, trial design, execution, outcome analyses and manuscript submission. During the design, execution and publication of our studies, our R&D team consults with key opinion leaders in the relevant field of research to optimize both design and execution, as well as to strengthen the scientific and academic level of the investigational plan. Our clinical studies have been conducted in collaboration with leading medical and research centers in countries such as Israel, Canada, China and The Netherlands including Meir Medical Center, Israel; Sourasky Medical Center, Israel; Sheba Medical Center, Israel; and McGill University, Canada. For information regarding the clinical validation of our various products, see “Item 4.B. Information on Enzymotec — Business Overview — Our products — Nutrition segment — Clinical validation” and “ Item 4.B. Information on Enzymotec — Business Overview — Our products — VAYA Pharma segment — Clinical validation.”
Intellectual property
Our proprietary technology is important to the development, manufacture, and sale of our products, and we seek to protect such technology and other intellectual property through a combination of patents, copyrights, trademarks, trade secrets, non-disclosure and confidentiality agreements, licenses, assignments of invention and other contractual arrangements with our employees, consultants, partners, suppliers, customers and others. We rely on our research and development program, clinical trials, production techniques and marketing and distribution programs to advance our products.
As of January 31, 2015, we had been granted over 85 patents and had applications for approximately 80 additional patents pending worldwide. Our principal granted patents relate to our technologies arising out of novel formulations, their beneficial uses and processes for the manufacturing thereof, rather than claiming specific molecules or active ingredients.
| | • | InFat. The patent portfolio for the InFat products includes issued patents and pending applications directed to formulations, manufacturing process and methods of use. Our current and potential customers for InFat include major global nutrition companies with worldwide operations. The majority of manufacturers of infant formulas containing InFat are located in Europe, New Zealand and Australia, where we have issued patents. In China, which is our largest end user market for InFat products, we have one issued patent covering a formulation and a process related to InFat and another issued patent covering a use related to InFat. In addition we have pending applications covering uses and a particular composition and manufacturing process. In Europe, we have three issued patents: one claiming a formulation which expires in 2024, and two claiming uses of InFat which expire in 2024 and 2028 and are currently under opposition proceedings. We also have a number of pending applications related to InFat in Europe. In each of New Zealand and Australia, we have issued patents claiming a manufacturing process for InFat, which expire in 2020 and 2018, respectively. In addition, we have two issued patents in Australia and one in New Zealand which cover uses related to InFat and expire in 2028 and 2031, as well as a pending application in New Zealand. While the United States is not currently a major market for InFat, we do believe it presents a growth opportunity for InFat. In the United States, we have one issued patent claiming a manufacturing process, which expires in 2017, and two issued patents claiming methods of use, which expire in 2026 and 2031, respectively. We also have seven pending U.S. applications covering particular compositions and uses related to the InFat products. We also have issued patents related to these products in Israel, Mexico, South Korea, India, Canada, Hong Kong, and Russia, and patent applications pending in various countries around the world. |
| | • | PS Products. The patent portfolio for our PS products (including Sharp PS) includes patents and patent applications directed to formulations, manufacturing processes, and methods of use. In each of the United States and Europe, the two largest markets for our PS products, we own one issued patent covering a formulation related to Sharp PS, which expires in the United States in 2026 and in Europe in 2024. We also have issued counterparts to that patent in Australia, Canada, Japan Hong Kong and South Korea. |
| | • | VAYA Products. The patent portfolio for our various VAYA products (including Vayarol, Vayacog and Vayarin) includes patents and patent applications directed to formulations and methods of use. The United States is currently the largest market for our VAYA products. We have four issued patents in the United States covering formulations or methods of use related to Vayarin, of which three of these patents also cover formulations or uses of Vayacog. None of these patents expires before 2024. We also have an issued U.S. patent covering method of use of Vayacog, which expires in 2030, and two issued patents covering a formulation of Vayarol and a use related to Vayarol, which expire in 2024 and in 2026, respectively. One or more patents related to one or more of our VAYA products have also been issued in each of Australia, Canada, China, Europe, Hong Kong, India, Israel, Japan, Mexico, New Zealand, the Philippines, Russia and South Korea. |
We have an exclusive license under a family of third party patents related to a process for the enzymatic production of PS, Vayarin and Vayacog including issued patents in the United States, Europe, China and Japan, each expiring in 2016. Under that license, we have the right to enforce the licensed patents against third party infringers. Royalties payable under that license are not material to our results of operations.
While our policy is to obtain patents by application, license or otherwise, to maintain trade secrets and to seek to operate without infringing on the intellectual property rights of third parties, technologies related to our business have been rapidly developing in recent years. Loss or invalidation of certain of our patents, or a finding of unenforceability or limited scope of certain of our intellectual property, could have a material adverse effect on us. See “Item 8.A. Financial Information — Consolidated Financial Statements and Other Financial Information — Legal Proceedings” below.
In addition to patent protection, we also rely on trade secrets, including unpatented knowhow, technology and other proprietary information in attempting to develop and maintain our competitive position.
We also rely on protection available under trademark laws. We currently hold registered trademarks in various jurisdictions for the mark “MSO” and certain other key product names, including “InFat”, “K•REAL”, “Sharp PS”, “Vayarol”, “Vayacog” and “Vayarin”.
We believe that, while our patents provide us with a competitive advantage, our success depends primarily on our marketing, business development, know-how and ongoing research and development efforts. Accordingly, we believe that the expiration of any of our patents, or the failure of any of our patent applications to result in issued patents, would have no more than a short-term adverse effect on our business or financial position. Nevertheless, we are continuously working to generate a new cluster of patents to reinforce our IP position and protect the competitive edge we are creating in the market. In any event, there can be no assurance that our patents or other intellectual property rights will afford us a meaningful competitive advantage.
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2014 to December 31, 2014 that are reasonable likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial condition.
| E. Off-Balance Sheet Arrangements |
Except for standard operating leases, we do not engage in any off-balance sheet arrangements, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.
| F. Contractual Obligations |
Our future contractual cash obligations as of December 31, 2014 in excess of one year are summarized in the following table:
| | Total (2) | | Less than 1 year | | 1 – 3 years | | 3 – 5 years | | More than 5 years | |
| | (in thousands) | |
Purchase commitments (1) | | $ | 2,316 | | | $ | 1,544 | | | $ | 772 | | | $ | – | | | $ | – | |
| Operating lease obligations | | | 1,337 | | | | 592 | | | | 659 | | | | 86 | | | | – | |
| Total | | $ | 3,653 | | | $ | 2,136 | | | $ | 1,431 | | | $ | 86 | | | $ | – | |
| | (1) | Consists of commitments to purchase raw materials. |
| | (2) | Excludes future projected royalty payments of approximately 3%-5% of revenues derived from research and development projects that were funded in part by grants received from the OCS. |
In addition, we have entered into a 10-year toll manufacturing agreement with respect to one of our products. Under the terms of the agreement, we have committed for minimum purchasing through the entire term of the agreement. In the event that we fail to meet our minimum purchase requirements or otherwise terminate the agreement, we will be required to pay a termination payment which is based on a fixed amount of up to $500,000 reduced by the amount actually purchased before termination.
ITEM 6: Directors, Senior Management and Employees
| A. Directors and Senior Management |
The following table sets forth information for our executive officers and directors as of the date of this annual report. Unless otherwise stated, the address for our directors and executive officers is c/o Enzymotec Ltd., Sagi 2000 Industrial Area, P.O. Box 6, Migdal Ha’Emeq 2310001, Israel.
| Name | | Age | | Position(s) |
| Executive officers | | | | |
| Ariel Katz | | 56 | | President and Chief Executive Officer |
| Oren Bryan | | 40 | | Vice President and Chief Financial Officer |
| Gai Ben-Dror | | 46 | | Vice President – Process Development |
| Ariel Blumovich | | 36 | | Vice President – Business Development |
| Shachar Carmi | | 50 | | Vice President – Nutrition Division |
| Robert Crim | | 57 | | President and CEO VAYA Pharma USA |
| Itay Dromi | | 50 | | Vice President – Human Resources and Information Systems |
| Yariv Gratz | | 50 | | Vice President – Operations |
| Directors | | | | |
Steve Dubin (3)(4) | | 61 | | Chairman of the Board |
Nir Belzer (2)(4) | | 52 | | Director |
Holger Liepmann(4) | | 63 | | Director |
Dov Pekelman (1)(4) | | 74 | | Director |
Yossi Peled (4) | | 67 | | Director |
Michal Silverberg (1)(2)(4)(5) | | 38 | | Director |
Joseph Tenne (1)(2)(3)(4)(5) | | 59 | | Director |
Imanuel (Mani) Wasserman (3)(4) | | 48 | | Director |
| | (1) | Member of our audit committee. |
| | (2) | Member of our compensation committee. |
| | (3) | Member of our nominating and governance committee. |
| | (4) | Independent director under the rules of the NASDAQ Stock Market. |
| | (5) | External director under the Israeli Companies Law. See “— Board Practices — External directors.” |
Our executive officers
Dr. Ariel Katz has served as our President and Chief Executive Officer since joining us in 2000. He has also served as the head of our VAYA Pharma segment from January 2012 to August 2014. Prior to joining Enzymotec, Dr. Katz held various positions with the Dead Sea Bromine Group of Israel Chemicals Ltd. over a period of 14 years, including senior positions in research and development, plant management, marketing and business development. Dr. Katz holds a bachelor’s degree in chemistry and a master’s degree in economic management both from Ben-Gurion University of the Negev, Beer Sheva, Israel, and a PhD in engineering in the field of artificial intelligence from Exeter University, UK. Dr. Katz was a guest lecturer in the Biotechnology Department of the Technion — Israel Institute of Technology, Haifa, Israel from 2003 to 2010.
Oren Bryan has served as our Vice President and Chief Financial Officer since June 2008. Prior to joining Enzymotec, he served as Chief Financial Officer of MIND C.T.I. Ltd., a global provider of real-time, product-based mediation, billing and customer care solutions for voice, data, video and content service from 2006 to 2008 and Controller of MIND C.T.I. Ltd. from 2005 to 2006. Before working at MIND C.T.I. Ltd., Mr. Bryan served as Controller of both Dor Chemicals Ltd. from 2001 to 2005 and a private software company from 2000 to 2001. Between 1997 and 2000, he was an accountant with Kost, Forer, Gabbay and Kasierer, a member of Ernst & Young Global. Mr. Bryan is a certified public accountant and holds a bachelor’s degree in economics and accounting from Haifa University, Israel.
Gai Ben-Dror has served as our Vice President — Process Development and previously as our Director of Process Development since joining Enzymotec in December 2001. As Director of Process Development, he was responsible for the development and commercialization of all of our products and for the building of our technological and analytical teams. Prior to joining us, Mr. Ben-Dror was a plant and pilot engineer in the Dead Sea Bromine Group of Israel Chemicals Ltd. from 1996 to 2000. Prior to that he worked as a research team leader at Sense-IT Ltd., a hardware development company, and as a project manager at Chimtec Ltd., a water treatment engineering company. He holds a bachelor’s degree in chemical engineering and an M.B.A. from Ben-Gurion University of the Negev, Beer Sheva, Israel.
Ariel Blumovich has served as our Vice President – Business Development since July 2014. Prior to joining Enzymotec, Mr. Blumovich served from 2010 to 2014 as Global Business Development Manager at the Samsung Group in South Korea, in which role he executed high-growth deals in the pharmaceutical and hi-technology business segments, including multinational joint-ventures, licensing, sales agreement, and strategic alliances. Prior to joining Samsung, Mr. Blumovich held positions at Sanofi-Aventis, Teva Pharmaceutical Industries, Ltd., and Israeli Electric Corp. He received his M.B.A. from The Tuck School of Business at Dartmouth College and his B.Sc, Mechanical Engineering from The Technion – Israel Institute of Technology.
Shachar Carmi has served as our Vice President – Sales, Nutrition Division since July 2014 and became our Vice President Nutrition Division in February 2015. Prior to joining Enzymotec, from 2009 to June 2014, he served as Vice President – Sales and Marketing at Biobee Sde Eliyahu, a leading producer of bumble bees for natural pollination and beneficial insects used in agriculture as an alternative to chemical pesticides. From 2007 to 2009, he served as Product Manager at Hazera Genetics, a leading breeder and supplier of vegetable seeds. Prior to that, he held positions at Milestone Agriculture, Inc. and Click Software. Mr. Carmi received his B.Sc. in Industrial Engineering from Tel Aviv University.
Robert Crim has served as President and CEO of Vaya Pharma USA since August 2014. Mr. Crim has over 15 years experience in the global clinical nutrition and medical foods area. Prior to joining Vaya Pharma, from 2010 to 2014, Mr. Crim was an independent consultant focusing on medical nutrition and healthcare clients. From 2004 to 2010, he held positions of increasing responsibility at Danone/Numico, including General Manager of the SHS business and Regional Vice President – North America and Global Business Development as well as serving on the Executive Committee of the Medical Nutrition Division. Prior to that, Mr. Crim held positions at Abbott, including Vice President – Consumer Nutritionals where he was responsible for the Ensure and Glucerna businesses. Mr. Crim has also held positions at Johnson & Johnson and Procter and Gamble. He received his M.B.A from University of Michigan and his B.A. from Harvard University.
Itay Dromi has served as our Vice President – Human Resources since July 2014. Mr. Dromi has over 20 years of global experience in human resources and organizational management. Prior to joining Enzymotec, Mr. Dromi served from 2010 to 2014 in multiple senior human resource positions at Teva Pharmaceutical, Ltd, including as Vice President – Human Resources TGO Asia Region and as Vice President – Human Resources of the Chemical Division. Mr. Dromi previously held human resource positions at Ultrashape and Delta Galil Industries. Mr. Dromi received his M.B.A from Bar Ilan University and an M.A. in Public Administration from the University of Haifa.
Yariv Gratz has served as our Vice President – Operations since June 2014. Prior to joining Enzymotec, Mr. Gratz served from 2010 to 2014 as Director of Operations at Nilit Ltd. where he was responsible for managing manufacturing facilities in Israel and China including global engineering and projects department and the industrial engineering unit, overseeing a total of 650 employees. Prior to this position, he served as Vice President – Operations for MIS – Israel. From 1992 to 2010, he held positions at Sanmina SCI, EIL – Electrochemical Industries and Gadot Bio Chem. Mr. Gratz received his M.B.A. from Herriot Watt and B.Sc. in Chemical Engineering from The Technion – Israel Institute of Technology.
Our directors
Steve Dubin has served as Chairman of our board of directors since January 2014 and previously served as Vice Chairman since his appointment as a director in April 2013. Since November 2011, Mr. Dubin has been a Principal in SDA Ventures LLC, a firm focused on assisting emerging growth and middle-market companies, primarily in the health & wellness and nutritional products markets, on matters including corporate development, business acquisition, customer relations, growth strategies and corporate finance. In connection with SDA Ventures, Mr. Dubin acts as a Senior Advisor to Paine & Partners, LLC, a global private equity investment firm located in New York, Chicago, and San Francisco, for the purpose of identifying and executing investment opportunities in the global human and animal food and nutritional products industries. From 2006 until its acquisition by Royal DSM N.V. in February 2011, Mr. Dubin served as Chief Executive Officer and a member of the board of directors of Martek Biosciences Corporation. He later served as President of DSM’s Nutritional Lipids Division from February 2011 through October 2011 and as a Senior Advisor to DSM Nutritional Products from November 2011 through October 2012. After joining Martek in 1992 and serving in various management positions, including Chief Financial Officer, Treasurer, Secretary, General Counsel and Senior Vice President, Business Development, he served as President of Martek from 2003 to 2006. From 2000 to 2003, Mr. Dubin co-founded and co-managed a Maryland-based, angel-investing club and was “Of Counsel” to Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., a U.S. law firm, during part of 2001 and 2002. Mr. Dubin currently serves as a member of the board of two privately held companies, Alcresta, Inc. and NeurExpand Brain Center LLC, formerly The Brain Center, LLC (where he serves as Vice Chair of the board of directors). From March 2013 through March 2014, Mr. Dubin was a director of MyCell Technologies and its subsidiary Oceans Omega LLC. During 2011 and 2012, he was a member of the board of directors of Scerene Healthcare, Inc. Mr. Dubin is a certified public accountant and a member of the Maryland Bar. He holds a bachelor’s degree in accounting from the University of Maryland and a J.D. from the National Law Center at George Washington University.
Nir Belzer has served as a director of Enzymotec since January 2007. Mr. Belzer is a co-founder of Aquagro Fund L.P., one of Israel’s first funds to focus on clean technologies, and has served as its Managing Partner since 2007. In addition, he is a co-founder of the Millennium Materials Technologies funds, one of which is a major shareholder of ours, and has served as Managing Partner of Millennium Materials Technologies funds since 1998. Mr. Belzer has 20 years of extensive experience in venture capital management, including fund management in Israel’s IDB Group. From 1995 to 1997, Mr. Belzer worked in the Israeli high tech industry, at Globes, a leading Israeli financial newspaper, as a Marketing Manager, and at Israel Aerospace Industries Ltd., as an avionics engineer for the Lavi project. Mr. Belzer was appointed as a director pursuant to Millennium Materials Technologies’ appointment rights under our articles of association in effect prior to our initial public offering. He holds a bachelor’s degree in mathematics and computer science, and avionics and an M.B.A. from Tel Aviv University.
Holger Liepmann has served as a director of Enzymotec since February 2015. Mr. Liepmann served in various positions with Abbott Laboratories from 1986 until his retirement in 2011. From 2006 to 2011, he served as executive vice president, Nutritional Products of Abbott Laboratories. In this capacity he was responsible for all aspects of Abbott Laboratories’ global nutritional business, including R&D, manufacturing, supply chain and commercial operations, and reported to Abbott’s CEO. Previously, he served as executive vice president, Pharmaceutical Products Group, senior vice president, Abbott International, the commercial operations for Abbott’s international pharmaceutical business, and vice president Japan Operations. Prior to joining Abbott, Mr. Liepmann worked for Bayer AG in a variety of capacities between 1975 and 1986, both in the US and in Germany. Mr. Liepmann earned a bachelor’s degree from Dartmouth College and a master’s degree in business administration from Stanford.
Prof. Dov Pekelman has served as a director of Enzymotec since October 2010. In addition, Professor Pekelman currently serves as the Chairman of the special committee of the board of directors of Taro Pharmaceuticals Industries Ltd. (NYSE: TARO), as well as Chairman of Atera Networks Ltd.. Prof. Pekelman serves on the board of directors of the Interdisciplinary Center (IDC), Herzliya, Israel and is Chairman of the IDC Corporation, the center’s economic arm. From 1985 to 2008, Professor Pekelman served as a senior consultant to Teva Pharmaceutical Industries Ltd. (NASDAQ: TEVA) and also founded and ran a leading, Israeli-based management-consulting firm, P.O.C. Ltd. Previously, he served on the board of directors of several industrial corporations, including Koor Industries Ltd. (TASE: KOR), and was also a member of the advisory committee of the Bank of Israel. He holds bachelor’s degree from the Technion — Israel Institute of Technology, Haifa, Israel and a doctorate from the University of Chicago.
