UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
☐
☒
☐
☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
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 LTD
(Exact Name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
ISRAEL
(Jurisdiction of incorporation or organization)
22 Hanagar Street
Neve Ne’eman Industrial Zone B
Hod-Hasharon 4501317
Israel
(Address of principal executive offices)
Rael Kolevsohn, Adv.
VP Legal Affairs & General Counsel
Allot Ltd.
22 Hanagar Street
Neve Ne’eman Industrial Zone B
Hod-Hasharon 4501317, Israel
Tel/Fax: +972 (9) 762-8419
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Ordinary Shares, par value ILS 0.10 per share
ALLT
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, 2020:
35,382,638 ordinary shares, ILS 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 ☐
No ☒
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 ☐
No ☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 from their obligations under those Sections.
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 ☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒
No ☐
2
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See
definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected
not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on the attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☒
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financial Reporting
Standards as issued by the
International Accounting Standards Board ☐
Other ☐
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 ☐
Item 18 ☐
Yes ☐
No ☒
3
TABLE OF CONTENTS
PART I
ITEM 1: Identity of Directors, Senior Management and Advisers
ITEM 2: Offer Statistics and Expected Timetable
ITEM 3: Key Information
A.
B.
C.
D.
Selected Financial Data
Capitalization and Indebtedness
Reasons for Offer and Use of Proceeds
Risk Factors
ITEM 4: Information on Allot
A.
B.
C.
D.
History and Development of Allot
Business Overview
Organizational Structure
Property, Plant and Equipment
ITEM 4A: Unresolved Staff Comments
ITEM 5: Operating and Financial Review and Prospects
A.
B.
C.
D.
E.
F.
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
A.
B.
C.
D.
E.
Directors and Senior Management
Compensation of Officers and Directors
Board Practices
Employees
Share Ownership
ITEM 7: Major Shareholders and Related Party Transactions
A.
B.
C.
D.
Major Shareholders
Record Holders
Related Party Transactions
Interests of Experts and Counsel
ITEM 8: Financial Information
A.
B.
Consolidated Financial Statements and Other Financial Information.
Significant Changes
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7
7
7
7
7
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8
8
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44
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ITEM 9: The Offer and Listing
ITEM 10: Additional Information
A.
B.
C.
D.
E.
F.
G.
H.
I.
Share Capital
Memorandum and Articles of Association
Material Contracts
Exchange Controls
Taxation
Dividends and Paying Agents
Statement by Experts
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 Proceeds
Material Modifications to the Rights of Security Holders
Use of Proceeds
A.
B.
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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Terms
PRELIMINARY NOTES
As used herein, and unless the context suggests otherwise, the terms “Allot,” “Company,” “we,” “us” or “ours” refer to Allot 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:
•
•
•
•
•
•
•
•
•
•
•
•
•
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 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.
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.
6
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.
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, 2018, 2019 and 2020 and the consolidated balance sheet data as of December 31, 2019 and
2020 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, 2016 and 2017 and the consolidated balance sheet data as of December 31, 2016 and 2017 have been derived from our audited
consolidated financial statements which are not included in this annual report.
2016
Year ended December 31,
2018
2017
2019
2020
Consolidated Statements of Operations:
Revenues:
Products
Services
Total revenues
Cost of revenues(1):
Products
Services
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 (loss)
Financing income (expenses), net
Income (loss) before income tax expenses (benefit)
Income tax expenses (benefit)
Net income (loss)
Basic net (loss) per share
Diluted net (loss) per share
Weighted average number of shares used in computing basic
$
$
$
$
54,432
35,937
90,369
20,401
7,494
27,895
62,474
24,827
606
24,221
35,290
9,812
69,323
(6,849)
1,059
(5,790)
2,204
(7,994)
(0.24)
(0.24)
$
$
$
$
$
48,727
33,265
81,992
19,258
9,272
28,530
53,462
22,244
392
21,852
38,316
10,696
70,864
(17,402)
894
(16,508)
1,564
(18,072) $
(0.54) $
(0.54) $
56,169
39,668
95,837
20,061
9,288
29,349
66,488
25,792
374
25,418
40,849
10,416
76,683
(10,195)
2,208
(7,987)
2,428
(10,415) $
(0.31) $
(0.31) $
$
$
67,440
42,660
110,100
22,743
11,091
33,834
76,266
31,839
378
31,461
47,105
6,678
85,244
(8,978)
1,960
(7,018)
1,641
(8,659) $
(0.25) $
(0.25) $
92,524
43,398
135,922
28,524
11,558
40,082
95,840
43,786
339
43,447
47,528
13,894
104,869
(9,029)
1,857
(7,172)
2,176
(9,348)
(0.27)
(0.27)
net earnings (loss) per share
33,202,309
33,253,158
33,710,507
34,250,582
35,007,201
Weighted average number of shares used in computing diluted
net earnings (loss) per share
33,202,309
33,253,158
33,710,507
34,250,582
35,007,201
___________________
(1)
Includes stock-based compensation expense related to options and restricted stock units, or RSUs, granted to employees and others as follows:
7
2016
2017
2019
2020
Year ended December 31,
2018
(in thousands)
316
$
678
928
940
2,862
362
648
1,166
1,190
3,336
$
$
$
264
847
1,257
1,052
3,420
2017
At Year ended December 31,
2018
(in thousands)
2019
$
15,342
31,471
63,194
111,786
184,525
41,396
(122,247)
851
143,129
$
16,336
23,008
64,290
101,999
189,844
53,491
(131,950)
853
135,903
16,930
28,740
61,012
79,444
215,169
83,318
(140,609)
871
131,851
$
$
$
355
1,368
2,145
1,330
5,198
2020
23,599
48,425
27,178
87,816
201,600
71,448
(149,957)
896
130,152
$
$
$
$
$
$
367
1,240
1,833
1,701
5,141
2016
23,326
29,821
60,507
123,980
190,940
33,637
(104,175)
843
157,303
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
Summary of 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. This report also contains forward-looking statements that involve risks and uncertainties. Our results of operations
could materially differ from those anticipated in these forward-looking statements, as a result of certain factors including the risks described
below and elsewhere in this report and our other filings with the Securities and Exchange Commission (the “SEC”). These risks 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.
8
Below is a high-level overview of the risks that we and those in our industry face, and is intended to enhance the readability and accessibility of
our disclosures. These risks include, but are not limited to:
•
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•
•
•
•
•
•
•
•
•
•
•
disruptions caused by external factors, including health epidemics such as the recent coronavirus (COVID-19) pandemic
general economic and business conditions, which may affect demand for our technology and solutions;
the effects of fluctuations in currency on our results of operation and financial condition;
our ability to achieve profitability, such as through keeping pace with advances in technology and achieving market acceptance and increasing
the functionality of our products and offering additional features and products;
the impacts of new market and technology trends on our enterprise market;
the impact of the telco operator’s Go To Market strategy and implementation efforts, on the success of a Revenue Share deal of our Security
Solution;
our reliance on our network intelligence solutions for significant revenues;
impacts to our revenues and operational risk as a result of making sales to large service providers;
technological risks, including network encryption, live network failures and software or hardware errors;
our dependence on third parties for products that make up a material portion of our business, including a single subcontractor for our Service
Gateway Tera platform;
the ability of our suppliers to provide, or refusal of our customers to implement, the single or limited sources from which certain hardware and
software components for our products are made;
sales disruptions or costs arising from a loss of rights to use the third-party solutions we integrate with our products;
our ability to comply with international regulatory regimes wherever we conduct business, including governmental requirements and
initiatives related to the telecommunication industry;
risks related to our proprietary rights and information, including our ability to protect the intellectual property embodied in our technology, to
defend against third-party infringement claims, and protect our IT systems from disruptions;
risks related to our ordinary shares, including volatile share prices and tax consequences for U.S. shareholders;
our status as a foreign private issuer and related exemptions with respect thereto;
exposure to unexpected or uncertain tax liabilities or consequences as a result of changes to fiscal and tax policies;
9
•
•
•
•
•
conditions and requirements as a result of being incorporated in Israel, including economic volatility and obligations to perform military
service;
costs and business impacts of complying with the requirements of the Israeli government grants received for research and development
expenditures;
our ability to successfully identify, manage and integrate acquisitions;
our ability to retain key personnel and maintain satisfactory labor relations; and
other factors as described in the section below.
Economic and External Risks
We face risks related to health epidemics and other widespread outbreaks of contagious disease, including the COVID-19 pandemic,
which could significantly disrupt our operations and materially negatively impact our financial results.
The ongoing COVID-19 pandemic originating in Wuhan, China and the extent to which it may have material and adverse effect our business
operation is still uncertain and difficult to predict with a degree of confidence. The pandemic and any preventative or protective actions that
governments, other third parties or we took and may need to take in the future in response, could result in a period of economic, financial and
business disruptions and reduced operations. These could continue to include disruptions or restrictions on our ability to travel, temporary closures
of our facilities or the facilities of our suppliers, supply chain disruption, customers or sales channels, negative effects on the health of our
management and employees and uncertainty and volatility in the global financial markets. Countries around the world, including those
jurisdictions in which we operate, have imposed quarantines, business shutdowns and travel and other restrictions. In particular, the Israeli prime
minister announced a number of additional restrictions to contain the virus, following recommendations from the Israeli ministries of health and
finance. Any private sector business is required to obtain a regulated permit, should it wish to maintain its offices open (“Tav Sagol”). This permit
sets the requirements which the business place needs to achieve, monitor and maintain. Additionally, the Israeli government enacted emergency
regulations restricting outdoor activity for all citizens, as well as business and commerce restrictions. Although travel to and from work is still
permitted we cannot predict whether the Israeli government will impose further restrictions that could lead to significant changes to, or a potential
shutdown of, our operations and we cannot assure you that we or our suppliers will be designated an “essential business” under the new
regulations. Any significant disruption of our business, or that of our suppliers, customers or sales channels could cause significant delays until
we, our suppliers, customers or sales channels are able to resume normal business operations, and would likely negatively impact our sales and
profitability, including among other things with regard to the timely and successful performance and implementation of transactions that
contribute materially to our anticipated revenues. While we have re-opened some of our offices in some countries, we may have to close those
offices once again if an outbreak recurs in the geographic locations of those offices. We are unsure as to how long offices will remain closed in
locations where outbreaks continue to occur, although we we believe that most of our employees are able to work remotely in an effective way.
Although we are monitoring the situation, we cannot predict whether, for how long, or the extent to which the pandemic and pandemic
containment efforts may disrupt our supply chain and/or operations. The ultimate geographic spread and severity of the disease; the duration of the
outbreak or future outbreaks; the effectiveness of vaccinations to prevent the contraction and spread of the virus; the travel restrictions and the
implementation of social distancing and ultimately the resulting impact on the global economy and our results of operations will depend on future
developments, which are highly uncertain and cannot be predicted.
10
Unfavorable or unstable economic conditions in the markets in which we operate could have a material adverse effect on our business,
financial condition or operating results.
In recent years, economies worldwide have demonstrated instability, and COVID-19 has served to markedly increase instability and volatility in
the global markets. The full economic impact of the pandemic is highly uncertain, but it is plausible that a global economic downturn will result as
governments impose business shutdowns, workforce reductions, quarantines and travel restrictions, and international trade, production and supply
chains are disrupted. Negative economic conditions in the global economy or certain regions such as the European Market, from which we derived
70% of our revenues in 2020, could cause a decrease in spending on the types of products and services that we offer.
Additionally, if the worldwide economy remains unstable or further deteriorates, 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 Euros. Other significant portions of our
expenses are denominated in Israeli shekel (ILS) and, to a lesser extent, in Euros and other currencies. Our ILS-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
ILS. In the past years, we have experienced material fluctuation between the ILS and the U.S. dollar and we anticipate that the ILS will continue
to fluctuate against the U.S dollar in the future. In 2020, the ILS appreciated by approximately 7.6% against the U.S. dollar and in 2019 the ILS
depreciated by approximately 8.4% against the U.S. dollar. In 2020, the Euro appreciated by approximately 9.3% against the U.S. dollar, and in
2019 the Euro depreciated by approximately 2% against the U.S. dollar. If the U.S dollar weakens against the ILS we are exposed to negative
impact on our results of operations. Moreover, if the U.S. dollar strengthens against the Euro, our results of operations generated by revenue in the
EUR may be negatively impacted.
Further, volatility in exchange rates resulting from Brexit is expected to continue in the short term , however, since our volume of business in the
UK is relatively low, we do not expect this to impact us significantly. We translate sales and other results denominated in foreign currency into
U.S. dollars for our financial statements. During periods of a strengthening dollar, our reported international sales and earnings could be reduced
because foreign currencies may translate into fewer U.S. dollars.
11
We use derivative financial instruments, such as foreign exchange forward contracts and others, to partially mitigate the risk of changes in foreign
exchange rates on forecast cash flows. We may not purchase derivative instruments adequately to insulate ourselves from foreign currency
exchange risks. 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. We could be adversely affected when the
U.S. dollar strengthens relative to the local currency between the time of a sale and the time we receive payment, which would be collected in the
devalued local currency. Accordingly, if there is an adverse movement in one or more exchange rates, we might suffer significant losses and our
results of operations may otherwise be adversely affected. Uncertainty in global market conditions has resulted in and may continue to cause
significant volatility in foreign currency exchange rates which could increase these risks. As our international operations expand, our exposure to
these risks also increases.
Risks Related to our Business and Results of Operations
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. In 2020 we had a net loss of $9.3 million.
Compared to the previous year, in 2020 revenues increased by $25.8 million while the gross profit increased by $19.6 million. Operating expenses
increased by $19.6 million, tax expenses increased by $0.5 million and financial income decreased by $0.1 million. In the future we intend to
continue to invest in these areas that we believe will contribute to our future growth. We had a net loss of $8.7 million in 2019.
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’ and enterprises’ challenges,
and which, similarly to us, intensely pursue the largest service providers (referred to as Tier 1 operators) as well as large enterprises. 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 are offered to operators and are deployed in their networks, enabling them to provide security services to their end
customers. Such products face significant competition from companies that directly offer to end customers security applications to be installed on
their devices; companies that approach that directly offer cloud security products to the business enterprise sector through distribution channels;
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. The operators’ move
to 5G networks, imposes a potential challenge for our security products’ architecture and our ability to compete with other existing solutions in the
market.
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 is subject to industry consolidation, as companies attempt to maintain or strengthen their positions in our evolving industry. 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, such as the recent Sandvine – Procera
transaction, which resulted in a combined company positioned to compete with us in the fields of analytics, policy charging and control, traffic
management, security, regulatory compliance and cloud managed services. As the merged company became fully integrated, we expect that
competition from Sandvine will intensify, geographically and also portfolio wise. 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.
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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.
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 products with our customers’ existing network infrastructure. While we will continue to introduce innovative 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.
Additionally, as networks start to evolve towards 5G, we will need to adapt the functionality of our products to comply with the design and
standards prescribed by the 3rd Generation Partnership Project (the 3GPP Organization), which is responsible for the industry standardization
effort and requires significant investment. Our business may be affected if we are unable to adapt our existing products in a quick and timely
manner or successfully develop and introduce solutions supporting 5G networks. In addition, in 4G/LTE networks, Allot provides a Traffic
Detection Function (TDF) element of the core network. According to the recent network design specifications, published by the 3GPP
Organization, in 5G networks this TDF function will be merged within the User Plane Function (UPF), which is provided by major NEP (Network
Equipment Provider) competitors. This change in network architecture may jeopardize Allot’s ability to sell a standalone TDF function, which
may have a material adverse impact on our business and financial results.
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Our revenues and business from the enterprise market may be adversely affected by new market and technology trends, including SD-
WAN and the transition to 5G networks.
Our business from the enterprise market may depend on new market and technology trends. For example, some enterprises are starting to
implement a new network architecture, enabled by Software Defined Wide Area Networking (SD-WAN) technology, in which some data traffic is
sent from remote offices of the enterprise directly to the public cloud services. In such designs, Allot’s products deployed at the central location of
the enterprise will have less traffic capacity to manage and will provide only partial visibility into the enterprise’s traffic. This may corrode the
value provided by Allot’s solutions and reduce amount of revenues derived from the enterprise market.
Our revenues and business may be adversely affected due to decline in revenues and profits of Communication Service Providers (CSPs).
Currently a substantial amount of our revenues are received from communication service providers. Many of these CSPs are facing declining
revenues and profits due to commoditization of the provided services (voice and data) and limited success in introduction of the new services for
the consumers and may not be able to continue to purchase our products and services for the prices we charge or will be unable to purchase these
products and services entirely. The outcome of such could result in a decline in our revenues and profits and adversely affect our business.
We depend on our network intelligence solutions for the substantial majority of our revenues.
In the past few years, we have increased sales of our security products. However, sales of our network intelligence solutions, which provide
service providers with visibility and control of their networks, continue to account for a major portion of our revenues, and accounted for 83% of
our total revenue in 2020. If we are unable to increase these sales, or compensate for them by sales of security products, 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 network intelligence
solutions would severely harm our ability to generate revenues and could have a material adverse effect on our business.
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 revenues derived from our largest two customers (different each year), in each of the past three years, were 54%, 27% and 28% of our total
revenues in 2020, 2019 and 2018, respectively. In addition, revenues from individual customers may fluctuate from time to time based on the
timing and the terms under which orders are received and the duration of the delivery and implementation of such orders, potentially resulting in
decreases in revenues from such customers. The loss of any significant customer or a significant decrease in business from any such customer
could have a material adverse effect on our revenues, results of operations and financial condition. For example, we entered into an agreement
with an existing customer in the EMEA region for a one-time delivery of our services, including AllotSmart products and related services for tens
of millions of dollars, which represented a substantial portion of our revenues in 2020.
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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 critical 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. 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 the 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 and in certain exceptional instances up to one and a half years. 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.
In addition, in our deals based on a revenue share model (and determined by the number of end subscribers using our solution), the cycle from the
upfront investments by our company and the revenues stream, is very long.
The complexity and scope of the solutions and 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 all the
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.
Risks Related to Our Technology and Products
Our technology faces challenges due to increased network encryption.
Our DPI, analytics and security products rely on their ability to read and understand the nature of Internet traffic. Due to an increase in network
encryption our ability to read, understand and analyze the traffic transmitted becomes impaired and may reduce or eliminate our ability to provide
our customers with the classification of the traffic and the necessary tools and capabilities that they might require.
We need to continue to increase the functionality of our products and offer additional features and products to maintain or increase our
profitability.
The commoditization of DPI technology and the introduction of competitive features and services will result in a decrease of the average sale
prices of our DPI technology enabled products.
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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 seek to enhance our products by offering higher system speeds, additional features and products, such as advanced Quality of Experience
(QoE) management products, and support for additional applications and enhanced reporting tools. We also continuously endeavor to assure our
solutions comply with contemporary network and software architectures such as, but not limited to, virtualized network services (NFV),
containerized deployments and 5G networks compliance.
Our 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 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 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 products may lead to
commercial disputes with our customers and increased spending on technical solutions, any of which may negatively impact our results of
operations.
A failure of our products may adversely affect the operation of our customers’ live networks or the quality and scope of service to our
customers and their end users, including, specifically with regard to security protection which could harm our reputation, brand position,
and financial condition.
Our products are, generally, installed in line as part of our customers’ networks and provide a wide range of services that our customers may offer
to their own customers. We endeavor to avoid any interruption to the regular operation of our customers’ networks, any reduction of quality of
services or failure to provide the quality and/or scope of services to users, including, by performing certain tasks during predetermined
maintenance windows, and implementing a system bypass, in the event of malfunctions. In addition, we offer security protection services offered
by our customers to their end users at a certain level and terms of performance. However, in certain cases, a failure of our products or failure of
our products to perform in accordance with the performance levels to which we may be committed, may result in our customers experiencing loss
of functionality, denial of service and access, interruption of live traffic on our customers’ networks, loss of security protection or inability to
provide similar services to our customers’ end users. Such failure of our products, may cause disputes with our customers, adversely affect our
reputation, lead to loss of revenues and potential legal exposure.
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.
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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 DPI technology enabled 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 threats 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 unwilling to incur the costs of security services and/or 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.
Risks Related to Our Dependence on Third Parties
We depend on third parties to market, sell, and install our products and to 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, original equipment manufacturers, or OEMs, and system integrators, to
market and sell a material portion of our products to end-customers. In 2020, approximately 29% of our revenues were derived from channel
partners. In some cases, our channel partners are also responsible for installing and providing initial customer support for our products, with our
continuous technical assistance. In the majority of the cases, the partners are responsible for the initial customer support (Tier 1 support), while we
act as the escalation level. As a result, we depend on the ability of our channel partners to successfully market and sell our products to these end-
customers. 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, our channel partners may experience disruptions in, or be prevented from, conducting business activities as a result of the COVID-19
pandemic, which could have a material adverse effect on our results of operations. Any failure by our channel partners to provide adequate initial
support to end-customers, due to COVID-19 or any other reason, 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 long 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 continue to remain in effect. If we are unable
to maintain our relationships with existing channel partners and to develop relationships with new channel partners in key markets our profitability
and results of operations may be materially adversely affected.
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We integrate into or bundle various third-party solutions with 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 offer third-party solutions bundled with our products. We 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 source
alternative third-party solutions, redesign our products to function with alternate third-party solutions or develop substitute components ourselves.
As a result, our sales may be delayed and/or adversely affected and we might be forced to limit the features available in our current or future
product offerings, which could have a material adverse effect on our business.
[We currently depend on a single subcontractor to manufacture and provide hardware and warranty support for our Service Gateway
Tera platform. If this subcontractor experiences delays, disruptions, quality control problems or a loss in capacity, our operating results
could be adversely affected.
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 Tera platform. In addition, our agreement with Flex (Israel) Ltd. requires it to procure and store key components
for our products at its facilities. If Flex (Israel) Ltd. experiences delays, disruptions or quality control problems in manufacturing our products,
including as a result of COVID-19 , or if we fail to effectively manage our relationship with Flex (Israel), product shipments may be delayed and
our ability to deliver certain products to customers could be adversely affected. Flex (Israel) Ltd. may terminate our agreement at any time during
the term of the agreement with advance notice. Therefore, the loss of Flex (Israel) Ltd. could materially and 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 such 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 chains or our inability to obtain such components on a timely basis,
including as a result of COVID-19, may require engineering changes to our products before substitute hardware components could be
incorporated. Such changes could be costly and could 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 manufacturers fail to obtain components in sufficient quantities
when required, our business could be harmed.
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.
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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.
Legal, Regulatory and Compliance Risks
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 materially 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. We also depend on our distributors and agents outside of Israel for compliance and adherence to local laws and regulations in the
markets in which they operate. 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. None of the
Company’s contracts with its channel partners authorize or contemplate any activities with sanctioned countries, and the Company does not intend
to authorize any channel partner to engage in activities with those countries in the future. Nevertheless, over ten 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. Although the Company is not aware of any channel partner making indirect sales to entities or individuals in sanctioned
countries in 2020, there is no guarantee that the Company’s channel partners will not make such indirect sales in the future, which could result in
material adverse impact on our reputation and lead to penalties and increased costs.
We are also subject to the U.S. Foreign Corrupt Practices Act 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.
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 existing
regulations and proposals in the United States, Europe and elsewhere for regulating service providers’ ability to prioritize applications in their
networks. Some 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. Some 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.
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On December 14, 2017 the United States Federal Communications Commission (the “FCC”) announced that it voted to repeal the Open Internet
Report and Order on Remand, Declaratory Ruling, and Order (the Open Internet Order). The Open Internet Order was issued by the FCC and went
into effect on June 12, 2015. The Open Internet Order set forth rules, grounded, among others, on Title II of the Communications Act of 1934; the
Open Internet Order regulated both fixed and mobile Internet Service Providers (ISPs) and prohibited 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 of 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
prohibited paid prioritization of content. The repeal largely reversed the Open Internet Order, including the classification of broadband Internet
service as a telecommunications service, which is subject to certain common carrier regulations, and restored the regulatory framework that
preceded the Open Internet Order. Because our products allow ISPs to identify network traffic and facilitate traffic management, the reinstatement
of this traditional regulatory framework has not, to date, affected but may in the future affect ISP’s demand for certain of our products. The repeal
of the Open Internet Order was upheld by a federal appeals court in October 2019, however, the repeal does not preclude state and local
governments from enacting their own net neutrality rules and certain U.S. states have already implemented net neutrality protections. Therefore,
the impact of the FCC’s repeal on the demand for our products is uncertain and difficult to assess at this time.
