UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
____________________
FORM 20-F
(Mark One)
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report………………………………
For the transition period from ______ to ______
Commission File Number 001-33129
ALLOT COMMUNICATIONS LTD.
(Exact Name of Registrant as specified in its charter)
ISRAEL
(Jurisdiction of incorporation or organization)
22 Hanagar Street
Neve Ne’eman Industrial Zone B
Hod-Hasharon 4501317
Israel
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares, par value NIS 0.10 per share
Name of each exchange on which registered
The NASDAQ Stock Market, LLC
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2015: 33,558,102 ordinary shares,
NIS 0.10 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes o No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (section 229.405 of this chapter), and (2) has been subject to such filing requirements for the
past 90 days:
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Indicate by check mark basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP x
International Financial Reporting
Standards as issued by the International
Accounting Standards Board o
Other o
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Item 17 o Item 18 o
Yes o No x
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Terms
PRELIMINARY NOTES
As used herein, and unless the context suggests otherwise, the terms “Allot,” “Company,” “we,” “us” or “ours” refer to Allot Communications Ltd.
Cautionary Note Regarding Forward-Looking Statements
In addition to historical facts, this annual report on Form 20-F contains forward-looking statements within the meaning of Section 27A of the U.S. Securities
Act of 1933, as amended (the “Securities Act”), Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the safe
harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations
and projections about future events. Forward-looking statements include information concerning our possible or assumed future results of operations,
business strategies, financing plans, competitive position, industry environment, potential growth opportunities, potential market opportunities and the effects
of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,”
“believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar
expressions that convey uncertainty of future events or outcomes and the negatives of those terms. These statements include but are not limited to:
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statements regarding projections of capital expenditures;
statements regarding competitive pressures;
statements regarding expected revenue growth;
statements regarding the expected growth in demand of our products
statements regarding trends in mobile networks, including the development of a digital lifestyle, over-the-top applications, the need to manage
mobile network traffic and cloud computing, among others;
statements regarding our ability to develop technologies to meet our customer demands and expand our product and service offerings;
statements regarding the acceptance and growth of our value-added services by our customers;
statements regarding the expected growth in the use of particular broadband applications;
statements as to our ability to meet anticipated cash needs based on our current business plan;
statements as to the impact of the rate of inflation and the political and security situation on our business;
statements regarding the price and market liquidity of our ordinary shares;
statements as to our ability to retain our current suppliers and subcontractors; and
statements regarding our future performance, sales, gross margins, expenses (including stock-based compensation expenses) and cost of revenues.
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These statements may be found in the sections of this annual report on Form 20-F entitled “ITEM 3: Key Information—Risk Factors,” “ITEM 4: Information
on Allot,” “ITEM 5: Operating and Financial Review and Prospects,” “ITEM 10: Additional Information—Taxation—United States Federal Income Taxation
—Passive Foreign Investment Company Considerations” and elsewhere in this annual report, including the section of this annual report entitled “ITEM 4:
Information on Allot—Business Overview—Overview” and “ITEM 4: Information on Allot—Business Overview—Industry Background,” which contain
information obtained from independent industry sources. Actual results could differ materially from those anticipated in these forward-looking statements due
to various factors, including all the risks discussed in “ITEM 3: Key Information—Risk Factors” and elsewhere in this annual report.
All forward-looking statements in this annual report reflect our current views about future events and are based on assumptions and are subject to risks and
uncertainties that could cause our actual results to differ materially from future results expressed or implied by the forward-looking statements. Many of these
factors are beyond our ability to control or predict. You should not put undue reliance on any forward-looking statements. Unless we are required to do so
under U.S. federal securities laws or other applicable laws, we do not intend to update or revise any forward-looking statements.
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PART I
ITEM 1: Identity of Directors, Senior Management and Advisers
ITEM 2: Offer Statistics and Expected Timetable
TABLE OF CONTENTS
ITEM 3: Key Information
Selected Financial Data
Capitalization and Indebtedness
Reasons for Offer and Use of Proceeds
Risk Factors
ITEM 4: Information on Allot
History and Development of Allot
Business Overview
Organizational Structure
Property, Plants and Equipment
ITEM 4A: Unresolved Staff Comments
ITEM 5: Operating and Financial Review and Prospects
Operating Results
Liquidity and Capital Resources
Research and Development, Patents and Licenses
Trend Information
Off-Balance Sheet Arrangements
Contractual Obligations
ITEM 6: Directors, Senior Management and Employees
Directors and Senior Management
Compensation of Officers and Directors
Board Practices
Employees
Share Ownership
ITEM 7: Major Shareholders and Related Party Transactions
Major Shareholders
Related Party Transactions
Interests of Experts and Counsel
ITEM 8: Financial Information
Consolidated Financial Statements and Other Financial Information
Significant Changes
ITEM 9: The Offer and Listing
Stock Price History
Markets
ITEM 10: Additional Information
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7
7
7
7
9
9
9
24
24
25
35
35
35
35
36
46
48
48
48
48
49
49
53
55
61
62
64
64
66
66
66
66
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67
68
68
Share Capital
Memorandum and Articles of Association
Material Contracts
Exchange Controls
Taxation
Documents on Display
Subsidiary Information
ITEM 11: Quantitative and Qualitative Disclosures About Market Risk
ITEM 12: Description of Securities Other Than Equity Securities
PART II
ITEM 13: Defaults, Dividend Arrearages and Delinquencies
ITEM 14: Material Modifications to the Rights of Security Holders and Use of Proceed
ITEM 15: Controls and Procedures
ITEM 16: Reserved
ITEM 16A: Audit Committee Financial Expert
ITEM 16B: Code of Ethics
ITEM 16C: Principal Accountant Fees and Services
ITEM 16D: Exemptions from the Listing Standards for Audit Committees
ITEM 16E: Purchase of Equity Securities by the Company and Affiliated Purchasers
ITEM 16F: Change in Registrant’s Certifying Accountant
ITEM 16G: Corporate Governance
ITEM 16H: Mine Safety Disclosure
PART III
ITEM 17: Financial Statements
ITEM 18: Financial Statements
ITEM 19: Exhibits
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68
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85
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PART I
ITEM 1: Identity of Directors, Senior Management and Advisers
Not applicable.
ITEM 2: Offer Statistics and Expected Timetable
Not applicable.
ITEM 3: Key Information
A. Selected Financial Data
You should read the following selected consolidated financial data in conjunction with “ITEM 5: Operating and Financial Review and Prospects” and our
consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. The consolidated statements of operations data
for the years ended December 31, 2013, 2014 and 2015 the consolidated balance sheet data as of December 31, 2014 and 2015 are derived from our audited
consolidated financial statements included in “ITEM 18: Financial Statements,” which have been prepared in accordance with generally accepted accounting
principles in the United States. The consolidated statements of operations for the years ended December 31, 2011 and 2012 and the consolidated balance sheet
data as of December 31, 2011, 2012 and 2013 have been derived from our audited consolidated financial statements which are not included in this annual
report.
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Consolidated Statements of Operations:
Revenues:
Products
Services
Total revenues
Cost of revenues(1):
Products
Services
Expenses related to the settlement of the Office of the Chief
Scientist grants(2)
Total cost of revenues
Gross profit
Operating expenses:
Research and development, gross
Less grant participation
Research and development, net(1)
Sales and marketing(1)
General and administrative(1)
Total operating expenses
Operating income (loss)
Financing income (expenses), net
Income (loss) before income tax expenses (benefit)
Income tax expenses (benefit)
Net income (loss)
Basic net earnings (loss) per share
Diluted net earnings (loss) per share
Weighted average number of shares used in computing basic
net earnings (loss) per share
Weighted average number of shares used in computing diluted
net earnings (loss) per share
___________________
(1)
2011
Year ended December 31,
2013
(in thousands, except per share and share data)
2012
2014
$
$
$
$
56,810 $
20,943
77,753
19,540
2,635
-
22,175
55,578
16,896
3,674
13,222
26,543
7,474
47,239
8,339
415
8,754
(55)
8,809 $
0.35 $
0.33 $
77,127 $
27,625
104,752
26,857
4,180
15,886
46,923
57,829
24,915
2,855
22,060
34,127
10,664
66,851
(9,022)
1,358
(7,664)
(926)
(6,738) $
(0.21) $
(0.21) $
66,318 $
30,227
96,545
20,572
6,246
-
26,818
69,727
28,073
1,051
27,022
39,817
9,952
76,791
(7,064)
727
(6,337)
120
(6,457) $
(0.20) $
(0.20) $
77,240 $
39,946
117,186
27,389
7,350
-
34,739
82,447
29,998
984
29,014
44,599
11,941
85,554
(3,107)
660
(2,447)
50
(2,497) $
(0.08) $
(0.08) $
2015
62,642
37,325
99,967
26,707
6,720
-
33,427
66,540
27,674
1,252
26,422
43,318
12,702
82,442
(15,902)
(584)
(16,486)
3,356
(19,842)
(0.59)
(0.59)
25,047,771
31,959,921
32,680,766
33,143,168
33,419,917
27,071,872
31,959,921
32,680,766
33,143,168
33,419,917
Includes stock-based compensation expense related to options and RSUs granted to employees and others as follows:
(2) Represents the full balance of the contingent liability related to grants received, which was paid in 2013.
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$
$
$
2011
2012
Year ended December 31,
2013
(in thousands)
2014
2015
103 $
442
1,001
710
2,256 $
222 $
1,186
2,060
1,349
4,817 $
368 $
1,666
3,106
2,591
7,731 $
353 $
1,919
3,322
2,501
8,095 $
324
1,637
2,802
2,407
7,170
2011
2012
At December 31,
2013
(in thousands)
2014
2015
116,682 $
25,138
17,580
158,937
197,058
34,489
(60,647)
720
162,569
50,026 $
78,188
14,841
131,598
221,791
52,670
(67,385)
761
169,121
42,813 $
38,000
40,798
133,362
199,257
29,330
(73,842)
774
169,927
19,180 $
59,000
54,271
138,174
212,948
37,968
(76,339)
819
174,980
15,470
42,903
64,921
126,756
208,215
44,810
(96,181)
837
163,405
Cost of revenues
Research and development expenses, net
Sales and marketing expenses
General and administrative expenses
Total
Consolidated balance sheet data:
Cash and cash equivalents
Short-term deposits and restricted deposits
Marketable securities
Working capital
Total assets
Total liabilities
Accumulated deficit
Share capital
Total shareholders’ equity
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Our business involves a high degree of risk. You should consider carefully the risks described below, together with the financial and other information
contained in this annual report and our other filings with the SEC. If any of the following risks actually occurs, our business, financial condition and results
of operations would suffer. In this case, the trading price of our ordinary shares would likely decline and you might lose all or part of your investment. The
risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may
also impair our business operations.
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Risks Relating to Our Business
We have a history of losses and may not be able to achieve or maintain profitability in the future
We have a history of net losses in all fiscal years since our inception, other than in 2006 and 2011. We had a net loss of $19.8 million in 2015, resulting
mainly from impairment charge of $5.8 million, tax expenses which amounted to $3.4 million (including $2.7 million of deferred tax asset and pre-paid tax
expenses write-off) and a decrease in product revenues. We had a net loss of $2.5 million in 2014, resulting from an inventory write-off of approximately
$3.4 million, due to launches of newer versions of our products, which rendered certain products in our inventory, obsolete. We had a net loss of $6.5 million
in 2013 due to an increase in the Company’s costs as a result of the acquisitions of Ortiva Wireless Inc. (“Ortiva”) and Oversi Networks Ltd. (“Oversi”) and
due to a decrease in the Company’s product revenues. We can provide no assurance that we will be able to achieve or maintain profitability, and we may incur
losses in the future if we do not generate sufficient revenues.
Our revenues and business may be adversely affected if we do not effectively compete in the markets in which we operate.
We compete against large companies in a rapidly evolving and highly competitive sector of the networking technology and security markets, which offer, or
may offer in the future, competing technologies, including partial or alternative solutions to operators' challenges, and which, similarly to us, intensely pursue
the largest service providers (referred to as Tier 1 operators). Our ability to effectively compete in these markets may be limited since our competitors may
have greater financial resources, significant market share and established relationships with operators and distribution channels.
Our Deep Packet Inspection (DPI) technology enabled offerings face significant competition from router and switch infrastructure companies that integrate
functionalities into their platforms, addressing some of the same types of issues that our products are designed to address. Our security products, which are
offered to operators and are deployed in their networks for the purpose of enabling them to provide security services to their end customers, are subject to
competition from companies which offer security products based on different technology and marketing and sales approaches.
Our security product offerings face significant competition from companies that directly approach end customers and offer them security applications to be
installed on their devices; companies that approach the business enterprise sector through distribution channels and offer cloud security products; and
companies that offer security products bundled with other products. By offering our security products to operators that provide security services to both
business enterprises and individual end customers, we aim to expand the reach of our products. However, such business model may prove to be slower to
market or less effective than our competitors' models, in which case our business may be harmed.
Certain of our current direct competitors, are substantially larger than we are and have significantly greater financial, sales and marketing, technical,
manufacturing and other resources. As the intelligent broadband solutions market has grown, including the markets for DPI enabled solutions for mobile
networks and for security products, new competitors have entered and may continue to enter the market. Furthermore, our market may be subject to industry
consolidation, as companies attempt to maintain or strengthen their positions in our evolving industry. For example, some of our current and potential
competitors have made acquisitions or have announced new strategic alliances designed to position them to provide many of the same products and services
that we provide to both the service provider and enterprise markets. Industry consolidation may result in stronger competitors that are better able to compete
as sole-source vendors for customers, may cause price reductions, reduced gross margins and loss of market share.
Therefore, if our competitors announce new products, services or enhancements that better meet the needs of customers or changing industry requirements,
offer alternative methods to achieve customer objectives or implement faster go to market strategies, if our business model proves less effective than those of
our competitors, if new competitors enter the market, or if industry consolidation results in stronger competitors with wider range of product offerings and
greater financial resources, our ability to effectively compete may be harmed, which could have a material adverse effect on our business, financial condition
or results of operations.
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We depend on one or more significant customers and the loss of any such significant customer or a significant decrease in business from any such
customer could harm our results of operations.
The loss of any significant customer or a significant decrease in business from any such customer could harm our results of operations and financial
condition. In addition, revenues from individual customers may fluctuate from time to time based on the timing and the terms under which further orders are
received and the duration of the delivery and implementation of such orders. We derived 45% of our total revenues in 2013 from three Tier 1 mobile and fixed
operators. We derived 44% of our total revenues in 2014 and 37% of our total revenues in 2015 from two Tier 1 mobile and fixed operators. Revenues
derived from each of these operators for each of 2013, 2014 and 2015 represented over 10% of our total revenues.
Demand for our products may be impacted by government regulation of the telecommunications industry.
Service providers are subject to government regulation in a number of jurisdictions in which we sell our products. There are several proposals in the United
States, Europe and elsewhere for regulating service providers’ ability to prioritize applications in their networks. Advocates for regulating this industry claim
that collecting premium fees from certain “preferred” applications would distort the market for Internet applications in favor of larger and better-funded
content providers. They also claim that this would impact end-users who already purchased broadband access only to experience response times that differ
based on content provider. Opponents believe that content providers who support bandwidth-intensive applications should be required to pay service
providers a premium in order to support further network investments. In August 2008, the United States Federal Communications Commission (the “FCC”)
issued a ruling prohibiting Comcast, the second-largest broadband provider in the United States, from delaying certain peer-to-peer traffic on its network.
Comcast filed an appeal of the ruling in September 2008. In April 2010, a federal appeals court ruled that under current law the FCC had limited power over
Web traffic. In December 2010, the FCC adopted rules which would give it regulatory power over Internet service providers in order to prevent them from
blocking or unreasonably discriminating against Web content, services or applications. In 2011, Verizon and other broadband companies challenged the
FCC’s rules in the United States Court of Appeals for the District of Columbia Circuit. In January 2014, the United States Court of Appeals for the District of
Columbia Circuit overturned the FCC’s anti-blocking and anti-discrimination rules, saying the agency overreached in barring broadband providers from
slowing or blocking selected Web traffic. On March 12, 2015, the FCC issued the Open Internet Report and Order on Remand, Declaratory Ruling, and Order
(the “Open Internet Order”), setting forth rules, grounded, among others, on Title II of the Communications Act of 1934; The Open Internet Order regulates
both fixed and mobile ISP's and prohibits them, subject to reasonable network management, from blocking and/or throttling of lawful content, applications,
services, or non-harmful devices, and from unreasonably interfering or disadvantaging of (i) end users’ ability to select, access service or the lawful Internet
content, applications, services, or devices of their choice or (ii) edge providers’ ability to make lawful content, applications, services, or devices available to
end users. The Open Internet Order also prohibits paid prioritization of content. Such regulation of both fixed and mobile ISPs may limit ISPs' ability to
manage, prioritize and monetize their network. Additionally, these regulations may attract growing public debate and attention of regulators in other
jurisdictions we operate in. Demand from service providers for the traffic management and subscriber management features of our products may be adversely
affected by such regulations. A decrease in demand for these features could adversely impact sales of our products and could have a material adverse effect on
our business, financial condition or result of operations.
We need to increase the functionality of our products and offer additional features and products in order to maintain or increase our profitability.
The commoditization of DPI technology and the introduction of competitive features and value added services will result in a decrease of the average sale
prices of our DPI technology enabled products.
The market in which we operate is highly competitive and unless we continue to enhance the functionality of our products, add additional features and offer
additional products, our competitiveness may be harmed.
We endeavor to enhance our products by offering higher system speeds, additional features and value-added products, such as additional optimization
products, security and parental control products, among other value added products and support for additional applications and enhanced reporting tools.
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Our value-added products offer customers additional tools to increase the efficiency of their networks or to help them offer additional services to their end
customers and derive additional revenues from their end customers. The industry and market for our value added products, are still developing and are
affected, among others, by trends and changes in internet broadband traffic, including changes in methods used by various content providers and broadband
applications and evolution of network security threats.
We cannot provide any assurance that demand for our additional features and value added products will continue or grow, or that we will be able to generate
revenues from such sales at the levels we anticipate or at all. Any inability to sell or maintain our additional features and value-added products may lead to
commercial disputes with our customers and to lengthy implementation processes and increased spending on technical solutions, all of which may negatively
impact our results of operations.
Our revenues and business will be harmed if we do not keep pace with changes in broadband applications, network security threats and with advances in
technology, or if we do not achieve widespread market acceptance, including through significant investments.
We will need to invest heavily in the continued development of our technology in order to keep pace with rapid changes in applications, increased broadband
network speeds, network security threats and with our competitors’ efforts to advance their technology. Our ability to develop and deliver effective product
offerings depends on many factors, including identifying our customers’ needs, technical implementation of new services and integration of our value-added
products with our customers’ existing network infrastructure. While we will continue to introduce innovative value-added products, we cannot provide any
assurance that any new products we introduce will achieve the same degree of success that we have with our existing products. Designers of broadband
applications and distributors of various network security threats that our products identify, manage or mitigate are using increasingly sophisticated methods to
avoid detection and management and/or mitigation by network operators.
Even if our products successfully identify a particular application, it is sometimes necessary to distinguish between different types of traffic belonging to a
single application. Accordingly, we face significant challenges in ensuring that we identify new applications and new versions of current applications as they
are introduced without impacting network performance, especially as networks become faster. This challenge is increased as we seek to expand sales of our
products to new geographic territories because the applications vary from country to country and region to region.
The network equipment market is characterized by rapid technological progress, frequent new product introductions, changes in customer requirements and
evolving industry standards. To compete, we need to achieve widespread market acceptance.
Alternative technologies could achieve widespread market acceptance and displace the technology on which we have based our product architecture.
Our business and revenues will be adversely affected if we fail to develop enhancements to our products, in order to keep pace with changes in broadband
applications, network security threats and advances in technology. We can give no assurance that our technological approach will achieve broad market
acceptance or that other technology or devices will not supersede our technology and products.
A failure of our products may adversely affect the operation of our customers' live networks, which could harm our reputation, brand position, and
financial condition.
Our products are, generally, installed in line, as part of our customers' networks. We endeavor to avoid any interruption to the regular operation of such
networks, including, by performing certain tasks during predetermined maintenance windows, and implementing a system bypass, in the event of
malfunctions. However, in certain cases, a failure of our products may result in our customers experiencing loss of functionality, denial of service and access,
disconnection of live traffic on their networks, loss of security protection, end user dissatisfaction and loss of revenues. Such failure of our products, may
cause commercial disputes with our customers and adversely affect our reputation.
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Sales of our products to large service providers can involve a lengthy sales cycle, which may impact the timing of our revenues and result in us expending
significant resources without making any sales.
Our sales cycles to large service providers, including carriers, mobile operators and cable operators, are generally lengthy because these end-customers
consider our products to be capital equipment and undertake significant testing to assess the performance of our products within their networks. Furthermore,
many of our product and service arrangements with our customers provide that the final acceptance of a product or service may be specified by the customer.
In such instances, we do not recognize the revenue until all acceptance criteria have been met. As a result, we often invest significant time from initial contact
with a large service provider until it decides to incorporate our products into its network, and we may not be able to recognize the revenue from a customer
until all acceptance criteria have been satisfied. We may also expend significant resources in attempting to persuade large service providers to incorporate our
products into their networks without success. Even after deciding to purchase our products, the initial network deployment of our products by a large service
provider may last up to one year. If a competitor succeeds in convincing a large service provider to adopt that competitor’s product, it may be difficult for us
to displace the competitor because of the cost, time, effort and perceived risk to network stability involved in changing solutions. As a result, we may incur
significant expenses without generating any sales, which could adversely affect our profitability.
The complexity and scope of the solutions and services we provide to larger service providers are increasing, and such larger projects entail greater
operational risk and an increased chance of failure.
The complexity and scope of the solutions and services we provide to larger service providers are increasing. The larger and more complex such projects are,
the greater the operational risks associated with them. These risks include, but are not limited to, the failure to meet high customization requirements of
service providers, the failure to fully integrate our products into the service provider’s network or with third-party products, our dependence on subcontractors
and partners and on effective cooperation with third-party vendors for the successful and timely completion of such projects. If we encounter any of these
risks, we may incur higher costs in order to complete the project and may be subject to contractual penalties resulting in lower profitability. In addition, the
project may demand more of our management’s time than was originally planned, and our reputation may be adversely impacted.
We depend on third parties to market, sell, install and provide initial technical support for our products for a material portion of our business.
We depend on third-party channel partners, such as distributors, resellers, OEMs and system integrators, to market and sell a material portion of our products
to end-customers. In 2015, approximately 49% of our revenues were derived from channel partners. Our channel partners are also responsible for installing
our products and providing initial customer support for them. As a result, we depend on the ability of our channel partners to successfully market and sell our
products to these end-customers. We also depend on our ability to maintain our relationships with existing channel partners and to develop relationships with
new channel partners in key markets. We can give no assurance that our channel partners will market our products effectively, receive and fulfill customer
orders for our products on a timely basis or continue to devote the resources necessary to provide us with effective sales, marketing and technical support. In
addition, any failure by our channel partners to provide adequate initial support to end-customers could result in customer dissatisfaction with us or our
products, which could result in a loss of customers, harm our reputation and delay or limit market acceptance of our products. Our products are complex and
it takes time for a new channel partner to gain experience in the operation and installation of these products. Therefore, it may take a period of time before a
new channel partner can successfully market, sell and support our products if an existing channel partner ceases to sell our products. Additionally, our
agreements with channel partners are generally not exclusive and our channel partners may market and sell products that compete with our products. Our
agreements with our distributors and resellers are usually for an initial one-year term and following the expiration of this term, can be terminated by either
party. We can give no assurance that these agreements will remain in effect, and any termination of one or more of the agreements may adversely affect our
profitability and results of operations.
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We are subject to certain regulatory regimes that may affect the way that we conduct business internationally, and our failure to comply with applicable
laws and regulations could adversely affect our reputation and result in penalties and increased costs.
We are subject to a complex system of laws and regulations related to international trade, including economic sanctions and export control laws and
regulations. It is our policy not to make direct or indirect prohibited sales of our products, including into countries sanctioned under laws to which we are
subject, and to contractually limit the territories into which our channel partners may sell our products. Nevertheless, several years ago one of our channel
partners sold certain of our products (designed for the enterprise market) outside of its contractually designated territory, including into a sanctioned country,
and we subsequently determined that our contract management protocol for authorizing channel partner sales was not adequately followed in that instance.
We are also subject to the U.S. Foreign Corrupt Practices Act, or FCPA, and may be subject to similar worldwide anti-bribery laws that generally prohibit
companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Some of the
countries in which we operate have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-
bribery laws may conflict with local customs and practices.
Despite our compliance and training programs, we cannot be certain that our procedures will be sufficient to ensure consistent compliance with all applicable
international trade and anti-corruption laws, or that our employees or channel partners will strictly follow all policies and requirements to which we subject
them. Any alleged or actual violations of these laws may subject us to government scrutiny, investigation, debarment, and civil and criminal penalties, which
may have an adverse effect on our results of operations, financial condition and reputation.
We depend on our traffic management systems and network management application suites for the substantial majority of our revenues.
In the past few years, we have increased sales of our Value Added Services. However, sales of our traffic management systems, continued to account for a
major portion of our revenues in 2013, 2014 and 2015. Specifically, 68%, 57% and 58% of our total revenues in 2013, 2014 and 2015, respectively. The
foregoing systems will continue to account for a considerable portion of our revenues in the immediate future. If we are unable to increase these sales, our
business will suffer. In addition, service providers may choose embedded or integrated solutions using routers and switches from larger networking vendors
over a standalone solution that we offer. Any factor adversely affecting our ability to sell, or the pricing of or demand for, our traffic management systems and
network management system, would severely harm our ability to generate revenues and could have a material adverse effect on our business.
We integrate various third-party solutions into our products and may integrate or offer additional third-party solutions in the future. If we lose the right to
use such solutions, our sales could be disrupted and we would have to spend additional capital to replace such components.
We integrate various third-party solutions into our products and may integrate or offer additional third-party solutions in the future. Sales of our products
could be disrupted if such third-party solutions were either no longer available to us or no longer offered to us on commercially reasonable terms. In either
case, we would be required to spend additional capital to either redesign our products to function with alternate third-party solutions or develop substitute
components ourselves. We might, as a result, be forced to limit the features available in our current or future product offerings, which could have a material
adverse effect on our business.
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Our products are highly technical and any undetected software or hardware errors in our products could have a material adverse effect on our operating
results.
Our products are complex and are incorporated into broadband networks, which are a major source of revenue for service providers and support critical
applications for subscribers and enterprises. Due to the highly technical nature of our products and variations among customers’ network environments, we
may not detect product defects until our products have been fully deployed in our customers’ networks. Regardless of whether warranty coverage exists for a
product, we may be required to dedicate significant technical resources to repair any defects. If we encounter significant errors, we could experience, among
other things, loss of major customers, cancellation of orders, increased costs, delay in recognizing revenues and damage to our reputation. We could also face
claims for product liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention. In
addition, if our business liability insurance is inadequate or future coverage is unavailable on acceptable terms or at all, our financial condition could be
harmed.
Demand for our DPI technology enabled products depends, in part, on the rate of adoption of bandwidth-intensive broadband applications, and the
impact multiple applications may have on network speed.
Our products are used by service providers and enterprises to monitor and manage bandwidth-intensive applications that cause congestion in broadband
networks and impact the quality of experience for users. Demand for our products is driven particularly by growth in applications, which are highly sensitive
to network delays and therefore require efficient network management. If the rapid growth in the adoption of such applications does not continue, the demand
for our products may be adversely impacted.
Demand for our security products depends, in part, on continued evolution of on-line threat as well as on operators’ interest in providing security
services to their end customers
Our security products are used by service providers to offer security services to their end customers, comprising both of business enterprises as well as
individual end customers. The demand for these services depends highly on continued evolution and increase of online threats. In the event that such threats
decrease, that end customers are not willing to incur the costs of security services and/or in the event that ISPs do not continue to pursue security services to
their end customers as a revenue source, demand for our security products may be materially adversely impacted.
We currently depend on a single subcontractor to manufacture and provide hardware warranty support for our Service Gateway platforms and
NetEnforcer platforms. If this subcontractor experiences delays, disruptions, quality control problems or a loss in capacity, it could materially and
adversely affect our operating results.
We currently depend on a single subcontractor, Flex (Israel) Ltd. (previously Flextronics (Israel) Ltd.), a subsidiary of Flex (previously Flextronics), a global
electronics manufacturing services company, to manufacture, assemble, test, package and provide hardware warranty support for our Service Gateway
platforms and NetEnforcer platforms. In addition, our agreement with Flex (Israel) requires it to procure and store key components for our products at its
facilities. If Flex (Israel) experiences delays, disruptions or quality control problems in manufacturing our products, or if we fail to effectively manage our
relationship with Flex (Israel), product shipments may be delayed and our ability to deliver products to customers could be materially and adversely affected.
Flex (Israel) may terminate our agreement at any time during the term upon prior notice. We expect that it would take approximately six months to transition
the manufacturing of our products to an alternate manufacturer and our inventory of completed products may not be sufficient for us to continue delivering
products to our customers on a timely basis during any such transition period. Therefore, the loss of Flex (Israel) could adversely affect our sales and
operating results and harm our reputation.
Certain hardware and software components for our products come from single or limited sources and we could lose sales if these sources fail to satisfy
our supply requirements or if our customers refuse to implement components from certain sources.
We obtain certain hardware components used in our products from single or limited sources.
Although the abovementioned hardware components are off-the-shelf items, because our systems have been designed to incorporate these specific hardware
components, any change to these components due to an interruption in supply or our inability to obtain such components on a timely basis, may require
engineering changes to our products before substitute hardware components could be incorporated. Such changes could be costly and result in lost sales
particularly to our traffic management systems. The agreements with our suppliers do not contain any minimum supply commitments. If we or our contract
manufacturer fail to obtain components in sufficient quantities when required, our business could be harmed.
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We obtain certain software components of our security products, from a few limited sources, depending primarily on our customers' preferences. In the event
that we are no longer able to source such software components from a particular source, and our customers refuse to implement components from our
alternative sources, we may be required to identify an alternative source from which we do not currently acquire such software or develop such software
ourselves. This may result in disputes with our customers and/or cancellation or delay of orders, which may materially adversely affect our business.
Our suppliers also sell products to our competitors and may enter into exclusive arrangements with our competitors, stop selling their products or components
to us at commercially reasonable prices or refuse to sell their products or components to us at any price. Our inability to obtain sufficient quantities of single-
source or limited-sourced components or to develop alternative sources for components or products would harm our ability to maintain and expand our
business.
We may expand our business or enhance our technology through acquisitions that could result in diversion of resources and extra expenses. This could
disrupt our business and adversely affect our financial condition.
Part of our strategy is to selectively pursue partnerships and acquisitions. We have acquired a number of companies in recent years, including most recently,
the acquisition of substantially all of the business and assets of Optenet S.A., a Madrid-based global IT security company, in March 2015. The negotiation of
acquisitions, investments or joint ventures, as well as the integration of acquired or jointly developed businesses or technologies, could divert our
management’s time and resources. Acquired businesses, technologies or joint ventures may not be successfully integrated with our products and operations
and we may not realize the intended benefits of these acquisitions. We may also incur future losses from any acquisition, investment or joint venture. In
addition, acquisitions could result in:
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substantial cash expenditures;
potentially dilutive issuances of equity securities;
the incurrence of debt and contingent liabilities;
a decrease in our profit margins; and
amortization of intangibles and potential impairment of goodwill.
If acquisitions disrupt our operations or result in significant expenditures or liabilities, our business, operating results or financial conditions may suffer.
If we are unable to successfully protect the intellectual property embodied in our technology, our business could be harmed significantly.
Know-how relating to networking protocols, building carrier-grade systems, identifying applications and developing and maintaining security products is an
important aspect of our intellectual property. It is our practice to have our employees sign appropriate non-compete agreements when permitted under
applicable law. These agreements prohibit our employees who cease working for us from competing directly with us or working for our competitors for a
limited period of time. The enforceability of non-compete clauses in certain jurisdictions in which we operate may be limited. Under the current laws of some
jurisdictions in which we operate, we may be unable to enforce these agreements and it may thereby be difficult for us to restrict our competitors from gaining
the expertise our former employees gained while working for us.
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Further, to protect our know-how, we customarily require our employees, distributors, resellers, software testers and contractors to execute confidentiality
agreements or agree to confidentiality undertakings when their relationship with us begins. Typically, our employment contracts also include the following
clauses: assignment of intellectual property rights for all inventions developed by employees and non-disclosure of all confidential information. We cannot
provide any assurance that the terms of these agreements are being observed and will be observed in the future. Because our product designs and software are
stored electronically and thus are highly portable, we attempt to reduce the portability of our designs and software by physically protecting our servers
through the use of closed networks, which prevent external access to our servers. We cannot be certain, however, that such protection will adequately deter
individuals or groups from wrongfully accessing our technology. Monitoring unauthorized use of intellectual property is difficult and some foreign laws do
not protect proprietary rights to the same extent as the laws of the United States. We cannot be certain that the steps we have taken to protect our proprietary
information will be sufficient. In addition, to protect our intellectual property, we may become involved in litigation, which could result in substantial
expenses, divert the attention of management, cause significant delays, materially disrupt the conduct of our business or adversely affect our revenue,
financial condition and results of operations.
As of December 31,2015, we had a limited patent portfolio. We had twelve issued U.S. patents and four pending patent applications. While we plan to protect
our intellectual property with, among other things, patent protection, there can be no assurance that:
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current or future U.S. or foreign patents applications will be approved;
our issued patents will protect our intellectual property and not be held invalid or unenforceable if challenged by third-parties;
we will succeed in protecting our technology adequately in all key jurisdictions in which we or our competitors operate;
the patents of others will not have an adverse effect on our ability to do business; or
others will not independently develop similar or competing products or methods or design around any patents that may be issued to us.
The failure to obtain patents, inability to obtain patents with claims of a scope necessary to cover our technology or the invalidation of our patents may
weaken our competitive position and may adversely affect our revenues.
We may be subject to claims of intellectual property infringement by third parties that, regardless of merit, could result in litigation and our business,
operating results or financial condition could be materially adversely affected.
There can be no assurance that we will not receive communications from third parties asserting that our products, and other intellectual property infringe, or
may infringe their proprietary rights. We are not currently subject to any proceedings for infringement of patents or other intellectual property rights and are
not aware of any parties that intend to pursue such claims against us. Any such claim, regardless of merit, could result in litigation, which could result in
substantial expenses, divert the attention of management, cause significant delays and materially disrupt the conduct of our business. As a consequence of
such claims, we could be required to pay substantial damage awards, develop non-infringing technology, enter into royalty-bearing licensing agreements, stop
selling our products or re-brand our products. If it appears necessary, we may seek to license intellectual property that we are alleged to infringe. Such
licensing agreements may not be available on terms acceptable to us or at all. Litigation is inherently uncertain and any adverse decision could result in a loss
of our proprietary rights, subject us to significant liabilities, require us to seek licenses from others and otherwise negatively affect our business. In the event
of a successful claim of infringement against us and our failure or inability to develop non-infringing technology or license the infringed or similar
technology, our business, operating results or financial condition could be materially adversely affected.
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We use certain “open source” software tools that may be subject to intellectual property infringement claims, the assertion of which could impair our
product development plans, interfere with our ability to support our clients or require us to pay licensing fees.
Certain of our products contain open source code, and we may use more open source code in the future. Open source code is code that is covered by a license
agreement that permits the user to liberally copy, modify and distribute the software without cost, provided that users and modifiers abide by certain licensing
requirements. The original developers of the open source code provide no warranties on such code. As a result of our use of open source software, we could
be subject to suits by parties claiming ownership of what we believe to be open source code, and we may incur expenses in defending claims that we did not
abide by the open source code license. If we are not successful in defending against such claims, we may be subject to monetary damages or be required to
remove the open source code from our products. Such events could disrupt our operations and the sales of our products, which would negatively impact our
revenues and cash flow. In addition, under certain conditions, the use of open source code to create derivative code may obligate us to make the resulting
derivative code available to others at no cost. If we are required to publicly disclose the source code for such derivative products or to license our derivative
products that use an open source license, our previously proprietary software products would be available to others, including our customers and competitors
without charge. We monitor our use of such open source code to avoid subjecting our products to conditions that we do not intend. The use of such open
source code, however, may ultimately subject some of our products to unintended conditions so that we are required to take remedial action that may divert
resources away from our development efforts.
Unfavorable economic conditions in emerging markets could have a material adverse effect on our business, financial condition or operating results.
During 2014, 2015 and the beginning of 2016, economies worldwide have demonstrated certain recovery trends. However, emerging markets, such as the
Commonwealth of Independent States (CIS) and China continued to experience a downturn and a depreciation of each of their currencies against the U.S.
dollar.
Oil and gas exporting countries, such as Russia and other CIS countries experienced deterioration in economic conditions, starting in the second half of 2015,
as a result of a fall in energy prices. China’s weak growth trends adversely affected other Asian economies as well.
If the economies of emerging markets remain unstable or further deteriorate, enterprises, telecommunication carriers and service providers in affected regions,
may significantly reduce or postpone capital investments, which could result in reductions in sales of our products or services, longer sales cycles, slower
adoption of new technologies and increased price competition in such regions. Such circumstances would have a material adverse effect on our results of
operations and cash flows.
Further, because a substantial portion of our operating expenses consists of salaries, we may not be able to reduce our operating expenses in line with any
reduction in revenues and, therefore, may not be able to continue to generate increased revenues and manage our costs to maintain profitability.
Our international operations expose us to the risk of fluctuations in currency exchange rates.
Our revenues are generated primarily in U.S. dollars and a major portion of our expenses are denominated in U.S. dollars. As a result, we consider the U.S.
dollar to be our functional currency. A significant portion of our revenue is also generated in EUR. Other significant portions of our expenses are
denominated in New Israeli shekel (NIS) and to a lesser extent in Euros and other currencies. Our NIS-denominated expenses consist principally of salaries
and related personnel expenses. We anticipate that a material portion of our expenses will continue to be denominated in NIS. In 2015, the fluctuation in NIS
against the U.S. dollar was immaterial, however, in the beginning of 2016, the NIS weakened against the U.S. dollar and we also experienced material
fluctuation in previous years, and anticipate that the NIS will continue to fluctuate against the U.S dollar, in the future. In 2014, NIS appreciated by
approximately 12% against the U.S. dollar. In 2015, the EUR appreciated by approximately 12% against the U.S. dollar. In 2014, the EUR appreciated by
approximately 13% against the U.S. dollar. If the U.S. dollar weakens against the NIS or other currencies we are exposed to negative impact on our results of
operations. We use derivative financial instruments, such as foreign exchange forward contracts, to mitigate the risk of changes in foreign exchange rates on
balance sheet accounts and forecast cash flows. We may not purchase derivative instruments adequately to insulate ourselves from foreign currency exchange
risks. The volatility in the foreign currency markets may make hedging our foreign currency exposures challenging. In addition, because a portion of our
revenue is not earned in U.S. dollars, fluctuations in exchange rates between the U.S. dollar and the currencies in which such revenue is earned may have a
material adverse effect on our results of operations and financial condition. If we wish to maintain the U.S. dollar-denominated value of our products in non-
U.S. markets, devaluation in the local currencies of our customers relative to the U.S. dollar could cause our customers to cancel or decrease orders or default
on payment.
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Our actual financial results may differ materially from any guidance we may publish from time to time.
We may, from time to time, voluntarily publish guidance regarding our future performance that represents our management’s estimates as of the date of
relevant release. Any such guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, is inherently
subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific
assumptions with respect to future business decisions, some of which will change. The principal reason that we may release this data is to provide a basis for
our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by
any such persons. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us
will not materialize or will vary significantly from actual results. Further, our sales during any given quarter tend to be unevenly distributed as individual
orders tend to close in greater numbers immediately prior to the relevant quarter end and further. Our revenues from individual customers may also fluctuate
from time to time based on the timing and the terms under which further orders are received and the duration of the delivery and implementation of such
orders. Therefore, if our projected sales do not close before the end of the relevant quarter, our actual results may be inconsistent with our published
guidance. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from the
guidance and the variations may be material. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in the
future that the data is forecast. In light of the foregoing, investors are urged to consider any guidance we may publish in context and not to place undue
reliance on it.
Risks Related to Our Ordinary Shares
The share price of our ordinary shares has been and may continue to be volatile.
Our quarterly financial performance is likely to vary in the future, and may not meet our expectations or the expectations of analysts or investors, which may
lead to additional volatility in our share price. The market price of our ordinary shares may be volatile and could fluctuate substantially due to many factors,
including, but not limited to:
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announcements or introductions of technological innovations, new products, product enhancements or pricing policies by us or our competitors;
winning or losing contracts with service providers;
disputes or other developments with respect to our or our competitors’ intellectual property rights;
announcements of strategic partnerships, joint ventures or other agreements by us or our competitors;
recruitment or departure of key personnel;
regulatory developments in the markets in which we sell our products;
our future repurchases, if any, of our ordinary shares pursuant to our current share repurchase program and/or any other share repurchase program
which may be approved in the future;
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our sale of ordinary shares or other securities in the future;
changes in the estimation of the future size and growth of our markets; or
market conditions in our industry, the industries of our customers and the economy as a whole.
Share price fluctuations may be exaggerated if the trading volume of our ordinary shares is too low. The lack of a trading market may result in the loss of
research coverage by securities analysts. Moreover, we can provide no assurance that any securities analysts will initiate or maintain research coverage of our
company and our ordinary shares. If our future quarterly operating results are below the expectations of securities analysts or investors, the price of our
ordinary shares would likely decline. Securities class action litigation has often been brought against companies following periods of volatility.
Our shareholders do not have the same protections afforded to shareholders of a U.S. company because we have elected to use certain exemptions
available to foreign private issuers from certain NASDAQ corporate governance requirements.
As a foreign private issuer, we are permitted under NASDAQ Rule 5615(a)(3) to follow Israeli corporate governance practices instead of the NASDAQ Stock
Market requirements that apply to U.S. companies. As a condition to following Israeli corporate governance practices, we must disclose which requirements
we are not following and describe the equivalent Israeli law requirement. We must also provide NASDAQ with a letter from our Israeli outside counsel,
certifying that our corporate governance practices are not prohibited by Israeli law. As a result of these exemptions, our shareholders do not have the same
protections as are afforded to shareholders of a U.S. company.
In the future, we may also choose to follow Israeli corporate governance practices instead of NASDAQ requirements with regard to, among other things, the
composition of our board of directors, compensation of officers, director nomination procedures and quorum requirements at shareholders’ meetings. In
addition, we may choose to follow Israeli corporate governance practice instead of NASDAQ requirements to obtain shareholder approval for certain dilutive
events (such as for 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). Accordingly, our shareholders may not be afforded
the same protection as provided under NASDAQ corporate governance rules. 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 than is accorded to
investors of domestic issuers. See “ITEM 16G: Corporate Governance”.
As a foreign private issuer, we are not subject to the provisions of Regulation FD or U.S. proxy rules and are exempt from filing certain Exchange Act
reports.