Yossi Peled has served as a director of Enzymotec since June 2001. From June 2009 to October 2011, Mr. Peled was the Chairman of our board of directors. In addition, he has served as the Chief Executive Officer of Galam Ltd. since 1987 and from 1977 until 1984. Mr. Peled is a member of the board of directors of a number of companies within the Galam Group, including Eurosweet GmbH (of which he is Chairman) and Galam Invest Ltd. From 2001 to 2003, Mr. Peled served as the Chairman of the board of directors of Lehavot Fire Protection Ltd., Israel’s leading fire protection equipment manufacturer. Previously, he held various managerial roles in Kibbutz Maanit and HaKibbutz HaArtzi, the national kibbutz organization in Israel, which represents more than 250 kibbutzim. Mr. Peled studied business administration at the Ruppin Academic Center, Israel, and executive business management at “Lahav” of the Faculty of Management Tel Aviv University.
Michal Silverberg has served as a director of Enzymotec since September 2013. In 2014 Ms. Silverberg became a Senior Director for TVI (Takeda Ventures Inc). Since 2007, Ms. Silverberg has worked in various positions in Novo Nordisk Inc., a global healthcare company headquartered in Denmark with shares listed on the Copenhagen and New York Stock Exchanges. Since 2010, she has served as Senior Director, New Product Commercialization & Business Development for the BioPharm unit. Prior to joining Novo Nordisk, Ms. Silverberg held various positions in a biotech company, an investment group and the Office of the Chief Scientist of Israel (Technological Incubators). Ms. Silverberg holds a B.A. in Economics and Business Management from Haifa University, Israel, an M.B.A. from Tel Aviv University, Israel, and an M.A. in Biotechnology from Columbia University, New York.
Joseph Tenne has served as a director of Enzymotec since September 2013. Mr. Tenne serves as the VP Finance of Itamar Medical, Ltd., an Israeli company listed on the Tel Aviv Stock Exchange, since August 2014. Mr. Tenne has served as a financial expert external director and the chairman of the audit committee of the MIND C.T.I. Ltd., an Israeli company whose shares are listed on the NASDAQ, since August 2014, as an external director and a member of the audit committee of Orbotech Ltd., an Israeli company listed on the NASDAQ since July 2014, as an independent director and a member of the audit committee of Ratio Oil Exploration (Finance) Ltd., an Israeli company listed on the Tel Aviv Stock Exchange since January 2015, and has served as a director of AudioCodes Ltd., an Israeli company listed on NASDAQ and on the Tel Aviv Stock Exchange since June 2003. Mr. Tenne is a financial expert, independent director and a member of the audit, compensation and nomination committees of AudioCodes. 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, which is engaged in the geothermal and recovered energy business. From January 2006 until April 2013, Mr. Tenne also served as the Chief Financial Officer of Ormat Industries Ltd., an Israeli holding company that was listed on the Tel Aviv Stock Exchange and was the parent company of Ormat Technologies, Inc. From 2003 to 2004, 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, which are mainly used in the food packaging industry. From 1997 until 2003, Mr. Tenne was a partner in Kesselman & Kesselman, Certified Public Accountants in Israel and a member of PricewaterhouseCoopers International Limited (PwC Israel). 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. Imanuel (Mani) Wasserman has served as a director of Enzymotec since October 2011. Dr. Wasserman is a co-founder of Beresheit General Partner Ltd., the general partner of Manof I funds, a NIS 2 billion Israeli fund, and has served as its managing partner since its inception in 2009. The fund is the first and largest of three “Manof” funds, initiated by the Israeli government to provide liquidity to the Israeli economy by providing debt, mezzanine and equity financings. The Israeli government committed to invest up to NIS 0.5 billion in the fund, and the remaining commitment to invest up to NIS 1.5 billion was made by leading Israeli financial institutions. Previously, he was a co-founder and managing director of Magna Capital Ltd., an Israeli strategy and M&A consulting firm, from 2000 to 2009. In addition, Dr. Wasserman worked as a lawyer, from 1992 to 1994 and from 1997 to 1999, with Zellermayer Pelossof and Co., an Israeli law firm. From 1995 to 1996, he was a foreign lawyer at Fried, Frank, Harris, Shriver and Jacobson, a U.S. law firm. Dr. Wasserman is the Chairman of Zohar Dalia, an Israeli manufacturer of cleaning products and raw materials. He currently serves as a director for the following companies: Beresheit General Partner Ltd., Galam Ltd., Cargal Ltd., Plasto-sac Ltd., Controp Ltd. and Aeronautics Ltd. Dr. Wasserman holds a bachelor’s degree in industrial engineering, an LLB, an LLM and a doctorate in law, all from Tel Aviv University. Dr. Wasserman was appointed as a director pursuant to Galam’s appointment rights under our articles of association in effect prior to our initial public offering.
Arrangements concerning election of directors; family relationships
Our current board of directors consists of eight directors. Pursuant to our articles of association in effect prior to our initial public offering, certain of our shareholders had rights to appoint members of our board of directors. See “— Directors and Senior Management.”
All rights to appoint directors and observers terminated upon the closing of the initial public offering, although currently-serving directors that were appointed pursuant to such rights will continue to serve pursuant to their appointment until the annual meeting of shareholders at which the term of their class of director expires.
We are not a party to, and are not aware of, any voting agreements among our shareholders. In addition, there are no family relationships among our executive officers and directors.
| B. Compensation of Officers and Directors |
Compensation of executive officers and directors
The aggregate compensation paid and share-based compensation and other payments expensed by us and our subsidiaries to our directors and executive officers with respect to the year ended December 31, 2014 was $2.2 million. This amount includes approximately $0.2 million set aside or accrued to provide pension, severance, retirement or similar benefits or expenses, but does not include business travel, relocation, professional and business association dues and expenses reimbursed to office holders, and other benefits commonly reimbursed or paid by companies in our industry. As of December 31, 2014, options to purchase 730,406 ordinary shares granted to our current directors and executive officers were outstanding under our equity incentive plans at a weighted average exercise price of $5.43 per share. In addition, as of December 31, 2014, 81,380 restricted shares units and 136,510 restricted shares were granted to our current directors and executive officers of which 19,550 restricted shares were vested. We do not have any written agreements with any director providing for benefits upon the termination of such director’s relationship with our company or our subsidiaries.
Summary Compensation Table
The table below reflects the compensation paid to or earned by our five most highly compensated office holders during or with respect to the year ended December 31, 2014. All amounts reported in the table are in terms of cost to the Company, as recognized in our financial statements for the year ended December 31, 2014.
| Name and Position | | Salary Cost (1) | | | Bonus (2) | | | Share-Based Compensation (3) | | | All Other Compensation (4) | | | Directors’ Fees | | | Total | |
| | | (in thousands) (5) | |
Steve Dubin Chairman of the Board | | $ | - | | | $ | - | | | $ | 412 | | | $ | - | | | $ | 120 | | | $ | 532 | |
Ariel Katz President and CEO | | | 301 | | | | - | | | | - | | | | 46 | | | | - | | | | 347 | |
Oren Bryan Vice President and CFO | | | 187 | | | | - | | | | 21 | | | | 21 | | | | - | | | | 229 | |
Gai Ben Dror Vice President – Process Development | | | 167 | | | | - | | | | - | | | | 23 | | | | - | | | | 190 | |
Ram Shemer Marketing Director – Nutrition Division | | | 133 | | | | - | | | | 11 | | | | 23 | | | | - | | | | 167 | |
| | (1) | Represents the office holder’s gross salary plus payment of mandatory social benefits made by the Company on behalf of such office holder. Such benefits may include, to the extent applicable to the office holder, payments, contributions and/or allocations for savings funds (e.g., Managers’ Life Insurance Policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance, and risk insurance (e.g., life, or work disability insurance), convalescence pay and social security payments. |
| | (2) | No bonuses were paid to any of the office holders for the year ended December 31, 2014. |
| | (3) | Represents grant date fair value computed in accordance with accounting guidance for equity-based compensation. For a discussion of the assumptions used in reaching this valuation, see Note 10 of the notes to our consolidated financial statements included elsewhere in this annual report. |
| | (4) | Represents other benefits provided to such office holder, which include (i) car expenses, including lease costs, gas and maintenance, provided to the office holder, (ii) unused vacation accruals and redemption, and (iii) accruals for severance pay. |
| | (5) | Some of the amounts were translated from NIS into U.S. dollars using the average exchange rate during the year ended December 31, 2014 of NIS 3.577 = U.S.$ 1.00, based on the daily representative rate of exchange between the NIS and the U.S. dollar reported by the Bank of Israel. |
Employment agreements with executive officers; consulting and directorship services provided by directors
We have entered into written employment agreements with all of our executive officers. These agreements contain provisions standard for a company in our industry regarding non-competition, confidentiality of information and assignment of inventions. See “Item 3.D. Key Information — Risk factors — Risks relating to our business and industry — Under applicable employment laws, we may not be able to enforce covenants not to compete” for a further description of the enforceability of non-competition clauses. These agreements do not provide for benefits upon the termination of these executives’ respective employment with us, other than payment of salary and benefits during the required notice period for termination of these agreements, which varies under these individual agreements. See “Item 6.D. Directors, Senior Management and Employees — Employees —Agreements and arrangements with, and compensation of, directors and executive officers” for additional information.
We receive consulting and directorship services from certain of our directors. The amounts payable pursuant to these arrangements have been approved by our board of directors and shareholders.
Equity incentive plans
The following are our equity incentive plans:
2003 Israeli Share Option Plan with 2012 U.S. Addendum
In November 2003, we adopted our 2003 Israeli Share Option Plan and in June 2012, we adopted the 2012 U.S. Addendum to this plan. This plan, including the 2012 U.S. Addendum, is referred to as the 2003 Plan. The 2003 Plan permits the grant of options to purchase our ordinary shares to the employees, officers, directors and service providers of our company and our subsidiaries (to whom we refer as permitted grantees). The 2003 Plan was terminated on August 21, 2013, although option awards outstanding as of that date will continue in full force in accordance with the terms under which they were granted. There were 2,000,560 options outstanding under the 2003 Plan at the time it was terminated.
The 2003 Plan is administered by our board of directors, which determined, subject to Israeli law, the grantees of awards and the terms and provisions of the grant, including, the number of shares, exercise prices, vesting schedules, acceleration of vesting and the other matters necessary in the administration of the 2003 Plan.
The 2003 Plan provides for the grant by us of awards under various tax regimes including, without limitation, pursuant to Sections 102 and 3(i) of the Israeli Income Tax Ordinance, to which we refer as the Ordinance, and Section 422 of the U.S. Internal Revenue Code of 1986, as amended, to which we refer as the Code. The Israeli Tax Authority, to which we refer as the ITA, approved the 2003 Plan, as required by applicable law.
Section 102 of the Ordinance allows employees, directors and officers, who are not controlling shareholders and who are Israeli residents, to receive favorable tax treatment for compensation in the form of shares or options. Section 102 of the Ordinance includes two alternatives for tax treatment involving the issuance of options or shares to a trustee for the benefit of the grantees and also includes an additional alternative for the issuance of options or shares directly to the grantee. Section 102(b)(2) of the Ordinance, the most favorable tax treatment for grantees, permits the issuance to a trustee under the “capital gains track.” In order to comply with the terms of the capital gains track, all options granted under a specific plan and subject to the provisions of Section 102 of the Ordinance, as well as the shares issued upon exercise of such options and other shares received subsequently following any realization of rights with respect to such options, such as share dividends and share splits, must be registered in the name of a trustee selected by the board of directors and held in trust for the benefit of the relevant employee, director or officer. The trustee may not release these options or shares to the holders thereof before the second anniversary of the registration of the options in the name of the trustee. However, under this track, we are not allowed to deduct an expense with respect to the issuance of the options or shares.
The 2003 Plan provides that options granted to our employees, directors and officers who are not controlling shareholders and who are considered Israeli residents are intended to qualify for special tax treatment under the “capital gains track” provisions of Section 102(b)(2) of the Ordinance. Our Israeli non-employee service providers and controlling shareholders may only be granted options under Section 3(i) of the Ordinance, which does not provide for similar tax benefits.
Options granted under the 2003 Plan to U.S. residents may qualify as “incentive stock options” within the meaning of Section 422 of the Code, or may be non-qualified. The exercise price for “incentive stock options” must not be less than the fair market value on the date on which an option is granted, or 110% of the fair market value if the option holder holds more than 10% of our share capital.
Options awarded under the 2003 Plan, generally vest over a four-year period from the effective date of grant, 25% on each anniversary of the date of grant. Any option not exercised within ten years from the grant date or within three months from termination of employment (and in certain cases, according to a resolution of the board of directors) will expire, unless extended by the board of directors. All option agreements for outstanding options include provisions for accelerated vesting upon the occurrence of certain events, including the completion of our initial public offering, or in the event of change in control, as defined. Pursuant to these provisions, 50% of every grantee’s unvested outstanding options under the 2003 Plan will vest immediately and the vesting of the remaining 50% will be accelerated to the earlier of: (i) one year from the date of closing of such initial public offering or event of change in control, subject to the grantee continuing to serve in the capacity of a permitted grantee under the plan; or (ii) in the event of change in control, the date upon which the grantee’s services are terminated, other than in the event of termination for cause.
2013 Omnibus Equity Incentive Plan
In August 2013, we adopted our 2013 Omnibus Equity Incentive Plan, which we refer to as the 2013 Plan, and which was approved by our shareholders on September 2, 2013. The 2013 Plan provides for the grant of options, restricted shares, restricted share units and other share-based awards to our company’s and our subsidiaries’ respective directors, employees, officers, consultants, advisors and to any other person whose services are considered valuable to us or any of our affiliates. Following the approval of the 2013 Plan by the Israeli tax authorities, we will only grant options or other equity incentive awards under the 2013 Plan, although previously-granted options and awards will continue to be governed by our 2003 Plan. The number of shares reserved under the plan is automatically increased annually on January 1 of each year by a number of ordinary shares equal to the lowest of (i) 2% of our outstanding shares; (ii) a number of shares determined by our board of directors, if so determined prior to January 1 of the year on which the increase will occur; and (iii) 1,360,000 shares.
The 2013 Plan is administered by our board of directors or by a committee designated by the board of directors, which shall determine, subject to Israeli law, the grantees of awards and the terms of the grant, including, exercise prices, vesting schedules, acceleration of vesting and the other matters necessary in the administration of the 2013 Plan. The 2013 Plan enables us to issue awards under various tax regimes including, without limitation, pursuant to Sections 102 and 3(i) of the Ordinance, and as “incentive stock options” under Section 422 of the Code and nonqualified stock options, as discussed under “2003 Israeli Share Option Plan with 2012 U.S. Addendum” above.
We currently intend to grant options under the 2013 Plan only to our employees, directors and officers who are not controlling shareholders and are considered Israeli residents, under the capital gains track of Section 102(b)2 of the Ordinance.
Awards under the 2013 Plan may be granted until September 2, 2023, ten years from the date on which the 2013 Plan was approved by our shareholders.
Options granted under the 2013 Plan generally vest over four years commencing on the date of grant such that 25% vest on the first anniversary of the date of grant and an additional 6.25% vest at the end of each subsequent three-month period thereafter for 36 months. Options, other than certain incentive share options, that are not exercised within ten years from the grant date expire, unless otherwise determined by our board of directors or its designated committee, as applicable. Incentive share options granted to a person holding more than 10% of our voting power will expire within five years from the date of the grant. In the event of termination of employment or services for reasons of disability or death, or retirement, the grantee, or in the case of death, his or her legal successor, may exercise options that have vested prior to termination within a period of one year from the date of disability or death, or within three months following retirement. If we terminate a grantee’s employment or service for cause, all of the grantee’s vested and unvested options will expire on the date of termination. If a grantee’s employment or service is terminated for any other reason, the grantee may exercise his or her vested options within 90 days of the date of termination. Any expired or unvested options return to the pool for reissuance.
In the event of a merger or consolidation of our company, or a sale of all, or substantially all, of our shares or assets or other transaction having a similar effect on us, then without the consent of the option holder, our board of directors or its designated committee, as applicable, may but is not required to (i) cause any outstanding award to be assumed or an equivalent award to be substituted by such successor corporation or (ii) in case the successor corporation refuses to assume or substitute the award (a) provide the grantee with the option to exercise the award as to all or part of the shares or (b) cancel the options against payment in cash in an amount determined by the board of directors or the committee as fair in the circumstances. Notwithstanding the foregoing, our board of directors or its designated committee may upon such event amend or terminate the terms of any award, including conferring the right to purchase any other security or asset that the board of directors shall deem, in good faith, appropriate.
Restricted share awards are ordinary shares that are awarded to a participant subject to the satisfaction of the terms and conditions established by the board of directors or a committee designated by the board of directors. Until such time as the applicable restrictions lapse, restricted shares are subject to forfeiture and may not be sold, assigned, pledged or otherwise disposed of by the participant who holds those shares. Generally, if a grantee’s employment or service is terminated for any reason prior to the expiration of the time when the restrictions lapse, shares that are still restricted will be forfeited.
The following table presents certain data for our 2003 Plan and 2013 Plan as at December 31, 2014.
| | | | | | Grants of restricted shares | | | Grants of restricted shares units (RSU) | | | Grants of share options | |
| Plan | | Shares available for future grants | | | Number of vested shares | | | Number of unvested shares | | | Number of vested RSUs | | | Number of unvested RSUs | | | Aggregate number exercised | | | Aggregate number outstanding | | | Weighted average exercise price of outstanding options | |
| 2003 Plan | | | | — | | | | — | | | | | | | - | | | | - | | | | 1,993,585 | | | | 1,035,611 | | | | 2.85 | |
| 2013 Plan | | | | 67,772 | (1) | | | 48,620 | | | | 116,960 | | | | - | | | | 269,231 | | | | - | | | | 552,001 | | | | 13.77 | |
| | (1) | As of January 1, 2015, the reserved pool under the 2013 Plan increased to 517,422 pursuant to the provisions of the 2013 Plan. |
From January 1, 2015 through February 17, 2015, we granted an additional 343,813 options and 164,148 restricted shares units to our employees, officers and directors.
Board of Directors
Under the Israeli Companies Law, the management of our business is vested in our board of directors. Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders or to management. Our executive officers are responsible for our day-to-day management and have individual responsibilities established by our board of directors. Our Chief Executive Officer is appointed by, and serves at the discretion of, our board of directors, subject to the employment agreement that we have entered into with him. All other executive officers are also appointed by our board of directors, and are subject to the terms of any applicable employment agreements that we may enter into with them.