On April 30, 2016, Regulation (EU) 2015/2120 of the European Parliament and of the Council came into effect, setting forth the first EU-wide Net
Neutrality (“Open Internet”) rules. Under these rules, blocking, throttling and discrimination of internet traffic by ISPs is prohibited in the EU,
with three exceptions: (i) compliance with legal obligations; (ii) integrity of the network; and (iii) congestion management in exceptional and
temporary situations. Outside these exceptions, there can be no prioritization of traffic within an internet access service. However, equal treatment
permits reasonable day-to-day traffic management according to objectively justified technical requirements, and which must be independent of the
origin or destination of the traffic and of any commercial considerations. These rules also allow internet access providers, as well as content and
applications providers, to offer special services with specific quality requirements (provided the Open Internet is not negatively affected by the
provision of these services). Such specialized services cannot be a substitute to internet access services, can only be provided if there is sufficient
network capacity to provide them in addition to any internet access service and must not be to the detriment of the availability or general quality of
internet access services for end-users.
Such regulation of both fixed and mobile ISPs, in European Economic Area (EEA) Member States, 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, in affected jurisdictions, for the traffic management and subscriber management features of our
products may be adversely affected by such regulations. To date, we have not experienced any material decrease in demand for these features;
however, a decrease in demand in the future could adversely impact sales of our products and could have a material adverse effect on our business,
financial condition or results of operations.
In addition, strict data privacy laws regulating the collection, transmission, storage and use of employee data and consumers’ personally-
identifying information applicable to ISPs are evolving in the US, European Union and other jurisdictions in which we sell our products. For
example, in the US, legislation has in recent years been proposed regarding restrictions on the use of geolocation information collected by mobile
devices without consumer consent and California’s California Consumer Privacy Act, which grants expanded rights to access and delete personal
information and opt out of certain personal information sharing, among other things, became effective on January 1, 2020. Similarly, the General
Data Protection Regulation (“GDPR”), enforcement of which began on May 25, 2018, creates a range of new compliance obligations, increases
financial penalties for non-compliance and extends the scope of the EU data protection law to all companies established in the EEA, and all
companies established outside the EEA that either: (a) offer goods or services to individuals in the EEA; or (b) monitor the behavior of individuals
in the EEA. The GDPR imposes a strict data protection compliance regime and includes enhanced rights for individuals. It applies to the
collection, use, retention, security, processing, transfer and deletion of personally identifiable information of individuals, and creates a range of
new compliance obligations. Implementation of, and compliance with, the GDPR has increased, and could continue to increase, our cost of doing
business. In addition, the GDPR may be interpreted or applied in a manner that is unforeseen by, or adverse to, us. Violations of the GDPR may
result in significant fines (up to four percent of worldwide annual turnover or EUR 20.0 million, whichever is greater) and reputational harm. Such
regulations may increase our compliance and administrative burden significantly and may require us to invest resources and management attention
in order to update our IT systems to meet the new requirements.
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The GDPR and other privacy and data protection laws may be interpreted and applied differently from country to country and may create
inconsistent or conflicting requirements. Such regulations increase our customers’ compliance and administrative burden significantly and may
require us to adapt certain of our products, as well as our support and maintenance services, if necessary, to different requirements in EEA
Member States, as well as in the US, in order to allow our customers in such jurisdictions, to comply with such regulations. There is also no
assurance that we will be able to adapt our products and/or our support and maintenance services sufficiently in order to allow our customers in
various jurisdictions to comply with such regulatory requirements in each jurisdiction.
As data protection and privacy-related laws and regulations continue to evolve, these changes may result in increased regulatory and public
scrutiny, escalating levels of enforcement and sanctions and increased costs of compliance. Therefore, we may be required to modify the features
and functionalities of certain of our products, in a manner that is less attractive to customers. Such adjustments of our products, if required, may
require extensive financial investments and may take long periods of time, leading to delay in sales cycles, deployment of our products and
recognition of related revenues. Furthermore we may be required to adjust the geographical and operational structure of our Customer Success
department, if required, and this may entail extensive financial investments in providing support and maintenance services.
Risks Related to Our Intellectual Property and Proprietary Information
If we are unable to successfully protect the intellectual property embodied in our technology, our business could be materially adversely
affected.
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.
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 clauses regarding 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, or
materially disrupt our business, all of which could adversely affect our revenue, financial condition and results of operations.
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We also aim to protect our intellectual property with patent protection. As of December 31, 2020 we had a patent portfolio consisting of 21
patents, out of which 12 already registered in the U.S. and 9 pending applications in the U.S. Despite the patents and other methods we seek to
protect our intellectual property, 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.
Any 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 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 the type of code that
is covered by a license agreement that permits the user to 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. While we
endeavor to ensure that no open source software is used in a way which may require us to disclose the source code to our related product, such use
could inadvertently occur. If we were required to make our software source code freely available, our business could be seriously harmed. The use
of such open source code 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.
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Disruption to our IT systems could adversely affect our reputation and have a material adverse effect on our business and results of
operations.
Risks to cybersecurity and privacy, including the activities of criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage,
employee malfeasance and human or technological error, are constantly evolving. Computer hackers and others routinely attempt to breach the
security of companies, governmental agencies, technology products, services and systems.
Our IT systems contain personal, financial and other information that is entrusted to us by our customers and employees as well as financial,
proprietary and other confidential information related to our business, and we rely on said systems to manage our business, operations and
research and development. If these IT systems are compromised as a result of cyber-attacks or cyber-related incidents, it could result in the loss or
misappropriation of sensitive data or other disruption to our operations. Although we have a cybersecurity program designed to protect and
preserve the integrity of our information technology systems, we have experienced and expect to continue to experience cyber-attacks of our IT
systems or networks (such as limited phishing, ransomware and malware activities identified by us in the past, which were mitigated). Although
none of these cyber-attacks nor breaches that have been of a minor nature, has had a material effect on our operations or financial condition, due to
our security measures and awareness, we cannot guarantee that any such incidents would not materially harm our business in the future.
If our IT systems are compromised as a result of cyber-attacks or cyber-related incidents, it could result in the loss or misappropriation of sensitive
data or other disruption to our operations. It could also disrupt our electronic communications systems and thus our ability to conduct our business
operations, our ability to process customer orders and electronically deliver products and services and our distribution channels.
Additionally, as a provider of network intelligence and security solutions for mobile and fixed service providers, an actual or perceived cyber-
attack, breach of security or theft of personal data store by us, regardless of whether the cyber-attack, breach or theft is attributable to the failure of
our products, could adversely affect the market’s perception of the efficacy of our solutions, and current or potential customers may look to our
competitors for alternative solutions. A breach of our systems may also lead defects and security vulnerabilities to be introduced into our software,
thereby damaging the reputation and perceived reliability and security of our products and services and potentially making the data systems of our
customers vulnerable to further data loss and cyber incidents.
Despite our investments in risk prevention and contingencies, data protection, prevention of intrusions, access control systems and other security
measures, we can provide no assurance that our current IT systems are fully protected against third-party intrusions, viruses, hacker attacks,
information or data theft or other similar threats. Any such security breach, whether actual or alleged, could result in system disruptions or
shutdowns and/or destruction, alteration, theft or unauthorized disclosure of confidential information. Even when an actual or attempted security
breach is detected, the full extent of the breach may not be determined for some time. An increasing number of companies have disclosed security
breaches of their IT systems and networks, some of which have involved sophisticated and highly targeted attacks. We believe such incidents are
likely to continue, and we are unable to predict the direct or indirect impact of these future attacks on our business.
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Risks Related to Our Ordinary Shares
The share price of our ordinary shares has been and may continue to be volatile.
The market price of our ordinary shares has been volatile in the past 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. Many factors could cause the market price of ordinary shares to fluctuate substantially, 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, acquisitions 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;
our sale of ordinary shares or other securities;
changes in the estimation of the future size and growth of our markets;
effect of COVID-19 and containment efforts on global 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. We currently follow Israeli home country
practices with regard to the quorum requirement for shareholder meetings and shareholder approval of equity compensation plans requirements.
As permitted under the Israeli Companies Law, 5759-1999, or the Companies Law, our articles of association provide that the quorum for any
meeting of shareholders shall be the presence of at least two shareholders present in person or by proxy who hold at least 25% of the voting power
of our shares instead of 33 1/3% of our issued share capital (as prescribed by Nasdaq’s rules). 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).
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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 US 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 US 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 US
domestic issuer.
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% of our assets were located in the United States or (iii) our business were administered principally in the United States. Our loss of
foreign private issuer status would make US regulatory provisions mandatory. The regulatory and compliance costs to us under US securities laws
as a US 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 US 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 US proxy disclosure requirements, including the requirement to disclose, under US 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 US domestic issuers. Such conversion and modifications will involve
additional costs. In addition, we would lose our ability to rely upon exemptions from certain Nasdaq corporate governance requirements that are
available to foreign private issuers.
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Certain US holders of our ordinary shares may suffer adverse tax consequences if we or any of our non-US subsidiaries are characterized
as a “controlled foreign corporation”, or a CFC, under Section 957(a) of the Internal Revenue Code of 1986, as amended (the “Code”).
A non-US corporation is considered a CFC if more than 50% of (1) the total combined voting power of all classes of stock of such corporation
entitled to vote, or (2) the total value of the stock of such corporation, is owned, or is considered as owned by applying certain constructive
ownership rules, including certain downward attribution rules by United States shareholders who each own stock representing 10% or more of the
vote or 10% or more of the value on any day during the taxable year of such non-US corporation (“10% U.S. Shareholder”). Because our group
includes one or more US subsidiaries, certain of our non-U.S. subsidiaries could be treated as CFCs (regardless of whether or not we are treated as
a CFC). Generally, 10% US Shareholders of a CFC are required to report annually and include currently in its U.S. taxable income such 10% U.S.
Shareholder’s pro rata share of the CFC’s “Subpart F income”, “global intangible low-taxed income”, and investments in US property by CFCs,
regardless of whether we make an actual distribution to such shareholders. “Subpart F income” includes, among other things, certain passive
income (such as income from dividends, interests, royalties, rents and annuities or gain from the sale of property that produces such types of
income) and certain sales and services income arising in connection with transactions between the CFC and a person related to the CFC.
Any individual that is a US Shareholder with respect to a CFC generally would not be allowed certain tax deductions or foreign tax credits that
would be allowed to a 10% US Shareholder that is a U.S. corporation. Failure to comply with these reporting obligations may subject a 10% US
Shareholder to significant monetary penalties and may prevent the statute of limitations with respect to such shareholder’s U.S. federal income tax
return for the year for which reporting was due from starting. We cannot provide any assurances that we will assist investors in determining
whether any of our non-U.S. subsidiaries is treated as a CFC or whether any investor is treated as a 10% US Shareholder with respect to any such
CFC or furnish to any 10% United States shareholders information that may be necessary to comply with the aforementioned reporting and tax
payment obligations. A United States investor should consult its tax advisors regarding the potential application of these rules to an investment in
our ordinary shares.
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 2020. 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. Outside of periods of armed conflict, Israel has also historically experienced terrorist activity and unrest, including for
instance, recent unrest due to the United States’ announcement to relocate its embassy from Tel Aviv to Jerusalem. 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 affected 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. Specifically, such hostilities as described
above, can adversely impact our ability to import products components or assemble, test, package or supply our products in accordance with the
terms of customer orders and accordingly impair our revenues.
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Continued salary increase of Research and Development manpower could adversely affect our ability to recruit suitable Research and
Development employees and could have an adverse effect on our business and revenues.
The current ongoing increase in salary of Research and Development manpower could have an adverse effect on our ability to recruit such suitable
individuals as well as adversely affect our ability to meet the ongoing Research and Development related requirements of the market and our
customers.
Our operations may be disrupted by the obligations of personnel to perform military service.
As of December 31, 2020, we employed 676 people, of whom 333 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, in prior years. Beginning in 2021 and onward, the benefited enterprise status is no longer applicable
to us. We expect to be able to utilize the approved enterprise tax benefits after we utilize our net operating loss carry forwards As of December 31,
2020, our net operating loss carry forwards for Israeli tax purposes amounted to approximately $82.1 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
since the 2018 tax year is 23%.
Effective January 1, 2011, the Investments Law was amended (the “2011 Amendment”) to revise the criteria for receiving tax benefits. Under the
transition provisions of the 2011 Amendment, a company may decide to irrevocably implement the 2011 Amendment while waiving benefits
provided under the Investments Law’s prior benefits programs or to remain subject to the Investments Law’s prior benefits programs. We have
opted not to apply the benefits under the 2011 Amendment, however, in the future, we may not be eligible to receive additional tax benefits as
were made available under the Investments Law prior to the 2011 Amendment. 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,
we would also be subject to income tax 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.”]
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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 Israel Innovation Authority (formerly known as the Office of the Chief Scientist of the Ministry of Economy)
for the financing of a portion of our research and development expenditures in Israel, pursuant to the provisions of The Encouragement of
Research, Development and Innovation in Industry 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 Israel Innovation Authority, and our failure to receive grants in the future
could adversely affect our profitability. In 2019 and 2020 we received and accrued non-royalty-bearing grants totaling $0.4 million and $0.3
million, respectively, from the Israel Innovation Authority, representing 1.2% and 0.8%, respectively, of our gross research and development
expenditures. In each of the years 2019 and 2020, we qualified to participate in one non-royalty-bearing research and development program,
funded by the Israel Innovation Authority 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. In the past three years, we were eligible to receive grants constituting of up
to 40% of certain research and development expenses relating to these programs. 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 Israel Innovation Authority 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 Israel
Innovation Authority, and from transferring intellectual property rights in technologies developed using these grants, without special approvals
from the Israel Innovation Authority.
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 our manufacturing volume outside 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 up to 6 times of the original grants plus LIBOR interest to the Israel Innovation Authority. 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 we may be subject to criminal charges.
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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 U.S., and the majority of our assets and
the assets of these persons are located outside the U.S. 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.”]
General Risk Factors
Our 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.
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Our financial condition and results of operations may be harmed by political events and regulatory developments that could have a
material adverse effect on global economic condition.
Significant political or regulatory developments in the jurisdictions in which we sell our products, such as those stemming from the recent change
in the presidential administration in the U.S. or the U.K.’s potential exit from the E.U., are difficult to predict and may have a material adverse
effect on us. For example, in the United States, the presidential administration has imposed tariffs on imports from China, Mexico, Canada and
other countries, and has expressed support for greater restrictions on free trade and has increased tariffs on goods imported into the United States.
Changes in U.S. political, regulatory and economic conditions or in its policies governing international trade and foreign manufacturing and
investment in the U.S. could materially adversely affect our sales in the U.S.
In the United Kingdom, following the vote to approve an exit from the E.U., commonly referred to as “Brexit,” the government officially
separated from the E.U. on January 31, 2020. A transition period ended on December 31, 2020, during which the U.K. and the E.U. negotiated the
terms of the U.K.’s relationship with the E.U. going forward. With the implementation of the E.U.-U.K. Trade and Cooperation Agreement
beginning on January 1, 2021, it is still unclear how the deal will impact relationships within the U.K. and between the U.K. and other countries
on many aspects of fiscal policy, cross-border trade and international relations. The Trade and Cooperation Agreement could potentially disrupt
the free movement of goods, services and people between the U.K. and the E.U., undermine bilateral cooperation in key geographic areas and
significantly disrupt trade between the U.K. and the E.U. or other nations as the U.K. pursues independent trade relations. Because this is an
unprecedented event, it is unclear what long-term economic, financial, trade, tax and legal implications Brexit would have and how it would affect
the regulation applicable to our business globally and in the region. The impact on us will depend, in part, on the outcome of tariff, trade,
regulatory and other negotiations. Brexit could also lead to legal uncertainty and potentially divergent national laws and regulations as the U.K.
determines which E.U. laws to replace or replicate. In addition, Brexit may lead other E.U. member countries to consider referendums regarding
their European Union membership. Any of these developments, along with any political, economic and regulatory changes that may occur, could
cause political and economic uncertainty in Europe and internationally and could materially adversely affect our sales in Europe.
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. 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.
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Our business may be materially affected by changes to fiscal and tax policies. Potentially negative or unexpected tax consequences of these
policies, or the uncertainty surrounding their potential effects, could adversely affect our results of operations and share price.
As we operate in the global market, we are subject to taxation in Israel and various jurisdictions in which we conduct our business. Our tax
expenses include the impact of tax exposures in certain jurisdictions, and may also be affected by adverse changes in the underlying profitability
and financial outlook of our operations or changes in tax laws, including introduction of unilateral taxation such as digital services taxes in certain
countries, international tax treaties, or guidelines such as the OECD inclusive framework on BEPS, or EU ATAD I and II, all of which could lead
to an increase in our effective tax rate or to changes in our valuation allowances against deferred tax assets on our consolidated balance sheets.
Furthermore, we are subject to tax audits by governmental authorities everywhere we do business. If we experience unfavorable results from one
or more such tax audits, there could be an adverse effect on our tax rate and therefore on our net income.
Our results of operations may also be affected by changes in tax laws, tax rates or double tax treaties. For example, in the United States, the 2017
Tax Cuts and Jobs Act (the “TCJA”) made significant changes to the U.S. Internal Revenue Code, including a reduction in the federal income
corporate tax rate from 35% to 21% and limitations on certain corporate deductions and credits. In addition, the TCJA requires complex
computations to be performed that were not previously required in U.S. tax law, and the preparation and analysis of information not previously
relevant or regularly produced. Because the law is still relatively new, the U.S. Treasury Department, the IRS, and other standard-setting bodies
could interpret or issue guidance on how provisions of the TCJA will be applied or otherwise administered that is different from our interpretation.
Finally, foreign governments may enact tax laws in response to the TCJA that could result in further changes to global taxation and materially
affect our financial position and results of operations.
Additionally, actions by national and international regulators and law enforcement agencies may result in changes to debt reference rates,
including the United Kingdom’s Financial Conduct Authority’s announcement that it intends to phase out the London Interbank Offered Rate
(“LIBOR”) by the end of 2021. While we do not have any long-term borrowings, it is difficult to predict the effect of potential alternatives to
LIBOR on our business, including the liquidity of our customers, due to a lack of current consensus as to what rate or rates may become accepted
alternatives to LIBOR. However, if LIBOR ceases to exist, there may be an adverse impact on the value of (or interest earned on) any LIBOR-
based marketable securities, loans and derivatives.
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 except for an initial approach from a competitor
asserting a potential infringement which we strongly refute. 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.
31
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.
Additionally, in recent years, U.S. and non-U.S. companies listed on securities exchanges in the United States have been faced with governance-
related demands from activist shareholders, unsolicited tender offers and proxy contests. Although as a foreign private issuer we are not subject to
U.S. proxy rules, responding to any action of this type by activist shareholders could be costly and time-consuming, disrupting our operations and
diverting the attention of management and our employees. Such activities could interfere with our ability to execute our strategic plans. In
addition, a proxy contest for the election of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation
expenses and require significant time and attention by management and our board of directors. The perceived uncertainties due to such actions of
activist shareholders also could affect the market price of our securities.
ITEM 4: Information on Allot
A.
History and Development of Allot
Our History
Our legal and commercial name is Allot 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 1500 District Avenue, Burlington, MA 01803.
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. In early 2018, we acquired all of the outstanding shares of
Netonomy Ltd., a Tel-Aviv based developer of software-based cyber security for the connected home. All acquisitions were financed by the
Company’s existing funds. In October 2018, we changed our name to “Allot Ltd”.
Our website address is 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. We have included our website address in this annual report solely for informational
purposes. Our SEC filings are available to you on the SEC’s website at http://www.sec.gov, which contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC. The information on that website is not part of this annual
report and is not incorporated by reference herein.
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B.
Business Overview
Overview
We are a provider of leading innovative network intelligence and security solutions for mobile and fixed service providers as well as enterprises
worldwide. Our solutions are deployed globally for network and application analytics, traffic control and shaping, network-based security
including mobile security, distributed denial of service (DDoS) protection, IoT security, and more.
Allot’s multi-service platforms are deployed by over 500 mobile, fixed and cloud service providers and over 1000 enterprises. Our industry-
leading network-based security as a service solution has achieved over 50% penetration with some service providers and is already used by over
20 million subscribers globally.
We have a global and diverse customer base composed of mobile and fixed broadband service providers, cable operators, satellite service
providers, private networks, data centers, governments, and enterprises such as financial and educational institutions. We have a strong backlog
which represent customers’ orders for products and/or services, not yet recognized as revenues. Backlog is subject to delivery delays or program
cancellations, which are beyond our control. With over 20 years of experience empowering service providers and enterprises to get more out of
their networks and to manage them better, we enable network operators as well as enterprises, to clearly see and understand their networks from
within, to optimize, innovate and capitalize on every opportunity, to learn about users and network behaviors, to improve quality of service and
reduce costs, and to detect security breaches to protect their own networks and their users from attacks, all while increasing value to customers and
deploying new services faster.
Through our combination of innovative technology, proven know-how and collaborative approach to industry standards and partnerships, we
deliver solutions that equip service providers with the capabilities to elevate their role as premier digital services providers and to expand into new
business opportunities. We offer our customers market leading, proprietary technologies that are powerful, diverse and scalable. In addition, we
have developed significant industry know-how and expertise through our experience in designing and implementing use cases with our large
customer base.
The Company delivers a unified security service for consumers mass market and SMB at home, at work and on the go, with the Allot Secure
product family. Our ASM (Allot Security Management) product, is the only platform that unifies security services for mobile, fixed and 5G
converged networks.
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 4G and 5G mobile networks and FTTH (Fiber To The Home) 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 services, messaging applications,
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.
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. Recent rise in the popularity of streaming video services, such as Netflix, Amazon
Prime, Disney+ and more, is at the core of the continuous traffic increase.
33
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 4G and 5G will not be able to cope with the rising tide of data traffic and the requirement for
continuous low-latency transmission, 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 DDoS attacks, spambots malware and other threats. 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, ransomware 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 personal devices users. There are several options to safeguard broadband users on-the-go.
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. In recent year we see a growing demand from large and mid-size operators to offer
such security services to their customers – both consumers and small businesses. The technological solutions used have evolved to a cloud-
managed solution with multiple coordinated enforcement points, including the network core, the CPE deployed in the subscriber’s home/office,
and the end devices. This variety enables the the telecommunication operators’ customers to choose between several levels of security defense and
initialize the service in the level most suitable to their budget and ability to invest in marketing it.
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. The same holds in the more modern world
of SD-WAN and SASE, especially at large enterprises with global presence.
Governments are looking for automated tools to implement regulatory requirements on the networks in their jurisdictions and protect the networks
from external threats
Many governments around the world have already implemented or are in the process of implementing network-related regulations. These
regulations may apply to multiple areas, for example, provision of level of service (SLA) by service providers to the consumers or defining certain
types of content which will not be accessible to the private individuals. In addition, governments want to protect the networks from external cyber
threats, such as DDoS attacks, hacking and botnet attacks. To achieve these goals and meet the regulation requirements, the service providers are
required to deploy scalable network-based solutions, which can be provided by Allot, capable of measuring different network parameters, filtering
the content and identifying and mitigating cyber attacks.
Integrated Network Intelligence Solutions
Our integrated network intelligence solutions, together, called AllotSmart, provide network visibility and control allowing mobile, fixed and
enterprise operators to elevate their role in the digital lifestyle ecosystem and expand into new business opportunities. AllotSmart enables 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 over-the-top (OTT) content and cloud computing services and improve customer loyalty by
personalizing operator offerings with various choices of service tiers and digital lifestyle options.
35
AllotSmart includes the following solutions:
•
•
•
•
Analytics solutions deliver accurate and meaningful network business intelligence to drive capacity planning, congestion management,
service planning, regulatory compliance and marketing decisions.
Traffic Management solutions prioritize critical network traffic, control congestion and optimize service delivery. Dynamic QoE
enforcement enables effective traffic management strategies that minimize infrastructure and operating costs.
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.
Digital Enforcements solutions (based on the AllotSmart product family) enable telecommunication providers to comply with a wide
range of regulatory requirements aimed to assist governments with securing the public.