As a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act related 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 annual and current reports and financial statements with the SEC as frequently
or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act, we are permitted to disclose limited compensation
information for our executive officers on an individual basis and we are generally exempt from filing quarterly reports with the SEC under the Exchange
Act. Moreover, we are not required to comply with Regulation FD, which restricts the selective disclosure of material nonpublic information to, among
others, broker-dealers and holders of a company’s securities under circumstances in which it is reasonably foreseeable that the holder will trade in the
company’s securities on the basis of the information. These exemptions and leniencies reduce the frequency and scope of information and protections to
which you may otherwise have been eligible in relation to a U.S. domestic issuer.
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We would lose our foreign private issuer status if (a) a majority of our outstanding voting securities were either directly or indirectly owned of record by
residents of the United States and (b)(i) a majority of our executive officers or directors were United States citizens or residents, (ii) more than 50 percent of
our assets were located in the United States or (iii) our business were administered principally outside the United States. Our loss of foreign private issuer
status would make U.S. regulatory provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may
be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer
forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We would also be required to follow U.S.
proxy disclosure requirements, including the requirement to disclose, under U.S. law, more detailed information about the compensation of our senior
executive officers on an individual basis. We may also be required to modify certain of our policies to comply with accepted governance practices associated
with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we would lose our ability to rely upon exemptions
from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.
Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company
Generally, if for any taxable year 75% or more of our gross income is passive income, or the average percentage of our assets which produce passive income
or which are held for the production of passive income (“passive assets”) is at least 50%, we would be characterized as a passive foreign investment company
(“PFIC”) for U.S. federal income tax purposes for such taxable year. Publicly traded corporations must determine the percentage of assets on the basis of the
value of their assets. No definitive guidance has been issued by the U.S. government concerning how to value the assets of a foreign public company for PFIC
testing purposes. It can be inferred from the legislative history that the fair market value of the total assets of a publicly traded foreign corporation can be
more easily measured, and is therefore likely to be less burdensome to taxpayers, by applying the “market capitalization” method. Under the market
capitalization method, the total asset value of a company would be considered to equal the aggregate fair market value of its outstanding stock (i.e., its market
capitalization) plus its outstanding liabilities, as of a relevant testing date. However, the legislative history did not specify the circumstances under which it
would be appropriate to use the “market capitalization” method, or that such method was an exclusive means for valuing the total assets of a publicly traded
corporation. Accordingly, if the market capitalization approach is found to be insufficient in the context of the facts and circumstances of a particular case,
other reasonable valuation methods may be employed to determine the fair market value of a corporation’s assets. In certain circumstances, including
extremely volatile market conditions, it may be appropriate to apply alternative valuation methods, to more accurately determine the fair market value of our
assets, such as a valuation of the assets by an independent qualified expert. Given the volatility of the capital markets in 2015, we have obtained an
independent valuation of our company for the 2015 tax year, as well as an opinion from a U.S. tax advisor that, applying the results of the independent
valuation of our company which employed an approach other than the market capitalization approach, and which provided the reasoning underlying the use of
such approach, we should not be a PFIC for the 2015 taxable year. We considered such valuation in determining the value of our total assets and we also
considered the above-referenced opinion. On that basis, we believe that we were not a PFIC for the 2015 tax year; however there can be no certainty that the
IRS will not challenge such a position and determine that based on the IRS’s interpretation of the asset test, we were a PFIC for the 2015 tax year. Thus, there
can be no assurance that we will not be considered a PFIC for 2015 or for any other taxable year. U.S. Holders should consult their own tax advisors
concerning the implication of the PFIC rules in his, her or its particular circumstances. See “ITEM 10: Taxation–United States Federal Income Taxation–
Passive Foreign Investment Company Considerations.”
If we were characterized as a passive foreign investment company, a U.S. Holder (as defined under “ITEM 10: Additional Information–Taxation–United
States Federal Income Taxation–Passive Foreign Investment Company Considerations”) could avoid certain adverse passive foreign investment company
consequences by making a qualified electing fund election to be taxed currently on its proportionate share of the passive foreign investment company’s
ordinary income and net capital gains. However, we do not intend to comply with the necessary accounting and record keeping requirements that would allow
a U.S. Holder to make a qualified electing fund election with respect to the Company. See “ITEM 10: Additional Information–Taxation–United States Federal
Income Taxation–Passive Foreign Investment Company Considerations.”
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If the price of our ordinary shares declines, we may be more vulnerable to an unsolicited or hostile acquisition bid.
We do not have a controlling shareholder. Notwithstanding provisions of our articles of association and Israeli law, a decline in the price of our ordinary
shares may result in us becoming subject to an unsolicited or hostile acquisition bid. In the event that such a bid is publicly disclosed, it may result in
increased speculation regarding our company and volatility in our share price even if our board of directors decides not to pursue a transaction. If our board of
directors does pursue a transaction, there can be no assurance that it will be consummated successfully or that the price paid will represent a premium above
the original price paid for our shares by all of our shareholders.
Risks Relating to our Location in Israel
Conditions in Israel could adversely affect our business.
We are incorporated under Israeli law and our principal offices, research and development division and manufacturing facilities are located in
Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the State of Israel was established in 1948, a
number of armed conflicts have occurred between Israel and its Arab neighbors. Although Israel has entered into various agreements with Egypt, Jordan and
the Palestinian Authority, there has been an increase in unrest and terrorist activity, which began in September 2000 and continued with varying levels of
severity into 2015. In recent years, these have included, among others, hostilities between Israel and Hezbollah in Lebanon and Hamas in the Gaza strip, both
of which resulted in rockets being fired into Israel, causing casualties and significant disruption of economic activities. Any armed conflicts, terrorist
activities or political instability in the region may affect a significant portion of our work force, which is located in Israel, and may limit materially our ability
to obtain raw materials from these countries or sell our products to companies in these countries. Any hostilities involving Israel or the interruption or
curtailment of trade between Israel and its present trading partners, or significant downturn in the economic or financial condition of Israel, could adversely
affect our operations and product development and manufacturing, cause our revenues to decrease and adversely affect the share price of publicly traded
companies having operations in Israel, such as us.
Our operations may be disrupted by the obligations of personnel to perform military service.
As of December 31, 2015, we employed 517 people, of whom 330 were based in Israel. Some of our employees in Israel are obligated to perform annual
military reserve duty in the Israel Defense Forces, depending on their age and position in the army. Additionally, they may be called to active reserve duty at
any time under emergency circumstances for extended periods of time. Our operations could be disrupted by the absence of one or more of our executive
officers or key employees for a significant period due to military service and any significant disruption in our operations could harm our business. The full
impact on our workforce or business if some of our executive officers and employees are called upon to perform military service, especially in times of
national emergency, is difficult to predict. Additionally, the absence of a significant number of employees at our manufacturing subcontractor, Flex, as a result
of military service obligations may disrupt their operations and could have a material adverse effect on our ability to timely deliver products to customers may
be materially adversely affected.
The tax benefits that are available to us require us to meet several conditions and may be terminated or reduced in the future, which would increase our
costs and taxes.
Our investment program in equipment at our facility in Hod-Hasharon, Israel, has been granted approved enterprise status and we are therefore eligible for tax
benefits under the Israeli Law for the Encouragement of Capital Investments, 1959, referred to as the Investments Law. We also have been granted benefited
enterprise status. We expect to utilize these tax benefits after we utilize our net operating loss carry forwards. As of December 31, 2015, our net operating
loss carry forwards for Israeli tax purposes amounted to approximately $39.9 million. To remain eligible for these tax benefits, we must continue to meet
certain conditions stipulated in the Investments Law and its regulations and the criteria set forth in the specific certificate of approval. If we do not meet these
requirements, the tax benefits would be canceled and we could be required to refund any tax benefits and investment grants that we received in the
past. Further, in the future these tax benefits may be reduced or discontinued. If these tax benefits are cancelled, our Israeli taxable income would be subject
to regular Israeli corporate tax rates. The standard corporate tax rate in Israel for 2016 and thereafter is 25.0% and was 26.5% in 2015 and 2014, respectively.
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Effective January 1, 2011, the Investment Law was amended. Under the amended Investment Law, the criteria for receiving tax benefits were revised. Under
the transition provisions of the new legislation, a company may decide to irrevocably implement the new amendment while waiving benefits provided under
the current law or to remain subject to the current law. In the future, we may not be eligible to receive additional tax benefits under this law. The termination
or reduction of these tax benefits would increase our tax liability, which would reduce our profits. Finally, in the event of a distribution of a dividend from the
abovementioned tax-exempt income, in addition to withholding tax at the following rates: (i) Israeli resident corporation – 0%, (ii) Israeli resident individual
– 20% in 2014 and onwards, and (iii) non-Israeli resident – 20% in 2014 and onwards subject to a reduced tax rate under the provisions of an applicable
double income on the amount distributed in accordance with the effective corporate tax rate which would have been applied had we not enjoyed the
exemption. See “ITEM 10: Additional Information—Taxation—Israeli Tax Considerations and Government Programs.”
No assurance can be given that we will be eligible to receive additional tax benefits under the Investments Law in the future. The termination or reduction of
these tax benefits would increase our tax liability in the future, which would reduce our profits or increase our losses. Additionally, if we increase our
activities outside of Israel, for example, by future acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs.
The government grants we have received for research and development expenditures require us to satisfy specified conditions and restrict our ability to
manufacture products and transfer technologies outside of Israel. If we fail to comply with these conditions or such restrictions, we may be required to
refund grants previously received together with interest and penalties and may be subject to criminal charges.
We have received grants from the Office of the Chief Scientist for the financing of a portion of our research and development expenditures in Israel, pursuant
to the provisions of The Encouragement of Industrial Research and Development Law, 1984, referred to as the Research and Development Law. In the future
we may not receive grants or we may receive significantly smaller grants from the Office of the Chief Scientist, and our failure to receive grants in the future
could adversely affect our profitability.
In 2013, 2014 and 2015 we received and accrued non-royalty-bearing grants totaling $1.1, $1.0 and $1.3 million, respectively, from the Office of the Chief
Scientist, representing 3.7%, 3.3% and 4.5% respectively of our gross research and development expenditures during the year. In 2013, 2014 and 2015 we
qualified to participate in two non-royalty-bearing research and development programs funded by the Office of the Chief Scientist to develop generic
technology relevant to the development of our products. Such programs are approved pursuant to special provisions of the Research and Development Law.
We were eligible to receive grants constituting between 40% and 55% of certain research and development expenses relating to these programs. One of the
programs are approved for companies with large Research and Development activities and another for members of a "Magnet" consortium. Although the
grants under these programs are not required to be repaid by way of royalties, the restrictions of the Research and Development Law described below apply to
these programs.
The provisions of the Research and Development Law and the terms of the Office of the Chief Scientist grants prohibit us from transferring manufacturing
products which we originally planned to manufacture in Israel outside of Israel if they incorporate technologies funded by the Office of the Chief Scientist,
and from transferring intellectual property rights in technologies developed using these grants, without special approvals from the Office of the Chief
Scientist.
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Even if we receive approval to manufacture our products outside of Israel, we may be required to pay an increased total amount of royalties, which may be up
to 300% of the grant amount plus interest, depending on the manufacturing volume that is performed outside of Israel. This restriction may impair our ability
to outsource manufacturing or engage in similar arrangements for those products or technologies. Know-how developed under an approved research and
development program may not be transferred to any third-parties, except in certain circumstances and subject to prior approval. Similarly, even if we receive
approval to transfer intellectual property rights in technologies developed using these grants, we may be required to repay a multiple of the original grants to
the Office of the Chief Scientist. In addition, if we fail to comply with any of the conditions and restrictions imposed by the Research and Development Law
or by the specific terms under which we received the grants, we may be required to refund any grants previously received together with interest and penalties,
and may be subject to criminal charges.
It may be difficult to enforce a U.S. judgment against us, our officers and directors in Israel or the United States, or to assert U.S. securities laws claims
in Israel or serve process on our officers and directors.
We are incorporated in Israel. The majority of our executive officers and directors are not residents of the United States, and the majority of our assets and the
assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court
judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Israeli court, or to effect
service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S.
securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws on the
grounds that Israel is not the most appropriate forum in which to bring such a claim. Even if an Israeli court agrees to hear a claim, it may determine that
Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact which
can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel
addressing the matters described above.
Provisions of Israeli law and our articles of association may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares
or assets.
Our articles of association contain certain provisions that may delay or prevent a change of control, including a classified board of directors. In addition,
Israeli corporate law regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions involving significant
shareholders and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli law could delay or prevent a change in
control and may make it more difficult for third-parties to acquire us, even if doing so would be beneficial to our shareholders, and may limit the price that
investors may be willing to pay for our ordinary shares in the future. Furthermore, Israeli tax considerations may make potential transactions undesirable to us
or to some of our shareholders. See “ITEM 10: Additional Information—Memorandum and Articles of Association—Acquisitions under Israeli Law” and “—
Anti-Takeover Measures.”
ITEM 4: Information on Allot
A. History and Development of Allot
Our History
Our legal and commercial name is Allot Communications Ltd. We are a company limited by shares organized under the laws of the State of Israel. Our
principal executive offices are located at 22 Hanagar Street, Neve Ne’eman Industrial Zone B, Hod-Hasharon 4501317, Israel, and our telephone number is
+972 (9) 761-9200. We have irrevocably appointed Allot Communications Inc. as our agent to receive service of process in any action against us in any
United States federal or state court. The address of Allot Communications Inc. is 300 TradeCenter, Suite 4680, Woburn, MA 01801-7422.
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We were incorporated on November 12, 1996 as “Ariadne Ltd.” and commenced operations in 1997. In September 1997, we changed our name to “Allot
Communications Ltd.”. In November 2006, we listed our shares on NASDAQ. In 2007, we introduced our Service Gateway platform that enables broadband
providers to build efficient, secure, manageable and profitable intelligent networks that are optimized to deliver Internet-based content and services. In 2008,
we completed the acquisition of the business of Esphion Limited, a developer of network protection solutions for carriers and internet service providers. In
2010, we listed our shares on the Tel Aviv Stock Exchange, or TASE, and began applying the reporting reliefs afforded under the Israeli Securities Law to
companies whose securities are dually listed on NASDAQ and the TASE. In 2012, we acquired the business of Ortiva Wireless Inc., a developer of video
optimization solutions for mobile and Internet networks. In 2012, we acquired the business of Oversi Networks Ltd., a developer of products and systems for
caching Internet content. In 2015, we acquired substantially all of the assets and business of Optenet S.A., a Madrid-based global IT security company.
B. Business Overview
Overview
We are a leading global provider of security and monetization solutions that enable mobile, fixed and enterprise service providers to protect and personalize
the digital experience. Allot’s flexible and highly scalable service delivery framework leverages the intelligence in data networks, enabling service providers
to get closer to their customers, safeguard network assets and users, and accelerate time-to-revenue for value-added services.
We have a global and diverse customer base composed of mobile and fixed broadband service providers, cable operators, private networks, data centers,
governments and enterprises, such as financial and educational institutions. Our scalable, carrier-grade solutions integrate capabilities that allow our
customers to optimize the delivery and performance of over-the-top (OTT) applications and services, monetize network utilization through value-added
product deployment, security service offerings, real-time metering and application-aware charging models and personalize the user experience through
service tiering and differentiation.
Through our combination of innovative technology, proven know-how and collaborative approach to industry standards and partnerships with broadband
service providers and enterprises, we deliver broadband solutions that equip our customers with the capabilities to elevate their role in the digital lifestyle
ecosystem and to expand into new business opportunities. We offer our customers proprietary technologies that are seamlessly woven into carrier-class
products and solutions. In addition, we have developed significant industry know-how and expertise through our experience in designing and implementing
use cases with our diverse customer base. Beginning from the proposal stage of a new project through the testing, acceptance and implementation of our
products, we collaborate closely with our customers and other industry participants to create innovative solutions to create the digital lifestyle ecosystems that
our customers require.
Industry Background
The rapid proliferation of broadband networks in recent years has been largely driven by demand from users for faster and more reliable access to the Internet
and by the proliferation in the number and complexity of broadband applications, as well as the proliferation of mobile smartphones, tablets and other
Internet-connected devices.
Rising Network Operational Costs Due to the Rapid Adoption of Broadband Applications
Advances in broadband access (such as the introduction of long-term evolution, or LTE, technology) combined with the advanced data capabilities of end-
user devices (such as smartphones and tablets) have promoted a growing number of applications and content delivered over broadband networks. The vast
majority of these applications run over-the-top of the network, which means they are not originated, controlled or charged by the network operator. The use of
OTT applications, such as streaming video, peer-to-peer (P2P), Voice over IP (VoIP), social networks, interactive gaming and online content, requires large
and increasing amounts of bandwidth. Moreover, many of these applications are highly sensitive to network delays caused by congestion. In response to these
challenges, service providers have been forced to invest heavily in network infrastructure upgrades and customer support services in order to maintain the
quality of experience for subscribers.
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Rising Data Traffic in Mobile Networks
The mobile data market continues to grow rapidly, fueled by the proliferation of smartphones and tablets, mobile-enabled laptops that use mobile modems or
tethered smartphones to connect to the Internet. On average, the data traffic generated by an Internet user with a smartphone is multiple times that of an
Internet user without a smartphone.
The cost of increasing the bandwidth in mobile networks is significantly higher than that in wireline networks. As a result, mobile operators are experiencing
economic and infrastructure challenges in meeting the rising tide of data traffic over their networks. In addition, as capacity increases in mobile networks,
smartphone users are likely to have increased expectations with respect to speed and performance.
It is becoming increasingly apparent that unmanaged 3G and 4G/LTE mobile networks will not be able to cope with the rising tide of data traffic, without
implementing intelligent bandwidth management solutions. Moreover, network providers may need to develop new pricing models if they are not able to
monetize the OTT traffic carried by their networks.
Service Providers Demand the Ability to Offer Services that Can Be Monetized at Different Rates
Some service providers still offer flat-rate broadband access, regardless of the type of applications and data used by subscribers. These operators provide the
same level of service to all subscribers and do not guarantee access quality, regardless of a subscriber’s willingness to pay for premium services and network
performance. However, with the increasing amount of data used, the flat-rate pricing model may not be profitable, especially for mobile broadband operators,
unless they can charge subscribers high rates. As a result, both mobile and fixed operators have begun to offer service plans based on gigabytes of data used.
However, this pricing model is also subject to competition from other service providers offering lower rates, contributing to downward pricing pressure and
high subscriber turnover rates.
To address these issues and increase the average revenue per user (ARPU), a significantly increased number of service providers have begun to offer
premium, differentiated services, such as free usage for specific applications, content bundling, off-peak usage incentives, security services, improved quality
for VoIP and Internet video, among others. By offering such tiered services and charging subscribers according to the value of these services, as well as based
on the gigabyte usage, service providers can capitalize on the revenue opportunities embodied in their networks. To offer premium services and to guarantee
high-quality delivery of content and user experience, service providers need enhanced visibility into and control of network traffic, including visibility into
the type of applications used on the network and levels of traffic generated by different subscribers.
The Challenge of Elevating the Role of Fixed and Mobile Broadband Networks
In the evolving digital lifestyle, consumers recognize the importance of the devices they use to access the Internet and choose the Internet content and services
they use based on quality. However, the network that connects them to the Internet is not as “visible”, and is therefore not as highly valued, even though it
plays a critical role in the service chain. In order to generate revenue through various pricing models and encourage consumers and content providers to seek
higher quality network services, service providers are seeking to elevate the role of network connectivity and services. To do so, service providers must be
able to identify and leverage the business intelligence in their data networks and capitalize on the network traffic that they generate.
The ability to identify, distinguish and prioritize different applications plays a major role in intelligent management of network resources and service delivery,
allowing service providers to optimize bandwidth utilization and reduce operational costs, while maintaining high quality of service for tiered and premium
services. Application designers are employing increasingly sophisticated methods to avoid detection by network operators who desire to manage network use.
Traditional network infrastructure devices, such as routers and switches, do not generally have sufficient computing resources or the required algorithms to
distinguish between different and rapidly evolving applications.
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Network Security Threats
As reliance on the Internet has grown, service provider and enterprise networks have become increasingly vulnerable to a wide range of security threats,
including denial of service attacks, spambots and malware. These attacks are designed to flood the network with traffic that consumes all the available
bandwidth and hinder the ability to provide high quality broadband access to subscribers or to prevent enterprises from using mission-critical applications.
These threats also compromise network and data integrity. We believe service providers and enterprises must protect against such attacks by detecting and
neutralizing malicious traffic at very early stages before such threats can compromise network integrity and services.
End-User Security Threats
Broadband devices, especially mobile devices, are increasingly vulnerable to online threats such as malware and phishing. Since most broadband users have
limited cyber-security expertise, they become easy targets for cybercriminals. Mobile device users are even more exposed since the threat awareness is lower
than that of PC users. There are several options to safeguard broadband users on-the-go. We, we believe service providers must protect their subscribers by
providing security-as-a-service so that individual and business customers are always protected seamlessly from the network security threats.
Enterprise Demand for Visibility and Delivery of Mission-Critical Applications and Services in the Cloud
The proliferation of network applications, bring your own device and cloud computing present significant challenges for enterprises that operate data centers,
wide-area networks, virtual private networks (VPN) and Internet connectivity for organizations of all sizes. Enterprises depend on network infrastructure to
ensure the delivery of business-critical applications to an increasingly mobile and often global workforce, and as such, face many of the same issues as
service providers. At the same time, Internet access has introduced a wide variety of recreational and non-business applications to enterprise networks,
resulting in network congestion and negatively impacting employee productivity. As a result, there is an increasing need for enterprises to be able to monitor
and control the traffic on their business networks.
Integrated Solutions
Our integrated broadband solutions allow mobile, fixed and enterprise operators to elevate their role in the digital lifestyle ecosystem and expand into new
business opportunities. Our solutions enable our customers to increase revenues by monetizing network usage through value-added products and services,
value-based charging,, reduce costs by optimizing the delivery and performance of OTT content and cloud computing services and improve customer loyalty
by personalizing operator offerings with various choices of service tiers and digital lifestyle options.
Our Integrated Solutions include:
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Analytics solutions deliver accurate and meaningful network business intelligence to drive capacity planning, congestion management, service planning
and marketing decisions.
Traffic Management solutions prioritize existing network capacity, control congestion and optimize service delivery. Dynamic Quality of Service
(QoS) enforcement enables effective traffic management strategies that minimize infrastructure and operating costs.
Video Caching and Optimization solutions improve the quality and efficiency of OTT video delivery. New revenue opportunities are created through
service packages designed especially for video consumers.
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Policy Control and Charging solutions drive personalized service plans and pay-for-use pricing models based on real-time consumption of bandwidth
and OTT applications. We provide a single point of integration with provisioning and pricing systems.
Service Enablement solutions facilitate a wide variety of cost-saving and revenue-generating use cases to create personalized customer experiences
demanded by today’s sophisticated consumers.
Security Solutions enable operators to secure the digital experience against online threats and harmful content, by providing network based Security as
a Service (SECaaS) to their end customers.
Allot’s Products (Our Platforms)
The Allot Service Gateway platforms (including Allot Service Gateway Tera, and Allot Service Gateway 9500) as well as Allot NetEnforcer platforms are
based on leading technology and high performance, designed for in-line deployment in a wide range of networks. Allot service Gateway platforms are
designed for deployment both on traditional and virtualized network access infrastructure. Within each platform, our Dynamic Actionable Recognition
Technology (DART) engine employs multiple deep packet inspection (DPI) and analytical methods to identify network traffic by subscriber, application,
device and network topology. Our technology is able to identify more OTT applications than any other solution on the market with frequent and custom
updates to our extensive signature library. These granular elements may be mapped directly into dynamic traffic management, charging and service
enablement policies.
High-Performance Platforms
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Allot Service Gateway 9500 provides visibility, control and security of application and user traffic in cloud data centers and ISP networks.
Theplatformprovidesa unified framework and single point of integration for traffic visibility and policyenforcement, charging, aswell as pre-integrated
services, including, web and cyber security,and web optimization, cyber threatprotection, data sourcing, and network analytics.
Allot Service Gateway Tera powers the deployment and delivery of digital lifestyle services in fixed, mobile and cloud networks that are on the path to
software-defined networking (SDN) and virtualized network services (NFV). The Allot Service Gateway Tera provides a unified framework for traffic
detection, policy enforcement and service integration across any access network, and helps manage traffic loads, keeping pace with the growing demand
for services and the complex needs of application delivery. Allot Service Gateway Tera supports both physical and virtual service deployment and
serves as a single point of seamless integration in the network for real-time data sourcing, traffic management, service chaining, video optimization,
application-based charging, endpoint protection and anti-DDoS, as well as value-added services from other leading vendors.
Allot Service Gateway integrates network intelligence, policy enforcement and revenue-generating services in a scalable, carrier-class platform
designed for fixed, mobile (3G/4G/LTE) and converged broadband networks. The Allot Service Gateway accurately identifies subscriber traffic in real
time at speeds up to 500 gigabits per second (Gbps), for a single device and can cluster up to 8 devices for a total of 4 Tbps (Tera bits per second) for a
single cluster. It optimizes bandwidth utilization based on usage, enforces QoS policy, and steers traffic to digital lifestyle services deployed within or
outside the platform. As the focal point for service enablement, The Allot Service Gateway allows service providers to reduce operating costs and drive
new revenue by delivering the personalized service and quality of experience that the digital lifestyle demands.
Allot NetEnforcer bandwidth management devices monitor and manage network traffic per application and per subscriber, enabling intelligent
optimization of broadband and wide area network (WAN) services. With full duplex speeds ranging from 10 megabits per second (Mbps) to 16 Gbps,
these devices provide essential visibility policy enforcement and traffic steering to added-value services in a wide range of service provider and
enterprise networks.
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Lifestyle Services
Our growing portfolio of digital lifestyle services operate seamlessly with our in-line platforms and centralized management system, providing new business
opportunities for service providers and enterprises.
Subscriber Management Platform
The Allot Subscriber Management Platform (SMP) drives the centralized creation, provisioning and pricing of subscriber services, including tiered and usage-
based data plans, which we believe are key to personalizing digital lifestyle offerings and maximizing average revenue per user. The Allot SMP allows
subscriber traffic to be managed across converged access networks and when offloading to Wi-Fi hotspots. Modular licensing provides flexible and scalable
management for any number of subscribers.
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Allot TierManager: Provides and manages differentiated services and tiered service plans that are tailored to subscriber preferences.
Allot QuotaManager: Provides and manages usage allowances and caps, with real-time metering of service consumption and dynamic enforcement of
quota limits and overage policy.
Allot ChargeSmart: Enables real-time, pay-for-use pricing, based on a user’s consumption of data and applications. It also integrates seamlessly in 3G
and 4G mobile networks and implements the pricing model via standard telecommunication interfaces, such as Diameter Gx, Sd, Gy and Gz.
Allot Smart Engage Onboarding: allows operators to engage customers at first time broadband usage, and also increase on going engagement,
including, increasing introduction of services and number of opt-ins for add-on services.
Analytics Services
Our analytics solutions analyze traffic data to drive smart business decisions.
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Allot ClearSee Analytics: Is a business intelligence application that helps network operators turn big data into valuable insight for the decision-makers
in their organization. Its self-service approach allows network operators to synthesize and analyze large varieties and volumes of data with
extreme efficiency. Tools include built-in dashboards for mining Network, Application, Subscriber, Device, and Quality of Experience data, plus Self-
Service data mining for modeling fresh perspectives and gaining deeper understanding of network usage and subscriber behavior.
Allot ClearSee Data Source: Extracts a rich variety of raw traffic statistics from operator networks, enriches it with data from operator business
systems, and loads it into a cutting-edge data warehouse where it is transformed into modeled data objects that are meaningful to telco operators and
easy to manipulate using the Allot ClearSee Analytics application This valuable source data may also be exported to external analytics tools and other
business applications.
Video Solutions
Our media caching and video optimization platforms enable operators to capitalize on the increasing volume of OTT video traffic.
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Allot MediaSwift E: Comprehensive caching and content delivery system for OTT video, P2P and other applications. Relieves network congestion
caused by videos and improves quality of experience for users. At the beginning of 2016, we announced to our customers, that Allot Media Swift E is
being withdrawn from sale and support, in accordance with a scheduled timetable. We may partner with specialist vendors, to provide local caching
solutions, compatible with the requirements of each customer's network.
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Allot VideoClass: Optimizes OTT video content and delivery to ensure efficient utilization of mobile radio access network (RAN) resources and
consistently high quality video to enhance viewer experience. At the beginning of 2016, we announced to our customers, that Allot VideoClass is
being withdrawn from sale and support, in accordance with a scheduled timetable, in light of the rise in encrypted video and the reduction in bandwidth
cost.
Security Solutions
Our security solutions protect network customers, network service integrity and brand reputation.
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Allot WebSafe Personal: Opt-in security services that allow ISP subscribers to define and enforce safe-browsing limits (Parental Control) and to
prevent incoming malware from infecting their devices (Anti-Malware). Services are enforced at the network level, requiring no device involvement or
battery consumption.
Allot WebSafe: URL filtering service that blocks blacklisted content and enables access control to objectionable content on the Internet.
Allot WebSafe Business : enables managed security service providers to protect the digital assets of business customers, whose applications are
migrating to the cloud and whose employees are increasingly mobile. Allot WebSafe Business provides flexible, multi-tenant Security as a Service to
small and medium business (SMB) customers, including, web (URL) filtering, anti-malware, application control and mail security.
Allot ServiceProtector: Attack detection and mitigation services that protect commercial networks against Denial of Service (DoS/DDoS) attacks,
Zero Day attacks, worms, zombie and spambot behavior.
Allot Content Protector: provides a carrier-class URL filtering service that blocks access to blacklisted and illegal content, enabling network operators
to comply with regulatory requirements.
Allot SpamOut Protector: prevents malicious spambots from compromising operators' network service, and includes anti-spam filter which detects
and blocks outbound spam and protects network and IP domain against being blacklisted as a spammer or a phishing security risk.
Centralized Management
The Allot NetXplorer is the management umbrella for our devices, platforms and solutions, providing a central access point for network-wide monitoring,
reporting, analytics, troubleshooting, accounting and QoS policy provisioning. Its user-friendly interface provides our customers with a comprehensive
overview of the application, user, device and network topology traffic, while its wide variety of reports provide accessible, detailed analyses of granular traffic
data.
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NetXplorer Analytics and Reporting: Real-time reporting provides 30-second accuracy for timely troubleshooting and resolution of customer care
issues, while historical traffic statistics facilitate analyses of usage trends and user behavior.
NetXplorer Data Collector: Provides distributed data collection and storage at different points in the network in order to support growing and large-
scale deployments with large volumes of network traffic.
NetAccounting Server: Aggregates network-wide usage statistics and exports the data to external accounting systems in standard formats.
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NetPolicy Provisioner: Provides a virtual “bandwidth management device” for self-monitoring and self-provisioning by a networks operator’s VPN,
ISP and managed services customers.
Customers
We have a global, diversified customer base consisting primarily of mobile and fixed service providers, cable operators, private networks, data centers,
governments and enterprises. We derive a significant and growing portion of our revenue from direct sales to large mobile and fixed-line service providers.
We generate the remainder of our revenue through a select and well-developed network of channel partners, generally consisting of distributors, resellers,
original equipment manufacturers (“OEMs”) and system integrators. In 2015, we derived 39% of our revenues from Europe, 8% from the United States, 29%
from Asia and Oceania, 10% from the Middle East and Africa and 14% from the Americas (excluding the United States). For a breakdown of total revenues
by geographic location, see “ITEM 5.A – Operating Results – Results of Operations – Revenues.”
Channel Partners
We market and sell our products to end-customers both by direct sales and through channel partners, which include distributors, resellers, OEMs and system
integrators. A significant portion of our sales occur through our channel partners. In 2015, approximately 49% of our revenues were derived from channel
partners. Our channel partners responsible for installing and providing initial customer support for our products. Our channel partners are located around the
world and address most major markets. Our channel partners target a range of end-users, including carriers, alternative carriers, cable operators, private
networks, data centers and enterprises in a wide range of industries, including government, financial institutions and education. Our agreements with channel
partners that are distributors or resellers are generally non-exclusive, for an initial term of one year and automatically renew for successive one-year terms
unless terminated. After the first year, such agreements may typically be terminated by either party upon ninety days prior notice.
We offer support to our channel partners. This support includes the generation of leads through marketing events, seminars and web-based leads and incentive
programs as well as technical and sales training.
Sales and Marketing
Our product sales cycle varies based on the intended use by the end-customer. The sales cycle for initial network deployment may generally last between
twelve and eighteen months for large and medium service providers, six to twelve months for small service providers, and one to six months for enterprises.
Follow-on orders and additional deployment of our products usually require shorter cycles. Large and medium service providers generally take longer to plan
the integration of our solutions into their existing networks and to set goals for the implementation of the technology.
We focus our marketing efforts on product positioning, increasing brand awareness, communicating product advantages and generating qualified leads for our
sales organization. We rely on a variety of marketing communications channels, including our website, trade shows, industry research and professional
publications, the press and special events to gain wider market exposure.
We have organized our worldwide sales efforts into the following territories: North America, South America, Europe, the Middle East and Africa; and Asia
and Oceania. We have regional offices in the United States, Israel, France, United Kingdom, Spain, Colombia, Singapore, Japan, New Zealand and China, and
a regional presence in Germany, Italy, Mexico, Brazil, India, Hong Kong, South Korea, South Africa and Australia.
As of December 31, 2015, our sales and marketing staff, including product management and business development functions, consisted of 134 employees.
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Service and Technical Support
We believe our technical support and professional services capabilities are a key element of our sales strategy. Our technical staff provides support and
professional services, as well as assists in presale activities and advises channel partners on the integration of our solutions into end-customer networks. Our
basic warranty to end-customers (directly or through our partners) is three months for software and twelve months for hardware. Generally, end-customers are
also offered a choice of one year or three-year customer support programs when they purchase our products. These customer support programs can be
renewed at the end of their terms. Our end-customer support plans generally offer the following features:
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unlimited 24/7 access to our support organization, via phone, email and online support system;
expedited replacement units in the event of a warranty claim;
software updates and upgrades offering new features and addressing new and changing network applications; and
periodic updates of solution documentation and technical information.
Our support plans are designed to maximize network up-time and minimize operating costs. Our customers, including partners and their end-customers, are
entitled to take advantage of our around-the-clock technical support which we provide through our four help desks, primarily located in France, Israel,
Singapore and the United States. We also offer our customers, 24-hour access to an external web-based technical knowledge base, which provides technical
support information and, in the case of our channel partners, enables them to support their customers independently and obtain follow up and support from us.
Many of our strategic customers purchase special support contracts, which include specifics service levels (for example, with respect to response time,
restoration time, resolution time, on-site support, spare parts management, and resident engineers).
We also offer particular professional services, such as, network audit, solution design, project management, customer project documentation, integration
services, interoperability testing and training.
The expenditures associated with the technical support staff are allocated in our statements of comprehensive loss between sale and marketing expenses and
cost of goods sold, based on the roles of and tasks performed by personnel.
As of December 31, 2015, our technical staff consisted of 101 employees.
Research and Development
Our research and development activities take place primarily in Israel. We also have research and development activities in Spain and Mexico. As of
December 31, 2015, 165 of our employees in Israel, 40 of our employees in Spain and 4 of our employees in Mexico, were engaged primarily in research and
development. We devote a significant amount of our resources towards research and development in order to introduce new products and continuously
enhance existing products and to support our growth strategy. We have assembled a core team of experienced engineers, many of whom are leaders in their
particular field or discipline and have technical degrees from top universities and have experience working for leading Israeli or international networking
companies. These engineers are involved in advancing our core technologies, as well as in applying these core technologies to our product development
activities. In previous years, our research and development efforts have benefited from royalty-bearing grants from the Office of the Chief Scientist. As of
December 31 2015, there are no outstanding royalties due from us to the Office of the Chief Scientist. In 2015, we benefited from additional grants from the
Office of Chief Scientist, however, these grants do not bear royalties. Under the terms of these grants we are required to perform our manufacturing activities
within the state of Israel, as a condition to maintaining these benefits. The State of Israel does not own any proprietary rights in technology developed with
the Office of the Chief Scientist funding and there is no restriction related to the Office of the Chief Scientist on the export of products manufactured using
technology developed with the Office of the Chief Scientist funding (other limitations on export apply under applicable law). For a description of restrictions
on the transfer of the technology and with respect to manufacturing rights, please see “ITEM 3: Key Information—Risk Factors—The government grants we
have received for research and development expenditures require us to satisfy specified conditions and restrict our ability to manufacture products and
transfer technologies outside of Israel. If we fail to comply with these conditions or such restrictions, we may be required to refund grants previously received
together with interest and penalties and may be subject to criminal charges.”
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Manufacturing
We subcontract the manufacture and repair of the hardware components of our Service Gateway platforms and our NetEnforcer traffic management systems
to Flex (Israel) Ltd., a subsidiary of Flex, a global electronics manufacturing services company, which manufactures these components in accordance with our
design. This strategy enables us to reduce our fixed costs, focus on our core research and development competencies and provide flexibility in meeting market
demand. Flex (Israel) is contractually obligated to provide us with manufacturing services based on agreed specifications, including manufacturing,
assembling, testing, packaging and procuring the raw materials for our devices. We are not required to provide any minimum orders. Our agreement with Flex
(Israel) is automatically renewed annually for additional one-year terms. Flex (Israel) may terminate our agreement with them at any time during the term
upon prior notice. We retain the right to procure independently any of the components used in our products. Flex (Israel) has a U.S. affiliate to which it can,
with the prior consent of the Office of the Chief Scientist, transfer manufacturing of our products if necessary, in which event we may be required to pay
increased royalties to the Office of the Chief Scientist. We expect that it would take approximately six months to transition manufacturing of our products to
an alternate manufacturer.
We design and develop internally a number of the key components for our products, including printed circuit boards. Some of the hardware components of
our products are obtained from single or limited sources. Since our products have been designed to incorporate these specific components, any change in
these components due to an interruption in supply or our inability to obtain such components on a timely basis may require engineering changes to our
products before we could incorporate substitute components. In particular, we purchase the central processing unit for our Service Gateway platforms and for
our NetEnforcer products from NetLogic Microsystems, Inc. (now part of Broadcom Corporation, recently acquired by Avago). We also purchase off the shelf
hardware components from single or limited sources for our Video Optimization, security and Traffic Management products. We carry approximately three to
six months of inventory of key components. We also work closely with our suppliers to monitor the end-of-life of the product cycle for integral components,
and believe that in the event that they announce end of life, we will be able to increase our inventory to allow enough time for replacing such components.
The agreements with our suppliers do not contain any minimum purchase or supply commitments. Product testing and quality assurance is performed by our
contract manufacturer using tests and automated testing equipment and according to controlled test documentation we specify. We also use inspection testing
and statistical process controls to assure the quality and reliability of our products.
Competition
We compete against large companies in a rapidly evolving and highly competitive sector of the networking technology market, which offer, or may offer in
the future, competing technologies, including partial or alternative solutions to operators' challenges, and which, similarly to us, intensely pursue the largest
service providers (referred to as Tier 1 operators). Our DPI technology enabled offerings face significant competition from router and switch infrastructure
companies. that integrate functionalities into their platforms addressing some of the same types of issues that our products are designed to address.
Our security products, which are offered to operators and are deployed in their networks for the purpose of enabling them to provide security services to their
end customers, are subject to competition from companies which offer security products, based on different technology and marketing and sales approaches.
Generally, we compete on the basis of product performance, ease of use and installation, customer support and price.
33
Our security product offerings face significant competition from companies that directly approach end customers and offer them security applications to be
installed on their devices; companies that approach the business enterprise sector through distribution channels and offer cloud security products;
and companies that offer security products bundled with other products. By offering our security products to operators that provide security services to both
business enterprises and individual end customers, we aim to expand the reach of our products.
See “ITEM 3: Key Information—Risk Factors— Our revenues and business may be adversely affected if we do not effectively compete in the markets in
which we operate.”
Intellectual Property
Our intellectual property rights are very important to our business. We believe that the complexity of our products and the know-how incorporated into them
makes it difficult to copy them or replicate their features. We rely on a combination of confidentiality and other protective clauses in our agreements,
copyright and trade secrets to protect our know-how. We also restrict access to our servers physically and through closed networks since our product designs
and software are stored electronically and thus are highly portable.
We customarily require our employees, customers, distributors, resellers, software testers, technology partners and contractors to execute confidentiality
agreements or agree to confidentiality undertakings when their relationship with us begins. Typically, our employment contracts also include the following
clauses: assignment of intellectual property rights for all inventions developed by employees, non-disclosure of all confidential information, and non-compete
clauses, which generally restrict the employee for six months following termination of employment. The enforceability of non-compete clauses in certain
jurisdictions in which we operate may be limited. See “ITEM 3: Key Information—Risk Factors— If we are unable to successfully protect the intellectual
property embodied in our technology, our business could be harmed significantly.” Because our product designs and software are stored electronically and
thus are highly portable, we attempt to reduce the portability of our designs and software by physically protecting our servers through the use of closed
networks, which prevent external access to our servers.
The communications equipment industry is characterized by constant product changes resulting from new technological developments, performance
improvements and lower hardware costs. We believe that our future growth depends to a large extent on our ability to be an innovator in the development and
application of hardware and software technology. As we develop the next generation products, we intend to pursue patent protection for our core technologies
in the telecommunications segment. We plan to seek patent protection in our largest markets and our competitors’ markets, for example in the United States
and Europe. As we continue to move into new markets, such as Japan, Korea and China, and Latin America countries we will evaluate how best to protect our
technologies in those markets. We intend to vigorously prosecute and defend the rights of our intellectual property.
As of December 31, 2015, we had twelve U.S. patents and four pending patent applications in the United States. We expect to formalize our evaluation
process for determining which inventions to protect by patents or other means. We cannot be certain that patents will be issued as a result of the patent
applications we have filed.
We have obtained a U.S. trademark registration for one of our key marks that we use to identify our products or services: “NetEnforcer.”
Government Regulation
See “ITEM 5: Overview—Government Grants” for a description of grants received from the Office of the Chief Scientist of the Ministry of Economy.
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C. Organizational Structure
As of December 31, 2015, we held directly and indirectly the percentage indicated of the outstanding capital stock of the following subsidiaries:
Company
Jurisdiction of Incorporation
Percentage
Ownership
Allot Communications Inc.
Allot Communications Europe SARL
Allot Communications (Asia Pacific) Pte. Limited
Allot Communications (UK) Limited (with branches in Spain, Italy and
Germany)
Allot Communications Japan K.K.
Allot Communications (New Zealand) Limited (with a branch in Australia)
Oversi Networks Ltd. (in merger process)
Allot Communications (Hong Kong) Ltd
Allot Communications Africa (PTY) Ltd
Allot Communications India Private Ltd
Allot Communications Spain, S.L. Sociedad Unipersonal
Allot Communications (Colombia) S.A.S
Allot MexSub
United States
France
Singapore
United Kingdom
Japan
New Zealand
Israel
Hong Kong
South Africa
India
Spain
Colombia
Mexico
D. Property, Plant and Equipment
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Our principal administrative and research and development activities are located in approximately 65,713 square foot (6,105 square meter) facilities in Hod-
Hasharon, Israel. The leases for our facilities vary in dates and terms, with the main facility’s non stabilized lease commencing in July 2006 and expiring in
June 2018.