We comply with the rule of the NASDAQ Stock Market that a majority of our directors be independent. Our board of directors has determined that all of our directors are independent under such rules. The definition of independent director under NASDAQ rules and external director under the Israeli Companies Law overlap to a significant degree such that we would generally expect the two directors serving as external directors to satisfy the requirements to be independent under NASDAQ rules. The definition of external director under the Israeli Companies Law includes a set of statutory criteria that must be satisfied, including criteria whose aim is to ensure that there is no factor that would impair the ability of the external director to exercise independent judgment. The definition of independent director under NASDAQ rules specifies similar, although less stringent, requirements in addition to the requirement that the board consider any factor which would impair the ability of the independent director to exercise independent judgment. In addition, both external directors and independent directors serve for a period of three years; external directors pursuant to the requirements of the Israeli Companies Law and independent directors pursuant to the staggered board provisions of our articles of association. However, external directors must be elected by a special majority of shareholders while independent directors may be elected by an ordinary majority. See “— External directors” for a description of the requirements under the Israeli Companies Law for a director to serve as an external director.
Under our amended articles of association, our board of directors must consist of at least seven and not more than 11 directors, including at least two external directors required to be appointed under the Israeli Companies Law. At any time, the minimum number of directors (other than external directors) may not fall below five. Our board of directors currently consists of eight directors, including our two external directors. Other than our external directors, for whom special election requirements apply under the Israeli Companies Law, as detailed below, our directors are divided into three classes with staggered three-year terms. Each class of directors consists, as nearly as possible, of one-third of the total number of directors constituting the entire board of directors (other than the external directors). At each annual general meeting of our shareholders, the election or re-election of directors following the expiration of the term of office of the directors of that class of directors, will be for a term of office that expires on the third annual general meeting following such election or re-election, such that each year the term of office of only one class of directors will expire. Each director will hold office until the annual general meeting of our shareholders for the year in which his or her term expires, unless they are removed by a vote of 65% of the voting power of our shareholders at a general meeting of our shareholders or upon the occurrence of certain events, in accordance with the Israeli Companies Law and our amended articles of association.
Our directors are divided among the three classes as follows:
| | • | the Class I directors are Holger Liepmann and Yossi Peled, and their terms will expire at the annual general meeting of shareholders to be held in 2017; |
| | • | the Class II directors are Imanuel (Mani) Wasserman and Nir Belzer, and their terms will expire at the annual general meeting of shareholders to be held in 2015; and |
| | • | the Class III directors are Steve Dubin and Dov Pekelman, and their terms will expire at the annual general meeting of shareholders to be held in 2016. |
In addition, our amended articles of association allow our board of directors to appoint directors to fill vacancies on our board of directors, for a term of office equal to the remaining period of the term of office of the director(s) whose office(s) have been vacated. External directors are elected for an initial term of three years and may be elected for additional three-year terms under the circumstances described below. External directors may be removed from office only under the limited circumstances set forth in the Israeli Companies Law. See “— External directors” below.
Under the Israeli Companies Law and our articles of association, nominations for directors may be made by any shareholder holding at least 1% of our outstanding voting power. However, any such shareholder may make such a nomination only if a written notice of such shareholder’s intent to make such nomination has been given to our Secretary (or, if we have no Secretary, our Chief Executive Officer). Any such notice must include certain information, including, among other things, a description of all arrangements between the nominating shareholder and the proposed director nominee(s) and any other person pursuant to which the nomination(s) are to be made by the nominating shareholder, the consent of the proposed director nominee(s) to serve as our director(s) if elected and a declaration signed by the nominee(s) declaring that there is no limitation under the Israeli Companies Law preventing their election, and that all of the information that is required under the Israeli Companies Law to be provided to us in connection with such election has been provided.
Under the Israeli Companies Law, our board of directors must determine the minimum number of directors who are required to have accounting and financial expertise. See “— External directors.” In determining the number of directors required to have such expertise, our board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that the minimum number of directors of our company who are required to have accounting and financial expertise is one.
External directors
Under the Israeli Companies Law, we are required to include at least two members who qualify as external directors. Joseph Tenne and Michal Silverberg currently serve as our external directors.
The provisions of the Israeli Companies Law set forth special approval requirements for the election of external directors. External directors must be elected by a majority vote of the shares present and voting at a shareholders meeting, provided that either:
| | • | such majority includes at least a majority of the shares held by all shareholders who are non-controlling shareholders and do not have a personal interest in the election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) that are voted at the meeting, excluding abstentions, to which we refer as a disinterested majority; or |
| | • | the total number of shares voted by non-controlling shareholders and by shareholders who do not have a personal interest in the election of the external director against the election of the external director does not exceed two percent (2%) of the aggregate voting rights in the company. |
The term “controlling shareholder” is defined in the Israeli Companies Law as a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in a company or has the right to appoint the majority of the directors of the company or its general manager. With respect to certain matters, a controlling shareholder is deemed to include a shareholder that holds 25% or more of the voting rights in a public company if no other shareholder holds more than 50% of the voting rights in the company, but excludes a shareholder whose power derives solely from his or her position as a director of the company or from any other position with the company.
Our two external directors serve on the Board for fixed three-year periods. Under the Israeli Companies law, the initial term of an external director is three years. Thereafter, an external director may be reelected by shareholders to serve in that capacity for up to two additional three-year terms, provided that either:
| | (i) | his or her service for each such additional term is recommended by one or more shareholders holding at least 1% of the company’s voting rights and is approved at a shareholders meeting by a disinterested majority, where the total number of shares held by non-controlling, disinterested shareholders voting for such reelection exceeds 2% of the aggregate voting rights in the company, subject to additional restrictions set forth in the Israeli Companies Law with respect to the affiliations of the external director nominee; or |
| | (ii) | his or her service for each such additional term is recommended by the board of directors and is approved at a shareholders meeting by the same majority required for the initial election of an external director (as described above). |
The term of office for external directors for Israeli companies traded on certain foreign stock exchanges, including the NASDAQ Global Select Market, may be extended indefinitely in increments of additional three-year terms, in each case provided that the audit committee and the board of directors of the company confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period(s) is beneficial to the company, and provided that the external director is reelected subject to the same shareholder vote requirements (as described above). Prior to the approval of the reelection of the external director at a general shareholders meeting, the company’s shareholders must be informed of the term previously served by him or her and of the reasons why the board of directors and audit committee recommended the extension of his or her term.
External directors may be removed from office by a special general meeting of shareholders called by the board of directors, which approves such dismissal by the same shareholder vote percentage required for their election or by a court, in each case, only under limited circumstances, including ceasing to meet the statutory qualifications for appointment, or violating their duty of loyalty to the company. If an external directorship becomes vacant and there are fewer than two external directors on the board of directors at the time, then the board of directors is required under the Israeli Companies Law to call a shareholders’ meeting as soon as practicable to appoint a replacement external director.
Each committee of the board of directors that exercises the powers of the board of directors must include at least one external director, except that the audit committee and the compensation committee must include all external directors then serving on the board of directors, and an external director must serve as the chairperson thereof. Under the Israeli Companies Law, external directors of a company are prohibited from receiving, directly or indirectly, any compensation from the company other than for their services as external directors pursuant to the Israeli Companies Law and the regulations promulgated thereunder. Compensation of an external director is determined prior to his or her appointment and may not be changed during his or her term subject to certain exceptions.
The Israeli Companies Law provides that a person is not qualified to be appointed as an external director if (i) the person is a relative of a controlling shareholder of the company, or (ii) if that person or his or her relative, partner, employer, another person to whom he or she was directly or indirectly subordinate, or any entity under the person’s control, has or had, during the two years preceding the date of appointment as an external director: (a) any affiliation or other disqualifying relationship with the company, with any person or entity controlling the company or a relative of such person, or with any entity controlled by or under common control with the company; or (b) in the case of a company with no shareholder holding 25% or more of its voting rights, had at the date of appointment as an external director, any affiliation or other disqualifying relationship with a person then serving as chairman of the board or chief executive officer, a holder of 5% or more of the issued share capital or voting power in the company or the most senior financial officer.
The term relative is defined in the Israeli Companies Law as a spouse, sibling, parent, grandparent or descendant; spouse’s sibling, parent or descendant; and the spouse of each of the foregoing persons.
Under the Israeli Companies Law, the term affiliation and the similar types of disqualifying relationships include (subject to certain exceptions):
| | • | an employment relationship; |
| | • | a business or professional relationship even if not maintained on a regular basis (excluding insignificant relationships); |
| | • | service as an office holder, excluding service as a director in a private company prior to the initial public offering of its shares if such director was appointed as a director of the private company in order to serve as an external director following the initial public offering. |
The term “office holder” is defined in the Israeli Companies Law as a general manager, chief business manager, deputy general manager, vice general manager, any other person assuming the responsibilities of any of these positions regardless of that person’s title, a director and any other manager directly subordinate to the general manager.
In addition, no person may serve as an external director if that person’s position or professional or other activities create, or may create, a conflict of interest with that person’s responsibilities as a director or otherwise interfere with that person’s ability to serve as an external director or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange. A person may furthermore not continue to serve as an external director if he or she received direct or indirect compensation from the company including amounts paid pursuant to indemnification or exculpation contracts or commitments and insurance coverage for his or her service as an external director, other than as permitted by the Israeli Companies Law and the regulations promulgated thereunder.
Following the termination of an external director’s service on a board of directors, such former external director and his or her spouse and children may not be provided a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholder’s control. This includes engagement as an office holder of the company or a company controlled by its controlling shareholder or employment by, or provision of services to, any such company for consideration, either directly or indirectly, including through a corporation controlled by the former external director. This restriction extends for a period of two years with regard to the former external director and his or her spouse or child and for one year with respect to other relatives of the former external director.
If at the time at which an external director is appointed all members of the board of directors who are not controlling shareholders or relatives of controlling shareholders of the company are of the same gender, the external director to be appointed must be of the other gender. A director of one company may not be appointed as an external director of another company if a director of the other company is acting as an external director of the first company at such time.
According to the Israeli Companies Law and the regulations promulgated thereunder, a person may be appointed as an external director only if he or she has professional qualifications or if he or she has accounting and financial expertise (each, as defined below); provided that, at least one of the external directors must be determined by our board of directors to have accounting and financial expertise. However, if at least one of our other directors (i) meets the independence requirements under the Exchange Act; (ii) meets the standards of the NASDAQ Stock Market rules for membership on the audit committee; and (iii) has accounting and financial expertise as defined under Israeli Companies Law, then neither of our external directors is required to possess accounting and financial expertise as long as each possesses the requisite professional qualifications.
A director with accounting and financial expertise is a director who, due to his or her education, experience and skills, possesses an expertise in, and an understanding of, financial and accounting matters and financial statements, such that he or she is able to understand the financial statements of the company and initiate a discussion about the presentation of financial data. A director is deemed to have professional qualifications if he or she has any of (i) an academic degree in economics, business management, accounting, law or public administration; (ii) an academic degree or has completed another form of higher education in the primary field of business of the company or in a field which is relevant to his/her position in the company; or (iii) at least five years of experience serving in one of the following capacities, or at least five years of cumulative experience serving in two or more of the following capacities: (a) a senior business management position in a company with a significant volume of business; (b) a senior position in the company’s primary field of business; or (c) a senior position in public administration or service. The board of directors is charged with determining whether a director possesses financial and accounting expertise or professional qualifications.
Our board of directors has determined that Joseph Tenne has accounting and financial expertise and possesses professional qualifications as required under the Israeli Companies Law.
Audit Committee
Our audit committee consists of Dov Pekelman, along with our two external directors, Joseph Tenne and Michal Silverberg. Joseph Tenne serves as the Chairman of the audit committee.
Companies Law Requirements
Under the Israeli Companies Law, we are required to have an audit committee comprised of at least three directors, including all of the external directors and one of whom must serve as chairman of the committee. The audit committee may not include the chairman of the board, a controlling shareholder of the company, a relative of a controlling shareholder, a director employed by or providing services on a regular basis to the company, to a controlling shareholder or to an entity controlled by a controlling shareholder or a director who derives most of his or her income from a controlling shareholder.
In addition, under the Israeli Companies Law, the audit committee of a publicly traded company must consist of a majority of unaffiliated directors. In general, an “unaffiliated director” under the Israeli Companies Law is defined as either an external director or as a director who meets the following criteria:
| | • | he or she meets the qualifications for being appointed as an external director, except for (i) the requirement that the director be an Israeli resident (which does not apply to companies such as ours whose securities have been offered outside of Israel or are listed outside of Israel); and (ii) the requirement for accounting and financial expertise or professional qualifications; and |
| | • | he or she has not served as a director of the company for a period exceeding nine consecutive years. For this purpose, a break of less than two years in the service shall not be deemed to interrupt the continuation of the service. |
NASDAQ Listing Requirements
Under the NASDAQ corporate governance rules, we are required to maintain an audit committee consisting of at least three independent directors, each of whom is financially literate and one of whom has accounting or related financial management expertise.
Our audit committee consists of Joseph Tenne, chairman, and Michal Silverberg and Dov Pekelman, each of whom is an independent director in accordance with Rule 10A-3(b)(1) under the Exchange Act and satisfies the independent director requirements under the NASDAQ Stock Market rules. All members of our audit committee meet the requirements for financial literacy under the NASDAQ corporate governance rules. Our board of directors has determined that Joseph Tenne meets the requirements of an audit committee financial expert as defined by the SEC rules.
Audit Committee Role
Our board of directors has adopted an audit committee charter that sets forth the responsibilities of the audit committee consistent with the rules and regulations of the SEC and the NASDAQ Stock Market rules, as well as the requirements for such committee under the Israeli Companies Law, including the following:
| | • | oversight of our independent registered public accounting firm and recommending the engagement, compensation or termination of engagement of our independent registered public accounting firm to the board of directors in accordance with Israeli law; |
| | • | recommending the engagement or termination of the person filling the office of our internal auditor; and |
| | • | recommending the terms of audit and non-audit services provided by the independent registered public accounting firm for pre-approval by our board of directors. |
Our audit committee provides assistance to our 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 pre-approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees the audit efforts of our independent accountants and takes those actions that it deems necessary to satisfy itself that the accountants are independent of management.
Under the Israeli Companies Law, our audit committee is responsible for:
| | (i) | determining whether there are deficiencies in the business management practices of our company, including in consultation with our internal auditor or the independent auditor, and making recommendations to the board of directors to improve such practices; |
| | (ii) | determining whether to approve certain related party transactions (including transactions in which an office holder has a personal interest and whether any such transaction is extraordinary or material under Israeli Companies Law) (see “— Approval of related party transactions under Israeli law”); |
| | (iii) | establishing the approval process (including, potentially, the approval of the audit committee) for certain transactions with a controlling shareholder or in which a controlling shareholder has a personal interest; |
| | (iv) | where the board of directors approves the working plan of the internal auditor, examining such work plan before its submission to the board of directors and proposing amendments thereto; |
| | (v) | examining our internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to dispose of its responsibilities; |
| | (vi) | examining the scope of our independent auditor’s work and compensation and submitting a recommendation with respect thereto to our board of directors or shareholders, depending on which of them is considering the appointment of our auditor; and |
| | (vii) | establishing procedures for the handling of employees’ complaints as to the management of our business and the protection to be provided to such employees. |
Our audit committee may not approve any actions requiring its approval (see “— Approval of related party transactions under Israeli law”), unless at the time of the approval a majority of the committee’s members are present, which majority consists of unaffiliated directors including at least one external director.
Compensation Committee and Compensation Policy
Our compensation committee consists of Joseph Tenne, chairman, and Michal Silverberg and Nir Belzer, each of whom is independent under NASDAQ Stock Market rules.
Under the Israeli Companies Law, the board of directors of a public company must appoint a compensation committee. The compensation committee must be comprised of at least three directors, including all of the external directors, who must constitute a majority of the members of, and include the chairperson of, the compensation committee. However, subject to certain exceptions, Israeli companies whose securities are traded on stock exchanges such as the NASDAQ Global Select Market, and who do not have a controlling shareholder, do not have to meet this majority requirement; provided, however, that the compensation committee meets other Israeli Companies Law composition requirements, as well as the requirements of the jurisdiction where the company’s securities are traded. Each compensation committee member who is not an external director must be a director whose compensation does not exceed an amount that may be paid to an external director. The compensation committee is subject to the same Israeli Companies Law restrictions as the audit committee as to who may not be a member of the compensation committee.
The duties of the compensation committee include the recommendation to the company’s board of directors of a policy regarding the terms of engagement of office holders, to which we refer as a compensation policy. That policy must be adopted by the company’s board of directors, after considering the recommendations of the compensation committee, and will need to be brought for approval by the company’s shareholders, which approval requires what we refer to as a Special Majority Approval for Compensation. A Special Majority Approval for Compensation requires shareholder approval by a majority vote of the shares present and voting at a meeting of shareholders called for such purpose, provided that either: (a) such majority includes at least a majority of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest in such compensation arrangement; or (b) the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in the compensation arrangement and who vote against the arrangement does not exceed 2% of the company’s aggregate voting rights..