Allot’s Products (Our Platforms)
The Allot Service Gateway (Allot SG) platforms (including Allot SG-Tera, Allot SG9x000 and Allot SG-VE & CE) 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
•
Allot Service Gateway is a series of products providing visibility, control and security of application and user traffic in cloud data
centers and ISP networks. The platform provides a unified framework and single point of integration for traffic visibility and policy
enforcement, charging, as well as pre-integrated services, including, web and cyber security, and web optimization, cyber threat
protection, data sourcing, and network analytics.
The Allot SG family includes a server based solution (SG 9x000 family), a chassis based solution (SG-Tera) reaching tera of traffic
monitoring, and a virtualized and containerized versions (SG VA & CA, respectively).
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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Analytics Services
Our analytics solutions analyze traffic data to drive smart business decisions.
•
•
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.
Security Solutions
Our security solutions protect network customers, network service integrity and brand reputation.
•
“Security as a Service”: Solutions enable operators to secure subscribers against online threats and harmful content by providing
network-based Security as a Service (SECaaS) to their end customers.
o Allot NetworkSecure (previously WebSafe Personal): A multi-tenant solution that allows the service provider to offer opt-in
security services that allow 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.
o Allot HomeSecure: A multi-tenant solution that allows the service provider to offer opt-in security services that allow 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 home router & network level.
o Allot DNSecure: A multi-tenant solution that allows the service provider to offer opt-in security services that allow 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 DNS requests level. Services are enforced at the network level, requiring no device
involvement or battery consumption.
o EndPoint Secure: A multi-tenant solution performing as an extension of NetworkSecure, for securing the subscribers’ devices while
off the net, with a seamless customer protection, using market leading malware protection and controls.
o ASM (Allot Secure Management): A platform that provides an end-to-end unified management of NetworkSecure, HomeSecure,
Endpoint Secure, DNSecure, IoT etc. Offering On-Net and Off-Net coverage, the solution blends advanced threat detection
technologies in network, CPE and at the endpoint with customer intelligence and comprehensive personalization capabilities to
deliver a scalable platform that simplifies security service activation, service awareness, operation and management.
o Allot Content Protector: As part as our security solution, we may also offer an integrated carrier-class URL filtering service that
blocks access to blacklisted and illegal content, enabling network operators to comply with regulatory requirements.
*The Allot SECaaS solutions are offered to the telecommunication operators (offering the Allot solutions as security services to their subscribers)
on a revenue share business model, where both Allot and the operator share the revenue generated from the operator’s subscribers for the use of
the Allot security services. The anticipated revenues from this revenue share model, is based on the penetration rate of the MAR (maximum
annual revenue potential of concluded transactions), which is estimated by Allot upon the transaction signature and constitutes an approximation
of the theoretical annual revenues Allot would receive if 100% of the operator’s subscribers, as estimated by Allot, signed up for the service.
•
•
•
Allot IoTSecure: A multi-tenant solution that enables CSP to grant each of its enterprise customers a dedicated management console for
monitoring and securing their mobile IoT deployments on the CSP network.
Allot DDoS Secure: A solution that provides attack detection and mitigation services that protect commercial networks against inbound
and outbound Denial of Service (DoS/DDoS) attacks, Zero Day attacks, worms, zombie and spambot behavior.
Allot SpamOut Protector: Prevents malicious spambots from compromising operators’ network service and includes an 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.
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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 Quality of Service 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.
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, OEMs and system integrators. We also endeavor to increase our sales to enterprises and have adapted the structure of our
sales organization to this end. In 2020, we derived 70% of our revenues from Europe, 6% from the Americas, 17% from Asia and Oceania and 7%
from the Middle East and Africa. A breakdown of total revenues by geographic location for 2018, 2019 and 2020 is set forth in the following
table.
Revenues:
Europe
Asia and Oceania
Middle East and Africa
Americas
Total Revenues
2020
% Revenues
Revenues by Location
2019
% Revenues
($ in thousands)
2018
% Revenues
$
$
94,644
23,519
9,628
8,131
135,922
70% $
17%
7%
6%
100% $
36,199
42,994
14,331
16,576
110,100
33% $
39%
13%
15%
100% $
45,730
22,018
13,726
14,363
95,837
48%
23%
14%
15%
100%
In September 2019, we entered into an agreement to provide AllotSmart products to an existing customer in the EMEA region. The sale was being
effected through a system integrator that provided our equipment and services along with additional products and services to the end customer. We
recognized the majority of the revenues related to this agreement in 2020, with additional ongoing revenues related to the ongoing maintenance
component of the agreement to be recognized over several years, in each case, subject to customary delivery and acceptance terms. The margins
are similar to our average margins and the products and services we have provided are our standard products and services, including our
AllotSmart products and services as well as our standard maintenance and support services for these products. The agreement was for the
performance and implementation of a specific project and does not contain any renewal provisions.
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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 2020, approximately 29% of our revenues were
derived from channel partners. In some cases, our channel partners are also responsible for installing and providing initial customer support for
our products, with our continuous technical assistance. In the majority of the cases, the partners are responsible for the initial customer support
(Tier 1 support), while we act as the escalation level. 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 regions: North America, South America, Europe, the Middle East and Africa;
and Asia and Oceania. We have regional offices in Spain, Italy, France, Singapore, India, Japan, Colombia, the U.S. and Israel. As of December
31, 2020, our sales and marketing staff, including product management and business development functions, consisted of 145 employees.
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 project
management, delivery, training, 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 multi-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:
•
unlimited 24/7 access to our global support organization, via phone, email and online support system, provided by regional support
centers;
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•
•
•
expedited replacement units in the event of a warranty claim;
software updates and upgrades offering new features and protocols and addressing new and changing network applications; and
periodic updates of solution documentation, technical information and training.
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 seven support centers, located in
France, Israel, Singapore, India, Colombia Spain 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, business intelligence reports, 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, 2020, our technical staff consisted of 169 employees, including 68 technical support persons, 89 deployment and professional
services engineers, eight documentation and training persons, and four employees related to operations.
Research and Development
Our research and development activities take place primarily in Israel. We also have research and development activities in Spain, Mexico and
India. As of late 2018, we have also been using a subcontractor in Belarus to source R&D engineers. In addition, as of 2020 we have been using a
subcontractor in Ukraine. 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 Israel Innovation Authority. As of December, 31 2020, there are no outstanding royalties due from us to the Israel Innovation
Authority. In 2020, we benefited from additional grants from the Israel Innovation Authority; however, these grants do not bear royalties. Under
the terms of those 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 Innovation Authority funding and there is no
restriction related to the Israel Innovation Authority on the export of products manufactured using technology developed with the Israel Innovation
Authority 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 Tera platform to Flex (Israel) Ltd., 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) Ltd. 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) Ltd. is automatically renewed annually for
additional one-year terms. Flex (Israel) Ltd. 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) Ltd. has affiliates outside of Israel, to which it can, with
the prior consent of the Israel Innovation Authority, transfer manufacturing of our products if necessary, in which event we may be required to pay
increased royalties to the Israel Innovation Authority.
We subcontract the integration of our security software products with off-the-shelf hardware platforms provided by Lenovo and Hewlett Packard
Enterprise (HPE). Based on verbal understandings, Arrow ocs (Israel) performs the integration of the software product with HPE servers, while
Malam-Team (Israel) performs the integration of such software with Lenovo Servers. Such hardware components are manufactured in accordance
with the design of our products.
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. We also purchase off–the-shelf hardware
components from single or limited sources for our 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’ and enterprises’ challenges, and which,
similarly to us, intensely pursue the largest service providers (referred to as Tier 1 operators) as well as large enterprises. 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. This competition is expected to intensify as transition to 5G
networks progresses.
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.
41
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 small and medium size business 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, subcontractors, 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 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.”
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 initiated and
continuously pursue patent protection for our core technologies in the telecommunications market. We have and plan to continue to seek patent
protection in our largest markets and our competitors’ markets, for example in the United States and Europe. As we continue to spread our
business into additional markets, such as Japan and Australia, 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, 2020, we had 12 issued U.S. patents and 9 pending patent applications in the U.S. 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.
42
Government Regulation
Due to the industry and geographic diversity of our operations and services, our operations are subject to a variety of rules and regulations, and
several government agencies in the United States, the E.U. and other countries regulate various aspects of our business. See the following risk
factors in “ITEM 3. Key Information—D. Risk Factors” for more information on regulation material to our business, financial condition and
results of operations:
•
•
•
•
•
•
•
•
•
Legal, Regulatory and Compliance Risks—Demand for our products may be impacted by government regulation of the telecommunications
industry.
Legal, Regulatory and Compliance Risks—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 materially adversely affect our reputation and result in
penalties and increased costs.
General Risks—Our business may be materially affected by changes to fiscal and tax policies. Potentially negative or unexpected tax
consequences of these policies, or the uncertainty surrounding their potential effects, could adversely affect our results of operations and share
price.
Risks Related to our Ordinary Shares—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.
Risks Related to our Ordinary Shares—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.
Risks Related to our Ordinary Shares—Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive
foreign investment company.
Risks Related to our Ordinary Shares—Certain U.S. holders of our ordinary shares may suffer adverse tax consequences if we or any of our
non-U.S. subsidiaries are characterized as a “controlled foreign corporation,” or a CFC, under Section 957(a) of the Code.
Risks Related to our Ordinary Shares—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.
Risks Related to our Ordinary Shares—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.
Additionally, see “ITEM 5: Overview—Government Grants” for a description of grants received from the Israel Innovation Authority of the
Ministry of Economy and “ITEM 10: Additional Information—Taxation—United States Federal Income Taxation—Passive Foreign Investment
Company Considerations” for a description of classification as a “passive foreign investment company,” or a PFIC, for United States federal
income tax purposes.
Internal Cybersecurity
As a provider of innovative network intelligence and security solutions for mobile and fixed service providers, we are particularly sensitive about
the possibility of cyber-attacks and data theft. A breach of our system could provide data information about us and the customers that our solutions
protect. Further, we may be targeted by cyber-terrorists because we are an Israeli company. We are also aware of the material impact that an actual
or perceived breach of our network may have on the market perception of our products and services and on our potential liability. In 2020 we have
experienced cyber-attacks and breaches, that have been of a minor nature, with no material impacted our ongoing operations.
43
We are focused on instituting new technologies and solutions to assist in the prevention of potential and attempted cyber-attacks, as well as
protective measures and contingency plans in the event of an existing attack. For instance, in our internal IT systems, we employ identity and
access controls, product software designs and other security measures that we believe are less susceptible to cyber-attacks. We also continuously
monitor our IT networks and systems for intrusions and regularly maintain our backup and protective systems. We have made certain updates to
our IT infrastructure to enhance our ability to prevent and respond to such threats and we routinely test the infrastructure for vulnerabilities.
We conduct periodic trainings for our employees in this respect on phishing, malware and other cybersecurity risks to the Company. We also have
mechanisms in place designed to ensure prompt internal reporting of potential or actual cybersecurity breaches, and maintain compliance
programs to address the potential applicability of restrictions on trading while in possession of material, nonpublic information generally and in
connection with a cybersecurity breach. Finally, our agreements with third parties also typically contain provisions that reduce or limit our
exposure to liability.
C.
Organizational Structure
As of December 31, 2020, 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
United States
France
Singapore
United Kingdom
Spain, Italy and Germany)
Allot Communications Japan K.K.
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
Allot Turkey Komunikasion Hizmeleri limited
Allot Australia (PTY) LTD
Japan
Hong Kong
South Africa
India
Spain
Colombia
Mexico
Turkey
Australia
* Allot Ltd also holds a branch in Colombia.
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 our approximately 65,412 square foot (6,077 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 expiring in
March 2022.
We also lease a total of 11,248 square feet (1,045 square meter) in two facilities in Spain, mainly for our sales and research and development
operations in Spain, pursuant to lease agreements. The lease agreement of our main site in Spain was renewed for one year in 2021 and may be
renewed for additional terms by mutual consent.
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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, 2020
and related notes and the information contained elsewhere in this annual report. Our financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (“U.S. 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.
A.
Operating Results
Overview
We are a leading global provider of network intelligence and security solutions that enable service providers and enterprises to protect and
personalize the digital experience and monetize on their networks. 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 2020, the primary drivers of our revenues were the mobile and fixed markets.
In January 2018, we acquired all of the outstanding shares of Netonomy Ltd., a developer of software-based cyber security for the connected
home. Under the terms of the agreement, the consideration includes approximately $3.2 million in cash, a $1.1 million holdback amount and a
performance-based contingent amount over a period of two and a half years following closing, which is capped at approximately $1.1 million. See
Note [1(b)] to our consolidated financial statements for further information.
Impacts from COVID-19
The global spread of COVID-19 began to accelerate late in March of 2020 and has since continued to spread and adversely affect workforces,
economies, and financial markets globally, leading to an economic downturn and continued economic uncertainty. The extensive impact of the
pandemic caused by COVID-19 has resulted and will likely continue to result in significant disruptions to the global economy and businesses and
capital markets around the world, including the locations where we operate. In an effort to halt the outbreak of COVID-19, a number of countries,
states, counties and other jurisdictions have imposed various measures, such as, for example, voluntary and mandatory quarantines, stay-at-home
orders, travel restrictions, limitations on gatherings of people, reduced operations and extended closures of businesses.
As part of our response to COVID-19, we transitioned our employees to remote working arrangements and temporarily closed or otherwise
implemented hybrid remote-work with limited onsite presence in our offices all around the world. Since the acceleration of the spread of COVID-
19, we have not experienced any major cost reduction initiatives, decrease in revenue, nor inability of customers to make scheduled payments.
The increasing number of stay-at-home orders has caused a multitude of businesses to transition to work-from-home business arrangements,
where possible. As more companies around the world have shifted to such arrangements, and thus have a greater number of employees working
remotely, networks, data stores and infrastructure through virtual private networks (VPNs) have become susceptible to cyber-threats and
ransomware attacks. In addition, there has been an overall increase in the volume of network traffic and increased usage of applications,
particularly streaming video services. As a result, we believe that the impact of COVID-19 on the way organizations operate and its long-lasting
effects has increased our long-term opportunity to provide our customers with products and solutions to improve their businesses as they adapt to
changing technology and work-from-home arrangements, and particularly protect customers’ devices and data connected to their networks, as well
as detect and mitigate threats to those networks.
We believe these patterns will likely continue for the foreseeable future or until efforts to contain the virus are successful, and we strive to be well
positioned to maximize our selling opportunities, as our customers seek increased data protection, security measures and other solutions that our
products and services already provide. In addition, because remote working conditions create an increase in network traffic as well as optimal
conditions for cyber- and ransomware attacks, we believe that our solutions, both from the Security product and Smart product families can serve
to protect telecommunication consumers as well as serve to protect networks and transmitted data from attackers.
The extent to which COVID-19 impacts our business going forward will depend on numerous evolving factors that we cannot reliably predict,
including the duration and scope of the pandemic; efficiency of available vaccines and the availability of such vaccines to the worldwide
population; governmental, business, and individuals' actions in response to the pandemic; and the impact on economic activity including the
possibility of recession or financial market instability. The uncertainty surrounding the containment of COVID-19 could affect management’s
accounting estimates and assumptions. For a discussion of certain risks associated with COVID-19, please see “ITEM 1A: Risk Factors.”
45
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, security solution to telecom providers 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 various years’ maintenance and support program, which
may be purchased by customers at the time of product purchase or on a renewal basis.
We recognize revenue under the core principle that transfer of control to our customers should be depicted in an amount reflecting the
consideration we expect to receive in revenue. As such, we identify a contract with a customer, identify the performance obligations in the
contract, determine the transaction price, allocate the transaction price to each performance obligation in the contract and recognize revenues when
(or as) we satisfy each performance obligation. 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.
Geographical breakdown. See “—Operating Results—Results of Operations—Revenues.” for the geographic breakdown of our revenues by
percentage for the years ended December 31, 2019 and 2020.
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 success staff. In 2020, our gross margin
increased compared to 2019, mainly due to an increase in revenue. In 2019, our gross margin increased compared to 2018, mainly due to increase
in revenues while the gross margin rate remains similar to last year.
We believe that measuring our products’ cost of revenues and gross margins is helpful to understand our financial statements and results of
operations because it enables the investors to evaluate the company’s effectiveness in its operations. In addition, our management team uses these
metrics to monitor the company’s performance .
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 Israel Innovation Authority. 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.
46
General and administrative. Our general and administrative expenses consist of salaries and related personnel costs, rental expenses, costs for
professional services, credit loss expenses and depreciation. General and administrative expenses also include costs associated with corporate
governance, VAT and other tax expenses 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.
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 intend to utilize these tax benefits after we utilize our net operating loss carry forwards. As
of December 31, 2020, our net operating loss carry forwards for Israeli tax purposes totaled approximately $82.1 million, which includes losses
related to our acquisition of Oversi. As a result of our acquisition of Oversi, through 2019 we could offset operating losses in Israel, which were
generated prior to the Oversi acquisition, 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 Israel Innovation Authority under our approved plans in
accordance with the Research and Development Law. In 2019 and 2020 we received grants from the Israel Innovation Authority 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. The revenues derived from our largest two customers (different each year), in each of the past three years, were 54% of
our total revenues in 2020 and 27% of our total revenues in 2019. 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 third parties 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 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 30.7% for 2019 and 29.5% for 2020. 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 to 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. 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. In 2019 our cost of revenues increased due to an increase in revenues while we kept fixed
elements of cost of revenues on a similar level. In 2020 our cost of revenues increased due to increase in revenues.
Currency exposure. A majority of our revenues in previous years 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 the U.S. dollar, for example in Euros. 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, Asia, Africa and Latin America.
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. Also see “ITEM 11: Quantitative and Qualitative Disclosure
About Market Risk.”
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 See “ITEM 11:
Quantitative and Qualitative Disclosure About Market Risk.”
Impacts of COVID-19. The trajectory of the pandemic remains highly uncertain, and we cannot predict the impacts, trends and uncertainties
resulting from the pandemic’s effect on global economic activity, the industry in which we operate, our sales, the availability and price of our
component parts, and the extent to which our operations and our business may be materially and adversely affected. To date, COVID-19 has
somewhat increased the sale cycle and has delayed the launch of already signed deals. For more information on the impacts to our business and
industry as a result of COVID-19, please see “ITEM 5: Operating and Financial Review and Prospects—Impacts from COVID-19.”
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with 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;
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;
Contingent liabilities; and
Contingent Consideration.
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.
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. Some of the Company’s product sales are through
resellers, distributors, OEMs and system integrators, all of whom are considered end-users. The Company also generates revenues from services,
in which the Company provides network filtering and security services to its customers.
The Company adopted accounting standards codification 606, "Revenue from Contracts with Customers" ("ASC 606"), effective on January 1,
2018. The Company recognizes revenue under the core principle that transfer of control to the Company’s customers should be depicted in an
amount reflecting the consideration the Company expects to receive. As such, the Company identifies a contract with a customer, identifies the
performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the
contract and recognizes revenues when (or as) the Company satisfies a performance obligation.
49
Some of the Company's contracts usually include combinations of products and services, that are capable of being distinct and accounted for as
separate performance obligations.
The products are distinct as the customer can derive the economic benefit of it without any professional services, updates or technical support. The
Company allocates the transaction price to each performance obligation based on its relative standalone selling price out of the total consideration
of the contract. For support, the Company determines the standalone selling prices based on the price at which the Company separately sells a
renewal support contract on a stand-alone basis. For professional services, the Company determines the standalone selling prices based on the
price at which the Company separately sells those services on a stand-alone basis. If the standalone selling price is not observable, the Company
estimates the standalone selling price by taking into account available information such as geographic or regional specific factors, internal costs,
profit objectives, and internally approved pricing guidelines related to the performance obligation.
Product revenue is recognized at a point in time when the performance obligation is being satisfied. Maintenance and support related revenues are
deferred and recognized on a straight-line basis over the term of the applicable maintenance and support agreement. Professional services are
usually recognized at a point in time when the performance obligation is being satisfied.
The Company also enters into service contracts, in which the Company provide security as a service solution to operators, which the Company
considers as its customers. The Company's security as a service solution are offered to operators on a Revenue Share business model, where both
the Company and the operator share the revenue generated from the operator's subscribers. Most of the Company's security as a service contracts
contain a single performance obligation comprised of series of distinct goods and services satisfied over time. The contracts consideration is based
on usage by the operator's subscribers. As such, the Company allocates the variable consideration in those contracts to distinct service periods in
which the service is provided and recognizes revenue for each distinct service period.
Provision for returns. We provide a provision for product returns based on its experience with historical sales returns. Such provisions amounted
to $0.3 million and $0.2 million as of December 31, 2020 and 2019, respectively.
Business combinations. Acquisition is accounted for using the purchase method of accounting in accordance with ASC No. 805, “Business
Combinations” ("ASC No. 805"). Accordingly, the purchase price is 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 is assigned to goodwill.
Allowance for doubtful accounts. Trade receivables are recorded and carried at the original invoiced amount which was recognized as revenues
less an allowance for any potential uncollectible amounts. The Company makes estimates of expected credit losses for the allowance for doubtful
accounts and allowance for unbilled receivables based upon its assessment of various factors, including historical experience, the age of the trade
receivable balances, credit quality of its customers, current economic conditions, reasonable and supportable forecasts of future economic
conditions, and other factors that may affect its ability to collect from customers. The estimated credit loss allowance is recorded as general and
administrative expenses on the Company’s consolidated statements of income (loss).
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 comprehensive loss. 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.
50
In connection with the grant of options and RSUs, we recorded total stock-based compensation expenses of $3.4 million in 2019 and $5.2 million
in 2020. In 2020, $0.4 million, $1.4 million, $2.1 million and $1.3 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, 2020, we had an aggregate of $13.2 million of
unrecognized stock-based compensation remaining to be recognized over a weighted average vesting period of 2.3 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 expenses in 2020 and 2019 totaled $1.9 million and
$0.6 million, respectively.
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, 2020, we held available for sale marketable securities of $27 million. As of December 31, 2020, the accumulated unrealized
gain recorded in other comprehensive income was $0.5 million.
Impairment of goodwill and long lived assets.
ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment
test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment testing is required. If
the Company elects not to use this option, or if the Company determines that it is more likely than not that the fair value of a reporting unit is less
than its carrying value, then the Company prepares a quantitative analysis to determine whether the carrying value of reporting unit exceeds its
estimated fair value. If the carrying value of a reporting unit exceeds its estimated fair value, the Company recognizes an impairment of goodwill
for the amount of this excess, in accordance with the guidance in FASB Accounting Standards Update ("ASU") No. 2017-04, Intangibles -
Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which we adopted as of January 1, 2020.
The Company operates in one operating segment, and this segment comprises its only reporting unit. The Company has performed an annual
impairment analysis as of December 31, 2020 and determined that the carrying value of the reporting unit was lower than the fair value of the
reporting unit. Fair value is determined using market value. During the years 2020, 2019 and 2018, no impairment losses were recorded.
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 one reporting unit. 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 the 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, 2020 and determined that the carrying value of the reporting unit was lower than the
fair value of the reporting unit. Fair value is determined using market value. During the years ended 2019 and 2020, 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.
51
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 the years ended 2019 and 2020, no
impairment losses were recorded.
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 $82.1 million and capital losses of approximately $27 million for
tax purposes as of December 31, 2020, which may be carried forward and offset against ordinary income and capital gains respectively in the
future for an indefinite period. In the United States, the accumulated losses for U.S. federal income tax return purposes were approximately $4.6
million as of December 31, 2020, and expire between 2026 and 2037. 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 attributed to such losses for the year ended December 31, 2020 was $16.2 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.
Contingent liabilities. We are, from time to time, involved in claims, lawsuits, government investigations, and other proceedings arising in the
ordinary course of our business. In making a determination regarding provisions for liability, using available information, we evaluate the
likelihood of an unfavorable outcome in legal or regulatory proceedings to which we are a party to and record a loss contingency when it is
probable a liability has been incurred and the amount of the loss can be reasonably estimated. These subjective determinations are based on the
status of such legal or regulatory proceedings, the merits of our defenses and consultation with legal counsel. Legal proceedings are inherently
unpredictable and subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions
change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and cash flows.