We also lease a 5,862 square foot (545 square meter) facility in Woburn, Massachusetts, for the purposes of our U.S. sales and marketing operations pursuant
to a lease that expires in August 2019. We lease a total of 7,642 square foot (710 square meter) in two facilities in Spain, mainly for our sales and research and
development operations in Spain, pursuant to lease agreements that expire on February 2017. We lease other smaller facilities for the purpose of our sales and
marketing and support activities in France, the United Kingdom, Italy, Germany, Singapore, China, Japan, South Africa, Colombia and New Zealand.
ITEM 4A: Unresolved Staff Comments
Not applicable.
ITEM 5: Operating and Financial Review and Prospects
The information contained in this section should be read in conjunction with our consolidated financial statements for the year ended December 31, 2015 and
related notes and the information contained elsewhere in this annual report. Our financial statements have been prepared in accordance with US GAAP. This
discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. As a result of many factors, such as those set
forth under “ITEM 3.D: Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” our actual results may differ materially from those
anticipated in these forward-looking statements.
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A. Operating Results
Overview
We are a leading global provider of security and monetization solutions that enable mobile, fixed and enterprise service providers to protect and personalize
the digital experience. Allot’s flexible and highly scalable service delivery framework leverages the intelligence in data networks, enabling service providers
to get closer to their customers, safeguard network assets and users, and accelerate time-to-revenue for value-added services. Our customers use our solutions
to create sophisticated policies to monitor network applications, enforce quality of service policies that guarantee mission-critical application performance,
mitigate security risks and leverage network infrastructure investments. Demand from users for faster and more reliable access to the Internet, an increase in
the number and complexity of broadband applications, and growth in mobile data-enhanced smartphones have resulted in the rapid proliferation of broadband
access networks in recent years. Our carrier-class products are used by service providers to offer subscriber-based and application-based tiered services that
enable them to optimize their service offerings, reduce churn rates and increase ARPU.
We market and sell our products through a variety of channels, including direct sales and through our channel partners, which include distributors, resellers,
OEMs and system integrators. End customers of our products include carriers, mobile operators, cable operators, wireless, wireline and satellite Internet
service providers, educational institutions, governments and enterprises. The resulting intelligent, content-aware broadband networks enable our customers to
accurately monitor and manage IP traffic per application, subscriber, network topology and device.
In 2015, the primary drivers of our revenues were the mobile and fixed markets, which were highlighted by our ongoing relationship with global Tier 1
mobile and fixed operators groups.
In 2012, we acquired the business of Ortiva Wireless Inc. (“Ortiva”), a developer of solutions for mobile and Internet networks and Oversi Networks Ltd.
(“Oversi”), a developer of products and systems for caching Internet content.
In March 2015, we acquired the business and substantially all of the assets of Optenet, S.A., a developer of security solutions for internet service providers
and enterprises. Under the terms of the agreement, the consideration includes approximately $9.9 million (€8.9 million) in cash. In addition, there is a
performance-based earn-out over a period of five years following closing, which is capped at approximately $27.5 million (€25 million) and is contingent
upon reaching certain revenues threshold from sale of Optenet products. The fair value of the contingent consideration as of the acquisition date was
estimated at $8.1 million (€7.3 million). See Note 1(b) to our consolidated financial statements for further information.
Key measures of our performance
Revenues
We generate revenues from two sources: (1) sales of our network traffic management systems and our network management application solutions and
platforms, and (2) maintenance and support services and professional services, including installation and training. We generally provide maintenance and
support services pursuant to a one- to three-year maintenance and support program, which may be purchased by customers at the time of product purchase or
on a renewal basis.
We recognize revenues from product sales when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations
with respect to implementation remain, the fee is fixed or determinable and collection is probable. We typically grant a one-year hardware and three-month
software warranty on all of our products, or one-year hardware and software warranty to customers that purchase annual maintenance and support. Typically
our support contracts with our customers, provide hot line support, warranty,software updates and upgrades, if and when available. We record a provision for
warranty at the time the product’s revenue is recognized. We estimate the liability of possible warranty claims based on our historical experience. Warranty
claims have to date been immaterial to our results of operations. Maintenance and support revenues are recognized on a straight-line basis over the term of the
applicable maintenance and support agreement. See “—Critical Accounting Policies and Estimates—Revenue Recognition” below.
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Customer concentration. In 2013, we derived 45% of our total revenues from three Tier 1 mobile and fixed operators. In 2014, we derived 44% of our total
revenues and in 2015, we derived 37% of our total revenues from two Tier 1 mobile and fixed operators.
Geographical breakdown. See “ITEM 4B: Information on Allot – Business Overview -- Customers” for the geographic breakdown of our revenues by
percentage for the years ended December 31, 2013, 2014 and 2015.
Cost of revenues and gross margins
Our products’ cost of revenues consists primarily of costs of materials, manufacturing services and overhead, warehousing and product testing. Our services’
cost of revenues consists primarily of salaries and related personnel costs for our customer support staff as well as the royalty payments mentioned above. We
expect cost of revenues to increase as a result of an increase in our product and service revenues which will require additional personnel hiring and other
operational expenditures related to such sales. Such increases may be partially offset by increased sales of our value added products and services, as their
related cost of revenues is generally lower. In 2013, our gross margin increased as a result of the elimination of royalty payments to the Office of the Chief
Scientist with respect to grants received through 2012. In 2014 our gross margin has decreased, primarily due to inventory write-offs of $3.4 million due to
product cycle replacement. Specifically in 2014 we launched the service gateway TERA and reduced the level of inventories related to the old product lines.
In 2015 our gross margin has decreased, primarily due to intangible assets impairment of $5.8 million derived from Oversi’s and Ortiva’s technologies
acquired in 2012 due to our decision to reach end of life on the respective product lines.
Operating expenses
Research and development. Our research and development expenses consist primarily of salaries and related personnel costs, costs for subcontractor services,
depreciation, rent and costs of materials consumed in connection with the design and development of our products. We expense all of our research and
development costs as they are incurred. Our net research and development expenses are comprised of gross research and development expenses offset by
financing through grants from the Office of the Chief Scientist. Such participation grants are recognized at the time at which we are entitled to such grants on
the basis of the costs incurred and included as a deduction of research and development expenses (see - “Government Grants” below). We believe that
significant investment in research and development, including hiring high quality research and development personnel, is essential to our future success.
Sales and marketing. Our sales and marketing expenses consist primarily of salaries and related personnel costs, travel expenses, costs associated with
promotional activities such as public relations, conventions and exhibitions, rental expenses, depreciation and commissions paid to third parties, promote our
brand, establish new marketing channels and expand our presence worldwide.
General and administrative. Our general and administrative expenses consist of salaries and related personnel costs, rental expenses, costs for professional
services and depreciation. General and administrative expenses also include costs associated with corporate governance, tax and regulatory compliance,
compliance with the rules implemented by the SEC, NASDAQ and the Tel-Aviv Stock Exchange (“TASE”) and premiums for our director and officer liability
insurance.
While we do not expect our operating expenses to increase in 2016, they may increase in future periods.
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Financial income, net
Financial income, net consists primarily of interest earned on our cash balances and other financial investments, foreign currency exchange gains or losses,
gains or losses resulting from the sale of marketable securities and bank fees.
In both 2013 and 2014, we had $0.7 million financial income, net. In 2015, we had $0.6 million financial expenses, net. The change in 2015 was primarily
attributed to foreign currency exchange losses.
In addition, financial income, net, may fluctuate due to foreign currency exchange gains or losses, as well as interest rate changes. See “—Factors Affecting
Our Performance.”
Approved Enterprise
Our facilities in Hod-Hasharon, Israel have been granted Approved Enterprise status under the Encouragement of Capital Investments Law, 1959, and enjoy
certain tax benefits under this program. We expect to utilize these tax benefits after we utilize our net operating loss carry forwards. As of December 31, 2015,
our net operating loss carry forwards for Israeli tax purposes totaled approximately $39.9 million, which includes losses related to our acquisition of Oversi.
As a result of our acquisition of Oversi, we may offset operating losses in Israel against taxable income annually with a limitation of up to 14% of the total
accumulated loss but no more than 50% of our taxable income. Income derived from other sources, other than through our “Approved Enterprise” status,
during the benefit period will be subject to the regular corporate tax rate.
Government Grants
Our research and development efforts have been financed, in part, through grants from the Office of the Chief Scientist under our approved plans in
accordance with the Research and Development Law. In 2013, 2014 and 2015 we received grants from the Chief Scientist through non-royalty bearing
programs.
Factors Affecting Our Performance
Our business, financial position and results of operations, as well as the period-to-period comparability of our financial results, are significantly affected by a
number of factors, some of which are beyond our control, including:
Customer concentration. We derived 37% of our total revenues in 2015 from two global Tier 1 mobile and fixed operator groups. While we have some
visibility into the likely scope of the customers’ projects, our relationships are conducted solely on a purchase order basis and we do not have any
commitment for future purchase orders from these customers. The loss of any of such significant customers could harm our results of operations and financial
condition.
Size of end-customers and sales cycles. We have a global, diversified end-customer base consisting primarily of service providers and enterprises. The
deployment of our products by small and midsize enterprises and service providers can be completed relatively quickly. Large service providers take longer to
plan the integration of our solutions into their existing networks and to set goals for the implementation of the technology. Sales to large service providers are
therefore more complicated as they involve a relatively larger number of network elements and solutions. We are seeking to achieve further significant
customer wins in the large service provider market that would positively impact our future performance. The longer sales cycles associated with the increased
sales to large service providers of our platforms may increase the unpredictability of the timing of our sales and may cause our quarterly and annual operating
results to fluctuate if a significant customer delays its purchasing decision and/or defers an order. Furthermore, longer sales cycles may result in delays from
the time we increase our operating expenses and make investments in inventory to the time that we generate revenue from related product sales.
Average selling prices. Our performance is affected by the selling prices of our products. We price our products based on several factors, including
manufacturing costs, the stage of the product’s life cycle, competition, technical complexity of the product, and discounts given to channel partners in certain
territories. We typically are able to charge the highest price for a product when it is first introduced to the market. We expect that the average selling prices for
our products will decrease over the product’s life cycle as our competitors introduce new products. In order to maintain or increase our current prices, we
expect that we will need to enhance the functionality of our existing products by offering higher system speeds, additional value-added products and features,
such as additional security functions, supporting additional applications and providing enhanced reporting tools. We also from time to time introduce
enhanced products, typically higher-end models that include new architecture and design and new capabilities. Such enhanced products typically increase our
average selling price. To further offset such declines, we sell maintenance and support programs for our products, and as our customer base and number of
field installations grow, our related service revenues are expected to increase.
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Cost of revenues and cost reductions. Our cost of revenues as a percentage of total revenues was 27.8% for 2013, 29.7% for 2014 and 33.4% for 2015. Our
products use off-the-shelf components and typically the prices of such components decline over time. However, the introduction and sale of new or enhanced
products and services may result in an increase in our cost of revenues. We make a continuous effort to identify cheaper components of comparable
performance and quality. We also seek improvements in engineering and manufacturing efficiency that will reduce costs. Our products incorporate features
that are purchased from third parties. In addition, new products usually have higher costs during the initial introduction period. We generally expect such costs
to decline as the product matures and sales volume increases. The introduction of new products may also involve a significant decrease in demand for older
products. Such a decrease may result in a devaluation or write-off of such older products and their respective components. In 2014, we recorded a write-off of
$3.4 million of inventory to our cost of revenues, due to product cycle replacement. Specifically in 2014 we launched the service gateway TERA that
supersedes the service gateway Sigma and Sigma E and as a result of the faster than anticipated adoption, we reduced the level of inventories related to the
old product lines. The growth of our customer base is usually coupled with increased service revenues primarily resulting from increased maintenance and
support. In addition, the growth of our installed base with large service providers may result in increased demand for professional services, such as training
and installation services. An increase in demand for such services may require us to hire additional personnel and incur other expenditures. However, these
additional expenses, handled efficiently, may be utilized to further support the growth of our customer base and increase service revenues. The increase of our
cost of revenues in 2015 was primarily due to intangibles assets impairment of $5.8 million derived from Oversi’s and Ortiva’s technologies acquired in 2012
due to our decision to phase out the respective product lines.
Currency exposure. A majority of our revenues and a substantial portion of our expenses are denominated in the U.S. dollar However, a significant portion of
our revenues is incurred in currencies other than U.S. dollar, mostly in Euro. In addition, a significant portion of our expenses, associated with our global
operations, including personnel and facilities-related expenses, are incurred in currencies other than the U.S. dollar, this is the case primarily in Israel and to a
lesser extent in other countries in Europe and Asia. Consequently, a decrease in the value of the U.S. dollar relative to local currencies will increase the dollar
cost of our operations in these countries. A relative decrease in the value of the U.S. dollar would be partially offset to the extent that we generate revenues in
such currencies. In order to partially mitigate this exposure we have decided in the past and may decide from time to time in the future to enter into hedging
transactions. We may discontinue hedging activities at any time. As such decisions involve substantial judgment and assessments primarily regarding future
trends in foreign exchange markets, which are very volatile, as well as our future level and timing of cash flows of these currencies, we cannot provide any
assurance that such hedging transactions will not affect our results of operations when they are realized. See Note 5 to our consolidated financial statements
included elsewhere in this annual report for further information.
Interest rate exposure. We have a significant amount of cash that is currently invested primarily in interest bearing vehicles, such as bank time deposits and
available for sale marketable securities. These investments expose us to risks associated with interest rate fluctuations.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and judgments are subject to
an inherent degree of uncertainty and actual results may differ. Our significant accounting policies are more fully described in Note 2 to our consolidated
financial statements included elsewhere in this annual report. Certain of our accounting policies are particularly important to the portrayal of our financial
position and results of operations. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions
to be used in making certain estimates. Those estimates are based on our historical experience, the terms of existing contracts, our observance of trends in our
industry, information provided by our customers and information available from other outside sources, as appropriate. With respect to our policies on revenue
recognition and warranty costs, our historical experience is based principally on our operations since we commenced selling our products in 1998. Our
estimates are primarily guided by observing the following critical accounting policies:
·
Revenue recognition;
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·
·
·
·
·
·
·
·
·
Provision for returns;
Business combinations
Allowance for doubtful accounts;
Accounting for stock-based compensation;
Inventories;
Marketable securities;
Impairment of goodwill and long lived assets;
Income taxes; and
Contingencies.
Because each of the accounting policies listed above requires the exercise of certain judgments and the use of estimates, actual results may differ from our
estimations and as a result would increase or decrease our future revenues and net income.
Revenue recognition. We account for revenue recognition in accordance with Accounting Standards Codification No. 605-25, “Multiple elements
arrangements” (“ASC No. 605-25”). We generate revenues mainly from selling our products along with related maintenance and support services. At times,
these arrangements may also include professional services, such as installation services or training. We generally sell our products through resellers,
distributors, OEMs and system integrators, all of whom are considered end-users.
Revenues from product sales are recognized when persuasive evidence of an agreement exists, title and risk of loss have transferred to the customer, no
significant performance obligations remain, payment for products is not contingent upon performance of installation or service obligations, the fee is fixed or
determinable and collectability is probable. In instances where final acceptance of the product or service is specified by the customer, we do not recognize the
revenue until all acceptance criteria have been met.
Maintenance and support related revenues included in multiple element arrangements are deferred and recognized on a straight-line basis over the term of the
applicable maintenance and support agreement. Other services, such as professional services, are recognized upon the completion of installation or when the
service is provided. In instances where the services provided in a multiple element arrangement are considered essential to the functionality of the product and
payment of the product is contingent upon performance of the services, the sales of the products and services would be considered one unit of accounting.
Deferred revenues are classified as short and long term based on their contractual term and recognized as revenues at the time the respective elements are
provided.
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Revenues arrangements with multiple deliverables are allocated using the relative selling price method. The Company determines the best estimated selling
price (“BESP”) in multiple elements arrangements as follows:
For the products, we determined the “BESP” based on management’s estimated selling price (“ESP”) by reviewing historical transactions and considering
multiple other factors, including but not limited to, pricing practices including discounting, and competition.
For the maintenance and support, the Company determined BESP based on VSOE of the price charged based on standalone sales (renewals) of such elements
using a consistent percentage of the Company's product price lists in the same territories.
Provision for returns. We provide a provision for product returns and stock rotation based on its experience with historical sales returns, stock rotations and
other known factors. Such provisions amounted to $0.7, $1.1 million and $0.9 million as of December 31, 2015, 2014 and 2013, respectively.
Business combinations. We account for our business acquisitions in accordance with Accounting Standards Codification (ASC) No. 805, Business
Combinations. We use management best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities
assumed at the business combination date. The total purchase price allocated to the tangible assets acquired is assigned based on the fair values as of the date
of the acquisition.
Allowance for doubtful accounts. We evaluate the collectability of our accounts receivable on a specific basis. We estimate this allowance based on our
judgment as to our ability to collect outstanding receivables. We primarily base this judgment on an analysis of significant outstanding invoices, the age of the
receivables, our historical collection experience and current economic trends. In circumstances where we are aware of a specific customer’s inability to meet
its financial obligations to us, we record a specific allowance against amounts due to reduce the net recognized receivable to the amount we reasonably
believe will be collected.
Accounting for stock-based compensation. We account for stock-based compensation in accordance with Accounting Standards Codification No. 718,
“Compensation - Stock Compensation” (“ASC No. 718”) that requires companies to estimate the fair value of equity-based payment awards on the date of
grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite
service periods in our consolidated statement of operations. We recognize compensation expense for the value of its awards granted based on the straight-line
method over the requisite service period of each of the awards, net of estimated forfeitures. ASC No. 718 requires forfeitures to be estimated at the time of the
grant and revised in subsequent periods if actual forfeitures differ from those estimates.
In connection with the grant of options and RSUs, we recorded total stock-based compensation expenses of $7.7 million in 2013, $8.1 million in 2014 and
$7.2 million in 2015. In 2015, $0.3 million, $1.7 million, $2.8 million and $2.4 million of our stock-based compensation expense resulted from cost of
revenue, research and development expenses, net, sales and marketing expenses and general and administrative expenses, respectively, based on the
department in which the recipient of the option grant was employed. As of December 31, 2015, we had an aggregate of $8.7 million of unrecognized stock-
based compensation remaining to be recognized over a weighted average vesting period of 2.13 years.
Inventories are stated at the lower of cost or market value. Inventory write-offs are provided to cover risks arising from slow-moving items, technological
obsolescence, excess inventory and discontinued products. Inventory write-off provision as of December 31, 2015, 2014 and 2013 totaled $1.7 million, $4.5
million and $1.8 million, respectively.
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Marketable securities. We account for our investments in marketable securities using Accounting Standards Codification No. 320, “Investments – Debt and
Equity Securities” (“ASC No. 320”).
We determine the appropriate classification of marketable securities at the time of purchase and evaluate such designation as of each balance sheet date. We
classify all of our investments in marketable securities as available for sale. Available for sale securities are carried at fair value, with unrealized gains and
losses reported in “accumulated other comprehensive income (loss)” in shareholders’ equity. Realized gains and losses on sales of investments are included in
earnings and are derived using the specific identification method for determining the cost of securities. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such amortization together with interest and dividends on securities are included in financial
income, net, if any.
As of December 31, 2015, we held available for sale marketable securities of $64.9 million. As of December 31, 2015, the unrealized loss recorded in other
comprehensive income was $0.4 million.
Impairment of goodwill and long lived assets. Goodwill represents the excess of the purchase price over the fair value of net assets of purchased businesses.
Under Accounting Standards Codification No. 350, “Intangibles-Goodwill and Other” (“ASC No. 350”), goodwill and intangible assets deemed to have
indefinite lives are tested for impairment annually, or more often if there are indicators of impairment present.
We perform an annual impairment analysis of goodwill at December 31 of each year, or more often as applicable. We operate in one operating segment, and
this segment comprises only reporting units. The provisions of ASC No. 350 require that a two-step impairment test be performed on goodwill at the level of
the reporting units. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value exceeds the carrying value of the
net assets, goodwill is considered not impaired, and no further testing is required to be performed. If the carrying value of the net assets exceeds the fair value,
then we must perform the second step of the impairment test in order to determine the implied fair value of goodwill. If the carrying value of goodwill
exceeds its implied fair value, then we would record an impairment loss equal to the difference.
We believe that our business activity and management structure meet the criterion of being a single reporting unit for accounting purposes. We performed an
annual impairment analysis as of December 31, 2015 and determined that the carrying value of the reporting unit was less than the fair value of the reporting
unit. Fair value is determined using market capitalization. During the years ended 2013, 2014 and 2015, no impairment losses were recorded.
Intangible assets acquired in a business combination are recorded at fair value at the date of the acquisition. Following initial recognition, intangible assets are
carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite
or indefinite. Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives. Some of the acquired
intangible assets are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in accelerated
amortization of such customer relationships and backlog as compared to the straight-line method. All other intangible assets are amortized over their
estimated useful lives on a straight-line basis.
Property and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with ASC No. 360, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. During 2015, we recorded impairment losses of $5.8 million in respect of
intangible assets. During 2014 and 2013, no such impairment losses were recorded.
42
Income taxes. We account for income taxes in accordance with Accounting Standards Codification No. 740, “Income Taxes” (“ASC No. 740”). ASC No. 740
prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected
to reverse. We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
In Israel, we have accumulated operating loss carry forwards of approximately $39.9 million and capital losses of approximately $27.3 million for tax
purposes as of December 31,2015, which may be carried forward and offset against taxable capital gains in the future for an indefinite period. In the United
States, the accumulated losses for U.S. federal income tax return purposes were approximately $4.1 million as of December 31,2015, which expire between
2024 and 2033. In France, we had approximately $4.0 million in net operating loss carry forwards as of December 31, 2015, which may be carried forward
and offset against taxable capital gains in the future for an indefinite period. We believe that because of our history of losses, and uncertainty with respect to
future taxable income, it is more likely than not that some of the deferred tax assets regarding the loss carry forwards will not be utilized in the foreseeable
future, and therefore, a valuation allowance was provided to reduce deferred tax assets to their realizable value. The valuation allowance for the year ended
December 31, 2015 was $15.1 million.
ASC No. 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax position
taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation
of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to
measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.
Contingencies. From time to time, we are a defendant or plaintiff in various legal actions, which arise in the normal course of business. We are required to
assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of
reserves required for these contingencies, if any, which would impact our results of operations, is made after considered analysis of each individual action
together with our legal advisors. The required reserves may change in the future due to new developments in each matter or changes in circumstances and
estimations. A change in the required reserves would impact our results of operations in the period the change is made.
Results of Operations
The following table sets forth our statements of operations as a percentage of revenues for the periods indicated:
Revenues:
Products
Services
Total revenues
Cost of revenues:
Products
Services
Total cost of revenues
Gross profit
Operating expenses:
Research and development, net
Sales and marketing
General and administrative
Total operating expenses
Operating loss
Financing income (expenses), net
Loss before income tax expense (benefit)
Income tax (expense) benefit
Net loss
Year Ended December 31,
2014
2015
2013
68.7 %
31.3
100.0
65.9%
34.1
100.0
21.3
6.5
27.8
72.2
28.0
41.2
10.3
79.5
7.3
0.8
6.6
(0.1)
6.7%
23.4
6.3
29.7
70.3
24.8
38.1
10.2
73.1
2.7
0.6
2.1
0.0
2.1%
62.7%
37.3
100.0
26.7
6.7
33.4
66.6
26.4
43.3
12.7
82.4
15.8
(0.6)
16.4
(3.4)
19.8%
43
Revenues
The following table sets forth a breakdown of our revenues by geographic locations for the periods indicated:
Revenues:
Europe
Asia and Oceania
Middle East and Africa
United States
Americas (excluding United States)
Total Revenues
$
$
2015
%
Revenues
Revenues by Location
%
Revenues
2014
(In thousands)
2013
%
Revenues
39,110
28,495
9,809
8,206
14,347
99,967
39% $
29%
10%
8%
14%
100% $
41,238
41,990
15,352
15,307
3,299
117,186
35% $
36%
13%
13%
3%
100% $
35,143
29,909
4,820
21,350
5,323
96,545
36%
31%
5%
22%
6%
100%
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenues
Products. Product revenues decreased by $14.6 million, or 18.9%, to $62.6 million in 2015 from $77.2 million in 2014. The decrease in revenues in 2015
was attributable to longer conversion cycles of bookings into revenues, mainly with respect to bookings from new customers, the sharp decrease in Euro and
other currencies against the U.S. dollar, and a decrease in the number of transactions with large Tier-1 operators up-scaling their equipment, compared
to previous year.
Services. Service revenues decreased by $2.6 million, or 6.6%, to $37.3 million in 2015 from $39.9 million in 2014. The decrease in services revenues is
primarily attributable to decrease in product revenue.
Product revenues comprised 62.7% of our total revenues in 2015, a decrease of 3.2% compared to 2014 while the services revenues portion of total revenues
increased by the same percentage.
Cost of revenues and gross margin
Products. Cost of product revenues decreased by $0.7 million, or 2.5%, to $26.7 million in 2015 from $27.4 million in 2014. Product gross margin, decreased
to 57.4% in 2015 from 64.5% in 2014. The decrease of our cost of product revenues in 2015 was in correlation with the decrease in product revenues, which
was compensated by an intangible assets impairment of $5.8 million derived from Oversi’s and Ortiva’s technologies acquired in 2012 due to our decision to
reach end of life on the respective product lines.
Services. Cost of services revenues decreased by $0.6 million, or 8.6%, to $6.7 million in 2015 from $7.3 million in 2014. This decrease is consistent with the
decrease in services revenues.
Total gross margin, decreased to 66.6% in 2015 from 70.4% in 2014.
Operating expenses
Research and development. Gross research and development expenses decreased by $2.3 million, or 7.7%, to $27.7 million in 2015 from $30.0 million in
2014. This decrease is primarily attributable to a decrease in salaries and related expenses of approximately $1.7 million and a decrease in other overhead
expenses of approximately $0.5 million.
44
Research and development expenses, as a percentage of total revenues increased to 26.4% in 2015 from 24.8% in 2014.
Sales and marketing. Sales and marketing expenses decreased by $1.3 million, or 2.9%, to $43.3 million in 2015 from $44.6 million in 2014. This decrease is
primarily attributable to decrease in commission expenses of approximately $1.0 million, and decrease in salary expenses of approximately $0.3 million.
Sales and marketing expenses, as a percentage of total revenues increased to 43.3% in 2015 from 38.1% in 2014.
General and administrative. General and administrative expenses increased by $0.8 million, or 6.4%, to $12.7 million in 2015 from $11.9 million in 2014.
This increase is primarily attributable to increase in bad debt expense of approximately $0.7 million.
General and administrative expenses as a percentage of revenues increased to 12.7% in 2015 from 10.2% in 2014.
Financial income, net. In 2015 we had $0.6 million financial expenses, net, in 2014, we had $0.7 million financial income, net. The change in 2015 was
primarily attributed to foreign currency exchange losses.
Income tax expense. Income tax expense in 2015 was $3.4 million, compared to income tax expense of $0.05 million in 2014. This decrease is due to
realization of deferred tax assets of $0.7 million and write-off of $2 million of deferred and pre-paid tax assets, as well as $0.5 million write-off of unutilized
withholding taxes as it is more likely than not that these assets will not be utilized in the foreseeable future.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Revenues
Products. Product revenues increased by $10.9 million, or 16.5%, to $77.2 million in 2014 from $66.3 million in 2013. The increase in revenues in 2014 was
attributable to transactions with large Tier-1 mobile and fixed operators, including mostly repeating customers, and the introduction of Service Gateway Tera.
Our sales in Europe, the Middle East, Africa, Asia and Oceania have increased significantly in 2014, and have compensated for and superseded the decrease
in America.
Services. Services revenues increased by $9.7 million, or 32.2%, to $39.9 million in 2014 from $30.2 million in 2013. The increase in services revenues is
primarily attributable to an increase in our installed base in 2014 and also to the growth of our professional services activities, which is in line with the
management’s decision to focus on potential revenues in these activities.
Product revenues comprised 65.9% of our total revenues in 2014, a decrease of 2.8% compared to 2013 while the services revenues portion of total revenues
increased by the same percentage.
Cost of revenues and gross margin
Products. Cost of product revenues increased by $6.8 million, or 33.1%, to $27.4 million in 2014 from $20.6 million in 2013. Product gross margin,
decreased to 64.5% in 2014 from 69.0% in 2013. The increase in cost of revenues was primarily due to inventory write-off of $3.4 million due to product
cycle replacement. Services. Cost of services revenues increased by $1.1 million, or 17.7%, to $7.3 million in 2014 from $6.3 million in 2013. This increase is
consistent with the increase in services revenues.
45
Total gross margin, decreased to 70.3% in 2014 from 72.2% in 2013.
Operating expenses
Research and development. Gross research and development expenses increased by $1.9 million, or 6.9%, to $30.0 million in 2014 from $28.1 million in
2013. This increase is primarily attributable to an increase in salaries and related expenses of approximately $1.1 million, an increase in overhead expenses of
approximately $0.6 million and an increase in stock-based compensation expenses of approximately $0.2 million.
Sales and marketing. Sales and marketing expenses increased by $4.8 million, or 12.0%, to $44.6 million in 2014 from $39.8 million in 2013. This increase is
primarily attributable to increased salaries and related expenses of approximately $2.7, an increase in commission expenses of approximately $1.1 million, an
increase in other expenses pf approximately $0.9 million and an increase in Stock-based compensation expenses of approximately $0.1 million.
Sales and marketing expenses, as a percentage of total revenues decreased to 38.1% in 2014 from 41.2% in 2013.
General and administrative. General and administrative expenses increased by $2.0 million, or 20.0%, to $11.9 million in 2014 from $10.0 million in 2013.
Salaries and related expenses costs increased by approximately $0.7 million, other overhead expenses increased by $0.2 million, and a one-time earn out
payment of approximately $1.1 million which is related to the Oversi acquisition.
General and administrative expenses as a percentage of revenues decreased to 10.2% in 2014 from 10.3% 2013.
Financial income, net. In 2014 and 2013, we had $0.7 million financial income, net.
Income tax expense. Income tax expense in 2014 was $0.05 million, compared to income tax expense of $0.1 million in 2013.
B. Liquidity and Capital Resources
As of December 31, 2015, we had $15.5 million in cash and cash equivalents, $64.9 million available for sale marketable securities, $0.2 million restricted
deposit and $42.7 million short-term deposits. As of December 31, 2015, our working capital, which we calculate by subtracting our current liabilities from
our current assets, was $126.8 million.
Based on our current business plan, we believe that our existing cash balances, will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for at least the next twelve months. If our estimates of revenues, expense or capital or liquidity requirements change or are inaccurate and
are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or arrange additional debt financing. In addition, we may seek to
sell additional equity or arrange debt financing to give us financial flexibility to pursue attractive acquisitions or investment opportunities that may arise in the
future.
Operating activities.
During 2015, we provided $4.2 million in cash and cash equivalents from operating activities. Net cash used in operating activities consisted mainly of a net
loss of $19.8 million, depreciation, amortization and impairment of intangible assets of $11.5 million, $7.2 million of stock-based compensation expense, an
increase of $0.06 million in inventory, an increase of $0.9 million in employees and payroll accruals, a decrease of $0.8 million in trade receivables, an
increase of $2.0 million in deferred revenues attributed to sales which revenue recognition criteria were met while cash was collected in the previous years, an
increase of $2.2 million in trade payables, an increase of $1.4 million in long-term deferred taxes, net, an increase of $2.6 million in other receivables and
prepaid expenses and $2.4 million related to other operating activities.
46
Net cash we provided in operating activities in 2014 was $15.8 million. Net cash provided in operating activities consisted mainly of a net loss of $2.5
million, depreciation and amortization of intangible assets of $5.2 million, $8.1 million of stock-based compensation expense, a decrease of $3.7 million in
inventory, an increase of $1.1 million in employees and payroll accruals, an increase of $6.9 million in trade receivables, an increase of $1.9 million in
deferred revenues attributed to sales which revenue recognition criteria were met while cash was collected in the previous year, an increase of $3.1 million in
trade payables and $2.1 million related to other operating activities.
During 2013, we used $19.2 million in cash and cash equivalents from operating activities. Net cash used in operating activities consisted mainly of a net loss
of $6.5 million, a decrease of $15.9 million in liability related to settlement of the Office of Chief Scientist grants, depreciation and amortization of intangible
assets of $6.3 million, $7.7 million of stock-based compensation expense, an increase of $3.8 million in inventory, a decrease of $2.1 million in employees
and payroll accruals, a decrease of $3.3 million in trade receivables, a decrease of $2.8 million in deferred revenues attributed to sales which revenue
recognition criteria were met while cash was collected in the previous years, a decrease of $1.6 million in trade payables and $4 million related to other
operating activities.
Investing activities.
Net cash used by investing activities in 2015 was $7.9 million, primarily attributable to investments in short-term bank deposits of $21.7 million, redemptions
of short-term bank deposits of $38.0 million, acquisitions of $9.9 million, an investment in available-for sale marketable securities of $34.1 million and the
purchase of property and equipment of $2.2 million. The above changes were partially offset by redemption of marketable securities of $22.2 million.
Net cash used in investing activities in 2014 was $40.9 million, primarily attributable to the investments of short-term bank deposits of $50.5 million,
redemptions of short-term bank deposits of $29.5 million, an investment in available-for sale marketable securities of $22.7 million and the purchase of
property and equipment of $3.4 million and an increase due to redemption of marketable securities of $8.2 million.
Net cash used by investing activities in 2013 was $11.1 million, primarily attributable to the redemption of short-term bank deposits of $40.0 million, an
investment in available-for sale marketable securities of $32.8 million and the purchase of property and equipment of $2.7 million and an increase due to
redemption of marketable securities of $6.5 million.
We expect that our capital expenditures will total approximately $2.5 million in 2016. We anticipate that these capital expenditures will be primarily related to
further investments in lab equipment for research and development.
Financing activities.
Net cash used in financing activities in 2015 was $0.03 million, which was attributable to issuance of share capital through the exercise of stock options and
RSUs of $0.13 million and re purchase of our ordinary shares of $0.17 million.
Net cash provided by financing activities in 2014 was $1.5 million, which was attributable to issuance of share capital through the exercise of stock options
and RSUs of $1.5 million.
Net cash provided by financing activities in 2013 was $0.9 million, which was attributable to issuance of share capital through the exercise of stock options
and RSUs of $0.9 million.
47
C. Research and Development, Patents and Licenses
In previous years, our research and development efforts have benefited from royalty-bearing grants from the Office of the Chief Scientist. In 2013, 2014 and
2015, we benefited from non-royalty bearing grants from the Office of Chief Scientist. The government grants we have received for research and
development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions.
If we fail to comply with such restrictions or these conditions, we may be required to refund grants previously received together with interest and penalties,
and may be subject to criminal charges.
In addition to our membership of a Magnet consortium which was approved prior to 2014, in 2014 we were also qualified to participate in one research and
development program funded by the Office of the Chief Scientist to develop generic technology relevant to the development of our products. Such program is
approved pursuant to the Research and Development Law, and the regulations promulgated thereunder. The programs is for companies with large research
and development activities. We were eligible to receive non-royalty-bearing grants constituting between 40% and 55% of certain research and development
expenses relating to this program. Although the grants under these programs are not required to be repaid by way of royalties, the restrictions under the
Research and Development Law described above apply to these programs.
Total research and development expenses, before royalty bearing grants, were approximately $28.1 million, $30.0 million and $27.7 million in the years
ended December 31, 2013, 2014 and 2015, respectively. Non royalty -bearing grants amounted to $1.1 million, $1.0 million and $1.3 million in 2013, 2014
and 2015, respectively.
As of December 31, 2015, we had twelve U.S. patents and four pending patent applications in the United States. We expect to formalize our evaluation
process for determining which inventions to protect by patents or other means. We cannot be certain that patents will be issued as a result of the patent
applications we have filed.
D. Trend Information
See “ITEM 5: Operating and Financial Review and Prospects” above.
E. Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities
that are likely to create material contingent obligations.
F. Contractual Obligations
The following table of our material contractual and other obligations known to us as of December 31, 2015, summarizes the aggregate effect that these
obligations are expected to have on our cash flows in the periods indicated.
Contractual Obligations
Operating leases —offices(1)
Operating leases —vehicles
Uncertain tax position (ASC-740)
Accrued severance pay(2)
Total
Total
Payments due by period
Less than 1
year
1–3 years
(in thousands of U.S. dollars)
Over 3 years
$
$
5,372 $
260
293
418
6,343 $
2,447 $
243
-
-
2,690 $
2,925
17
-
-
2,942 $
-
-
293
418
711
_____________________
(1) Consists primarily of an operating lease for our facilities in Hod Hasharon, Israel, as well as operating leases for facilities leased by our subsidiaries.
(2)
Severance pay relates to accrued severance obligations to our Israeli employees as required under Israeli labor law. These obligations are payable only
upon termination, retirement or death of the respective employee and there is no obligation if the employee voluntarily resigns. Of this amount, $136
thousands is unfunded.
48
ITEM 6: Directors, Senior Management and Employees
A. Directors and Senior Management
The following table sets forth the names, ages and positions of our directors and executive officers as of March 1, 2016:
Chairman of the Board
Director
Director
Director
55
Age
60
60
Director
Position
64
53
67
49
Director
Director
Name
Directors
Shraga Katz
Rami Hadar
Itzhak Danziger (5)
Nurit Benjamini(1)(2)(3) (4)
(5)
Steven D. Levy(1)(2) (4)(5)
Miron (Ronnie) Kenneth (1)
(2) (5)
Yigal Jacoby(5)
Executive Officers
Andrei Elefant
Shmuel Arvatz
Amir Hochbaum
Anat Shenig
Itai Weissman
Gary Drutin
Rael Kolevsohn
Pini Gvili
Ramy Moriah
Yossi Abraham
Shaked Levy
_______________________
(1) Member of our compensation and nomination committee.
(2) Member of our audit committee.
(3) Lead independent director.
(4) Outside director.
(5) Independent director under the rules of NASDAQ.
42
54
57
47
41
55
46
51
60
44
41
Chief Executive Officer and President
Chief Financial Officer
Vice President, Research and Development
Vice President, Human Resources
Vice President, Product Management
Vice President, Chief Customer Officer
Vice President, Legal Affairs, General Counsel and Company Secretary
Vice President, Operations
Vice President, Customer Care
Vice President, Business Development
Vice President, Customer Success & Growth
Directors
Shraga Katz has served as our chairman of the board of directors since 2008. Mr. Katz is a Venture Partner of Magma Venture Partners, a leading venture
capital firm specializing in early-stage investments in communication, semiconductors, internet and media. Mr. Katz has over 30 years of experience in the
technology sector and has specialized for over 20 years in the communications industry. In 1996, Mr. Katz founded Ceragon Networks Ltd. (NASDAQ:
CRNT), a global provider of high capacity wireless networking solutions for mobile and fixed operators and private networks, and served as its President and
Chief Executive Officer until mid-2005. Prior to founding Ceragon, Mr. Katz served in the Israeli Defense Forces for 17 years. Mr. Katz was head of the
Electronic Research and Development Department of the Israeli Ministry of Defense. Mr. Katz serves as director on the Board of GreenSQL, Corephotonics
and Teridion Technologies Ltd. Mr. Katz holds a B.Sc. from the Technion — Israel Institute of Technology and an M.B.A. from Tel Aviv University.
49
Rami Hadar has served as a director since 2006 and served as our Chief Executive Officer and President from 2006 to 2014. Prior to joining us, Mr. Hadar
founded CTP Systems, a developer of cordless telephony systems in 1989 and served as Chief Executive Officer until its acquisition by DSP Communications
in 1995. Mr. Hadar continued with DSP Communication’s executive management team for two years, and thereafter, in 1999, the company was acquired by
Intel. In 1997, Mr. Hadar co-founded Ensemble Communications, a pioneer in the broadband wireless space and the WiMax standard, where he served as
Executive Vice President of Sales and Marketing until 2002. Mr. Hadar also served as Chief Executive Officer of Native Networks from 2002 to 2005, which
was successfully sold and integrated to Alcatel. Mr. Hadar holds a B.Sc. in Electrical Engineering from Technion — Israel Institute of Technology.
Itzhak Danziger has served as a director since 2011. Prior to his appointment as a director, Mr. Danziger served as an observer to our Board since 2010.
Itzhak Danziger serves as a member of the board of Galil Software, an Israeli software services company, and as a director of Jinni Media, a privately held
technology company. From 1985 to 2007, Mr. Danziger held various executive positions at Comverse, a technology companies group that develops and
markets telecommunications systems, including as president of Comverse Technology Group, as president of Comverse Network Systems and as chairman of
Comverse subsidiary - Starhome. Prior to joining Comverse, Mr. Danziger held various R&D and management positions in Tadiran Telecom Division, which
was later acquired by ECI Telecom. In the non-profit sector,, Mr. Danziger serves as a the chairman of the Center for Educational Technology (CET), as Vice
President of the New Israel Fund (NIF), a director in Israel Venture Networks (IVN), a director in Israel Venture Network (IVN) , a venture philanthropy
NGO, in Avney Rosha, the Israel Institute for School Leadership, and in other non-governmental organizations. Mr. Danziger was also a member of the
National Task Force for the Advancement of Education in Israel (Dovrat Committee) and was chairman of two of its subcommittees. Mr. Danziger holds
B.Sc. cum laude and M.Sc. in electrical engineering from the Technion - Israel Institute of Technology and M.A. cum laude in philosophy and digital culture
from Tel Aviv University.
Nurit Benjamini has served as an outside director since 2007 and serves as the lead independent director on our board. Since December 2013, Ms. Benjamini
has served as the Chief Financial Officer of TabTale Ltd. a company that develops, designs and manufactures interactive digital content to be displayed on
electronic devices and websites. Ms. Benjamini served as the Chief Financial Officer of Wixpress Ltd., an internet company that offers web technology that
enables online users to create HTML5 websites regardless of technical skill or previous knowledge, from 2011 to 2013. Previously, from 2007 to 2011, Ms.
Benjamini has served as the Chief Financial Officer of CopperGate Communications Ltd., a leading fabless semiconductor company in home entertainment
networking, that was acquired by Sigma Designs Inc. (NASDAQ:SIGM) in November 2009. Prior to her position with CopperGate Communications Ltd.,
Ms. Benjamini served as the Chief Financial Officer of Compugen Ltd. (NASDAQ: CGEN) from 2000 to 2007. Prior to her position with Compugen Ltd.,
from 1998 to 2000, Ms. Benjamini served as the Chief Financial Officer of Phone-Or Ltd. Between 1993 and 1998, Ms. Benjamini served as the Chief
Financial Officer of Aladdin Knowledge Systems Ltd. (formerly NASDAQ: ALDN). Ms. Benjamini serves as an outside director of BiolineRX Ltd.