We have adopted a compensation policy which serves as the basis for decisions concerning the financial terms of employment or engagement of office holders, including exculpation, insurance, indemnification or any monetary payment or obligation of payment or other benefit in respect of employment or engagement. The compensation policy must relate to certain factors, including advancement of the company’s objectives, the company’s business plan and its long-term strategy, and creation of appropriate incentives for office holders. It must also consider, among other things, the company’s risk management, size and the nature of its operations. The compensation policy must furthermore consider the following additional factors:
| | • | the knowledge, skills, expertise and accomplishments of the relevant office holder; |
| | • | the office holder’s roles and responsibilities and prior compensation agreements with him or her; |
| | • | the relationship between the terms offered and the average compensation of the other employees of the company, including those employed through manpower companies; |
| | • | the impact of disparities in salary upon work relationships in the company; |
| | • | the possibility of reducing variable compensation at the discretion of the board of directors; and the possibility of setting a limit on the exercise value of non-cash variable equity-based compensation; and |
| | • | as to severance compensation, the period of service of the office holder, the terms of his or her compensation during such service period, the company’s performance during that period of service, the person’s contribution towards the company’s achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving the company. |
| | The compensation policy must also include the following principles: |
| | • | the link between variable compensation and long-term performance and measurable criteria; |
| | • | the relationship between variable and fixed compensation, and the ceiling for the value of variable compensation; |
| | • | the conditions under which an office holder would be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate and was required to be restated in the company’s financial statements; |
| | • | the minimum holding or vesting period for variable, equity-based compensation; and |
| | • | maximum limits for severance compensation. |
The compensation committee is responsible for (a) recommending the compensation policy to a company’s board of directors for its approval (and subsequent approval by its shareholders) and (b) duties related to the compensation policy and to the compensation of a company’s office holders as well as functions previously fulfilled by a company’s audit committee with respect to matters related to approval of the terms of engagement of office holders, including:
| | • | recommending whether a compensation policy should continue in effect, if the then-current policy has a term of greater than three (3) years (approval of either a new compensation policy or the continuation of an existing compensation policy must in any case occur every three years); |
| | • | recommending to the board of directors periodic updates to the compensation policy; |
| | • | assessing implementation of the compensation policy; |
| | • | approving compensation terms of executive officers, directors and employees that require approval of the compensation committee; |
| | • | determining whether the compensation terms of a chief executive officer nominee, which were determined pursuant to the compensation policy, will be exempt from approval of the shareholders because such approval would harm the ability to engage with such nominee; and |
| | • | determining, subject to the approval of the board and under special circumstances, override a determination of the company’s shareholders regarding certain compensation related issues. |
Compensation Committee Role
Our board of directors has adopted a compensation committee charter setting forth the responsibilities of the compensation committee, which include:
| | • | the responsibilities set forth in the compensation policy; |
| | • | reviewing and approving the granting of options and other incentive awards to the extent such authority is delegated by our board of directors; and |
| | • | reviewing, evaluating and making recommendations regarding the compensation and benefits for our non-employee directors. |
Nominating and Governance Committee
Our nominating and governance committee consists of Mani Wasserman, chairman, Steve Dubin and Joseph Tenne. Our board of directors has adopted a nominating and governance committee charter that sets forth the responsibilities of the nominating and governance committee, which include:
| | • | overseeing and assisting our board in reviewing and recommending nominees for election as directors; |
| | • | assessing the performance of the members of our board; and |
| | • | establishing and maintaining effective corporate governance policies and practices, including, but not limited to, developing and recommending to our board a set of corporate governance guidelines applicable to our company. |
Internal Auditor
Under the Israeli Companies Law, the board of directors of an Israeli public company must appoint an internal auditor recommended by the audit committee. An internal auditor may not be:
| | • | a person (or a relative of a person) who holds 5% or more of the company’s outstanding shares or voting rights; |
| | • | a person (or a relative of a person) who has the power to appoint a director or the general manager of the company; |
| | • | an office holder (including a director) of the company (or a relative thereof); or |
| | • | a member of the company’s independent accounting firm, or anyone on its behalf. |
The role of the internal auditor is to examine, among other things, our compliance with applicable law and orderly business procedures. The audit committee is required to oversee the activities and to assess the performance of the internal auditor as well as to review the internal auditor’s work plan. . Our internal auditor is an employee of the Israeli member firm of KPMG and not functioning as an employee or officer of the company.
Approval of related party transactions under Israeli law
Fiduciary duties of directors and executive officers
The Israeli Companies Law codifies the fiduciary duties that office holders owe to a company. Each person listed in the table under “—Directors and Senior Management” is an office holder under the Israeli Companies Law.
An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of loyalty requires that an office holder act in good faith and in the best interests of the company.
The duty of care includes a duty to use reasonable means to obtain:
| | • | information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position; and |
| | • | all other important information pertaining to any such action. |
The duty of loyalty includes a duty to:
| | • | refrain from any conflict of interest between the performance of his or her duties to the company and his or her other duties or personal affairs; |
| | • | refrain from any activity that is competitive with the company; |
| | • | refrain from exploiting any business opportunity of the company to receive a personal gain for himself or herself or others; and |
| | • | disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder. |
| Disclosure of personal interests of an office holder and approval of certain transactions |
The Israeli Companies Law requires that an office holder promptly disclose to the board of directors any personal interest that he or she may be aware of and all related material information or documents concerning any existing or proposed transaction with the company. An interested office holder’s disclosure must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. A personal interest includes an interest of any person in an act or transaction of a company, including a personal interest of such person’s relative or of a corporate body in which such person or a relative of such person is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager, but excluding a personal interest stemming from one’s ownership of shares in the company. A personal interest furthermore includes the personal interest of a person for whom the office holder holds a voting proxy or the personal interest of the office holder with respect to his or her vote on behalf of a person for whom he or she holds a proxy even if such shareholder has no personal interest in the matter. An office holder is not, however, obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in a transaction that is not considered an extraordinary transaction. Under the Israeli Companies Law, an extraordinary transaction is defined as any of the following:
| | • | a transaction other than in the ordinary course of business; |
| | • | a transaction that is not on market terms; or |
| | • | a transaction that may have a material impact on a company’s profitability, assets or liabilities. |
If it is determined that an office holder has a personal interest in a transaction which is not an extraordinary transaction, approval by the board of directors is required for the transaction, unless the company’s articles of association provide for a different method of approval. Further, so long as an office holder has disclosed his or her personal interest in a transaction, the board of directors may approve an action by the office holder that would otherwise be deemed a breach of his or her duty of loyalty. However, a company may not approve a transaction or action that is not in the best interests of the company or that is not performed by the office holder in good faith. An extraordinary transaction in which an office holder has a personal interest requires approval first by the company’s audit committee and subsequently by the board of directors. The compensation of, or an undertaking to indemnify or insure, an office holder who is not a director requires approval first by the company’s compensation committee, then by the company’s board of directors. If such compensation arrangement or an undertaking to indemnify or insure is inconsistent with the company’s stated compensation policy or if the office holder is the chief executive officer (apart from a number of specific exceptions), then such arrangement is further subject to a Special Majority Approval for Compensation. . Arrangements regarding the compensation, indemnification or insurance of a director require the approval of the compensation committee, board of directors and shareholders by ordinary majority, in that order, and under certain circumstances, a Special Majority Approval for Compensation.
Generally, a person who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit committee may not be present at such a meeting or vote on that matter unless the chairman of the relevant committee or board of directors (as applicable) determines that he or she should be present in order to present the transaction that is subject to approval. If a majority of the members of the audit committee or the board of directors (as applicable) has a personal interest in the approval of a transaction, then all directors may participate in discussions of the audit committee or the board of directors (as applicable) on such transaction and the voting on approval thereof, but shareholder approval is also required for such transaction.
| Disclosure of personal interests of controlling shareholders and approval of certain transactions |
Pursuant to Israeli law, the disclosure requirements regarding personal interests that apply to directors and executive officers also apply to a controlling shareholder of a public company. In the context of a transaction involving a shareholder of the company, a controlling shareholder also includes a shareholder who holds 25% or more of the voting rights in the company if no other shareholder holds more than 50% of the voting rights in the company. For this purpose, the holdings of all shareholders who have a personal interest in the same transaction will be aggregated. The approval of the audit committee or the compensation committee, the board of directors and the shareholders of the company, in that order is required for (a) extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, (b) the engagement with a controlling shareholder or his or her relative, directly or indirectly, including through a company under the control of the controlling shareholder, for the provision of services to the company, (c) the terms of engagement and compensation of a controlling shareholder or his or her relative who is an office holder or (d) the employment of a controlling shareholder or his or her relative by the company, other than as an office holder. In addition, the shareholder approval requires one of the following, which we refer to as a Special Majority:
• at least a majority of the shares held by all shareholders who do not have a personal interest in the transaction and who are present and voting at the meeting approves the transaction, excluding abstentions; or
• the shares voted against the transaction by shareholders who have no personal interest in the transaction and who are present and voting at the meeting do not exceed 2% of the voting rights in the company.
To the extent that any such transaction with a controlling shareholder is for a period extending beyond three years, approval is required once every three years, unless, with respect to certain transactions, the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto.
Arrangements regarding the compensation, indemnification or insurance of a controlling shareholder in his or her capacity as an office holder require the approval of the compensation committee, board of directors and shareholders by a Special Majority, in that order, and the terms thereof may not be inconsistent with the company’s stated compensation policy.
Pursuant to regulations promulgated under the Israeli Companies Law, certain transactions with a controlling shareholder or his or her relative, or with directors, that would otherwise require approval of a company’s shareholders may be exempt from shareholder approval upon certain determinations of the audit committee and board of directors. Under these regulations, a shareholder holding at least 1% of the issued share capital of the company may require, within 14 days of the publication of such determinations, that despite such determinations by the audit committee and the board of directors, such transaction will require shareholder approval under the same majority requirements that would otherwise apply to such transactions.
Pursuant to the Israeli Companies Law, a shareholder has a duty to act in good faith and in a customary manner toward the company and other shareholders and to refrain from abusing his or her power in a company, including, among other things, in voting at a general meeting and at shareholder class meetings with respect to the following matters:
| | • | an amendment to the company’s articles of association; |
| | • | an increase of the company’s authorized share capital; |
| | • | the approval of related party transactions and acts of office holders that require shareholder approval. |
A shareholder also has a general duty to refrain from discriminating against other shareholders.
In addition, certain shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that he or she has the power to determine the outcome of a shareholder vote and any shareholder who has the power to appoint or to prevent the appointment of an office holder of the company or other power towards the company. The Israeli Companies Law does not define the substance of the duty of fairness, except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness.
Exculpation, insurance and indemnification of directors and officers
Under the Israeli Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care but only if a provision authorizing such exculpation is included in its articles of association. Our articles of association include such a provision. A company may not exculpate in advance a director from liability arising out of a prohibited dividend or distribution to shareholders.
Under the Israeli Companies Law, a company may indemnify an office holder in respect of the following liabilities and expenses incurred for acts performed by him or her as an office holder, either pursuant to an undertaking made in advance of an event or following an event, provided its articles of association include a provision authorizing such indemnification:
| | • | financial liability imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the abovementioned foreseen events and amount or criteria; |
| | • | reasonable litigation expenses, including attorneys’ fees, incurred by the office holder (1) as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding; and (ii) no financial liability was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and (2) in connection with a monetary sanction; and |
| | • | reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf, or by a third party, or in connection with criminal proceedings in which the office holder was acquitted, or as a result of a conviction for an offense that does not require proof of criminal intent. |
Under the Israeli Companies Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an office holder if and to the extent provided in the company’s articles of association:
| | • | a breach of the duty of loyalty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company; |
| | • | a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office holder; and |
| | • | a financial liability imposed on the office holder in favor of a third party. |
Under the Israeli Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:
| | • | a breach of the duty of loyalty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company; |
| | • | a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder; |
| | • | an act or omission committed with intent to derive illegal personal benefit; or |
| | • | a fine or forfeit levied against the office holder. |
Under the Israeli Companies Law, exculpation, indemnification and insurance of office holders in a public company must be approved by the compensation committee and the board of directors and, with respect to certain office holders or under certain circumstances, also by the shareholders. See “— Approval of related party transactions under Israeli law.”
Our articles of association permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted or to be permitted by the Israeli Companies Law.
In addition, we have entered into agreements with each of our directors and executive officers exculpating them from liability to us for damages caused to us as a result of a breach of duty of care and undertaking to indemnify them, in each case, to the fullest extent permitted by our articles of association and Israeli law.
The maximum indemnification amount set forth in such agreements is limited to an amount the higher of (x) 25% of our total shareholders’ equity based on our most recently published financial statements prior to the time that indemnification is paid; or (y) $25 million; provided, however, that in relation to indemnification claimed in connection with a public offering of our securities, the amount, if higher, shall be equal to the aggregate proceeds raised by us and/or selling shareholders. The maximum amount set forth in such agreements is in addition to any amount paid (if paid) under insurance and/or by a third-party pursuant to an indemnification arrangement.
We have obtained directors and officers liability insurance for the benefit of our office holders and intend to continue to maintain such coverage and pay all premiums thereunder to the fullest extent permitted by the Israeli Companies Law.
The total number of our full-time employees and the distribution of our employees (i) geographically; and (ii) according to main area of activity, as of the end of each of the last three years, are set forth in the following two tables, respectively:
| | | Number of full-time employees by region as of December 31, | |
| | | 2012 | | | 2013 | | | 2014 | |
| Region | | | | | | | | | | | | |
| Israel | | | 104 | | | | 126 | | | | 136 | |
| United States | | | 26 | | | | 30 | | | | 31 | |
| China | | | 1 | | | | 2 | | | | 2 | |
| Australia | | | - | | | | - | | | | 1 | |
| Total | | | 131 | | | | 158 | | | | 170 | |
| | | Number of full-time employees by area of activity as of December 31, | |
| | | 2012 | | | 2013 | | | 2014 | |
| Area of Activity | | | | | | | | | | | | |
| Management and administrative | | | 19 | | | | 26 | | | | 28 | |
| Research and development | | | 27 | | | | 29 | | | | 34 | |
| Operations and manufacture | | | 37 | | | | 49 | | | | 52 | |
| Sales and marketing | | | 37 | | | | 43 | | | | 45 | |
| Quality | | | 11 | | | | 11 | | | | 11 | |
| Total | | | 131 | | | | 158 | | | | 170 | |
During the periods covered by the above tables, we did not employ a significant number of temporary employees.
Israeli labor laws govern the length of the workday, minimum wages for employees, procedures for hiring and dismissing employees, determination of severance pay, annual leave, sick days, advance notice of termination, payments to the National Insurance Institute, and other conditions of employment and include equal opportunity and anti-discrimination laws. While none of our employees is party to any collective bargaining agreements, 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) are applicable to our employees in Israel by order of the Israeli Ministry of the Economy (formerly the Ministry of Industry, Trade and Labor). These provisions primarily concern pension fund benefits for all employees, insurance for work-related accidents, recuperation pay and travel expenses. We generally provide our employees with benefits and working conditions beyond the required minimums.
We have never experienced any employment-related work stoppages and believe our relationships with our employees are good.
For information regarding the share ownership of our directors and executive officers, please refer to “Item 6.B. Directors, Senior Management and Employees—Compensation—Option plans” and “Item 7.A. Major Shareholders and Related Party Transactions—
Major Shareholders.”
Our directors and executive officers hold, in the aggregate, as of February 17, 2015, options exercisable for 982,893 ordinary shares, which have a weighted average exercise price of $5.89 per share and have expiration dates generally ten years after the grant date of the option. In addition, as of February 17, 2015, our directors and executive officers hold, in the aggregate, 199,854 restricted share unites and 136,510 restricted shares.
ITEM 7: Major Shareholders and Related Party Transactions
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of February 17, 2015:
| | • | each person or entity known by us to own beneficially more than 5% of our outstanding ordinary shares; |
| | • | each of our executive officers and directors individually; and |
| | • | all of our executive officers and directors as a group. |
The beneficial ownership of our ordinary shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power, or the right to receive the economic benefit of ownership. For purposes of the table below, we deem ordinary shares issuable pursuant to options that are currently exercisable or exercisable within 60 days of February 17, 2015 to be outstanding and to be beneficially owned by the person holding the options for the purposes of computing the percentage ownership of that person, but we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person. The percentage of ordinary shares beneficially owned is based on 22,495,779 ordinary shares outstanding as of February 17, 2015.
Except where otherwise indicated, we believe, based on information furnished to us by such owners, that the beneficial owners of the ordinary shares listed below have sole investment and voting power with respect to such shares.
As of February 17, 2015, we are aware of five U.S. persons that are holders of record of our shares. Such holders of record currently hold, in the aggregate, 17,227,725 ordinary shares, constituting 76.6% of the beneficial ownership of our outstanding ordinary shares.
Unless otherwise noted below, each shareholder’s address is c/o Enzymotec Ltd., Sagi 2000 Industrial Area, P.O. Box 6, Migdal Ha’Emeq 2310001, Israel.
| | | Shares Beneficially Owned | |
| Name of Beneficial Owner | | Number | | | Percent | |
| Principal and Selling Shareholders | | | | | | | | |
Galam Ltd.(1) | | | 4,623,232 | | | | 20.6 | % |
Paulson & Co. Inc. (2) | | | 4,238,275 | | | | 18.8 | % |
Visium Balanced Master Fund, Ltd. (3) | | | 2,125,000 | | | | 9.4 | % |
XT Hi-Tech Investments (1992) Ltd.(4) | | | 1,889,315 | | | | 8.4 | % |
| | | | | | | | | |
| Directors and officers | | | | | | | | |
| Steve Dubin | | | * | | | | * | |
Nir Belzer(5) | | | 231,182 | | | | 1.0 | % |
| Holger Liepmann | | | — | | | | — | |
| Dov Pekelman | | | * | | | | * | |
| Yossi Peled | | | * | | | | * | |
| Michal Silverberg | | | * | | | | * | |
| Joseph Tenne | | | * | | | | * | |
| Imanuel (Mani) Wasserman | | | — | | | | — | |
Ariel Katz(6) | | | 424,646 | | | | 1.9 | % |
| Oren Bryan | | | * | | | | * | |
| Gai Ben-Dror | | | * | | | | * | |
| Ariel Blumovich | | | — | | | | — | |
| Shahar Carmi | | | — | | | | — | |
| Robert Crim | | | — | | | | — | |
| Itay Dromi | | | — | | | | — | |
| Yaniv Gratz | | | — | | | | — | |
All directors and executive officers as a group (16 persons)(7) | | | 1,132,413 | | | | 4.9 | % |
____________
| | * | Less than 1% of our outstanding ordinary shares. |
| | (1) | Based on a Schedule 13G filed by Galam Ltd. filed on February 12, 2015, consists of 3,318,856 ordinary shares held by Galam Management and Marketing Agricultural Cooperative Society Ltd. (“Galam M&M”) and 1,304,376 ordinary shares held by Galam Ltd. (“Galam Ltd.”), its wholly-owned subsidiary. The management boards of the two entities are comprised of the same people and hold voting and dispositive power over the shares held by the two entities. As such, the members of the boards may be deemed to be the beneficial owners of those shares. There are 13 members of the management boards, two of which, Imanuel (Mani) Wasserman and Yossi Peled, are also members of our board of directors. A majority of the shares of Galam M&M are held by Ochmanit the Economic Union for Ma’anit Agricultural Cooperative Society Ltd. (“Ochmanit”). Ochmanit is wholly-owned by Kibbutz Ma’anit and its members with 51% of the voting rights held by Kibbutz Ma’anit. A majority of the members of the management boards of Galam M&M and Galam Ltd. are appointed by Ochmanit, in part based on candidates nominated by a vote of the members of Kibbutz Ma’anit. Established in 1935, Kibbutz Ma’anit is a communal society, referred to in Hebrew as a “kibbutz,” with approximately 180 members located near Pardes-Hanna between Tel Aviv and Haifa. The Kibbutz is engaged in a number of economic activities, including agriculture and industrial operations, and holds its assets on a communal basis. No members of Kibbutz Ma’anit are employed by us. The address of this shareholder is Kibbutz Ma’anit, 3785500, Israel. |
| | (2) | Based on a Schedule 13G/A filed by Paulson & Co. Inc. on February 17, 2015, consists of 4,238,275 ordinary shares held by Paulson & Co. Inc. (“Paulson”), an investment advisor that is registered under Section 203 of the Investment Advisers Act of 1940. In its role as investment advisor, or manager, Paulson possesses voting and/or investment power over our shares that are owned by various onshore and offshore investment funds and separate managed accounts (the “Funds”). All securities reported above are owned by the Funds. The address of this shareholder is 1251 Avenue of the Americas, New York, NY 10020. |
| | (3) | Based on a Schedule 13G/A filed by Visium Balanced Master Fund, Ltd. on February 12, 2015, includes 2,125,000 ordinary shares held by Visium Balanced Master Fund, Ltd., a Cayman Islands corporation (“VBMF”). Visium Asset Management, LP, a Delaware limited partnership (“VAM”) is an investment manager of the pooled assets of VBMF and as such may be deemed to beneficially own the ordinary shares held by VBMF. JG Asset, LLC, a Delaware limited liability company (“JG Asset”), is the General Partner of VAM and as such may be deemed to beneficially own the ordinary shares beneficially owned by VAM. Jacob Gottlieb, a natural person, is the Managing Member of JG Asset and as such may be deemed to beneficially own the ordinary shares beneficially owned by JG Asset. This shareholder’s principal business office is c/o Visium Asset Management, LP, 888 Seventh Avenue, New York, NY 10019. |
| | (4) | Consists of 1,889,315 shares held by XT Hi-Tech Investments (1992) Ltd. (formerly Ofer Hi-Tech Investments Ltd.). XT Hi-Tech Investments (1992) Ltd. is an indirect wholly-owned subsidiary of XT Investments Ltd., which is a direct wholly-owned subsidiary of XT Holdings Ltd. (formerly Ofer Holdings Group Ltd.), of which Orona Investments Ltd., or Orona, and Lynav Holdings Ltd., or Lynav, are each the direct owners of one-half of the outstanding ordinary shares. Udi Angel indirectly controls Orona. Lynav is held 95% by CIBC Bank and Trust Company (Cayman) Ltd., or CIBC, as trustee of a discretionary trust established in the Cayman Islands. Udi Angel is member of the board of directors of XT Hi-Tech Investments (1992) Ltd. and has a casting vote with respect to various decisions taken by the board, including voting and disposition over our shares. As such, he may be deemed to have beneficial ownership over our shares held by XT Hi-Tech Investments (1992) Ltd. The address of this shareholder is 9 Andre Saharov Street, P.O. Box 15090, Haifa 31905, Israel. |
| | (5) | Consists of 8,000 shares held by Mr. Belzer in “street name,” 6,505 shares held by Millennium Materials Technologies Fund II L.P., or MMT. Also consists of 197,374 shares held of record by M-4 Management L.P., or M-4 and 19,303 shares issuable upon the exercise of options held by Mr. Belzer. The general partner of MMT is Millennium Materials II Fund Management Company Ltd., or MMC2. Mr. Belzer is one of four persons that controls MMC2 and, as such, he may be deemed to share beneficial ownership over our shares held by MMT. Mr. Belzer controls the general partner of M-4 and therefore beneficially owns the shares held by M-4. Mr. Belzer’s address is 6 Koifman Street, Floor 14, Tel Aviv 68012, Israel. |
| | (6) | Consists of 118,646 shares held by a trustee on behalf of Dr. Katz and 306,000 shares issuable upon the exercise of options. |
| | (7) | Consists of 455,457 shares, 116,960 restricted shares and 559,996 shares issuable upon the exercise of options. Please see footnotes (5) and (6) above for further information concerning the composition of the shares beneficially owned by our executive officers and directors. |
The following sets forth the changes in percentage ownership of our major shareholders:
Immediately following our initial public offering on September 26, 2013, Galam Ltd. (and its affiliates) beneficially owned 6,521,880 ordinary shares or 31.3% of our issued and outstanding ordinary shares. On February 12, 2015, Galam Ltd. filed a Schedule 13G stated that as of December 31, 2014 it beneficially owned 4,623,232 ordinary shares or 20.6% of our issued and outstanding ordinary shares.