52
Contingent Consideration. We measure liabilities related to earn-out payments at fair value at the end of each reporting period. The fair value was
estimated by utilizing the future potential cash payments discounted to arrive at a present value amount, based on our expectation. The discount
rate was based on the Monte-Carlo simulation method by taking into account, forecast future revenues, expected volatility and weighted average
cost of debt.
For more information regarding recently issued accounting pronouncements see Note 2 to the consolidated financial statements.
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, net
Loss before income tax expense
tax expense
Net loss
Revenues
Year Ended December 31,
2019
2020
61.3
38.7
100.0
20.6
10.1
30.7
69.3
28.6
42.8
6.1
77.5
8.2
1.8
6.4
1.5
[7.9%]
68.1
31.9
100
21
8.5
29.5
70.5
32
35
10.2
77.2
6.6
1.3
5.3
1.6
[6.9%]
See “ITEM 4B: Information on Allot—Business Overview—Customers” for the geographic breakdown of our revenues by percentage for the
years ended December 31, 2018, 2019 and 2020.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Products. Product revenues increased by $25.1 million, or 37.2%, to $92.5 million in 2020 from $67.4 million in 2019. The increase in revenues in
2020 was attributable to an increase in projects which require a larger portion of hardware components.
Services. Service revenues increased by $0.7 million, or 1.7%, to $43.4 million in 2020 from $42.7 million in 2019. The increase was mainly
attributed to increase in revenue share arrangements.
Product revenues comprised 68.1% of our total revenues in 2020, an increase of 6.8% compared to 2019 while the services revenues portion of
total revenues comprised 31.9% of our total revenues in 2020, a decrease by 6.8%.
Cost of revenues and gross margin
Products. Cost of product revenues increased by $5.8 million, or 25.4%, to $28.5 million in 2020 from $22.7 million in 2019. Product gross
margin increased to 69.2% in 2020 from 66.3% in 2019. This increase is attributed to better product mix sold.
Services. Cost of services revenues increased by $0.5 million, or 4.2%, to $11.6 million in 2020 from $11.1 million in 2019. No significant
changes from last year.
Total gross margin increased to 70.5% in 2020 from 69.3% in 2019.
53
Operating expenses
Research and development. Gross research and development expenses increased by $11.9 million, or 37.5%, to $43.8 million in 2020 from $31.8
million in 2019. Gross research and development expenses as a percentage of total revenues increased to 32.2% (32%, net) in 2020 from 28.9%
(28.6%, net) in 2019.
Sales and marketing. Sales and marketing expenses increased by $0.4 million, or 0.9%, to $47.5 million in 2020 from $47.1 million in 2019. The
increase in our sales and marketing expenses is mainly attributable to our increased efforts to strengthen our position in certain territories, which
led to increase in payroll-related expenses which was partially offset with a decrease in travel expenses (due to COVID-19) and agent commission
fees. Sales and marketing expenses as a percentage of total revenues decreased to 35% in 2020 from 42.8% in 2019.
General and administrative. General and administrative expenses increased by $7.2 million, or 108.1%, to $13.9 million in 2020 from $6.7
million in 2019, deriving mainly from the re-evaluation of the Optenet acquisition earn-out provisions in 2019 and increase in credit loss expenses
in 2020. General and administrative expenses as a percentage of revenues increased to 10.1% in 2020 from 6.1% in 2019.
Financial income, net. In 2020 we had $1.9 million financial income, net. In 2019 we had $2.0 million financial income, net. The change in 2020
was primarily attributed to decrease in interest income which was partially offset with an increase in exchange rate differences income.
Income tax expense. Income tax expense in 2020 was $2.2 million, compared to income tax expense of $1.6 million in 2019. The increase in 2020
was mainly due to a decrease in the write-off of withholding taxes expenses of approximately $0.4 million, an increase in tax exposures expenses
of $0.5 million and an increase in current tax and deferred tax expenses of $0.5 million, compared to 2019.
For a discussion of our operating results for the fiscal year ended December 31, 2019 as compared to the fiscal year ended December 31, 2018, see
“ITEM 5. Operating and Financial Review and Prospects—Operating Results” of our Annual Report on Form 20-F for the fiscal year ended
December 31, 2019, which was filed with the SEC on March 26, 2020.
B.
Liquidity and Capital Resources
As of December 31, 2020, we had $23.6 million in cash and cash equivalents, $27.2 million available for sale marketable securities $48.4 million
in short-term deposits and restricted deposits and $0.2 million in long-term deposits. As of December 31, 2020, our working capital, which we
calculate by subtracting our current liabilities from our current assets, was $87.8 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
Net cash used in operating activities in 2020 was $12.2 million. Net cash used in operating activities consisted mainly of a net loss of $9.3 million,
depreciation, amortization and impairment of intangible assets of $4.3 million, $5.2 million of stock-based compensation expense, an increase of
$1.9 million in inventory, an increase of $2 million in employees and payroll accruals, a decrease of $8.3 million in trade receivables, a decrease
of $9.6 million in trade payables, an increase of $3 in other payables and accrued expenses, an increase of $7.3 million in other receivables and
prepaid expenses, a decrease of $5.2 million in deferred revenues and $1.7 million related to other operating activities. The change in employees
and payroll accruals, trade payables and other receivables and prepaid expenses was mainly due to advanced payments to suppliers and payroll-
related items.
54
During 2019, we had $16.1 million in cash and cash equivalents from operating activities. Net cash provided by operating activities consisted
mainly of a net loss of $8.7 million, depreciation, amortization and impairment of intangible assets of $4.3 million, $3.4 million of stock-based
compensation expense, an increase of $0.3 million in inventory, an increase of $4.6 million in employees and payroll accruals, an increase of $2.9
million in trade receivables, an increase of $3.9 million in trade payables, a decrease of $9.0 in other payables and accrued expenses, an increase
of $3.2 million in other receivables and prepaid expenses, an increase of $23.5 million in deferred revenues and $0.4 million related to other
operating activities.
Investing Activities
Net cash provided by investing activities in 2020 was $17.1 million, primarily attributable to Proceeds from redemption or sale of marketable
securities of $34.8 million and decrease in restricted deposit of $32.9 million The above changes were partially offset by investment in Short-term
deposits of $41.9 million, purchase of property and equipment of $7.5 million and investment in marketable securities of $1.2 million.
Net cash used in investing activities in 2019 was $16.5 million, primarily attributable to an investment in available-for sale marketable securities
of $40.0 million, purchase of property and equipment for $3.7 million and investment in short-term bank deposits and restricted deposits of $16.9
million. The above changes were partially offset by redemption of marketable securities of $43.6 million.
We expect that our capital expenditures will total approximately $9.6 million in 2021. We anticipate that these capital expenditures will be
primarily related to purchase of equipment of SECaaS deals and to further investments in lab equipment for research and development and
customer success as well as IT infrastructure.
Financing Activities
Net cash provided by financing activities in 2020 was $1.8 million, which was attributable to issuance of share capital through the exercise of
stock options.
Net cash provided by financing activities in 2019 was $1.0 million, which was attributable to issuance of share capital through the exercise of
stock options.
[For a discussion of our liquidity and capital resources for the fiscal year ended December 31, 2018, see “ITEM 5. Operating and Financial
Review and Prospects—Liquidity and Capital Resources” of our Annual Report on Form 20-F for the fiscal year ended December 31, 2019, which
was filed with the SEC on March 26, 2020.]
C.
Research and Development, Patents and Licenses
In 2018, 2019 and 2020, we benefited from non-royalty bearing grants from the Israel Innovation Authority. 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 we may be subject to criminal charges.
As of December 31, 2020, we had 12 issued U.S. patents and 9 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.
55
D.
Trend Information
See “ITEM 5: Operating and Financial Review and Prospects” above and “Impact of COVID-19”, under Item 5.A 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, 2020, summarizes the aggregate effect that
these obligations are expected to have on our cash flows in the periods indicated.
Payments due by period
Contractual Obligations
Purchase obligations
Operating leases - offices(1)
Operating leases - vehicles
Uncertain tax position (ASC-740)
Total
____________________
(1)
Total
5,218
4,072
716
743
10,749
$
$
$
Less than 1
year
1–3 years
(in thousands of U.S. dollars)
$
$
$
$
5,218
2,448
433
1,538
283
3-5 years
$
$
8,099
$
1,821
$
86
86
Consists primarily of an operating lease for our facilities in Hod-Hasharon, Israel, as well as operating leases for facilities leased by our
subsidiaries.
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, 2021:
Name
Directors
Yigal Jacoby(5)
Manuel Echanove(5)
Itzhak Danziger (5)
Nurit Benjamini (1)(2)(3)(4)(5)
Steven D. Levy (1)(2)(4)(5)
Miron (Ronnie) Kenneth (1)(2)(5)
Nadav Zohar (5)
Executive Officers
Erez Antebi
Ziv Leitman
Ronit Weinstein
Ronen Priel
Rael Kolevsohn
Pini Gvili
Keren Rubanenko
Ran Fridman
Vered Zur
Hagay Katz
Mark Shteiman
Yael Villa
Aharon Mullokandov
Noam Lila
_____________
(1)
(2)
(3)
(4)
(5)
Member of our compensation and nomination committee.
Member of our audit committee.
Lead independent director.
Outside director.
Independent director under the rules of Nasdaq.
Age
Position
Chairman of the Board
Director
Director
Director
Director
Director
Director
Chief Executive Officer and President
Chief Financial Officer
Vice President, Human Resources
Chief Technology Officer
Vice President, Legal Affairs, General Counsel and Company
Secretary
Vice President, Operations
Senior Vice President, Allot Smart Business Unit
Executive Vice President, Global Sales
Vice President, Marketing
Vice President Strategic Accounts, Cyber Security
Vice President Product Management
Senior Vice President, Cyber Security Business Unit
Vice President, R&D Cyber Security Business Unit
Vice President, Customer Success
60
56
72
54
64
65
55
62
62
58
45
51
56
44
46
57
61
44
60
38
45
56
Directors
Yigal Jacoby has served as Chairman of our board of directors since November, 2016. Mr. Jacoby co-founded our company in 1996,served as our
Chief Executive Officer 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, a network
hardware vendor, 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 serving as Chairman at LiveU Ltd., a
provider of live cellular video transmission solutions. 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.
Manuel Echanove has served as a director since July 2017. Prior to his appointment Mr. Echanove served in various management positions with
the Telefonica group, a multinational telecommunications company, between 1996 and 2012. During his tenure at Telefonica, Mr. Echanove held
various senior management positions as Commercial General Manager, General Director of Business Development and General Director of
Multimedia and Brand Business. He also served as General Manager in the Corporate Strategy area of Telefónica S.A. before leaving Telefonica
in 2012. Prior to joining Telefonica, Mr. Echanove served in sales and marketing management positions at France Telecom, British Telecom, each
a multinational telecommunications company, and Data General, a minicomputer firm. Mr. Echanove is currently the CEO of Wetania Consulting
S.L. a management consulting company, which he founded in 2013. Mr. Echanove has an Economics and Business Administration degree from
the Universidad Pontificia de Comillas.
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 EyeControl
and Jinni Media, privately held technology companies. 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, a privately held manufacturer of business telecommunications equipment.
In the non-profit sector, Mr. Danziger serves as the chairman of the Center for Educational Technology (CET), as Vice President and board
member of the New Israel Fund (NIF), a non-profit for social justice and equality, the chairman of Israel Venture Network (IVN) - Yozma fund for
investments in social businesses and a director in Israel Venture Network (IVN), a venture philanthropy NGO. Mr. Danziger was also a member of
the National Task Force for the Advancement of Education in Israel (Dovrat Committee). Mr. Danziger holds a B.Sc. cum laude and an M.Sc. in
electrical engineering from the Technion - Israel Institute of Technology and an 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 Crazy Labs Ltd., a company that provides mobile content. Ms. Benjamini served as the
Chief Financial Officer of Wix.com Ltd. (NASDAQ: WIX), a software company providing web development solutions, from 2011 to 2013.
Previously, from 2007 to 2011, Ms. Benjamini has served as the Chief Financial Officer of CopperGate Communications Ltd. (now Sigma
Designs Ltd.) that was acquired by Sigma Designs Inc. (NASDAQ: SIGM), a provider of system-on-chip semiconductors, in November 2009.
Prior to her position with CopperGate Communications Ltd., Ms. Benjamini served as the Chief Financial Officer of Compugen Ltd., a genomics-
based drug and diagnostic discovery company, from 2000 to 2007. Ms. Benjamini serves as an outside director of BiolineRX Ltd.
(NASDAQ/TASE: BLRX), a biopharmaceutical company focused on oncology, as 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 Gamida Cell Ltd. (NASDAQ: GMDA), an
advanced cell therapy company and as a director at Caesarstone Ltd. Ms. Benjamini holds a B.A. in Economics and Business and an M.B.A. in
Finance, both from Bar Ilan University, Israel.
57
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, a global financial services firm, from 1998 to 2005. Before joining Lehman Brothers, Mr. Levy was a
Director of Telecommunications Research at Salomon Brothers, an American investment bank, from 1997 to 1998, Managing Director and Head
of the Communications Research Team at Oppenheimer & Co., a global full-service brokerage and investment bank from 1994 to 1997 and a
senior communications analyst at Hambrecht & Quist, a California-based investment bank, from 1986 to 1994. Mr. Levy has served as a director
of PCTEL, a broadband wireless technology company since 2006 and currently serves as the their Chairman and served as a director of Edison
Properties, a privately held U.S. real estate company, since 2015. Mr. Levy previously served as a director of privately held GENBAND Inc., a
U.S. provider of telecommunications equipment. 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 Chief Executive Officer 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., a provider of
scale-out data center fabrics, (from January 2001 to 2011). In 2011 Voltaire was acquired by Mellanox Technologies Ltd. (NASDAQ: MLNX), a
multinational supplier of computer networking products. 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 the European organization of
Cadence Design Systems Inc. (NASDAQ: CDN), a multinational electronic design automation software and engineering services company. 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.
Nadav Zohar has served as an interim director since February 2017 and as a director since April 2017. Mr. Zohar has held the position of
Chairman of the LRC Group since 2018. Mr. Zohar served as the head of Business Development of Gett, an “on demand” transportation service
provider from March 2015 and October 2018. Prior to joining Gett, Mr. Zohar served as Chief Operating Officer of Delek Global Real Estate
PLC, company description to be added, between 2006 and 2009 and held several executive positions with Morgan Stanley, a multinational
investment bank and financial services company, between 2001 and 2006, the last of which was Executive Director, Financial Sponsors Group.
Prior to joining Morgan Stanley, Mr. Zohar served in executive roles at Lehman Brothers, a global financial services firm, between 1997 and 2001.
Mr. Zohar serves as a board member of Matomy Media Group Ltd. (London Stock Exchange: MTMY), a digital performance-based advertising
company. Mr. Zohar holds a Masters in Finance (graduated with Merit) from the London Business School and a LLB in Law (graduated with
honors) from the University of Reading.
Executive Officers
Erez Antebi has served as our President and Chief Executive Officer since February 2017. Mr. Antebi served as the Chief Executive Officer of
Gilat Satellite Networks (NADAQ: GILT), a satellite communications technology and services provider, between 2012 and 2015. Between 2005
and 2012 Mr. Antebi also served in several executive roles at Gilat Satellite Networks. Between 2003 and 2005 Mr. Antebi served as the Chief
Executive Officer of Clariton Networks, a start-up company, providing services in cellular coverage. Prior to that Mr. Antebi has served in a
variety of roles at Gilat Satellite Networks, Tadiran, a provider of radio communications for military applications and for Rafael, Israel Ministry of
Defense. Mr. Antebi currently serves on the advisory boards of HiSky. Mr. Antebi holds a B. Sc., Electrical Engineering (Communications),
Summa Cum Laude, and a M.Sc., Electrical Engineering (Information Theory), both from the Technion, Israel.
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Ziv Leitman has served as our Chief Financial Officer since November 2019. Prior to joining Allot, Mr. Leitman served as Chief Financial
Officer of Powermat Technologies, a wireless charging pioneer leader, and from 2011 to 2017 as CFO of Partner Communications, one of Israel’s
leading mobile, fixed-line, Internet and TV service providers. Between 2009 to 2011, he served as Deputy Chief Executive Officer and Chief
Financial Officer of Paz Oil Company, and between 2002 to 2009, as CFO of Comverse Inc., a leading provider of telecommunications products.
From 1989 to 2002 Mr. Leitman also held Chief Financial Officer positions at Discount Investment Corp., Lucent Technologies EIS, Kimberly-
Clark Israel and Optrotech (Orbotech). Mr. Leitman is a Certified Public Accountant and holds a B.A. in Economics and Accounting and an
M.B.A. in Finance & Information Systems, both from the Tel Aviv University.
Ronit Weinstein has served as our Vice President Human Resources since May 2019. Prior to joining Allot, between 2018 to 2019 Ms. Weinstein
served as VP Human Resources at Verint Systems Ltd., a leading global company in the field of actionable intelligence, between 2017 and 2018 as
a Human Resources and Organizational Consultant, between 2007 and 2017 as VP Human Resources at Flash Networks Ltd. a leading provider of
optimization solutions, between 2007 to 2007 as VP Human Resources at TTI Telecom, between 2003 to 2006 as VP Human Resources at
Compugen Ltd. a leading genomics-based drug and diagnostic discovery company, between 1997 to 2003 as VP Human Resources of the Enavis
subsidiary of ECI Telecom, a global provider of ELASTIC network solutions to CSPs, critical infrastructures and data center operators and
between 1993 to 1996 as an organizational consultant. Ms. Weinstein holds a B.A. in Political Science and Sociology from Tel Aviv University
and a B.A. in Sociology from UCLA.
Mark Shteiman has served as our Vice President Product Management since October 2019. Prior to that Mr. Shteiman served as our Associate
Vice President Product Management from June 2018. Prior to Allot Mr. Shteiman served as Vice President Product Management at Kaminario
Ltd. a leading All-flash Software-defined storage company, redefining the future of cloud-scale datacenters, between 2012 and 2015 served as
Head of Product, City business unit of AGT International Ltd., between 2011 and 2013 founded Friendize Me. a SaaS Social E-commerce
company and served as its Chief Executive Officer, between 2009 and 2011 as Vice President, Products at Gigafone Ltd., between 2006 and 2008
as VP Product Management NGM at Neustar, between 2000 – 2006 he held a number of positions at Followap a leading mobile instant messaging
(IM) and interoperability provider for mobile telecom operators and internet service providers, during 2000 held a position in the Israeli Defense
Forces and between 1996 – 1998 served as a software developer at Aitech Defense Systems. Mr. Shteiman holds a B.Sc in Computer Science from
the Technion, Israel.
Ronen Priel has served as our Chief Technology Offer since October 2019. Prior to that, Mr. Priel served as Allot’s Vice President Product
Management & Marketing, from August 2016. Prior to joining Allot, Mr. Priel served as Vice President Business Management and Strategy,
Video Intelligence Solutions (VIS) Division of Verint (NADAQ: VRNT), a global leader in Actionable Intelligence® solutions with a focus on
customer engagement optimization, security intelligence, and fraud, risk and compliance, since 2014. Between 2008 and 2014 Mr. Priel served in
a number of executive roles in Verint. Between 2006 and 2008 he served as Senior Director of Products Marketing at Pontis Ltd. and between
1999 and 2004 Mr. Priel served as Product Line Manager & Director of Marketing at ECtel Ltd. Mr. Priel holds a BA in computer science from
the Israeli Open University and an M.B.A. from Insead, France.
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 and Vice 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 attorney 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 the Hebrew University in Jerusalem.
59
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.
Ran Fridman has served as our Executive Vice President, Global Sales since April 2017. Prior to joining us, Mr. Fridman served as Chief
Business Officer of eVolution Networks, a provider of Deep Learning AI based energy efficiency solution for mobile operators and data centers.
Between 2013 and 2015 Mr. Fridman served as Senior Vice President of Sales and Customer Services, worldwide, of Flash Networks, a provider
of mobile optimization and monetization solutions. Prior to that, Mr. Fridman held various executive sales positions at Nokia Siemens Networks.
Mr. Fridman holds a B.A. in computer science from the Academic College of Tel-Aviv Jaffa.
Vered Zur has served as our Vice President, Marketing since April 2017. Prior to joining us, Ms. Zur served as Chief Marketing Officer of Electra
Ltd. (TASE: ELECTRA), a leading supplier of electric appliances. Between 2011 and 2014, Ms. Zur served as VP global Sales Operations and
Business enablement of Amdocs (NASDAQ: DOX), a provider of software and services to communications and media companies. Between 2005
and 2011, Ms. Zur served as VP Customer Marketing of Comverse (Xura), a company that provided telecommunications software. Prior to that
Ms. Zur served in various marketing roles at telecommunications companies and advertising agencies. Ms. Zur holds a B.A. in Behavioral Science
from the Ben-Gurion University and a M.B.A from the Edinburgh Business School, Heriot-Watt University.
Hagay Katz has served as our Vice President, Strategic Accounts, Cyber Security, BD since July 2017. Prior to joining us Mr. Katz served as
Head of VSAT line of business at Gilat Satellite Networks (NASDAQ/TASE: GILT), a provider of satellite communication, systems between 2010
and 2017. Between 2006 and 2010 Mr. Katz served as Director of Products at Modu Mobile, a provider of cellular handsets and consumer
electronics. Between 2000 and 2006 Mr. Katz served as Co-Founder and VP Marketing and Business Development of PacketLight Networks, a
developer of broadband access/transport system to operator networks and a range of optical transport systems for storage applications, which was
acquired by the RAD group. Prior to that, Mr. Katz served as Regional Vice President Sales – APAC and Scandinavia of Teledata and as a project
manager in Telstra. Mr. Katz also serves as a member of the advisory boards of several technological companies. Mr. Katz holds a BSc and a MSc
in Electronic Engineering from the Tel-Aviv University and a MBA in Marketing and Finance of Monash University; Melbourne.
Keren Rubanenko has served as our Senior Vice President, Allot Smart Business Unit, since November 2020. Prior to that Keren served as our
Senior Vice President, Customer Success since November 2018. Prior to joining Allot, Keren was Vice President, Customer Success at
RADCOM, Vice President, R&D and Operations Surveillance Solutions at Nice Systems between 2011 and 2015, between 1999 and2011, Keren
held a number of senior positions at Comverse Technologies including serving as Associate VP and General Manager, Voice Product Unit. Ms.
Rubanenko holds a B.A. in Business Administration.
Yael Villa has served as our Senior Vice President, Cyber-Security Business Unit, since November 2020. Prior to joining Allot, Yael was Chief
Executive Officer National initiative for Precision Medicine between 2019-2020, General Manager (GM) &Vice President Security at Cisco
between 2015-2018, GM&CTO at EMC Israel between 2013 and 2015, GM&CTO at RSA Israel between 2007 and 2012. Prior to that time, Yael
held several CTO positions at small startups. Dr. Villa was also a Professor at Tel Aviv University and the Academic Collage of Tel Aviv -Yaffo
between 1983-2016. Dr. Villa holds a Ph.D. in Mathematics and Statistics from the University of Tel Aviv.
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Aharon Mullokandov has served as our Vice President, Cyber Security R&D since June 2020. Prior to that time, Mr. Mullokandov served as our
Associate Vice President Program Development from August 2019. Prior to Allot Mr. Mullokandov served as head of Customer Support at Here
Mobility (Here technologies), from 2018 until 2019. Between 2016 and 2018, he served as head of Drive Division at Servotronix, and between
2006 and 2016, he held various positions at Gilat Satellite Networks. Aharon’s last position at Gilat Satellite Networks was Assistant Vice
President, Global Cloud Operations Services. Mr. Mullokandov holds a B.Sc in Electrical, Electronics and Communications Engineering from the
Ariel University, Israel.
Noam Lila has served as our Vice President, Customer Success since January 2021. Prior to that time, Noam served as our Assistant Vice
President, APAC Customer Success from February 2019. Prior to joining Allot, Noam accumulated over 20 years of experience in the
telecommunications industry, holding various executive positions at Amdocs and Comverse. Most recently he was Vice President of sSrvices at
Amdocs located in Australia, Vice President of APAC CS at Comverse located in Japan, VP of IT & SCM at Comverse, AVP of EMEA CS at
Comverse and others. Throughout his career, Noam lead hundreds of projects deployment and transformation programs to Tier 1 customers and
some with value of more than $100 million (USD) each.