(NASDAQ: BLRX), a member of its compensation committee, and as a chairman of its audit committee. Ms. Benjamini serves as a director and chair-person
of the audit committee of Redhill Biopharma (NASDAQ/TASE: RDHL). Ms. Benjamini holds a B.A. in Economics and Business and an M.B.A. in Finance,
both from Bar Ilan University, Israel.
Steven D. Levy has served as an outside director since 2007. Mr. Levy served as a Managing Director and Global Head of Communications Technology
Research at Lehman Brothers from 1998 to 2005. Before joining Lehman Brothers, Mr. Levy was a Director of Telecommunications Research at Salomon
Brothers from 1997 to 1998, Managing Director and Head of the Communications Research Team at Oppenheimer & Co. from 1994 to 1997 and a senior
communications analyst at Hambrecht & Quist from 1986 to 1994. Mr. Levy has served as a director of PCTEL, a broadband wireless technology company
since January 2006 and of privately held GENBAND Inc., a U.S. provider of telecommunications equipment, since August 2007. Mr. Levy holds a B.Sc. in
Materials Engineering and an M.B.A., both from the Rensselaer Polytechnic Institute.
Miron (Ronnie) Kenneth has served as a director since October 2014. Mr. Kenneth has more than 20 years of experience in the global high technology
business, and is currently a private investor in high technology startups. He serves as the Chairman of Teridion Technologies Ltd., a privately held company
specializing in overlay network technologies for service providers. From May 2011 to May 2013, Mr. Kenneth served as the CEO of Pontis Ltd., a privately-
held company specializing in providing online marketing and analytics platforms for service providers. Prior to his tenure at Pontis, Mr. Kenneth was the
Chairman and Chief Executive Officer of Voltaire Technologies Ltd. (from January 2001 to 2011). In 2011 Voltaire was acquired by Mellanox Technologies
Ltd. (NASDAQ: MLNX). Prior to his employment at Voltaire, Mr. Kenneth was a General Partner in Telos Venture Partners, a Silicon Valley based venture
firm. Prior to Telos, Mr. Kenneth also held senior management positions in Cadence Design Systems Inc.’s (NASDAQ: CDN) European organization. Mr.
Kenneth has an M.B.A. from Golden Gate University in San Francisco, California and a B.A. in Economics and Computer Science from Bar Ilan University
in Israel.
50
Yigal Jacoby co-founded our company in 1996 and served as our CEO until 2006 and as a Chairman of our board of directors until 2008. Prior to co-
founding Allot, Mr. Jacoby founded Armon Networking, a manufacturer of network management solutions in 1992, and managed it until it was acquired by
Bay Networks, where he served as the General Manager of its Network Management Division. From 1985 to 1992, Mr. Jacoby held various engineering and
marketing management positions at Tekelec, a manufacturer of Telecommunication monitoring and diagnostic equipment. Currently, Mr. Jacoby is an active
investor and director of several Israeli start-up companies, including Chairman at LiveU Ltd., a provider of live cellular video transmission solution.s Mr.
Jacoby has a B.A., cum laude, in Computer Science from Technion — Israel Institute of Technology and an M.Sc. in Computer Science from University of
Southern California.
Executive Officers
Andrei Elefant has served as Chief Executive Officer and President since 2014. Mr. Elefant joined our company in 2000 and previously served as our Vice
President — Product Management from 2007 to 2014. In this role, Mr. Elefant assumed responsibility over our marketing activities in 2008. Prior to joining
us, Mr. Elefant served as officer in the Israeli air force. Mr. Elefant holds a B.Sc. in Mechanical Engineering from the Technion — Israel Institute of
Technology and an M.B.A. from Tel-Aviv University.
Shmuel Arvatz has served as Chief Financial Officer since November 2014. Prior to joining Allot, Mr. Arvatz served from 2002 as the CFO of
ClickSoftware (NASDAQ: CKSW), a leading provider of automated mobile workforce management and service optimization solutions for enterprises. From
2001 to 2002, Mr. Arvatz was the Chief Financial Officer of Shrem, Fudim, Kelner Technologies Ltd., a leading investment house in Israel. Earlier in his
career, Mr. Arvatz served as Executive Vice President and Chief Financial Officer of Tecnomatix Technologies Ltd. (NASDAQ: TCNO), a leading provider
of software e-management solutions and Vice President and Chief Financial Officer of ADC Israel Ltd. (formerly Teledata Communications Ltd. NASDAQ
TLDC). Mr. Arvatz holds a B.A. in Accounting and Economics from Bar-Ilan University.
Amir Hochbaum has served as our Vice President — Research and Development since 2008. Before joining Allot, Mr. Hochbaum served as the Chief
Operating Officer of Axerra Networks. From 2005 to 2007, Mr. Hochbaum was Senior Vice President, Research, Development and Operations of Vyyo Israel
(NASDAQ: VYYO) where he also served as a member of Vyyo’s executive management team. Prior to Vyyo, between 1994 and 2005, Mr. Hochbaum held a
succession of management positions at Avaya (formerly Lucent, Madge and Lannet) including Managing Director and Vice President of R&D. Between 1984
and 1994, Mr. Hochbaum held a succession of management positions at ServiceSoft, including management of engineering, product development, product
management and customer service . Mr. Hochbaum holds a B.S. in Mathematics and Computer Science and an M.S. in Computer Science from the Hebrew
University of Jerusalem.
Anat Shenig joined our company in 2000 and has served as our Vice President — Human Resources since 2007. Ms. Shenig is responsible for human
resources recruiting, welfare policy and employees’ training. Prior to joining us, Ms. Shenig served as Human Resource Manager for Davidoff insurance
company and as an organizational consultant for Aman Consulting. Ms. Shenig holds bachelor degrees in Psychology and Economics from Tel Aviv
University and an M.B.A. in organizational behavior from Tel Aviv University.
Itai Weissman joined our company in 2005, and has served as our Vice President – Product Management since 2014. Prior to joining us, between 2002 and
2005, Mr. Weissman was Customers' Projects Team Manager at ECTEL Ltd., a provider of communications network monitoring and analysis solutions
(acquired by cVidya in 2009). Between 2001 and 2002 Mr. Weissman was acting head of the computer security solutions section in the I.D.F. Between 1996
and 2000 Mr. Weissman was Team Leader FPGA and Embedded Design in the I.D.F . Mr. Weissman holds a BSc degree in Electrical engineering from the
Tel Aviv University.
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Gary Drutin joined our company in 2012 and serves as our Chief Customer Officer. Mr. Drutin oversees the world-wide sales force and our marketing team.
Before that, Mr. Drutin served as our Vice President Global Sales and as our Vice President International. Before joining Allot, Mr. Drutin served as the
business development director of the microWave LOB at Broadcom (after the Provigent acquisition) from 2011 to 2012. Prior to the acquisition he was Senior
VP worldwide Sales at Provigent from 2010 to 2011. From 2004 to 2010 he was VP Global Sales at AudioCodes Ltd. From 1997 to 2004, he served as
Country Manager and General Manager for Cisco Israel, Cyprus and Malta. From 1990 to 1997, he served in sales management roles at Digital Equipment
Corporation Israel. Mr. Drutin holds an M.B.A from Tel-Aviv University in Information Systems and Marketing and a B.Sc. degree in Computer Engineering
from the Technion — Israel Institute of Technology.
Rael Kolevsohn joined our company in 2014 and serves as our Vice President – Legal Affairs, General Counsel, and Company Secretary. Prior to joining us,
he served as Vice President and General Counsel of Radvision Ltd. from 2007 to 2014. From 1998 to 2007, Mr. Kolevsohn served as General Counsel
andVice President of Gilat Satellite Networks Ltd. after joining Gilat as Legal Counsel. From 1994 to 1998, he completed his legal internship and worked as
an Associate at the Tel Aviv law firm of Yossifof, Amir Cohen & Co. Mr. Kolevsohn is a member of the Israel Bar Association and holds an LL.B. degree,
with honors, from Hebrew University.
Pini Gvili has served as our Vice President — Operations since 2006. Prior to joining us, from 2004 to 2006, he served as Vice President Operations for
Celerica, a start-up company specializing in solutions for cellular network optimization. From 2001 to 2004, Mr. Gvili was the Vice President — Operations
and IT at Terayon Communication Systems, and from 1998 to 2000, held the position of Manager of Integration and Final Testing at Telegate. Mr. Gvili was
also a hardware/software engineer at Comverse/Efrat, a world leader of voice mail and digital recording systems, from 1994 to 1997. Mr. Gvili has a B.Sc. in
Computer Science from Champlain University and was awarded a practical electronics degree from ORT Technical College.
Ramy Moriah has served as our Vice President — Customer Care since 2005. Prior to joining us, Mr. Moriah was a founding member of Daisy System’s
Design Center in Israel, in 1984. From 1991 to 1994, Mr. Moriah held the position of Manager of Software Development at Orbot Instruments, a world leader
of Automatic Optical Inspection manufacturer for the VLSI Chip Industry. Mr. Moriah was also the acting General Manager at ACA, 3D CAD/solid modeling
software for architecture from 1995 to 1997, and served there as Vice President — Research and Development from 1995 to 1997. Mr. Moriah holds a B.Sc.,
cum laude, in Computer Engineering from the Technion — Israel Institute of Technology and an M.Sc. in Management and Information Systems from the Tel
Aviv University School of Business Administration.
Yossi Abraham serves as our Vice President – Business Development since August 2015. Mr. Abraham is responsible for leading global business
development initiatives. Prior to joining us, between 2014 and 2015, Mr. Abraham served as Chief Marketing Officer of Excelacom Inc., services and
solutions company, providing consulting, professional services and products elements to communications and media providers. Before that, Mr. Abraham
held various positions in Comverse Inc., between 2000 and 2014. His last position with Comverse Inc. was Vice President, Global Services Sales and
Marketing. Mr. Abraham holds a B.A. in Logistics and Economics from the Bar Ilan University (Cum Laude) and a MBA in marketing, from the Tel Aviv
University (Magna Cum Laude).
Shaked Levy has served as our Vice President – Customer Success and Growth since February 2016. Prior to joining us Mr. Levy held various managerial
positions between 2002 and 2016 at Verint Ltd., a provider of actionable intelligence solutions, most recently as a Senior Vice President – Customer Care &
R&D Group, Communications & Cyber Intelligence solutions. Mr. Levy holds a Master in Business Management from the Bar Ilan University, a BA in
Social Sciences, Business Management, from the Open University and a Computers and Electronics Technician diploma, from the Mosinzon college.
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B. Compensation of Officers and Directors
The aggregate compensation paid to or accrued on behalf of our directors and executive officers as a group during 2015 consisted of approximately $3.1
million in salary, fees, bonus, commissions and directors’ fees, including amounts we expended for automobiles made available to our officers, but excluding
equity based compensation, dues for professional and business associations, business travel and other expenses, and other benefits commonly reimbursed or
paid by companies in Israel. This amount includes approximately $0.3 million set aside or accrued to provide pension, severance, retirement or similar
benefits or expenses.
In 2015, we paid or accrued to the chairman of the board of directors, Mr. Shraga Katz, an annual fee of NIS 358,200 (approximately $91,800). In 2015, we
paid each of our directors, Itzhak Danziger and Yigal Jacoby, an annual fee of NIS 52,440 (approximately $13,400). During such time, we paid or accrued to
each of our outside directors, Nurit Benjamini, Steven Levy and Ronnie Keneth fees as permitted by the Israeli Companies Law (the “Companies Law”). In
2015, we paid or accrued to each of our directors (other than Shraga Katz) a per meeting attendance fee of NIS 3,750 (approximately $960) for any meeting
he or she attended in person, NIS 2,250 (approximately $580) for any meeting he or she attended by conference call or similar means, and NIS 1,875
(approximately $480) for any written resolution of the Board executed by such director. Our directors are also typically granted upon election an agreed
amount of options and upon reelection options to purchase 30,000 of our ordinary shares, which vest in equal installments on a quarterly basis over a period
of three years.
In 2015, we paid or accrued to our President and Chief Executive Officer, Mr. Andrei Elefant, an annual salary of NIS 1,223,521 (approximately $314,000).
During 2015, our officers and directors received, in the aggregate, options and RSUs to purchase 189,167 ordinary shares under our equity incentive plan.
The options (excluding RSUs) have a weighted average exercise price of approximately $5.68 and expire seven years after the date the options were granted.
As of December 31, 2015, 3,171,370 ordinary shares were subject to outstanding option awards and RSUs granted to employees under our equity incentive
plans, including 1,646,204 ordinary shares issuable under currently exercisable share options. As of December 31, 2015, 209,833 shares remained available
for issuance under our equity incentive plans.
Compensation of our Five Most Highly Compensated Office Holders
Summary Compensation Table
The table and summary below outline the compensation granted to our five most highly compensated office holders during or with respect to the year ended
December 31, 2015. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
For purposes of the table and the summary below, “compensation” includes base salary, discretionary and non-equity incentive bonuses, equity-based
compensation, payments accrued or paid in connection with retirement or termination of employment, and personal benefits and perquisites such as car,
phone and social benefits paid to or earned by each Covered Executive during the year ended December 31, 2015.
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Name and Principal Position (1)
Gary Drutin
Chief Customer Officer
Andrei Elefant
President and Chief Executive Officer
Shmuel Arvatz CFO
Amir Hochbaum VP R&D
Vin Costello
Former President & VP Sales, Americas
Year
2015
2015
2015
2015
2015
Salary ($)
Bonus ($) (2)
Equity-Based
Compensation
($) (3)
All Other
Compensation
($) (4)
Total ($)
259,388
-
782,365
65,555
1,107,308
218,596
218,596
209,360
40,016
-
-
596,785
259,125
247,717
55,048
57,512
50,577
910,445
535,233
507,654
256,127
-
101,292
47,951
405,370
(1) Unless otherwise indicated herein, all Covered Executives are full-time employees of Allot.
(2) Amounts reported in this column represent annual incentive bonuses granted to the Covered Executives based on performance-metric based formulas set
forth in their respective employment agreements.
(3) Amounts reported in this column represent the grant date fair value computed in accordance with accounting guidance for stock-based compensation.
For a discussion of the assumptions used in reaching this valuation, see Note 12 to our consolidated financial statements for the year ended December 31,
2015, included herein.
(4) Amounts reported in this column include personal benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites
may include, to the extent applicable to the respective Covered Executive, payments, contributions and/or allocations for savings funds (e.g., Managers
Life Insurance Policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance, vacation, car or car allowance, medical
insurances and benefits, risk insurance (e.g., life insurance or work disability insurance), telephone expense reimbursement, convalescence or recreation
pay, relocation reimbursement, payments for social security, and other personal benefits and perquisites consistent with the Company’s guidelines. All
amounts reported in the table represent incremental cost to the Company.
Compensation Policy
Under the Companies Law, we are required to adopt a compensation policy, recommended by the compensation and nominating committee and approved by
the Board of Directors and the shareholders, in that order. The shareholder approval requires a majority of the votes cast by shareholders, excluding any
controlling shareholder and those who have a personal interest in the matter. In general, all directors and executive officers’ terms of compensation, including
fixed remuneration, bonuses, equity compensation, retirement or termination payments, indemnification, liability insurance and the grant of an exemption
from liability, must comply with the compensation policy.
In addition, the compensation terms of directors, the chief executive officer, and any employee or service provider who is considered a controlling shareholder
must be approved separately by the compensation and nominating committee, the Board of Directors and the shareholders of the Company (by the same
majority noted above), in that order. The compensation terms of other executive officers require the approval of the compensation and nominating committee
and the Board of Directors.
Our compensation policy was approved by our compensation and nominating committee and by our Board of Directors, and subsequently approved by our
shareholders in August 2013, and will be in effect for a period of three years following approval . Our compensation policy provides:
●
●
●
Objectives: To attract, motivate and retain highly experienced personnel who will provide leadership for Allot’s success and enhance shareholder
value, and to provide for each executive officer an opportunity to advance in a growing organization.
Compensation instruments: Includes base salary; limited personal benefits and perquisites; cash bonuses; equity-based awards; and retirement and
termination arrangements.
Ratio between fixed and variable compensation: Allot aims to balance the mix of fixed compensation (such as base salary) and variable
compensation (such as performance based cash bonuses and equity-based awards) pursuant to the ranges set forth in the compensation policy in
order, among other things, to tie the compensation of each executive officer to Allot’s financial and strategic achievements and enhance the
alignment between the executive officer’s interests and the long-term interests of Allot and its shareholders.
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●
●
●
●
●
●
●
●
●
●
Internal compensation ratio: Allot will target a ratio between overall compensation of the executive officers and the average and median salary of
the other employees of Allot, as set forth in the compensation policy, to ensure that levels of executive compensation will not have a negative
impact on work relations in Allot.
Base salary, benefits and perquisites: The compensation policy provides guidelines and criteria for determining base salary, benefits and
perquisites for executive officers.
Cash bonuses: Allot’s policy is to allow annual cash bonuses, which may be awarded to executive officers pursuant to the guidelines and criteria,
including caps on maximum payouts, set forth in the compensation policy.
“Clawback”: In the event of an accounting restatement, Allot shall be entitled to recover from current executive officers bonus compensation in
the amount of the excess over what would have been paid under the accounting restatement, with a three-year look-back.
Equity-based awards: Allot’s policy is to provide equity-based awards in the form of stock options, restricted stock units and other forms of equity,
which may be awarded to executive officers pursuant to the guidelines and criteria, including minimum vesting period, set forth in the
compensation policy.
Retirement and termination: The compensation policy provides guidelines and criteria for determining retirement and termination arrangements of
executive officers, including limitations thereon.
Exculpation, indemnification and insurance: The compensation policy provides guidelines and criteria for providing directors and executive
officers with exculpation, indemnification and insurance.
Directors: The compensation policy provides guidelines for the compensation of our directors in accordance with applicable regulations
promulgated under the Companies Law, and for equity-based awards that may be granted to directors pursuant to the guidelines and criteria,
including minimum vesting period, set forth in the compensation policy.
Applicability: The compensation policy applies to all compensation agreements and arrangements approved after the date on which the
compensation policy is approved by the shareholders.
Review: The compensation and nominating committee and the Board of Directors of Allot reviews the adequacy of the compensation policy from
time to time, as required by the Companies Law.
C. Board Practices
Corporate Governance Practices
As a foreign private issuer, we are permitted under NASDAQ Rule 5615(a)(3) to follow Israeli corporate governance practices instead of the NASDAQ Stock
Market requirements applicable to the U.S. issuers, provided we disclose which requirements we are not following and describe the equivalent Israeli
requirement. See “ITEM 16G: Corporate Governance Requirements” for a discussion of those ways in which our corporate governance practices differ from
those required by NASDAQ for domestic companies.
55
Board of Directors
Terms of Directors
Our articles of association provide that we may have not less than five directors and up to nine directors.
Under our articles of association, our directors (other than the outside directors, whose appointments are required under the Companies Law; see “—Outside
Directors”) are divided into three classes. 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 outside 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 that class of directors is 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.
Shraga Katz, who is a Class I director and our Chairman of the board of directors, will hold office until our annual meeting of shareholders to be held in 2016.
Our Class II directors, Itzhak Danziger and Miron Kenneth, will hold office until our annual meeting of shareholders to be held in 2017. Our Class III
directors, Yigal Jacoby and Rami Hadar, will hold office until our annual meeting of shareholders to be held in 2018. The directors (other than the outside
directors) are elected by a vote of the holders of a majority of the voting power present and voting at the meeting. Each director will hold office until the
annual general meeting of our shareholders for the year in which his or her term expires and until his or her successor is duly elected and qualified, unless the
tenure of such director expires earlier pursuant to the Companies Law or unless he or she resigns or is removed from office.
Under the Companies Law, a director (including an outside director) must declare in writing that he or she has the required skills and the ability to dedicate
the time required to serve as a director in addition to other statutory requirements. A director who ceases to meet the statutory requirements for his or her
appointment must immediately notify us of the same and his or her office will become vacated upon such notice.
Under our articles of association the approval of a special majority of the holders of at least 75% of the voting rights present and voting at a general meeting is
generally required to remove any of our directors (other than the outside directors) from office. The holders of a majority of the voting power present and
voting at a meeting may elect directors in their stead or fill any vacancy, however created, in our board of directors. In addition, vacancies on our board of
directors, other than a vacancy in the office of an outside director, may be filled by a vote of a simple majority of the directors then in office. A director so
chosen or appointed will hold office until the next annual general meeting of our shareholders, unless earlier removed by the vote of a majority of the
directors then in office prior to such annual meeting. See “—Outside Directors” for a description of the procedure for election of outside directors.
Outside Directors
Qualifications of Outside Directors
The Companies Law requires companies incorporated under the laws of the State of Israel with shares listed on a stock exchange, including the NASDAQ
Global Select Market, to appoint at least two outside directors. Our outside directors are Ms. Benjamini and Mr. Levy. Ms. Benjamini also serves as the lead
independent director.
Outside directors are required to meet standards of independence and qualifications set forth in the Companies Law and related regulations. Among other
independence qualifications, a person may not serve as an outside director if he is a relative of a controlling shareholder of a company, or if he or his affiliate
(as defined in the Companies Law) has an employment, business or professional relationship or other affiliation (as defined in the Companies Law) with us.
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In addition, the Companies Law requires every outside director appointed to the board of directors of an Israeli company to qualify as a “financial and
accounting expert” or as “professionally competent,” as such terms are defined in the applicable regulations under the Companies Law, and at least one
outside director must qualify as a “financial and accounting expert.” If at least one of our directors meets the independence requirements of the Exchange Act
and the standards of the NASDAQ Stock Market rules for membership on the audit committee and also has financial and accounting expertise as defined in
the Companies Law, then the other outside directors are only required to meet the professional qualifications requirement. Under applicable regulations, a
director with financial and accounting expertise is a director who, through his or her education, professional experience and skill, has a high level of
proficiency in and understanding of business accounting matters and financial statements. He or she must be able to thoroughly comprehend the financial
statements of the company and initiate debate regarding the manner in which financial information is presented.
Election of Outside Directors
Outside directors are elected by a majority vote at a shareholders’ meeting, provided that either:
·
·
the majority of shares voted at the meeting, including at least a majority of the shares of non-controlling shareholder(s) and shareholders who do
not have a personal interest in the election of the outside director (other than a personal interest that does not result from the shareholder's
relationship with a controlling shareholder), voted at the meeting, excluding abstentions, vote in favor of the election of the outside director; or
the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in the election of the outside
director (excluding a personal interest that does not result from the shareholder's relationship with a controlling shareholder) voted against the
election of the outside director does not exceed two percent of the aggregate voting rights in the company.
The initial term of an outside director is three years, and he or she may be reelected to up to two additional terms of three years each at a shareholders’
meeting, subject to the voting threshold set forth above. Thereafter, an outside director may be reelected for additional periods of up to three years each, only
if the company's audit committee and board of directors confirm that, in light of the outside director’s expertise and special contribution to the work of the
board of directors and its committees, the reelection for such additional period is beneficial to the company. Outside directors may be removed by the same
voting threshold as is required for their election, or by a court, and only if the outside directors cease to meet the statutory qualifications for their appointment
or if they violate their duty of loyalty to the company. The tenure of outside directors, like all directors, may also be terminated by a court under limited
circumstances. If the vacancy of an outside director position causes the company to have fewer than two outside directors, a company’s board of directors is
required under the Companies Law to call a special general meeting of the company’s shareholders as soon as possible to appoint a new outside director. Each
committee of a company’s board of directors which is authorized to exercise the board of directors’ authorities is required to include at least one outside
director, except for the audit committee and the compensation committee, which are required to include all outside directors.
An outside director is entitled to compensation and reimbursement of expenses as provided in regulations promulgated under the Companies Law, and is
otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with services provided as an outside director, other than
indemnification, exculpation and insurance as permitted pursuant to the Companies Law.
NASDAQ Requirements
Under the NASDAQ Stock Market rules, a majority of directors must meet the independence requirements specified in those rules. Our board of directors
consists of seven members, four of whom are independent under the NASDAQ Stock Market rules. Specifically, our board has determined that Ms. Nurit
Benjamini, Mr. Itzhak Danziger, Mr. Yigal Jacoby, Mr. Steven Levy and Mr. Miron Kenneth meet the independence standards of the NASDAQ Stock Market
rules. In reaching this conclusion, the board determined that none of these directors have a relationship that would preclude a finding of independence and
that the other relationships that these directors have with us do not impair their independence. As stated above under “– Corporate Governance Practices.” See
“ITEM 16G. Corporate Governance” for additional information.
57
Audit Committee
Companies Law Requirements
Under the Companies Law, the board of directors of any public company must appoint an audit committee comprised of at least three directors, including all
of the outside directors. The following persons may not be appointed as members of the audit committee:
·
·
·
the chairperson of the board of directors;
a controlling shareholder or a relative of a controlling shareholder (as defined in the Companies Law); or
any director who is engaged by, or provides services on a regular basis to the company, the company’s controlling shareholder or an entity
controlled by a controlling shareholder or any director who generally relies on a controlling shareholder for his or her livelihood.
The Companies Law requires the majority of the audit committee members to be independent directors (as defined in the Companies Law), and the chairman
of the audit committee is required to be an outside director. Any person disqualified from serving as a member of the audit committee may not be present at
the audit committee meetings, unless the chairperson of the audit committee has determined that this person is required to be present for a particular matter.
The Companies Law provides for certain other exclusions to this provision.
NASDAQ Requirements
Under the NASDAQ Stock Market rules, companies are required to maintain an audit committee consisting of at least three independent directors, all of
whom are financially literate and one of whom has accounting or related financial management expertise. Our audit committee members are required to meet
additional independence standards, including minimum standards set forth in rules of the SEC and adopted by the NASDAQ Stock Market.
Each of the members of our audit committee is “independent” under the relevant NASDAQ Stock Market rules and as defined in Rule 10A-3(b)(1) under the
Exchange Act, which is different from the general test for independence of board and committee members.
Approval of Transactions with Related Parties
The approval of the audit committee is required to effect specified actions and transactions with office holders and controlling shareholders. The term “office
holder” means a general manager, chief business manager, deputy general manager, vice general manager, or any other person assuming the responsibilities of
any of the foregoing positions, without regard to such person’s title, as well as any director or manager directly subordinate to the general manager. The term
“controlling shareholder” means 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. For the purpose of approving transactions with controlling shareholders, the term also
includes any shareholder that holds 25% or more of the voting rights of the company, if the company has no shareholder that owns more than 50% of its
voting rights. For purposes of determining the holding percentage stated above, two or more shareholders who have a personal interest in a transaction that is
brought for the company’s approval are deemed as joint holders. The audit committee may not approve an action or a transaction with a controlling
shareholder or with an office holder unless all the requirements of the Companies Law regarding the structure of the committee and the persons entitled to be
present at meetings are met at the time of approval.
58
Audit Committee Role
Our board of directors has adopted an audit committee charter setting forth the responsibilities of the audit committee consistent with the rules of the SEC and
the NASDAQ Stock Market, which include:
·
·
·
retaining and terminating the company’s independent auditors, subject to shareholder ratification;
pre-approval of audit and non-audit services provided by the independent auditors; and
approval of transactions with office holders and controlling shareholders, as described above, and other related-party transactions.
Additionally, under the Companies Law, the audit committee is responsible for: (a) identifying deficiencies in the management of a company’s business and
making recommendations to the board of directors as to how to correct them; (b) reviewing and deciding whether to approve certain related party transactions
and certain transactions involving conflicts of interest; (c) deciding whether certain actions involving conflicts of interest are material actions and whether
certain related party transactions are extraordinary transactions; (d) reviewing the internal auditor’s work program; (e) examining the company’s internal
control structure and processes, the performance of the internal auditor and whether the internal auditor has the tools and resources required to perform his or
her duties; and (f) examining the independent auditor’s scope of work as well as the independent auditor’s fees, and providing the corporate body responsible
for determining the independent auditor’s fees with its recommendations. In addition the audit committee is also be responsible for implementing procedures
concerning employee complaints on improprieties in the administration of the company’s business and the protection to be provided to such employees.
Furthermore, in accordance with regulations promulgated under the Companies Law, the audit committee discusses the draft financial statements and presents
to the board its recommendations with respect to the draft financial statements. The audit committee charter states that in fulfilling this role the committee is
entitled to rely on interviews and consultations with our management, our internal auditor and our independent auditor, and is not obligated to conduct any
independent investigation or verification.
Our audit committee consists of Ms. Nurit Benjamini, Mr. Steven Levy and Mr. Miron Kenneth. The financial experts on the audit committee pursuant to the
definition of the SEC are all members of the audit committee.
Compensation and Nominating Committee
Under the Companies Law, the compensation committee of a public company must consist of at least three directors who satisfy certain independence
qualifications, including the additional independence requirements of the NASDAQ Stock Market rules applicable to the members of compensation
committees, and the chairman of the compensation committee is required to be an outside director. We have established a compensation and nominating
committee which currently consists of Ms. Nurit Benjamini, Mr. Steven Levy, and Mr. Miron Kenneth. The chairperson is Mr. Levy. This committee oversees
matters related to our compensation policy and practices. Our board of directors has adopted a compensation and nominating committee charter setting forth
the responsibilities of the committee consistent with the Companies Law and the NASDAQ Stock Market rules, which include:
·
·
·
·
approving, and recommending to the board of directors and the shareholders for their approval, the compensation of our Chief Executive Officer
and other executive officers;
granting options and RSUs to our employees and the employees of our subsidiaries;
recommending candidates for nomination as members of our board of directors; and
developing and recommending to the board corporate governance guidelines and a code of business ethics and conduct in accordance with
applicable laws.
59
The compensation committee is also authorized to retain and terminate compensation consultants, legal counsel or other advisors to the committee and to
approve the engagement of any such consultant, counsel or advisor, to the extent it deems necessary or appropriate after specifically analyzing the
independence of any such consultant retained by the committee.
On specified criteria, to review modifications to the compensation policy from time to time, to review its implementation and to approve the actual
compensation terms of office holders prior to approval by the board of directors.
Internal Auditor
Under the Companies Law, the board of directors of a public company must appoint an internal auditor nominated by the audit committee. The role of the
internal auditor is, among other things, to examine whether a company’s actions comply with applicable law and orderly business procedure. The internal
auditor may be an employee of the company but not an interested party (as defined in the Companies Law), an office holder of the company, or a relative of
an interested party or an office holder, among other restrictions. The firm of Deloitte Brightman Almagor Zohar is the internal auditor of the Company.
Exculpation, Insurance and Indemnification of Office Holders
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. However, a company may provide
certain indemnification rights as detailed below and obtain insurance for an act performed in breach of the duty of loyalty of an office holder provided that the
office holder acted in good faith, the act or its approval does not harm the company, and the office holder discloses the nature of his or her personal interest in
the act and all material facts and documents a reasonable time before discussion of the approval. Our articles of association, in accordance with Israeli law,
allow us to exculpate an office holder, in advance, from liability to us, in whole or in part, for damages caused to us as a result of a breach of duty of care. We
may not exculpate a director for liability arising out of a prohibited dividend or distribution to shareholders or prohibited purchase of its securities.
In accordance with Israeli law, our articles of association allow us to indemnify an office holder in respect of certain liabilities either in advance of an event or
following an event. Under Israeli law, an undertaking provided in advance by an Israeli company to indemnify an office holder with respect to a financial
liability imposed on him or her in favor of another person pursuant to a judgment, settlement or arbitrator’s award approved by a court 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 must detail the above
mentioned events and amount or criteria. Our articles of association allow us to undertake in advance to indemnify an office holder for, among other costs,
reasonable litigation expenses, including attorneys’ fees, and certain financial liabilities and obligations, subject to certain restrictions pursuant to the
Companies Law.
In accordance with Israeli law, our articles of association allow us to insure an office holder against certain liabilities incurred for acts performed as an office
holder, including certain breaches of duty of loyalty to the company, a breach of duty of care to the company or to another person and certain financial
liabilities and obligations imposed on the office holder.
We may not indemnify or insure an office holder against any of the following:
·
·
a breach of duty of loyalty, except to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would
not prejudice 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;
60
·
·
an act or omission committed with intent to derive illegal personal benefit; or
a fine, civil fine, monetary sanction or forfeit levied against the office holder.
Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by our compensation committee and our board of
directors and, in respect of our directors, the chief executive officer, and any employee or service provider who is considered a controlling shareholder, by our
shareholders, provided that changes to existing arrangements may be approved by the audit committee if it approves that such changes are immaterial.
As of the date of this annual report, there are no claims for directors’ and officers’ liability insurance which have been filed in 2015 under our policies and we
are not aware of any pending or threatened litigation or proceeding involving any of our directors or officers in which indemnification is sought.
We have entered into agreements with each of our directors and with certain of our office holders exculpating them, to the fullest extent permitted by law,
from liability to us for damages caused to us as a result of a breach of duty of care, and undertaking to indemnify them to the fullest extent permitted by law.
This indemnification is limited to events determined as foreseeable by the board of directors based on our activities, and to an amount or according to criteria
determined by the board of directors as reasonable under the circumstances, and the insurance is subject to our discretion depending on its availability,
effectiveness and cost. The current maximum amount set forth in such agreements is the greater of (1) with respect to indemnification in connection with a
public offering of our securities, the gross proceeds raised by us and/or any selling shareholder in such public offering, and (2) with respect to all permitted
indemnification, including a public offering of our securities, an amount equal to 50% of the our shareholders’ equity on a consolidated basis, based on our
most recent financial statements made publicly available before the date on which the indemnity payment is made.
In the opinion of the SEC, indemnification of directors and office holders for liabilities arising under the Securities Act is against public policy and therefore
unenforceable.
D. Employees
As of December 31, 2015, we had 517 employees of whom 330 were based in Israel, 97 in Europe, 55 in the America and the remainder in Asia and Oceania.
The breakdown of our employees by department is as follows:
Department
Manufacturing and operations
Research and development
Sales, marketing, service and support
Management and administration
Total
2013
December 31,
2014
2015
16
172
199
44
430
18
179
210
55
462
17
209
235
56
517
Under applicable Israeli law, we and our employees are subject to protective labor provisions such as restrictions on working hours, minimum wages,
minimum vacation, sick pay, severance pay and advance notice of termination of employment as well as equal opportunity and anti-discrimination laws.
Orders issued by the Israeli Ministry of Economy make certain industry-wide collective bargaining agreements applicable to us. These agreements affect
matters such as cost of living adjustments to salaries, length of working hours and week, recuperation, travel expenses, and pension rights. Our employees are
not represented by a labor union. We provide our employees with benefits and working conditions which we believe are competitive with benefits and
working conditions provided by similar companies in Israel. We have never experienced labor-related work stoppages and believe that our relations with our
employees are good.
61
E. Share Ownership
Beneficial Ownership of Executive Officers and Directors
The following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of March 1, 2016 by (i) each of our directors
and nominees, (ii) each of our executive officers and (iii) all of our executive officers and directors serving as of March 1, 2016, as a group. Unless otherwise
stated, the address of each named executive officer and director is c/o Allot Communications Ltd., 22 Hanagar Street, Neve Ne’eman Industrial Zone B, Hod-
Hasharon 4501317, Israel.
Name of Beneficial Owner
Directors
Nurit Benjamini
Itzhak Danziger
Rami Hadar
Shraga Katz
Steven D. Levy
Yigal Jacoby
Miron Kenneth
Executive Officers
Andrei Elefant
Shmuel Arvatz
Amir Hochbaum
Anat Shenig
Itai Weissman
Gary Drutin
Rael Kolevsohn
Pini Gvili
Ramy Moriah
Yossi Avraham
All directors and executive officers as a group
__________________________
*
Less than one percent of the outstanding ordinary shares.
Number of
Shares
Beneficially
Held(1)
Percent of
Class
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
706,304
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
2.11%
(1) As used in this table, “beneficial ownership” is determined in accordance with the rules of the SEC and consists of either or both voting or investment
power with respect to securities. For purposes of this table, a person is deemed to be the beneficial owner of securities that can be acquired within 60
days from March 1, 2016 through the exercise of any option or RSU. Ordinary shares subject to options or RSUs that are currently exercisable or
exercisable within 60 days are deemed outstanding for computing the ownership percentage of the person holding such options or RSUs, but are not
deemed outstanding for the purpose of computing the ownership percentage of any other person. Except as otherwise indicated, the persons named in
the table have reported that they have sole voting and sole investment power with respect to all shares of common stock shown as beneficially owned
by them. The amounts and percentages are based upon 33,445,184 ordinary shares outstanding as of March 1, 2016 pursuant to Rule 13d-3(d)(1)(i)
under the Exchange Act.
Our directors and executive officers hold, in the aggregate, outstanding options and RSUs currently exercisable for 1,341,580 ordinary shares, as of March 1,
2016. The options (excluding RSUs) have a weighted average exercise price of $9.74 per share and have expiration dates until 2024.
62
Share Option Plans
The following table summarizes our equity incentive plans, which have outstanding awards as of March 1 2016:
Plan
Share reserved
grants, net (*)
Option and
RSUs
Outstanding
options and
RSUs
Options
outstanding
exercise price Date of expiration
Options
exercisable
2006 incentive compensation plan
2003 incentive compensation plan
1997 incentive compensation plan
159,135
-
-
6,514,767
2,987,330
766,071
3,453,510 0.0256-27.58
-
-
-
-
01/03/2016-
20/10/2024
-
-
1,686,871
-
-
(*) “Grants net” is calculated by subtracting options and RSUs expired or forfeited.
As of As of March 1, 2016 we had 33,445,184 ordinary shares outstanding. We have adopted three share option plans. Under our share option plans, as of
March 1, 2016, 3,453,510 ordinary shares were subject to outstanding options and RSUs, including 1,686,871 ordinary shares issuable under currently
exercisable share options and vested RSUs. As of March 1, 2016, 159,135 shares remained available for issuance under our share incentive plans. Upon
issuance, such ordinary shares may be freely sold in the public market, except for shares held by affiliates who have certain restrictions on their ability to
sell. The options (excluding RSUs) have a weighted average exercise price of $10.09 per share
We will only grant options, RSUs or other equity incentive awards under the 2006 Incentive Compensation Plan, although previously-granted options will
continue to be governed by our other plans.
2006 Incentive Compensation Plan
The 2006 plan is intended to further our success by increasing the ownership interest of certain of our and our subsidiaries’ employees, directors and
consultants and to enhance our and our subsidiaries’ ability to attract and retain employees, directors and consultants.
The number of ordinary shares that we may issue under the 2006 plan will increase on the first day of each fiscal year during the term of the 2006 plan, in
each case in an amount equal to the lesser of (i) 1,000,000 shares, (ii) 3.5% of our outstanding ordinary shares on the last day of the immediately preceding
year, or (iii) an amount determined by our board of directors. The number of shares subject to the 2006 plan is also subject to adjustment if particular capital
changes affect our share capital. Ordinary shares subject to outstanding awards under the 2006 plan or our 2003 plan or 1997 plans that are subsequently
forfeited or terminated for any other reason before being exercised will again be available for grant under the 2006 plan. As of March 1, 2016, options, RSUs
or other awards to purchase 3,453,510 ordinary shares were outstanding under the 2006 plan and 159,135 remained available for future options, RSUs or
other awards.
63
Israeli participants in the 2006 plan may be granted options and/or restricted stock units subject to Section 102 of the Israeli Income Tax Ordinance.
Section 102 of the Israeli Income Tax Ordinance, allows employees, directors and officers, who are not controlling shareholders and are considered Israeli
residents to receive favorable tax treatment for compensation in the form of shares or options. Our non-employees service providers and controlling
shareholders may only be granted options under another section of the Tax Ordinance, which does not provide for similar tax benefits. Section 102 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. The most favorable tax treatment for the grantees is under Section 102(b)(2) of the Tax
Ordinance, the issuance to a trustee under the “capital gain track.” However, under this track we are not allowed to deduct an expense with respect to the
issuance of the options or shares. Any stock options granted under the 2006 plan to participants in the United States will be either “incentive stock options,”
which may be eligible for special tax treatment under the U.S. Internal Revenue Code of 1986, or options other than incentive stock options (referred to as
“nonqualified stock options”), as determined by our compensation and nominating committee and stated in the option agreement.
Our compensation and nominating committee administers the 2006 plan and it selects which of our and our subsidiaries’ and affiliates’ eligible employees,
directors and/or consultants receive options, RSUs or other awards under the 2006 plan and will determine the terms of the grant, including, exercise prices,
method of payment, vesting schedules, acceleration of vesting and the other matters necessary in the administration of the plan.
If we undergo a change of control, as defined in the 2006 plan, subject to any contrary law or rule, or the terms of any award agreement in effect before the
change of control, (a) the compensation and nominating committee may, in its discretion, accelerate the vesting, exercisability and payment, as applicable, of
outstanding options, RSUs and other awards; and (b) the compensation and nominating committee, in its discretion, may adjust outstanding awards by
substituting ordinary shares or other securities of any successor or another party to the change of control transaction, or cash out outstanding options, RSUs
and other awards, in any such case, generally based on the consideration received by our shareholders in the transaction.
ITEM 7: Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information regarding the beneficial ownership of our outstanding ordinary shares as of March 1, 2016, by each person
who we know beneficially owns 5.0% or more of the outstanding ordinary shares. Each of our shareholders has identical voting rights with respect to its
shares. All of the information with respect to beneficial ownership of the ordinary shares is given to the best of our knowledge.
Zohar Zisapel (2)
Migdal Insurance & Financial holdings Ltd (3)
FMR LLC and Abigail P. Johnson (4)
T. Rowe Price Associates, Inc. (5)
Alyeska Investment Group, L.P. (6)
Phoenix Investments and Finance Ltd. (7)
______________
Ordinary
Shares
Beneficially
Owned(1)
2,842,378
2,573,259
2,742,676
1,866,840
1,842,720
2,034,481
Percentage
of
Ordinary
Shares
Beneficially
Owned
8.5%
7.7%
8.2%
5.6%
5.5%
6.1%
(1) As used in this table, “beneficial ownership” means the sole or shared power to vote or direct the voting or to dispose or direct the disposition of
any security. For purposes of this table, a person is deemed to be the beneficial owner of securities that can be acquired within 60 days from
March 1, 2016 through the exercise of any option or warrant. Ordinary shares subject to options or warrants that are currently exercisable or
exercisable within 60 days are deemed outstanding for computing the ownership percentage of the person holding such options or warrants, but
are not deemed outstanding for computing the ownership percentage of any other person. The amounts and percentages are based upon
33,445,184 ordinary shares outstanding as of March 1, 2016.
64
(2)
(3)
(4)
(5)
(6)
(7)
Based on a Schedule 13G/A filed on January 13, 2011. Consists of 2,777,487 shares held by Zohar Zisapel and 64,891 shares held by Lomsha
Ltd., an Israeli company controlled by Zohar Zisapel. The address of Mr. Zisapel and Lomsha Ltd. is 24 Raoul Wallenberg Street, Tel Aviv
69719, Israel.