Immediately following the consummation of our initial public offering on September 26, 2013, XT Hi-Tech Investments (1992) Ltd. beneficially owned 3,068,704 ordinary shares or 14.7% of our issued and outstanding ordinary shares. Following our secondary offering on March 5, 2014, XT Hi-Tech Investments (1992) Ltd. beneficially owned 1,889,915 ordinary shares or 8.4% of our issued and outstanding ordinary shares.
Immediately following the consummation of our initial public offering on September 26, 2013, Millennium Materials Technologies Fund II L.P , or Millennium beneficially owned 1,667,156 ordinary shares or 8.0% of our issued and outstanding ordinary shares. Following our secondary offering on March 5, 2014, Millennium beneficially owned 536,888 ordinary shares or 1.6% of our issued and outstanding ordinary shares.
Immediately following the consummation of our initial public offering on September 26, 2013, Arancia International, Inc. beneficially owned 1,075,828 ordinary shares or 5.2% of our issued and outstanding ordinary shares. Following our secondary offering on March 5, 2014, Arancia International, Inc.beneficially owned 762,634 ordinary shares or approximately 3.5% of our issued and outstanding ordinary shares.
On February 14, 2014, Paulson & Co. filed a Schedule 13G with the SEC stating that it beneficially owned 1,733,030 ordinary shares, or 8.3% of our issued and outstanding ordinary shares. On March 10, 2014, Paulson & Co. filed a Schedule 13G/A stating that it beneficially owned 4,177,830 ordinary shares or 19.24% of our issued and outstanding ordinary shares. On February 17, 2015, Paulson & Co. filed a Schedule 13G/A stating that, as of December 31, 2014, it beneficially owned 4,238,275 ordinary shares, which is 18.8% of our issued and outstanding ordinary shares.
On March 10, 2014, VBMF filed a Schedule 13G with the SEC stating that it beneficially owned 1,140,000 ordinary shares, or 5.2% of our issued and outstanding ordinary shares. On February 12, 2015, VBMF filed a Schedule 13G/A with the SEC stating that, as of December 31, 2014 it beneficially owned 2,125,000 ordinary shares, which is 9.4% of our issued and outstanding ordinary shares.
None of the Company’s major shareholders listed above have different voting rights.
| B. Related Party Transactions |
Investors’ Rights Agreement
Pursuant to our Amended and Restated Investors’ Rights Agreement (the “Investors’ Rights Agreement”), dated as of September 22, 2013, certain of our shareholders hold registration rights as described below.
Demand registration rights
Subject to the terms of the any lock-up agreements entered into by parties to the Investors’ Rights Agreement, at the request of the holders of a majority of the then outstanding ordinary shares that are registrable pursuant to the Investors’ Rights Agreement, we must register any or all of these shareholders’ ordinary shares as follows:
| | • | before we become eligible under applicable securities laws to file a registration statement on Form F-3, we are required to effect up to two such registrations, but only if the minimum anticipated aggregate offering price of the shares to be registered exceeds $5.0 million, and |
| | • | after we become eligible under applicable securities laws to file a registration statement on Form F-3, we are required to effect an unlimited number of registrations, but only (1) if the minimum anticipated aggregate offering price of the shares to be registered exceeds $1.0 million, and (2) up to two within a period of twelve months. |
Such registration must also include any additional registrable securities requested to be included in such registration by any other holders of registrable ordinary shares who are party to the Investors’ Rights Agreement or entitled thereunder.
Our obligation to effect a registration is subject to certain qualifications and limitations, including (i) our right to postpone a registration during the period that is 60 days (30 days in the case of a Form F-3 Registration) before our good faith estimate of the date of filing of, and ending on the date 180 days (90 days in the case of a Form F-3 Registration) after the effective date of, a registration statement initiated by us; (ii) our right to postpone a registration no more than once in any 12 month period for a period of up to 90 days in the event of our furnishing a certificate signed by the Chairman of our board of directors that states that in the good faith judgment of our board of directors, it would be materially detrimental to us or our shareholders for such registration statement to either become effective or remain effective, because such action would (a) materially interfere with a significant acquisition, corporate reorganization, or other similar transaction involving us; (b) require premature disclosure of material information that we have a bona fide business purpose for preserving as confidential; or (c) render us unable to comply with requirements under the Securities Act or Exchange Act; and (iii) our right not to effect a Form F-1 Registration if the initiating holders propose to dispose of shares that may be immediately registered pursuant to a previously requested Form F-3 Registration.
Piggyback registration rights
All of our shareholders that are a party to the Investors’ Rights Agreement have the right to request that we include their registrable securities in certain registration statements that we file in connection with the public offering of our shares. If the public offering that we are effecting is underwritten, the right of any shareholder to include shares in the registration related thereto is conditioned upon the shareholder accepting the terms of the underwriting as agreed between us and the underwriters and then only in such quantity as the underwriters in their sole discretion determine will not jeopardize the success of an offering.
Expenses
We have agreed to pay all expenses incurred in carrying out the above registrations, including the reasonable fees of one counsel chosen by the selling shareholders that are a party to the Investors’ Rights Agreement. However, each shareholder participating in such registration or sale is responsible for its pro rata portion of the customary and standard discounts or commissions payable to any underwriter, as well as transfer taxes owed in connection with the sale of its shares and any individual shareholder or group of shareholders that retains separate advisors is entirely responsible for the fees and expenses related thereto.
Agreements and arrangements with, and compensation of, directors and executive officers
Employment agreements
We have entered into written employment agreements with each of our executive officers. These agreements provide for notice periods of varying duration for termination of the agreement by us or by the relevant executive officer, during which time the executive officer will continue to receive base salary and benefits. These agreements also contain customary provisions regarding noncompetition, confidentiality of information and assignment of inventions. However, the enforceability of the noncompetition provisions may be limited under applicable law. See “Item 3.D. Key Information — Risk factors — Risks relating to our business and industry — Under applicable employment laws, we may not be able to enforce covenants not to compete” for a further description of the enforceability of non-competition clauses.
Indemnification agreements
Our articles of association permit us to exculpate, indemnify and insure each of our directors and office holders to the fullest extent permitted by the Israeli Companies Law. We have entered into indemnification agreements with each of our directors and executive officers, undertaking to indemnify them to the fullest extent permitted by Israeli law, including with respect to liabilities resulting from a public offering of our shares, to the extent that these liabilities are not covered by insurance. We have also obtained Directors and Officers insurance for each of our executive officers and directors. For further information, see “Item 6.C. Directors, Senior Management and Employees — Board Practices — Exculpation, insurance and indemnification of directors and officers.”
| C. Interests of experts and counsel |
Not applicable.
ITEM 8: Financial Information
| A. Consolidated Financial Statements and Other Financial Information |
Consolidated Financial Statements
We have appended our consolidated financial statements at the end of this annual report, starting at page F-2, as part of this annual report.
Legal Proceedings
Patent litigations and proceedings related to Neptune Technologies & Bioressources Inc.
We were previously party to a number of actions initiated by Neptune Technologies & Bioressources Inc., which we refer to as Neptune, in which Neptune has claimed that our krill oil products infringe certain of its patents, namely U.S. Patent Nos. 8,030,348, 8,278,351 and 8,383,675. We refer to these three patents as the ‘348 patent, the ‘351 patent and the ‘675 patent, respectively. The complaints with respect to each of these patents were filed against us and certain other parties in the U.S. District Court for the District of Delaware, which we refer to as the District Court, in October 2011, October 2012 and February 2013, respectively. In each of the complaints, Neptune sought both permanent injunctions prohibiting us from making or selling the allegedly infringing products and an unspecified amount of monetary damages against us and the other defendants.
Additionally, in April 2013, we received a notice of an investigation by the U.S. International Trade Commission, or ITC, regarding complaints filed before the ITC by Neptune and its subsidiary, Acasti Pharma Inc. Neptune and its subsidiaries instituted these complaints against us and certain of Neptune’s other principal competitors in the United States alleging a violation of Section 337 of the Tariff Act of 1930 by reason of alleged infringement of the ‘351 patent and the ‘675 patent.
In April 2014 we signed a final settlement and license agreement with Neptune and Acasti. The ITC investigation and U.S. federal court actions were terminated and dismissed accordingly.
According to the terms of the settlement and license agreement, we received a worldwide non-exclusive license to the entire ‘348 patent family for as long as any patent in that family exists, for all of the Company’s relevant current products and future anticipated products under development.
The settlement and license agreement required a one-time upfront payment that we paid to Neptune. Further royalties payment to Neptune depend upon the outcome of (1) Inter Partes Review, or IPR, proceedings in the U.S. Patent Office, or USPTO, of certain agreed claims of the ’351 patent, and (2) a potential Australian post-grant reexamination of certain agreed claims of Neptune’s Australian Patent AU2002322233.
With respect to the ‘351 patent, in March 2014, the USPTO issued a decision instituting an IPR of the agreed claims of the ‘351 patent filed by Aker BioMarine AS, or Aker, concluding that there is reasonable likelihood that Aker will prevail in demonstrating unpatentability of those claims. On July 9, 2014, the USPTO issued a decision instituting our IPR of the agreed claims of the ‘351 patent and granted us motion to join our IPR with Aker’s IPR. The USPTO held a final hearing in the ‘351 IPR on October 31, 2014, but has not yet issued its decision. The ‘351 patent is also the subject of an ex parte reexamination, which has been stayed pending the outcome of Aker’s ‘351 IPR. Prior to the reexamination being stayed, the Patent Office rejected all claims of the ‘351 patent in a January 2, 2014 office action. That action is not final and Neptune will have an opportunity to respond once the stay is lifted.
Under the terms of the final license and settlement agreement, we submitted our post-grant reexamination to the Australian Patent Office on December 12, 2014. On January 28, 2015, the Australian Patent Office issued a reexamination report, finding that all the agreed claims lack novelty. Neptune has until March 28, 2015 to overcome the examiner’s objections, either by argument or amendment.
Claim for finder’s fee
In March 2013, a claim was filed against us in the Haifa District Court, Israel, seeking a finder’s fee in connection with funds invested in our company by one of our investors.
The claim was based upon an agreement entered into in March 2000, between us and the plaintiff, pursuant to which we agreed to pay him a finder’s fee should he introduce us to an investor who would invest an amount in excess of $500,000 in our company. In previous litigation between us and the plaintiff concerning this agreement, the plaintiff claimed to have been entitled to a finder’s fee in respect of an investment made by an investor in us, although the investment materialized more than a year later. This previous claim was adjudicated in the plaintiff’s favor and we paid him a fee of $75,000.
In the new claim, the plaintiff alleged that he was entitled to an additional finder’s fee in the amount of NIS 6.2 million (approximately $1.8 million) in connection with the multiple investments made by the same investor over the past 11 years. In May 2014 a settlement agreement was signed between us and the plaintiff under which we paid the plaintiff a fee of $78,000 as full and final settlement for all claims.
Arbitration with AAK
In May 2014, AAK submitted a request for arbitration to the International Chamber of Commerce in Amsterdam, the Netherlands, seeking a determination of the arbitrators that our disclosure of information in connection with our initial public offering was an intentional, material breach of the joint venture agreement. The request, as further developed in AAK’s statement of claim, filed on November 14, 2014, indicates that AAK believes AL is exposed to likely damage in the future as a result of the level of disclosure that the Company made about it although AAK does not provide any specific instance of this having occurred. AAK’s statement of claim does not state a measure of damages, seek termination of the joint venture agreement or seek to determine what harm, if any, was caused to AL or AAK. In addition, the statement of claim seeks declaratory relief as to the correct interpretation of certain provisions of the buy-sell mechanism under the joint venture agreement. AAK’s position is that following notice of termination provided by one party, if neither party provides the other party with a buy-sell notice before December 31, 2016, the joint venture will terminate. On December 12, 2014, we submitted our statement of defense and counterclaims in which we stated our position that we were permitted to disclose information related to AL and required to be disclosed under law in connection with our initial public offering, as well as subsequently in connection with our public company status, and we believe that we have complied with the other limitations in the joint venture agreement. We also stated our position that the joint venture agreement can only be terminated by one party buying the other party’s share, such that if the buy-sell process is not concluded by December 31, 2016, the termination is ineffective and the joint venture is automatically renewed for additional three-year period. In addition, we filed counterclaims against AAK with respect to certain disputed operational issues which we raised and with respect to AAK’s conduct during our initial public offering. On January 23, 2015, AAK submitted its statement of defense with respect to our counterclaims. The arbitration hearing is scheduled for June 2015, and an award is expected by no later than December 31, 2015.
Securities Class Action
On September 5, 2014 and September 30, 2014, two stockholders filed class action complaints in the United States District Court for the District of New Jersey, or the Court, purportedly on behalf of all persons who acquired the Company’s ordinary shares in its initial public offering or between September 27, 2013 and August 4, 2014. The lawsuits name as defendants the Company, its directors, certain of its officers and the underwriters of its initial public offering and assert claims under the United States federal securities laws. On February 11, 2015, the Court consolidated the cases as In re Enzymotec Ltd. Securities Litigation, Master File No. 14-CV-05556 though a schedule for an amended complaint and responses thereto has not yet been set. The Company believes that the lawsuits are without merit and intends to defend itself vigorously.
Dividend policy
We have never declared or paid cash or non-cash dividends to our shareholders and we do not intend to pay cash or non-cash dividends in the foreseeable future. We intend to reinvest any earnings in developing and expanding our business. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on a number of factors, including future earnings, our financial condition, operating results, contractual restrictions, capital requirements, business prospects, our strategic goals and plans to expand our business, applicable law and other factors that our board of directors may deem relevant.
See “Item 3.D. Key Information — Risk factors — Risks related to an investment in our ordinary shares — We have never paid cash or non-cash dividends on our share capital, and we do not anticipate paying any cash or non-cash dividends in the foreseeable future” for an explanation concerning the payment of dividends under Israeli law.
No significant changes have occurred since December 31, 2014, except as otherwise disclosed in this annual report.
ITEM 9: The Offer and Listing
| A. Offer and Listing Details |
Our ordinary shares began trading publicly on the NASDAQ Global Select Market on September 27, 2013 under the symbol “ENZY.” 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.
| Period | | High | | | Low | |
| Annual | | | | | | | | |
| Year ended December 31, 2014 | | $ | 30.40 | | | $ | 6.34 | |
| Year ended December 31, 2013 | | $ | 35.12 | | | $ | 14.25 | |
| Quarterly | | | | | | | | |
| First Quarter 2015 (through February 26, 2015) | | $ | 8.40 | | | $ | 5.38 | |
| Fourth Quarter 2014 | | $ | 8.75 | | | $ | 6.34 | |
| Third Quarter 2014 | | $ | 15.40 | | | $ | 6.62 | |
| Second Quarter 2014 | | $ | 22.39 | | | $ | 12.10 | |
| First Quarter 2014 | | $ | 30.40 | | | $ | 20.52 | |
| Fourth Quarter 2013 | | $ | 35.12 | | | $ | 16.31 | |
| Third Quarter 2013 (beginning on September 27, 2013) | | $ | 19.38 | | | $ | 14.25 | |
| Most Recent Six Months | | | | | | | | |
| February 2015 (through February 26, 2015) | | $ | 8.40 | | | $ | 5.38 | |
| January 2015 | | $ | 7.74 | | | $ | 6.71 | |
| December 2014 | | $ | 8.40 | | | $ | 6.64 | |
| November 2014 | | $ | 8.75 | | | $ | 6.34 | |
| October 2014 | | $ | 7.62 | | | $ | 6.35 | |
| September 2014 | | $ | 8.86 | | | $ | 6.62 | |
The closing sale price of our ordinary shares, as reported by the NASDAQ Global Select Market, on February 26, 2015, was $8.18 per ordinary share.