Nir Perry has served as our former SVP Research and Development between September 24, 2017 and end of November 2020. Prior to joining us,
Mr. Perry has served in various research and development and managerial roles of increasing responsibilities, in Verint Systems Ltd. (NASDAQ:
VRNT), an analytics company, providing actionable intelligence solutions in the areas of customer engagement and cyber intelligence, between
the years 1996 and 2017, most recently, serving as SVP Product House and ISL Site Manager, Enterprise Intelligence Solutions, between 2015 and
2017, as SVP Global R&D, Video Intelligence Solutions, between 2011 and 2014, and as VP TLV R&D, Witness Action Solution, between 2008
and 2010. Mr. Perry holds a B.Sc. cum laude, in Electrical and Electronical Engineering from the Tel-Aviv University and a MBA from the Tel-
Aviv University.
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 2020 consisted of
approximately $5 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 $0.9 million set aside or accrued to
provide pension, severance, retirement or similar benefits or expenses.
In 2020, we paid or accrued to the chairman of the board of directors, Mr. Yigal Jacoby, an annual fee of ILS 358,200 (approximately $104,184
USD). During such time we paid our directors, Itzhak Danziger, Nadav Zohar and Manuel Echanove ILS 71,940 (approximately $20,924 USD),
ILS 71,940 (approximately $20,924 USD) and ILS 71,940 (approximately $20,924 USD), respectively, and we paid or accrued to each of our
outside directors, Nurit Benjamini, Steven Levy and Miron (Ronnie) Kenneth, as permitted by the Companies Law, an annual fee of ILS 97,440
(approximately $28,341 USD), ILS 97,440 (approximately $28,341 USD) and ILS 87,690 (approximately $25,505 USD), respectively. The above
fees for each of our directors (other than Yigal Jacoby) have included a per-meeting attendance fee of ILS 3,750 (approximately $1,091USD ) for
any meeting he or she attended in person, and ILS 2,250 (approximately $654 USD) for any meeting he or she attended by conference call or
similar means. Our directors are also typically granted upon election an agreed amount of equity based awards, which vest over a period of not
less than three years, and 10,000 RSUs, as of every third annual general meeting following the respective director’s initial election.
During 2020, our executive officers and directors received, in the aggregate, 228,000 RSUs under our equity incentive plans.
Compensation of our Five Most Highly Compensated Office Holders
Summary Compensation Table
The table and summary below outline the compensation granted to our five most highly compensated office holders during or with respect to the
year ended December 31, 2020. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
For purposes of the table and the summary below, “compensation” includes base salary, discretionary and non-equity incentive bonuses, equity-
based compensation, payments accrued or paid in connection with retirement or termination of employment, and personal benefits and perquisites
such as car, phone and social benefits paid to or earned by each Covered Executive during the year ended December 31, 2020.
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Name and Principal Position (1)
Erez Antebi, President and Chief Executive Officer
Ran Fridman, Executive Vice President Global Sales
Ziv Leitman, Chief Financial Officer
Nir Pery, Former Vice President R&D
Keren Rubanenko, Vice President Customer Success
Salary
($)
279,943
280,265
292,744
199,604
210,459
Bonus and
Commision
($) (2)
Equity-Based
Compensation
($) (3)
All Other
Compensation
($) (4)
124,602
182,051
62,301
45,679
46,412
339,832
158,099
141,237
292,921
110,702
94,537
122,844
89,743
115,943
66,677
Total
($)
838,914
743,259
586,025
654,157
434,250
(1) Unless otherwise indicated herein, all Covered Executives are full-time employees of Allot.
(2) Amounts reported in this column represent annual incentive bonuses and commissions 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, 2020, 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 our 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 September 2019, 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 promote for each executive officer an opportunity to advance in a growing organization.
Compensation instruments: Includes base salary; 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 (base salary, benefits and
perquisites) and variable compensation (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 maximum bonus opportunities, 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 shall review and reassess 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.
Board of Directors
Terms of Directors
Our articles of association provide that we may have not less than five directors and have up to nine directors.
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Under our articles of association, our directors (other than the outside directors, whose appointments are required under the Companies Law; for
more information, please 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.
Our Class I director, Nadav Zohar, will hold office until the 2022 Annual General Meeting of Shareholders. Our Class II directors, Itzhak
Danziger and Miron Kenneth, will hold office until our annual meeting of shareholders [to be held in 2023. Our Class III directors, Yigal Jacoby
(who also serves as our Chairman of the board of directors) and Manuel Echanove, will hold office until our annual meeting of shareholders to be
held in 2021. 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.
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.
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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.
The terms of our outside directors, Nurit Benjamini and Steven Levy, will continue until February 20, 2022 and August 14, 2022, respectively,
unless such office is vacated in accordance with our Articles of Association or the Israel Companies Law. 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, all 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, Mr. Miron Kenneth, Mr. Nadav Zohar and Mr. Manuel
Echanove 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. See “ITEM 16G. Corporate Governance” for additional information.
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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.
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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 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 chairperson is Ms. Nurit Benjamini. The
financial experts on the audit committee pursuant to the definition under the relevant SEC rules and 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.
67
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 audit committee has appointed the firm
of Deloitte Brightman Almagor Zohar as 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;
68
•
•
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 2020 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, 2020, we had 676 employees of whom 333 were based in Israel, 205 in Europe, 24 in North America, 31 in Latin America
and 83 in Asia, Africa and Oceania. We have never experienced a work stoppage or a strike. 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
The table below provides a breakdown of personnel employed or engaged by the Company:
Department
Full time Employee
Part time Employee
Permanent Contractor
Subcontractor
Total
2018
December 31,
2019
2020
13
200
261
50
524
422
27
41
34
524
2018
13
233
289
59
594
December 31,
2019
2020
478
29
37
50
594
15
281
314
66
676
504
30
32
110
676
In the foregoing table and in each instance herein where number of employees is provided, employees include full time and part time employees,
as well as subcontractors and consultants. Typically, our employees, as well as our subcontractors and consultants, are employed or engaged for
indefinite periods of time and may be dismissed or terminated with or without notice, depending on the jurisdiction and contracts under which
they are employed or engaged. 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. Except as otherwise stated hereunder, our employees are not represented by a labor union.
Under Spanish Labor law, we and our employees are subject to protective labor provisions and collective bargaining agreements, governing,
among others, 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. Our workers in our San Sebastian office in Spain are represented by a
worker’s representative, who may be subject to reelection during 2021. In addition, our employees in our Madrid office in Spain are represented
by five worker representatives, who were recently elected for a term of four years and thus will be subject to reelection during 2021. Such
representatives represent the employees with respect to labor health and prevention, training and equality. We provide our employees with benefits
and working conditions which we believe are competitive with benefits and working conditions provided by similar companies. We have never
experienced labor-related work stoppages and believe that our relations with our employees are good.
69
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 February 20, 2021 by (i) each of
our directors, (ii) each of our executive officers and (iii) all of our executive officers and directors serving as of February 20, 2021, as a group.
Unless otherwise stated, the address of each named executive officer and director is c/o Allot Ltd, 22 Hanagar Street, Neve Ne’eman Industrial
Zone B, Hod-Hasharon 4501317, Israel.
Name of Beneficial Owner
Directors
Nurit Benjamini
Itzhak Danziger
Manuel Echanove
Nadav Zohar
Steven D. Levy
Yigal Jacoby
Miron Kenneth
Executive Officers
Erez Antebi
Ziv Leitman
Nir Pery (2)
Ronit Weinstein
Ronen Priel
Rael Kolevsohn
Pini Gvili
Keren Rubanenko
Ran Fridman
Vered Zur
Hagay Katz
Mark Shteiman
Yael Villa
Aharon Mullokandov
Noam Lila
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
*
*
*
*
*
450,181
*
*
*
*
*
*
*
*
*
*
*
*
*
*
1,251,255
*
*
*
*
1.26%
*
*
*
*
*
*
*
*
*
*
*
*
*
*
3.51%
(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 February 20, 2021 through the exercise of any option or pursuant to vesting of RSU. Ordinary shares subject to
options that are currently exercisable or exercisable within 60 days of February 20, 2021 and outstanding RSUs vesting within 60 days of
February 20, 2021, 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 ordinary shares shown as beneficially
owned by them. The amounts and percentages are based upon 35,623,246 ordinary shares] outstanding as of February 20, 2021 pursuant to Rule
13d-3(d)(1)(i) under the Exchange Act.
(2) Former Executive Officer, stepped down in November 2020.
70
Our directors and executive officers hold, in the aggregate, 1,153,999 outstanding options and RSUs. The said amount includes options currently
exercisable for 591,370 ordinary shares, as of February 20, 2021. The options (excluding RSUs) have a weighted average exercise price of $7.35
per share and have expiration dates until 2025.
Share Option Plans
The following table summarizes our equity incentive plans, which have outstanding awards as of February 20, 2021:
Plan
2016 Incentive
Compensation Plan
____________
Shares
reserved
981,125
Option and
RSU grants,
net (*)
7,787,894
Outstanding
options and
RSUs
2,691,713
Options
outstanding
exercise
price
0.031-27.58
Date of expiration
03/11/2023-06/09/2025
Options
exercisable
900,491
(*) “Option and RSU grants, net” is calculated by subtracting options and RSUs expired or forfeited.
As of February 20, 2021, we had 35,623,246 ordinary shares outstanding. We have adopted four share option plans. Under our share option plans,
as of February 20, 2021, there were 2,691,713 outstanding options and RSUs, including options currently exercisable for 900,491 ordinary shares.
As of February 20, 2021, 981,125 shares remained available for future grants under the 2016 Plan (as described below). 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 $7.77 per share.
We will only grant options, RSUs or other equity incentive awards under the 2016 Incentive Compensation Plan, although previously-granted
options will continue to be governed by our other plans.
2016 Incentive Compensation Plan, as amended (formerly, 2006 Incentive Compensation Plan)
The Allot Ltd. 2006 Incentive Compensation Plan (the “2006 Plan”) was adopted by the Company’s board of directors on October 29, 2006 and
became effective immediately prior to the effective date of the Company’s initial public offering. Effective October 28, 2016, the Board of
Directors of the Company amended and restated the 2006 Plan to extend the term of the 2006 Plan by ten years and to rename the 2006 Plan as the
Allot Ltd. 2016 Incentive Compensation Plan (the “2016 Plan”). The 2016 Plan will remain in effect, subject to the right of the Board of Directors
to amend or terminate the 2016 Plan at any time pursuant to the terms of the 2016 Plan, until all shares reserved for issuance under the 2016 Plan
shall have been delivered, and any restrictions on such shares shall have lapsed, provided that in no event may an award under the 2016 Plan be
granted on or after October 27, 2026.
The 2016 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.
71
The number of ordinary shares that we may issue under the 2016 Plan will increase on the first day of each fiscal year during the term of the 2016
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 2016 Plan is also subject
to adjustment if particular capital changes affect our share capital. Ordinary shares subject to outstanding awards under the 2016 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 2016 Plan. As of February 20, 2021, there were 2,691,713 outstanding options and RSUs under the 2016 Plan and 981,125 ordinary shares
remained reserved for future grants under the 2016 Plan. Israeli participants in the 2016 Plan may be granted options and/or restricted stock units
subject to Section 102 of the Ordinance. Section 102 of the 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 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 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 2016 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 2016 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 2016 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 2016 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 February 20, 2021,
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.
72
Lynrock Lake Partners LLC (2)
Clal Insurance Enterprises Holdings Ltd. (3)
Migdal Insurance & Financial Holdings Ltd. (4)
Harel Insurance Investments & Financial Services Ltd. (5)
__________________
(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 February 20, 2021 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 35,623,246 ordinary shares outstanding as of February 20, 2021.
19.57%
7.52%
9.99%
6.16%
Percentage
of Ordinary
Shares
Beneficially
Owned
Ordinary
Shares
Beneficially
Owned(1)
6,972,602
2,679,041
3,560,150
2,194,610
(2) Based on a Schedule 13G/A filed on February 16, 2021, Lynrock Lake LP, Lynrock Lake Partners LLC and Cynthia Paul reported that each
had sole voting power over 6,972,602 ordinary shares.
As of December 31, 2020, Lynrock Lake Master Fund LP (“Lynrock Lake Master”) directly held 6,200,731 ordinary shares of the Company.
Lynrock Lake LP (the “Investment Manager”) is the investment manager of Lynrock Lake Master, and pursuant to an investment
management agreement, the Investment Manager has been delegated full voting and investment power over securities of the Issuer held by
Lynrock Lake Master. Cynthia Paul, the Chief Investment Officer of the Investment Manager and Sole Member of Lynrock Lake Partners
LLC, the general partner of the Investment Manager, may be deemed to exercise voting and investment power over securities of the Issuer
held by Lynrock Lake Master. The address of the reporting persons is 2 International Drive, Suite 130, Rye Brook, NY 10573.
(3) Based on a Schedule 13G/A filed on February 16, 2021, Clal Insurance Enterprises Holdings Ltd. (“Clal”) Clal had shared voting and
dispositive power over 2,679,041 of our shares. All of these 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 Clal. The address of the reporting person is
36 Raoul Wallenberg Street, Tel Aviv 37070, Israel.
(4) Based on a Schedule 13G filed on February 16, 2021 by Midgal Insurance & Financial Holdings Ltd. (“MigdalMigdal had shared voting
power and dispositive power over these ordinary shares. Of these shares, 2,858,619 ordinary shares are held for members of the public
through, among others, provident funds, mutual funds, pension funds and insurance policies, which are managed by direct and indirect
subsidiaries of Reporting Person, each of which subsidiaries operates under independent management and makes independent voting and
investment decisions and 701,531 ordinary shares are held by companies for the management of funds for joint investments in trusteeship,
each of which operates under independent management and makes independent voting and investment decisions. The address of the
reporting person is 4 Efal Street; P.O BOX 3063; Petach Tikva 49512, Israel.
(5) Based on a Schedule 13G filed on January 27, 2021 by Harel Insurance Investments & Financial Services Ltd. (“Harel”), on February 20,
2021, Harel had shared voting and dispositive power over 2,194,610 ordinary shares held by Harel for members of the public through,
among others, provident funds and/or mutual funds and/or pension funds and/or insurance policies and/or exchange traded funds, which are
managed by subsidiaries of Harel. The address of Harel is Harel House, 3 Aba Hillel Street, Ramat Gan 52118, Israel.
Significant Changes in the Ownership of Major Shareholders
As of February 20, 2021, Harel Insurance Investments & Financial Services Ltd. was the beneficial owner of 2,194,610, or 6.16% of our ordinary
shares.
As of February 20, 2021, Sphera Capital Ltd. ceased to be the beneficial owner of 5% or more of our ordinary shares. As of March 1, 2020,
Sphera Capital Ltd. was the beneficial owner of 1,808,196, or 5.21% of our ordinary shares.
As of February 20, 2021, Outerbridge Master Fund LP ceased to be the beneficial owner of 5% or more of our ordinary shares. As of March 1,
2020, Outerbridge Master Fund LP was the beneficial owner of 2,940,802, or 8.47% of our ordinary shares.
73
As of February 20, 2021, Renaissance Technologies LLC ceased to be the beneficial owner of 5% or more of our ordinary shares. As of March 1,
2020, Renaissance Technologies LLC was the beneficial owner of 1,949,869, or 5.61% of our ordinary shares.
A.
Record Holders
As of February 20, 2021, there were 16 record holders of ordinary shares, of which seven consisted of United States record holders holding
approximately 99.5% 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 2016 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.”
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, 2020 and 2019, 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, 2020, please see pages [F-5 to F-50]
of this report.
74
Export Sales
See “ITEM 4: Operating and Financial Review and Prospects” under the caption “Customers” 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. Such matters are generally subject to
many uncertainties and outcomes are not predictable with assurance. We accrue for contingencies when the loss is probable and it can reasonably
estimate the amount of any such loss. Except as set forth in Note [11] to our consolidated financial statements for the fiscal year ended December
31, 2020 included elsewhere in this report, we are currently not a party to any material legal or administrative proceedings for which an
appropriate accrual has not been made, and is not aware of any pending or threatened material legal or administrative proceedings against us.
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
Since the date of our audited financial statements included elsewhere in this annual report, there have not been any significant changes in our
financial position.
ITEM 9: The Offer and Listing
Our ordinary shares have been quoted under the symbol “ALLT” on the Nasdaq Stock Market since November 16, 2006 and on the TASE since December
21, 2010.
As of March 1, 2021, the last reported sale price of our ordinary shares on the Nasdaq Global Select Market was $15.91 per share and on the TASE was
51.00 ILS per share.
ITEM 10: Additional Information
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Association
Registration Number and Objectives
We are registered as a public company with the Israeli Registrar of Companies. Our registration number is 51-239477-6.
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.
75
Ordinary Shares
Our authorized share capital consists of 200,000,000 ordinary shares, par value ILS 0.10 per share. As of February 20, 2021, we had 35,623,246
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, provided1 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.
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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.
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.
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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
We have not been party to any material contracts within the two years prior to the date of this annual report, other than contracts entered into in the
ordinary course of business, or as otherwise described below in this ITEM 10.C.
Material Contract
Agreement with Flextronics (Israel) Ltd. and Amendment No. 1
thereto
Non-Stabilized Lease Agreement
Location
“ITEM 4.B: Information on the Company–Business Overview–
Manufacturing.”
“ITEM 4: Information on Allot – D. Property, Plant and Equipment”
D.
Exchange Controls
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 2020 and 2019, the corporate tax rate was 23%. The corporate tax rate for 2021 and
thereafter is scheduled to be 23%. However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a
Benefited Enterprise, a Preferred Enterprise or a Technological 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 Ordinance. Expenditures from research and development
that not so approved are deductible in equal amounts over three years, according to the Ordinance.
From time to time we may apply the Israel Innovation Authority 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, 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 Ordinance,
came into effect (the “TP Regulations”). Section 85A of the 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 did not 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, 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 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. 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.
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.
Should a company derive income from sources other than the Approved Enterprise during the relevant period of benefits, such income is taxable
at the regular corporate tax rates.
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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.
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.
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.
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.
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.
As of December 31, 2020, the company has not yet realized the benefits under the “Approved Enterprise” program. We believe that we met the
aforementioned conditions.
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 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. 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.
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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 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 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 ILS 5.0 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 ILS 5.0 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 year of 2009 as “year of election” under the Investments Law after the 2005 Amendment. The benefit period under this year of
election has ended on December 31, 2020.
We believe that a portion of taxable operating income that we may realize in the future will be eligible to benefits under the Investments Law.
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As of December 31, 2020, we did not generate exempt income under the provisions of the Investments Law.
Tax Benefits under the 2011 Amendment
As of January 1, 2011 new legislation amending the Investments Law came into effect (the “2011 Amendment”). The 2011 Amendment
introduced a new status of “Preferred Company” and “Preferred Enterprise”, replacing the then existing 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. As of the 2017 tax year the
corporate tax rate for preferred taxable income is 7.5%in areas in Israel designated as Development Zone A and 16% elsewhere in Israel.
A dividend distributed from income which is attributed to a 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. Under the
transition provisions of the new legislation, a company may decide to irrevocably implement the 2011 Amendment while waiving benefits
provided under the Investments Law prior to the 2011 Amendment; or to remain subject to the Investments Law prior to the 2011 Amendment. We
have examined the possible effect, if any, of these provisions of the 2011 Amendment on our financial statements and have decided, at this time,
not to opt to apply the new benefits under the 2011 Amendment.
Tax Benefits under the 2016 Amendment
In December 2016 new legislation amended the Investments Law, effective as of the 2017 tax year (the “2016 Amendment”). Under the 2016
Amendment a new status of “Technological Preferred Enterprise” was introduced to the Investments Law.
Under the 2016 Amendment two new tracks are available:
•
•
Technological Preferred Enterprise – an enterprise which is part of a consolidated group with consolidated annual revenues of less than
ILS 10 billion. A Technological Preferred Enterprise which is located in areas other than Development Zone A will be subject to tax at a
rate of 12% on profits derived from intellectual property, and a Technological Preferred Enterprise in Development Zone A will be
subject to tax at a rate of 7.5%; and
Special Technological Preferred Enterprise – an enterprise which is part of a consolidated group with consolidated annual revenues
exceeding ILS 10 billion. Such an enterprise will be subject to tax at a rate of 6% on profits derived from intellectual property regardless
of the enterprise’s geographical location.
Any dividends distributed to foreign companies, as defined in the Investments Law, derived from income from the Technological Preferred
Enterprise will be subject to tax at a rate of 20% (which may be reduced by an applicable double tax treaty), or a lower rate of 4% in case 90% or
more of the Preferred Technological Enterprise’s shares are held by foreign corporations.
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We have examined the possible effect, if any, of these provisions of the 2016 Amendment on our financial statements and have decided, at this
time, not to opt to apply the new benefits under the 2016 Amendment.
Special Provisions Relating to Israeli Tax Reporting in United States Dollars
Under the Income Tax (Inflationary Adjustments) Law, 1985, 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 ILS
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.
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).
Individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 3% on annual income exceeding a certain threshold
(NIS 645,450 for 2021, linked to the annual change in the Israeli Consumer Price Index), including, but not limited to income derived from,
dividends, interest and capital gains.
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, 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 Israeli residents (i) have a controlling interest of more than 25% in such non-Israeli corporation, or (ii) are the beneficiaries or
are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be
subject to the withholding of Israeli tax at the source.
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, (ii) the capital gains from such sale, exchange or
disposition can be allocated to a permanent establishment in Israel, or (iii) such U.S. resident is an individual and was present in Israel for 183
days or more during the relevant taxable year. In such case, the sale, exchange or disposition of 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.
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Taxation of Dividends paid to Non-Resident Holders of Shares
Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. Such sources of income include passive
income such as dividends. On distributions of dividends other than bonus shares, or stock dividends, income tax is applicable at the rate of 25%, or
30% for a shareholder that is considered a “material shareholder” at any time during the 12-month period preceding such distribution, unless a
different rate is provided in a treaty between Israel and the shareholder’s country of residence. However, under the Investments Law, dividends
generated by an Approved Enterprise, Privileged Enterprise, Preferred Enterprise or Technological Preferred Enterprise may be are taxed at a
different rate as discussed above.
Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary shares that is a Treaty U.S. Resident is 25%.
However, if the income out of which the dividend is paid is not generated by an Approved Enterprise, Privileged Enterprise, Preferred Enterprise
or Technological Preferred Enterprise, and not more than 25% of our gross income consists of interest or dividends (and certain other conditions
are met), dividends paid to a U.S. corporation holding at least 10% of our issued voting power during the part of the tax year which precedes the
date of payment of the dividend and during the whole of its prior tax year are generally taxed at a rate of 12.5%. If the aforementioned conditions
are met and the income out of which the dividend is paid is generated by an Approved Enterprise, Privileged Enterprise, Preferred Enterprise or
Technological Preferred Enterprise, then the tax rate will be 15%.
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;
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;
87
•
•
•
persons whose “functional currency” is not the United States dollar;
persons subject to special tax accounting rules as a result of any item of gross income with respect to our common stock being taken into
account in an applicable financial statement; 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 individual 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 distributed 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. In addition, for periods in which we are a
“United Stated-owned foreign corporation”, a portion of dividends paid by us may be treated as U.S. source solely for purposes of the foreign tax
credit. We would be treated as a United States-owned foreign corporation if 50% or more of the total value or total voting power of our stock is
owned, directly, indirectly or by attribution, by United States persons. To the extent any portion of our dividends is treated as U.S. source income
pursuant to this rule, the ability of a U.S. Holder to claim a foreign tax credit for any Israeli withholding taxes payable in respect of our dividends
may be limited. A U.S. Holder entitled to benefits under the United States-Israel Tax Treaty may, however, elect to treat any dividends as foreign
source income for foreign tax credit purposes if the dividend income is separated from other income items for purposes of calculating the U.S.
Holder’s foreign tax credit. 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.(or, if required by an
applicable income tax treaty, the dividends are attributable to a permanent establishment that such holder maintains in the United States).
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.