Based on a Schedule 13G filed on February 10, 2016. Midgal Insurance & Financial Holdings Ltd reported that it had shared voting power and
shared dispositive power over these shares. Of these shares, 2,426,788 shares are held for members of the public through, among others,
provident funds, mutual funds, pension funds and insurance policies, which are managed by subsidiaries of Midgal Insurance & Financial
Holdings Ltd, according to the following segmentation: 1,372,490 shares are held by Profit participating life assurance accounts; 947,272 shares
are held by Provident funds and companies that manage provident funds and 107,026 shares are held by companies for the management of funds
for joint investments in trusteeship, each of which subsidiaries operates under independent management and makes independent voting and
investment decisions. In addition, 146,471, shares are beneficially held for their own account (Nostro account). The address of the reporting
person is 4 Efal Street; P.O BOX 3063; Petach Tikva 49512, Israel.
Based on a Schedule 13G filed on February 12, 2016. FMR LLC reported that it had sole voting power over 1,331,276 shares and sole
dispositive power over 2,742,676 shares and Abigail P. Johnson, director, vice-chairman and chief executive officer of FMR LLC had sole
dispositive power over 2,742,676 shares. The address of the reporting person is 245 Summer Street, Boston, Massachusetts 02210.
Based on a Schedule 13G filed on February 12, 2016. T. Rowe Price Associates, Inc. reported that they held sole voting power over 275,000
shares and sole dispositive power over 1,866,840 shares. The address of the reporting person is 100 E. Pratt Street, Baltimore, Maryland 21202.
Based on a Schedule 13G filed on February 16, 2016. Alyeska Investment Group, L.P., Alyeska Investment Group, LLC, Alyeska Fund 2 GP,
LLC and Anand Parekh reported that each such reporting entity had shared voting power and shared dispositive power over these shares. The
address of each reporting person is 77 West Wacker Drive, 7th Floor Chicago, IL 60601.
Based on information made available by Thomson Reuters, as of March 1, 2016, Phoenix Investments and Finance Ltd. held 1,098,715 shares
and Excellence Nessuah Ltd., a subsidiary of Phoenix Investments and Finance Ltd. (to the best of the Company's knowledge) held 935,766
shares.
Significant Changes in the Ownership of Major Shareholders
As of March 1, 2016, Zohar Zisapel was the beneficial owner of 2,842,378, or 8.5%, of our ordinary shares. Its beneficial ownership did not change since
December 31, 2010.
As of March 1, 2016, Migdal Insurance & Financial Holdings Ltd was the beneficial owner of 2,573,259, or 7.7%, of our ordinary shares. As of March 1,
2015, Migdal Insurance & Financial Holdings Ltd was the beneficial owner of 2,484,436, or 7.4%, of our ordinary shares. As of March 6, 2014, Migdal
Insurance & Financial Holdings Ltd was the beneficial owner of 2,616,542, or 7.9%, of our ordinary shares.
As of March 1, 2016, FMR LLC was the beneficial owner of 2,742,676, or 8.2% of our ordinary shares. As of March 1, 2014, FMR LLC was the beneficial
owner of 3,250,691, or 9.9%, of our ordinary shares.
As of March 1, 2016, T. Rowe Price Associates, Inc. was the beneficial owner of 1,866,840, or 5.6%, of our ordinary shares. As of March 1, 2015, T. Rowe
Price Associates, Inc. was the beneficial owner of 1,531,880, or 4.6%, of our ordinary shares. As of March 6, 2014, T. Rowe Price Associates, Inc. was the
beneficial owner of 2,786,740, or 8.5%, of our ordinary shares.
65
As of March 1, 2016, Psagot Investement House Ltd. ceased to be the beneficial owner of 5% or more of our ordinary shares. As of March 1, 2015, Psagot
Investment House Ltd was the beneficial owner of 2,014,430, or 6.0% of our ordinary shares. As of March 6, 2014, Psagot Investment House Ltd was the
beneficial owner of 1,876,791, or 5.75% of our ordinary shares.
Record Holders
As of March 1, 2016, there were 18 record holders of ordinary shares, of which 9 consisted of United States record holders holding approximately 99.48% of
our outstanding ordinary shares. The actual number of shareholders is greater than this number of record holders, and includes shareholders who are
beneficial owners, but whose shares are held in street name by brokers and other nominees. The United States record holders included Cede & Co., the
nominee of the Depositary Trust Company.
B. Related Party Transactions
Our policy is to enter into transactions with related parties on terms that, on the whole, are no less favorable, than those available from unaffiliated third
parties. Based on our experience in the business sectors in which we operate and the terms of our transactions with unaffiliated third parties, we believe that
all of the transactions described below met this policy standard at the time they occurred.
Agreements with Directors and Officers
Engagement of Officers. We have entered into employment agreements with each of our officers, who work for us as employees or as consultants. These
agreements all contain provisions standard for a company in our industry regarding noncompetition, confidentiality of information and assignment of
inventions. The enforceability of covenants not to compete in Israel may be limited. In connection with the engagement of our officers, we have granted them
options pursuant to our 2006 Incentive Compensation Plan.
Exculpation, Indemnification and Insurance. Our articles of association permit us to exculpate, indemnify and insure our office holders, in accordance with
the provisions of the Companies Law. We have entered into agreements with each of our directors and certain office holders, exculpating them from a breach
of their duty of care to us to the fullest extent permitted by law and undertaking to indemnify them to the fullest extent permitted by law, to the extent that
these liabilities are not covered by insurance. See “ITEM 6: Directors, Senior Management and Employees—Board Practices—Exculpation, Insurance and
Indemnification of Office Holders.”
Agreement with Galil Software
Our director, Itzhak Danziger, is a member of the board of directors of Galil Software Ltd and holds less than 10% of its shares. We have engaged Galil
Software since 2010 to provide us with certain quality assurance services in the ordinary course of our business. We paid Galil Software approximately
$ 302,000 in 2013, and approximately $43,000 in 2014. We have not paid Galil Software any fees during 2015 and as of March 1 2016.
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8: Financial Information
A. Consolidated Financial Statements and Other Financial Information.
Consolidated Financial Statements
For our audited consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of comprehensive income, changes in
shareholders' equity and cash flows for each of the three years in the period ended December 31, 2015, please see pages F-3 to F-46 of this report.
66
Export Sales
See “ITEM 5: Operating and Financial Review and Prospects” under the caption “Geographic Breakdown of Revenues” for certain details of export sales for
the last three fiscal years.
Legal Proceedings
We may, from time to time in the future be involved in legal proceedings in the ordinary course of business.
Dividends
We have never declared or paid any cash dividends on our ordinary shares and we do not anticipate paying any cash dividends on our ordinary shares in the
future. We currently intend to retain all future earnings to finance our operations and to expand our business. Any future determination relating to our
dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital
requirements, financial condition and future prospects and other factors our board of directors may deem relevant.
B. Significant Changes
ITEM 9: The Offer and Listing
Not applicable, except for Items 9.A.4 and 9.C, which are detailed below.
Stock Price History
Our ordinary shares have been trading on the NASDAQ Global Select Market under the symbol “ALLT” since November 2006. The following table sets forth
the high and low sales prices for our ordinary shares as reported by the NASDAQ Global Select Market, in U.S. dollars, for 2015, each quarter in the 2015
and 2014 and the most recent six months prior to the filing of this annual report as reported by the Tel Aviv Stock Exchange (since December 2011), in NIS,
for each of the last five years:
Year
2011
2012
2013
2014
2015
2016 (through March 1, 2016)
NASDAQ Global Select Market
High
Low
Tel Aviv Stock Exchange
Low
High
19.05 $
28.03
18.28
18.09
9.85
5.89
9.45 NIS
15.55
11.01
7.88
4.41
4.24
71.22 NIS
111.60
68.12
63.99
39.9
23.5
35.74
58.56
39.20
31.13
18.21
16.85
$
67
2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Most Recent Six Months
March 2016 (through March 1, 2016)
February 2016
January 2016
December 2015
November 2015
October 2015
September 2015
Markets
NASDAQ Global Select Market
High
Low
Tel Aviv Stock Exchange
Low
High
$
17.31 $
14.68
13.61
11.77
13.01 NIS
11.52
10.12
7.88
63.99 NIS
51.20
46.95
46.45
NASDAQ Global Select Market
High
Low
Tel Aviv Stock Exchange
Low
High
$
9.85 $
9.41
7.34
6.23
8.71 NIS
6.92
4.41
4.82
39.9 NIS
36.9
27.83
24.21
NASDAQ Global Select Market
High
Low
Tel Aviv Stock Exchange
Low
High
$
4.8 $
5.39
5.89
6.23
5.75
5. 9
5.63
4.61 NIS
4.24
4.7
5.12
5.15
4.82
4.41
18.78 NIS
21.4
23.5
24.21
22.59
24
21.12
45.56
41.22
35.96
31.13
33.62
26.36
18.21
18.83
17.82
16.85
18.88
19.55
20
18.83
18.74
Our ordinary shares have been quoted under the symbol “ALLT” on the NASDAQ Stock Market since November 16, 2006 and on the Tel Aviv Stock
Exchange since December 21, 2010.
As of March 1, 2016, the last reported sale price of our ordinary shares on the Nasdaq Global Select Market was 4.64 per share and on the Tel Aviv Stock
Exchange was 18.6 per share.
ITEM 10: Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Memorandum and Articles of Association Incorporation
We are registered as a public company with the Israeli Registrar of Companies. Our registration number is 51-239477-6.
68
Objective
Our objectives under our memorandum of association are to engage in the business of computers, hardware and software, including without limitation
research and development, marketing, consulting and the selling of knowledge, and any other activity which our board of directors shall determine.
Ordinary Shares
Our authorized share capital consists of 200,000,000 ordinary shares, par value NIS 0.10 per share. As of March 1, 2016, we had 33,445,184 ordinary shares
outstanding. All outstanding ordinary shares are validly issued, fully paid and non-assessable. The rights attached to the Ordinary Shares are as follows:
Voting. Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders at a shareholder meeting.
Shareholders may vote at shareholder meeting either in person, by proxy or by written ballot. Shareholder voting rights may be affected by the grant of any
special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.
Transfer of Shares. Fully paid ordinary shares are issued in registered form and may be freely transferred under our articles of association unless the transfer
is restricted or prohibited by another instrument, Israeli law or the rules of a stock exchange on which the shares are traded.
Election of Directors. Our ordinary shares do not have cumulative voting rights for the election of directors. Rather, under our articles of association our
directors are elected by the holders of a simple majority of our ordinary shares at a general shareholder meeting. As a result, the holders of our ordinary shares
that represent more than 50% of the voting power represented at a shareholder meeting have the power to elect any or all of our directors whose positions are
being filled at that meeting, subject to the special approval requirements for outside directors. See “ITEM 6: Directors, Senior Management and Employees—
Board Practices—Outside Directors.”
Dividend and Liquidation Rights. Under the Companies Law, shareholder approval is not required for the declaration of a dividend, unless the company’s
articles of association provide otherwise. Our articles of association provide that our board of directors may declare and distribute a dividend to be paid to the
holders of ordinary shares without shareholder approval in proportion to the paid up capital attributable to the shares that they hold. Dividends may be paid
only out of profits legally available for distribution, as defined in the Companies Law, provided that there is no reasonable concern that the payment of a
dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. If we do not have profits legally available for
distribution, we may seek the approval of the court to distribute a dividend. The court may approve our request if it is convinced that there is no reasonable
concern that a payment of a 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 ordinary shares in proportion to the
paid up capital attributable to the shares that they hold. Dividend and liquidation rights 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.
Shareholder Meetings
We are required to convene an annual general meeting of our shareholders once every calendar year within a period of not more than 15 months following the
preceding annual general meeting. Our board of directors may convene a special general meeting of our shareholders and is required to do so at the request of
two directors or one quarter of the members of our board of directors or at the request of one or more holders of 5% or more of our share capital and 1% of
our voting power or the holder or holders of 5% or more of our voting power. All shareholder meetings require prior notice of at least 21 days. The
chairperson of our board of directors, or any other person appointed by the board of directors, presides over our general meetings. In the absence of the
chairperson of the board of directors or such other person, one of the members of the board designated by a majority of the directors presides over the
meeting. If no director is designated to preside as chairperson, then the shareholders present will choose one of the shareholders present to be chairperson.
Subject to the provisions of the 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.
69
Quorum
The quorum required for a meeting of shareholders consists of at least two shareholders present in person, by proxy or by written ballot, who hold or
represent between them at least 25% of our voting power. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following
week at the same time and place or any time and place as the directors designate in a notice to the shareholders. At the reconvened meeting, the required
quorum consists of at least two shareholders present, in person, by proxy or by written ballot, who hold or represent between them at least 10% of our voting
power, provided that if the meeting was initially called pursuant to a request by our shareholders, then the quorum required must include at least the number
of shareholders entitled to call the meeting. See “— Shareholder Meetings.”
Resolutions
An ordinary resolution requires approval by the holders of a simple majority of the voting rights represented at the meeting, in person, by proxy or by written
ballot, and voting on the resolution.
Under the Companies Law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders require a simple
majority. A resolution for the voluntary winding up of the company requires the approval by holders of at least 75% of the voting rights represented at the
meeting, in person, by proxy or by written ballot, and voting on the resolution. Under our articles of association (1) certain shareholders’ resolutions require
the approval of a special majority of the holders of at least 75% of the voting rights represented at the meeting, in person, by proxy or by written ballot, and
voting on the resolution, and (2) certain shareholders’ resolutions require the approval of a special majority of the holders of at least two-thirds of the voting
securities of the company then outstanding.
Access to Corporate Records
Under the Companies Law, all shareholders generally have the right to review minutes of our general meetings, our shareholder register, including with
respect to material shareholders, our articles of association, our financial statements and any document we are required by law to file publicly with the Israeli
Companies Registrar. Any shareholder who specifies the purpose of its request may request to review any document in our possession that relates to any
action or transaction with a related party which requires shareholder approval under the Companies Law. We may deny a request to review a document if we
determine that the request was not made in good faith, that the document contains a commercial secret or a patent or that the document’s disclosure may
otherwise impair our interests.
Fiduciary duties and approval of specified related party transactions under Israeli law
Fiduciary duties of office holders
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company.
The duty of care of an office holder requires an office holder to act with the degree of proficiency with which a reasonable office holder in the same position
would have acted under the same circumstances. The duty of care includes, among other things, a duty to use reasonable means, in light of the circumstances,
to obtain certain information pertaining to the proposed action before the board of directors.
The duty of loyalty incumbent on an office holder requires him or her to act in good faith and for the benefit of the company, and includes, among other
things, the duty to avoid conflicts of interest with the company, to refrain from competing with the company, and to disclose to the company information
disclosed to him or her as a result of being an office holder.
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We may approve an act specified above which would otherwise constitute a breach of the office holder’s duty of loyalty, provided that the office holder acted
in good faith, the act or its approval does not harm the company, and the office holder discloses his or her personal interest a sufficient time before the
approval of such act. Any such approval is subject to the terms of the Companies Law, setting forth, among other things, the organs of the company entitled to
provide such approval, and the methods of obtaining such approval.
Disclosure of personal interests of an office holder and approval of acts and transactions
The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may have relating to any existing or
proposed transaction by the company (as well as certain information or documents). Once an office holder has disclosed his or her personal interest in a
transaction, the approval of the appropriate organ(s) in the company is required in order to effect the transaction. However, a company may approve such a
transaction or action only if it is in the best interests of the Company.
Disclosure of personal interests of a controlling shareholder and approval of transactions
Under the Companies Law, a controlling shareholder must also disclose any personal interest it may have in an existing or proposed transaction by the
company. Transactions with controlling shareholders that are material, that are not in the ordinary course of business or that are not on market terms require
approval by the audit committee, the board of directors and the shareholders of the company, and the Companies Law provides for certain quantitative
requirements in respect of the voting of shareholders not having a personal interest in the applicable transaction.
Duties of shareholders
Under the Companies Law, a shareholder has a duty to refrain from abusing its power, to act in good faith and to act in an acceptable manner in exercising its
rights and performing its obligations to the company and other shareholders. A shareholder also has a general duty to refrain from acting to the detriment of
other shareholders.
In addition, any controlling shareholder or any shareholder having specific power with respect to a company (the power to appoint an office holder, or
specific influence over a certain vote) is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this
duty 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,
taking the shareholder’s position in the company into account.
Approval of private placements
Under the Companies Law and the regulations promulgated thereunder, certain private placements of securities may require approval at a general meeting of
the shareholders of a company. These include, for example, certain private placements completed in lieu of a special tender offer (See “Memorandum and
Articles of Association—Acquisition under Israeli law”) or a private placement which qualifies as a related party transaction (See “Corporate governance
practices—Fiduciary duties and approval of specified related party transactions under Israeli law”).
Acquisitions under Israeli Law
Full Tender Offer. A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90% of the target company’s issued
and outstanding share capital is required by the Companies Law to make a tender offer for the purchase of all of the issued and outstanding shares of the
company. If the shareholders who do not accept the offer hold less than 5% of the issued and outstanding share capital of the company, and more than half of
the offerees who do not have a personal interest in the tender offer accept the tender offer, all of the shares that the acquirer offered to purchase will be
transferred to the acquirer by operation of law. Notwithstanding the above, 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, the offer will nonetheless be accepted. However, a shareholder that had its shares so
transferred may, within six months from the date of acceptance of the tender offer, petition the court to determine that the tender offer was for less than fair
value and that the fair value should be paid as determined by the court. The bidder may provide in its tender offer that any accepting shareholder may not
petition the court for fair value, but such condition will not be valid unless all of the information required under the Companies Law was provided prior to the
acceptance date. The description above regarding a full tender offer also applies, with certain limitations, when a full tender offer for the purchase of all of the
company’s securities is accepted.
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Special Tender Offer. The Companies Law provides, subject to certain exceptions, that an acquisition of shares of a public Israeli 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 at least 25% of the voting rights in the company.
This rule does not apply if there is already another holder of at least 25% of the voting rights in the company. Similarly, the Companies Law provides that an
acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a holder of
more than 45% of the voting rights in the company, and there is no other shareholder of the company who holds more than 45% of the voting rights in the
company. The special tender offer may be consummated subject to certain majority requirements set forth in the Companies Law, and provided further that at
least 5% of the voting rights attached to the company’s outstanding shares will be acquired by the party making the offer.
Merger. The Companies Law permits merger transactions between two Israeli companies if approved by each party’s board of directors and a certain
percentage of each party’s shareholders. Following the approval of the board of directors of each of the merging companies, the boards must jointly prepare a
merger proposal for submission to the Israeli Registrar of Companies.
Under the Companies Law, if the approval of a general meeting of the shareholders is required, merger transactions may be approved by the holders of a
simple majority of our shares present, in person, by proxy or by written ballot, at a general meeting of the shareholders and voting on the transaction. In
determining whether the required majority has approved the merger, if shares of the company are held by the other party to the merger, by any person holding
at least 25% of the voting rights, or 25% of the means of appointing directors or the general manager of the other party to the merger, then a vote against the
merger by holders of the majority of the shares present and voting, excluding shares held by the other party or by such person, or any person or entity acting
on behalf of, related to or controlled by either of them, is sufficient to reject the merger transaction. In certain circumstances, 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.
The Companies Law provides for certain requirements and procedures that each of the merging companies is to fulfill. In addition, a merger may not be
completed unless at least fifty days have passed from the date that a proposal for approval of the merger was filed with the Israeli Registrar of Companies and
thirty days from the date that shareholder approval of both merging companies was obtained.
Anti-Takeover Measures
Undesignated preferred shares. The Companies Law allows us to create and issue shares having rights different from those attached to our ordinary shares,
including shares providing certain preferred or additional rights with respect to voting, distributions or other matters and shares having preemptive rights. We
do not have any authorized or issued shares other than ordinary shares. In the future, if we do create and issue a class of shares other than ordinary shares,
such class of shares, depending on the specific rights that may be attached to them, may delay or prevent a takeover or otherwise prevent our shareholders
from realizing a potential premium over the market value of their ordinary shares. The authorization of a new class of shares will require an amendment to our
articles of association which requires the prior approval of a simple majority of our shares represented and voted at a general meeting. In addition, we
undertook towards the TASE that, as long as our shares are registered for trading with the TASE we will not issue or authorize shares of any class other than
the class currently registered with the TASE, unless such issuance is in accordance with certain provisions of the Israeli Securities Law determining that a
company registering its shares for trade on the TASE may not have more than one class of shares for a period of one year following registration with the
TASE, and following such period the company is permitted to issue preferred shares if the preference of those shares is limited to a preference in the
distribution of dividends and the preferred shares have no voting rights.
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Supermajority voting. Our articles of association require the approval of the holders of at least two-thirds of our combined voting power to effect certain
amendments to our articles of association.
Classified board of directors. Our articles of association provide for a classified board of directors. See “ITEM 6: Directors, Senior Management and
Employees—Board Practices—Term of Directors.”
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is American Stock Transfer & Trust Company. Its address is 6201 15th Avenue, Brooklyn, New York
11219, and its telephone number is (800) 937-5449.
C. Material Contracts
Summaries of the following material contracts and amendments to these contracts are included in this annual report in the places indicated:
Material Contract
Agreement with Flex (Israel) Ltd. and Amendment
No. 1 thereto
Agreement with Optenet S.A
Compensation Policy
2006 Incentive Compensation Plan
Non-Stabilized Lease Agreement
D. Exchange Controls
Location
“ITEM 4.B: Information on the Company–Business Overview–Manufacturing.”
“ITEM 5.A: Operating and Financial Review and Prospects-Operating Results”
ITEM 6.B: Directors, Senior Management and Employees—Compensation of Directors and
Officers.”
“ITEM 6.E: Share Ownership– Share Option Plans–2006 Incentive Compensation Plan.”
“ITEM 4: Information on Allot – D. Property, Plant and Equipment”
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 memorandum of association nor 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.
E. Taxation
Israeli Tax Considerations and Government Programs
The following is a general discussion only and is not exhaustive of all possible tax considerations. It is not intended, and should not be construed, as legal or
professional tax advice and should not be relied upon for tax planning purposes. In addition, this discussion does not address all of the tax consequences that
may be relevant to purchasers of our ordinary shares in light of their particular circumstances, or certain types of purchasers of our ordinary shares subject to
special tax treatment. Examples of this kind of investor include residents of Israel and traders in securities who are subject to special tax regimes not covered
in this discussion. Each individual/entity should consult its own tax or legal advisor as to the Israeli tax consequences of the purchase, ownership and
disposition of our ordinary shares.
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To the extent that part of the discussion is based on new tax legislation, which has not been subject to judicial or administrative interpretation, we cannot
assure that the tax authorities or the courts will accept the views expressed in this section.
The following summary describes the current tax structure applicable to companies in Israel, with special reference to its effect on us. The following also
contains a discussion of the material Israeli tax consequences to holders of our ordinary shares.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax. In 2015 and 2014, the corporate tax ratewas 26.5%. On January 5, 2016 the Israeli parliament
approved the reduction of the corporate tax rate by 1.5%, from 26.5% to 25.0%, effective from January 1, 2016. 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 generally subject to the prevailing corporate tax rate.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction for expenditures, including capital expenditures, for the year in which they are incurred.
Expenditures are deemed related to scientific research and development projects, if:
·
·
·
The expenditures are approved by the relevant Israeli government ministry, determined by the field of research;
The research and development must be for the promotion of the company; and
The research and development is carried out by or on behalf of the company seeking such tax deduction.
The amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research
and development projects. No deduction under these research and development deduction rules is allowed if such deduction is related to an expense invested
in an asset depreciable under the general depreciation rules of the income Tax Ordinance, 1961. Expenditures from research and development that not so
approved are deductible in equal amounts over three years, according to ITO (ISRAELI TAX ORDINANCE).
From time to time we may apply the Office of the Chief Scientist for approval to allow a tax deduction for all research and development expenses during the
year incurred. There can be no assurance that such application will be accepted.
Law for the Encouragement of Industry (Taxes), 1969
The Law for the Encouragement of Industry (Taxes), 1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for
industrial companies. We believe that we currently qualify as an “Industrial Company” within the meaning of the Industry Encouragement Law. The Industry
Encouragement Law defines “Industrial Company” as a company resident in Israel, of which 90% or more of its income in any tax year, other than of income
from defense loans, capital gains, interest and dividend, is derived from an “Industrial Enterprise which is located in Israel” owned by it. An “Industrial
Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production activity.
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The following corporate tax benefits, among others, are available to Industrial Companies:
·
·
·
Amortization of the cost of purchased know-how and patents and of rights to use a patent and know-how which are used for the development or
advancement of the company, over an eight-year period;
Under specified conditions, an election to file consolidated tax returns with additional related Israeli Industrial Companies; and
Expenses related to a public offering in Israel and in recognized stock markets outside Israel, are deductible in equal amounts over three years.
Under certain tax laws and regulations, an “Industrial Enterprise” may be eligible for special depreciation rates for machinery, equipment and buildings.
These rates differ based on various factors, including the date the operations begin and the number of work shifts. An “Industrial Company” owning an
approved enterprise may choose between these special depreciation rates and the depreciation rates available to the approved enterprise.
Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We can give no
assurance that we qualify or will continue to qualify as an “Industrial Company” or that the benefits described above will be available in the future.
Israeli Transfer Pricing Regulations
On November 29, 2006, the Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came
into effect (the “TP Regulations”). Section 85A of the Tax Ordinance and the TP Regulations generally require that all cross-border transactions carried out
between related parties be conducted on an arm’s length basis and be taxed accordingly. The TP Regulations are not expected to have a material effect on us.
Tax Benefits under the Law for Encouragement of Capital Investments, 1959
Tax Benefits Prior to the 2005 Amendment
The Law for the Encouragement of Capital Investments, 1959, as amended (effective as of April 1, 2005), generally referred to as the Investments Law,
provides that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry and Commerce of
the State of Israel, be designated as an “Approved Enterprise.” The Investment Center bases its decision as to whether or not to approve an application,
among other things, on the criteria set forth in the Investments Law and regulations, the policy of the Investment Center, and the specific objectives and
financial criteria of the applicant. Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated both by its
financial scope, including its capital sources, and by its physical characteristics, such as the equipment to be purchased and utilized pursuant to the program.
The Investments Law provides that an approved enterprise is eligible for tax benefits on taxable income derived from its approved enterprise programs. The
tax benefits under the Investments Law also apply to income generated by a company from the grant of a usage right with respect to know-how developed by
the Approved Enterprise, income generated from royalties, and income derived from a service which is auxiliary to such usage right or royalties, provided
that such income is generated within the Approved Enterprise’s ordinary course of business. If a company has more than one approval or only a portion of its
capital investments are approved, its effective tax rate is the result of a weighted average of the applicable rates. The tax benefits under the Investments Law
are not, generally, available with respect to income derived from products manufactured outside of Israel. In addition, the tax benefits available to an
Approved Enterprise are contingent upon the fulfillment of conditions stipulated in the Investments Law and regulations and the criteria set forth in the
specific certificate of approval, as described above. In the event that a company does not meet these conditions, it would be required to refund the amount of
tax benefits, plus a consumer price index linkage adjustment and interest.
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The Investments 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 in the first five years of using the equipment.
Taxable income of a company derived from an Approved Enterprise is subject to corporate tax at the maximum rate of 25%, rather than the regular corporate
tax rate, for the benefit period.
Should we derive income from sources other than the Approved Enterprise during the relevant period of benefits, such income will be taxable at the regular
corporate tax rates.
Under certain circumstances (as further detailed below), the benefit period may extend to a maximum of ten years from the commencement of the benefit
period.
A company may elect to receive an alternative package of benefits. Under the alternative package of benefits, a company’s undistributed income derived from
the Approved Enterprise will be exempt from corporate tax for a period of between two and ten years from the first year the company derives taxable income
under the program, after the commencement of production, depending on the geographic location of the Approved Enterprise within Israel, and such company
will be eligible for a reduced tax rate for the remainder of the benefits period. The year’s limitation does not apply to the exemption period.
A company that has elected the alternative package of benefits, such as us, that subsequently pays a dividend out of income derived from the approved
enterprise(s) during the tax exemption period will be subject to corporate tax in the year the dividend is distributed in respect of the gross amount
distributed, at the rate which would have been applicable had the company not elected the alternative package of benefits, (generally 10%-25%, depending on
the percentage of the company’s ordinary shares held by foreign shareholders). The dividend recipient is subject to withholding tax at the reduced rate of 15%
applicable to dividends from approved enterprises, if the dividend is distributed during the tax exemption period or within twelve years thereafter. In the
event, however, that the company qualifies as a foreign investors’ company, there is no such time limitation.
As of December 31, 2015, we believe that we are meeting the aforementioned conditions.
Foreign Investors' Company (“FIC”)
A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a foreign investors’ company. A foreign investors’
company is a company of which, among other criteria, more than 25% of its share capital and combined share and loan capital is owned by non-Israeli
residents. A company that qualifies as a foreign investors’ company and has an approved enterprise program is eligible for tax benefits for a ten-year benefit
period. As specified above, depending on the geographic location of the approved enterprise within Israel, income derived from the approved enterprise
program may be entitled to the following:
·
·
Extension of the benefit period to up to ten years.
An additional period of reduced corporate tax liability at rates ranging between 10% and 25%, depending on the level of foreign (that is, non-
Israeli) ownership of our shares.
Subject to applicable provisions concerning income under the alternative package of benefits, dividends paid by a company are considered to be attributable
to income received from the entire company and the company’s effective tax rate is the result of a weighted average of the various applicable tax rates,
excluding any tax-exempt income. Under the Investments Law, a company that has elected the alternative package of benefits is not obliged to distribute
retained profits, and may generally decide from which year’s profits to declare dividends.
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In 1998, the production facilities of the Company related to its computational technologies were granted the status of an “Approved Enterprise” under the
Law. In 2004, an expansion program was granted the status of “Approved Enterprise.” According to the provisions of the Law, the Company has elected the
alternative package of benefits and has waived Government grants in return for tax benefits.
Tax Benefits under the 2005 Amendment
An amendment to the Investments Law, generally referred as the 2005 Amendment, effective as of April 1, 2005 has significantly changed the provisions of
the Investments Law. The amendment includes revisions to the criteria for investments qualified to receive tax benefits as an Approved Enterprise. The 2005
Amendment applies to new investment programs and investment programs commencing after 2004, and does not apply to investment programs approved
prior to December 31, 2004, and therefore to benefits included in any certificate of approval that was granted before the 2005 Amendment came into effect,
which will remain subject to the provisions of the Investments Law as they were on the date of such approval.
However, a company that was granted benefits according to Section 51 of the Investments Law (prior the 2005 Amendment) will not be allowed to choose a
new tax year as a “Year of Election,” referred to below, under the 2005 Amendment, for a period of two years from the company’s previous Commencement
Year (referred to below) under the old Investments Law.
The 2005 Amendment simplifies the approval process for the approved enterprise. According to the 2005 Amendment, only approved enterprises receiving
cash grants require the approval of the Investment Center.
As a result of the 2005 Amendment, it is no longer necessary for a company to acquire Approved Enterprise status in order to receive the tax benefits
previously available under the Alternative Route, and therefore such companies need not apply to the Investment Center for this purpose. Rather, a company
may claim the tax benefits offered by the Investments Law directly in its tax returns or by notifying the Israeli Tax Authority within twelve months of the end
of that year, provided that its facilities meet the criteria for tax benefits set out by the 2005 Amendment. Such enterprise is referred to as the Benefited
Enterprise. Companies are also granted a right to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the 2005
Amendment. The 2005 Amendment includes provisions attempting to ensure that a company will not enjoy both Government grants and tax benefits for the
same investment program.
Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities), which are generally required to derive more than
25% of their business income from export. In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment in the
Benefited Enterprise exceeding a certain percentage or a minimum amount specified in the Investments Law. Such investment may be made over a period of
no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Benefited Enterprise, or the Year
of Election. Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a
Benefited Enterprise and the company’s effective tax rate will be the result of a weighted average of the applicable rates. In this case, the minimum
investment required in order to qualify as a Benefited Enterprise is required to exceed a certain percentage or a minimum amount of the company’s
production assets at the end of the year before the expansion.
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The duration of tax benefits is subject to a limitation of the earlier of seven to ten years from the Commencement Year, or twelve years from the first day of
the Year of Election. The Commencement Year is defined as the later of (a) the first tax year in which a company had derived income for tax purposes from
the Beneficiary Enterprise or (b) the year in which a company requested to have the tax benefits apply to the Beneficiary Enterprise – Year of Election. The
tax benefits granted to a Benefited Enterprise are determined, as applicable to its geographic location within Israel, according to one of the following new tax
routes, which may be applicable to us:
·
·
Similar to the aforementioned alternative route, exemption from corporate tax on undistributed income for a period of two to ten years, depending on
the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits
period, depending on the level of foreign investment in each year. Benefits may be granted for a term of seven to ten years, depending on the level of
foreign investment in the company. If the company pays a dividend out of income derived from the Benefited Enterprise during the tax exemption
period, such income will be subject to corporate tax at the applicable rate (10%-25%) in respect of the gross amount of the dividend that we may be
distributed. The company is required to withhold tax at the source at a rate of 15% from any dividends distributed from income derived from the
Benefited Enterprise; and
A special tax route, which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on
income of the Benefited Enterprise. The benefits period is ten years. Upon payment of dividends, the company is required to withhold tax at source at a
rate of 15% for Israeli residents and at a rate of 4% for foreign residents.
Generally, a company that is Abundant in Foreign Investment (owned by at least 74% foreign shareholders and has undertaken to invest a minimum sum of
$20 million in the Benefited Enterprise as defined in the Investments Law) is entitled to an extension of the benefits period by an additional five years,
depending on the rate of its income that is derived in foreign currency.
The 2005 Amendment changes the definition of “foreign investment” in the Investments Law so that the definition requires a minimal investment of NIS 5
million by foreign investors. Furthermore, such definition also includes the purchase of shares of a company from another shareholder, provided that the
company’s outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the aforementioned definition took effect retroactively from 2003.
As a result of the 2005 Amendment, tax-exempt income generated under the provisions of the Investments Law, as amended, will subject us to taxes upon
distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income.
We elected the years of 2006 and 2009 as “year of election” under the Investments Law after the 2005 Amendment.
We expect that a substantial portion of any taxable operating income that we may realize in the future will be derived from our approved enterprise status.
We currently intend to reinvest any income derived from our Approved Enterprise program and not to distribute such income as a dividend. As of December
31, 2015, we did not generate income under the provisions of the Investments Law.
Tax Benefits under the 2011 Amendment
As of January 1, 2011 new legislation amending the Investment Law came into effect (the “2011 Amendment”). The 2011 Amendment introduced a new
status of “Preferred Company” and “Preferred Enterprise”, replacing the existed status of “Benefited Company” and “Benefited Enterprise”. Similar to a
“Benefited Company”, a Preferred Company is an industrial company owning a Preferred Enterprise which meets certain conditions (including a minimum
threshold of 25% export). However, under this legislation the requirement for a minimum investment in productive assets was cancelled.
Under the 2011 Amendment, a uniform corporate tax rate applies to all qualifying income of the Preferred Company, as opposed to the former law, which was
limited to income from the Approved Enterprises and Benefited Enterprise during the benefits period. The uniform corporate tax rate was 9% in areas in
Israel designated as Development Zone A and 16% elsewhere in Israel during 2014 and 2015, and it scheduled to remain at 9% and 16%, respectively, in
2016.
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A dividend distributed from income which is attributed to a Preferred Enterprise/Special Preferred Enterprise will be subject to withholding tax at source at
the following rates: (i) Israeli resident corporation –0%, (ii) Israeli resident individual – 20% in 2014 and onwards (iii) non-Israeli resident - 20% in 2014 and
onwards, subject to a reduced tax rate under the provisions of an applicable double tax treaty.
The provisions of the 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits. 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 came into effect, will remain subject to the provisions of the Investment Law as in
effect on the date of such approval, and subject to certain 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 program, before the 2011 Amendment came into effect 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.
Under the transition provisions of the new legislation, a company may decide to irrevocably implement the new law while waiving benefits provided under
the current law or to remain subject to the current law. 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.
Special Provisions Relating to Tax Reporting in United States Dollars
Under the Income Tax (Inflationary Adjustments) Law, 1985 (the “Israeli law”), results for tax purposes are measured in real terms, in accordance with the
changes in the Israeli Consumer Price Index ("Israeli CPI"). Accordingly, until 2011, results for tax purposes were measured in terms of earnings in NIS after
certain adjustments for increases in the Israeli CPI. Commencing in the taxable year 2012, we have elected to measure our taxable income and file our tax
return in United States Dollars, under the Israeli Income Tax Regulations (Principles Regarding the Management of Books of Account of Foreign Invested
Companies and Certain Partnerships and the Determination of Their Taxable Income), 1986.
Capital Gains Tax on Sales of Our Ordinary Shares
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of
assets located in Israel, including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or a tax
treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between real gain and inflationary surplus. The
inflationary surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable to the
increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale.
The real gain is the excess of the total capital gain over the inflationary surplus.
As of January 1, 2012, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 25% for Israeli
individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain is generally taxed at a
rate of 30%. Additionally, if such shareholder is considered a “material shareholder” at any time during the 12-month period preceding such sale, i.e., such
shareholder holds directly or indirectly, including with others, at least 10% of any means of control in a company, the tax rate is 30%. Israeli companies are
subject to the Corporate Tax rate on capital gains derived from the sale of shares. However, the foregoing tax rates do not apply to: (i) dealers in securities;
and (ii) shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement).
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The tax basis of shares acquired prior to January 1, 2003 is determined in accordance with the average closing share price in the three trading days preceding
January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than
such average price.
In addition, as of January 1, 2013, shareholders that are individuals who have taxable income that exceeds NIS 800,000 in a tax year (linked to the CPI each
year - NIS 810,720 in 2015), will be subject to an additional tax, referred to as High Income Tax, at the rate of 2% on their taxable income for such tax year
which is in excess of such amount. For this purpose taxable income will include taxable capital gains from the sale of our shares and taxable income from
dividend distributions.
Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a
recognized stock exchange or regulated market outside of Israel, provided that such capital gains are not derived from a permanent establishment in Israel, the
shareholders are not subject to the Adjustments Law, and the shareholders did not acquire their shares prior to an initial public offering. However, non-Israeli
corporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of more than 25% in such non-Israeli corporation, or (ii)
is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to
the withholding of Israeli tax at the source.
Pursuant to the Convention between the government of the United States and the government of Israel with respect to taxes on income, as amended (the
“U.S.-Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a person who (i) holds the ordinary shares as a capital asset, (ii) qualifies as
a resident of the United States within the meaning of the U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded to such person by the U.S.-
Israel Tax Treaty, generally, will not be subject to the Israeli capital gains tax. Such exemption will not apply if (i) such U.S. resident holds, directly or
indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange or disposition, subject
to certain conditions, or (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent establishment in Israel. In such case, the
sale, exchange or disposition of ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, such U.S.
resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition,
subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.
United States Federal Income Taxation
The following is a description of the material United States federal income tax consequences of the ownership and disposition of our ordinary shares. This
description addresses only the United States federal income tax considerations of holders that 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:
·
·
·
·
·
·
financial institutions or insurance companies;
real estate investment trusts, regulated investment companies or grantor trusts;
dealers or traders in securities or currencies;
tax-exempt entities;
certain former citizens or long-term residents of the United States;
persons that will hold our shares through a partnership or other pass-through entity;
80
·
·
·
·
persons that received our shares as compensation for the performance of services;
persons that will hold our shares as part of a “hedging” or “conversion” transaction or as a position in a “straddle” for United States federal
income tax purposes;
persons whose “functional currency” is not the United States dollar; or
holders that own directly, indirectly or through attribution 10.0% or more of the voting power or value of our shares.
Moreover, this description does not address the United States federal estate and gift or alternative minimum tax consequences of the ownership and
disposition of our ordinary shares.
This description is based on the U.S. Internal Revenue Code of 1986, as amended, existing, proposed and temporary United States Treasury Regulations and
judicial and administrative interpretations thereof, in each case as in effect and available on the date hereof. All of the foregoing are subject to change, which
change could apply retroactively and could affect the tax consequences described below.
For purposes of this description, a “U.S. Holder” is a beneficial owner of our ordinary shares that, for United States federal income tax purposes, is:
·
·
·
·
a citizen or resident of the United States;
corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United
States or any state thereof, including the District of Columbia;
an estate the income of which is subject to United States federal income taxation regardless of its source; or
a trust if such trust has validly elected to be treated as a United States person for United States federal income tax purposes or if (1) a court within
the United States is able to exercise primary supervision over its administration and (2) one or more United States persons have the authority to
control all of the substantial decisions of such trust.
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
United States federal income tax purposes).
If a partnership (or any other entity treated as a partnership for United States federal income tax purposes) holds our ordinary shares, the tax treatment of a
partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult
its tax advisor as to its tax consequences.
You should consult your tax advisor with respect to the United States federal, state, local and foreign tax consequences of owning and disposing of
our ordinary shares.
Distributions
Subject to the discussion below under “Passive Foreign Investment Company Considerations,” if you are a U.S. Holder, for United States federal income tax
purposes, the gross amount of any distribution made to you, with respect to our ordinary shares before reduction of any Israeli taxes withheld therefrom, other
than certain distributions, if any, of our ordinary shares distribute pro rata to all our shareholders, 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 United States federal income tax principles.
Subject to the discussion below under “Passive Foreign Investment Company Considerations,” 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 (that is, 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. Subject to the discussion below under
“Passive Foreign Investment Company Considerations,” to the extent, if any, that the amount of any distribution by us exceeds our current and accumulated
earnings and profits as determined under United States 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 capital gain. We do not expect to maintain calculations of our earnings and profits under United States federal income tax
principles and, therefore, if you are a U.S. Holder you should expect that the entire amount of any distribution generally will be reported as dividend income
to you.
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If you are a U.S. Holder, dividends paid to you with respect to your ordinary shares will be treated as 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 United States 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 when 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
personal tax advisors to determine whether and to what extent you would be entitled to this credit.
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 United States 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.
Sales Exchange or other Disposition of Ordinary Shares
Subject to the discussion below under “Passive Foreign Investment Company Considerations,” 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. Such gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, capital
gain from the sale, exchange or other disposition of ordinary shares is eligible for the preferential rate of taxation applicable to long-term capital gains if your
holding period for such ordinary shares exceeds one year (that is, such gain is long-term capital gain). Gain or loss, if any, recognized by you generally will be
treated as United States source income or loss for United States foreign tax credit purposes. The deductibility of capital losses for U.S. federal income tax
purposes is subject to limitations.
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 United States federal income or withholding tax on any gain realized on the sale or exchange of our ordinary shares unless:
·
·
such gain is effectively connected with your conduct of a trade or business 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.
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Passive Foreign Investment Company Considerations
A non-U.S. corporation will be classified as a “passive foreign investment company,” or a PFIC, for United States federal income tax purposes in any taxable
year in which, after applying certain look-through rules, either:
·
·
at least 75 percent of its gross income is "passive income"; or
at least 50 percent of the average value of its gross assets (based on the quarterly value of such gross assets) 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 and the excess of
gains over losses from the disposition of assets which produce passive income.