Not applicable.
See “— Offer and Listing Details” above.
Not applicable.
Not applicable.
Not applicable.
ITEM 10: Additional Information
Not applicable.
| B. Memorandum of Association and Articles of Association |
General
As of February 26, 2015, our authorized share capital consists of 100,000,000 ordinary shares, par value NIS 0.01 per share.
All of our outstanding ordinary shares will be validly issued, fully paid and non-assessable. Our ordinary shares are not redeemable and do not have any preemptive rights.
Registration number and purposes of the company
Our registration number with the Israeli Registrar of Companies is 51-260924-9. As set forth in Article 3 of our amended articles of association, our purpose is to engage in any lawful activity.
Voting rights and conversion
All ordinary shares will have identical voting and other rights in all respects.
Transfer of shares
Our fully paid ordinary shares are issued in registered form and may be freely transferred under our amended articles of association, unless the transfer is restricted or prohibited by another instrument, applicable law or the rules of a stock exchange on which the shares are listed for trade. The ownership or voting of our ordinary shares by non-residents of Israel is not restricted in any way by our amended articles of association or the laws of the State of Israel, except for ownership by nationals of some countries that are, or have been, in a state of war with Israel.
Election of directors
Our ordinary shares do not have cumulative voting rights for the election of directors. As a result, the holders of a majority of the voting power represented at a shareholders meeting have the power to elect all of our directors, subject to the special approval requirements for external directors described under “Item 6.C. Directors, Senior Management and Employees — Board Practices — External directors.”
Under our amended articles of association, our board of directors must consist of not less than five but no more than nine directors, not including two external directors as required by the Israeli Companies Law. Pursuant to our amended articles of association, other than the external directors, for whom special election requirements apply under the Israeli Companies Law, the vote required to appoint a director is a simple majority vote of holders of our voting shares, participating and voting at the relevant meeting. In addition, our directors, other than the external directors, are divided into three classes that are each elected at a general meeting of our shareholders every three years, in a staggered fashion (such that one class is elected each year), and serve on our board of directors until they are removed by a vote of 65% of the voting power of our shareholders at a general or special meeting of our shareholders or upon the occurrence of certain events, in accordance with the Israeli Companies Law and our amended articles of association. In addition, our amended articles of association allow our board of directors to appoint directors to fill vacancies on the board of directors to serve for a term of office equal to the remaining period of the term of office of the directors(s) whose office(s) have been vacated. External directors are elected for an initial term of three years, may be elected for additional terms of three years each under certain circumstances, and may be removed from office pursuant to the terms of the Israeli Companies Law. See “Item 6.C. Directors, Senior Management and Employees — Board Practices — External directors.
Dividend and liquidation rights
We may declare a dividend to be paid to the holders of our ordinary shares in proportion to their respective shareholdings. Under the Israeli Companies Law, dividend distributions are determined by the board of directors and do not require the approval of the shareholders of a company unless the company’s articles of association provide otherwise. Our amended articles of association do not require shareholder approval of a dividend distribution and provide that dividend distributions may be determined by our board of directors.
Pursuant to the Israeli Companies Law, the distribution amount is limited to the greater of retained earnings or earnings generated over the previous two years, according to our then last reviewed or audited financial statements, provided that the date of the financial statements is not more than six months prior to the date of the distribution, or we may distribute dividends that do not meet such criteria only with court approval. In each case, we are only permitted to distribute a dividend if our board of directors and the court, if applicable, determines that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of our ordinary shares in proportion to their shareholdings. This right, as well as the right to receive dividends, may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Exchange controls
There are currently no Israeli currency control restrictions on remittances of dividends on our ordinary shares, proceeds from the sale of the shares or interest or other payments to non-residents of Israel, except for shareholders who are subjects of countries that are, or have been, in a state of war with Israel.
Shareholder meetings
Under Israeli law, we are required to hold an annual general meeting of our shareholders once every calendar year that must be held no later than 15 months after the date of the previous annual general meeting. All meetings other than the annual general meeting of shareholders are referred to in our amended articles of association as extraordinary general meetings. Our board of directors may call extraordinary general meetings whenever it sees fit, at such time and place, within or outside of Israel, as it may determine. In addition, the Israeli Companies Law provides that our board of directors is required to convene an extraordinary general meeting upon the written request of (i) any two of our directors or one-quarter of the members of our board of directors or (ii) one or more shareholders holding, in the aggregate, either (a) 5% or more of our outstanding issued shares and 1% of our outstanding voting power or (b) 5% or more of our outstanding voting power.
Subject to the provisions of the Israeli Companies Law and the regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which may be between four and 40 days prior to the date of the meeting. Furthermore, the Israeli Companies Law requires that resolutions regarding the following matters must be passed at a general meeting of our shareholders:
| | • | amendments to our articles of association; |
| | • | appointment or termination of our auditors; |
| | • | appointment of external directors; |
| | • | approval of certain related party transactions; |
| | • | increases or reductions of our authorized share capital; |
| | • | the exercise of our board of director’s powers by a general meeting, if our board of directors is unable to exercise its powers and the exercise of any of its powers is required for our proper management. |
The Israeli Companies Law and our amended articles of association require that a notice of any annual general meeting or extraordinary general meeting be provided to shareholders at least 21 days prior to the meeting and if the agenda of the meeting includes the appointment or removal of directors, the approval of transactions with office holders or interested or related parties, or an approval of a merger, notice must be provided at least 35 days prior to the meeting.
Under the Israeli Companies Law and under our amended articles of association, shareholders are not permitted to take action via written consent in lieu of a meeting.
Voting rights
Quorum requirements
Pursuant to our amended articles of association, holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote before the shareholders at a general meeting. As a foreign private issuer, the quorum required for our general meetings of shareholders consists of at least two shareholders present in person, by proxy or written ballot who hold or represent between them at least 25% of the total outstanding voting rights. A meeting adjourned for lack of a quorum is generally adjourned to the same day in the following week at the same time and place or to a later time or date if so specified in the notice of the meeting. At the reconvened meeting, any two or more shareholders present in person or by proxy shall constitute a lawful quorum.
Vote requirements
Our amended articles of association provide that all resolutions of our shareholders require a simple majority vote, unless otherwise required by the Israeli Companies Law or by our amended articles of association. Under the Israeli Companies Law, each of (i) the approval of an extraordinary transaction with a controlling shareholder; and (ii) the terms of employment or other engagement of the controlling shareholder of the company or such controlling shareholder’s relative (even if not extraordinary) requires, the approval described above under “Item 6.C. Directors, Senior Management and Employees — Board Practices — Approval of related party transactions under Israeli law — Fiduciary duties of directors and executive officers — Disclosure of personal interests of controlling shareholders and approval of certain transactions.” Under our amended articles of association, the alteration of the rights, privileges, preferences or obligations of any class of our shares requires a simple majority of the class so affected (or such other percentage of the relevant class that may be set forth in the governing documents relevant to such class), in addition to the ordinary majority vote of all classes of shares voting together as a single class at a shareholder meeting. Our amended articles of association also require that the removal of any director from office (other than our external directors) or the amendment of the provisions of our amended articles relating to our staggered board requires the vote of 65% of the voting power of our shareholders. Another exception to the simple majority vote requirement is a resolution for the voluntary winding up, or an approval of a scheme of arrangement or reorganization, of the company pursuant to Section 350 of the Israeli Companies Law, which requires the approval of holders of 75% of the voting rights represented at the meeting, in person, by proxy or by voting deed and voting on the resolution.
Access to Corporate Records
Under the Israeli Companies Law, shareholders are provided access to: minutes of our general meetings; our shareholders register and principal shareholders register, articles of association and financial statements; and any document that we are required by law to file publicly with the Israeli Companies Registrar or the Israel Securities Authority. In addition, shareholders may request to be provided with any document related to an action or transaction requiring shareholder approval under the related party transaction provisions of the Israeli Companies Law. We may deny this request if we believe it has not been made in good faith or if such denial is necessary to protect our interest or protect a trade secret or patent.
Modification of class rights
Under the Israeli Companies Law and our amended articles of association, the rights attached to any class of share, such as voting, liquidation and dividend rights, may be amended by adoption of a resolution by the holders of a majority of the shares of that class present at a separate class meeting, or otherwise in accordance with the rights attached to such class of shares, as set forth in our amended articles of association.
Registration rights
For a discussion of registration rights we have granted to certain of our shareholders, please see “Item 7.B. Major Shareholders and Related Party Transactions — Related Party Transactions — Investors’ rights agreement.”
Acquisitions under Israeli law
Full tender offer
A person wishing to acquire shares of an Israeli public company and who would as a result hold over 90% of the target company’s issued and outstanding share capital is required by the Israeli Companies Law to make a tender offer to all of the company’s shareholders for the purchase of all of the issued and outstanding shares of the company. A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90% of the issued and outstanding share capital of a certain class of shares is required to make a tender offer to all of the shareholders who hold shares of the relevant class for the purchase of all of the issued and outstanding shares of that class. If the shareholders who do not accept the offer hold less than 5% of the issued and outstanding share capital of the company or of the applicable class, and more than half of the shareholders who do not have a personal interest in the offer accept the offer, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. However, a tender offer will also be accepted if the shareholders who do not accept the offer hold less than 2% of the issued and outstanding share capital of the company or of the applicable class of shares.
Upon a successful completion of such a full tender offer, any shareholder that was an offeree in such tender offer, whether such shareholder accepted the tender offer or not, may, within six months from the date of acceptance of the tender offer, petition an Israeli court to determine whether the tender offer was for less than fair value and that the fair value should be paid as determined by the court. However, under certain conditions, the offeror may include in the terms of the tender offer that an offeree who accepted the offer will not be entitled to petition the Israeli court as described above.
If (a) the shareholders who did not respond or accept the tender offer hold at least 5% of the issued and outstanding share capital of the company or of the applicable class or the shareholders who accept the offer constitute less than a majority of the offerees that do not have a personal interest in the acceptance of the tender offer, or (b) the shareholders who did not accept the tender offer hold 2% or more of the issued and outstanding share capital of the company (or of the applicable class), the acquirer may not acquire shares of the company that will increase its holdings to more than 90% of the company’s issued and outstanding share capital or of the applicable class from shareholders who accepted the tender offer.
Special tender offer
The Israeli Companies Law provides that an acquisition of shares of an Israeli public company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a holder of 25% or more of the voting rights in the company. This requirement does not apply if there is already another holder of at least 25% of the voting rights in the company. Similarly, the Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a holder of more than 45% of the voting rights in the company, if there is no other shareholder of the company who holds more than 45% of the voting rights in the company, subject to certain exceptions.
A special tender offer must be extended to all shareholders of a company but the offeror is not required to purchase shares representing more than 5% of the voting power attached to the company’s outstanding shares, regardless of how many shares are tendered by shareholders. A special tender offer may be consummated only if (i) at least 5% of the voting power attached to the company’s outstanding shares will be acquired by the offeror; and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer (excluding the purchaser, controlling shareholders, holders of 25% or more of the voting rights in the company or any person having a personal interest in the acceptance of the tender offer). If a special tender offer is accepted, then the purchaser or any person or entity controlling it or under common control with the purchaser or such controlling person or entity may not make a subsequent tender offer for the purchase of shares of the target company and may not enter into a merger with the target company for a period of one year from the date of the offer, unless the purchaser or such person or entity undertook to effect such an offer or merger in the initial special tender offer.
Merger
The Israeli Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements described under the Israeli Companies Law are met, by a majority vote of each party’s shares, and, in the case of the target company, a majority vote of each class of its shares, voted on the proposed merger at a shareholders meeting.
For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the votes of shares represented at the shareholders meeting that are held by parties other than the other party to the merger, or by any person (or group of persons acting in concert) who holds (or hold, as the case may be) 25% or more of the voting rights or the right to appoint 25% or more of the directors of the other party, vote against the merger. If, however, the merger involves a merger with a company’s own controlling shareholder or if the controlling shareholder has a personal interest in the merger, then the merger is instead subject to the same Special Majority approval that governs all extraordinary transactions with controlling shareholders (as described under “Item 6.C. Directors, Senior Management and Employees — Board Practices — Approval of related party transactions under Israeli law — Fiduciary duties of directors and executive officers — Disclosure of personal interests of controlling shareholders and approval of certain transactions”).
If the transaction would have been approved by the shareholders of a merging company but for the separate approval of each class or the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered to the shareholders of the company.
Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of the merging entities, and may further give instructions to secure the rights of creditors.
In addition, a merger may not be consummated unless at least 50 days have passed from the date on which a proposal for approval of the merger was filed by each party with the Israeli Registrar of Companies and at least 30 days have passed from the date on which the merger was approved by the shareholders of each party.
Anti-takeover measures under Israeli law
The Israeli Companies Law allow us to create and issue shares having rights different from those attached to our ordinary shares, including shares providing certain preferred rights with respect to voting, distributions or other matters and shares having preemptive rights. Currently, no preferred shares are authorized under our amended articles of association. In the future, if we do authorize, create and issue a specific class of preferred shares, such class of shares, depending on the specific rights that may be attached to it, may have the ability to frustrate or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the market value of their ordinary shares. The authorization and designation of a class of preferred shares will require an amendment to our amended articles of association, which requires the prior approval of the holders of a majority of the voting power attaching to our issued and outstanding shares at a general meeting. The convening of the meeting, the shareholders entitled to participate and the majority vote required to be obtained at such a meeting will be subject to the requirements set forth in the Israeli Companies Law as described above in “— Voting rights.”
Borrowing powers
Pursuant to the Israeli Companies Law and our amended articles of association, our board of directors may exercise all powers and take all actions that are not required under law or under our amended articles of association to be exercised or taken by our shareholders, including the power to borrow money for company purposes.
Changes in capital
Our articles of association enable us to increase or reduce our share capital. Any such changes are subject to the provisions of the Israeli Companies Law and must be approved by a resolution duly passed by our shareholders at a general meeting by voting on such change in the capital. In addition, transactions that have the effect of reducing capital, such as the declaration and payment of dividends in the absence of sufficient retained earnings or profits, require the approval of both our board of directors and an Israeli court.
For a description of the registration rights present in our Amended and Restated Investors’ Rights Agreement, please refer to “Item 7.B. Major Shareholders and Related Party Transactions—Related Party Transaction—Investors’ rights agreement.”
We entered into an underwriting agreement between us and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Jefferies LLC, as representatives of the underwriters, on September 26, 2013, with respect to the ordinary shares sold in our initial public offering in the United States. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect of such liabilities.
In 1998, Israeli currency control regulations were liberalized significantly, so that Israeli residents generally may freely deal in foreign currency and foreign assets, and non-residents may freely deal in Israeli currency and Israeli assets. There are currently no Israeli currency control restrictions on remittances of dividends on the ordinary shares or the proceeds from the sale of the shares provided that all taxes were paid or withheld; however, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.
Non-residents of Israel may freely hold and trade our securities. Neither our articles of association nor the laws of the State of Israel restrict in any way the ownership or voting of ordinary shares by non-residents, except that such restrictions may exist with respect to citizens of countries which are in a state of war with Israel. Israeli residents are allowed to purchase our ordinary shares.
The following description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of our ordinary shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
Israeli tax considerations and government programs
The following is a brief summary of the material Israeli tax laws applicable to us, and certain Israeli Government programs that benefit us. This section also contains a discussion of material Israeli 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. Because parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion. The discussion below is subject to change, including due to amendments under Israeli law or changes to the applicable judicial or administrative interpretations of Israeli law, which change could affect the tax consequences described below.
General corporate tax structure in Israel
Israeli companies are generally subject to corporate tax, currently at the rate of 26.5% of a company’s taxable income. However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli company are subject to tax at the prevailing corporate tax rate.
Starting in the year ended December 31, 2014, the Company elected to compute its taxable income in accordance with Income Tax Regulations (Rules for Accounting for Foreign Investors Companies and Certain Partnerships and Setting their Taxable Income), 1986. Accordingly, the taxable income or loss is calculated in dollars. Applying these regulations reduces the effect of dollar-NIS exchange rate on the Company’s Israeli taxable income.
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for “Industrial Companies.”
The Industry Encouragement Law defines an “Industrial Company” as a company resident in Israel, which was incorporated in Israel and 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 Industrial Enterprise; |
| | • | 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 three years. |
We currently qualify as an Industrial Company within the meaning of the Industry Encouragement Law. 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.
Law for the Encouragement of Capital Investments, 5719-1959
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, or the 2005 Amendment, and further amended as of January 1, 2011, or (the 2011 Amendment”. Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the 2005 Amendment. Similarly, the 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 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. We have examined the possible effect, if any, of these provisions of the 2011 Amendment on our financial statements and have decided, at this time, not to opt to apply the new benefits under the 2011 Amendment.
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 (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 or an alternative package of tax benefits, known as the alternative benefits track. The tax benefits from any certificate of approval relate only to taxable income attributable to the specific Approved Enterprise. Income derived from activity that is not integral to the activity of the Approved Enterprise does not enjoy tax benefits.
In addition, a company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors’ Company (“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 an FIC is made on an annual basis.
If a company elects the alternative benefits track and distributes a dividend out of income derived by its Approved Enterprise during the tax exemption period it will be subject to corporate tax in respect of the amount of the distributed dividend (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have been applicable without the benefits under the alternative benefits track. In addition, dividends paid out of income attributed to an Approved 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 Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an Approved Enterprise program during the first five years in which the equipment is used.
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.
We currently have Approved Enterprise programs under the Investment Law, which, we believe, entitle us to certain tax benefits. The tax benefit period for these programs has not yet commenced. We have elected the alternative benefits program which provides for the waiver of grants in return for tax exemptions. Accordingly, taxable income from our Approved Enterprise programs (once generated) will be tax exempt for a period of ten years commencing with the year we will first earn such taxable income.
Tax benefits subsequent to the 2005 Amendment
The 2005 Amendment applies to new investment programs 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. Pursuant to the 2005 Amendment, the Investment Center will continue to grant Approved Enterprise status to qualifying investments. The 2005 Amendment, however, limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise, such as provisions generally requiring that at least 25% of the Approved Enterprise’s income be derived from exports.
The 2005 Amendment provides that a certificate of approval from the Investment Center will only be necessary for receiving cash grants. As a result, it was no longer necessary for a company to obtain an Approved Enterprise certificate of approval in order to receive the tax benefits previously available under the alternative benefits track. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment. 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 allows a company to receive “Benefited Enterprise” status, and may be made over a period of no more than three years from the end of the year in which the company chose to have the tax benefits apply to its Benefited Enterprise.