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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, if required by an applicable income
tax treaty, the gain is attributable to a permanent establishment that you maintain in the United States); or
you are an individual and have been present in the United States for 183 days or more in the taxable year of such sale or exchange and
certain other conditions are met.
Passive Foreign Investment Company 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, or in certain cases, adjusted
basis) 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. As a
public company, the market capitalization method was employed to value our assets for PFIC purposes. In previous years, we obtained an
independent valuation of our company which employed an approach other than the market capitalization approach. For the 2020 tax year, based on
the analysis of our U.S. tax advisor, the market capitalization method was determined to be appropriate for determining our PFIC status. On that
basis, we believe that we were not a PFIC for the 2020 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 2020 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, particularly as a result of COVID-19, 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.”
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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.
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.
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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.
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.
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. The SEC maintains a website at
http:/www.sec.gov containing reports, proxy and information statements and other information regarding issuers that file electronically with the
SEC. Our securities filings, including this annual report and the exhibits thereto, are available on the SEC’s website, the TASE’s website at
http://maya.tase.co.il and 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 also post our annual reports filed with the SEC on our website at http://www.allot.com. The information contained on our
website is not part of this or any other report filed with or furnished to the SEC. 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.
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As a foreign private issuer, we are exempt from the rules under the Exchange Act relating to the furnishing and content of proxy statements, and
our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16
of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as
frequently or as promptly as United States companies whose securities are registered under the Exchange Act. However, we are required to file
with the SEC, within 120 days after the end of each subsequent fiscal year, an annual report on Form 20-F containing financial statements which
will be examined and reported on, with an opinion expressed, by an independent public accounting firm. We also furnish to the SEC reports on
Form 6-K containing quarterly unaudited financial information.
I.
Subsidiary Information
Not applicable.
ITEM 11: Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market risks, including foreign currency exchange fluctuations, changes in interest rates and inflation. We regularly assess
currency, interest rate and inflation risks to minimize any adverse effects on our business as a result of those factors.
Risk of Interest Rate Fluctuation
The primary objectives of our investment activities are to preserve principal, support liquidity requirements, and maximize income without significantly
increasing risk. Our investments are subject to market risk due to changes in interest rates, which may affect our interest income and fair market value of
our investments.
To minimize this risk, we maintain our portfolio of cash, cash equivalents and short and long-term investments in a variety of securities, including U.S.
government and agency securities, and corporate debt securities. 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 risks related to 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. We do not believe that a 10% increase or decrease in interest rates would have a material impact on
our operating results, cash flows or the fair value of our portfolio. 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 ILS. In 2020, we derived substantial part of our revenues in U.S. dollars and also 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 ILS and to a lesser
extent in Euros and other currencies. Our ILS-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. Any strengthening or weakening in the value of the ILS against the U.S. dollar is being partially
mitigated using hedging transactions and therefore, though we cannot provide any assurance that such transaction will fully mitigate the effect on our net
income, it is not likely that such effect will be material in the upcoming year.
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In the event of a 10% hypothetical strengthening or weakening in the value of the Euro against the U.S. dollar, we may be able to mitigate the effect of such
currency exchange fluctuation by adapting our pricing. However, in the event that market conditions will limit our ability to adjust our pricing, we might
not be able to fully mitigate the adverse effect of such currency fluctuation. [We estimate that in such event, the impact on our net income in 2020 is not
likely to exceed $2 million.] 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 ILS, EUR and CNY. These transactions constitute a
future cash flow hedge. As of December 31, 2020, we had outstanding forward contracts in the amount of $19.7 million. These transactions were for a
period of up to twelve months. As of December 31, 2020, the fair value of the above mentioned foreign currency derivative contracts was $1.0 million.
ITEM 12: Description of Securities Other Than Equity Securities
Not applicable.
PART II
ITEM 13: Defaults, Dividend Arrearages and Delinquencies
None.
ITEM 14: Material Modifications to the Rights of Security Holders and Use of Proceeds
A.
Material Modifications to the Rights of Security Holders
None.
B.
Use of Proceeds
Not applicable.
ITEM 15: Controls and Procedures
(a)
(b)
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, 2020. 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, 2020, 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.
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 designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those
policies and procedures that:
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•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of
our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020.
In making this assessment, our management used the criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our management has concluded, based on its assessment, that our
internal control over financial reporting was effective as of December 31, 2020 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.
Attestation Report of the Registered Independent Public Accounting Firm. Our independent auditors, Kost Forer Gabbay & Kasierer, a member of
Ernst & Young Global, have audited the consolidated financial statements included in this annual report on Form 20-F, and as part of its audit,
have issued an unqualified audit report on the effectiveness of our internal control over financial reporting as of December 31, 2020. The report is
included in pages F-2 and F-3 of this annual report on Form 20-F and is incorporated herein by reference.
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.
(c)
(d)
ITEM 16: Reserved
ITEM 16A: Audit Committee Financial Expert
The board of directors has determined that Ms. 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. The board of directors has also determined that Ms. Benjamini is independent, as such term
is defined by Nasdaq Rule 5605(a)(2) and Rule 10A-3 under the Exchange Act.
ITEM 16B: Code of Ethics
We have adopted a code of ethics applicable to our Chief Executive Officer, Chief Financial Officer, principal accounting officer or 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. Under Item 16B of Form 20-F, if a waiver or amendment of the code of ethics applies to the persons specified in Item 16B(a) of the
Form 20-F 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 2020.
95
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,
2019
2020
(in thousands of U.S. dollars)
$
$
280
15
133
428
$
$
285
20
88
393
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
Total
__________________
(1)
“Audit fees” include fees for services performed by our independent public accounting firm in connection with our annual audit for 2019 and 2020,
certain procedures regarding our quarterly financial results submitted on Form 6-K and consultation concerning financial accounting and reporting
standards.
“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.
“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.
(2)
(3)
Audit Committee’s Pre-Approval Policies and Procedures
Our audit committee has adopted a pre-approval policy for the engagement of our independent accountant to perform certain audit and non-audit services.
Pursuant to this policy, which is designed to assure that such engagements do not impair the independence of our auditors, the audit committee pre-
approves annually a catalog of specific audit and non-audit services in the categories of audit service, audit-related service and tax services that may be
performed by our independent accountants.
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, which
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 approvals previously granted were each valid
for a period of six months. During 2018, 2019 and 2020 we did not repurchase any outstanding ordinary shares under this program.
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.
96
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, 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 do not seek shareholder approval for equity compensation plans a practice which complies with the requirements of the Companies Law, but does
not fully reflect the requirements of Rule 5635(c). Under Israeli law, we may amend our 2016 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 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.
PART III
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.
97
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
Allot Ltd
By:
/s/ Erez Antebi
Erez Antebi
Chief Executive Officer and President
Dated: March 15, 2021
98
ANNUAL REPORT ON FORM 20-F
INDEX OF EXHIBITS
Number
Description
1.1
1.2
1.3
2.1
2.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
8.1
12.1
12.2
13.1
15.1
101.INS
101.SCH
101.PRE
101.CAL
101.LAB
101.DEF
Articles of Association of the Registrant (2)
Certificate of Name Change (9)
Memorandum of Association of the Registrant (10)
Specimen share certificate (1)
Description of Registrant’s Securities
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 Ltd (1)
2016 Incentive Compensation Plan, as amended and restated (6)
Israeli Subplan (Appendix A) of the 2016 Incentive Compensation Plan, as amended and restated (7)
US Subplan (Appendix B) of the 2016 Incentive Compensation Plan, as amended and restated (8)
Manufacturing Agreement, dated July 19, 2007, by and between Flextronics (Israel) Ltd. and the Registrant (4)
Amendment No. 1, dated September 1, 2012, to the Manufacturing Agreement, dated July 19, 2007, by and between Flextronics (Israel)
Ltd. and the Registrant (11)
Compensation Policy for Executive Officers and Directors (5)
List of Subsidiaries of the Registrant
Certification of Principal Executive Officer required by Rule 13a-14(a) and Rule 15d-14(a) (Section 302 Certifications)
Certification of Principal Financial Officer required by Rule 13a-14(a) and Rule 15d-14(a) (Section 302 Certifications)
Certification of Principal Executive Officer and Principal Financial Officer required by Rule 13a-14(b) and Rule 15d-14(b) (Section 906
Certifications), furnished herewith
Consent of Kost Forer Gabbay & Kasierer
Inline XBRL Instance Document
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Presentation Linkbase Document
Inline XBRL Taxonomy Calculation Linkbase Document
Inline XBRL Taxonomy Label Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Cover Page Interactive Data File (embedded within the Inline XBRL document)
Previously filed with the SEC on October 31, 2006 pursuant to a registration statement on Form F-1 (File No. 333-138313) and incorporated by
reference herein.
Previously included in Exhibit 99.3 to the report of foreign private issuer on Form 6-K furnished to the SEC on November 1, 2018 and incorporated
by reference herein.
Previously filed with the SEC on March 26, 2015 as Exhibit 4.8 to the annual report on Form 20-F for the year ended December 31, 2014 and
incorporated by reference herein.
Previously filed with the SEC on March 28, 2016 as Exhibit 5.1 to the annual report on Form 20-F for the year ended December 31, 2015 and
incorporated by reference herein.
Previously included as Exhibit A-1 to the proxy statement included in Exhibit 99.1 to the report of foreign private issuer on Form 6-K furnished to
the SEC on September 4, 2019 and incorporated by reference herein.
Previously filed with the SEC on March 23, 2017 as Exhibit 4.2 to the annual report on Form 20-F for the year ended December 31, 2016 and
incorporated by reference herein.
Previously filed with the SEC on March 23, 2017 as Exhibit 4.3 to the annual report on Form 20-F for the year ended December 31, 2016 and
incorporated by reference herein.
Previously filed with the SEC on March 23, 2017 as Exhibit 4.4 to the annual report on Form 20-F for the year ended December 31, 2016 and
incorporated by reference herein.
Previously included in Exhibit 99.1 to the report of foreign private issuer on Form 6-K furnished to the SEC on November 1, 2018 and incorporated
by reference herein.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10) Previously included in Exhibit 99.2 to the report of foreign private issuer on Form 6-K furnished to the SEC on November 1, 2018 and incorporated
by reference herein.
(11) Previously filed with the SEC on March 22, 2018 as Exhibit 4.6 to the annual report on Form 20-F for the year ended December 31, 2017 and
incorporated by reference herein.
99
104
___________________
(1)
ALLOT LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2020
U.S. DOLLARS IN THOUSANDS
ALLOT LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2020
U.S. DOLLARS IN THOUSANDS
INDEX
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Loss
Consolidated 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-47
Kost Forer Gabbay & Kasierer
144 Menahem Begin Road, Building A
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
ALLOT LTD.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Allot LTD. (the "Company") as of December 31, 2020 and 2019 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, 2020 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company's internal control over financial reporting as of December 31, 2020, 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 15, 2021 expressed an
unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
F - 2
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated
or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on
the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the
critical audit matter or on the accounts or disclosures to which it relates.
Description
of the
Matter
How We
Addressed
the Matter
in Our
Audit
Revenue Recognition
As described in Note 2.M to the consolidated financial statements, the Company derives revenues from sales of products, related
maintenance and support services and professional services. The Company’s contracts with customers often contain multiple performance
obligations which are accounted for separately when they are distinct. The Company allocates the transaction price to the distinct
performance obligations on a relative standalone selling price basis and recognizes revenue when control is transferred. Product revenues
are recognized at the point in time when the product has been delivered. The Company recognizes revenues from maintenance and support
services ratably over the term of the applicable maintenance and support agreement. Revenues from professional services are recognized,
when the services are provided or once the service term has expired.
Auditing the Company’s revenue recognition was complex due to the effort required to evaluate whether products and services are
considered distinct performance obligations that should be accounted for separately. In addition, subjective assumptions used in developing
the sated alone selling price of distinct performance obligations.
We obtained an understanding, evaluated design and tested the operating effectiveness of internal controls related to the identification of
distinct performance obligations, the determination of the stand-alone selling prices and the timing of revenue recognition.
Among the procedures we performed to test the identification and determination of distinct performance obligations, for a sample of
contracts, we read the executed contract to understand and evaluated management’s identification of significant terms for completeness,
including the identification of distinct performance obligations.
To test management’s determination of stand-alone selling price for each performance obligation, we performed procedures to evaluate the
methodology applied, tested the accuracy of the underlying data and calculations and the application of that methodology to the sample of
contracts.
We also tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the
financial statements.
We used Analytical tools in order to analyze and investigate and validate a full correlation between revenues, trade receivables and cash.
Finally, we assessed the appropriateness of the related disclosures in the consolidated financial statements.
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company's auditor since 2006.
Tel-Aviv, Israel
March 15, 2021
F - 3
Kost Forer Gabbay & Kasierer
144 Menahem Begin Road, Building A
Tel-Aviv 6492102, 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 LTD.
Opinion on Internal Control over Financial Reporting
We have audited Allot LTD. internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the "COSO Criteria"). In
our opinion, Allot LTD. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of the Company as of December 31, 2020 and 2019, 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, 2020, and the related notes and our report dated March
15, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures, as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
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.
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.
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company's auditor since 2006.
Tel-Aviv, Israel
March 15, 2021
F - 4
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Restricted deposits
Short-term bank deposits
Available-for-sale marketable securities
Trade receivables (net of allowance for credit losses of $ 2,309 and $ 1,867 at December 31, 2020 and 2019,
$
respectively)
Other receivables and prepaid expenses
Inventories
Total current assets
NON-CURRENT ASSETS:
Restricted deposits
Long-term bank deposits
Severance pay fund
Operating lease right-of-use assets
Deferred taxes
Other assets
Property and equipment, net
Intangible assets, net
Goodwill
Total non- current assets
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
ALLOT LTD.
December 31,
2020
2019
$
23,599
1,200
47,225
27,178
20,685
14,205
12,586
16,930
23,183
5,557
61,012
29,008
6,528
10,668
146,678
152,886
-
215
434
4,458
420
2,975
11,993
2,744
31,683
54,922
10,913
-
387
6,368
517
926
8,135
3,354
31,683
62,283
$
201,600
$
215,169
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
Short-term operating lease liabilities
Other payables and accrued expenses
Total current liabilities
LONG-TERM LIABILITIES:
Deferred revenues
Long-term operating lease liabilities
Accrued severance pay
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, 2020 and 2019; Issued:
36,198,638 and 35,336,728 shares at December 31, 2020 and 2019, respectively; Outstanding: 35,382,638 and
34,520,728 shares at December 31, 2020 and 2019, respectively
Additional paid-in capital
Treasury stock at cost - 816,000 shares at December 31, 2020 and 2019.
Accumulated other comprehensive income (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 LTD.
December 31,
2020
2019
$
$
2,092
14,138
26,658
2,813
13,161
58,862
9,782
1,835
969
12,586
11,676
12,041
36,360
3,151
10,214
73,442
5,262
3,820
794
9,876
896
283,065
(3,998)
146
(149,957)
871
276,112
(3,998)
(525)
(140,609)
130,152
131,851
$
201,600
$
215,169
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 $ 339, $ 378 and $ 374 for the years
ended December 31, 2020, 2019 and 2018, respectively)
Sales and marketing
General and administrative
Total operating expenses
Operating loss
Financial income, net
Loss before income tax expense
Income tax expense
Net loss
Unrealized gain (loss) on available-for-sale marketable securities
Net amount reclassified to earnings from available-for-sale marketable securities
Total comprehensive gain (loss) from available-for-sale marketable securities
Unrealized gain (loss) on foreign currency cash flow hedges transactions
Net amount reclassified to earnings from hedging transactions
Total comprehensive gain (loss) from hedge transactions
Total comprehensive loss
Net loss per share:
Basic and diluted
ALLOT LTD.
Year ended December 31,
2019
2020
2018
$
$
92,524
43,398
135,922
$
67,440
42,660
110,100
28,524
11,558
40,082
95,840
43,447
47,528
13,894
104,869
(9,029)
1,857
(7,172)
2,176
22,743
11,091
33,834
76,266
31,461
47,105
6,678
85,244
(8,978)
1,960
(7,018)
1,641
56,169
39,668
95,837
20,061
9,288
29,349
66,488
25,418
40,849
10,416
76,683
(10,195)
2,208
(7,987)
2,428
$
(9,348) $
(8,659) $
(10,415)
191
(40)
151
723
(203)
520
666
4
670
(332)
(96)
(428)
(216)
(10)
(226)
(1,480)
903
(577)
(8,677) $
(8,417) $
(11,218)
(0.27) $
(0.25) $
(0.31)
$
$
Weighted average number of shares used in per share computations of net loss:
Basic and diluted
35,007,201
34,250,582
33,710,507
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands, except share data
ALLOT LTD.
Ordinary shares
Outstanding
shares
Amount
Additional
paid-in
capital
Treasury
stock
Accumulated
other
comprehensive
income (loss)
Accumulated
deficit
Total
shareholders'
equity
33,483,262
851
268,487
(3,998)
36
(122,247)
143,129
-
412,999
-
-
-
-
2
-
-
-
-
416
2,862
-
-
-
-
-
-
-
-
-
-
712
-
-
(803)
-
-
(10,415)
712
418
2,862
(803)
(10,415)
33,896,261
853
271,765
(3,998)
(767)
(131,950)
135,903
624,467
-
-
-
18
-
-
-
974
3,373
-
-
-
-
-
-
-
-
242
-
-
-
-
(8,659)
992
3,373
242
(8,659)
34,520,728
871
276,112
(3,998)
(525)
(140,609)
131,851
861,910
-
-
-
25
-
-
-
1,810
5,143
-
-
-
-
-
-
-
-
671
-
-
-
-
(9,348)
1,835
5,143
671
(9,348)
35,382,638
896
283,065
(3,998)
146
(149,957)
130,152
Balance as of January 1,
2018
Cumulative effect of
new accounting
standard (See Note 1)
Exercise of stock
options and restricted
stock units
Stock-based
compensation
Other comprehensive
loss
Net loss
Balance as of December
31, 2018
Exercise of stock
options and restricted
stock units
Stock-based
compensation
Other comprehensive
income
Net loss
Balance as of December
31, 2019
Exercise of stock
options and restricted
stock units
Stock-based
compensation
Other comprehensive
income
Net loss
Balance as of December
31, 2020
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
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
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 available-for sale marketable
securities
Decrease (increase) in operating lease right-of-use asset
Increase (decrease) in operating leases liability
Decrease (increase) in trade receivables
Increase in other receivables and prepaid expenses
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
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Decrease (increase) in restricted deposits
Redemption of (Investment in) short-term deposits
Purchase of property and equipment
Investment in available-for sale marketable securities
Proceeds from sales and maturity of available-for sale marketable securities
Acquisition of Netonomy, net of cash
ALLOT LTD.
Year ended December 31,
2019
2020
2018
$
(9,348) $
(8,659) $
(10,415)
4,312
5,198
18
128
(2,048)
357
1,910
(2,323)
8,323
(7,272)
(1,918)
96
(9,584)
2,047
(5,182)
3,061
(12,225)
32,896
(41,883)
(7,582)
(1,219)
34,847
-
4,359
3,420
-
(54)
(326)
343
(6,368)
6,971
(2,915)
(3,168)
(253)
(236)
3,863
4,635
23,520
(9,040)
16,092
(33,374)
16,986
(3,708)
(39,950)
43,555
-
3,834
2,862
39
16
535
804
-
-
(3,356)
(1,101)
(3,448)
20
1,945
(1,178)
3,566
6,906
1,029
(294)
8,500
(3,485)
(34,777)
32,651
(3,048)
Net cash provided by (used in) investing activities
17,059
(16,491)
(453)
F - 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from financing activities:
Proceeds from exercise of stock options
Net cash provided by financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Supplementary cash flow information:
Cash paid during the year for:
Taxes
Non-cash activity:
Right-of-use assets obtained in the exchange for operating lease liabilities
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
ALLOT LTD.
Year ended
December 31,
2019
2020
2018
1,835
1,835
6,669
16,930
993
993
594
16,336
418
418
994
15,342
23,599
$
16,930
$
16,336
410
$
473
$
347
1,080
$
1,208
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:-
GENERAL
ALLOT LTD.
a. Allot 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 of leading innovative network intelligence (“AllotSmart”) and security solutions (“AllotSecure”) for
mobile and fixed service providers as well as enterprises worldwide. Our solutions are deployed globally for network and application
analytics, traffic control and shaping, network-based security including mobile security, distributed denial of service (DDoS)
protection, IoT security, and more. AllotSmart generates insightful intelligence that allows CSPs to analyze every packet of network,
user, application and security data, CSPs can see, control and secure their networks, optimizing performance, minimizing costs and
maximizing end-user QoE. AllotSecure provide security service for the mass market and SMB at home, at work and on the go for
mobile, fixed and 5G converged networks. AllotSecure enables customers to detect security breaches and protect networks and network
users from attacks.
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 thirteen wholly-owned subsidiaries (the Company together with said subsidiaries shall collectively be referred to
as "Allot"): Allot Communications, Inc. in Burlington, 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 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 subsidiary”), which was incorporated in 2013 under the laws of Hong-Kong, Allot Communications
Spain, S.L. Sociedad Unipersonal (the "Spanish subsidiary”), which was incorporated in 2015 under the laws of Spain, Allot
Communications (Colombia) S.A.S (the "Colombian subsidiary”), which was incorporated in 2015 under the laws of Colombia and
Allot MexSub (the "Mexican subsidiary"), which was incorporated in 2015 under the laws of Mexico, Allot Turkey Komunikasion
Hizmeleri limited (the “Turkish subsidiary”), which was incorporated in 2018 under laws of Turkey, Allot Australia (PTY) LTD (the
“Australian subsidiary”), which was incorporated in 2018 under the laws of Australia.
F - 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:-
GENERAL (Cont.)
ALLOT LTD.
The French, Singaporean, Indian, Colombian and U.S, subsidiaries are engaged in sales and marketing, technical support services and
other services of the Company's products. The European (excluding Spanish), Japanese, UK, HK, African, Turkish and Australian
subsidiaries are engaged in sales and marketing and other services.
The Spanish and Mexican subsidiaries commenced operations in 2015 and are engaged in the marketing, technical support and
development activities of one of the Company's product lines.
b. Acquisition:
On January 14, 2018 (the "Netonomy acquisition date"), the Company entered into a purchase agreement with the shareholders of
Netonomy LTD ("Netonomy"), a developer of software-based cybersecurity solutions for the connected home.
The total consideration for the acquisition was $3,765, which consisted of $ 3,180 paid in cash, holdback amount summing to $ 303
and additional contingent consideration at a fair value of $ 282 at the Netonomy acquisition date. As of December 31, 2020, the
contingent consideration is estimated at a fair value of $ 834, The change in fair value of the contingent consideration was recorded to
operating expenses.
According to the agreement, the holdback amount (“Holdback Amount”) summing to $ 1,100 would be held to partially satisfy any
claims for indemnification. Such amount shall be paid in three installments consisting each one 40%, 40% and 20% of the Holdback
amount following the first, second and 30-months anniversaries of the Closing Date, respectively. Notwithstanding the aforementioned,
a sum of $ 797 out of the Holdback amount shall be paid provided that certain employees keep working in the Company during the
here mentioned periods (“the Restricted Holdback Amount”). As of December 31, 2020 the Company has no Holdback liability.
In this agreement, the contingent consideration was payable over a two-and-a-half-year term, starting April 1, 2018 and ended
September 30, 2020 ("Contingent Consideration Period") depending on the Company’s revenues from Netonomy’s technology, and has
payments cap of $ 1,100. A maximum sum of $ 797 out of the contingent consideration amount shall be paid provided that certain
employees keep working in the Company during the mentioned period. The obligations in respect of the holdback amount and the
contingent consideration are presented under Other payables and accrued expenses.
As of December 31, 2020, the Contingent Consideration Period ended however, the Contingent Consideration was not settled yet.
F - 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:-
GENERAL (Cont.)
ALLOT LTD.
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.
On July 2018, the merger of Netonomy with the Company was approved by the Israeli tax authorities with Allot as the receiving
company and Netonomy as the transferring company and March 31, 2018 as the Merger Date.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
Non-current assets
Account Payable
Other Payables
IPR&D
Goodwill
Net assets acquired
Fair value
$
$
4
(11)
(142)
3,659
121
3,631
The acquired assets are net of cash balance of $132.