PFIC status is an annual determination that is based on tests which are factual in nature and our status in future years will depend on our income, assets and
activities in each of those years. Therefore there can be no assurance that we will not be considered a PFIC for any taxable year. While public companies
often employ a market capitalization method to value their assets, the IRS has not issued guidance concerning how to value a foreign public company’s assets
for PFIC purposes. The market price of our ordinary shares is likely to fluctuate and the market price of the shares of technology companies has been
especially volatile. In certain circumstances, including volatile market conditions, it may be appropriate to employ alternative methods to more accurately
determine the fair market value of our assets other than the market capitalization method. Given the volatility of the capital markets in 2015, we have obtained
an independent valuation of our company for the 2015 tax year, as well as an opinion from a U.S. tax advisor that, applying the results of the independent
valuation of our company which employed an approach other than the market capitalization approach, and which provided the reasoning underlying the use of
such approach, we should not be a PFIC for the 2015 taxable year. We considered such valuation in determining the value of our total assets and we also
considered the above-referenced opinion. On that basis, we believe that we were not a PFIC for the 2015 tax year. however there can be no certainty that the
IRS will not challenge such a position and determine that based on the IRS’s interpretation of the asset test, we were a PFIC for the 2015 tax year. If we were
a PFIC, and you are a U.S. Holder, you generally would be subject to ordinary income tax rates, imputed interest charges and other disadvantageous tax
treatment (including the denial of the taxation of such dividends at the lower rates applicable to long-term capital gains, as discussed above under “–
Distributions”) with respect to any gain from the sale, exchange or other disposition of, and certain distributions with respect to, your ordinary shares. A U.S.
Holder should consult his, her or its own tax advisor with respect to the potential application of the PFIC rules in his, her or its particular circumstances.
Because the market price of our ordinary shares is likely to fluctuate and the market price of the shares of technology companies has been especially volatile,
and because that market price may affect the determination of whether we will be considered a PFIC, we cannot assure you that we will not be considered a
PFIC for any taxable year.
Under the PFIC rules, unless a U.S. Holder makes one of the elections described in the next paragraphs, a special tax regime will apply to both (a) any
“excess distribution” by us (generally, the U.S. Holder’s ratable portion of distributions in any year which are greater than 125% of the average annual
distribution received by such U.S. Holder in the shorter of the three preceding years or the U.S. Holder’s holding period) 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 the U.S. Holder’s holding period, (b) the amount deemed realized had been
subject to tax in each year of that holding period, 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 are available to U.S. Holders of shares that may serve to alleviate some of the adverse tax consequences of PFIC status. If we agreed to
provide the necessary information, you could avoid the interest charge imposed by the PFIC rules by making a qualified electing fund, or a QEF election,
which election may be made retroactively under certain circumstances, in which case you generally would be required to include in income on a current basis
your pro rata share of our ordinary earnings as ordinary income and your pro rata share of our net capital gains as long-term capital gain. We do not expect to
provide to U.S. Holders the information needed to report income and gain pursuant to a QEF election, and we make no undertaking to provide such
information in the event that we are a PFIC.
83
Under an alternative tax regime, you may also avoid certain adverse tax consequences relating to PFIC status discussed above by making a mark-to-market
election with respect to our ordinary shares annually, provided that the shares are “marketable.” Shares will be marketable if they are regularly traded on
certain U.S. stock exchanges (including NASDAQ) or on certain non-U.S. stock exchanges. For these purposes, the shares will generally be considered
regularly traded during any calendar year during which they are traded, other than in negligible quantities, on at least fifteen days during each calendar
quarter.
If you choose to make a mark-to-market election, you would recognize as ordinary income or loss each year an amount equal to the difference as of the close
of the taxable year between the fair market value of the PFIC shares and your adjusted tax basis in the PFIC shares. Losses would be allowed only to the
extent of net mark-to-market gain previously included by you under the election for prior taxable years. If the mark-to-market election were made, then the
PFIC rules set forth above relating to excess distributions and realized gains would not apply for periods covered by the election. If you make a mark-to-
market election after the beginning of your holding period of our ordinary shares, you would be subject to interest charges with respect to the inclusion of
ordinary income attributable to the period before the effective date of such election.
Under certain circumstances, ordinary shares owned by a Non-U.S. Holder may be attributed to a U.S. person owning an interest, directly or indirectly, in the
Non-U.S. Holder. In this event, distributions and other transactions in respect of such ordinary shares may be treated as excess distributions with respect to
such U.S. person, and a QEF election may be made by such U.S. person with respect to its indirect interest in us, subject to the discussion in the preceding
paragraphs.
We may invest in stock of non-U.S. corporations that are PFICs. In such a case, provided that we are classified as a PFIC, a U.S. Holder would be treated as
owning its pro rata share of the stock of the PFIC owned by us. Such a U.S. Holder would be subject to the rules generally applicable to shareholders of
PFICs discussed above with respect to distributions received by us from such a PFIC and dispositions by us of the stock of such a PFIC (even though the U.S.
Holder may not have received the proceeds of such distribution or disposition). Assuming we receive the necessary information from the PFIC in which we
own stock, certain U.S. Holders may make the QEF election discussed above with respect to the stock of the PFIC owned by us, with the consequences
discussed above. However, no assurance can be given that we will be able to provide U.S. Holders with such information. A. U.S. Holder generally would not
be able to make the mark-to-market election described above with respect to the stock of any PFIC owned by us.
If we were a PFIC, a holder of ordinary shares that is a U.S. Holder must file United States Internal Revenue Service Form 8621 for each tax year in which
the U.S. Holder owns the ordinary shares.
You should consult your own tax advisor regarding our potential status as a PFIC and the tax consequences and filing requirements that would arise
if we were treated as a PFIC.
Foreign Asset Reporting
Certain U.S. Holders who are individuals (and certain specified entities) are required to report information relating to an interest in ordinary shares, subject to
certain exceptions (including an exception for securities held in certain accounts maintained by financial institutions). U.S. Holders are encouraged to consult
their own tax advisers regarding the effect of this reporting requirement on their ownership and disposition of ordinary shares.
3.8% Medicare Tax on “Net Investment Income”
Certain U.S. Holders who are individuals, estates or trusts are required to pay an additional 3.8% tax on, among other things, dividends and capital gains from
the sale or other disposition of ordinary shares. U.S. Holders are encouraged to consult their own tax advisers regarding the effect of this additional tax on
their ownership and disposition of ordinary shares.
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Backup Withholding Tax and Information Reporting Requirements
United States backup withholding tax and information reporting requirements generally apply to certain payments to certain non-corporate holders of stock.
Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, ordinary shares made within the
United States, or by a United States payor or United States middleman, to a holder of ordinary shares, other than an exempt recipient (including a corporation,
a payee that is not a United States 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 United
States payor or United States 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. The backup withholding tax rate currently is
28.0%.
Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against the beneficial owner’s United States federal income
tax liability, if any, provided that the required information is furnished to the IRS.
The above description is not intended to constitute a complete analysis of all tax consequences relating to ownership and disposition of our ordinary
shares. You should consult your tax advisor concerning the tax consequences of your particular situation.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are currently subject to the information and periodic reporting requirements of the Exchange Act, and file periodic reports and other information with the
SEC through its electronic data gathering, analysis and retrieval (EDGAR) system. 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. You
may also 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, DC
20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC also maintains a website at http://www.sec.gov
from which certain filings may be accessed. As of November 2010, our filings are also available at the TASE’s website at http://maya.tase.co.il and at the
Israeli Securities Authority’s website at http://www.magna.isa.gov.il. As permitted under NASDAQ Stock Market Rule 5250(d)(1)(C), we will post our
annual reports filed with the SEC on our website at http://www.allot.com. We will furnish hard copies of such reports to our shareholders upon written request
free of charge. The information contained on our website is not part of this or any other report filed with or furnished to the SEC.
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 will be 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 file with the SEC reports on Form 6-K containing quarterly unaudited financial information.
85
I.
Subsidiary Information
Not applicable.
ITEM 11: Quantitative and Qualitative Disclosures 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.
Risk of Interest Rate Fluctuation
We do not have any long-term borrowings. We have a significant amount of cash that is currently invested primarily in interest bearing investment such as
bank time deposits, money market funds and available for sale marketable securities. These investments expose us to the changes in interest rates. If interest
rates further decline, our results of operations may be adversely affected due to lower interest income from these investments. The primary objective of our
investment activities is to preserve principal while maximizing the income that we receive from our investments without significantly increasing risk and loss.
Our investments are exposed to market risk due to fluctuation in interest rates, which may affect our interest income and the fair market value of our
investments. We manage this exposure by performing ongoing evaluations of our investments. Due to the short and medium-term maturities nature of our
investments to date, their carrying value approximates the fair value. We generally hold investments to maturity in order to limit our exposure to interest rate
fluctuations.
Foreign Currency Exchange Risk
Our foreign currency exposures give rise to market risk associated with exchange rate movements of the U.S. dollar, our functional and reporting currency,
mainly against the shekel. In 2015, we derived our revenues primarily in U.S. dollars and a substantial portion in Euros and other currencies. Although a
substantial part of our expenses were denominated in U.S. dollars, a significant portion of our expenses were denominated in shekels and to a lesser extent in
Euros and other currencies. Our shekel-denominated expenses consist principally of salaries and related personnel expenses. We monitor foreign currency
exposure and, from time to time, may use various instruments to preserve the value of sales transactions and commitments; however, this cannot assure our
protection against risks of currency fluctuations. For more information regarding foreign currency related risks, see “ITEM 3: Key Information—Risk Factors
—our international operations expose us to the risk of fluctuations in currency exchange rates.”
We use currency forward contracts together with currency options primarily to hedge payments in NIS. These transactions constitute a future cash flow
hedge. As of December 31, 2015, we had outstanding forward contracts in the amount of $18.4 million. These transactions were for a period of up to twelve
months. As of December 31, 2015, the fair value of the above mentioned foreign currency derivative contracts was $0.03 million.
ITEM 12: Description of Securities Other Than Equity Securities
Not applicable.
PART II
ITEM 13: Defaults, Dividend Arrearages and Delinquencies
None.
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ITEM 14: Material Modifications to the Rights of Security Holders and Use of Proceed
A. Material Modifications to the Rights of Security Holders
None.
E. Use of Proceeds
The effective date of the registration statement (file no. 333-138313) for our initial public offering of ordinary shares, par value NIS 0.10, was November 15,
2006. We registered 6,500,000 ordinary shares in the offering and received net proceeds of $70.5 million.
From the effective date of the registration statement and until December 31, 2015, the net proceeds had been invested in cash equivalents, marketable
securities, capital expenditure and other corporate purposes. None of the net proceeds of the offering was paid directly or indirectly to any director, officer,
general partner of ours or to their associates, persons owning ten percent or more of any class of our equity securities, or to any of our affiliates.
We conducted a subsequent public offering of our ordinary shares on November 15, 2011 raising net proceeds of $85 million.
ITEM 15: Controls and Procedures
(a) Disclosure Controls and Procedures. As of the end of the period covered by this report, 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, 2015. Based upon, and as of the date of, such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of December 31, 2015, our disclosures 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. Our internal control over financial
reporting is a process 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. Our internal control over financial reporting 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.
87
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015.
In making this assessment, our management used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Our management has concluded, based on its assessment, that our internal control over financial
reporting was effective as of December 31, 2015 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.
In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal control over financial
reporting for the first fiscal year in which the acquisition occurred. On March 23, 2015 and as further discussed in Note 1(b) of the Notes to Consolidated
Financial Statements, we completed the acquisition of Optenet S.A. ("Optenet") which represented approximately 0.2% of total assets and 0% of revenues of
our related consolidated financial statement amounts as of and for the year ended December 31, 2015. We have elected to exclude Optenet’s operations from
our assessment of internal control over financial reporting as of December 31, 2015.
Our independent auditors, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, have issued an audit report on the effectiveness of our internal
control over financial reporting. The report is included with our consolidated financial statements included elsewhere in this annual report.
(c) 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 16: Reserved
ITEM 16A: Audit Committee Financial Expert
The board of directors has determined that Nurit Benjamini is an “audit committee financial expert” as defined under the U.S. federal securities laws and is
independent under the rules of the NASDAQ Stock Market.
ITEM 16B: Code of Ethics
We have adopted a code of ethics applicable to our Chief Executive Officer, Chief Financial Officer, controller and persons performing similar functions. This
code has been posted on our website, www.allot.com. Information contained on, or that can be accessed through, our website does not constitute a part of this
annual report and is not incorporated by reference herein. Waivers of our code of ethics may only be granted by the board of directors. Any amendments to
this code or any waiver that is granted, and the basis for granting the waiver, will be publicly communicated as appropriate on our website or through a filing
on a Form 6-K. Under Item 16B of Form 20-F, if a waiver or amendment of the Code of Ethics applies to our principal executive officer, principal financial
officer, principal accounting officer, controller or other persons performing similar functions and relates to standards promoting any of the values described in
Item 16B(b) of Form 20-F, we will disclose such waiver or amendment (i) on our website within five business days following the date of amendment or
waiver in accordance with the requirements of Instruction 4 to such Item 16B or (ii) through the filing of a Form 6-K. We granted no waivers under our Code
of Ethics in 2015.
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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 expensed by our independent registered public accounting firm.
Year ended December, 31,
2014
2015
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
Total
(in thousands of U.S. dollars)
265
57
188
510
238 $
54
127
419 $
$
$
(1) “Audit fees” include fees for services performed by our independent public accounting firm in connection with our annual audit for 2014 and 2015,
certain procedures regarding our quarterly financial results submitted on Form 6-K, the filing of our Form F-3, fees related to public offering, and
consultation concerning financial accounting and reporting standards.
(2) “Audit-Related fees” relate to assurance and associated services that are traditionally performed by the independent auditor, including: accounting
consultation and consultation concerning financial accounting, reporting standards and due diligence investigations.
(3) “Tax fees” include fees for professional services rendered by our independent registered public accounting firm for tax compliance, transfer pricing and
tax advice on actual or contemplated transactions.
Audit Committee’s Pre-Approval Policies and Procedures
Our audit committee pre-approved all audit and non-audit services provided to us and to our subsidiaries during the periods listed above.
ITEM 16D: Exemptions from the Listing Standards for Audit Committees
Not applicable.
ITEM 16E: Purchase of Equity Securities by the Company and Affiliated Purchasers
On August 2015, the Board of Directors approved a program for the Company to repurchase up to $15 million of its outstanding ordinary shares, such
program was thereafter approved by the Israeli court, pursuant to Israeli law on November 26, 2015.
Share purchases will take place in open market transactions or in privately negotiated transactions and may be made from time to time depending on market
conditions, share price, trading volume and other factors. Such purchases will be made in accordance with all applicable securities laws and regulations. The
repurchase program does not require Allot to acquire a specific number of shares, and may be suspended from time to time or discontinued. The court
approval will initially be valid for a period of six months.
ITEM 16F: Change in Registrant’s Certifying Accountant
None.
ITEM 16G: Corporate Governance
As a foreign private issuer, we are permitted under NASDAQ Rule 5615(a)(3) to follow Israeli corporate governance practices instead of the NASDAQ Stock
Market requirements, provided we disclose which requirements we are not following and describe the equivalent Israeli requirement. We must also provide
NASDAQ with a letter from outside counsel in our home country, Israel, certifying that our corporate governance practices are not prohibited by Israeli law.
89
We rely on this “foreign private issuer exemption” with respect to the following items:
·
·
We follow the requirements of Israeli law with respect to the quorum requirement for meetings of our shareholders, which are different from the
requirements of Rule 5620(c). Under our articles of association, the quorum required for an ordinary meeting of shareholders consists of at least
two shareholders present in person, by proxy or by written ballot 33.33%, who hold or represent between them at least 25% of the voting power
of our shares, instead of the issued share capital provided by under the NASDAQ requirements. This quorum requirement is based on the default
requirement set forth in the Companies Law. We submitted a letter from our outside counsel in connection with this item prior to our initial public
offering in November 2006.
We do not seek shareholder approval for equity compensation plans in accordance with the requirements of the Companies Law, which does not
fully reflect the requirements of Rule 5635(c). Under Israeli law, we may amend our 2006 Incentive Compensation Plan by the approval of our
board of directors, and without shareholder approval as is generally required under Rule 5635(c). Under Israeli law, the adoption and amendment
of equity compensation plans, including changes to the reserved shares, do not require shareholder approval. We submitted a letter from our
outside counsel in connection with this item in June 2008.
We are subject to additional Israeli corporate governance requirements applicable to companies incorporated in Israel whose securities are listed for trading
on a stock exchange outside of Israel.
We may in the future provide NASDAQ with an additional letter or letters notifying NASDAQ that we are following our home country practices, consistent
with the Companies Law and practices, in lieu of other requirements of Rule 5600.
ITEM 16H: Mine Safety Disclosure
Not applicable.
90
ITEM 17: Financial Statements
Not applicable.
ITEM 18: Financial Statements
See Financial Statements included at the end of this report.
ITEM 19: Exhibits
See exhibit index incorporated herein by reference.
PART III
91
The registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
Dated: March 28, 2016
Allot Communications Ltd.
By /s/ Andrei Elephant:
Andrei Elefant
Chief Executive Officer and President
92
ANNUAL REPORT ON FORM 20-F
INDEX OF EXHIBITS
Number
1.1
1.2
2.1
3.1
4.1
5.1
5.2
6.1
7.1
8.1
9.1
10.1
10.2
10.3
Description
Articles of Association of the Registrant (2)
Certificate of Name Change (1)
Specimen share certificate (1)
Non-Stabilized Lease Agreement, dated February 13, 2006, by and among, Aderet Hod Hasharon Ltd., Miritz, Inc., Leah and Israel Ruben
Assets Ltd., Tamar and Moshe Cohen Assets Ltd., Drish Assets Ltd., S. L. A. A. Assets and Consulting Ltd., Iris Katz Ltd., Y. A. Groder
Investments Ltd., Ginotel Hod Hasharon 2000 Ltd. and Allot Communications Ltd. (1)
2006 Incentive Compensation Plan (3)
Manufacturing Agreement, dated July 19, 2007, by and between Flextronics (Israel) Ltd. and the Registrant (8)
Amendment No. 1, dated September 1, 2012, to the Manufacturing Agreement, dated July 19, 2007, by and between Flextronics (Israel) Ltd.
and the Registrant*(5)
Asset Purchase Agreement, dated February 19, 2015, by and between Optenet S.A. and the Registrant. (7)
Compensation Policy for Executive Officers and Directors (9)
List of Subsidiaries of the Registrant (8)
Code of Ethics (6)
Certification of Principal Executive Officer required by Rule 13a-14(a) and Rule 15d-14(a) (Section 302 Certifications) (8)
Certification of Principal Financial Officer required by Rule 13a-14(a) and Rule 15d-14(a) (Section 302 Certifications) (8)
Certification of Principal Executive Officer and Principal Financial Officer required by Rule 13a-14(b) and Rule 15d-14(b) (Section 906
Certifications) (8)
11.1
101.INS
101.SCH
101.PRE
101.CAL
101.LAB
101.DEF
__________________________
Consent of Kost Forer Gabbay & Kasierer (8)
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Presentation Linkbase Document
XBRL Taxonomy Calculation Linkbase Document
XBRL Taxonomy Label Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Previously filed with the Securities and Exchange Commission on October 31, 2006 pursuant to a registration statement on Form F-1 (File No.
333-138313) and incorporated by reference herein.
Previously filed with the Securities and Exchange Commission on March 26, 2014 as Exhibit 1.1 to Form 20-F for the year ended December 31,
2013 and incorporated by reference herein.
Previously filed with the Securities and Exchange Commission on March 21, 2013 as Exhibit 4.5 to Form 20-F for the year ended December 31,
2012 and incorporated by reference herein.
Previously filed with the Securities and Exchange Commission on June 27, 2008 as Exhibit 4.11 to Form 20-F for the year ended December 31,
2007 and incorporated by reference herein.
Previously filed with the Securities and Exchange Commission on March 21, 2013 as Exhibit 4.7 to Form 20-F for the year ended December 31,
2012 and incorporated by reference herein.
Previously filed with the Securities and Exchange Commission on June 28, 2007 as Exhibit 4 to Form 20-F for the year ended December 31, 2006
and incorporated by reference herein.
Previously filed with the Securities and Exchange Commission on March 26, 2015 as Exhibit 4.8 to Form 20-F for the year ended December 31,
2014 and incorporated by reference herein.
(8)
Furnished herewith.
(9)
*
Previously included in Exhibit 99.1 to Form 6-K furnished to the Securities and Exchange Commission on July 2, 2013 and incorporated by
reference herein.
Portions of this exhibit were omitted and have been filed separately with the Secretary of the Securities and Exchange Commission pursuant to
the Registrant’s application requesting confidential treatment under Rule 24b-2 of the Exchange Act.
93
ALLOT COMMUNICATIONS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2015
U.S. DOLLARS IN THOUSANDS
ALLOT COMMUNICATIONS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2015
U.S. DOLLARS IN THOUSANDS
INDEX
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Loss
Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F - 2 - F - 4
F - 5 - F - 6
F - 7
F - 8
F - 9 - F - 10
F - 11 - F - 44
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
ALLOT COMMUNICATIONS LTD.
We have audited the accompanying consolidated balance sheets of Allot Communications Ltd. ("the Company") as of December 31, 2015 and
2014, and the related consolidated statements of comprehensive loss, changes in shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of
the Company at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2015, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's
internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 28, 2016 expressed an unqualified
opinion thereon.
Tel Aviv, Israel
March 28, 2016
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F - 2
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
ALLOT COMMUNICATIONS LTD.
We have audited Allot Communications Ltd. ("the Company") and its subsidiaries internal control over financial reporting as of December 31,
2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). The Company's management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management’s report. Our
responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
F - 3
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the Company and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015, based on the COSO criteria.
As indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management’s assessment of and conclusion
on the effectiveness of internal control over financial reporting did not include the internal controls of the Optenet business (the "Acquired Business") which
was acquired in 2015. The Acquired Business’s assets and revenues are included in the Company's 2015 consolidated financial statements and constituted
0.2% of total assets as of December 31, 2015 and 0% of total revenues for the period ended from March 23, 2015 to December 31, 2015. Our audit of internal
control over financial reporting of the Acquired Business also did not include an evaluation of the internal control over financial reporting of the Acquired
Business.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of the Company and its subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of comprehensive loss,
changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2015 and our report dated March 28, 2016
expressed an unqualified opinion thereon.
Tel Aviv, Israel
March 28, 2016
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F - 4
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Restricted deposit
Short-term bank deposits
Available-for-sale marketable securities
Trade receivables (net of allowance for doubtful accounts of $ 657 and $ 707 at December 31, 2015 and 2014,
$
respectively)
Other receivables and prepaid expenses
Inventories
Total current assets
NON-CURRENT ASSETS:
Severance pay fund
Deferred taxes
Other assets
Total non-current assets
PROPERTY AND EQUIPMENT, NET
INTANGIBLE ASSETS, NET
GOODWILL
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
ALLOT COMMUNICATIONS LTD.
December 31,
2015
2014
15,470 $
203
42,700
64,921
23,874
4,513
10,169
19,180
-
59,000
54,271
23,759
5,383
10,109
161,850
171,702
282
501
2,712
262
1,716
4,948
3,495
6,926
5,189
5,957
6,119
31,562
7,549
20,814
$
208,215 $
212,948
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands, except share and per share data
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables
Employees and payroll accruals
Deferred revenues
Other payables and accrued expenses
Total current liabilities
LONG-TERM LIABILITIES:
Deferred revenues
Accrued severance pay
Other long-term liability
Total long-term liabilities
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Share capital -
Ordinary shares of NIS 0.1 par value - Authorized: 200,000,000 shares at December 31, 2015 and 2014; Issued
and outstanding: 33,558,102 and 33,319,923 shares at December 31, 2015 and 2014, respectively
Additional paid-in capital
Treasury stock
Accumulated other comprehensive loss
Accumulated deficit
Total shareholders' equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
ALLOT COMMUNICATIONS LTD.
December 31,
2015
2014
$
7,107 $
8,211
14,066
5,710
6,300
7,237
12,704
7,287
35,094
33,528
4,912
651
4,153
4,158
282
-
9,716
4,440
837
259,385
(166)
(470)
(96,181)
819
252,120
-
(1,620)
(76,339)
163,405
174,980
$
208,215 $
212,948
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
U.S. dollars in thousands, except share and per share data
Revenues:
Products
Services
Total revenues
Cost of revenues:
Products
Services
Total cost of revenues
Gross profit
Operating expenses:
Research and development (net of grant participations of $ 1,252, $ 984 and $ 1,051 for the
years ended December 31, 2015, 2014 and 2013, respectively)
Sales and marketing
General and administrative
Total operating expenses
Operating loss
Financial income (expense), net
Loss before income tax expense
Income tax expense
Net loss
ALLOT COMMUNICATIONS LTD.
Year ended December 31,
2014
2015
2013
$
62,642 $
37,325
99,967
77,240 $
39,946
117,186
66,318
30,227
96,545
26,707
6,720
27,389
7,350
20,572
6,246
33,427
34,739
26,818
66,540
82,447
69,727
26,422
43,318
12,702
29,014
44,599
11,941
27,022
39,817
9,952
82,442
85,554
76,791
(15,902)
(584)
(16,486)
3,356
(3,107)
660
(2,447)
50
(7,064)
727
(6,337)
120
$
(19,842)
$
(2,497) $
(6,457)
Unrealized loss on available-for-sale marketable securities
Unrealized gain (loss) on foreign currency cash flow hedges transactions
(261)
1,411
(205)
(1,781)
(20)
(1,374)
Total comprehensive loss
Net loss per share:
Basic and diluted
$
(18,692) $
(4,483) $
(7,851)
$
(0.59)
$
(0.08) $
(0.20)
Weighted average number of shares used in per share computations of net loss:
Basic and diluted
33,419,917
33,143,168
32,680,766
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands, except share data
ALLOT COMMUNICATIONS LTD.
Ordinary shares
Outstanding
shares
Amount
Additional
paid-in capital
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Total
Accumulated
deficit
shareholders'
equity
32,547,151 $
761 $
233,985 $
- $
1,760
$
(67,385) $
169,121
Balance at January 1,
2013
Exercise of stock options
Stock-based
compensation
Other comprehensive
loss
Net loss
Balance at December 31,
2013
Exercise of stock options
Stock-based
compensation
Other comprehensive
loss
Net loss
32,877,118
442,805
-
-
-
Balance at December 31,
2014
33,319,923
Exercise of stock options
Treasury stock acquired,
net *)
Stock-based
compensation
Other comprehensive
income
Net loss
263,179
(25,000)
-
-
-
Balance at December 31,
329,967
13
913
-
-
-
-
-
-
7,731
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,394)
-
-
-
-
(6,457)
926
7,731
(1,394)
(6,457)
366
(73,842)
169,927
-
-
(1,986)
-
-
-
-
(2,497)
1,476
8,060
(1,986)
(2,497)
(1,620)
(76,339)
174,980
-
-
-
1,150
-
-
-
-
-
(19,842)
132
(166)
7,151
1,150
(19,842)
242,629
1,431
8,060
-
-
252,120
114
774
45
-
-
-
819
18
-
-
-
-
-
(166)
7,151
-
-
-
-
-
2015
33,558,102
837
259,385
(166)
(470)
(96,181)
163,405
*) net of issuance expenses of $ 35.
Accumulated other comprehensive income (loss):
Accumulated unrealized gain (loss) on available-for-sale marketable securities
Accumulated unrealized gain (loss) on foreign currency cash flows hedge transactions
Accumulated other comprehensive (loss) income
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
Year ended
December 31,
2014
2015
2013
$
$
(425) $
(45)
(164) $
(1,456)
(470) $
(1,620) $
41
325
366
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
Impairment of intangible assets
Stock-based compensation
Capital loss
Increase (decrease) in accrued severance pay, net
Decrease (increase) in other assets
Decrease in accrued interest and amortization of premium on marketable securities
Decrease (increase) in trade receivables
Increase in other receivables and prepaid expenses
Decrease (increase) in inventories
Decrease (increase) in long-term deferred taxes, net
Increase (decrease) in trade payables
Increase (decrease) in employees and payroll accruals
Increase (decrease) in deferred revenues
Increase (decrease) in other payables and accrued expenses
Liability related to settlement of OCS grants
ALLOT COMMUNICATIONS LTD.
Year ended December 31,
2014
2015
2013
$
(19,842) $
(2,497) $
(6,457)
5,708
5,777
7,170
328
349
1,205
967
(847)
(2,623)
(60)
1,403
2,218
901
1,961
(429)
-
5,166
-
8,095
-
(8)
100
793
(6,851)
(1,321)
3,689
(224)
3,109
1,073
1,911
2,800
-
6,338
-
7,731
18
(13)
(532)
366
3,328
(2,749)
(3,835)
(77)
(1,618)
(2,053)
(2,823)
(988)
(15,886)
Net cash provided by (used in) operating activities
4,186
15,835
(19,250)
Cash flows from investing activities:
Decrease (increase) in restricted deposits
Investments in short-term bank deposits
Proceeds from short-term bank deposits
Purchase of property and equipment
Investment in available-for sale marketable securities
Proceeds from sales of available-for-sale marketable securities
Proceeds from maturity of available-for-sale marketable securities
Loan granted to third party
Repayment of loan to third party
Acquisition of Optenet, net of cash (see schedule A below)
(203)
(21,700)
38,000
(2,223)
(34,098)
7,176
15,045
-
-
(9,859)
-
(50,500)
29,500
(3,391)
(22,736)
-
8,266
(2,735)
652
-
146
-
40,042
(2,706)
(32,805)
2,597
3,864
-
-
-
Net cash (used in) provided by investing activities
(7,862)
(40,944)
11,138
The accompanying notes are an integral part of the consolidated financial statements.
F - 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from financing activities:
Proceeds from exercise of stock options
Purchase of treasury stock, net
Net cash provided by (used in) financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
ALLOT COMMUNICATIONS LTD.
Year ended
December 31,
2014
2015
2013
132
(166)
1,476
-
(34)
1,476
899
-
899
(3,710)
19,180
(23,633)
42,813
(7,213)
50,026
Cash and cash equivalents at the end of the year
$
15,470 $
19,180 $
42,813
Supplementary cash flow information:
Cash paid (received) during the year for:
Taxes
Schedule A- Acquisition of Optenet:
Estimated net fair value of assets acquired and liabilities assumed at the date of acquisition was as
follows:
Working capital, net (excluding cash and cash equivalents)
Equipment and other assets
Intangible assets
Goodwill
Total consideration
Non cash consideration
Payment for acquisition, net of cash
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
$
139 $
82 $
(9)
$
$
$
$
(204) $
152
7,242
10,748
17,938 $
(8,079) $
9,859 $
- $
-
-
-
-
$
- $
-
$
-
-
-
-
-
-
-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL
ALLOT COMMUNICATIONS LTD.
a.
Allot Communications Ltd. (the "Company") was incorporated in November 1996 under the laws of the State of Israel. The Company
is engaged in developing, selling and marketing intelligent service optimization and monetization solutions for mobile, fixed and cloud
service providers, and enterprises. The Company’s flexible and highly scalable service delivery framework, in the form of hardware
platforms and software applications, leverages the intelligence in data networks enabling service providers to get closer to their
customers; to safeguard network assets and users; and to accelerate time-to-revenue for value-added services. The Company's products
consist of the Service Gateway and NetEnforcer service delivery platforms, the NetXplorer and Subscriber Management Platform
network management and provisioning suites and value added services such as WebSafe Personal and Business Security solution,
Service Protector network protection solution, ClearSee for Network analytics and MediaSwift E and VideoClass for media
optimization.
The Company's Ordinary Shares are listed in the NASDAQ Global Select Market under the symbol "ALLT" from its initial public
offering in November 2006. Since November, 2010, the Company's Ordinary Shares have been listed for trading in the Tel Aviv Stock
Exchange as well.
The Company holds twelve wholly-owned subsidiaries (the Company together with said subsidiaries shall collectively be referred to as
"Allot"): Allot Communications, Inc. in Woburn, Massachusetts, United-States (the "U.S. subsidiary"), which was incorporated in 1997
under the laws of the State of California, Allot Communication Europe SARL in Sophia, France (the "European subsidiary"), which
was incorporated in 1998 under the laws of France, Allot Communications Japan K.K. in Tokyo, Japan (the "Japanese subsidiary"),
which was incorporated in 2004 under the laws of Japan, Allot Communication (UK) Limited (the "UK subsidiary"), which was
incorporated in 2006 under the laws of England and Wales, Allot Communications (Asia Pacific) Pte. Ltd. ("the Singaporean
subsidiary"), which was incorporated in 2006 under the laws of Singapore, Allot Communications (New Zealand) Limited. (the "NZ
subsidiary"), which was incorporated in 2007 under the laws of New Zealand, Allot India Private Limited. (the "Indian subsidiary”),
which was incorporated in 2012 under the laws of India and commenced its activity in 2013, Allot Communications Africa (PTY) Ltd.
(the "African subsidiary”), which was incorporated in 2013 under the laws of South Africa, Allot Communications (Hong Kong)
Limited (the "HK”), which was incorporated in 2013 under the laws of Hong-Kong, Allot Communications Spain, S.L. Sociedad
Unipersonal, which was incorporated in 2015 under the laws of Spain, Allot Communications (Colombia) S.A.S, which was
incorporated in 2015 under the laws of Colombia and Allot MexSub, which was incorporated in 2015 under the laws of Mexico.
The U.S. subsidiary is engaged in the sale, marketing and technical support and development services in the Americas of products
manufactured and imported by the Company. The European, Japanese, NZ, UK, Singaporean, Indian, African, Colombian and Mexican
subsidiaries are engaged in marketing and technical support services of the Company's products in Europe, Japan, Oceania, UK, Asia
Pacific and Latin America, respectively.
F - 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL (Cont.)
ALLOT COMMUNICATIONS LTD.
The Spanish subsidiary commenced its operations in 2015 and is engaged in the marketing, technical support and development
activities of one of the Company's product lines.
b.
Acquisition:
On March 23, 2015 (the "Optenet acquisition date"), the Company entered into an asset purchase agreement (the "Optenet APA") with
the shareholders of Optenet S.A. ("Optenet") a private, global IT security company that develops security solutions for internet service
providers and enterprises.
The total consideration for the acquisition was $ 17,938, which consisted of $ 9,859 paid in cash and primarily an additional contingent
consideration estimated at fair value of $ 8,079 at the Optenet acquisition date. As of December 31, 2015, the contingent consideration
is estimated at fair value of $ 7,809.
The contingent consideration is payable over a five year term ending March 23, 2020 based on achievement of certain thresholds of
revenues derived from Optenet’s products and has payments cap of $27,500. The obligation in respect of the contingent consideration
is presented under Note 10 - Other payables and accrued expenses and Other long-term liability. See also Note 6.
The acquisition was accounted for using the purchase method of accounting in accordance with ASC No. 805, “Business
Combinations” ("ASC No. 805"). Accordingly, the purchase price was allocated according to the estimated fair values of the assets
acquired and liabilities assumed and the excess of the purchase price over the net tangible and identified intangible assets was assigned
to goodwill. The fair value of intangible assets was determined by management with the assistance of a third party valuation.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
Current assets
Equipment
Deferred revenues
Current and non-current liabilities
Technology
Customer relationships
Backlog
Goodwill
Net assets acquired
F - 12
Fair value
$
54
152
(155)
(103)
4,032
2,824
386
10,748
$
17,938
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL (Cont.)
Technology includes security solutions for internet service providers and enterprises such as encompass parental control, anti-
malware and anti-spam products. The technology is amortized over the estimated useful life of 4.34 years using the straight line
method.
Backlog from customer orders is amortized over the estimated useful life of 2.8 years.
Customer relationships is derived from customer contracts and related customer relationships with existing customers.
Customer relationships is amortized based on the accelerated method over the estimated useful life of 4.8 years.
The Company acquisition transaction costs amounted to $ 397.
Unaudited pro forma condensed results of operations:
The following represents the unaudited consolidated pro forma revenue and net loss for the years ended December 31, 2015 and
2014, to give effect to the acquisition of Optenet as if it had occurred on January 1, 2014. The pro forma information is not
necessarily indicative of the results of operations that would have been had the acquisition actually occurred on January 1, 2014,
nor does it purport to represent the results of operations for future periods.
Revenues
Net loss
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES
Year ended December 31,
2015
2014
Unaudited
$
$
100,683 $
(21,177) $
124,244
(17,976)
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").
a.
Use of estimates:
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates,
judgments and assumptions. The Company's management believes that the estimates, judgments and assumptions used are reasonable
based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
F - 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
b.
Financial statements in U.S. dollars:
ALLOT COMMUNICATIONS LTD.
The majority of the revenues of the Company and its subsidiaries are generated in U.S. dollars ("dollar") or linked to the dollar. In
addition, a major portion of the Company's and certain of its subsidiaries' costs are incurred or determined in dollars. The Company's
management believes that the dollar is the currency of the primary economic environment in which the Company and its subsidiaries
operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the dollar.
Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with
Accounting Standards Codification No. 830, "Foreign Currency Matters" ("ASC No. 830"). All transactions gains and losses from the
remeasurement of monetary balance sheet items are reflected in the statements of operations as financial income or expenses as
appropriate.
c.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and
transactions have been eliminated upon consolidation.
d.
Cash and cash equivalents:
The Company considers all unrestricted highly liquid investments which are readily convertible into cash, with maturity of three
months or less at the date of acquisition, to be cash equivalents.
e.
Restricted deposits:
The restricted deposits are held in favor of financial institutions in respect of fulfillments of forward contract and operating obligations.
f.
Short-term bank deposits:
Short-term bank deposits are deposits with maturities of more than three months but less than one year at the balance sheet date. The
deposits are in dollars and bear interest at annual weighted average rate of 0.93% and 0.56% at December 31, 2015 and 2014,
respectively.
g.
Marketable securities:
The Company accounts for investments in marketable securities in accordance with ASC 320, "Investments - Debt and Equity
Securities". Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-
evaluates such determinations at each balance sheet date.
F - 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT COMMUNICATIONS LTD.
Marketable securities classified as "available-for-sale" are carried at fair value, based on quoted market prices. Unrealized gains and
losses are reported in a separate component of shareholders' equity in accumulated other comprehensive income (loss). Gains and
losses are recognized when realized, on a specific identification basis, in the Company's consolidated statements of comprehensive loss.
The Company's securities are reviewed for impairment in accordance with ASC 320-10-35. If such assets are considered to be
impaired, the impairment charge is recognized in earnings when a decline in the fair value of its investments below the cost basis is
judged to be Other-Than-Temporary Impairment (OTTI). Factors considered in making such a determination include the duration and
severity of the impairment, the reason for the decline in value, the potential recovery period and the Company's intent to sell, including
whether it is more likely than not that the Company will be required to sell the investment before recovery of cost basis. Based on the
above factors, the Company concluded that unrealized losses on its available-for-sale securities, for the years ended 2015, 2014 and
2013, were not OTTI.
h.
Inventories:
Inventories are stated at the lower of cost or market value. Inventory write-offs are provided to cover risks arising primarily from end of
life products and from slow-moving items, technological obsolescence, and excess inventory. Inventory write-offs during the year
ended December 31, 2015, 2014 and 2013 totaled $ 775, $ 4,097 and $ 1,531, respectively, and was recorded in cost of revenues for
products.
Inventory write-off provision as of December 31, 2015 and 2014 amounted of $ 1,663 and $ 4,560, respectively.
Cost is determined as follows:
Raw materials and finished goods – weighted average cost method
i.
Property and equipment, net:
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over
the estimated useful lives of the assets at the following annual rates:
Lab equipment
Computers and peripheral equipment
Office furniture
Leasehold improvements
F - 15
%
25 - 33
15 - 33
6 - 15
By the shorter of term of the
lease or the useful life of the
asset
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
j.
Goodwill impairment:
ALLOT COMMUNICATIONS LTD.
Goodwill represents the excess of the purchase price over the fair value of net assets of purchased businesses. Under Accounting
Standards Codification No. 350, "Intangibles-Goodwill and Other" ("ASC No. 350"), goodwill is not amortized, but rather subject to an
annual impairment test, or more often if there are indicators of impairment present. In accordance with ASC No. 350 the Company
performs an annual impairment test at December 31 each year.
ASC 350 requires goodwill to be tested for impairment at the reporting unit level at least annually or between annual tests in certain
circumstances, and written down when impaired. . In accordance with ASC No. 350 the Company performs an annual impairment test
at December 31 each year.
ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further
impairment testing is required. If it does result in a more likely than not indication of impairment, the two-step impairment test is
performed. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to
performing the first step of the goodwill impairment test.
The first step, identifying a potential impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying
amount exceeds its fair value, the second step would need to be performed; otherwise, no further step is required. The second step,
measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess
of the goodwill carrying amount over the applied fair value is recognized as an impairment loss, and the carrying value of goodwill is
written down to fair value.
The Company operates in a single reportable unit. The Company has performed an annual impairment analysis as of December 31,
2015 and determined that the carrying value of the reporting unit was less than the fair value of the reporting unit. Fair value is
determined using market capitalization. During years 2015, 2014 and 2013, no impairment losses were recorded.
k.
Impairment of long lived assets and intangible assets subject to amortization:
Property and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with ASC No. 360,
"Accounting for the Impairment or Disposal of Long-Lived Assets," whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair
value of the assets.
F - 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT COMMUNICATIONS LTD.
Intangible assets acquired in a business combination are recorded at fair value at the date of acquisition. Following initial recognition,
intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of
intangible assets are assessed to be either finite or indefinite. Intangible assets that are not considered to have an indefinite useful life
are amortized over their estimated useful lives. Some of the acquired intangible assets are amortized over their estimated useful lives in
proportion to the economic benefits realized. This accounting policy results in accelerated amortization of such customer relationships
as compared to the straight-line method. All other intangible assets are amortized over their estimated useful lives on a straight-line
basis.
During 2015, the Company recorded impairment losses of $ 5,777. During 2014 and 2013, no impairment losses were recorded (see
Note 9).
l.
Revenue recognition:
The Company generates revenues mainly from selling its products along with related maintenance and support services. At times, these
arrangements may also include professional services, such as installation services or training. The Company generally sells its products
through resellers, distributors, OEMs and system integrators, all of whom are considered end-users.
Revenues from product sales are recognized when persuasive evidence of an agreement exists, title and risk of loss have transferred, no
significant performance obligations remain, product payment is not contingent upon performance of installation or service obligations,
the fee is fixed or determinable and collectability is probable. In instances where final acceptance of the product or service is specified
by the customer, revenue recognition is deferred until all acceptance criteria have been met.
Maintenance and support related revenues included in multiple element arrangements are deferred and recognized on a straight-line
basis over the term of the applicable maintenance and support agreement. Other services are recognized upon the completion of
installation or when the service is provided. In instances where the services provided in a multiple element arrangement are considered
essential to the functionality of the product and payment of the product is contingent upon performance of the services, the sales of the
products and services would be considered one unit of accounting.
Pursuant to the guidance of ASU 2009-13, "Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue
Recognition)" (ASU 2009-13) and ASU 2009-14, when a sales arrangement contains multiple elements, such as products and services,
the Company allocates revenues to each element based on a selling price hierarchy. The selling price for a deliverable is based on
VSOE if available, third party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE
is available. In multiple element arrangements, revenues are allocated to each separate unit of accounting for each of the deliverables
using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy.