The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Benefited Enterprise depends on, among other things, the geographic location in Israel of the Benefited Enterprise. The location will also determine the period for which tax benefits are available. Such tax benefits include an exemption from corporate tax on undistributed income generated by the Benefited Enterprise for a period of between two to ten years, depending on the geographic location of the Benefited 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. The benefits period is limited to 12 or 14 years from the year the company first chose to have the tax benefits apply, depending on the location of the company.
A company qualifying for tax benefits under the 2005 Amendment which pays a dividend out of income derived by its Benefited Enterprise during the tax exemption period will be subject to corporate tax in respect of the amount of the dividend (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have otherwise been applicable. Dividends paid out of income attributed to a Benefited 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 benefits available to a Benefited 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 currently have Benefited Enterprise programs under the Investments Law, which, we believe, entitle us to certain tax benefits. The tax benefit period for these programs has not yet commenced but is expected to end in 2022. During the benefits period, the majority of the taxable income from our Benefited Enterprise programs (once generated) will be tax exempt for a period of ten years commencing with the year we will first earn taxable income relating to such enterprises, subject to the 12 or 14 year limitation described above.
Tax benefits under the 2011 Amendment
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. The definition of a Preferred Company includes a company incorporated in Israel that is not wholly-owned by a governmental entity, and that has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its income derived by its Preferred Enterprise in 2011 and 2012, unless the Preferred Enterprise is located in a specified development zone, in which case the rate is 10%. Under the 2011 Amendment, such corporate tax rates were reduced from 15% and 10%, respectively, to 12.5% and 7%, respectively, in 2013. Such corporate tax rates were increased to 16% and 9%, respectively, in 2014 and thereafter. Our facilities are located in a specified development zone.
Dividends paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply).
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 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 other conditions; (ii) terms and benefits included in any certificate of approval that was granted to an Approved Enterprise which had participated in an alternative benefits 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 Benefited 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.
The termination or substantial reduction of any of the benefits available under the Investment Law could materially increase our tax liabilities.
We have examined the possible effect, if any, of the provisions of the 2011 Amendment on our financial statements and have decided, at this time, not to apply the new benefits under the 2011 Amendment.
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 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. 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 (i) is a U.S. resident (for purposes of the treaty); (ii) holds the shares as a capital asset; and (iii) is entitled to claim the benefits afforded to such person by the treaty, is generally exempt from Israeli capital gains tax. Such exemption will not apply if: (i) the capital gain arising from the disposition can be attributed to a permanent establishment 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, subject to certain conditions; or (iii) such U.S. resident is an individual and was present in Israel for 183 days or more during the relevant taxable year. In such case, the sale, exchange or disposition of our ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the United States-Israel Tax Treaty, the taxpayer would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations under U.S. law applicable to foreign tax credits. The United States-Israel Tax Treaty does not relate to U.S. state or local taxes.
In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in the form of a merger or otherwise, the Israel Tax Authority may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by this authority or obtain a specific exemption from the Israel Tax Authority to confirm their status as non-Israeli resident, and, in the absence of such declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.
Taxation of Non-Israeli Shareholders on Receipt of Dividends. Non-Israeli residents are generally subject to Israeli withholding tax on the receipt of dividends paid on our ordinary shares at the rate of 25%, unless relief is provided in a treaty between Israel and the shareholder’s country of residence (subject to the receipt of a valid certificate from the Israeli 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 withholding tax rate is 30%, unless such “substantial shareholder” holds such shares through a nominee company, in which case the rate is 25%. 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. 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 U.S. resident (for purposes of the United States-Israel Tax Treaty) is 25%. 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 Benefited Enterprise and 20% if the dividend is distributed from income attributed to a Preferred Enterprise, unless a reduced tax rate is provided under an applicable tax treaty. We cannot assure you that in the event we declare a dividend we will designate the income out of which the dividend is paid in a manner that will reduce shareholders’ tax liability.
If the dividend is attributable partly to income derived from an Approved Enterprise, Benefited Enterprise or Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. U.S. residents who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for Untied States federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in U.S. tax legislation.
Excess Tax
Individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 2% on annual income exceeding NIS 811,560 for 2014, which amount is linked to the annual change in the Israeli consumer price index, including, but not limited to, dividends, interest and capital gain, subject to the provisions of an applicable tax treaty.
Estate and gift tax
Israeli law presently does not impose estate or gift taxes.
U.S. federal income tax consequences
The following is a description of the material U.S. federal income tax consequences relating to the acquisition, ownership and disposition of our ordinary shares. This description addresses only the U.S. federal income tax consequences to holders that are initial purchasers of our ordinary shares and that will hold such ordinary shares as capital assets. This description does not address tax considerations applicable to holders that may be subject to special tax rules, including, without limitation:
| | • | banks, financial institutions or insurance companies; |
| | • | real estate investment trusts, regulated investment companies or grantor trusts; |
| | • | dealers or traders in securities, commodities or currencies; |
| | • | tax exempt entities or organizations, including an “individual retirement account” or “Roth IRA” as defined in Section 408 or 408A of the Code (as defined below), respectively; |
| | • | certain former citizens or long-term residents of the United States; |
| | • | persons that received our shares as compensation for the performance of services; |
| | • | persons that will hold our shares as part of a “hedging,” “integrated” or “conversion” transaction or as a position in a “straddle” for U.S. federal income tax purposes; |
| | • | partnerships (including entities classified as partnerships for U.S. federal income tax purposes) or other pass-through entities, or holders that will hold our shares through such an entity; |
| | • | holders that acquire ordinary shares as a result of holding or owning our preferred shares; |
| | • | U.S. Holders (as defined below) whose “functional currency” is not the U.S. Dollar; or |
| | • | holders that own directly, indirectly or through attribution 10% or more of the voting power or value of our shares. |
Moreover, this description does not address the U.S. federal estate, gift, or alternative minimum tax consequences, or any U.S. state, local or non-U.S. tax consequences of the acquisition, ownership and disposition of our ordinary shares.
This description is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, existing, proposed and temporary U.S. Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, in each case as in effect and available on the date hereof. All the foregoing is subject to change, which change could apply retroactively and could affect the tax consequences described below. There can be no assurances that the U.S. Internal Revenue Service, or IRS, will not take a different position concerning the tax consequences of the acquisition, ownership and disposition of our ordinary shares or that such a position would not be sustained. Holders should consult their own tax advisors concerning the U.S. federal, state, local and foreign tax consequences of acquiring, owning and disposing of our ordinary shares in their particular circumstances.
For purposes of this description, the term “U.S. Holder” means a beneficial owner of our ordinary shares that, for U.S. federal income tax purposes, is (i) a citizen or resident of the United States; (ii) a corporation (or entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source; or (iv) a trust (x) with respect to which a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (y) that has elected to be treated as a domestic trust for U.S. federal income tax purposes.
A “Non-U.S. Holder” is a beneficial owner of our ordinary shares that is neither a U.S. Holder nor a partnership (or other entity treated as a partnership for U.S. federal income tax purposes).
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.
Unless otherwise indicated, this discussion assumes that the Company is not, and will not become, a “passive foreign investment company, or a PFIC, for U.S. federal income tax purposes. See “— Passive foreign investment company consequences” below.
Persons considering an investment in our ordinary shares should consult their own tax advisors as to the particular tax consequences applicable to them relating to the acquisition, ownership and disposition of our ordinary shares, including the applicability of U.S. federal, state and local tax laws and non-U.S. tax laws.
Distributions
If you are a U.S. Holder, the gross amount of any distribution made to you with respect to our ordinary shares before reduction for any Israeli taxes withheld therefrom, other than certain distributions, if any, of our ordinary shares distributed pro rata to all our shareholders, generally will be includible in your income as dividend income to the extent such distribution is paid out of our current or accumulated earnings and profits as determined under U.S. federal income tax principles. We do not expect to maintain calculations of our earnings and profits under U.S. federal income tax principles. Therefore, U.S. Holders should expect that the entire amount of any distribution generally will be reported as dividend income. Non-corporate U.S. Holders may qualify for the lower rates of taxation with respect to dividends on ordinary shares applicable to long-term capital gains (i.e., gains from the sale of capital assets held for more than one year), provided that certain conditions are met, including certain holding period requirements and the absence of certain risk reduction transactions. However, such dividends will not be eligible for the dividends received deduction generally allowed to corporate U.S. Holders. To the extent that the amount of any distribution by us exceeds our current and accumulated earnings and profits as determined under U.S. federal income tax principles, it will be treated first as a tax-free return of your adjusted tax basis in our ordinary shares and thereafter as either long-term or short-term capital gain depending upon whether the U.S. Holder has held our ordinary shares for more than one year as of the time such distribution is received.
If you are a U.S. Holder, dividends paid to you with respect to our ordinary shares will be foreign source income, which may be relevant in calculating your foreign tax credit limitation. Subject to certain conditions and limitations, Israeli tax withheld on dividends may be deducted from your taxable income or credited against your U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends that we distribute generally should constitute “passive category income,” or, in the case of certain U.S. Holders, “general category income.” A foreign tax credit for foreign taxes imposed on distributions may be denied if you do not satisfy certain minimum holding period requirements. The rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisor to determine whether and to what extent you will be entitled to this credit.
The amount of a distribution paid to a U.S. Holder in a foreign currency will be the dollar value of the foreign currency calculated by reference to the spot exchange rate on the day the U.S. Holder receives the distribution, regardless of whether the foreign currency is converted into U.S. dollars at that time. Any foreign currency gain or loss a U.S. Holder realizes on a subsequent conversion of foreign currency into U.S. dollars will be U.S. source ordinary income or loss. If dividends received in foreign currency are converted into U.S. dollars on the day they are received, a U.S. Holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend.
Subject to the discussion below under “—Backup Withholding Tax and Information Reporting Requirements,” if you are a Non-U.S. Holder, you generally will not be subject to U.S. federal income (or withholding) tax on dividends received by you on your ordinary shares, unless you conduct a trade or business in the United States and such income is effectively connected with that trade or business (or, if required by an applicable income tax treaty, the dividends are attributable to a permanent establishment or fixed base that such holder maintains in the United States).
Sale, exchange or other disposition of our ordinary shares
Subject to the discussion below under “— Passive foreign investment company consequences,” if you are a U.S. Holder, you generally will recognize gain or loss on the sale, exchange or other disposition of our ordinary shares equal to the difference between the amount realized on such sale, exchange or other disposition and your adjusted tax basis in our ordinary shares, and such gain or loss will be capital gain or loss. The adjusted tax basis in an ordinary share generally will be equal to the cost of such ordinary share. If you are a non-corporate U.S. Holder, capital gain from the sale, exchange or other disposition of ordinary shares is generally eligible for a preferential rate of taxation applicable to capital gains, if your holding period determined at the time of such sale, exchange or other disposition for such ordinary shares exceeds one year (i.e., such gain is long-term capital gain). The deductibility of capital losses for U.S. federal income tax purposes is subject to limitations under the Code. Any such gain or loss that a U.S. Holder recognizes generally will be treated as U.S. source income or loss for foreign tax credit limitation purposes.
For a cash basis taxpayer, units of foreign currency paid or received are translated into U.S. dollars at the spot rate on the settlement date of the purchase or sale. In that case, no foreign currency exchange gain or loss will result from currency fluctuations between the trade date and the settlement date of such a purchase or sale. An accrual basis taxpayer, however, may elect the same treatment required of cash basis taxpayers with respect to purchases and sales of our ordinary shares that are traded on an established securities market, provided the election is applied consistently from year to year. Such election may not be changed without the consent of the IRS. For an accrual basis taxpayer who does not make such election, units of foreign currency paid or received are translated into U.S. dollars at the spot rate on the trade date of the purchase or sale. Such an accrual basis taxpayer may recognize exchange gain or loss based on currency fluctuations between the trade date and the settlement date. Any foreign currency gain or loss a U.S. Holder realizes will be U.S. source ordinary income or loss.
The determination of whether our ordinary shares are traded on an established securities market is not entirely clear under current U.S. federal income tax law.
Subject to the discussion below under “Backup Withholding Tax and Information Reporting Requirements,” if you are a Non-U.S. Holder, you generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale or exchange of such ordinary shares unless:
| | • | such gain is effectively connected with your conduct of a trade or business in the United States (or, if required by an applicable income tax treaty, the gain is attributable to a permanent establishment or fixed base that you maintain in the United States); or |
| | • | you are an individual and have been present in the United States for 183 days or more in the taxable year of such sale or exchange and certain other conditions are met. |
Passive foreign investment company consequences
If we were to be classified as a PFIC in any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of U.S. federal income tax that a U.S. Holder could derive from investing in a non-U.S. company that does not distribute all of its earnings on a current basis.
A non-U.S. corporation will be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which, after applying certain look-through rules with respect to the income and assets of subsidiaries, either (i) at least 75% of its gross income is “passive income” or (ii) at least 50% of the average quarterly value of its total gross assets (which would generally be measured by fair market value of the assets, and for which purpose the total value of our assets may be determined in part by the market value of our ordinary shares, which is subject to change) is attributable to assets that produce “passive income” or are held for the production of passive income.
Passive income for this purpose generally includes dividends, interest, royalties, rents, gains from commodities and securities transactions, the excess of gains over losses from the disposition of assets which produce passive income, and includes amounts derived by reason of the temporary investment of funds raised in offerings of our ordinary shares. If a non-U.S. corporation owns at least 25% by value of the stock of another corporation, the non-U.S. corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation and as receiving directly its proportionate share of the other corporation’s income. If we are classified as a PFIC in any year with respect to which a U.S. Holder owns our ordinary shares, we will continue to be treated as a PFIC with respect to such U.S. Holder in all succeeding years during which the U.S. Holder owns our ordinary shares, regardless of whether we continue to meet the tests described above.
Based on the composition of our income and the composition and estimated fair market values of our assets, we do not believe that we were a PFIC for the taxable year ended December 31, 2014 and based on our future projections, we do not expect to be a PFIC for the taxable year ended December 31, 2015. There can be no assurance that we will not be considered a PFIC for any taxable year. PFIC status is determined as of the end of the taxable year and depends on a number of factors, including the value of a corporation’s assets and the amount and type of its gross income. Furthermore, because the value of our gross assets is likely to be determined in large part by reference to our market capitalization, a decline in the value of our ordinary shares may result in our becoming a PFIC. Even though we have determined that we were not a PFIC for the year ended December 31, 2014, there can be no assurance that the IRS will agree with our conclusion.
If we were a PFIC, and you are a U.S. Holder, then unless you make one of the elections described below, a special tax regime will apply to both (a) any “excess distribution” by us to you (generally, your ratable portion of distributions in any year which are greater than 125% of the average annual distribution received by you in the shorter of the three preceding years or your holding period for our ordinary shares) and (b) any gain realized on the sale or other disposition of the ordinary shares. Under this regime, any excess distribution and realized gain will be treated as ordinary income and will be subject to tax as if (a) the excess distribution or gain had been realized ratably over your holding period, (b) the amount deemed realized in each year had been subject to tax in each year of that holding period at the highest marginal rate for such year (other than income allocated to the current period or any taxable period before we became a PFIC, which would be subject to tax at the U.S. Holder’s regular ordinary income rate for the current year and would not be subject to the interest charge discussed below), and (c) the interest charge generally applicable to underpayments of tax had been imposed on the taxes deemed to have been payable in those years. In addition, dividend distributions made to you will not qualify for the lower rates of taxation applicable to long-term capital gains discussed above under “—Distributions.”
Certain elections exist that may alleviate some of the adverse consequences of PFIC status and would result in an alternative treatment (such as mark-to-market treatment) of our ordinary shares. If a U.S. Holder makes the mark-to-market election, the U.S. Holder generally will recognize as ordinary income any excess of the fair market value of the ordinary shares at the end of each taxable year over their adjusted tax basis, and will recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ordinary shares over their fair market value at the end of the taxable year (but only to the extent of the net amount of income previously included as a result of the mark-to-market election). If a U.S. Holder makes the election, the U.S. Holder’s tax basis in the ordinary shares will be adjusted to reflect these income or loss amounts. Any gain recognized on the sale or other disposition of ordinary shares in a year when we are a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount of income previously included as a result of the mark-to-market election). The mark-to-market election is available only if we are a PFIC and our ordinary shares are “regularly traded” on a “qualified exchange.” Our ordinary shares will be treated as “regularly traded” in any calendar year in which more than a de minimis quantity of the ordinary shares are traded on a qualified exchange on at least 15 days during each calendar quarter. The NASDAQ Global Select Market is a qualified exchange for this purpose and, consequently, if the ordinary shares are regularly traded, the mark-to-market election will be available to a U.S. Holder.
We do not intend to provide the information necessary for U.S. Holders to make qualified electing fund elections if we are classified as a PFIC. U.S. Holders should consult their tax advisors to determine whether any of these elections would be available and if so, what the consequences of the alternative treatments would be in their particular circumstances.
If we are determined to be a PFIC, the general tax treatment for U.S. Holders described in this section would apply to indirect distributions and gains deemed to be realized by U.S. Holders in respect of any of our subsidiaries that also may be determined to be PFICs.
If a U.S. Holder owns ordinary shares during any year in which we are a PFIC and the U.S. Holder recognizes gain on a disposition of our ordinary shares or receives distributions with respect to our ordinary shares, the U.S. Holder generally will be required to file an IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) with respect to the company, generally with the U.S. Holder’s federal income tax return for that year. If our company were a PFIC for a given taxable year, then you should consult your tax advisor concerning your annual filing requirements.
The U.S. federal income tax rules relating to PFICs are complex. Prospective U.S. investors are urged to consult their own tax advisors with respect to the acquisition, ownership and disposition of our ordinary shares, the consequences to them of an investment in a PFIC, any elections available with respect to our ordinary shares and the IRS information reporting obligations with respect to the acquisition, ownership and disposition of our ordinary shares.
Medicare tax
Certain U.S. Holders that are individuals, estates or trusts are subject to a 3.8% tax on all or a portion of their “net investment income,” which may include all or a portion of their dividend income and net gains from the disposition of ordinary shares. Each U.S. Holder that is an individual, estate or trust is urged to consult its tax advisors regarding the applicability of the Medicare tax to its income and gains in respect of its investment in our ordinary shares.
Certain reporting requirements with respect to payments to foreign corporations
U.S. Holders paying more than U.S. $100,000 for our ordinary shares generally will be required to file IRS Form 926 reporting the payment for our ordinary shares to any foreign corporation. Substantial penalties may be imposed upon a U.S. Holder that fails to comply. Each U.S. Holder should consult its own tax advisor as to the possible obligation to file IRS Form 926.