IPR&D is related to new technology that is still under development. Netonomy’s solution provides a simple, reliable and secure
network for connected homes through a minimal footprint agent installed on the home router, which provides visibility into the network
and blocks external and internal attacks. Acquisition costs in a total amount of $49 were recorded to operating expenses. The Company
started to depreciate the IPR&D asset from Q3 2019 as the R&D phase was completed and the related product was ready to be sold.
Unaudited pro forma condensed results of operations:
Pro forma results of operations related to this acquisition have not been prepared because they are not material to the Company’s
consolidated Statements of Comprehensive Loss.
F - 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES
ALLOT LTD.
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.
The novel coronavirus (“COVID-19”) pandemic has created, and may continue to create, significant uncertainty in macroeconomic
conditions, and the extent of its impact on the Company’s operational and financial performance will depend on certain developments,
including the duration and spread of the outbreak and the impact on the Company’s customers and its sales cycles. The Company
considered the impact of COVID-19 on the estimates and assumptions and determined that there were no material adverse impacts on
the consolidated financial statements for the period ended December 31, 2020. As events continue to evolve and additional information
becomes available, the Company’s estimates and assumptions may change materially in future periods.
b.
Financial statements in U.S. dollars:
The majority operation of the Company and its subsidiaries are generated in U.S. dollars ("dollar") or linked to the dollar. 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 a 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 fulfillment of forward contracts and operating obligations.
F - 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
f.
Short-term bank deposits:
ALLOT LTD.
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 an annual weighted average rate of 0.85% and 2.33% at December 31, 2020 and 2019,
respectively. In connection with the Company's hedging transactions, the Company is required to maintain compensating deposits
balances in the bank. Out of the short-term bank deposits, a total of $2,500 is due to the hedging transactions as of December 31, 2020
and 2019.
g. Trade Receivable and Allowances:
Trade receivables are recorded and carried at the original invoiced amount which was recognized as revenues less an allowance for any
potential uncollectible amounts. The Company makes estimates of expected credit losses for the allowance for doubtful accounts and
allowance for unbilled receivables based upon its assessment of various factors, including historical experience, the age of the trade
receivable balances, credit quality of its customers, current economic conditions, reasonable and supportable forecasts of future
economic conditions, and other factors that may affect its ability to collect from customers. The estimated credit loss allowance is
recorded as general and administrative expenses on the Company’s consolidated statements of income (loss).
The follow table displays a rollforward of the total allowance for credit losses for the years ended December 31, 2020, 2019, and 2018.
Total allowance for credit losses – January 1
Current-period provision for expected credit losses
Write-offs
Recoveries collected
Total allowance for credit losses – December 31
F - 15
2020
2019
2018
1,867
1,894
(934)
(518)
2,309
1,415
866
(3)
(411)
1,867
1,292
504
(11)
(370)
1,415
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
h. Marketable securities:
ALLOT LTD.
Marketable securities consist mainly of corporate bonds. The Company determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such designation at each balance sheet date. In accordance with FASB ASC No. 320
“Investments- Debt and Equity Securities,” the Company classifies marketable securities as available-for-sale. Available-for-sale
securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a
separate component of stockholders’ equity, net of taxes. Realized gains and losses on sales of marketable securities, as determined on
a specific identification basis, are included in financial income, net. The amortized cost of marketable securities is adjusted for
amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in financial income,
net. The Company has classified all marketable securities as short-term, even though the stated maturity date may be one year or more
beyond the current balance sheet date, because it is probable that the Company will sell these securities prior to maturity to meet
liquidity needs or as part of risk versus reward objectives.
Starting on January 1, 2020, as a result of the adoption of ASC 326, available-for-sale debt securities with an amortized cost basis in
excess of estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses.
Expected credit losses on available-for-sale debt securities are recognized in interest and other income (expense), net, on the
Company’s consolidated statements of income (loss), and any remaining unrealized losses, net of taxes, are included in accumulated
other comprehensive income (loss) in stockholders' equity. As of December 31,2020, no credit loss impairment was recorded regarding
the available for sale marketable securities.
Prior to the adoption of ASC 326, The Company's securities were reviewed for impairment in accordance with ASC 320. If such assets
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 2020,
2019 and 2018, were not OTTI.
i.
Inventories:
Inventories are stated at the lower of cost or net realizable 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
years ended December 31, 2020, 2019 and 2018 amounted to $ 1,928, $ 629 and $ 2,231, respectively, and were recorded in cost of
revenues.
Provision for slow moving inventory as of December 31, 2020 and 2019 amounted to $ 4,624 and $ 2,839, respectively.
Inventory cost is determined using the weighted average cost method.
F - 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
j.
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:
ALLOT LTD.
Lab equipment
Computers and peripheral equipment
Office furniture
Equipment at customer site
Leasehold improvements
k. Goodwill:
%
16 - 25
33
6
16
Over the shorter of the term
of the lease or the useful life
of the asset
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 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill
impairment test. If the qualitative assessment does not result in a more likely than not indication of impairment, no further impairment
testing is required. If the Company elects not to use this option, or if the Company determines that it is more likely than not that the fair
value of a reporting unit is less than its carrying value, then the Company prepares a quantitative analysis to determine whether the
carrying value of reporting unit exceeds its estimated fair value. If the carrying value of a reporting unit exceeds its estimated fair value,
the Company recognizes an impairment of goodwill for the amount of this excess, in accordance with the guidance in FASB
Accounting Standards Update ("ASU") No. 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill
Impairment, which we adopted as of January 1, 2020.
The Company operates in one operating segment, and this segment comprises its only reporting unit. The Company has performed an
annual impairment analysis as of December 31, 2020 and determined that the carrying value of the reporting unit was lower than the
fair value of the reporting unit. Fair value is determined using market value. During the years 2020, 2019 and 2018, no impairment
losses were recorded.
F - 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
l.
Impairment of long-lived assets and intangible assets subject to amortization:
ALLOT LTD.
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.
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.
The Company has performed an annual impairment analysis as of December 31, 2020 and determined that there were no circumstances
indicate the asset’s carrying value may not be recoverable. During the years 2020, 2019 and 2018, no impairment losses were recorded.
m. 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. Some of the Company’s product sales are
through resellers, distributors, OEMs and system integrators, all of whom are considered end-users. The Company also generates
revenues from services, in which the Company provides network filtering and security services to its customers.
The Company adopted accounting standards codification 606, "Revenue from Contracts with Customers" ("ASC 606"), effective on
January 1, 2018. The Company recognizes revenue under the core principle that transfer of control to the Company’s customers should
be depicted in an amount reflecting the consideration the Company expects to receive. As such, the Company identifies a contract with
a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to
each performance obligation in the contract and recognizes revenues when (or as) the Company satisfies a performance obligation.
Some of the Company's contracts usually include combinations of products and services, that are capable of being distinct and
accounted for as separate performance obligations. The products are distinct as the customer can derive the economic benefit of it
without any professional services, updates or technical support. The Company allocates the transaction price to each performance
obligation based on its relative standalone selling price out of the total consideration of the contract. For support, the Company
determines the standalone selling prices based on the price at which the Company separately sells a renewal support contract on a
stand-alone basis. For professional services, the Company determines the standalone selling prices based on the price at which the
Company separately sells those services on a stand-alone basis. If the standalone selling price is not observable, the Company estimates
the standalone selling price by taking into account available information such as geographic or regional specific factors, internal costs,
profit objectives, and internally approved pricing guidelines related to the performance obligation.
Product revenue is recognized at a point in time when the performance obligation is being satisfied. Maintenance and support related
revenues are deferred and recognized on a straight-line basis over the term of the applicable maintenance and support agreement.
Professional services are usually recognized at a point in time when the performance obligation is being satisfied.
The Company also enters into service contracts, in which the Company provide security as a service solution to operators, which the
Company considers as its customers. The Company's security as a service solution is offered to operators on a Revenue Share business
model, where both the Company and the operator share the revenue generated from the operator's subscribers. Most of the Company's
security as a service contracts contain a single performance obligation comprised of series of distinct goods and services satisfied over
time. The contracts consideration is based on usage by the operator's subscribers. As such, the Company allocates the variable
consideration in those contracts to distinct service periods in which the service is provided and recognizes revenue for each distinct
service period.
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 LTD.
Deferred revenue includes amounts received from customers for which revenue has not yet been recognized. Deferred revenues are
classified as short and long-term based on their contractual term and recognized as (or when) the Company performs under the contract.
The portion of the transaction price allocated to remaining performance obligations represents contracts that have not yet been
recognized that include deferred revenue and amounts not yet received that will be recognized as revenue in future periods. The
aggregate amount of the transaction price allocated to remaining performance obligations that the Company expects to recognize is $
110 million of which approximately $77 million is estimated to be recognized before December 31, 2021 and approximately $33
million is estimated to be recognized after December 31, 2021.
The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such
that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or
less.
The Company pays sales commissions to sales and marketing personnel based on their certain predetermined sales goals. The company
evaluates its commission and capitalize only incremental commissions costs which are considered recoverable costs of obtaining a
contract with a customer. These capitalized sales commissions costs are amortized over a period of benefit which is typically over the
term of the customer contracts as initial commission rates are commensurate with the renewal commission rates. Amortization
expenses related to these costs are included in sales and marketing expenses in the consolidated statements of operations. For the year
ended December 31, 2020, the amortization of deferred commission was $1,286. The Company uses the practical expedient and does
not assess the existence of a significant financing component when the difference between payment and revenue recognition is a year or
less.
The Company estimated variable consideration related to product returns based on its experience with historical product returns and
other known factors. Such provisions amounted to $290 and $163 as of December 31, 2020 and 2019, respectively. As of December 31,
2020 and 2019, this provision was recorded as part of other payables and accrued expenses.
Following the adoption of ASC 606 in January 1, 2018, the Company recognizes for term-based license agreements at the point in time
when control transfers and the associated maintenance revenues over the contract period. Adoption of the standard has resulted in a
reduction of deferred revenues of $712 that was recorded in accumulated deficit due to upfront recognition of license revenues from
term licenses.
n. Cost of revenues:
Cost of revenues consists primarily of costs of materials and the cost of maintenance and services, resulting from costs associated with
support, customer success and professional services.
F - 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
o. Advertising expenses:
ALLOT LTD.
Advertising expenses are charged to the statement of comprehensive loss, as incurred. Advertising expenses for the years ended
December 31, 2020, 2019 and 2018 amounted to $ 1,103, $ 1,274 and $ 1,270, respectively.
p. 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.
q.
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.
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 the current ruling, they are legally released from the 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, 2020, 2019 and 2018, amounted to $ 3,619, $ 2,249 and $ 1,950, respectively.
F - 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
r. Accounting for stock-based compensation:
ALLOT LTD.
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. The Company recognizes
compensation expenses for the value of its awards based on the straight-line method over the requisite service period of each of the
awards, net of estimated forfeitures.
The Company accounted for changes in award terms as a modification in accordance with ASC 718. A modification to the terms of an
award should be treated as an exchange of the original award for a new award with total compensation cost equal to the grant-date fair
value of the original award plus the incremental value measured at the same date. Under ASC 718, the calculation of the incremental
value is based on the excess of the fair value of the new (modified) award based on current circumstances over the fair value of the
original award measured immediately before its terms are modified based on current circumstances.
The Company estimated the forfeiture rate based on historical forfeitures of equity awards and adjusted the rate to reflect changes in
facts and circumstances if any. The Company adopted ASU 2016-09 in the first quarter of the fiscal year 2017 and elected to retain its
existing accounting policy and estimate expected forfeitures.
The following table sets forth the total stock-based compensation expense resulting from stock options, restricted share units and
Phantoms granted to employees included in the consolidated statements of comprehensive loss, for the years ended December 31, 2020,
2019 and 2018:
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total stock-based compensation expense
F - 21
Year ended
December 31,
2019
2020
2018
$
$
$
355
1,368
2,145
1,330
$
264
847
1,257
1,052
316
678
928
940
5,198
$
3,420
$
2,862
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company selected the binomial option pricing model as the most appropriate fair value method for its stock options awards with
the following assumptions for the years ended December 31, 2018:
ALLOT LTD.
Suboptimal exercise multiple
Risk free interest rate
Volatility
Dividend yield
Year ended
December 31,
2018
2.9-3.5
2.09%-3.05%
26%-47%
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 pre-vesting and post-vesting are in the range of 0%-33% and 0%-41%, respectively, in the years 2020, 2019
and 2018. During 2019 and 2020 no options were granted by the Company.
The computations of expected volatility and suboptimal exercise multiple is based on the average of the Company's realized historical
stock price. The computation of the suboptimal exercise multiple and the forfeiture rates are based on the grantee's expected exercise
prior and post vesting termination behavior. The interest rate for a 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.
The option pricing model of the of restricted stock units ("RSUs") is based on the closing market value of the underlying shares at the
date of grant.
s.
Treasury stock:
In the past, the Company repurchased its Ordinary shares 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.
t.
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.
F - 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT LTD.
The majority of cash and cash equivalents and short-term deposits of the Company are invested in dollar deposits in major U.S. and
Israeli banks. Such investments 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.
Marketable securities include investments in dollar linked corporate and government bonds. Marketable securities consist of highly
liquid debt instruments with high credit standing. The Company’s investment policy, approved by the Board of Directors, limits the
amount the Group may invest in any one type of investment or issuer, thereby reducing credit risk concentrations. Management
believes that the portfolio is well diversified and, accordingly, minimal credit risk exists with respect to these marketable debt
securities.
The Company's trade receivables are derived from sales to customers located in EMEA, as well as in APAC, Latin America and the
United States. 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
credit losses on a specific basis. Allowance for credit losses amounted to $ 2,309 and $ 1,867 as of December 31, 2020 and 2019,
respectively.
The Company utilizes foreign currency forward contracts to protect against risk of overall changes in exchange rates. The derivative
instruments hedge a portion of the Company's non-dollar currency exposure. Counterparties to the Company’s derivative instruments
are all major financial institutions and its exposure is limited to the amount of any asset resulting from the forward contracts.
u. Grants from the Israel Innovation Authority:
Participation grants from the Israel Innovation Authority (Previously known as the Office of the Chief Scientist) 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 $ 339, $
378 and $ 374 in 2020, 2019 and 2018, respectively.
v.
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.
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 LTD.
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. The deferred tax assets and liabilities are classified
to non-current assets and liabilities, respectively.
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. The Company classifies interest related to unrecognized tax benefits in taxes on income.
w. Basic and diluted net income (loss) per share:
Basic net income (loss) per share is computed based on the weighted average number of Ordinary Shares outstanding during each year.
Diluted net income (loss) 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, 2020, 2019 and 2018, all outstanding options and RSUs have been excluded from the calculation of
the diluted net loss per share since their effect was anti-dilutive. See Note 16. The amount of those options and RSU’s was: 2,897,273,
3,105,801, 2,998,174 respectively.
x. Comprehensive 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 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 other
comprehensive loss relate to unrealized gains and losses on hedging derivative instruments and unrealized gains and losses on
available-for-sale marketable securities.
F - 24
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, 2020:
ALLOT LTD.
Balance as of December 31, 2019
Changes in other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive loss to:
Cost of revenues
Operating expenses
Financial income, net
Net current-period other comprehensive income
Year ended
December 31, 2020
Unrealized
gains
(losses) on
cash
flow hedges
Unrealized
gain (losses) on
marketable
securities
$
$
321
191
(846) $
723
-
-
(40)
151
(5)
(198)
-
520
Balance as of December 31, 2020
$
472
$
(326) $
Total
(525)
914
(5)
(198)
(40)
671
146
There was no income tax expense or benefit allocated to other comprehensive income, including reclassification adjustments for the
year ended December 31, 2020.
y.
Fair value of financial instruments:
The carrying amounts of short-term bank deposits, trade receivables, other receivables, trade payables and other payables approximate
their fair value due to the short-term maturities of such instruments.
The Company measures its cash and cash equivalents, marketable securities, derivative instruments and earn-out considerations 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
F - 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT LTD.
Level 3 -
Unobservable inputs which are supported by little or no market activity.
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 measures its marketable securities and foreign currency derivative contracts at fair value. Marketable securities and
foreign currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market
observable data of similar instruments.
The Company's earn-out considerations were classified within Level 3. In previous years, the valuation methodology used by the
Company to calculate the fair value consideration is the discounted cash flow using the Monte-Carlo simulation method by taking into
account, forecast future revenues, expected volatility of 42.5% for Optenet and 20.7% for Netonomy and the weighted average cost of
debt of 2%.
As of December 31, 2020, no fair value measurement is required for both earn-outs. See Note 4.
z. Derivatives and hedging:
The Company accounts for derivatives and hedging based on Accounting Standards Codifiation 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. As a result of
adopting new accounting guidance discussed in Note 2, " Recently adopted accounting pronouncements," beginning January 1, 2019,
gains and losses on the derivatives instruments that are designated and qualify as a cash flow hedge are recorded in accumulated other
comprehensive income (loss) and reclassified into in the same accounting period in which the designated forecasted transaction or
hedged item affects earnings. Prior to January 1, 2019, cash flow hedge ineffectiveness was separately measured and reported
immediately in earnings. Cash flow hedge ineffectiveness was immaterial during 2018 and 2017. To apply hedge accounting treatment,
cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions.
aa. 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.
F - 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ab. Lease:
ALLOT LTD.
On January 1, 2019, the Company adopted ASU No. 2016-02, Leases (ASC 842). The Company determines if an arrangement is a
lease and the classification of that lease at inception based on: (1) whether the contract involves the use of an identified asset, (2)
whether the Company obtains the right to substantially all the economic benefits from the use of the asset throughout lease period, and
(3) whether the Company has a right to direct the use of the asset. The Company elected to not recognize a lease liability and a right-of-
use (“ROU”) asset for leases with a term of twelve months or less. The Company also elected the practical expedient to not separate
lease and non-lease components for its leases.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make
minimum lease payments arising from the lease. ROU assets are initially measured at amounts, which represents the discounted present
value of the lease payments over the lease, plus any initial direct costs incurred. The lease liability is initially measured at lease
commencement date based on the discounted present value of minimum lease payments over the lease term. The implicit rate within
the company's operating leases is generally not determinable, therefore the Company uses the it's Incremental Borrowing Rate (“IBR”)
based on the information available at commencement date in determining the present value of lease payments. The Company’s IBR is
estimated to approximate the interest rate for collateralized borrowing with similar terms and payments and in economic environments
where the leased asset is located. Certain leases include options to extend or terminate the lease.
An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably
certain that the Company will exercise that option. An option to terminate is considered unless it is reasonably certain that the
Company will not exercise the option.
Payments under our lease arrangements are primarily fixed, however, certain lease agreements contain variable payments, which are
expensed as incurred and not included in the operating lease right-of-use assets and liabilities. Variable lease payments are primarily
comprised of payments affected by common area maintenance and utility charges.
ac. Warranty costs:
The Company generally provides three months software and a one-year hardware warranty for 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, 2020, 2019 and 2018 were immaterial.
ad. Recently Adopted Accounting Pronouncements:
On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments – Credit
Losses on Financial Instruments” (“ASU 2016-13”), which requires that expected credit losses relating to financial assets be measured
on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13
limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds
fair value and also requires the reversal of previously recognized credit losses if fair value increases. The Company adopted ASU 2016-
13 using the modified retrospective approach as of January 1, 2020. The adoption by the Company of the new guidance did not have a
material impact on its consolidated financial statements.
On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2017-04, “Intangibles - Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 eliminates the requirement to measure the
implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (the "Step 2
test") from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit. The adoption did not have a
material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842). The standard requires the recognition of ROU assets and
lease liabilities for all leases. The standard requires a modified retrospective transition approach to recognize and measure leases at the
initial application.
F - 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ALLOT LTD.
The Company adopted the standard as of January 1, 2019, using a modified retrospective transition approach and elected to use the
effective date as the date of initial application. The Company adopted the ”package of practical expedients”, which permits it not to
reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs.
The standard had a material impact on the Company’s consolidated balance sheets which resulted in the recognition of ROU assets and
lease liabilities of $6.7 million and $6.7 million, respectively, on January 1, 2019, which included reclassifying deferred rent and rent
prepayments as components of the ROU assets. The standard did not have a material impact on the Company's consolidated statements
of comprehensive income.
The Company adopted Accounting Standards Update (“ASU”) No. 2017- 12, “Derivatives and Hedging” (Topic 815): Targeted
Improvements to Accounting for Hedging Activities, which amended the eligibility criteria for hedged items and transactions to expand
an entity’s ability to hedge nonfinancial and financial risk components. The new guidance eliminates the requirement to separately
measure and present hedge ineffectiveness and aligns the presentation of hedge gains and losses with the underlying hedge item. The
new guidance also simplifies the hedge documentation and hedge effectiveness assessment requirements. The amended presentation
and disclosure requirements were adopted on a prospective basis, while any amendments to cash flow and net investment hedge
relationships which existed on the date of adoption were applied on a “modified retrospective” basis, meaning a cumulative effect
adjustment to the opening balance of retained earnings as of the beginning of the year of adoption. The new guidance was effective for
the Company on January 1, 2019 and the adoption did not have a material impact on the Company’s consolidated financial statements.
ae. Recently Issued Accounting Pronouncement Not Yet Adopted:
In December 2019, the FASB issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): “Simplifying the
Accounting for Income Taxes” (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for us
in the first quarter of 2021 on a prospective basis, and early adoption is permitted. The Company is currently evaluating the impact of
the new guidance on its consolidated financial statements.
F - 28
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:
ALLOT LTD.
December 31, 2020
Gross
Gross
unrealized
unrealized
loss
gain
Amortized
cost
Fair
value
Amortized
cost
December 31, 2019
Gross
Gross
unrealized
unrealized
loss
gain
Fair
value
Available-for-sale - matures
within one year:
Governmental debentures
Corporate debentures
$
-
12,611
$
Available-for-sale - matures
after one year through
three years:
Governmental debentures
Corporate debentures
Available-for-sale - matures
after three years through
five years:
Corporate debentures
$
-
97
97
3
364
367
12,611
379
13,181
13,560
535
535
26,706
$
$
8
8
472
$
-
-
-
-
-
-
-
-
-
$
-
12,708
$
449
30,928
$
12,708
31,377
$
1
79
80
382
13,545
855
23,653
13,927
24,508
1
197
198
-
(8)
(8)
-
(7)
(7)
$
450
30,999
31,449
856
23,843
24,699
543
543
$ 27,178
4,806
4,806
60,691
$
$
58
58
336
$
-
-
(15) $
4,864
4,864
61,012
As of December 31, 2020, the Company had no investments with a significant unrealized loss for more than 12 months.
As of December 31,2020, no credit loss impairment was recorded regarding the available for sale marketable securities.
NOTE 4:-
FAIR VALUE MEASUREMENTS
In accordance with ASC No. 820, the Company measures its 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.
In previous years, the earn-out liability related to the acquisitions of Optenet and Netonomy are classified within Level 3 because these
liabilities were based on present value calculations and an external valuation model whose inputs include market interest rates, estimated
operational capitalization rates and volatilities. The fair value of the consideration was determined according to discounted cash flow. As of
December 31, 2020 no valuation was needed for both Openet and Netonomy earn-outs.
F - 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:-
FAIR VALUE MEASUREMENTS (Cont.)
The Company's financial net assets measured at fair value on a recurring basis, including accrued interest components, consisted of the
following types of instruments as of December 31, 2020 and 2019, respectively:
ALLOT LTD.
Available-for-sale marketable securities
Foreign currency derivative contracts
Total financial net assets
Available-for-sale marketable securities
Foreign currency derivative contracts
Earn-out liability
Total financial net assets
NOTE 5:-
DERIVATIVE INSTRUMENTS
As of December 31, 2020
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
-
-
-
$
$
27,178
(952)
$
26,226
$
-
-
-
$
$
27,178
(952)
26,226
As of December 31, 2019
Fair value measurements using input type
Level 1
Level 2
Level 3
Total
-
-
-
-
$
$
$
61,012
(871)
-
$
-
-
(1,100)
61,012
(871)
(1,100)
60,141
$
(1,100) $
59,041
$
$
$
$
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), trade receivables and forecasted revenues denominated in currencies
other than U.S. dollar.