F - 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT COMMUNICATIONS LTD.
Revenue arrangements with multiple deliverables are allocated using the relative selling price method. The Company determines the
estimated selling price in multiple elements arrangements as follows:
The Company determines the ESP in multiple-element arrangements for the products, based on reviewing historical transactions, and
considering several other external and internal factors including, but not limited to, pricing practices including discounting and
competition.
The Company determines the selling price for maintenance and support based on VSOE of the price charged based on standalone sales
(renewals) of such elements using a consistent percentage of the Company's product price lists.
Deferred revenues are classified as short and long-term based on their contractual term and recognized as revenues at the time the
respective elements are provided
The Company records a provision for estimated product returns based on its experience with historical product returns and other known
factors. Such provisions amounted to $ 688 and $ 1,147 as of December 31, 2015 and 2014, respectively.
m.
Advertising expenses:
Advertising expenses are charged to the statement of comprehensive loss, as incurred. Advertising expenses for the years ended
December 31, 2015, 2014 and 2013 amounted to $ 1,201, $ 1,131 and $ 973, respectively.
n.
Research and development costs:
Accounting Standards Codification No. 985-20, requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
Based on the Company's product development process, technological feasibility is established upon the completion of a working
model. The Company does not incur material costs between the completion of a working model and the point at which the products are
ready for general release. Therefore, research and development costs are charged to the consolidated statement of comprehensive loss
as incurred.
o.
Severance pay:
The liability in Israel for substantially all of the Company`s employees in respect of severance pay liability is calculated in accordance
with Section 14 of the Severance Pay Law -1963 (herein- "Section 14"). Section 14 states that Company's contributions for severance
pay shall be in line of severance compensation and upon release of the policy to the employee, no additional obligations shall be
conducted between the parties regarding the matter of severance pay and no additional payments shall be made by the Company to the
employee.
F - 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT COMMUNICATIONS LTD.
Furthermore, the related obligation and amounts deposited on behalf of such obligation under Section 14, are not stated on the balance
sheet, because pursuant to current ruling, they are legally released from obligation to employees once the deposits have been paid.
There are a limited number of employees in Israel, for whom the Company is liable for severance pay. The Company's liability for
severance pay for its Israeli employees was calculated pursuant to Section 14, based on the most recent monthly salary of its Israeli
employees multiplied by the number of years of employment as of the balance sheet date for such employees.
The Company's liability was partly provided by monthly deposits with severance pay funds and insurance policies and the remainder
by an accrual.
Severance expense for the years ended December 31, 2015, 2014 and 2013, amounted to $ 2,286, $ 2,092 and $ 2,070, respectively.
p.
Accounting for stock-based compensation:
The Company accounts for stock based compensation in accordance with Accounting Standards Codification No. 718, "Compensation
- Stock Compensation" ("ASC No. 718") that requires companies to estimate the fair value of equity-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an
expense over the requisite service periods in the Company's consolidated statement of comprehensive loss.
ASC No. 718 requires forfeitures to be estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ
from those estimates.
F - 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT COMMUNICATIONS LTD.
The following table sets forth the total stock-based compensation expense resulting from stock options and RSUs granted to employees
included in the consolidated statements of comprehensive loss, for the years ended December 31, 2015, 2014 and 2013:
Cost of revenues
Research and development
Sales and marketing
General and administrative
Year ended
December 31,
2014
2015
2013
$
324 $
1,637
2,802
2,407
353 $
1,919
3,322
2,501
368
1,666
3,106
2,591
Total stock-based compensation expense
$
7,170 $
8,095 $
7,731
The Company selected the binomial option pricing model as the most appropriate fair value method for its stock-based compensation
awards with the following assumptions for the years ended December 31, 2015, 2014 and 2013:
Suboptimal exercise multiple
Risk free interest rate
Volatility
Dividend yield
Year ended
December 31,
2014
3
2015
3
2013
3
0.23%-2.35% 0.1%-2.73% 0.1%-2.77%
37%-55% 44%-60% 53%-63%
0%
0%
0%
The expected annual post-vesting and pre-vesting forfeiture rates affects the number of exercisable options. Based on the Company's
historical experience, the annual post-vesting in 2015, 2014, and 2013 are 0%-14%.
The computations of expected volatility and suboptimal exercise multiple is based on the average of the Company's realized historical
stock price volatility based on market capitalization and type of technology platform. The computation of the suboptimal exercise
multiple and the forfeiture rates are based on the grantees expected exercise prior and post vesting termination behavior. The interest
rate for period within the contractual life of the award is based on the U.S. Treasury Bills yield curve in effect at the time of grant. The
Company currently has no plans to distribute dividends and intends to retain future earnings to finance the development of its business.
The expected life of the stock options represents the weighted-average period the stock options are expected to remain outstanding and
is a derived output of the binomial model. The expected life of the stock options is impacted by all of the underlying assumptions used
in the Company's model.
F - 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (CONT.)
q.
Treasury stock:
ALLOT COMMUNICATIONS LTD.
The Company repurchases its Ordinary shares from time to time on the open market and holds such shares as treasury stock. The
Company presents the cost to repurchase treasury stock as a reduction of shareholders' equity.
r.
Concentration of credit risks:
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash
equivalents, marketable securities, short-term bank deposits, trade receivables and derivative instruments.
The majority of cash and cash equivalents, marketable securities and short-term deposits of the Company are invested in dollar deposits
in major U.S. and Israeli banks. Such deposits in the United States may be in excess of insured limits and are not insured in other
jurisdictions. Generally, the cash and cash equivalents and short-term bank deposits may be redeemed upon demand, and therefore,
bear minimal risk.
The Company's trade receivables are primarily derived from sales to customers located mainly in the United States, as well as in
EMEA, APAC and Latin America. Concentration of credit risk with respect to trade receivables is limited by credit limits, ongoing
credit evaluation and account monitoring procedures. The Company performs ongoing credit evaluations of its customers and
establishes an allowance for doubtful accounts on a specific basis. Allowance for doubtful accounts amounted to $ 657 and $ 707 as of
December 31, 2015 and 2014, respectively.
The Company has no significant off balance sheet concentrations of credit risk.
s.
Grants from the OCS:
Participation grants from the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor in Israel ("OCS") for research
and development activity are recognized at the time the Company is entitled to such grants on the basis of the costs incurred and
included as a deduction of research and development costs. Research and development non royalty bearing grants recognized amounted
to $ 1,252, $ 984 and $ 1,051 in 2015, 2014 and 2013, respectively.
t.
Income taxes:
The Company accounts for income taxes in accordance with Accounting Standards Codification No. 740, "Income Taxes" ("ASC No.
740"). ASC No. 740 prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined
based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to
reduce deferred tax assets to their estimated realizable value if it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
F - 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT COMMUNICATIONS LTD.
ASC No. 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to
evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it
is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of
any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement.
u.
Basic and diluted net income (loss) per share:
Basic net income per share is computed based on the weighted average number of Ordinary Shares outstanding during each year.
Diluted net income per share is computed based on the weighted average number of Ordinary Shares outstanding during each year, plus
dilutive potential Ordinary Shares considered outstanding during the year, in accordance with FASB ASC 260 "Earnings Per Share".
For the years ended December 31, 2015, 2014 and 2013, all outstanding options and warrants have been excluded from the calculation
of the diluted net loss per share since their effect was anti-dilutive. See Note 16.
v.
Comprehensive income (loss):
The Company accounts for comprehensive loss in accordance with Accounting Standards Codification No. 220, "Comprehensive
Income" ("ASC No. 220"). This statement establishes standards for the reporting and display of comprehensive income (loss) and its
components in a full set of general purpose financial statements. Comprehensive loss represents all changes in shareholders' equity
during the period except those resulting from investments by, or distributions to shareholders. The Company determined that its items
of comprehensive income (loss) relate to unrealized gains and losses on hedging derivative instruments and unrealized gains and losses
on available-for-sale marketable securities.
F - 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The following table shows the components and the effects on net loss of amounts reclassified from accumulated other comprehensive
loss as of December 31, 2015:
ALLOT COMMUNICATIONS LTD.
Balance as of December 31, 2014
Changes in other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss) to :
Cost of revenues
Operating expenses
Financial income, net
Year ended
December 31, 2015
Unrealized
gains (losses)
on
marketable
securities
Unrealized
gains (losses)
on cash flow
hedges
$
(164) $
(266)
(1,456) $
4
-
-
5
76
1,331
-
Total
(1,620)
(252)
76
1,331
(5)
Net current-period other comprehensive income (loss)
(261)
1,411
1,150
Balance as of December 31, 2015
$
(425) $
(45) $
(470)
w.
Fair value of financial instruments:
The Company measures its cash and cash equivalents, marketable securities, derivative instruments, short-term bank deposits, trade
receivables, other receivables, trade payables and other payables at fair value.
Fair value is an exit price, representing the amount that would be received if the Company were to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing an asset or a liability. The Company uses a three-tier
value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 -
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 -
Include other inputs that are directly or indirectly observable in the marketplace, other than quoted prices included in
Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets with insufficient volume or infrequent transactions, or other inputs that are observable
(model-derived valuations in which significant inputs are observable), or can be derived principally from or corroborated
by observable market data; and
Level 3 -
Unobservable inputs which are supported by little or no market activity.
F - 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT COMMUNICATIONS LTD.
The Company categorized each of its fair value measurements in one of those three levels of hierarchy. The fair value hierarchy also
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company's earn-out consideration is classified within Level 3. The valuation methodology used by the Company to calculate the
fair value consideration is the discounted cash flow using Monte-Carlo simulation method by taking into account, forecast future
revenues, expected volatility and weighted average cost of debt of 2%.
x.
Derivatives and hedging:
The Company accounts for derivatives and hedging based on Accounting Standards Codification No. 815, "Derivatives and Hedging"
("ASC No. 815").
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivative instruments
that are not designated and qualified as hedging instruments must be adjusted to fair value through earnings.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges,
the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive
income (loss) in shareholders' equity and reclassified into earnings in the same period or periods during which the hedged transaction
affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To apply
hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged
transactions.
y.
Business combinations:
The Company accounts for business combinations in accordance with ASC No. 805. ASC No. 805 requires recognition of assets
acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair values as of that date. Any
excess of the fair value of net assets acquired over the purchase price is recorded as goodwill and any subsequent changes in estimated
contingencies are to be recorded in earnings. In addition, changes in valuation allowance related to acquired deferred tax assets and
acquired income tax positions are to be recognized in earnings.
z.
Warranty costs:
The Company generally provides three months software and a one year hardware warranty for all of its products. A provision is
recorded for estimated warranty costs at the time revenues are recognized based on the Company's experience. Warranty expenses for
the years ended December 31, 2015, 2014 and 2013 were immaterial.
F - 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
aa.
Recently Issued Accounting Pronouncements:
ALLOT COMMUNICATIONS LTD.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the
presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a
statement of financial position. The Company early adopted ASU 2015-17 effective December 31, 2015 on a prospective basis. No
prior periods were retrospectively adjusted.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, an updated standard on revenue
recognition. ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving
comparability in the financial statements of companies reporting using IFRS and US GAAP. The core principle of the new standard is
for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration
(that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will
result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively
(for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. ASU 2014-09 was
initially scheduled to be effective for annual and interim reporting periods beginning after December 15, 2016 and may be adopted
either on a full retrospective or modified retrospective approach. However, on July 9, 2015, the FASB approved a one year deferral of
the effective date of ASU 2014-09. The revised effective date is for annual reporting periods beginning after December 15, 2017 and
interim periods thereafter, with an early adoption permitted as of the original effective date. The Company is still evaluating the impact
of implementation of this standard on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", which will replace the existing guidance in ASC 840,
"Leases." The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize
lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This ASU
is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods; early adoption is
permitted and modified retrospective application is required. The Company is in the process of evaluating this guidance to determine
the impact it will have on its financial statements.
F - 25
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- AVAILABLE-FOR-SALE MARKETABLE SECURITIES
The following is a summary of available-for-sale marketable securities:
December 31, 2015
Gross
unrealized
gain
Gross
unrealized
loss
Amortized
cost
Fair
value
Amortized
cost
December 31, 2014
Gross
Gross
unrealized
unrealized
loss
gain
Fair
value
Available-for-sale - matures
within one year:
Governmental debentures $
Corporate debentures
Available-for-sale - matures
after one year through
three years:
Governmental debentures
Corporate debentures
Available-for-sale - matures
after three years through
five years:
Governmental debentures
Corporate debentures
293 $
20,077
- $
1
(0) $
(19)
293 $
20,059
912 $
14,231
1 $
18
- $
(1)
913
14,248
20,370
1
(19)
20,352
15,143
19
(1)
15,161
978
29,004
-
3
(6)
(230)
972
28,777
562
30,036
29,982
3
(236)
29,749
30,598
344
14,650
-
5
(5)
(174)
339
14,481
-
8,694
14,994
5
(179)
14,820
8,694
-
-
-
-
-
-
(9)
(89)
553
29,947
(98)
30,500
-
(84)
-
8,610
(84)
8,610
$
65,346 $
9 $
(434) $
64,921 $
54,435 $
19 $
(183) $
54,271
All investments with an unrealized loss as of December 31, 2015 are with continuous unrealized losses for less than 12 months.
F - 26
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:- FAIR VALUE MEASUREMENTS
In accordance with ASC No. 820, the Company measures its cash equivalents, marketable securities and foreign currency derivative instruments
at fair value. Cash equivalents and available for sale marketable securities are classified within Level 1 or Level 2. This is because these assets
are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The Company's financial assets measured at fair value on a recurring basis, including accrued interest components, consisted of the following
types of instruments as of December 31, 2015 and 2014, respectively:
Available-for-sale marketable securities
Foreign currency derivative contracts
Total financial assets
Available-for-sale marketable securities
Foreign currency derivative contracts
Total financial assets
As of December 31, 2015
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
- $
-
64,921 $
401
- $
-
64,921
401
- $
65,322 $
- $
65,322
As of December 31, 2014
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
- $
-
54,271 $
(899)
- $
-
54,271
(899)
- $
53,372 $
- $
53,372
$
$
$
$
F - 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5:- DERIVATIVE INSTRUMENTS
ALLOT COMMUNICATIONS LTD.
The Company enters into hedge transactions with a major financial institution, using derivative instruments, primarily forward contracts and
options to purchase and sell foreign currencies, in order to reduce the net currency exposure associated with anticipated expenses (primarily
salaries and related expenses that are designated as cash flow hedges) in currencies other than U.S. dollar, and forecasted revenues denominated
in Euro. The net loss (income) recognized in "Financial income, net" during the years ended December 31, 2015, 2014 and 2013 was $ (1,200),
$ (2,144) and $ 181, respectively.
The Company currently hedges such future exposures for a maximum period of one year. However, the Company may choose not to hedge
certain foreign currency exchange exposures for a variety of reasons, including but not limited to immateriality, accounting considerations and
the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the
financial impact resulting from movements in foreign currency exchange rates.
The Company records all derivatives on the consolidated balance sheets at fair value in accordance with ASC No. 820 at Level 2. The effective
portion of cash flow hedges are recorded in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective
portion of cash flow hedges are adjusted to fair value through earnings in financial income, net. The Company does not enter into derivative
transactions for trading purposes.
The Company had a net unrealized gain (loss) associated with cash flow hedges of $ (45) and $ (1,456) recorded in other comprehensive income
(loss) as of December 31, 2015 and 2014, respectively. As of December 31, 2015 and 2014, the Company had outstanding hedge transactions in
the amount of $ 18,361 and $ 28,436, respectively.
F - 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5:- DERIVATIVE INSTRUMENTS (Cont.)
ALLOT COMMUNICATIONS LTD.
The fair value of the outstanding foreign exchange contracts recorded by the Company on its consolidated balance sheets as of December 31,
2015 and 2014, as assets and liabilities is as follows:
Foreign exchange forward and
options contracts
Fair value of foreign exchange hedge transactions
Fair value of foreign exchange hedge transactions
Total derivatives designated as hedging instruments
Balance sheet
Other receivables and prepaid
expenses
Accrued expenses
December 31,
2015
2014
$
$
104 $
(149)
41
(1,497)
(45) $
(1,456)
Gain or loss on the derivative instruments, which partially offset the foreign currency impact from the underlying exposures, reclassified from
other comprehensive income (loss) to operating expenses for the years ended December 31, 2015 and 2014 were $ 1,407 and $ 717,
respectively.
Non-designated hedges:
The Company also uses foreign currency forward contracts to mitigate variability in gains and losses generated from the re-measurement of
certain monetary assets and liabilities denominated in foreign currencies. These derivatives do not qualify for special hedge accounting
treatment. These derivatives are carried at fair value with changes recorded in financial income, net. Changes in the fair value of these
derivatives are largely offset by re-measurement of the underlying assets and liabilities. Cash flows from such derivatives are classified as
operating activities. The derivatives have maturities of approximately twelve months. As of December 31, 2015 and 2014, the Company’s
transactions were $ 14,901 and $ 17,580, respectively.
NOTE 6:- OTHER RECEIVABLES AND PREPAID EXPENSES
Prepaid expenses
Government authorities
Grants receivable from the OCS
Foreign currency derivative contracts
Short-term lease deposits
Loan to third-party (1)
Others
December 31,
2015
2014
$
1,959 $
898
728
566
215
-
147
1,920
1,918
41
676
136
607
85
$
4,513 $
5,383
(1)
Represents a loan granted on January 1, 2014 to Optenet in the total amount of € 2,000, of which an amount of $ 1,215 is presented in
non-current other assets as of December 31, 2014. The loan is due in equal payments in the amount of € 125 per quarter, and bears an
annual interest rate of Eurobor + 5%. As of March 23, 2015, as part of the acquisition of Optenet, the remaining outstanding loan was
considered part of the purchase price. (See Note 1b)
F - 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 7:-
INVENTORIES
Raw materials
Finished goods
ALLOT COMMUNICATIONS LTD.
December 31,
2015
2014
$
1,584 $
8,585
1,796
8,313
$
10,169 $
10,109
As of December 31, 2015 and 2014, the finished products line item above includes deferral of the cost of goods sold for which revenue was not
yet recognized in the amount of approximately $ 572 and $ 1,336, respectively.
NOTE 8:- PROPERTY AND EQUIPMENT, NET
Cost:
Lab equipment
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
Accumulated depreciation:
Lab equipment
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
$
December 31,
2015
2014
12,527 $
18,667
955
1,164
11,366
18,200
847
1,056
33,313
31,469
9,483
17,453
568
620
8,089
16,418
463
542
28,124
25,512
Depreciated cost
$
5,189 $
5,957
Depreciation expense for the years ended December 31, 2015, 2014 and 2013 was $ 2,813, $ 3,308 and $ 3,423, respectively.
F - 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:-
INTANGIBLE ASSETS, NET
a.
The following table shows the Company's intangible assets for the periods presented:
ALLOT COMMUNICATIONS LTD.
Original Cost:
Technology *)
Backlog
Customer relationships **)
Accumulated amortization:
Technology
Backlog
Customer relationships
Amortized cost
December 31,
2015
2014
$
9,111 $ 10,725
1,491
1,877
899
3,592
$ 14,580 $ 13,115
$
5,765 $
1,632
1,064
3,592
1,437
537
$
8,461 $
5,566
$
6,119 $
7,549
*)
During 2015, the Company recorded an impairment loss of $ 3,214 and $ 2,432 related to technology purchased in 2012 from
acquisitions of Ortiva Wireless Inc. and Oversi Networks Ltd. ("Oversi"), respectively, due to the Company's decision to reach end of
life on the respective product lines. The impairment loss was recorded in cost of revenues.
**)
During 2015, the Company recorded an impairment loss of $ 131 related to Oversi's customer relationships, due to the Company's
decision to reach end of life on the respective product line. The impairment loss was recorded in sales and marketing.
b.
c.
Amortization expense for the years ended December 31, 2015, 2014 and 2013 was $ 2,895, $ 1,858 and $ 2,915, respectively.
Estimated amortization expense for the years ending:
Year ending December 31,
2016
2017
2018
2019
Total
1,666
1,488
1,647
1,318
6,119
F - 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- OTHER PAYABLES AND ACCRUED EXPENSES
Contingent consideration
Accrued expenses
Advances from customers
Accrued taxes
Foreign currency derivative contracts
Others
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES
a.
Lease commitments:
ALLOT COMMUNICATIONS LTD.
December 31,
2015
2014
$
1,949 $
1,758
1,103
473
163
264
-
3,241
1,853
384
1,575
234
$
5,710 $
7,287
In March 2013, the Company signed a non-cancelable agreement to rent offices for an average period of five years, starting July 2013.
The total rental expenses are approximately $ 137 per month.
The U.S. subsidiary has an operating lease for office facilities in Woburn, Massachusetts and in San Diego, California, the leases expire
on August 31, 2019 and on April 30, 2018, respectively. The Company's subsidiaries maintain smaller offices in South Africa, China,
Singapore, Japan, New Zealand, UK, Spain, Colombia and various locations in Europe.
In addition, the Company has operating lease agreements for its motor vehicles, which terminate in 2016 through 2019.
Operating leases (offices and motor vehicles) expense for the years ended December 31, 2015, 2014 and 2013 was $ 2,828, $ 3,155 and
$ 3,273, respectively.
As of December 31, 2015, the aggregate future minimum lease obligations (offices and motor vehicles) under non-cancelable operating
leases agreements were as follows:
Year ending December 31,
2016
2017
2018
2019
Total
$
2,690
1,948
894
100
$
5,632
F - 32
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
b.
Major subcontractor:
The Company currently depends on one subcontractor to manufacture and provide hardware, warranty and support for its traffic
management systems. If the subcontractor experiences delays, disruptions, quality control problems or a loss in capacity, shipments of
products may be delayed and the Company's ability to deliver products could be materially adversely affected. Certain hardware
components for the Company's products come from single or limited sources, and the Company could lose sales if these sources fail to
satisfy its supply requirements. In the event that the Company terminates its business connection with the subcontractor, it will have to
compensate the subcontractor for certain inventory costs, as specified in the agreement with the subcontractor.
NOTE 12:- SHAREHOLDERS' EQUITY
a.
Company's shares:
As of December 31, 2015, the Company's authorized share capital consists of NIS 20,000,000 divided into 200,000,000 Ordinary
Shares, par value NIS 0.1 per share. Ordinary Shares confer on their holders the right to receive notice to participate and vote in general
meetings of the Company, the right to a share in the excess of assets upon liquidation of the Company, and the right to receive
dividends, if declared.
b.
Treasury stock:
In August 2015, the Company's Board of Directors authorized the repurchase of up to an aggregate of $ 15 million of the Company's
Ordinary shares in the open market, subject to normal trading restrictions. During 2015 the Company purchased 25,000 of its Ordinary
shares for a total consideration of $ 166,000. Total consideration for the purchase of these Ordinary shares was recorded as Treasury
stock, at cost, as part of shareholders' equity.
F - 33
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- SHAREHOLDERS' EQUITY (Cont.)
c.
Stock option plan:
A summary of the Company's stock option activity, pertaining to its option plans for employees and related information is as follows:
2015
Year ended December 31,
2014
2013
Number
of shares upon
exercise
Weighted
average
exercise price
Number
of shares upon
exercise
Weighted
average
exercise price
Number
of shares upon
exercise
Weighted
average
exercise price
Outstanding at beginning of year
Granted
Forfeited
Exercised
2,531,381 $
704,348 $
(320,496) $
(103,267) $
11.99
6.73
15.13
1.28
2,875,003 $
572,533 $
(562,787) $
(353,368) $
12.02
11.93
17.02
4.18
2,709,910 $
749,255 $
(254,290) $
(329,872) $
11.03
11.74
11.64
2.83
Outstanding at end of year
2,811,966 $
10.70
2,531,381 $
11.99
2,875,003 $
12.02
Exercisable at end of year
1,646,204 $
11.99
1,440,143 $
11.75
1,364,620 $
10.38
Vested and expected to vest
2,197,848 $
11.16
1,950,116 $
11.97
2,117,348 $
11.65
The aggregate intrinsic value represents the total intrinsic value (the difference between the Company's closing stock price on the last
trading day of the fiscal year 2015 and the exercise price, multiplied by the number of in-the-money options) that would have been
received by the option holders had all option holders exercised their options on December 31, 2015. This amount may change based on
the fair market value of the Company's stock. The total intrinsic value of options outstanding at December 31, 2015, was $ 1,580. The
total intrinsic value of exercisable options at December 31, 2015 was approximately $ 1,170. The total intrinsic value of options vested
and expected to vest at December 31, 2015 was approximately $ 1,363.
The total intrinsic value of options exercised during the year ended December 31, 2015 was approximately $ 469. The number of
options vested during the year ended December 31, 2015 was 300,466. The weighted-average remaining contractual life of the
outstanding options as of December 31, 2015 is 6.26 years. The weighted-average remaining contractual life of exercisable options as
of December 31, 2015 is 5.66 years.
F - 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- SHAREHOLDERS' EQUITY (Cont.)
ALLOT COMMUNICATIONS LTD.
The options outstanding as of December 31, 2015, have been classified by exercise price, as follows:
Exercise price
Shares upon exercise of
options outstanding as of
December 31, 2015
Weighted average
remaining contractual life
Years
Shares upon exercise of
options exercisable as of
December 31, 2015
$
$
$
$
$
23.31-27.58
15.20-17.07
10.16-14.68
5.25-9.25
0.03-4.95
161,176
404,229
997,927
892,063
356,571
2,811,966
5.56
5.57
7.47
5.89
4.92
143,345
373,760
578,824
237,348
312,927
1,646,204
The following provides a summary of the restricted stock unit activity for the Company for the two years ended December 31, 2015:
Outstanding at beginning of year
Granted
Vested
Forfeited
Year ended December 31,
2015
2014
Number
of shares
upon
exercise
Weighted
average
exercise
price
Number
of shares
upon
exercise
Weighted
average
exercise
price
445,264 $
158,551 $
(159,912) $
(84,499) $
12.43
8.52
11.22
12.57
14,208 $
561,873 $
(89,437) $
(41,380) $
13.57
12.96
14.68
15.13
Unvested at end of year
359,404 $
10.95
445,264 $
12.43
As of December 31, 2015, $ 5,339 and $ 3,312 unrecognized compensation cost related to stock options and RSUs respectively is
expected to be recognized over a weighted average vesting period of 2.13 years.
As of December 31, 2015, the Company holds outstanding options under the 2006 option plan. The outstanding options and RSUs are
exercisable to 2,811,966 and 359,404 Ordinary shares respectively.
F - 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- SHAREHOLDERS' EQUITY (Cont.)
ALLOT COMMUNICATIONS LTD.
Under the terms of the above option plan, options may be granted to employees, officers, directors and various service providers of the
Company and its subsidiaries. The options generally become exercisable quarterly over a four-year period, commencing one year after
date of the grant, subject to the continued employment of the employee. The options generally expire no later than ten years from the
date of the grant. The exercise price of the options at the date of grant under the plans may not be less than the nominal value of the
shares into which such options are exercised, any options, which are forfeited or cancelled before expiration, become available for
future grants. As of December 31, 2015, 319,507 Ordinary shares are available for future issuance under the option plans.
In 2015 and 2014, the Company granted 1,732 and 8,333 options, respectively, to employees with an exercise price of $ 0.03, which
was lower than the trading price of the Company's Ordinary Shares quoted on the NASDAQ Global Select Market on the date of the
grants.
In addition to granting stock options, the Company granted 158,551 and 561,873 RSUs in 2015 and 2014, respectively under the 2006
option plan. RSUs vest over a four year period subject to the continued employment of the employee. RSUs that are cancelled or
forfeited become available for future grants.
NOTE 13:- TAXES ON INCOME
a.
Corporate tax rates:
The Israeli corporate tax rate in 2014 and 2015 is 26.5% (2013 - 25%).
In August 2013, the Israeli Parliament issued the Law for Changing National Priorities (Legislative Amendments for Achieving Budget
Targets for 2013 and 2014), 2013 ("the Budget Law"), which consists, among others, of taxation of revaluation gains effective from
August 1, 2013 but contingent on the publication of regulations that define what should be considered as "retained earnings not subject
to corporate tax" and regulations that set forth provisions for avoiding double taxation of foreign assets. As of the date of approval of
these financial statements, no such regulations were issued.
a.
Foreign Exchange Regulations:
Commencing in taxable year 2013, the Company has elected to measure its taxable income and file its tax return under the Israeli
Income Foreign Tax Regulations. Under the Foreign Exchange Regulations, an Israeli company must calculate its tax liability in U.S.
Dollars according to certain orders. The tax liability, as calculated in U.S. Dollars is translated into NIS according to the exchange rate
as of December 31st of each year.
F - 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
c.
Tax benefits under Israel's law for the Encouragement of Capital Investments, 1959 ("the Law"):
ALLOT COMMUNICATIONS LTD.
In 1998, the production facilities of the Company related to its computational technologies were granted the status of an "Approved
Enterprise" under the Law. In 2004, expansion program was granted the status of "Approved Enterprise". According to the provisions
of the Law, the Company has elected the alternative track of benefits and has waived Government grants in return for tax benefits. The
period of tax benefits, detailed above, is limited to the earlier of 12 years from the commencement of production, or 14 years from the
approval date.
According to the provisions of the Law under the alternative track, the Company's income may be tax-exempt for a period of two years
commencing with the year it first earns taxable income, and subject to corporate taxes at the reduced rate of 10% to 25%, for an
additional period of five to eight years depending upon the level of foreign ownership of the Company.
The Law was significantly amended effective April 1, 2005 ("the Amendment"). The Amendment includes revisions to the criteria for
investments qualified to receive tax benefits as a Beneficiary Enterprise and among other things, simplifies the approval process. The
Amendment applies to new investment programs. Therefore, investment programs commencing after December 31, 2004, do not affect
the approved programs of the Company.
In addition, the Law provides that terms and benefits included in any letter of approval already granted will remain subject to the
provisions of the Law as they were on the date of such approval. Therefore, the Company's existing Approved Enterprise will generally
not be subject to the provisions of the Amendment. The Company elected 2006 and 2009 as "year of election" under the Amendment.
The entitlement to the above benefits is contingent upon the fulfillment of the conditions stipulated in the Law, regulations published
there under and the criteria set forth in the specific letters of approval. In the event of failure to comply with these conditions, the
benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest
and linked to changes in the Israeli CPI. As of December 31, 2015, management believes that the Company meets the aforementioned
conditions.
F - 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
ALLOT COMMUNICATIONS LTD.
If the Company pays a dividend out of exempt income derived from the Approved and Beneficiary Enterprise, it will be subject to
corporate tax in respect of the gross amount distributed, including any taxes thereon, at the rate which would have been applicable had
it not enjoyed the alternative benefits, generally 10%-25%, depending on the percentage of the Company's Ordinary shares held by
foreign shareholders. The dividend recipient is subject to withholding tax at the rate of 15% applicable to dividends from approved
enterprises, if the dividend is distributed during the tax exemption period or within twelve years thereafter. The Company currently has
no plans to distribute dividends and intends to retain future earnings to finance the development of its business. As of December 31,
2015, there are no profits earned by the Company Israel’s “Approved Enterprises” and “Beneficiary Enterprise”.
Income from sources other than the "Approved and Beneficiary Enterprise" during the benefit period will be subject to tax at the
regular corporate tax rate.
As of January 1, 2011 new legislation amending to the Investment Law came into effect (the "2011 Amendment"). The 2011
Amendment introduced a new status of "Preferred Company" and "Preferred Enterprise", replacing the existed status of "Beneficiary
Company" and "Beneficiary Enterprise". Similarly to "Beneficiary Company", a Preferred Company is an industrial company owning a
Preferred Enterprise which meets certain conditions (including a minimum threshold of 25% export). However, under this new
legislation the requirement for a minimum investment in productive assets was cancelled.
Under the 2011 Amendment, a uniform corporate tax rate will apply to all qualifying income of the Preferred Company, as opposed to
the former law, which was limited to income from the Approved Enterprises and Beneficiary Enterprise during the benefits period. The
uniform corporate tax rate was 7% in areas in Israel designated as Development Zone A and 12.5% elsewhere in Israel during 2013,
9% in development Zone A and 16% elsewhere in Israel, respectively, in 2014 and thereafter. The Company has not yet made an
election to qualify as a Preferred Enterprise and therefore the rules of the 2011 amendment is not yet applied to the Company. As the
Company operates outside of Zone A, once it will be elected it will be subject to the 16% tax rate.
A dividend distributed from income which is attributed to a Preferred Enterprise/Special Preferred Enterprise will be subject to
withholding tax at source at the following rates: (i) Israeli resident corporation – 0%, (ii) Israeli resident individual – 15% in 2013 and
20% as of 2014 and 2015 (iii) non-Israeli resident - 15% in 2013 and 20% as of 2014 and 2015 subject to a reduced tax rate under the
provisions of an applicable double tax treaty.
Under the transition provisions of the new legislation, the Company may decide to irrevocably implement the new law while waiving
benefits provided under the current law or to remain subject to the current law.
F - 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
ALLOT COMMUNICATIONS LTD.
e.
Tax benefits under the law for the Encouragement of Industry (Taxes), 1969 (the "Encouragement Law"):
The Encouragement Law, provides several tax benefits for industrial companies. An industrial company is defined as a company
resident in Israel, at least 90% of the income of which in a given tax year exclusive of income from specified Government loans, capital
gains, interest and dividends, is derived from an industrial enterprise owned by it. An industrial enterprise is defined as an enterprise
whose major activity in a given tax year is industrial production activity.
Management believes that the Company is currently qualified as an "industrial company" under the Encouragement Law and as such,
enjoys tax benefits, including: (1) deduction of purchase of know-how and patents and/or right to use a patent over an eight-year
period; (2) the right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli industrial
companies and an industrial holding company; (3) accelerated depreciation rates on equipment and buildings; and (4) expenses related
to a public offering on the Tel-Aviv Stock Exchange and on recognized stock markets outside of Israel, are deductible in equal amounts
over three years.
Eligibility for benefits under the Encouragement Law is not subject to receipt of prior approval from any governmental authority. No
assurance can be given that the Israeli tax authorities will agree that the Company qualifies, or, if the Company qualifies, then the
Company will continue to qualify as an industrial company or that the benefits described above will be available to the Company in the
future.
f.
Pre-tax income (loss) is comprised as follows:
Domestic
Foreign
F - 39
Year ended
December 31,
2014
2015
2013
$
(16,898) $
412
(3,792) $
1,345
(6,556)
219
$
(16,486) $
(2,447) $
(6,337)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
ALLOT COMMUNICATIONS LTD.
g.
A reconciliation of the theoretical tax expenses, assuming all income is taxed at the statutory tax rate applicable to the income of the
Company and the actual tax expenses is as follows:
Year ended
December 31,
2014
2015
2013
Loss before taxes on income
$
(16,486) $
(2,447) $
(6,337)
Theoretical tax expense computed at the Israeli statutory tax rate (26.5%, 26.5% and
25% for the years 2015, 2014 and 2013, respectively)
$
(4,369) $
(649) $
(1,584)
Changes in valuation allowance
Increase (decrease) in losses and temporary differences due to change in Israeli
corporate and “Approved Enterprise" tax
Write off of prepaid and withholding taxes
Foreign tax rates differences related to subsidiaries
Non-deductible expenses and other
Non-deductible share-based compensation expense
3,716
(1,328)
3,987
679
1,150
103
181
1,896
611
-
(34)
(381)
1,831
(3,650)
-
4
(227)
1,590
Actual tax expense
$
3,356 $
50 $
120
h.
Income tax expense is comprised as follows:
Current taxes
Deferred taxes (benefit)
Write off of prepaid and withholding taxes
F - 40
Year ended December 31,
2014
2015
2013
$
146 $
2,060
1,150
612 $
(562)
-
408
(288)
-
$
3,356 $
50 $
120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
i.
Net operating losses carry forward:
ALLOT COMMUNICATIONS LTD.
The Company has accumulated net operating losses for tax purposes as of December 31, 2015, in the amount of approximately
$ 39,900, which may be carried forward and offset against taxable income in the future for an indefinite period. In December 2014, the
Israeli Tax Authorities approved a final tax ruling with respect to the Company’s acquisition of Oversi. According to the ruling, the net
operating losses may be offset against taxable income annually with a limitation of up to 14% of the total accumulated losses but no
more than 50% of the Company's taxable income. As of December 31, 2015, the Company recorded a full valuation allowance with
respect to its deferred tax assets in Allot Communications Ltd. of $ 1,331 and wrote-off prepaid and withholding taxes of $ 1,150 as the
Company does not expect to utilize these tax assets in the near future. In addition, the Company has accumulated capital losses for tax
purposes as of December 31, 2015, of approximately $ 27,300, which may be carried forward and offset against taxable capital gains in
the future for an indefinite period, but are limited as stated above. Management currently believes that since the Company has a history
of losses, and uncertainty with respect to future taxable income, it is more likely than not that the deferred tax assets regarding the loss
carry forwards will not be utilized in the foreseeable future. Thus, a valuation allowance was provided to reduce deferred tax assets to
their realizable value.
The U.S. subsidiary has accumulated losses for U.S. federal income tax return purposes of approximately $ 4,075. The federal
accumulated losses for tax purposes expire between 2024 and 2033. The state accumulated losses for tax purposes begin to expire in
2014. An amount of $ 1,707 of the net operating loss carry-forwards relates to excess tax deductions from stock options.
Such losses are subject to limitations of Internal Revenue Code, Section 382, which in general provides that utilization of net operating
losses is subject to an annual limitation if an ownership change results from transactions increasing the ownership of certain
shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. The annual
limitations may result in the expiration of losses before utilization.
The European subsidiary is subject to French income taxes and has a net operating loss carry forward as of December 31, 2015 of
approximately $ 4,000, which may be carried forward and offset against taxable income in the future for an indefinite period.
The Spanish subsidiary is subject to Spanish income taxes and has a net operating loss carry forward as of December 31, 2015 of
approximately $ 750, which may be carried forward and offset against taxable income in the future for an indefinite period.
F - 41
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
j.
Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred income
taxes are as follows:
Deferred tax assets:
Operating and capital loss carryforwards
Reserves and allowances
Deferred tax asset before valuation allowance
Valuation allowance
Net deferred tax asset
Deferred tax liability
Net deferred tax asset
December 31,
2015
2014
$
14,842 $
948
13,103
1,183
15,790
(15,124)
666
14,286
(11,408)
2,878
$
(157)
509 $
(309)
2,569
k.
As of December 31, 2015 and 2014, the provision in respect of ASC 740-10 was $ 293 and $ 279, respectively. The accrued interest
and penalties related to the provision in income taxes is immaterial.
The Company conducts business globally and, as a result, the Company or one or more of its subsidiaries file income tax returns in the
U.S. federal jurisdiction and various states and foreign jurisdictions. In the normal course of business, the Company is subject to
examination by taxing authorities throughout the world, including such major jurisdictions as Israel, France, and the United States.
With a few exceptions, the Company is no longer subject to Israeli final tax assessment through the year 2011 and the European and
U.S. subsidiaries have final tax assessments through 2011.
NOTE 14:- GEOGRAPHIC INFORMATION
Allot operates in a single reportable segment. Revenues are based on the location of the Company's channel partners which are considered as
end customers, as well as direct customers of the Company:
Europe
Asia and Oceania
Americas (excluding the United States)
Middle East and Africa
United States
F - 42
Year ended
December 31,
2014
2015
2013
$
39,110 $
28,495
14,347
9,809
8,206
41,238 $
41,990
3,299
15,352
15,307
35,143
29,909
5,323
4,820
21,350
$
99,967 $
117,186 $
96,545
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- GEOGRAPHIC INFORMATION (Cont.)
The following are the Company’s major customers:
Customer A
Customer B
Customer C
The following presents total long-lived assets as of December 31, 2015 and 2014:
Long-lived assets:
Israel
United States
Other
NOTE 15:- FINANCIAL INCOME, NET
Financial income:
Interest income
Financial expenses:
ALLOT COMMUNICATIONS LTD.
Year ended
December 31,
2014
2013
2015
27%
10%
-
37%
27%
17%
-
44%
17%
17%
11%
45%
December 31,
2015
2014
$
4,924 $
109
156
5,603
181
173
$
5,189 $
5,957
Year ended
December 31,
2014
2015
2013
$
2,174 $
1,900 $
1,358
Exchange rate differences and other
Amortization/accretion of premium/discount on marketable securities, net
1,480
1,278
174
1,066
$
(584) $
660 $
F - 43
47
584
727
ALLOT COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net earnings (loss) per share:
Numerator:
Net loss
Year ended
December 31,
2014
2015
2013
$
(19,842) $
(2,497) $
(6,457)
Denominator:
Weighted average number of shares outstanding used in computing diluted net earnings per
share
33,419,917
33,143,168
32,680,766
Basic and diluted net loss per share
$
(0.59) $
(0.08) $
(0.20)
The following numbers of shares were excluded from the computation of diluted net less per ordinary share for the periods presented because
including them would have had an anti-dilutive effect:
Year ended
December 31,
2014
2015
2013
Ordinary shares
3,424,891
2,300,425
2,018,751
NOTE 17:- SUBSEQUENT EVENT
On January 4, 2016, the Israeli Parliament's Plenum approved by a second and third reading the Bill for Amending the Income Tax Ordinance
(No. 217) (Reduction of Corporate Tax Rate), 2015, which consists of the reduction of the corporate tax rate from 26.5% to 25%.
The deferred tax balances included in the financial statements as of December 31, 2015 are calculated according to the tax rates that were in
effect as of the reporting date and do not take into account the potential effects of the reduction in the tax rate. Said effects will be included in
the financial statements that will be issued starting from the date on which the new tax rate is substantially enacted, namely in the first quarter of
2016.
F - 44
Flextronics Manufacturing Services Agreement
Exhibit 5.1
This Manufacturing Services Agreement (“Agreement”) is entered into this as of July 19, 2007 by and between Allot Communications Ltd., having
its place of business at 22 Hanagar St., Hod Hasharon, Israel ("Customer") and Flextronics (Israel) Ltd., having its place of business at Migdal - Haemek,
P.O.B 867, Israel (“Flextronics”) (Customer and Flextronics shall be referred to hereinafter, each a “Party” and collectively the “Parties”).
Customer has created a market for Customer’s Products as defined in Exhibit A and is solely responsible for the sales and marketing of the Products.
Flextronics has developed processes and practices for manufacturing products for many different electronic applications and at Customer’s request desires to
manufacture the Products in accordance with Customer’s specifications all subject to the terms and conditions contained herein. Customer acknowledges that
Flextronics’s expertise is manufacturing and that Flextronics’s responsibility related to the Customer’s Products is limited to this extent, The Parties agree as
follows:
1. WORK, LICENSE, DEFINITIONS
1.1. Work. Flextronics agrees to perform the Work as defined in Section 1.3 herein pursuant to purchase orders or changes thereto issued by
Customer and accepted by Flextronics subject to and in accordance with the terms and conditions stipulated in this Agreement.