Backup withholding tax and information reporting requirements
U.S. backup withholding tax and information reporting requirements may apply to certain payments to certain holders of stock. Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, our ordinary shares made within the United States, or by a U.S. payor or U.S. middleman, to a holder of our ordinary shares, other than an exempt recipient (including a payee that is not a U.S. person that provides an appropriate certification and certain other persons). A payor will be required to withhold backup withholding tax from any payments of dividends on, or the proceeds from the sale or redemption of, ordinary shares within the United States, or by a U.S. payor or U.S. middleman, to a holder, other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements. Any amounts withheld under the backup withholding rules will be allowed as a credit against the beneficial owner’s U.S. federal income tax liability, if any, and any excess amounts withheld under the backup withholding rules may be refunded, provided that the required information is timely furnished to the IRS.
Foreign asset reporting
Certain U.S. Holders who are individuals are required to report information relating to an interest in our ordinary shares, subject to certain exceptions (including an exception for shares held in accounts maintained by financial institutions) by filing IRS Form 8938 (Statement of Specified Foreign Financial Assets) with their federal income tax return. U.S. Holders are urged to consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition of our ordinary shares.
THE DISCUSSION ABOVE IS A GENERAL SUMMARY. IT DOES NOT COVER ALL TAX MATTERS THAT MAY BE OF IMPORTANCE TO A PROSPECTIVE INVESTOR. EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT ITS OWN TAX ADVISOR ABOUT THE TAX CONSEQUENCES TO IT OF AN INVESTMENT IN ORDINARY SHARES IN LIGHT OF THE INVESTOR’S OWN CIRCUMSTANCES.
| F. Dividends and Paying Agents |
Not applicable.
Not applicable.
We are currently subject to the information and periodic reporting requirements of the Exchange Act applicable to foreign private issuers and fulfill the obligations of those requirements by filing reports with the SEC. We file periodic reports and other information with the SEC through its electronic data gathering, analysis and retrieval (EDGAR) system.
As a foreign private issuer, we are exempt from the rules under the Exchange Act relating to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. 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 are required to file with the SEC, within 120 days after the end of each subsequent fiscal year, an annual report on Form 20-F containing financial statements which will be examined and reported on, with an opinion expressed, by an independent public accounting firm. We also intend to furnish with the SEC reports on Form 6-K containing quarterly unaudited financial information.
Our securities filings, including this annual report and the exhibits thereto, are available for inspection and copying at the public reference facilities of the SEC located at Room 1580, 100 F Street, N.E., Washington, D.C. 20549. Additionally, you may obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains a website at http://www.sec.gov from which certain filings may be accessed. Our filings with the SEC are also available to the public through this website at http://www.sec.gov.
As permitted under NASDAQ Stock Market Rule 5250(d)(1)©, we post our annual reports filed with the SEC on our website at http://ir.enzymotec.com. We will furnish hard copies of such reports to our shareholders free of charge upon written request. The information contained on our website is not part of this or any other report filed with or furnished to the SEC.
| I. Subsidiary Information |
Not applicable.
ITEM 11: Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosure about market risk
Market risk is the risk of loss related to changes in market prices, including interest rates and foreign exchange rates, of financial instruments that may adversely impact our consolidated financial position, results of operations or cash flows.
Foreign currency exchange risk.
The U.S. dollar is our functional and reporting currency, with net revenues denominated in U.S. dollars accounting for 75% and 73% of our net revenues in 2013 and 2014. While we incur expenses primarily in U.S. dollars, a significant portion of expenses are denominated in shekels, accounting for 34% and 38% of our expenses in 2013 and 2014, respectively. We also have expenses, although to a much lesser extent, in other non- dollar currencies, in particular the euro. This exposes us to risk associated with exchange rate fluctuations vis-à-vis the U.S. dollar. Furthermore, we anticipate that a material portion of our expenses, principally of salaries and related personnel expenses, will continue to be denominated in shekels.
To the extent the U.S. dollar weakens against the shekel, we will experience a negative impact on our profit margins. A devaluation of the shekel in relation to the U.S. dollar has the effect of reducing the U.S. dollar amount of our expenses that are payable in shekels, unless those expenses or payables are linked to the U.S. dollar. Conversely, any increase in the value of the shekel in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of our unlinked shekel expenses, which would have a negative impact on our profit margins. In 2014, the value of the shekel depreciated in relation to the U.S. dollar by approximately 12.0%, the effect of which was offset by a negative inflation of Israel, at a rate of approximately 0.2%. In 2013, the value of the shekel appreciated in relation to the U.S. dollar by approximately 7.0%, the effect of which was compounded by inflation in Israel, at the rate of approximately 1.8%.
In Europe, our net revenues are received primarily in euros, accounting for approximately 22% and 27% of our total net revenues in 2013 and 2014, respectively, and such net revenues exceed our expenses incurred in euros. Accordingly, if the euro appreciates relative to the U.S. dollar, the U.S. dollar value of our sales is positively impacted, as was the case in 2012 and 2013, when the euro appreciated by 2.0% and 4.5%, respectively, in relation to the U.S. dollar. However, if the euro depreciates relative to the U.S. dollar, the U.S. dollar value of our sales is negatively impacted, as was the case in 2014, when the euro depreciated by 11.8%.
Because exchange rates between the U.S. dollar and the shekel (as well as between the U.S. dollar and other currencies) fluctuate continuously, such fluctuations have an impact on our results of operations and period-to-period comparisons of our results. The effects of foreign currency re-measurements are reported in our consolidated financial statements of operations. We engage in currency hedging activities in order to reduce some of this currency exposure. These measures, however, may not adequately protect us from material adverse effects due to the impact of foreign currency fluctuations.
The following table presents information about the changes in the exchange rates of the shekel against the U.S. dollar and changes in the exchange rates of the euro against the U.S. dollar:
| | | Change in Average Exchange Rate | |
| Period | | Shekel against the U.S. dollar (%) | | | Euro against the U.S. dollar (%) | |
| 2013 | | | (6.4 | ) | | | 3.5 | |
| 2014 | | | (0.9 | ) | | | (0.2 | ) |
The net effect of risks stemming from currency exchange rate fluctuations on our operating results can be quantified as follows:
| | • | An increase of 10% in the value of the shekel relative to the U.S. dollar in the year ended December 31, 2014 would have resulted in a net decrease in the U.S. dollar reporting value of our operating income of $1.5 million, due to the adverse impact on our operating margins that we would experience as a result of such an increase, while a 10% decrease in value of the shekel relative to the U.S. dollar in the year ended December 31, 2014 would have caused a net increase in the U.S. dollar reporting value of our operating income of $1.5 million for 2014, due to the favorable effect on our operating margins that would result from such devaluation of the shekel. |
| | • | An increase of 10% in the value of the euro relative to the U.S. dollar in 2014 would have resulted in a net increase in the U.S. dollar reporting value of our operating income of $1.1 million, due to the favorable effect on our operating margins that we would experience as a result of such an increase, while a decrease of 10% in the value of the euro relative to the U.S. dollar in 2013 would have resulted in a net decrease in the U.S. dollar reporting value of our operating income of $1.1 million for 2013, due to the adverse impact on our operating margins that would result from such devaluation of the euro. |
We will continue to monitor exposure to currency fluctuations. Instruments that may be used to hedge future risks may include foreign currency forward and swap contracts. These instruments may be used to selectively manage risks, but there can be no assurance that we will be fully protected against material foreign currency fluctuations. See Note 13 to our consolidated financial statements contained elsewhere in this annual report for additional information regarding foreign exchange risk management.
Inflation-related risks
We do not believe that the rate of inflation in Israel has had a material impact on our business to date, however, our costs in Israel will increase if inflation in Israel exceeds the devaluation of the shekel against the U.S. dollar or if the timing of such devaluation lags behind inflation in Israel.
ITEM 12: Description of Securities Other Than Equity Securities
Not applicable.
PART II
ITEM 13: Defaults, Dividend Arrearages and Delinquencies
None.
ITEM 14: Material Modifications to the Rights of Security Holders and Use of Proceeds
Initial Public Offering
Our initial public offering closed on October 2, 2013. We issued a total of 5,073,800 ordinary shares with aggregate proceeds of $71.0 million (including the option to purchase additional shares) at a price per share of $14.00. Under the terms of the offering, we incurred aggregate underwriting discounts of $5.0 million (including the option to purchase additional shares), resulting in net proceeds of $66.1 million. We also incurred expenses of $3.2 million in connection with the offering.
From the effective date of the registration statement and until December 31, 2014, we used approximately $8 million of the net proceeds for the purchase of property, plant and equipment and intangible assets, $1 million of the net proceeds to pay bonuses to certain of our employees, including some of our executive officers, $11 million for funding our increased working capital and approximately $4 million of the net proceeds to pay the remaining balance of an existing long-term credit facility, including acceleration fees.
We may use a portion of the balance of the net proceeds to meet our anticipated increased working capital requirements and for other general corporate purposes. We may also use a portion of our net proceeds to fund the construction of the additional manufacturing facility. We may use also a portion of our net proceeds for exploring opportunities to accelerate growth in our core business through acquisitions of complementary businesses or technologies. We do not currently have specific plans or commitments with respect to the balance of net proceeds from the initial offering, and, accordingly, are unable to quantify the allocation of such proceeds among the various potential uses. Our management has significant flexibility in applying the net proceeds of the initial public offering.
ITEM 15: Controls and Procedures
(a) Disclosure Controls and Procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2014. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2014, our disclosure controls and procedures were effective such that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Annual Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, 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 and includes those policies and procedures that:
| | · | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
| | · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| | · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making such assessment, our management used the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on such assessment, management has concluded that, as of December 31, 2014, our internal control over financial reporting is effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with generally accepted accounting principles.
(c) Attestation report of the registered public accounting firm. This annual report does not include an attestation report of our independent registered public accounting firm regarding internal controls over financial reporting because the Jumpstart Our Business Startups Act (“JOBS Act”) provides an exemption from such requirement as we qualify as an emerging growth company.
(d) Changes in Internal Control Over Financial Reporting. During the period covered by this report, no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) have occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A: Audit Committee Financial Expert
All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the NASDAQ corporate governance rules. Our board of directors has determined that Joseph Tenne is an audit committee financial expert as defined by the SEC rules and has the requisite financial experience as defined by the NASDAQ corporate governance rules. In addition, Mr. Tenne is independent as such term is defined in Rule 10A-3(b)(1) under the Exchange Act and under the listing standards of NASDAQ.
ITEM 16B: Code of Ethics
We have adopted a Code of Business Conduct and Ethics applicable to all of our directors and employees, including our Chief Executive Officer, Chief Financial Officer, controller or principal accounting officer, or other persons performing similar functions, which is a “code of ethics” as defined in this Item 16B of Form 20-F promulgated by the SEC. The full text of the Code of Business Conduct and Ethics is posted on our website at http://ir.enzymotec.com. Information contained on, or that can be accessed through, our website does not constitute a part of this Form 20-F and is not incorporated by reference herein. If we make any amendment to the Code of Business Conduct and Ethics or grant any waivers, including any implicit waiver, from a provision of said code, we will disclose the nature and basis of such amendment or waiver on a Form 6-K or on our website to the extent required by the rules and regulations of the SEC, including the instructions to Item 16B of Form 20-F. We granted no waivers under our Code of Business Ethics and Conduct in 2014.
ITEM 16C: Principal Accountant Fees and Services
Fees paid to the Auditors
The following table sets forth, for each of the years indicated, the fees billed by our independent registered public accounting firm, Kesselman & Kesselman (a member firm of Pricewaterhouse Coopers International Limited) (PwC Israel).
| | | Year ended December, 31 | |
| | | 2013 | | | 2014 | |
| | | (in thousands of U.S. dollars) | |
| Audit fees | | $ | 330 | | | $ | 210 | |
| Audit-related fees | | | ― | | | | ― | |
| Tax fees | | | 40 | | | | 37 | |
| All other fees | | | ― | | | | ― | |
| Total | | $ | 370 | | | $ | 247 | |
Audit fees for the years ended December 31, 2013 and 2014 were for professional services rendered for the audit of our annual consolidated financial statements as of December 31, 2013 and 2014, review of consolidated quarterly financial statements, statutory audits of Enzymotec and its subsidiaries, issuance of comfort letters, consents and assistance with review of documents filed with the SEC (including our registration statement on Form F-1 related to our initial public offering in 2013 and registration statement on Form F-1 related to a follow-on offering in 2014).
Tax fees for the years ended December 31, 2013 and 2014 were for services related to tax compliance, including tax returns and claims for refund, and tax planning and tax advice, including assistance with tax audits and appeals, and assistance with respect to requests for rulings from tax authorities.
Audit Committee’s Pre-Approval Policies and Procedures
Our audit committee provides assistance to our 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 pre-approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices. Our audit committee also oversees the audit efforts of our independent accountants and takes those actions that it deems necessary to satisfy itself that the accountants are independent of management.
Enzymotec’s audit committee is responsible for the oversight of its independent auditors’ work. The audit committee’s policy is to pre-approve all audit and non-audit services provided by PwC and other members of PricewaterhouseCoopers International Limited. These services may include audit services, audit-related services, tax services and other services, as further described above. The audit committee sets forth the basis for its pre-approval in detail, listing the particular services or categories of services which are pre-approved, and setting forth a specific budget for such services. Additional services may be pre-approved by the audit committee on an individual basis. Once services have been pre-approved, PwC and management then report to the audit committee on a periodic basis regarding the extent of services actually provided in accordance with the applicable pre-approval and the fees for the services performed. Such fees for 2013 and 2014 were pre-approved by the audit committee in accordance with these procedures.
ITEM 16D: Exemptions from the Listing Standards for Audit Committees
Not applicable.
ITEM 16E: Purchase of Equity Securities by the Company and Affiliated Purchasers
Not applicable.
ITEM 16F: Change in Registrant’s Certifying Accountant
None.
ITEM 16G: Corporate Governance
As a foreign private issuer, we are permitted to, and do, follow certain home country corporate governance practices instead of those otherwise required under the NASDAQ Stock Market rules for domestic U.S. issuers. For instance, we follow home country practice in Israel with regard to the quorum requirement for shareholder meetings. As permitted under the Israeli Companies Law, our articles of association provide that the quorum for any meeting of shareholders shall be the presence of at least two shareholders present in person, by proxy or by a voting instrument, who hold at least 25% of the voting power of our shares instead of 33 1/3% of the issued share capital requirement. We may in the future elect to follow home country practices in Israel with regard to other matters, including the formation of compensation, nominating and corporate governance committees, separate executive sessions of independent directors and non-management directors and the requirement to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, issuances 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). Following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on the NASDAQ Global Select Market may provide less protection to you than what is accorded to investors under the NASDAQ Stock Market requirements applicable to domestic U.S. issuers.
ITEM 16H: Mine Safety Disclosures
Not applicable.
PART III
ITEM 17: Financial Statements
Not applicable.
ITEM 18: Financial Statements
We have appended our consolidated financial statements at the end of this annual report, starting at page F-2, as part of this annual report.
ITEM 19: Exhibits
See exhibit index incorporated herein by reference.
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 its behalf.
| | Enzymotec Ltd. |
| | | |
| | By: | /s/ Ariel Katz |
| | | Ariel Katz |
| | | President and Chief Executive Officer |
Dated: March 2, 2015
ANNUAL REPORT ON FORM 20-F
INDEX OF EXHIBITS
| Exhibit no. | | Description of exhibit |
| 1.1 | | Amended and Restated Articles of Association of the Registrant (3) |
| 2.1 | | Amended and Restated Investors’ Rights Agreement, dated September 22, 2013, by and among the Registrant and the other parties thereto (3) |
| 4.1 | | Agreement between the Israel Land Administration and Registrant, dated September 17, 2009 relating to Registrant’s facility at the Sagi 2000 Industrial Area, Migdal Ha’Emeq, Israel and Addendum thereto dated August 14, 2013∞(2) |
| 4.2 | | Shareholders’ Agreement between AarhusKarlshamn AB (publ) and Enzymotec Ltd. regarding the joint venture company Advanced Lipids AB dated June 14, 2007†(1) |
| 4.4 | | Enzymotec Ltd. Employee Share Option Plan (1999) (4) |
| 4.5 | | Enzymotec Ltd. 2003 Israeli Share Option Plan, as amended as of April 17, 2013 (4) |
| 4.6 | | 2012 U.S. Addendum to 2003 Israeli Share Option Plan (4) |
| 4.7 | | Enzymotec Ltd. 2013 Omnibus Equity Incentive Plan (2) |
| 4.8 | | Form of indemnification agreement by and between Enzymotec Ltd. and each of its directors and executive officers (4) |
| 4.9 | | Memorandum of Understanding by and among Antarctic Sea Fisheries S.A. and Enzymotec Ltd. dated April 23, 2013†(4) |
| 4.10 | | Amendment to Memorandum of Understanding by and among Antarctic Sea Fisheries S.A. and Enzymotec Ltd. dated June 14, 2013 (4) |
| 4.11 | | Enzymotec Ltd. 2014 Compensation Policy (5) |
| 8.1 | | List of subsidiaries of Enzymotec Ltd. |
| 12.1 | | Certification of Principal Executive Officer required by Rule 13a-14(a) and Rule 15d-14(a) (Section 302 Certifications) |
| 12.2 | | Certification of Principal Financial Officer required by Rule 13a-14(a) and Rule 15d-14(a) (Section 302 Certifications) |
| 13.1 | | Certification of Principal Executive Officer and Principal Financial Officer required by Rule 13a-14(b) and Rule 15d-14(b) (Section 906 Certifications), furnished herewith |
| 15.1 | | Consent of Kesselman & Kesselman, a member firm of PricewaterhouseCoopers International Limited, an independent registered public accounting firm |
| 101.INS | | XBRL Document |
| 101.SCH | | XBRL Taxonomy Extension Schema Document |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | | XBRL Taxonomy Definition Linkbase Document |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
| ∞ | English summary of original Hebrew document. |
| | † | Portions of this exhibit have been omitted and filed separately with the SEC pursuant to a confidential treatment request. |
| | (1) | Previously filed with the SEC on August 22, 2013 pursuant to a registration statement on Form F-1 (File No. 333-190781) and incorporated by reference herein. |
| | (2) | Previously filed with the SEC on September 16, 2013 pursuant to a pre-effective amendment to a registration statement on Form F-1 (File No. 333-190781) and incorporated by reference herein. |
| | (3) | Previously filed with the SEC on September 24, 2013 pursuant to a pre-effective amendment to a registration statement on Form F-1 (File No. 333-190781) and incorporated by reference herein. |
| | (4) | Previously filed with the SEC on September 27, 2013 pursuant to a post-effective amendment to a registration statement on Form F-1 (File No. 333-190781) and incorporated by reference herein. |
| | (5) | Previously furnished to the SEC on May 30, 2014 as part of Exhibit 99.1 to a current report on Form 6-K and incorporated by reference herein. |
ENZYMOTEC LTD.
INDEX TO FINANCIAL STATEMENTS