F - 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5:-
DERIVATIVE INSTRUMENTS (Cont.)
ALLOT LTD.
The Company currently hedges such future exposures for a maximum period of two years. 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. Cash flow
hedges are recorded in other comprehensive income (loss) until the hedged item is recognized in earnings. The Company does not enter into
derivative transactions for trading purposes. The net income (loss) recognized in "Financial income (expense), net" during the years ended
December 31, 2020, 2019 and 2018 was $1,200, $534 and $1,480, respectively.
The Company had a net unrealized loss associated with cash flow hedges of $326 and $846 recorded in other comprehensive loss as of
December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, the Company had outstanding hedge transactions in the net
amount of $ 8,700 and $ 36,169, respectively.
The fair value of the outstanding foreign exchange contracts recorded by the Company on its consolidated balance sheets as of December
31, 2020 and 2019, as assets and liabilities are as follows:
Foreign exchange forward and
options contracts
Balance sheet
Fair value of foreign exchange hedge transactions Other receivables and prepaid expenses
Fair value of foreign exchange hedge transactions Other payables and accrued expenses
Total derivatives designated as hedging
instruments
Other Comprehensive loss
December 31,
2020
2019
$
$
$
2,258
(3,224)
158
(1,041)
(326) $
(846)
Gain or loss on the derivative instruments, which partially offset the foreign currency impact from the underlying exposures, reclassified
from other comprehensive loss to operating expenses and cost of revenues for the years ended December 31, 2020, 2019 and 2018 were $
203, $ (96) and $ 903, 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 the re-measurement of the underlying assets and liabilities. The derivatives have maturities of up to twelve
months.
F - 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5:-
DERIVATIVE INSTRUMENTS (Cont.)
As of December 31, 2020 and 2019, the Company’s outstanding non-hedge transactions were $ 13,773 and $ 15,741, respectively.
The fair value of the outstanding non-designated foreign exchange contracts recorded by the Company on its consolidated balance sheets as
of December 31, 2020 and 2019, as assets and liabilities are as follows:
Foreign exchange forward and
options contracts
Balance sheet
December 31,
2020
2019
ALLOT LTD.
Fair value of foreign exchange non-designated
hedge transactions
Other receivables and prepaid expenses
Fair value of foreign exchange non-designated
hedge transactions
Other payables and accrued expenses
Total derivatives non-designated as hedging
instruments
NOTE 6:-
OTHER RECEIVABLES AND PREPAID EXPENSES
Prepaid expenses
Government authorities
Prepayment to OEM
Foreign currency derivative contracts
Short-term lease deposits
Grants receivable from the OCS
Others
F - 32
$
$
$
-
$
(13)
(13) $
12
-
12
December 31,
2020
2019
$
6,495
2,403
2,359
2,285
231
103
329
3,957
1,773
-
170
195
-
433
$
14,205
$
6,528
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 7:-
INVENTORIES
Raw materials
Finished goods
ALLOT LTD.
December 31,
2020
2019
$
$
1,299
11,287
$
1,264
9,404
12,586
$
10,668
As of December 31, 2020 and 2019, 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 $ 4,246 and $ 2,958, respectively.
NOTE 8:-
PROPERTY AND EQUIPMENT, NET
Cost:
Lab equipment
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
Lease equipment
Accumulated depreciation:
Lab equipment
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
Lease equipment
$
December 31,
2020
2019
$
17,624
13,090
1,454
3,134
2,976
38,278
13,511
10,501
575
1,224
474
26,285
17,548
22,374
1,356
2,557
930
44,765
14,548
20,145
659
1,162
116
36,630
Depreciated cost
$
11,993
$
8,135
Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $ 3,704, $ 2,752 and $ 2,203, respectively.
F - 33
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:
Original Cost:
Technology
Backlog
Customer relationships
IP R&D
Accumulated amortization:
Technology
Backlog
Customer relationships
IP R&D
Amortized cost
F - 34
ALLOT LTD.
Weighted
Average
Useful life
(Years)
3.8
2.8
4.4
6
December 31,
2020
2019
$
$
$
$
$
$
9,111
1,877
3,592
3,659
9,111
1,877
3,592
3,659
18,239
$
18,239
9,111
1,877
3,592
915
15,495
2,744
$
$
$
9,111
1,877
3,592
305
14,885
3,354
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:-
INTANGIBLE ASSETS, NET (Cont.)
b. Amortization expense for the years ended December 31, 2020, 2019 and 2018 were $ 610, $ 1,607 and $ 1,631, respectively.
c.
Estimated amortization expense for the years ending:
Year ending December 31,
ALLOT LTD.
2021
2022
2023
Thereafter
Total
NOTE 10:- OTHER PAYABLES AND ACCRUED EXPENSES
Accrued expenses
Government authorities
Foreign currency derivative contracts
Holdback and contingent earnout
Provision for returns
Advances from customers
Others
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES
a.
Lease commitments:
610
610
610
914
2,744
3,887
3,061
1,041
1,575
163
253
234
December 31,
2020
2019
$
$
4,920
3,723
3,237
837
290
7
147
$
13,161
$
10,214
The Group's facilities are leased under several lease agreements for periods ending up to 2023, with options to extend the leases ending
up to 2026.
In addition, the Company has various operating lease agreements with respect to motor vehicles.
Lease expenses of office rent and vehicles for the years ended December 31, 2020, 2019 and 2018 were approximately $3,282, $3,129
and $2,934, respectively. Expenses for short-term leases in 2020 were $ 119.
F - 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
The following table represents the weighted-average remaining lease term and discount rate:
Weighted average remaining lease term
Weighted average discount rate
ALLOT LTD.
Year ended
December 31,
2020
2.02 years
1.8%
The discount rate was determined based on the estimated collateralized borrowing rate of the Company, adjusted to the specific lease
term and location of each lease.
Maturities of operating lease liabilities were as follows:
Year ending December 31,
2021
2022
2023
2024
2025 and thereafter
Total lease payments
Less - imputed interest
Present value of lease liabilities
$
$
$
$
2,836
1,358
368
120
61
4,743
(95)
4,648
During the year ended December 31, 2020 the short-term maturities of operating lease liabilities which were not recognized under ASU
No. 2016-02, Leases (ASC 842) were $ 139.
b. Major subcontractor:
The Company currently depends on one subcontractor to manufacture and provide certain hardware, warranty and support components
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 such products could be materially adversely affected. 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.
c.
Liens and guarantees:
As of December 31, 2020, the Company has provided bank guarantees in respect of prepayments from customers in an aggregate
amount of approximately $ 501, in addition to bank guarantees in favor of leases agreements in an aggregate amount of approximately
$ 503.
F - 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
d. Litigations:
As of December 31, 2020, there are no open litigation against the Company.
NOTE 12:-
SHAREHOLDERS' EQUITY
a. Company's shares:
ALLOT LTD.
As of December 31, 2020, 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.
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:
2020
Number
of shares
upon
exercise
Weighted
average
exercise
price
Year ended December 31,
2019
Number
of shares
upon
exercise
Weighted
average
exercise
price
2018
Number
of shares
upon
exercise
Weighted
average
exercise
price
Outstanding at beginning of year
Granted
Forfeited
Exercised
Outstanding at end of year
Exercisable at end of year
Vested and expected to vest
1,453,741
-
$
$
(28,657) $
(290,828) $
1,134,256
1,065,498
1,132,007
$
$
$
7.59
-
17.47
6.25
1,736,143
-
$
$
(59,107) $
(223,295) $
7.26
-
10.05
4.36
$
2,189,297
62,200
$
(414,617) $
(100,737) $
7.68
1,453,741
7.83
1,240,005
7.68
1,442,990
$
$
$
7.59
1,736,143
8.01
1,281,665
7.61
1,464,802
$
$
$
7.63
5.91
9.79
4.07
7.26
8.02
7.65
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 years 2020, 2019 and 2018 and the exercise price, multiplied by the number of in-the-money options) that
would have been received by the option holders if all option holders exercised their options on December 31, 2020, 2019 and 2018,
respectively. 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, 2020, 2019 and 2018, were $ 4,578, $ 3,510 and $ 1,518, respectively.
F - 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:-
SHAREHOLDERS' EQUITY (Cont.)
ALLOT LTD.
The total intrinsic value of exercisable options at December 31, 2020, 2019 and 2018, were approximately $ 4,226, $ 2,791 and $
1,058, respectively. The total intrinsic value of options vested and expected to vest at December 31, 2020, 2019 and 2018, were
approximately $ 4,568, $ 3,399 and $ 1,246, respectively.
The total intrinsic value (the difference between the Company's closing stock price on the exercise date and the exercise price) of
options exercised during the years ended December 31, 2020, 2019 and 2018 were approximately $ 1,437, $ 769 and $ 201,
respectively. The weighted-average grant-date fair value of the options granted during the year ended on December 31, 2018 was $
2.89. No options were granted during 2020 and 2019. The number of options vested during the year ended December 31, 2020 was
116,321. The weighted-average remaining contractual life of the outstanding options as of December 31, 2020 is 2.67 years. The
weighted-average remaining contractual life of exercisable options as of December 31, 2020 is 2.58 years.
The options outstanding as of December 31, 2020, have been classified by exercise price, as follows:
Exercise price
$
$
$
$
$
23.31-27.58
15.2-17.07
10.0 -14.68
5.01-9.7
0.1-4.95
Shares upon exercise of
options
outstanding as of December
31, 2020
Weighted average remaining
contractual
life
Years
Shares upon exercise of
options exercisable
as of December 31, 2020
49,500
46,936
140,150
360,605
537,065
1,134,256
1.66
1.02
2.74
2.27
3.16
49,500
46,936
140,150
319,253
509,659
1,065,498
The following provides a summary of the restricted stock unit activity for the Company for the two years ended December 31, 2020:
Outstanding at beginning of year
Granted
Vested
Forfeited
Unvested at end of year
Year ended December 31,
2020
2019
Number
of shares
upon
exercise
Weighted
average
share price
Number
of shares
upon
exercise
Weighted
average
share price
$
1,652,060
869,250
$
(570,000) $
(188,293) $
6.53
10.96
10.69
10.01
$
1,252,031
1,001,000
$
(401,904) $
(199,067) $
1,763,017
$
8.63
1,652,060
$
5.45
7.53
7.53
7.61
6.53
As of December 31, 2020, $ 120 and $ 13,091 unrecognized compensation cost related to stock options and RSUs respectively is
expected to be recognized over a weighted average vesting period of 2.33 years.
F - 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:-
SHAREHOLDERS' EQUITY (Cont.)
ALLOT LTD.
Under the terms of the above option plans, options may be granted to employees, officers, directors and various service providers of the
Company and its subsidiaries. The options vest over a four-year period, 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, 2020, 72,373 Ordinary shares are available for
future issuance under the option plans.
In addition to granting stock options, the Company granted 869,250 and 1,001,000 RSUs in 2020 and 2019, respectively under the
2016 option plan. RSUs vest over a period of between three to four years, 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 income tax rate was 23% in 2020, 2019 and 2018.
b.
Foreign Exchange Regulations:
Commencing in taxable year 2012, the Company has elected to measure its taxable income and file its tax return under the Israeli
Income Tax Regulations (Principles Regarding the Management of Books of Account of Foreign Invested Companies and Certain
Partnerships and the Determination of Their Taxable Income) 1986 ("Foreign Exchange Regulations"). Under the Foreign Exchange
Regulations, an Israeli company must calculate its tax liability in U.S. Dollars according to certain rules. 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.
c.
Tax benefits under Israel's law for the Encouragement of Capital Investments, 1959 ("the Law"):
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 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.
F - 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
ALLOT LTD.
According to the provisions of the Law under the alternative track, the Company's income attributable to the Approved Enterprise
program 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 2005 - Amendment"). The 2005 - 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. The Company elected 2006 and 2009 as "year of election" under the 2005 -
Amendment. As at December 31, 2020 the Beneficiary Enterprise programs are no longer in effect as the 12-year activation period
commencing on the election year has ended.
In addition, the 2005-Amendment 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 2005 - Amendment.
The entitlement to the Approved Enterprise benefits is contingent upon the fulfillment of the conditions stipulated in the Law,
regulations published thereunder 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, 2020, management believes that the Company meets the
aforementioned conditions.
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, 2020, there is no income 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 the Law came into effect (the "2011 Amendment"). The 2011 Amendment introduced
a new status of "Preferred Company" and "Preferred Enterprise", replacing the then existing status of "Beneficiary Company" and
"Beneficiary Enterprise".
F - 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
ALLOT LTD.
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 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 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel during 2016 and
2017. Effective July 1, 2021 income of a Preferred Enterprise attributable to assets other than the industrial assets of the company, such
as marketing intangibles, will be subject to the standard corporate 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 – 20% as of 2014
and thereafter (iii) non-Israeli resident - 20% as of 2014 and thereafter subject to a reduced tax rate under the provisions of an
applicable double tax treaty.
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018
Budget Years), 2016 which includes Amendment 73 to the Law for the Encouragement of Capital Investments ("the 2016 -
Amendment") was published. According to the 2016 - Amendment, a preferred enterprise located in development area A will be
subject to a tax rate of 7.5% instead of 9% effective from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises
located in other areas remains at 16%).
The December 2016 amendment also prescribes special tax tracks for technological enterprises, the new tax tracks under the
amendment are as follows:
Technological preferred enterprise - an enterprise whose total consolidated revenues (parent company and all subsidiaries) is less than
NIS 10 billion. A technological preferred enterprise, as defined in the Law, which is located in the center of Israel will be subject to tax
at a rate of 12% on profits deriving from intellectual property as such is determined by applying the specifications of the Law and the
regulations promulgated thereunder (in development area A - a tax rate of 7.5%).
Special technological preferred enterprise - an enterprise whose total consolidated revenues (parent company and all subsidiaries)
exceeds NIS 10 billion. Such enterprise will be subject to tax at a rate of 6% on profits deriving from intellectual property, regardless of
the enterprise’s geographical location. Income of the Preferred Technological Enterprise or a Special Preferred Technological
Enterprise, which is not derived from its intellectual property is subject to tax at the ordinary corporate tax rate.
Under the transition provisions of the 2016 Amendment, 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 - 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
ALLOT LTD.
d. 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.
e.
Pre-tax income (loss) is comprised as follows:
Domestic
Foreign
F - 42
Year ended
December 31,
2019
2020
2018
$
$
(8,722) $
1,550
(8,934) $
1,916
(9,877)
1,890
(7,172) $
(7,018) $
(7,987)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
ALLOT LTD.
f. 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:
$
$
Loss before taxes on income
Theoretical tax income computed at the Israeli statutory tax rate (23% for the
years 2020, 2019 and 2018, respectively)
Changes in valuation allowance
Increase 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
Other expenses and Exchange rate differences
Non-deductible share-based compensation expense
Change in expense associated with tax positions for current year
Year ended
December 31,
2019
2020
2018
(7,172) $
(7,018) $
(7,987)
(1,650) $
(1,614) $
(1,837)
1,979
-
1,066
35
72
(383)
557
500
951
-
1,536
44
470
(143)
397
-
1,189
659
1,828
50
147
(82)
474
-
Actual tax expense
g.
Income tax expense is comprised as follows:
Current taxes
Deferred taxes expense (benefit)
Write off of prepaid and withholding taxes
Change in expense associated with tax positions for current year
F - 43
$
2,176
$
1,641
$
2,428
Year ended December 31,
2019
2020
2018
$
$
$
513
97
1,066
500
$
341
(236)
1,536
-
580
20
1,828
-
2,176
$
1,641
$
2,428
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
h. Net operating losses carry forward:
ALLOT LTD.
The Company has accumulated net operating losses for tax purposes as of December 31, 2020, in the amount of approximately
$82,080, 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 on the merger date 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, 2020, the Company recorded a full
valuation allowance with respect to its deferred tax assets in Allot Ltd. and wrote-off prepaid and withholding taxes of $4,991 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, 2020, of approximately $27,243, which may be carried forward and offset against taxable capital gains in
the future for an indefinite period but are limited as stated above with regard to the Oversi merger. 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 $ 4,669 and $ 7,434 for state
taxes. The federal accumulated losses for tax purposes expire between 2026 and 2037. The state accumulated losses for tax purposes
began to expire in 2014. As of December 31, 2020, the Company recorded a partial valuation allowance with respect to its deferred tax
assets in the US Subsidiary.
A portion of the 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.
i. 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:
F - 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
Deferred tax assets:
Operating and capital loss carryforwards
Research and development
Employee benefits
Intangible assets
Other temporary differences mainly relating to reserve and allowances
Deferred tax asset before valuation allowance
Valuation allowance
Deferred tax asset net of valuation allowance
Deferred tax liability:
Intangible assets
Other temporary differences mainly relating to reserve and allowances
Net deferred tax asset
ALLOT LTD.
December 31,
2020
2019
$
26,731
2,602
1,368
282
1,607
32,590
(27,652)
4,938
22,353
5,496
1,062
489
2,024
31,424
(25,880)
5,544
3,493
1,025
420
$
3,562
1,465
517
$
$
As of December 31, 2020, the Company has provided a valuation allowance of approximately $27.6 million in respect of the
Company’s deferred tax assets resulting from tax loss carryforwards and other temporary differences. Realization of deferred tax assets
is dependent upon future earnings, if any, the time and amount of which are uncertain. As the Company has accumulated net operating
losses for tax purposes as of December 31, 2020, in the amount of approximately $82,080, so it is more likely than not that sufficient
taxable income will not be available for the tax losses to be utilized in the future. Therefore, a valuation allowance was recorded to
reduce the deferred tax assets to their recoverable amounts.
j. As of December 31, 2020, the Company’s provision in respect of ASC 740-10 is $743. $500 were added in 2020 due to the risk that
selling in different countries will be considered by tax authorities as permanent establishment. The accrued interest and penalties
related to the provision in income taxes are 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 tax assessment through the year 2015 and the Spanish and U.S.
subsidiaries have final tax assessments through 2015 and 2016, respectively. The Company is currently under audit by the Israeli Tax
Authorities for the years 2015– 2016.
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
Middle East and Africa
F - 45
Year ended
December 31,
2019
2020
2018
$
$
94,644
23,519
8,131
9,628
$
36,199
42,994
16,576
14,331
45,730
22,018
14,363
13,726
$
135,922
$
110,100
$
95,837
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- GEOGRAPHIC INFORMATION (Cont.)
The following table sets forth the customers that represented 10% or more of the Company’s total revenues in each of the periods set forth
below:
ALLOT LTD.
1st Customer
2nd Customer
Year ended
December 31,
2019
2020
2018
43%
11%
54%
16%
11%
27%
22%
-
22%
A total percentage of 83%, 76% and 74% of the Company’s revenues for the years ended December 31, 2020, 2019 and 2018, respectively
are attributed to network intelligence solutions, while 17%, 24% and 26% are attributed to security solutions for the years ended December
31, 2020, 2019 and 2018, respectively.
The following presents total long-lived assets as of December 31, 2020 and 2019:
Long-lived assets:
Israel
Other
F - 46
December 31,
2020
2019
$
$
14,210
2,241
$
12,764
1,739
16,451
$
14,503
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- FINANCIAL INCOME (EXPENSES), NET
Financial income:
Interest income
Exchange rate differences and other
Financial expenses:
ALLOT LTD.
Year ended
December 31,
2019
2020
2018
$
$
1,754
231
$
2,551
-
2,696
305
Exchange rate differences and other
Amortization/accretion of premium/discount on marketable securities, net
-
128
334
257
-
793
$
1,857
$
1,960
$
2,208
NOTE 16:- EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net loss per share:
Numerator:
Net loss
Denominator:
Weighted average number of shares outstanding used in computing basic and diluted
net loss per share
Basic and diluted net loss per share
NOTE 17:-
SUBSEQUENT EVENT
Year ended
December 31,
2019
2020
2018
(9,348) $
(8,659) $
(10,415)
35,007,201
34,250,582
33,710,507
(0.27) $
(0.25) $
(0.31)
$
$
On February 17, 2021, a former employee filed a claim against the Company alleging that he is entitled to compensation for unfair dismissal
by the Company. The claim is still in its preliminary stage and the Company cannot estimate the chances of the claim to be accepted.
F - 47
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES ACT OF 1934
Exhibit 2.2
The following description sets forth certain material terms and provisions of Allot Ltd.’s (the “Company”) securities that
are registered under Section 12 of the Securities Exchange Act of 1934, as amended.
DESCRIPTION OF SHARE CAPITAL
This description summarizes relevant provisions of the Israeli Companies Law, 5759-1999, or the Companies Law. The
following summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the
applicable provisions of the Companies Law and the Company’s articles of association, a copy of which is incorporated by
reference as an exhibit to the Annual Report on Form 20-F of which this Exhibit 2.2 is a part. The Company encourages you to
read its articles of association and the applicable provisions of the Companies Law for additional information.
Ordinary Shares
Our authorized share capital consists of 200,000,000 ordinary shares, par value ILS 0.10 per share. As of March 1, 2021,
we had 35,654,053 ordinary shares outstanding. All outstanding ordinary shares are validly issued, fully paid and non-assessable.
Our ordinary shares are listed under the symbol “ALLT” on the NASDAQ Stock Market and on the Tel Aviv Stock Exchange
(“TASE”).
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.
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.
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.
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.
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.
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.
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.
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. Under our articles of association, our directors (other than the outside directors, whose
appointments are required under the Companies Law) 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.
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.
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.
List of Subsidiaries
Exhibit 8.1
Company
Allot Communications Inc.
Allot Communications Europe SARL
Allot Communications (Asia Pacific) Pte. Limited
Allot Communications (UK) Limited (with branches in Spain, Italy and
United States
France
Singapore
United Kingdom
Jurisdiction of Incorporation
Germany)
Allot Communications Japan K.K.
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
Allot Turkey Komunikasion Hizmeleri limited.
Allot Australia (PTY) LTD
* Allot Ltd. also holds a branch in Colombia.
Japan
Hong Kong
South Africa
India
Spain
Colombia
Mexico
Turkey
Australia
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
EXCHANGE ACT RULE 13a-14(a)/15d-14(d)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 12.1
I, Erez Antebi, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Allot Ltd. (the “company”);
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;
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 company as of, and for, the periods presented in this report;
The company’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 Rules 13a-15(f) and 15d-
15(f)) for the company and have:
(a)
(b)
(c)
(d)
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 company, 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;
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;
Evaluated the effectiveness of the company’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
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial
reporting; and
5.
The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
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
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal
control over financial reporting.
Date: March 15, 2021
/s/ Erez Antebi
Erez Antebi
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
EXCHANGE ACT RULE 13a-14(a)/15d-14(d)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 12.2
I, Ziv Leitman, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Allot Ltd. (the “company”);
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;
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 company as of, and for, the periods presented in this report;
The company’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 Rules 13a-15(f) and 15d-
15(f)) for the company and have:
(a)
(b)
(c)
(d)
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 company, 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;
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;
Evaluated the effectiveness of the company’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
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial
reporting; and
5.
The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
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 company’s ability to record, process, summarize and report financial information; and
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 15, 2021
/s/ Ziv Leitman
Ziv Leitman
Chief Financial Officer
(Principal Financial Officer)
Exhibit 13.1
CERTIFICATIONS 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 Ltd. (the “Company”) on Form 20-F for the period ended December 31, 2020, as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Erez Antebi, and I, Ziv Leitman, 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.
Date: March 15, 2021
Date: March 15, 2021
/s/ Erez Antebi
Erez Antebi
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Ziv Leitman
Ziv Leitman
Chief Financial Officer
(Principal Financial Officer)
A signed original of this written statement required by Section 906 has been provided to Allot Ltd. and will be retained by Allot
Ltd. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 15.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-165144, 333-172492,
333-180770, 333-187406, 333-194833, 333-203028, 333- 210420, 333-216893, 333-223838, 333-230391 and 333-237405)
pertaining to the 2016 Incentive Compensation Plan (formerly 2006 Incentive Compensation Plan) of Allot Ltd., of our reports
dated March 15, 2021, with respect to the consolidated financial statements of Allot Ltd., and the effectiveness of internal
control over financial reporting of Allot Ltd., included in this Annual Report (Form 20-F) for the year ended December 31, 2020.
Tel Aviv, Israel
March 15, 2021
/s/ KOST FORER GABBAY & KASIERER
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global