1.2. License. Flextronics is hereby granted by Customer a non-exclusive, non-transferable or assignable, revocable license limited for the term of
this Agreement to use Customer's patents, trade secrets and other intellectual property (hereinafter “Customer’s IP”) for the sole and exclusive purpose of
performing Flextronics’s obligations under this Agreement. Customer retains full ownership in Customer’s IP including to any development and/or
enhancement based on thereto, even if devised, created or developed by Flextronics (hereinafter “IP Enhancements”), and Customer’s IP shall not be
affected or limited in any manner whatsoever due to Flextronics’s right to use such Customer’s IP or IP Enhancements for the purpose of performing this
Agreement. For avoidance of doubt, the use by Customer of the IP Enhancement shall be free of charge royalty free and be not subject to any restriction
whatsoever. Customer’s IP and IP Enhancements shall remain Confidential Information as more fully described in Section 10.1. By providing Flextronics the
right to use Customer’s IP and IP Enhancements for the sole purpose of performing this Agreement, Customer does not grant any express or implied right to
Flextronics to or under any patents, copyrights, trademarks, or trade secret included in or related to Customer’s IP other than the limited right to use the same
as set forth above.
Flextronics shall use Customer’s IP and IP Enhancements only in a manner and form pre-approved by Customer or pursuant to this Agreement.
Flextronics will not misuse or divulge in any manner Customer’s IP and/or IP Enhancements, and will not, or knowingly allow any third parties to: (i) delete
or modify any Customer’s IP proprietary notices which appear on or in the Product(s) or its related documents including the Specifications; (ii) directly or
indirectly modify, change, alter or otherwise tamper the Specifications and/or the Product(s) and/or modify, adapt, translate or make derivative works based
on the Specifications and/or Product(s); (iii) sell, sublicense, rent, lease, disclose, distribute, publish, copy, transfer, use or otherwise make the Specifications
and/or Product(s) available to any third party other than Customer, or allow third parties other than Customer to use the Specifications and/or Product(s); and
(iv) copy the documentation related to the Products – all except as otherwise specifically provided for in this Agreement.
If at any time, Flextronics becomes aware of any breach of the provision of Section 1.2 above, it shall promptly notify Customer in writing. Upon
being aware of such breach, Flextronics shall promptly take steps to cure such breach to ensure that its use of Customer’s IP and/or IP Enhancements shall
comply with this Agreement. In the event a cure is not effected within 30 days period, then the license granted herein will automatically terminate until the
standards of use are restored and Flextronics receives written notice from Customer that it may resume said uses of Customer IP and/or IP Enhancements.
1.3. Definitions. Flextronics and Customer agree to the following definitions:
“Approved Vendor List”
or “AVL”
“Confidential
Information”
Shall mean a list of manufacturers currently approved by Customer to provide the Materials specified
in the bill of materials for the Product.
Shall mean any know-how, trade secrets, technical information, drawings, models, business
information (including information contained in any reports provided under this Agreement),
inventions, discoveries, methods, procedures, formulae, protocols, techniques, data, all whether
disclosed in oral, written, graphic, or electronic form and including the Specification, Customer’s IP
and IP Enhancements.
“Cost”
As it relates to Inventory and Special Inventory shall mean the cost represented on the bill of Materials.
“Customer”
Shall mean Allot Communications Ltd.
“Customer Controlled
Materials”
“Customer Controlled
Materials Terms”
Shall mean certain Materials provided by suppliers with whom Customer has a commercial contractual
or non contractual relationship, and which are included in the AVL.
Shall mean the terms and conditions that Customer has negotiated with its suppliers for the purchase of
Customer Controlled Materials.
“Disputes”
Shall have the meaning set forth in Section 11.11 below.
“Logistics Data”
“Economic
Inventory”
Shall mean material procurement policy such as: Lead Time, Long Lead time, Economic Order
Inventory, Minimum Order Quantity (MOQ), Order Multiple, Cancellation window and Order Period
all as defined in Exhibit B attached hereto or as mutually agreed in writing.
Order
Shall mean Materials purchased in quantities greater than the required amount for purchase orders, in
order to achieve price targets for such Materials.
“Flextronics”
Shall mean Flextronics (Israel) Ltd.
“Inventory”
Shall mean any Materials that are used to manufacture the Products based on the Logistics Data
pursuant to a purchase order from the Customer.
2
“Lead Time(s)”
Shall mean in Section 2.3 the lead time recorded on Flextronics’s MRP system at the time of
procurement of Inventory and Special Inventory or at the time of the cancellation of the purchase order
or termination of this Agreement.
“Long
Materials”
Lead
Time
Shall mean Materials with lead times exceeding the period covered by the accepted purchase orders for
the Product according to the Logistics Data or this Agreement.
“Materials”
Shall mean labor, components, materials and supplies that are used in the manufacturing, testing,
packaging and distribution of electronic products.
“Minimum
Quantity”
Order
Shall mean Materials purchased according to the Logistics Data in excess of requirements for purchase
orders because of minimum lot sizes available from manufacturers.
"Purchase
"purchase order/s"
Order/s"or
Purchase orders for Products issued by Customer in accordance with the terms hereof and accepted by
Flextronics
“Product”
Shall mean the Customer’s products described in Exhibit C.
“Special Inventory”
Shall mean any Long Lead Time Materials and/or Minimum Order Quantity and/or Economic Order
Inventory.
“Specifications”
“Work”
Shall mean the written specifications for each Product to be produced and provided by Customer,
which shall include bill of Materials (including AVL), designs, schematics, assembly drawings, process
documentation, test specifications, current revision number and any additional information reasonably
requested by Flextronics or otherwise required hereunder.
Shall mean the manufacturing and delivery of the Products to Customer in accordance with and subject
to the terms of this Agreement including: labor, the procurement of Inventory and Special Inventory,
allocation of the required manpower, implementation of planning and control of the manufacturing
process, execution of the integrating processes, assembling, testing, and packing of the Products, all of
the foregoing pursuant to detailed written Specifications for each such Product which are attached to
this Agreement and the delivering of such Products in accordance with Customer’s Purchase Orders
issued in accordance with the terms hereof.
“Reports and Metrics”
Shall mean Customer reports and metrics that are defined by Customer and attached to this Agreement
or otherwise mutually agreed by the parties in writing and will be provided by Flextronics on a
periodical basis.
3
2. FORECASTS, ORDERS, MATERIALS PROCUREMENT
2.1. Forecast. Customer shall provide Flextronics, on a monthly basis, a rolling six (6) months non-binding forecast indicating Customer’s
Product requirements on a monthly basis.
2.2. Purchase Orders. Customer will issue written electronic or fax transmitted purchase orders once per calendar month which specify all
Products to be delivered within a minimum four (4) month period commencing on the date of acceptance of the purchase order. Each purchase order shall
reference this Agreement and the applicable written Specifications as described in Section 1.3. Flextronics shall accept or reject each purchase order
according to its terms (including the delivery date) within five (5) working days of receipt of such order. If a purchase order has not been confirmed within
such period it shall be deemed rejected.
Customer may use its standard purchase order form to release items, quantities, prices, schedules, change notices, specifications, or other notices,
subject to and in accordance with the terms and conditions provided for hereunder. Notwithstanding the foregoing, the Parties agree that the terms and
conditions contained in this Agreement shall be the sole and exclusive terms and conditions related to the Work performed under this Agreement, unless
Flextronics has explicitly agreed otherwise in writing in each instance by an authorized signatory.
2.3. Materials Procurement. Customer's accepted purchase orders will constitute authorization for Flextronics to procure Inventory and Special
Inventory in compliance with the Logistics Data in order to manufacture the Products covered by such purchase orders.
Logistics Data will be reviewed and approved by Customer once per quarter prior to recording on Flextronics’s MRP system. Customer will either
approve or ask to amend (if necessary) Logistics Data within ten (10) days from receipt of data from Flextronics based on changes in manufacturers’ items
commercial terms in the market (i.e., lead time, prices, etc.). If Customer has not requested amendment within said period the Logistics Data shall be deemed
approved.
Flextronics may purchase, subject to Customer prior written approval, Long Lead-Time Materials sufficient to meet all deliveries under the purchase
orders and Product forecast in effect at the time the order with the supplier is placed, and may reasonably purchase Minimum Order Quantity even if greater
than the amount necessary to meet purchase orders and Product forecast. Flextronics shall purchase Economic Order Inventory only subject to the prior
written approval of Customer.
Flextronics agrees to use reasonable commercial actions in order to reduce the cost of the Materials procured, and of the performance of the Work.
2.4. Preferred Supplier. Simultaneously with the execution of this Agreement Customer shall provide Flextronics and maintain an Approved
Vendor List (“Vendors”). Flextronics shall purchase from Vendors on a current AVL the Materials required to manufacture the Product. Customer shall allow
Flextronics to suggest alternative vendors to be included on AVL’s for Materials. Any such alternative vendor will be included in the AVL only if Customer’s
prior written approval was provided to Flextronics regarding such vendor.
4
3. SHIPMENTS, SCHEDULE CHANGE, CANCELLATION, STORAGE
3.1. Delivering and Shipments. Flextronics undertakes that all shipments to Customer will be made on the required delivery dates set forth in
the related accepted purchase order and such shipments will contain the correct quantities ordered by Customer in the applicable Purchase Order. Provided,
however, that Flextronics may reschedule a shipment to the extent the delay results from circumstances which are beyond its reasonable commercial control
or such delay has been required, and/or consented by Customer. All Products delivered pursuant to the terms of this Agreement shall be suitably packed for
shipment in accordance with Customer's Specifications and marked for shipment to Customer's destination specified in the applicable purchase order.
Shipment terms will be to Customer’s facilities (including to any facility designated by Customer) in Israel, provided, however, that upon prior reasonable
written notice, Customer, at its option, may collect shipments from Flextronics’ facility. Risk of loss and title to Product(s) will pass to Customer upon
delivery to the above destinations as applicable. Any special packing expenses not included in the original price quotation for the Products, will be paid by
Customer provided that Flextronics notifies customer in writing and in advance of such expense.
3.2. Quantity Increases and Shipment Schedule Changes.
For any accepted purchase order, Customer may without incurring any additional costs (i) increase the quantity of Products or (ii) reschedule
the quantity of Products and/or their shipment date, both as provided in the table below. With respect to any increase in the quantity of Products, (1)
Flextronics will be obligated to fulfill such increase as provided in the table below and (2) to the extent that such increase exceeds the allowable quantity
increase provided in the table below, Flextronics will use reasonable commercial efforts to fulfill such excess increase.
Maximum Allowable Variance From Accepted Purchase Order Quantities/Shipment
Dates
# of days before
Shipment Date
on Purchase Order
0-14
15-30
31-60
61-90
91-120
Allowable
Quantity
Increases
0%
10%
20%
40%
50%
Maximum
Reschedule
Quantity
0%
10%
30%
60%
80%
Maximum
Reschedule
Period
0
30 days
30 days
30 days
60 days
Any purchase order quantities increased or rescheduled pursuant to this subsection (a) may not be subsequently increased or rescheduled. Allowable quantity
increases are subject to Materials’ availability. Flextronics will use reasonable commercial efforts to meet quantity increases.
Except as set forth herein above, all changes in quantity or shipment date require Flextronics’s prior written approval which will not be unreasonably
withheld. If Customer wishes to reschedule in a manner not consistent with this Agreement (including rescheduling beyond the limitations as per the table
above, whether or not consented by Flextronics) , then Customer will issue an advance payment in the amount equal to the consideration under this
Agreement due for the Excess Inventory (as defined below). However, any amount paid to Flextronics as an advance payment against Excess Inventory as
detailed above, will be deducted from payment due to Flextronics for any future purchase(s) made by Customer under this Agreement of Products that include
the same Inventory and/or Special Inventory, such deduction to be made in the amounts already paid under the pre-payment for the same items.
5
In addition, if Flextronics notifies Customer that such Inventory and/or Special Inventory has remained in Flextronics’s possession for more than
ninety (90) days since the reschedule request, then Customer agrees to immediately purchase such Inventory and/or Special Inventory from Flextronics upon
receipt of the notice and to pay Flextronics for such Inventory, and Special Inventory as follows: (a) 105% of the Cost of all Inventory and Special Inventory
in Flextronics’s possession which is not returnable without charge (unless the charge was approved by Customer as set forth in section (b) below) to the
vendor or usable for other customers whether in raw form or work in process as determined in Flextronics’ sole discretion, and of all Inventory and Special
Inventory on order and not cancelable without charge (unless the charge was approved by Customer), (b) any vendor cancellation charges actually incurred or
payable with respect to Inventory and/or Special Inventory accepted for cancellation or return to the vendor provided such cancellation charges were
approved in writing in advance by Customer.
If Flextronics agrees to accept a reschedule or increase in excess of the flexibility table in subsection (a) and if there are extra costs to meet such
reschedule or increase, Flextronics will inform Customer of such extra costs and will obtain from Customer its written approval of paying said extra costs.
Customer shall not be liable for any additional costs incurred by Flextronics as set above, if such costs were not approved by Customer as set herein.
Prior to invoicing Customer for the amounts due pursuant to this Section, Flextronics will use its reasonable commercial efforts to return unused
Inventory and Special Inventory and to cancel pending orders for such inventory, and to dispose of it either through integration in other products, or in any
other reasonably commercial possible manner, in order to mitigate the amounts payable by Customer. Customer shall pay all amounts due under this Section
within thirty (30) days from the end of the calendar month on which Flextronics issued an invoice. Flextronics will ship the Inventory and Special Inventory
paid for by Customer under this section to Customer or as instructed by Customer in writing, but in any event in Israel, promptly upon said payment by
Customer. Risk of loss and title to that Inventory and Special Inventory will pass to Customer upon delivery to one of the above destinations. In the event
Customer does not pay within above payment terms, and without derogating from Flextronics’s remedies under law, Flextronics will be entitled to dispose of
such Inventory and Special Inventory in a commercially reasonable manner, including with respect to price and to credit Customer for any monies received
from third parties in consideration of the sale of aforesaid Inventory and/or Special Inventory. If the consideration received shall be less than the amounts due
to Flextronics, Flextronics shall submit an invoice for the balance amount due and Customer agrees to pay said amount within thirty (30) days from the end of
the calendar month on which such invoice was issued.
“Excess Inventory” shall be defined as inventory and non canceled open purchase order issued by Flextronics for Materials that do not have demand for the
following three (3) months due to a change in Purchase Orders or forecast, or obsolescence. “Quarter” shall be defined as calendar quarter. Excess Inventory
shall be calculated at the end of each Quarter. Customer shall issue an advance payment against the future purchase of Products equal to the Cost of Excess
Inventory at the end of each Quarter. Reconciliation shall be made with respect to the residual balance of prior advance payments and the new Excess
Inventory value.
6
3.3. Cancellation of Orders and Customer Responsibility for Inventory. Customer may cancel any portion of the Product quantity of an
accepted purchase order at any time, provided that it will thereupon pay Flextronics for Products, Inventory, and Special Inventory affected by the
cancellation as follows: (i) 100% of the current price for all finished Products in Flextronics’s possession; (ii) 105% of the Cost of all Inventory and Special
Inventory in Flextronics’s possession and not returnable without charge (unless the charge was approved by Customer) to the vendor or usable for other
customers at Flextronics sole discretion, whether in raw form or work in process; (iii) 105% of the Cost of all Inventory and Special Inventory on order and
not cancelable without charge (unless the charge was approved by Customer) or usable for other customers at Flextronics sole discretion; (iv) any vendor
cancellation charges incurred with respect to Inventory and Special Inventory accepted for cancellation or return by the vendor provided such cancellation
charges were approved in writing in advance by Customer and (v) Expenses incurred by Flextronics related to labor costs and equipment specifically put in
place to support Customer’s purchase orders, where such expenses, were pre-approved in writing by Customer. Without derogating from the aforesaid,
Flextronics will use reasonable commercial efforts to reduce the cost borne by Customer as a result of the purchase order’s cancellation.
3.4. Customer Responsibility for Ordered Product; Storage of Ordered Product.
In the event Customer does not arrange for the prompt pickup of Products ordered and inspected by it under this Agreement within 14 days after
being informed by Flextronics that such Products are ready for pickup in accordance with Customer’s purchase order, then Customer hereby authorizes
Flextronics to transfer such Products to a warehouse operated by Flextronics or a third party as instructed by Customer. Upon completing a transfer of said
Product(s) to a third party warehouse, Flextronics will notify Customer regarding said transfer. Such transfer shall be considered a delivery and sale to
Customer for all purposes of this Agreement, and title and risk of loss for such Products shall thereupon transfer from Flextronics to Customer. In accordance
with the terms of this Agreement, Flextronics shall be entitled to invoice Customer for (i) such sale (Products) (ii) in the event Product(s) are stored at
Flextronics facilities storage and handling charges equal to one half of one percent (0.50%) of the contract price of the Products per month, or any portion
thereof, that the Products are stored for Customer. Such storage and handling fee shall cover the expense of storage, security, and transporting the Products to
and from such site. During the time that the Products are stored at Flextronics facilities pursuant to this section hereof, Customer shall have the right, upon
prior reasonable written notice, to inspect the Products for the purposes of this Agreement. Customer may, at any given time, transfer by itself the Product(s)
to any other facility or upon Customer’s request, Flextronics shall ship the Products to Customer under the terms of this Agreement at Customer's expense.
3.5. Audit and Access
(i) Flextronics shall provide Customer periodical reports in the format agreed by Parties, which shall be submitted each quarter. Customer may
request other reports pertaining to the Work and Flextronics will provide such reports, to the extent commercially reasonable.
7
(ii) Customer shall have the right, at its expense, to conduct audits of the manufacturing services and related facilities, for the purpose of
auditing Flextronics’s compliance with the manufacturing provisions of this Agreements, as follows: The audits may include, only the equipment designated
for the manufacturing process, the facility at Flextronics's premises, finished goods warehouse, the inventory designated for the Work and Product(s) and any
technical records (manufacturing specifications, production files and quality documentation). All audits shall be performed within Flextronics’ facility. No
documents or data of any kind, or any copies, may be removed from Flextronics’ facility. Customer will conduct the audits in a reasonable manner so as not
to cause undue disruption to Flextronics’ Work. Audits shall be conducted during business hours, and shall be coordinated with Flextronics at least 72 hours
in advance. In the course of such audits and at Customer sole expense Flextronics shall provide, and shall inform its subcontractors to provide, such auditors
any reasonable assistance that they may require in accordance with the aforesaid.
(iii) If, as a result of an audit, it is thought that Flextronics has undercharged or overcharged Customer, Customer shall notify Flextronics in
writing of the amount of such undercharge or overcharge, and shall specify the relevant data and the reasoning for its determination, The Parties will conduct
in good faith discussion in order to reach an agreement regarding said undercharged or overcharged amounts.
4. ENGINEERING CHANGES
Customer may request, in writing, that Flextronics incorporate engineering changes into the Product. Such request will include a description of the
proposed engineering changes sufficient to permit Flextronics to accurately evaluate its feasibility and cost. Flextronics shall respond to Customer’s request in
writing, within 3 working days of notification and shall state the costs and time of implementation and the impact on the delivery schedule and pricing of the
Product. Flextronics will not proceed with the engineering changes until the Parties have agreed upon the changes to the Product’s Specifications, delivery
schedule and Product pricing and the Customer has issued a purchase order for the implementation costs to be borne by the Customer and the Cost of
Inventory and Special Inventory on-hand and on-order that becomes obsolete in connection therewith (it being clarified that if Products, Inventory and
Special Inventory are cancelled as affected by the ECO then such Products, Inventory and Special Inventory will be invoiced and paid as per Section 3.3).
5. TOOLING, NON-RECURRING EXPENSES, SOFTWARE
Flextronics shall provide tooling that is not Product-specific at its expense. Customer shall pay for or obtain and deliver to Flextronics any Product-
specific tooling and other reasonably necessary non-recurring expenses, to be set forth in Flextronics’s quotation, such specific product or tooling shall remain
Customer’s sole and exclusive property (“Customer Tooling”). All Customer Tooling that Customer provides to Flextronics is and shall remain the sole
property of Customer. Customer grants Flextronics a non exclusive, non transferable, non assignable license to use Customer Tooling: (i) only for the
purposes required to perform Flextronics’ obligations under this Agreement; (ii) subject to the terms and conditions set forth in section 1.2 above; (iii)
provided Flextronics will not by itself or knowingly allow any third parties to (1) access, delete, modify, alter, or change software incorporated in Customer
Tooling, or make inoperable authorization keys or license control utilities, or decompile or perform reverse engineering of such software, or modify, adapt,
translate or make derivative works based on such software or the documentation related thereto; (2) sell, sublicense, rent, lease or otherwise commercialize,
disclose, distribute, publish, copy, transfer or otherwise make such software available to any party other than Customer, or allow third parties other than
Customer to use such software; and (iv) provided Flextronics will not transfer the license granted under this section to any third party, all except as otherwise
required for the purposes of this Agreement but subject to Customer’s prior written approval. All software developed by Flextronics (excluding any software
which is a work for hire product pursuant to this Agreement) to support the process tooling or otherwise shall be and remain the property of Flextronics.
8
6. EXPRESS LIMITED WARRANTIES
Flextronics warrants that for a period of thirteen (13) months from the date of shipment the Products will (a) be manufactured in accordance with Customer's
applicable Specifications and will be free from defects in workmanship, (b) consist of new materials (not used, recycled, except as may be approved in
advance by Customer, (c) be delivered to Customer free and clear of any third party right. Materials are warranted to the same extent that the original
manufacturer warrants the Materials and Flextronics passes such warranties through to Customer. This express limited warranty does not apply to (a)
Materials consigned or supplied by Customer to Flextronics; (b) defects resulting from Customer's Specifications or the design of the Products; and (c)
Product that has been abused, damaged, altered or misused by any person or entity after title passes to Customer. With respect to first articles, prototypes,
pre-production units, test units or other similar Products, Flextronics makes no representations or warranties whatsoever. Notwithstanding anything else in
this Agreement or otherwise, Flextronics assumes no liability for or obligation related to the performance, accuracy, Specifications, failure to meet
Specifications or defects of or due to tooling, designs or instructions produced or supplied by Customer. Upon any failure of a Product to comply with the
above warranty, Flextronics’ sole obligation, and Customer's sole remedy, is for Flextronics, at its option, to promptly repair or replace such unit and return it
to Customer freight prepaid. Customer shall return Products covered by the warranty freight prepaid after completing a failure report and obtaining a return
material authorization number from Flextronics to be displayed on the shipping container. Customer shall bear all of the risk, and all costs and expenses,
associated with Products that have been returned to Flextronics for which there is no defect found. Customer will provide its own warranties directly to any
of its end users or other third parties. Customer will not pass through to end users or other third parties the warranties made by Flextronics under this
Agreement. Furthermore, Customer will not make any representations to end users or other third parties on behalf of Flextronics, and Customer will
expressly indicate that the end users and third parties must look solely to Customer in connection with any problems, warranty claim or other matters
concerning the Product.
EXCEPT AS SPECIFICALLY SET FORTH HEREIN, FLEXTRONICS MAKES NO OTHER WARRANTIES OR CONDITIONS ON THE
PRODUCTS, EXPRESS, IMPLIED, STATUTORY, OR IN ANY OTHER PROVISION OF THIS AGREEMENT OR COMMUNICATION WITH
CUSTOMER, AND FLEXTRONICS SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OR CONDITION OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE.
7. PAYMENT TERMS, ADDITIONAL COSTS AND PRICE CHANGES
7.1. Price and Payment Terms. The price for Products to be manufactured will be agreed by the parties and will be indicated on the purchase
orders issued by Customer and accepted by Flextronics. The initial price shall be as set forth on the Price List attached hereto and incorporated herein as
Exhibit D. The initial price for Products should be reviewed on a quarterly basis by the Parties. Any changes and timing of changes shall be agreed upon in
writing by the Parties. All prices quoted are exclusive of VAT and customs taxes and same shall be born by Customer. Any other tax, cost or levy will be born
by each Party according to applicable law. Payment for any Products, services or other costs to be paid by Customer, expect as specified in Sections 3.2 and
3.3 hereinabove shall be due thirty (30) days from the end of the calendar month on which invoice is issued. Customer agrees to pay one percent (1%)
monthly interest on all late payments (Including all payments set forth in Sections 3.3 and 3.2).
9
7.2. Standard Cost. The Parties shall apply the following process for setting Standard Costs. “Standard Cost” shall be defined as the cost for
components and materials based on supplier selling prices as mutually agreed between the Parties. Standard Costs shall be set for all Materials on a Quarterly
basis. Standard Costs shall be fixed for each Quarter and shall be adjusted in each subsequent Quarter.
Flextronics shall propose updated Standard Costs to Customer in the first week of the last month of each Quarter which will be calculated as an average of
actual open purchase orders with suppliers for the subsequent forty-five (45)-day period and be applied to the subsequent Quarter. Standard Costs for each
Quarter shall be mutually agreed between the Parties during the second week of the last month in the Quarter. Product pricing for the next Quarter shall be
based on the new Standard Costs and shall become effective on the first day of the Quarter.
In cases where the actual purchase price of any Material exceeds the Standard Cost by more than US$150 during the Quarter, Flextronics shall contact
Customer for written approval prior to the purchase of any such Material. Customer shall respond to such purchase price variance (PPV) requests within two
(2) business days. Customer shall be deemed to have given its approval unless it delivers Flextronics a clear written advise to the contrary within said period.
Flextronics is hereby granted a waiver from requesting written approval if the variant per order line is less than US$150.
7.3. Purchase Price Variance Reconciliation and Inventory Revaluation.
Adverse PPV is the responsibility of Customer on these standards.
There are two types of requests Flextronics can ask for regarding price change: Temporary price change / fixed price change.
Temporary price change could be asked for reasons like rescheduling delivery date, temporary allocation or other reasons, in such cases where Customer
approved the change, the Standard Cost will remain the same for the next Quarter and Flextronics will debit Customer's account for the difference in price
which will be paid within thirty (30) days from the end of the calendar month on which an invoice therefore was issued.
Fixed price change could be asked for reasons like allocation market price change or other reasons, in such cases where Customer approved the change, the
Standard Cost will be changed in the next Quarter and Flextronics will debit Customer's account for the difference in price at the end of the Quarter. The
amount will be calculated as the quantity of parts consumed in last Quarter that were purchased in increased price times the difference between the old price
and the new price.
An example for temporary price change/fixed price change is attached hereto as Exhibit E.
7.4. WIP & Finished Goods.
At the end of each Quarter after the new Standard Cost of each part was determined, a new price for the Product will be calculated by Flextronics and
presented to Customer. Those prices will take effect on the first day of the following Quarter.
10
7.5. Additional Costs. Customer is responsible for (a) any and all expediting charges reasonably necessary because of a change in Customer's
requirements which charges are preapproved, (b) any overtime charges based on manpower tariffs approved in advance by Customer, incurred as a result of
delays in the normal production or interruption in the workflow process caused by Customer’s change in the Specifications.
8. TERM AND TERMINATION
8.1. Term. The term of this Agreement shall commence on the date hereof and shall continue for one (1) year thereafter (hereinafter “the initial
term”) unless terminated as provided in Section 8.2 or 9 After the expiration of the initial term (unless this Agreement has been terminated earlier), this
Agreement shall be automatically renewed for separate but successive one year terms.
8.2. Termination. This Agreement may be terminated by (a) Flextronics for any reason subject to one hundred and eighty (180) days prior
written notice to the Customer; (b) Customer for any reason subject to ninety (90) days prior written notice to Flextronics; (c) by either Party if the other party
defaults in the performance of any material terms or conditions of this Agreement (including any delivery or payment obligation) and such default continues
unremedied for a period of thirty (30) days after the delivery of written notice thereof by the terminating Party to the other Party; (d) as specifically provided
in this Agreement, or (e) by either Party upon the other Party seeking an order for relief under the bankruptcy laws of the State of Israel or similar laws of any
other jurisdiction, a composition with or assignment for the benefit of creditors, or dissolution or liquidation proceedings are initiated by or against the other
party and not withdrawn within 90 days or an attachment or similar encumbrance is levied over a substantial part of the other party’s assets and is not
removed within 90 days. Expiration or termination of this Agreement under any of the foregoing provisions shall not affect (i) the amounts due under this
Agreement by either Party that exist on the date of expiration or termination, and as of such date onwards the provisions of Sections 3.2, 3.3, and 3.4 shall
apply with respect to payment and shipment to Customer of finished Products, Inventory, and Special Inventory in existence as of such date. For the sake of
clarity: upon termination, Flextronics will cease all Work and Customer shall thereupon pay to Flextronics all amounts stated in Section 7.1 for all completed
Products and as provided in Section 3.3 for any and all semi-finished products, Inventory, Special Inventory and Excess Inventory; (ii) any obligation due by
Flextronics for the delivery and warranty of any Product(s) ordered prior to termination of this Agreement even if delivery date and/or warranty period related
to said Product(s) is due after the Experation or Termination date. Notwithstanding termination or expiration of this Agreement, Sections 3, 6, 7.1, 8, 9 and 10
shall survive said termination or expiration, and (iii) Flextronics will return to Customer any property of Customer, including, but not limited to,
demonstration equipment, Customer Tooling, Specifications, product and technical documentation, schematics, and all Confidential Information.
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9. LIABILITY, LIMITATION
9.1. Patents, Copyrights, Trade Secrets, Other Proprietary Rights. Customer shall defend and indemnify Flextronics from all claims,
liabilities, costs, damages, judgments and reasonable attorney's fees (collectively, “Losses”) resulting from or arising out of any infringement or other
violation of any patents, patent rights, trademarks, trademark rights, trade names, trade name rights, copyrights, trade secrets, proprietary rights and processes
or other such rights related to the Product or claims relating to Customer’s instructions, tooling, specifications and designs (“Claims”) provided that: (i)
Flextronics will provide the Customer with prompt written notice of any Claim no later than 3 business days following receipt of notice by Flextronics; (ii)
Flextronics will grant Customer sole control of the defense and settlement of Claims subject to any reasonable request of Flextronics and (iii) Flextronics will
provide Customer with reasonable assistance, at Customer’s sole expense. Customer assumes no liability for any Claims made by any third party to the extent
that such Claims result from the use of specifications other than the Specification, unaltered by Flextronics or anyone on its behalf. Customer may at its sole
option either: (1) procure for Flextronics the right to continue to perform this Agreement; (2) modify the Specification so that there will no longer be an
infringement or misappropriation or (3) terminate this Agreement and pay Flextronics the consideration due under this Agreement for the Work performed
until the date of termination, including all payments set forth in Section 3.3. Provided, with respect to Losses (excluding costs and reasonable attorney's fees)
indemnity under this Section 9.1 will be available subject to judgment by a court, arbitrator or mediator or any other out of court settlement.
9.2. Flextronics shall defend and indemnify Customer from all Losses resulting from or arising out of any infringement or other violation of any
patents, patent rights, trademarks, trademark rights, trade names, trade name rights, copyrights, trade secrets, proprietary rights and processes or other such
rights as a result of the Work (including but not limited to manufacturing methods employed by Flextronics but excluding Claims as defined above)
(“Manufacturing Claims”) provided that: (i) Customer will provide Flextronics with prompt written notice of any Manufacturing Claim no later than 3
business days following receipt of notice by Customer; (ii) Customer will grant Flextronics sole control of the defense and settlement of Manufacturing
Claims subject to any reasonable request of Customer and (iii) Customer will provide Flextronics with reasonable assistance, at Flextronics's sole
expense. Flextronics may at its sole option either: (1) procure for Customer the right to continue to perform this Agreement; (2) modify its manufacturing
methods so that there will no longer be an infringement or misappropriation or (3) terminate this Agreement and Section 8.2 shall apply. Provided, with
respect to Losses (excluding costsand reasonable attorney’s fees) indemnity under this Section 9.2 will be available subject to judgment by a court, arbitrator
or mediator or any other out of court settlement.
9.3. THE FOREGOING STATES THE ENTIRE LIABILITY OF THE PARTIES TO EACH OTHER CONCERNING
INFRINGEMENT OF PATENT, COPYRIGHT, TRADE SECRET OR OTHER INTELLECTUAL PROPERTY RIGHTS.
9.4. No Other Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INCIDENTAL,
CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES OF ANY KIND OR NATURE ARISING OUT OF THIS AGREEMENT OR THE
SALE OF PRODUCTS, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT, TORT (INCLUDING THE
POSSIBILITY OF NEGLIGENCE OR STRICT LIABILITY), OR OTHERWISE, EVEN IF THE PARTY HAS BEEN WARNED OF THE
POSSIBILITY OF ANY SUCH LOSS OR DAMAGE, AND EVEN IF ANY OF THE LIMITED REMEDIES IN THIS AGREEMENT FAIL OF
THEIR ESSENTIAL PURPOSE.
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10. CONFIDENTIALITY
10.1. Non-Disclosure of Confidential Information. Except to the extent expressly authorized by this Agreement or otherwise agreed in writing
by the Parties, each Party agrees that, during the term of this Agreement and for five (5) years thereafter, it shall keep confidential and shall not publish or
otherwise disclose and shall not use for any purpose other than as provided for in this Agreement, all Confidential Information furnished to it by the other
Party pursuant to this Agreement unless the receiving party can demonstrate that such Confidential Information: (a) was already known to the receiving Party,
other than under an obligation of confidentiality, at the time of disclosure by the other Party; (b) was generally available to the public or otherwise part of the
public domain at the time of its disclosure to the receiving Party; (c) became generally available to the public or otherwise part of the public domain after its
disclosure and other than through any act or omission of the receiving Party in breach of this Agreement; (d) was disclosed to the receiving Party by a third
party without obligations of confidentiality with respect thereto; or (e) was independently discovered or developed by the receiving Party without the use of or
access to Confidential Information belonging to the disclosing Party by persons who had no knowledge of or access to Confidential Information.
10.2. Authorized Disclosures. Each Party may disclose Confidential Information belonging to the other Party to the extent such disclosure is
reasonably necessary in the following situations: (a) for the purpose of complying with applicable law, including without limitation the rules and regulations
of the Securities and Exchange Commission or other relevant securities authority; (b) prosecuting or defending litigation; and (c) complying with applicable
governmental regulations, provided, however, that the receiving Party gives the disclosing Party prompt notice thereof so that the disclosing Party may seek a
protective order or other appropriate remedy, and further provided, that in the event that such protective order or other remedy is not obtained, the receiving
Party shall furnish only that portion of the Confidential Information which is legally required, and shall exercise all efforts required to obtain confidential
treatment for such information. Notwithstanding the foregoing, in the event a Party is required to make a disclosure of the other Party’s Confidential
Information pursuant to this sub-sections (a) or (b), it will, except where impracticable, give reasonable advance notice to the other Party of such disclosure.
10.3. Employees; Agents. The receiving Party undertakes to disclose the Confidential Information only to those of its employees who have to be
so informed in order to ensure its proper evaluation, and provided, that such employees are bound by written confidentiality and non-use undertakings
towards the receiving Party which also apply to the Confidential Information disclosed to the receiving Party under this Agreement. The receiving Party will
be responsible for ensuring that the obligations of confidentiality and non-use contained herein are observed by all such employees, and it represents that it
has instituted policies and procedures which provide such adequate protection for the Confidential Information. The receiving Party shall bear full
responsibility for any harm caused to the disclosing Party by disclosure to said employees.
11. MISCELLANEOUS
11.1. Entire Agreement. This Agreement constitutes the entire agreement between the Parties with respect to the transactions contemplated
hereby and supersedes all prior agreements and understandings between the Parties relating to such transactions. In all respects, this Agreement shall govern
and supersedes any other documents related to the Work contemplated herein including, without limitation, preprinted terms and conditions on Customer’s
purchase orders and these shall be of no force and effect.
13
11.2. Amendments, Schedules and Appendices. This Agreement may be amended only by written consent of both parties. Each Schedule and
Appendix hereto is incorporated herein by this reference. The parties may amend any Schedule and Appendix from time to time by entering into a separate
written agreement, referencing such Schedule and Appendix and specifying the amendment thereto, signed by an authorized representative of each of the
parties.
11.3. Independent Contractor. Neither party shall, for any purpose, be deemed to be an agent of the other party and the relationship between the
parties shall only be that of independent contractors. Neither party shall have any right or authority to assume or create any obligations or to make any
representations or warranties on behalf of any other party, whether express or implied, or to bind the other party in any respect whatsoever.
11.4. Insurance. Flextronics and Customer agree to maintain appropriate insurance to cover their respective risks under this Agreement with
coverage amounts commensurate with levels in their respective markets. Customer specifically agrees to maintain insurance coverage for any finished
Products or Materials the title and risk of loss of which passes to Customer pursuant to this Agreement and which is stored on the premises of Flextronics.
11.5. Force Majeure. In the event that either party is prevented from performing or is unable to perform any of its obligations under this
Agreement (other than a payment obligation) due to any Act of God, fire, casualty, flood, earthquake, war, strike, lockout, epidemic, destruction of production
facilities, riot, insurrection, or any other cause unknown to the Parties at the execution of this Agreement which is beyond the reasonable control of the party
invoking this section, and if such party shall have used its commercially reasonable efforts to mitigate its effects, inter alia as part of DRP (Disaster Recovery
Plan) program, such Party shall give prompt written notice to the other Party regarding the circumstances surrounding such preventing event, its performance
shall be excused, and the time for the performance shall be extended for the period of delay or inability to perform due to such occurrences. Regardless of the
excuse of Force Majeure, if such Party is not able to perform within ninety (90) days after such event, the other Party may terminate the Agreement.
Notwithstanding anything to the contrary herein or otherwise, neither party may rely on the aforesaid provisions or on any force majeure circumstance
applicable by law as an excuse for non-payment.
11.6. Successors, Assignment. This Agreements shall be binding upon and inure to the benefit of the Parties hereto and their respective
successors, assigns and legal representatives. Neither Party shall have the right to assign or otherwise transfer its rights or obligations under this Agreement
except with the prior written consent of the other party, not to be unreasonably withheld. Notwithstanding the foregoing, Customer shall be entitled to transfer
and/or assign this Agreement to any company controlling Customer (directly or indirectly), controlled by Customer or any affiliate of of Customer, subject to
a 30 days prior written notification to Flextronics and provided that in such event Flextronics shall be entitled to assign this Agreement to Flextronics Inc.
11.7. Notices. All notices required or permitted under this Agreement will be in writing and will be deemed received (a) when delivered
personally; (b) when sent by facsimile, evidenced by a written confirmation; (c) five (5) days after having been sent by registered or certified mail, return
receipt requested, postage prepaid; or (d) two (2) days after deposit with a commercial overnight carrier. All communications will be sent to the addresses set
forth above or to such other address as may be designated by a party by giving written notice to the other Party pursuant to this section.
14
11.8. Set-off; Lien. Amounts due hereunder may not be set off except with mutual prior written consent. It is specifically agreed that Flextronics
shall not have any lien or any other similar right upon any Confidential Information, Costumer’s IP and IP Enhancements and Flextronics hereby expressly
waives any claim or demand to that effect.
11.9. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original instrument and all of which
together shall constitute a single agreement.
11.10. Disputes Resolution
(i) Any dispute arising out of or relating to this Agreement or the breach, termination or validity thereof shall be exclusively settled in
arbitration in accordance with substantial Israeli law. The arbitrator shall be agreed upon by the Parties and in the absence of an agreement within 21 days
from the first written notice by a Party to the other Party of its determination to apply to arbitration, as shall be determined by the President of the Israeli Bar
at the request of any party hereof.
(ii) Without derogating from rights of termination as detailed in this Agreement, it is clarified that Flextronics will continue to provide the Work
and Customer shall continue to perform its obligations hereunder during any arbitration or legal proceedings commenced pursuant to this Section 11.10(i)
above and the existence of a dispute shall not enable Flextronics to stop the Work or services or otherwise not timely perform its obligations or enable
Customer to stop payments or otherwise not timely perform its obligations, except that Flextronics shall be entitled to demand appropriate securities, such as
bank guarantees and pre-payments as a condition to the continued performance thereby of any further Work, unless otherwise determined by the Arbitrator.
(iii) The foregoing shall not affect the right of the parties to seek injunctions before the competent Court.
11.11. Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the state of Israel, without giving
effect to choice of law rules. Section 11.10(i) shall not apply to disputes as to: (a) a breach of confidentiality obligations under this Agreement;
11.12. Even-Handed Construction. The terms and conditions as set forth in this Agreement have been arrived at after mutual negotiation, and it is
the intention of the parties that its terms and conditions not be construed against any party merely because it was prepared by one of the parties.
11.13. Controlling Language. This Agreement is in English only, which language shall be controlling in all respects. All documents exchanged
under this Agreement shall be in English.
AGREED TO:
Allot Communications Ltd.
Flextronics (Israel) Ltd.
By: Pini Gvili / Doron Faibish
Title: VP Operations / General Counsel
By:
Title:
15
List of Subsidiaries
Company
Jurisdiction of Incorporation
Exhibit 8.1
Allot Communications Inc.
Allot Communications Europe SARL
Allot Communications (Asia Pacific) Pte. Limited
Allot Communications (UK) Limited (with branches in Spain, Italy and
Germany)
Allot Communications Japan K.K.
United States
France
Singapore
United Kingdom
Japan
Allot Communications (New Zealand) Limited (with a branch in Australia)
New Zealand
Oversi Networks Ltd. (in merger process)
Allot Communications (Hong Kong) Ltd
Allot Communications Africa (PTY) Ltd
Allot Communications India Private Ltd
Allot Communications Spain, S.L. Sociedad Unipersonal
Allot Communications (Colombia) S.A.S
Allot MexSub
Israel
Hong Kong
South Africa
India
Spain
Colombia
Mexico
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
EXCHANGE ACT RULE 13A-14(A)/15D-14(A)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 10.1
I, Andrei Elefant, certify that:
1. I have reviewed this annual report on Form 20-F of Allot Communications Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by this report
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 28, 2016
/s/ Andrei Elefant
Andrei Elefant
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
EXCHANGE ACT RULE 13A-14(A)/15D-14(A)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 10.2
I, Shmuel Arvatz, certify that:
1. I have reviewed this annual report on Form 20-F of Allot Communications Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by this report
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 28, 2016
/s/ Shmuel Arvatz
Shmuel Arvatz
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Allot Communications Ltd. (the “Company”) on Form 20-F for the period ended December 31, 2015, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrei Elefant, and I, Shmuel Arvatz, do hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
●
●
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company
EXHIBIT 10.3
Date: March 28, 2016
Date: March 28, 2016
/s/ Andrei Elefant
Andrei Elefant
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Shmuel Arvatz
Shmuel Arvatz
Chief Financial Officer
(Principal Financial Officer)
Exhibit 11.1
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Registration Statement on Form S-8 (File Nos. 333-140701, 333-149237, 333-159306, 333-165144, 333-
172492, 333-180770, 333-187406, 333-194833 and 333-203028) pertaining to the 2006 Incentive Compensation Plan of Allot Communications Ltd., of our
report dated March 28, 2016, with respect to the consolidated financial statements and the effectiveness of internal control over financial reporting of Allot
Communications Ltd. included in this annual report on Form 20-F for the year ended December 31, 2015.
/s/ KOST FORER GABBAY &
KASIERER
KOST FORER GABBAY &
KASIERER
A Member of Ernst & Young Global
Tel Aviv, Israel
March 28, 2016